<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 18, 1998
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PROSPECT MEDICAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 8011 330564370
(State or other jurisdiction of (Primary Standard Industrial (IRS Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
515 SOUTH FLOWER STREET, SUITE 1640
LOS ANGELES, CALIFORNIA 90071
(213) 629-2185
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
JACOB Y. TERNER, M.D.
515 SOUTH FLOWER STREET, SUITE 1640
LOS ANGELES, CALIFORNIA 90071
(213) 629-2185
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES OF COMMUNICATIONS TO:
DALE S. MILLER, ESQ.
HOWARD J. UNTERBERGER, ESQ. STEVEN DREYER, ESQ.
SHAUNA ROTHKOPF, ESQ. Hall Dickler Kent Friedman & Wood, LLP
Miller & Holguin 909 Third Avenue
1801 Century Park East, Seventh Floor New York, New York 10022
Los Angeles, California 90067 (212) 339-5400
(310) 556-1990
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
------------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
TITLE OF EACH PROPOSED MAXIMUM PROPOSED MAXIMUM
CLASS OF SECURITIES AMOUNT TO OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED BE REGISTERED UNIT PRICE REGISTRATION FEE
- -------------------------------------- --------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Common Stock.......................... 3,450,000 shares(1) $6.00 per share(5) $20,700,000 $6,106.50
Warrants for the purchase of Common
Stock............................... 3,450,000 warrants(2) $.10 per warrant(5) $345,000 $101.78
Common Stock underlying Warrants...... 3,450,000 shares(3) $8.40 per share $28,980,000 $8,549.10
Representative's Warrants............. 300,000 warrants $.0001 per warrant $30 $.01
Common Stock underlying
Representative's Warrants........... 300,000 shares(4) $7.20 per share $2,160,000 $637.20
Warrants underlying Representative's
Warrants............................ 300,000 warrants(4) $.12 per warrant $36,000 $10.62
Common Stock underlying Warrants which
underlie Representative's
Warrants............................ 300,000 shares(4) $8.40 per share $2,520,000 $743.40
Total Registration Fee................ $16,148.61
</TABLE>
(1) Includes 450,000 shares that the Underwriters may purchase from the
Registrant to cover over-allotments, if any.
(2) Includes 450,000 Warrants that the Underwriters may purchase from the
Registrant to cover over-allotments, if any.
(3) Includes 450,000 shares underlying Warrants that the Underwriters may
purchase from the Registrant to cover over-allotments, if any. Also
registered hereunder are an indeterminate number of additional shares of
Common Stock which may become issuable by virtue of anti-dilution provisions
of the Warrants.
(4) Also registered hereunder are an indeterminate number of additional shares
of Common Stock and Warrants which may become issuable by virtue of
anti-dilution provisions of the Representative's Warrants and an
indeterminate number of additional shares of Common Stock which may become
issuable by virtue of anti-dilution provisions of the Warrants which
underlie the Representative's Warrants.
(5) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a) promulgated under the Securities Act of 1933.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED SEPTEMER 18, 1998
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy, nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
<PAGE>
PROSPECTUS
PROSPECT MEDICAL HOLDINGS, INC.
3,000,000 SHARES OF COMMON STOCK
AND 3,000,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
This Prospectus relates to the offering (the "Offering") of 3,000,000 shares
(the "Shares") of common stock, $.01 par value per share (the "Common Stock"),
and 3,000,000 Redeemable Common Stock Purchase Warrants (the "Warrants") of
Prospect Medical Holdings, Inc., a Delaware corporation (the "Company"). The
Shares and Warrants are sometimes hereinafter collectively referred to as the
"Securities." The Shares and the Warrants may be purchased separately and will
be transferable separately immediately following completion of this Offering.
Each Warrant entitles the registered holder thereof to purchase one share of
Common Stock at an initial exercise price of $8.40 per share at any time during
the period commencing , 1999 [the first anniversary of the effective
date of the registration statement filed with respect to the Securities] and
terminating on , 2003 [the day immediately preceding the fifth anniversary
of said effective date]. The Warrant exercise price is subject to adjustment
under certain circumstances. Commencing , 1999 [the first anniversary
of said effective date], the Company may redeem the Warrants, in whole but not
in part, at $.10 per Warrant on thirty (30) days' prior written notice to the
Warrant holders, provided that the average closing sales price of the Common
Stock as reported on the American Stock Exchange (the "American Stock Exchange")
equals or exceeds $18.00 per share for any twenty (20) trading days within a
period of thirty (30) consecutive trading days ending on the fifth trading day
prior to the date of the notice of redemption. See "Description of Capital
Stock."
Prior to this Offering, there has been no active trading market for the
Common Stock or the Warrants, and there can be no assurance that such a market
will develop after the completion of this Offering or, if such a market does
develop, that it will be sustained. It is currently anticipated that the initial
public offering prices of the Common Stock and the Warrants will be $6.00 per
share and $.10 per Warrant, respectively. For information regarding the factors
considered in determining the initial public offering prices of the Securities
and the terms of the Warrants, see "Risk Factors" and "Underwriting." The
Company intends to apply to list the Shares and the Warrants on the American
Stock Exchange under the symbols "PXX" and "PXX.W," respectively. No assurance
can be given that such application will be granted or, if granted, that an
active trading market will develop.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
AND SUBSTANTIAL DILUTION. SEE "RISK FACTORS" BEGINNING ON
PAGE 8 AND "DILUTION."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNTS PROCEEDS TO
PRICE TO PUBLIC AND COMMISSIONS(1) COMPANY(2)
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
Per Share......................................... $ $ $
Per Warrant....................................... $ $ $
Total............................................. $ $ $
</TABLE>
(1) THE COMPANY HAS AGREED TO INDEMNIFY THE SEVERAL UNDERWRITERS (THE
"UNDERWRITERS"), AGAINST CERTAIN LIABILITIES, INCLUDING LIABILITIES UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). DOES NOT
INCLUDE ADDITIONAL COMPENSATION PAYABLE TO SECURITY CAPITAL TRADING, INC.,
THE REPRESENTATIVE (THE "REPRESENTATIVE") OF THE UNDERWRITERS, IN THE FORM
OF A NON-ACCOUNTABLE EXPENSE ALLOWANCE. SEE "UNDERWRITING" FOR INFORMATION
CONCERNING INDEMNIFICATION AND CONTRIBUTION ARRANGEMENTS WITH THE
UNDERWRITERS AND OTHER COMPENSATION PAYABLE TO THE REPRESENTATIVE.
(2) BEFORE DEDUCTING OFFERING EXPENSES PAYABLE BY THE COMPANY ESTIMATED AT
$ , EXCLUDING THE NON-ACCOUNTABLE EXPENSE ALLOWANCE PAYABLE TO THE
REPRESENTATIVE.
(3) THE COMPANY HAS GRANTED THE UNDERWRITERS A 45-DAY OPTION TO PURCHASE UP TO
AN ADDITIONAL 450,000 SHARES OF COMMON STOCK AND/OR 450,000 WARRANTS ON THE
SAME TERMS AS SET FORTH ABOVE, SOLELY TO COVER OVER-ALLOTMENTS, IF ANY. IF
SUCH OPTION IS EXERCISED IN FULL, THE TOTAL PRICE TO PUBLIC, UNDERWRITING
DISCOUNTS AND COMMISSIONS, AND PROCEEDS TO COMPANY WILL BE $ ,
$ AND $ , RESPECTIVELY. SEE "UNDERWRITING."
The Securities are offered by the Underwriters, subject to prior sale, when,
as, and if delivered to and accepted by the Underwriters and subject to approval
of certain legal matters by their counsel and subject to certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
this Offering and to reject any order in whole or in part. It is expected that
delivery of the Securities offered hereby will be made against payment therefor
on or about , 1998 at the offices of Security Capital Trading, Inc.,
in New York, New York or in book-entry form through the facilities of The
Depository Trust Company.
SECURITY CAPITAL TRADING, INC.
The date of this Prospectus is , 1998
<PAGE>
[Insert map showing location of Prospect affiliated physician organizations]
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES, SUCH AS STATEMENTS OF THE COMPANY'S OR ITS MANAGEMENT'S PLANS,
OBJECTIVES, EXPECTATIONS, INTENTIONS, BELIEFS AND ESTIMATES. THE CAUTIONARY
STATEMENTS MADE IN THIS PROSPECTUS SHOULD BE READ AS BEING APPLICABLE TO ALL
FORWARD-LOOKING STATEMENTS WHEREVER THEY APPEAR IN THIS PROSPECTUS. THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE
DISCUSSED IN "RISK FACTORS" AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS," AS WELL AS THOSE DISCUSSED
ELSEWHERE IN THIS PROSPECTUS.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK AND
WARRANTS, INCLUDING OVER-ALLOTTING, ENTERING STABILIZING BIDS, EFFECTING
SYNDICATE COVERING TRANSACTIONS AND IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY INFORMATION IS QUALIFIED IN ITS ENTIRETY BY THE
DETAILED INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES
THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS AND, ACCORDINGLY, SHOULD BE READ
IN CONJUNCTION WITH THAT INFORMATION AND THOSE FINANCIAL STATEMENTS AND NOTES.
PROSPECT MEDICAL HOLDINGS, INC., A DELAWARE CORPORATION ("PROSPECT MEDICAL
HOLDINGS" OR THE "COMPANY"), CONDUCTS ITS OPERATIONS THROUGH ITS TWO
WHOLLY-OWNED SUBSIDIARIES, PROSPECT MEDICAL SYSTEMS, INC., A DELAWARE
CORPORATION ("PROSPECT MEDICAL SYSTEMS"), AND SIERRA MEDICAL MANAGEMENT, INC., A
DELAWARE CORPORATION ("SIERRA MEDICAL MANAGEMENT"). EXCEPT AS OTHERWISE REQUIRED
BY THE CONTEXT, ALL REFERENCES HEREIN TO THE COMPANY SHALL BE DEEMED TO INCLUDE
PROSPECT MEDICAL SYSTEMS AND SIERRA MEDICAL MANAGEMENT. EXCEPT AS OTHERWISE
REQUIRED BY THE CONTEXT, ALL INFORMATION IN THIS PROSPECTUS ASSUMES THAT (I) THE
OVER-ALLOTMENT OPTION GRANTED TO THE UNDERWRITERS OF THIS OFFERING (THE
"UNDERWRITERS") IS NOT EXERCISED AND (II) THE REDEEMABLE COMMON STOCK PURCHASE
WARRANTS OFFERED HEREBY (THE "WARRANTS") AND THE WARRANTS GRANTED TO SECURITY
CAPITAL TRADING, INC. (THE "REPRESENTATIVE'S WARRANTS") AND ANY UNDERLYING
WARRANTS ARE NOT EXERCISED AND ANY UNDERLYING COMMON STOCK IS NOT ISSUED.
THE COMPANY
The Company primarily manages physician organizations that specialize in
providing medical services to individuals enrolled in managed care programs
offered by health maintenance organizations ("HMOs"). The Company's affiliated
physician organizations have entered into agreements with HMOs. Under these
agreements, the affiliated physician organizations provide medical services to
the HMO's enrollees in consideration for its payment of prepaid monthly fees
known as "capitation" payments. Physician organizations include medical groups
that employ physicians and independent practice associations that contract with
physicians.
Physician organizations increasingly are viewing managed care
administrators, such as the Company, as a means to increase their bargaining
power in response to the growth of HMOs. Additionally, physician organizations
are responding to the cost-containment pressures within the managed care
industry by affiliating with managed care administrators, such as the Company,
to control economic risk and perform the non-medical management and
administrative tasks that arise from the practice of medicine in a managed care
setting.
The Company's growth strategy has thus far focused on the acquisition by its
affiliated physician organizations of other medical groups and independent
practice associations. These organizations provide services in Orange, Los
Angeles, Ventura and Santa Barbara Counties of the State of California. As of
June 30, 1998, the Company had approximately 350 primary care physicians and
approximately 1,390 specialists within its provider network. More specifically,
the Company has grown principally through four strategic acquisitions (Santa
Ana/Tustin Physicians Group, Sierra Medical Group, Western Medical Group and
Antelope Valley Medical Group (as such terms are defined herein)) and through
internal growth by the addition of new enrollees to its existing affiliated
physician organizations. As of June 30, 1998, the affiliated physician
organizations provided services pursuant to agreements with 17 HMOs. The table
set forth below shows the increase since July 31, 1996, when current management
assumed control of the Company, in the number of commercial, Medicare and
Medicaid enrollees served by the Company's affiliated physician organizations.
1
<PAGE>
NUMBER OF ENROLLEES
<TABLE>
<CAPTION>
JUNE 30,
JULY 31, 1996(1) 1998(2)
----------------- ---------------
<S> <C> <C>
Enrollees
Commercial................................................ 4,900 81,480
Medicare.................................................. 1,900 8,587
Medicaid.................................................. -- 6,679
----- ------
Total 6,800 96,746
----- ------
----- ------
</TABLE>
- ------------------------
(1) Approximate. Does not include enrollees of Prospect Medical Group (as
defined herein) that were added to the Company's service network on July 31,
1996 when current management assumed control of the Company.
(2) Includes enrollment increases as a result of the Antelope Valley Medical
Group acquisition. Does not reflect the potential loss of enrollees
commencing as of July 1, 1998, as a result of the Yorba Linda Settlement
Agreement (as defined herein). See "Risk Factors--Recent Settlement
Agreement with Yorba Linda Medical Group", "Unaudited Pro Forma Financial
Information" and "Business of the Company--Legal Proceedings" herein.
The Company has selected its acquisition candidates based on criteria that
include (i) either a history of profitable operation or a compelling synergy
with opportunities for economies of scale through combining operations; (ii)
either geographic proximity to the Company's current operations or a material
share of the potential acquisition candidate's own local marketplace; (iii) a
favorable hospital relationship; and/or (iv) willingness of the acquisition
candidate's management to continue managing the acquired entity following its
acquisition.
Currently, the non-physician components of hospitalization and hospital
facilities are generally provided to the enrollees by hospitals that contract
with and are paid by the HMOs. The future strategy of the Company is to provide
and manage all health care services, including hospital health care services. To
implement this strategy, the Company intends to obtain a license pursuant to
California law which will allow the Company to contract with HMOs on a full-risk
basis. The Company also intends to seek a certification under federal law which
will allow the Company to contract with the United States Department of Health
and Human Services, Health Care Financing Administration ("HCFA"), to manage and
provide health care services on a full-risk basis directly to Medicare
beneficiaries without an HMO intermediary.
Southern California is a highly-developed managed care market. Management
believes that there is more economic opportunity in developed markets because
(i) physicians and hospitals in developed markets have established practice and
referral patterns that are consistent with providing services within a managed
care framework and (ii) there is generally a higher concentration of physicians
and hospitals in a developed market, creating a more competitive environment
with greater opportunities for the Company and its affiliated physician
organizations to negotiate more favorable provider contracts. The Company
believes that the managed care industry operates most effectively on a regional
basis, and is affected most by provider competition, physician referral
patterns, custom and practice and local hospital relationships. Management also
believes that developing a significant local market presence permits economies
of scale and greater efficiencies through centralization of operations.
The Company believes that physician management fosters better relationships
with providers. The Chief Executive Officer, Jacob Y. Terner, M.D., and
President, Gregg DeNicola, M.D., have been practicing physicians. More recently
Dr. Terner served as Chairman of the Board and Chief Executive Officer of
Century MediCorp, Inc. ("Century MediCorp"), a publicly-traded corporation
operating through three wholly-owned HMO subsidiaries, hospitals and an
affiliated independent practice association, until its October 1992 merger with
a major publicly-traded HMO. The Company typically retains senior management of
the entities that it acquires.
2
<PAGE>
The Company provides management and other administrative services to
physician organizations that specialize in managed care, including personnel,
claims administration, utilization management and quality assurance, case
management and data collection and management information systems. The Company
also helps these physician organizations by negotiating capitation rates and
incentive payment arrangements with HMOs. The Company assists physician
organizations that accept full financial risk for all physician services to be
provided under an HMO agreement. The Company and its direct subsidiaries are
prohibited by California law from engaging in the corporate practice of medicine
and, therefore, do not practice medicine or employ physicians. The physician
organizations affiliated with the Company hire and contract with physicians and
ancillary health care service providers for the provision of medical services.
The Company has entered into a long-term management services agreement with
each affiliated physician organization. The Company helps its affiliated
physician organizations acquire other physician organizations that have
contracts with HMOs. The Company then enters into a long-term management
services agreement with each newly-acquired physician organization. Under the
long-term management services agreements, the Company provides the physician
organizations with certain management and administrative support services as
described above in return for a fee calculated with reference to certain
components of the physician organization's revenues and the Company's costs of
providing its services. The Company's management fee fluctuates based on the
profitability of the affiliated physician organizations as the Company is
entitled to a residual interest in the profits of the affiliated physician
organizations. The Company's fee arrangements are structured so that, by
enabling its affiliated physician organizations to deliver required medical
services in a more cost-effective manner, the Company will benefit from the
savings so obtained.
Prospect Medical Holdings, formerly known as Med-Search, Inc., was
incorporated in Delaware on May 12, 1993. The principal corporate executive
offices of the Company are located at 515 South Flower St., Suite 1640, Los
Angeles, California 90071, and its telephone number is (213) 629-2185.
THE OFFERING
<TABLE>
<S> <C>
Securities Offered by the
Company......................... 3,000,000 shares of Common Stock and 3,000,000 Warrants
(collectively, the "Securities"). The shares of Common
Stock and Warrants may be purchased separately and will
be separately transferable immediately following
completion of this Offering. See "Description of Capital
Stock."
Terms of Warrants................. Each Warrant entitles the registered holder thereof to
purchase, at any time during the period commencing
, 1999 [the first anniversary of the effective
date of the registration statement filed with respect to
the Securities], and terminating on , 2003 [the
day immediately preceding the fifth anniversary of said
effective date], one share of Common Stock at an initial
exercise price of $8.40 per share, subject to
adjustment. Commencing , 1999 [the first
anniversary of said effective date], the Warrants are
subject to redemption by the Company, in whole but not
in part, at $.10 per Warrant on thirty (30) days' prior
written notice to the Warrant holders, provided that the
average closing sales price of the Common Stock as
reported on the American Stock Exchange equals or
exceeds $18.00 per share, subject to adjustment, for any
twenty (20) trading days within a period of thirty (30)
consecutive trading days ending on the fifth trading day
prior to the date of the notice of redemption. See
"Description of Capital Stock-- Warrants."
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
Common Stock Outstanding Prior to
this Offering(1)................ 4,449,395 shares of Common Stock
Securities to Be Outstanding
After Completion of this
Offering(1)..................... 7,449,395 shares of Common Stock and 3,000,000 Warrants
Risk Factors and Dilution......... An investment in the Common Stock and the Warrants
offered hereby involves a high degree of risk and
immediate and substantial dilution and should be
considered only by persons who can afford the loss of
their entire investment. See "Risk Factors" and
"Dilution."
Use of Proceeds................... The Company intends to apply a portion of the proceeds
of the Offering to pay down the outstanding balance
under the Company's credit facility provided by Imperial
Bank. Draws under such facility were used by the Company
(i) in connection with certain acquisitions, and (ii)
for working capital. The Company intends to apply
additional proceeds of the Offering (i) to repay certain
outstanding promissory notes made in connection with
certain completed acquisitions, (ii) to pay a portion of
the costs to establish a health plan with a limited
license pursuant to California law and to form and
develop a Medicare Health Plan (as defined herein), in
each case to assume full risk for the provision of
health care services under contracts with HMOs or HCFA,
as applicable, and (iii) for working capital.
Proposed American Stock Exchange
Symbols:
Common Stock.................... "PXX"
Warrants........................ "PXX.W"
</TABLE>
- ------------------------
(1) Calculated after deduction of the shares of Common Stock that were returned
to the Company in exchange for a release from certain agreements pursuant to
the Yorba Linda Settlement Agreement effective as of July 1, 1998. See "Risk
Factors--Recent Settlement Agreement with Yorba Linda Medical Group" and
"Business of the Company--History of the Company" for a further description
of the Yorba Linda Settlement Agreement. Does not include (i) any shares of
Common Stock that may be issued pursuant to the Underwriters' over-allotment
option or any shares of Common Stock that may be issued pursuant to the
exercise of Warrants offered hereby or the Representative's Warrants or
warrants underlying the Representative's Warrants, (ii) 166,000 shares of
Common Stock reserved for issuance pursuant to grants that may be made under
the Company's 1998 Stock Option Plan (the "Stock Option Plan"), including
but not limited to 55,000 shares of Common Stock reserved for issuance upon
exercise of options granted to two officers of the Company at an exercise
price equal to $5.00 per share, (iii) 477,119 shares of Common Stock in the
aggregate reserved for issuance upon exercise of options granted to three
current directors and a former director of the Company at an exercise price
equal to $1.25 per share, (iv) 10,000 shares of Common Stock reserved for
issuance upon exercise of options granted to a recently elected director at
an exercise price equal to $5.00 per share, (v) 35,000 shares of Common
Stock reserved for issuance upon exercise of options granted to the sellers
of Sierra Primary Care Medical Group, A Medical Corporation and Sierra
Medical Management, Inc., at an exercise price equal to $5.00 per share,
(vi) 13,635 shares of Common Stock reserved for issuance upon exercise of
warrants granted to certain finders in connection with the 1996 Merger (as
defined herein) and related transactions at an exercise price equal to
$1.375 per share, (vii) 192,725 shares of Common Stock reserved for issuance
upon exercise of warrants granted to the Company's commercial lender at an
exercise price of $5.00 per share and (viii) 10,080 shares of
4
<PAGE>
Common Stock that may be issued to a physician whose assets were acquired by
an affiliated physician organization. See "Management of the Company--Stock
Option Plan," "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources-- Credit
Facility," and "Business of the Company--History of the Company."
5
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data with respect to the Company's
statement of operations for the year ended September 30, 1993 and the balance
sheet data at September 30, 1993 have been derived from the financial statements
of Prospect Medical Group, the Company's predecessor for financial statement
reporting purposes. These financial statements have not been audited and are not
included herein. The following selected financial data with respect to the
Company's statements of operations for the years ended September 30, 1994, 1995
and 1996 and the balance sheet data at September 30, 1994, 1995 and 1996 have
been derived from the financial statements of the Company or its predecessor as
applicable which have been audited by BDO Seidman, LLP, independent certified
public accountants. The following selected financial data with respect to the
Company's statement of operations for the year ended September 30, 1997 and the
balance sheet data at September 30, 1997 have been derived from the financial
statements of the Company which have been audited by Ernst & Young LLP,
independent auditors. The selected financial data presented below for the nine
months ended June 30, 1997 and the nine months ended June 30, 1998 have not been
audited and were prepared by management of the Company on the same basis as the
audited financial statements appearing elsewhere in this Prospectus and, in the
opinion of management of the Company, include all adjustments necessary to
present fairly the information set forth therein. The results for the nine
months ended June 30, 1998 are not necessarily indicative of the results to be
expected for the year ending September 30, 1998 or future periods. The following
data should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements of
the Company and the related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED NINE
SEPTEMBER 30, MONTHS
1997 ENDED
YEARS ENDED SEPTEMBER 30, ------------- JUNE 30,
------------------------------------------------------------- ---------
PRO FORMA
(UNAUDITED) AS ADJUSTED (UNAUDITED)
------------- (UNAUDITED) ---------
1993(1) 1994(1) 1995(1) 1996 1997 (2)(4)(5) 1997
------------- ----------- ----------- --------- --------- ------------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total Operating Revenues......... $ 6,583 $ 10,232 $ 14,657 $ 24,435 $ 29,955 $ 48,729 $ 19,977
------ ----------- ----------- --------- --------- ------------- ---------
Expenses:
Cost of Medical Services......... 4,645 6,496 10,660 19,492 23,202 36,506 16,107
General and Administrative....... 1,669 2,741 3,545 4,291 7,236 12,516 4,330
Depreciation & Amortization...... 7 50 125 102 244 1,578 114
------ ----------- ----------- --------- --------- ------------- ---------
Total Cost of Operations..... 6,321 9,287 14,330 23,885 30,682 50,600 20,551
Provision for Impairment of
Goodwill....................... -- -- -- -- (2,197) (5,053) (2,197)
------ ----------- ----------- --------- --------- ------------- ---------
Income (Loss) before Provision
for Income Taxes............... 262 945 327 550 (2,924) (6,924) (2,771)
Income Tax Expense (Benefit)..... 104 384 139 (5) (285) (449) 173
------ ----------- ----------- --------- --------- ------------- ---------
Net Income (Loss)............ $ 158 $ 561 $ 188 $ 555 $ (2,639) $ (6,475) $ (2,944)
------ ----------- ----------- --------- --------- ------------- ---------
------ ----------- ----------- --------- --------- ------------- ---------
Net Income (Loss) Per Common
Share
Basic:
Basic Income (Loss) Per
Share........................ $ 0.10 $ 0.32 $ 0.10 $ 0.22 $ (0.55) $ (0.87) $ (0.62)
Weighted Average Number of
Common Shares Outstanding.... 1,525 1,742 1,976 2,487 4,801 7,465 4,767
Diluted:
Diluted Income (Loss) Per
Share........................ $ 0.10 $ 0.32 $ 0.10 $ 0.22 $ (0.55) $ (0.87) $ (0.62)
Weighted Average Number of
Common and Common Dilutive
Shares Outstanding........... 1,525 1,742 1,976 2,487 4,801 7,465 4,767
<CAPTION>
NINE MONTHS
ENDED
JUNE 30, 1998
-------------
PRO FORMA
AS ADJUSTED
(UNAUDITED)
1998 (3)(4)(5)
--------- -------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total Operating Revenues......... $ 40,314 $ 39,336
--------- -------------
Expenses:
Cost of Medical Services......... 26,854 27,406
General and Administrative....... 12,294 11,112
Depreciation & Amortization...... 786 1,041
--------- -------------
Total Cost of Operations..... 39,934 39,559
Provision for Impairment of
Goodwill....................... -- (312)
--------- -------------
Income (Loss) before Provision
for Income Taxes............... 380 (535)
Income Tax Expense (Benefit)..... 4 4
--------- -------------
Net Income (Loss)............ $ 376 $ (539)
--------- -------------
--------- -------------
Net Income (Loss) Per Common
Share
Basic:
Basic Income (Loss) Per
Share........................ $ 0.07 $ (0.07)
Weighted Average Number of
Common Shares Outstanding.... 5,398 7,449
Diluted:
Diluted Income (Loss) Per
Share........................ $ 0.07 $ (0.07)
Weighted Average Number of
Common and Common Dilutive
Shares Outstanding........... 5,765 7,449
</TABLE>
See accompanying notes to the audited historical and unaudited pro forma
consolidated statement of operations data.
6
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30, 1998
------------------------------------------------------- ------------------------
PRO FORMA
(UNAUDITED) AS ADJUSTED
1993(1) 1994(1) 1995(1) 1996 1997 (UNAUDITED) (UNAUDITED)
----------- --------- --------- --------- --------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Assets:
Cash and Cash Equivalents........... $ 217 $ 278 $ 822 $ 5,333 $ 2,822 $ 1,765 $ 2,997
Other Current Assets................ 1,914 2,592 2,856 1,651 3,743 5,361 5,361
Intangible and Other Assets......... 119 541 583 2,947 17,946 21,377 21,057
----------- --------- --------- --------- --------- ----------- -----------
Total Assets...................... $ 2,250 $ 3,411 $ 4,261 $ 9,931 $ 24,511 $ 28,503 $ 29,415
----------- --------- --------- --------- --------- ----------- -----------
----------- --------- --------- --------- --------- ----------- -----------
Liabilities:
Accrued Medical Claims.............. $ 447 $ 833 $ 1,278 $ 3,063 $ 5,918 $ 6,025 $ 6,025
Other Current Liabilities........... 766 932 1,157 792 2,650 3,671 1,851
Other Liabilities................... -- 291 222 778 12,064 13,462 614
----------- --------- --------- --------- --------- ----------- -----------
Total Liabilities................. 1,213 2,056 2,657 4,633 20,632 23,158 8,490
Shareholders' Equity:................. 1,037 1,355 1,604 5,298 3,879 5,345 20,925
----------- --------- --------- --------- --------- ----------- -----------
Total Liabilities & Shareholders'
Equity............................ $ 2,250 $ 3,411 $ 4,261 $ 9,931 $ 24,511 $ 28,503 $ 29,415
----------- --------- --------- --------- --------- ----------- -----------
----------- --------- --------- --------- --------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1998 (UNAUDITED)
--------------------------------------
PRO PRO FORMA
ACTUAL FORMA(4) AS ADJUSTED(5)
--------- ----------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
PRO FORMA BALANCE SHEET DATA:
Cash and Cash Equivalents................................... $ 1,765 $ 1,822 $ 2,997
Working Capital (Deficit)................................... (2,569) (2,513) 482
Total Assets................................................ 28,503 28,560 29,415
Long-Term Debt.............................................. 13,231 13,231 381
Total Shareholders' Equity.................................. 5,343 5,400 20,925
</TABLE>
- ------------------------
(1) On July 31, 1996, a wholly-owned subsidiary of the Company merged into
Prospect Medical Systems (the "1996 Merger"), with Prospect Medical Systems
being the surviving corporation and a wholly-owned subsidiary of the
Company. As the shareholders of Prospect Medical Group became the majority
stockholders in the merged company, under applicable financial reporting
requirements, Prospect Medical Group is considered the predecessor entity to
the Company for periods prior to July 31, 1996 for financial statement
reporting purposes.
(2) Gives effect to the acquisitions of Sierra Medical Group, Santa Ana/Tustin
Physicians Group and certain assets of Antelope Valley Medical Group as if
they had occurred on October 1, 1996. See "Business of the Company--History
of the Company," "Unaudited Pro Forma Financial Information" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(3) Gives effect to the acquisition of certain assets of Antelope Valley Medical
Group as if it had occurred on October 1, 1996. See "Business of the
Company--History of the Company," "Unaudited Pro Forma Financial
Information" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
(4) Gives effect to the Yorba Linda Settlement Agreement. See "Risk
Factors--Recent Settlement Agreement with Yorba Linda Medical Group" and
"Business of the Company--History of the Company" for further discussion of
the Yorba Linda Settlement Agreement.
(5) Gives effect to the completion of this Offering at an assumed initial
offering price of $6.00 per share and $.10 per Warrant and the receipt and
application of the estimated net proceeds therefrom as if such transaction
had occurred on October 1, 1996 and October 1, 1997 for the statement of
operations data for fiscal year 1997 and the nine months ended June 30,
1998, respectively, and on June 30, 1998 for balance sheet data. See "Use of
Proceeds" and "Capitalization."
7
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE COMMON STOCK AND WARRANTS OFFERED HEREBY INVOLVES A
HIGH DEGREE OF RISK. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE
FOLLOWING RISK FACTORS, IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS
PROSPECTUS, BEFORE PURCHASING THE SECURITIES OFFERED HEREBY. THIS PROSPECTUS
CONTAINS FORWARD-LOOKING STATEMENTS. DISCUSSIONS CONTAINING SUCH FORWARD-LOOKING
STATEMENTS MAY BE FOUND IN THE MATERIAL SET FORTH BELOW AND UNDER "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND
"BUSINESS OF THE COMPANY--STRATEGY OF THE COMPANY," AS WELL AS IN THE PROSPECTUS
GENERALLY. PROSPECTIVE INVESTORS ARE CAUTIONED THAT ANY SUCH FORWARD-LOOKING
STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISKS AND
UNCERTAINTIES. ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY FROM THOSE
DISCUSSED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS,
INCLUDING, WITHOUT LIMITATION, THE RISK FACTORS SET FORTH BELOW AND THE MATTERS
SET FORTH IN THIS PROSPECTUS GENERALLY.
LACK OF PROFITABLE HISTORY AND NEGATIVE WORKING CAPITAL. The Company has a
limited history of operations and earnings following implementation of the
Company's current growth strategy in mid-1996. The Company's audited financial
statements for the fiscal years ended September 30, 1995, 1996 and 1997 reflect
net income (loss) of $188,250, $555,428, and $(2,639,415), respectively, and the
Company's unaudited financial statements for the nine months ended June 30, 1998
reflect net income of $375,516. There can be no assurance that the Company will
be able to integrate and manage profitably the physician organizations with
which it affiliates, or that the Company will be able to successfully and
profitably manage HMO and other payor contracts on behalf of these physician
organizations. See "Selected Consolidated Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations." In
addition, the Company had negative working capital of $2,569,000 and $2,003,000
at June 30, 1998 and September 30, 1997, respectively.
DIFFICULTY IN CONTROLLING HEALTH CARE COSTS; CAPITATED NATURE OF
REVENUE. As of June 30, 1998, the Company received approximately 89% of its
revenues from agreements with HMOs. The Company's continuing profitability
primarily depends upon the ability to pay out less in medical and administrative
costs than the capitation revenue received from HMOs. HMOs are increasingly
overseeing the provision of and the prices charged for medical services with the
goal of reducing costs and lowering capitation payments. The Company's success
therefore depends in large part on the effective management of health care
costs, including controlling utilization of specialty care and other ancillary
care and purchasing services at competitive prices. Any adjustment downward in
capitation payments caused by the increasing efforts by HMOs to reduce costs
could have a material adverse effect on the Company's operating results and
financial position. In addition, employer groups are becoming increasingly
successful in negotiating reductions in the growth of premiums paid for their
employees' health insurance, which tends to depress the payments for health care
services. At the same time, employer groups are demanding higher accountability
from payors and providers of health care services with respect to measurable
accessibility, quality and service. If these trends continue, the cost of
providing physician services could increase while the level of payment could
grow at a lower rate or could decrease. There can be no assurance that these
pricing pressures will not have a material adverse effect on the operating
results and financial condition of the Company.
Agreements with HMOs may also contain shared-risk arrangements under which
additional compensation can be earned based on the provision of high quality,
cost-effective health care to enrollees but which may require that a portion of
any loss in connection with such shared-risk arrangements, including losses
resulting from the provision of hospital services, be assumed by the Company,
thereby reducing the Company's net income. The amount of non-capitated and
hospital costs in any period could be affected by factors beyond the control of
the Company, such as changes in treatment protocols, new technologies and
inflation. To the extent that such non-capitated and hospital costs are higher
than anticipated, revenue paid to the Company may not be sufficient to cover the
costs the Company is responsible for paying. Any such insufficiency could have a
material adverse effect on the operating results and financial condition of the
Company.
8
<PAGE>
RISKS ASSOCIATED WITH GROWTH STRATEGY. The Company's strategy primarily
involves growth through acquisition of additional physician organizations that
specialize in managed care and the expansion of their medical practices;
establishing a health plan with a limited license to provide hospital, ancillary
health care and physician services to commercial and Medicare enrollees within
the Company's service network; and formation and development of a Medicare
Health Plan to provide hospital, ancillary health care and physician services to
Medicare enrollees not currently served by the Company's provider network.
Several of the acquisitions by the Company were large transactions which involve
significant risks and uncertainties for the Company. The Company anticipates
continuing to pursue growth through acquisitions and expansion of existing
medical practices. The success of past and future acquisitions is largely
dependent on the ability of the Company to integrate the operations of the
acquired physician organizations into the Company's operations in an efficient
and effective manner. The histories, business models and cultures of acquired
physician organizations may differ from those of the Company and its affiliated
physician organizations. The process of integrating management services, which
includes management information systems, claims administration and billing
services, utilization management of medical services, care coordination and case
management, quality and cost monitoring and physician recruitment, as well as
administrative functions, facilities and other aspects of operations, while
managing a larger entity with differing histories, business models and cultures,
presents a significant challenge to the Company's management. In addition,
integration must be carried out so that the Company is able to control medical
and administrative costs. The ability to control such costs is key to the
successful future operations of the Company. There can be no assurance that the
Company's acquisitions will be successfully integrated on a timely basis, if at
all, or that the anticipated benefits of these acquisitions, including cost
savings, will be realized. Furthermore, there can be no assurance that any cost
savings which are realized will not be offset by increases in other expenses or
operating losses. The Company will encounter similar uncertainties and risks
with respect to any future acquisitions it may make. Failure to effectively
accomplish the integration of acquired companies could have a material adverse
effect on the Company's results of operations and financial condition. Further,
there can be no assurance that the Company will be able to successfully expand
and manage the physician organizations with which it affiliates. The Company's
growth is dependent on its ability to affiliate with physician organizations, to
manage and control costs, and to realize economies of scale.
Certain of the companies whose assets were recently acquired by affiliated
physician organizations have recently or historically operated at a loss. Other
acquired companies have experienced fluctuations in quarter-to-quarter operating
results. See "--Fluctuations in Quarterly Results." The Company has commenced
the institution of certain measures intended to reduce any operating losses and
to operate the acquired businesses profitably. However, there can be no
assurance that the Company will reverse these trends or operate these assets
profitably. If there are continuing operating losses from the acquired assets,
the Company may need additional capital to fund its business, and there can be
no assurance that such additional capital can be obtained at all or, if
obtained, that it will be on terms acceptable to the Company.
The Company and its affiliated physician organizations are regularly in
discussions with potential acquisition candidates and may from time to time
enter into letters of intent or definitive agreements with respect to the
acquisition of such businesses. No assurance can be given as to the Company's or
the affiliated physician organizations' ability to identify suitable acquisition
candidates, to compete successfully at favorable prices for available
acquisition candidates or to complete future acquisitions, or as to the
financial effect on the Company of any acquired business. Future acquisitions by
the Company may involve the issuance of additional shares of common stock, which
could have a dilutive effect on earnings per share, or could involve significant
cash expenditures and may result in increased indebtedness and interest and
amortization expenses or decreased operating income, which could have an adverse
impact on the Company's future operating results.
There can be no assurance that the Company and/or its affiliated physician
organizations will be able to achieve and manage its planned growth or that
suitable physician organizations will continue to be
9
<PAGE>
available for affiliation upon terms satisfactory to the Company, if at all. In
addition, there can be no assurance that the Company will be able to continue to
attract and retain a sufficient number of qualified physicians and other health
care professionals to continue to expand its operations or otherwise to maintain
an adequate infrastructure to support continued growth. Any failure of the
Company to consummate economically feasible acquisitions, effectively integrate
acquisitions or price services appropriately could have a material adverse
effect on the Company's growth, financial condition and results of operations.
The integration of acquired entities also requires the dedication of
management resources, which may distract the attention of management from the
day-to-day business of the combined companies. Furthermore, new acquisitions may
expose the Company's service network to new payors and providers with which it
has had no previous business experience. The Company cannot predict whether it
will be able to enroll into the Company's service network all members currently
served by physicians affiliated with newly acquired entities. Also, there can be
no assurance that there will not be substantial unanticipated costs or other
material adverse effects associated with acquisition and integration activities,
any of which could result in significant one-time charges to earnings or
otherwise adversely affect the Company's operating results.
To establish a health plan to provide hospital, physician and ancillary
health care services to commercial and Medicare enrollees and thereby accept
full financial risk for the provision of hospital as well as physician and
ancillary health care services, the Company or an affiliated physician
organization will need to obtain a license under the State of California
Knox-Keene Health Care Service Plan Act of 1975 ("Knox-Keene") which Act is
administered by the State of California Department of Corporations ("DOC").
Further, in order to accept full risk for Medicare beneficiaries, in addition to
a Knox-Keene license, the Company or its affiliated physician organization or
organizations will need to obtain certification as a Medicare Health Plan from
HCFA. There can be no assurance that the Company and/or its affiliated physician
organizations will be able to obtain the necessary licenses or certifications to
operate as a health plan with a limited license or as a Medicare Health Plan.
The application process to obtain such licenses and/or certifications is also
time-consuming and expensive.
Even if the Company obtains a limited license under Knox-Keene to operate as
a health plan, the Company will need to enter into agreements with
fully-licensed HMOs to provide hospital, physician and ancillary health care
services to commercial and/or Medicare enrollees. The Company cannot predict
which, if any, HMOs will be willing or able to enter into agreements with the
Company pursuant to which the Company or an affiliated physician organization
would assume full risk for all hospital, physician and ancillary health care
services or if any such agreements will be available on terms acceptable to the
Company. Even if the necessary licenses and certifications to form a Medicare
Health Plan are obtained, the Medicare Health Plan will need to enter into one
or more agreements with HCFA to provide health care services to Medicare
beneficiaries. There also can be no assurance that the Medicare Health Plan will
be able to enter into one or more contracts with HCFA to assume full risk for
all health care services provided to Medicare beneficiaries or if any such
contracts will be available on terms acceptable to the Company. There can be no
assurance that the Company or an affiliate, as the case may be, will be able to
implement or operate as a health plan with a limited license or as a Medicare
Health Plan. A Medicare Health Plan performs all marketing and sales functions
directed at Medicare beneficiaries. The Company has no experience in direct
marketing or sales to Medicare beneficiaries. There can be no assurance that the
Company will be able to successfully market or sell to Medicare beneficiaries.
There also can be no assurance that, even if the Company or an affiliate
satisfies all of the conditions stated above to assume full risk for all health
care services, the Company will earn a profit or not incur losses from such
operations.
NEED FOR ADDITIONAL CAPITAL. Implementation of the Company's growth
strategy requires substantial capital resources to permit its affiliated
physician organizations to acquire the assets or stock of additional physician
organizations that specialize in managed care, for the effective integration,
operation, and
10
<PAGE>
expansion of affiliated physician organizations, and/or for the acquisition of
related management companies and for the effective integration and operation of
such management companies. Such resources will also be needed to obtain a
limited Knox-Keene license and the certifications required to form a Medicare
Health Plan. The Company may also require working capital in connection with its
ongoing operations.
A portion of the Company's revenues is derived from incentive payments under
HMO agreements that are accrued monthly but are not received until approximately
the third quarter of the calendar year, which is well after the revenue has
accrued. These payments are not always made in a timely manner. Subsequent to
this Offering, the Company anticipates that a renewal or replacement of its
credit facility, including any additional amounts available thereunder, and cash
flows from operations will be sufficient to meet the Company's currently
anticipated acquisition, health plan formation and development, expansion and
working capital needs through September 30, 1999; subsequent to September 30,
1999, the Company anticipates that the capital needed to implement its business
plan may exceed the capital sources described above. To finance its ongoing
capital requirements, the Company may from time to time to issue additional
equity securities or incur additional debt. A greater amount of debt or
additional equity financing could be required to the extent that the Company's
Common Stock fails to maintain a market value sufficient to warrant its use in
future acquisitions or to the extent that physician organizations are unwilling
to accept Common Stock in exchange for their operating assets or common stock.
Pursuant to the Company's agreements with the Representative, the Company's
ability to issue any securities is restricted for a period commencing in March
1998 and ending twelve months following the effective date of the Registration
Statement of which this Prospectus forms a part (the "Effective Date"), except
for certain specified purposes, which purposes include acquisitions. See
"--Shares Eligible for Future Sale" herein for further discussion. The Company's
ability to issue any convertible debt or equity securities in a public or
private sale may also be restricted under certain circumstances pursuant to
contractual restrictions in the Company's agreements with its commercial lender.
There can be no assurance that the Company will be able to obtain additional
required capital on terms acceptable to the Company, if at all. Any additional
capital could result in increased indebtedness and interest and financing
expense, decreased operating income to fund future expansion and dilution of the
existing equity owners. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
CURRENT FINANCING ARRANGEMENTS. The Company currently has a revolving
credit facility with Imperial Bank, a California banking corporation (the
"Bank"). The maximum amount available to the Company under the credit facility
is $12,500,000. The credit facility matures on July 3, 1999. The Company
currently intends to renegotiate the terms of or replace its credit facility
upon maturity. There can be no assurance that the Company will be able to
renegotiate the terms of or replace the credit facility or that any renegotiated
or replacement financing can be obtained on terms acceptable to the Company.
HIGH CONCENTRATION OF HMO CONTRACTS; SHORT-TERM NATURE OF HMO CONTRACTS. In
the current fiscal year, based on revenues for the nine-month period ended June
30, 1998, the Company anticipates that contracts with three HMOs will account
for approximately 70% of the Company's revenue, of which the contracts with
PacifiCare of California/FHP, Inc. will account for approximately 50% of the
Company's revenue, the contracts with Cigna Healthcare of California, Inc. will
account for slightly less than 10% of the Company's revenue and the contract
with Blue Cross of California will account for slightly more than 10% of the
Company's revenue. HMO contracts generally are for one-year terms, may be
terminated earlier without cause upon notice and upon renewal and are subject to
annual negotiation of capitation rates, covered benefits and other terms and
conditions. At times, HMO contracts may be continued on a month-to-month basis
while the parties renegotiate the terms of the contracts. There can be no
assurance that any of such contracts will not be terminated, will be renewed or,
if renewed, that they will contain favorable terms. The loss of any HMO contract
and the failure to regain or retain such HMO's members or the related revenues
could have a material adverse effect on the Company.
11
<PAGE>
RELIANCE ON GOVERNMENT SPONSORED HEALTH CARE PROGRAMS. Although the
Company's affiliated physician organizations do not directly contract with HCFA,
the Company estimates that approximately 35% of the revenues of such affiliated
physician organizations are derived from payments made to their contracting HMOs
under Medicare, Medicaid and other government-sponsored health care programs.
Consequently, any change in the regulations, policies, practices,
interpretations or statutes adversely affecting payments made to HMOs under
these government-sponsored health care programs could adversely affect the
results of operations of the Company.
DEPENDENCE ON HMO MEMBER GROWTH. The Company is also largely dependent on
the continued increase in the number of HMO members who use its service
networks. This growth may come from affiliation with additional physician
organizations, increased membership in HMOs currently contracting with the
Company through its affiliated physician organizations, additional agreements
with HMOs and development or acquisition of other management companies. There
can be no assurance that the Company will be successful in identifying,
acquiring and integrating additional physician organizations or other management
companies or in increasing the number of enrollees. A decline in membership in
HMOs could have a material adverse effect on the operating results and financial
condition of the Company.
DEPENDENCE ON AFFILIATED PHYSICIAN ORGANIZATIONS. Substantially all of the
Company's revenues are derived from management agreements with its affiliated
physician organizations. The Company's management agreements are for a term of
30 years with additional renewal terms of 10 years and may be terminated only
for cause. Physicians are employed by the affiliated medical groups (and not by
the Company) pursuant to employment agreements with initial terms ranging from
three to seven years. The Company's affiliated independent practice associations
generally contract with independent physicians pursuant to provider agreements
with a term of one year, terminable by either party upon 30 days' (for primary
care physicians) or 90 days' (for specialty care physicians) notice. Key members
of a physician organization could retire, become disabled, terminate their
employment agreements or provider contracts, or otherwise become unable or
unwilling to continue generating revenues at the current level or practicing
medicine within such physician organization. There can be no assurance that (i)
physicians presently in the Company's affiliated physician organizations will
not leave such physician organizations and that enrollees served by such
physicians will not enroll in an unaffiliated physician organization, (ii) the
Company will be able to attract additional physicians into its affiliated
physician organizations, or (iii) the amount of capitation and risk-sharing
payments to such physicians will not have to be increased. In addition, each of
the Company's affiliated physician organizations operates within a limited
geographic area, and a deterioration of economic or other conditions within such
area could have a material adverse impact upon the Company. Any material decline
in revenue of the Company's affiliated physician organizations, whether as a
result of physicians leaving the affiliated physician organizations or
otherwise, could have a material adverse effect on the Company.
The Company's affiliated independent practice associations seek to include
exclusivity and non-diversion arrangements with contracting physicians in their
agreements. In an exclusivity agreement generally, a contracting physician
agrees to refrain from providing physician services to members of HMOs except
through Company-affiliated physician organizations. Under a non-diversion
agreement, a physician is required to refrain from diverting enrollees in a
Company-affiliated independent practice association to an independent practice
association unaffiliated with the Company. Although the affiliated independent
practice associations have entered into exclusivity and/or non-diversion
agreements of varying degrees with certain physicians, there can be no assurance
as to the enforceability of such restrictive agreements. There can also be no
assurance that the affiliated independent practice associations will be able to
enter into additional exclusivity arrangements. In addition, the affiliated
independent practice associations do not have exclusivity and/or non-diversion
agreements with a substantial number of the contracting physicians.
12
<PAGE>
RECENT SETTLEMENT AGREEMENT WITH YORBA LINDA MEDICAL GROUP. Certain
physicians who are employed by Yorba Linda Medical Group have provided medical
services to enrollees of an affiliated physician organization, Prospect Medical
Group, under separate provider agreements. Under the agreements between these
physicians and Prospect Medical Group, these physicians had agreed to be
exclusive providers for Prospect Medical Group. These physicians sought release
from the exclusivity and other noncompetition provisions in their agreements
with Prospect Medical Group in order to join another physician organization. As
described under "Business of the Company--History of the Company," the Company
and Prospect Medical Group have agreed to the release in exchange for the return
of 1,126,323 shares of Common Stock of the Company pursuant to a settlement
agreement (the "Yorba Linda Settlement Agreement"). The Board of Directors of
the Company believed that the return of the Common Stock constituted adequate
consideration for the release of such physicians from their agreements. The
Company estimates that no more than approximately 13,000 of the Company's
enrollees who were served by these physicians as of June 30, 1998 may enroll
with an unaffiliated physician organization, that any such change in enrollment
would occur by October 1, 1998 and that the loss of these enrollees could reduce
the Company's capitation revenues by no more than 16%, or total revenues by no
more than 15% based on the results of operations for the nine months ended June
30, 1998. Management of the Company believes these reductions in revenue will
not materially adversely affect the Company's business, operations, financial
condition or cash flows because the costs associated with this revenue were
relatively higher than the costs associated with the Company's other revenue.
See "Unaudited Pro Forma Financial Information" herein for a description of the
anticipated effect of the Yorba Linda Settlement Agreement on the results of
operations, financial condition or cash flows of the Company.
HIGHLY COMPETITIVE MARKET. The managed care industry is highly competitive
and is subject to continuing changes with respect to the manner in which
services are provided and how providers are selected and compensated. The
Company competes with any entity that contracts with HMOs and other payors for
the provision of prepaid health services, including but not limited to: (i)
other companies that provide management services to health care providers; (ii)
hospitals that affiliate with one or more medical groups; (iii) HMOs that employ
or contract directly with physicians; and (iv) other physician organizations.
Additionally, the physician organizations with which the Company is affiliated
compete with other medical groups and independent practice associations in the
areas in which the Company does business, or is expected to do business in the
future. Pressures to reduce the cost of medical care, through legal reform of
the health care system or through market forces such as the continued expansion
of managed care, could adversely impact the Company's revenues. Further,
increased enrollment in prepaid plans because of health care reform or for other
reasons, increased participation by physicians in group practices and other
factors may attract new entrants into the managed care industry and result in
increased competition for the Company. Certain of the Company's competitors are
significantly larger and better capitalized, provide a wider variety of
services, may have more experience in providing health care management services
and may have longer established relationships with HMOs. There can be no
assurance that the Company will be able to compete effectively with such
competitors, that additional competitors will not enter the market or that such
competition will not make it more difficult to enter into affiliations with
physician organizations on terms beneficial to the Company, if at all. See
"Business of the Company--Competition."
DEPENDENCE ON INFORMATION SYSTEMS. New systems are critical to developing
and implementing operational, financial and disease management information. To
develop its network, the Company has invested in a sophisticated management
information system. See "--Year 2000 Risks" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The Company may
experience unanticipated delays, complications and expenses in implementing,
integrating and operating such systems. Furthermore, such systems may require
modifications, improvements or replacements as the Company expands and as new
technologies become available. See "Management's Discussion and Analysis of
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Financial Condition and Results of Operations--Liquidity and Capital
Resources--Year 2000" for a discussion of the effects of the year 2000 on the
Company's management information systems. Such modifications, improvements or
replacements may require substantial expenditures and may require interruptions
in operations during periods of implementation. Moreover, implementation of such
systems is subject to the availability of information technology and skilled
personnel to assist the Company in creating and implementing the systems. No
assurance can be given that the Company will be able to enhance existing and/or
implement new information systems. The failure to successfully implement and
maintain operational, financial and clinical information systems would have a
material adverse effect on the Company. See "Business of the Company--Strategy
of the Company."
DEPENDENCE ON KEY PERSONNEL. The Company's future success depends on the
services of its key management personnel, who include Jacob Y. Terner, M.D. and
Gregg DeNicola, M.D. The loss of either of these individuals, or the inability
to attract and retain a sufficient number of qualified management personnel,
could have a materially adverse effect on the Company's results of operations.
Currently, the Company maintains no life insurance on its key management
personnel.
RISKS INHERENT IN PROVISION OF MEDICAL SERVICES. Each of the affiliated
physician organizations is involved in the delivery of health care services to
the public and, therefore, is exposed to the risk of professional liability
claims. Each of the affiliated physician organizations' contracts with HMOs
generally require such physician organizations to indemnify the HMO for losses
resulting from the negligence of physicians who were employed by or contracted
with the physician organization. Claims of this nature, if successful, could
result in substantial damage awards to the claimants, which may exceed the
limits of any applicable insurance coverage. Insurance against losses related to
claims of this type can be expensive. Moreover, in recent years, physicians,
hospitals and other participants in the health care industry have become subject
to an increasing number of lawsuits alleging medical malpractice and related
claims based on the withholding of approval for or reimbursement of necessary
medical services. Many of these lawsuits involve large claims and substantial
defense costs. Although the Company does not engage in the practice of medicine
or the provision of medical services, there can be no assurance that the Company
will not become involved in such litigation in the future. The Company and its
affiliated physician organizations are currently insured under policies which
cover general and professional liability (including malpractice) and directors'
and officers' liability insurance on a "claims made" basis in amounts deemed
appropriate by management, based upon historical claims and the nature and risk
of its business. In addition, the affiliated independent practice association
provider contracts with physicians typically require each physician to maintain
professional liability insurance coverage of the physician and of each employee,
servant and agent of the physician. There can be no assurance, however, that
future claims will not exceed the limits of available insurance coverage, that
existing insurers will remain solvent and able to meet their obligations to
provide coverage for any such claims, or that such coverage will continue to be
available or available with sufficient limits and at reasonable cost to
adequately and economically insure the Company's and affiliated physician
organizations' operations in the future. A judgment against the Company or any
of its affiliated physician organizations could have a material adverse effect
on the Company.
FULL RISK CAPITATION. Under all current HMO contracts, the affiliated
physician organizations accept the financial risk for the provision of physician
(including certain specialty care physician) services and certain ancillary
health care services. Pursuant to the Company's future growth strategy, the
Company or an affiliated entity may also accept the financial risk for hospital
services. In the event that (i) the Company is unable to negotiate favorable
prices or rates in contracts with providers of these services on behalf of
itself or its affiliate, or (ii) the affiliated physician organizations are
unable to effectively control the utilization of these services, the Company
could experience material adverse effects on its results of operations.
FLUCTUATIONS IN QUARTERLY RESULTS. The Company's financial statements
(including interim financial statements) contain accruals which are calculated
quarterly for estimates of incentive payments to be made
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by the HMOs to the affiliated physician organizations based upon a comparison of
specialist and hospital utilization to budgeted costs. Quarterly results have in
the past and may in the future be affected by adjustments to such estimates for
actual costs incurred. Historically, the affiliated physician organizations and
HMOs generally reconcile differences between actual and estimated amounts
receivable or payable relating to HMO incentive payment arrangements by the
third quarter of each calendar year. In the event that the affiliated physician
organizations and HMOs are unable to reconcile such differences, extensive
negotiation, arbitration or litigation relating to the final settlement of these
amounts may occur. Any delay in the settlement of these amounts may result in an
inability of the Company to record anticipated income. As the Company's network
expands to include additional HMOs, the timing of these reconciliations may
vary; this variation in timing may cause the Company's results not to be
directly comparable to corresponding quarters in other years. The Company's
financial statements also include estimates of costs for covered medical
benefits incurred by enrollees, which costs have not yet been reported by the
providers. While these estimates are based on information available to the
Company at the time of calculation, actual costs may differ from the Company's
estimates of such amounts. If the actual costs differ significantly from the
amounts estimated by the Company, adjustments will be required and quarterly
results may be affected. Quarterly results may also be affected by movements of
HMO members from one HMO to another, particularly during periods of open
enrollment for HMOs. Additionally, the Company, through the affiliated physician
organizations, anticipates making acquisitions in the future. Such acquisitions
could cause fluctuations in the Company's quarterly results. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
YEAR 2000 RISKS. The Company is seeking to ensure that its electronic data
processing systems, including any embedded systems that control equipment, will
recognize the year 2000 and will not treat any date after December 31, 1999 as a
date during the twentieth century. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources--Year 2000." However, no assurances can be given that the Company will
be able to avoid all year 2000 problems, especially those that could originate
with third parties with whom the Company engages in electronic transactions or
otherwise does business. If the Company or any third party with whom the Company
does business were to have a year 2000 problem, the Company's business could be
seriously disrupted and the Company's financial condition and results of
operations could be materially adversely affected.
RISK RELATED TO INTANGIBLE ASSETS AND AMORTIZATION OF GOODWILL. The Company
has a significant amount of intangible assets. As a result of acquisitions,
intangible assets (net of accumulated amortization) of approximately $18,588,000
have been recorded in the Company's balance sheet as of June 30, 1998.
Additional acquisitions will result in the recognition of additional intangible
assets which will cause a further increase in amortization expense. Further, any
future determination that a significant impairment of the value of acquired
intangible assets has occurred would require the write-down of the impaired
portion of unamortized goodwill to fair value, which would have a material
adverse effect on the Company's results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
GOVERNMENT REGULATION. The activities currently conducted by the Company
and its affiliated physician organizations are subject to extensive regulation
at the local, state, and federal levels. The Company believes its operations are
in material compliance with applicable laws. However, the assortment of laws and
regulations affecting the Company's business are complex, in many cases
ambiguous and many provisions have not been the subject of regulatory or
judicial interpretation. There can be no assurance that a review of the
Company's business by courts or regulatory authorities will not result in a
determination that the Company has not complied fully with all applicable laws
and regulations in one or more aspects of its business which could adversely
affect the operations of the Company. Further, there can be no assurance that
the health care regulatory environment will not change so as to restrict the
Company's existing operations or their expansion. See "Business of the
Company--Governmental Regulation."
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In California, and in certain other states in which the Company may attempt
to conduct business in the future, general business corporations are not
permitted to practice medicine, exercise control over physicians who practice
medicine or engage in certain practices such as fee-splitting with physicians.
The statutory prohibitions against the corporate practice of medicine generally
proscribe lay entities from employing or hiring health care practitioners, or
from otherwise interfering directly or indirectly with a health care
practitioner's practice of medicine. The Company believes that it is not engaged
in the corporate practice of medicine as it neither represents to the public
that it offers medical services nor purports to control the practice of
medicine. Further, although the Company provides the affiliated physician
organizations with administrative, management and support services, the
affiliated physician organizations continue to be exclusively in control of and
responsible for all aspects of the practice of medicine and delivery of medical
services. The Company's agreements with its affiliated physician organizations
specifically reserve to the physicians exclusive authority to make all decisions
regarding medical care, including the right to employ physicians or enter into
contracts for the provision of medical services or make other financial
commitments. See "Business of the Company--The Affiliated Physician
Organizations." There can be no assurance, however, that regulatory authorities,
courts or parties with which the Company does business will not assert that the
Company is engaged in the corporate practice of medicine and seek relief
prohibiting the Company from carrying on business or voiding existing
contractual relationships. If such assertions are made, the Company might be
required to restructure its contracts with HMOs or with its affiliated physician
organizations. Any such restructuring could have a material adverse effect on
the Company.
The Company is subject to federal legislation that prohibits activities and
arrangements that provide kickbacks or other economic inducements for the
referral of business under the Medicare and Medicaid programs. "Safe harbor"
regulations have been promulgated to identify certain business and payment
practices which are deemed not to violate this legislation. In addition, federal
legislation (known as Stark II) currently restricts the ability of physicians to
refer Medicare/Medicaid patients to entities providing certain designated health
services if the physician has an ownership interest or compensation arrangement
in such entity. Non-compliance with either the federal anti-kickback legislation
or the federal self-referral prohibition can result in exclusion from the
Medicare and Medicaid programs and civil and criminal penalties. In addition,
with respect to the self-referral prohibition, the entity and the referring
physician are prohibited from receiving reimbursement for services rendered.
Many states, including California, have similar anti-kickback and self-referral
laws which provide for similar penalties. Although the Company believes that its
operations comply with all federal and state anti-kickback and self-referral
laws, no assurances can be given that the Company's operations fall outside the
scope of these prohibitions. Further, there can be no assurance that the Company
will be able to comply with any prospective legislation which may be enacted to
regulate the health care industry. See "Business of the Company-- Governmental
Regulation."
In April 1998, the Office of the Inspector General of the Department of
Health and Human Services (the "OIG") issued an advisory opinion under the
Medicare/Medicaid anti-kickback statute with respect to compensation
arrangements in a proposed management services agreement between a medical
practice management company and a primary care physician practice. Based upon
such advisory opinion, the Company has revised its standard management agreement
with its affiliated physician organizations to specify a flat fee payable on a
monthly basis as compensation for marketing services. However, no assurance can
be given that the OIG or any other health care regulatory agency will not
interpret the Company's compensation arrangements to be in violation of the
prohibitions of the anti-kickback statute. See "Business of the
Company--Governmental Regulation."
There are also state and federal civil and criminal statutes imposing
substantial penalties, including civil and criminal fines and imprisonment, on
health care providers that 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. The Company believes
it is in material compliance with such laws, but there is no assurance
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that the Company's activities will not be challenged or scrutinized by
governmental authorities. Moreover, technical Medicare and other reimbursement
rules affect the structure of physician billing arrangements. The Company
believes it is in material compliance with such regulations, but regulatory
authorities may differ and in such event the Company may have to modify its
physician billing arrangements. Non-compliance with such regulations may
adversely affect the operation of the Company and subject it to penalties and
additional costs.
INACTIVE PRIOR MARKET FOR THE COMMON STOCK; NO ASSURANCE OF AMERICAN STOCK
EXCHANGE LISTING. Prior to the Offering, the Company's Common Stock has been
the subject of limited and sporadic trading on the OTC-Bulletin Board. The
Company intends to apply to list the Shares and the Warrants on the American
Stock Exchange under the proposed symbols "PXX" and "PXX.W," respectively. No
assurance can be given that such application will be granted or, if granted,
that an active trading market will develop. See "Price Range of Common Stock and
Dividend Policy." There can be no assurance that an active trading market, if
developed, will be sustained.
The Board of Governors of the American Stock Exchange, Inc. has established
certain standards for the initial listing and continued listing of a security on
the American Stock Exchange. The standards for initial listing require, among
other things, that an issuer have a three-year history of operations; minimum
public distribution of 500,000 shares together with a minimum of 800 public
holders or 1,000,000 shares together with a minimum of 400 public holders, and
stockholders equity of at least $4,000,000; the minimum bid price for the listed
securities be $3.00 per share; and the minimum market value of the public float
(the shares held by non-insiders) be at least $15,000,000. The maintenance
standards require, among other things, that an issuer maintain a minimum market
value of its public float of at least $1,000,000, a minimum public distribution
of 200,000 shares and a minimum of 300 holders and comply with certain filing
requirements of the American Stock Exchange. There can be no assurance that the
Company will continue to satisfy the requirements for maintaining an American
Stock Exchange listing. If the Company's securities were to be de-listed from
the American Stock Exchange, it would adversely affect the prices of such
securities and the ability of holders to sell them, and the Company would be
required to comply with the initial listing requirements to be relisted on the
American Stock Exchange.
DETERMINATION OF OFFERING PRICE; POSSIBLE VOLATILITY OF STOCK PRICE. The
Offering Price of the Common Stock and the Warrants has been established by
negotiation between the Company and the Representative of the Underwriters and
may not be indicative of the prices that will prevail in the public market. See
"Underwriting." There has been a history of significant volatility in the market
prices for shares of health care companies and smaller capitalization companies
generally, and it is likely that the market price of the Common Stock will be
highly volatile. There can be no assurance that shares of Common Stock or the
Warrants may be resold at or above the Offering Price after this Offering.
Prices for the Common Stock and the Warrants following this Offering may be
influenced by many factors, including announcements of legislation or regulation
affecting the health care industry in general and reimbursement for health care
services in particular, the depth and liquidity of the market for the Common
Stock and the Warrants, investor perception of the Company and fluctuations in
the Company's operating results and market conditions.
RISK OF LOW-PRICED SECURITIES; RISK OF APPLICATION OF PENNY STOCK RULES. If
the Company is unable to satisfy the American Stock Exchange's listing and/or
maintenance requirements, the Common Stock would remain on, or return to, as the
case may be, the OTC Bulletin Board, a screen-based electronic bulletin board
maintained by the National Association of Securities Dealers, Inc. If the price
per share were to drop below $5.00, then unless the Company satisfied certain
net asset tests, the Company's securities would become subject to certain penny
stock rules promulgated by the Securities and Exchange Commission (the
"Commission"). The penny stock rules require a broker-dealer, prior to a
transaction in a penny stock not otherwise exempt from the rules, to deliver a
standardized risk disclosure document prepared by the Commission that provides
information about penny stocks and the nature and level of risks in the penny
stock market. The broker-dealer also must provide the customer with current bid
and offer quotations for
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the penny stock, the compensation of the broker-dealer and its salesperson in
the transaction and monthly account statements showing the market value of each
penny stock held in the customer's account. In addition, the penny stock rules
require that prior to a transaction in a penny stock not otherwise exempt from
such rules, the broker-dealer must make a special written determination that the
penny stock is a suitable investment for the purchaser and receive the
purchaser's written agreement to the transaction. These disclosure requirements
may have the effect of reducing the level of trading activity in the secondary
market for a stock that becomes subject to the penny stock rules. If the Common
Stock becomes subject to the penny stock rules, investors in the Offering may
find it more difficult to sell their shares.
SPECULATIVE NATURE OF WARRANTS. The Warrants do not confer any rights of
Common Stock ownership on their holders, such as voting rights or the right to
receive dividends, but rather merely represent the right to acquire shares of
Common Stock at a fixed price for a limited period of time. Following the
completion of this Offering, the market value of the Warrants will be uncertain
and there can be no assurance that the market value of the Warrants will equal
or exceed their initial public offering price. There can be no assurance that
the market price of the Common Stock will ever equal or exceed the exercise
price of the Warrants, and consequently, whether it will ever be profitable for
holders of the Warrants to exercise the Warrants.
POTENTIAL ADVERSE EFFECT OF REDEMPTION OF WARRANTS. Commencing , 1999
[the first anniversary of the effective date of the registration statement filed
with respect to the Securities], the Warrants are subject to redemption by the
Company at $.10 per Warrant on thirty days' prior written notice to the warrant
holders if the average closing sales price of the Common Stock as reported on
the American Stock Exchange equals or exceeds $18.00 per share of Common Stock
for any twenty (20) trading days within a period of thirty (30) consecutive
trading days ending on the fifth trading day prior to the date of the notice of
redemption. If the Warrants are redeemed, holders of the Warrants will lose
their rights to exercise the Warrants after the expiration of the 30-day notice
of redemption period. Upon receipt of a notice of redemption, holders would be
required to: (i) exercise the Warrants and pay the exercise price at a time when
it may be disadvantageous for them to do so; (ii) sell the Warrants at the
current market price, if any, when they might otherwise wish to hold the
Warrants; or (iii) accept the redemption price which is likely to be
substantially less than the market value of the Warrants at the time of
redemption. See "Description of Capital Stock--Warrants."
POTENTIAL ADVERSE EFFECT OF SUBSTANTIAL SHARES OF COMMON STOCK
RESERVED. The Company has reserved a total of 4,504,559 shares of Common Stock
for issuance as follows: (i) 3,000,000 shares for issuance upon exercise of the
3,000,000 Warrants; (ii) 300,000 shares for issuance upon exercise of the
Representative's Warrants; (iii) 300,000 shares for issuance upon exercise of
the Warrants issuable upon exercise of the Representative's Warrants; (iv)
166,000 shares of Common Stock reserved for issuance pursuant to grants that may
be made under the Company's Stock Option Plan, including but not limited to
55,000 shares of Common Stock reserved for issuance upon exercise of options
granted to two officers of the Company at an exercise price equal to $5.00 per
share; (v) 477,119 shares of Common Stock in the aggregate reserved for issuance
upon exercise of options granted to three current directors and a former
director of the Company at an exercise price equal to $1.25 per share; (vi)
10,000 shares of Common Stock reserved for issuance upon exercise of options
granted to a recently elected director at an exercise price equal to $5.00 per
share, (vii) 35,000 shares of Common Stock reserved for issuance upon exercise
of options granted to the sellers of stock of Sierra Primary Care Medical Group,
A Medical Corporation and Sierra Medical Management, Inc., at an exercise price
equal to $5.00 per share; (viii) 13,635 shares of Common Stock reserved for
issuance upon exercise of warrants granted to certain finders in connection with
the 1996 Merger and related transactions at an exercise price equal to $1.375
per share; (ix) 192,725 shares of Common Stock reserved for issuance upon
exercise of warrants granted to the Company's commercial lender at an exercise
price of $5.00 per share; and (x) 10,080 shares that may be issued to a
physician whose assets were acquired by an affiliated physician organization.
The existence of the Warrants, the Representative's Warrants and any other
options or warrants may adversely affect the Company's ability to
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consummate future equity financings. Further, the holders of such warrants and
options may exercise them at a time when the Company would otherwise be able to
obtain additional equity capital on terms more favorable to the Company. See
"Shares Eligible for Future Sale."
LEGAL RESTRICTIONS ON SALES OF SHARES UNDERLYING THE WARRANTS. The Warrants
are not exercisable for one year and will not then be exercisable unless, at the
time of the exercise, the Company has a current prospectus covering the shares
of Common Stock issuable upon exercise of the Warrants, and such shares have
been registered, qualified or deemed to be exempt under the securities laws of
the state of residence of the exercising holder of the Warrants.
LACK OF EXPERIENCE OF REPRESENTATIVE. Securities Capital Trading, Inc., the
Representative, commenced operations in June 1995. The Representative has
co-managed and participated as an underwriter in only two previous public
offerings of securities. Accordingly, the Representative has limited experience
as a co-manager or underwriter of public offerings of securities. In addition,
the Representative is a relatively small firm and no assurance can be given that
the Representative will be able to participate as a market maker of the
Securities. No assurance can be given that any broker-dealer will be a market
maker in any of the Securities. See "Underwriting."
REPRESENTATIVE'S POTENTIAL INFLUENCE ON THE MARKET AND THE COMPANY. A
significant amount of the Securities offered hereby may be sold to customers of
the Representative. Such customers subsequently may engage in transactions for
the sale or purchase of such Securities through or with the Representative. If
the Representative participates in the market, as a market maker or otherwise,
the Representative may exert a dominating influence on the market, if one
develops, for the Securities described in this Prospectus. Such market making
activity may be discontinued at any time. The price and liquidity of the Common
Stock and the Warrants may be significantly affected by the degree, if any, of
the Representative's participation in such market. In addition, the
Representative may have a continuing influence on the Company through exercise
of the Representative's Warrants. See "Underwriting."
DILUTION. The Offering Price is substantially higher than the book value
per share of Common Stock. Investors purchasing shares of Common Stock in this
Offering will, therefore, incur immediate, substantial dilution in net tangible
book value of their shares. Substantial additional dilution could result from
the expected issuance of other equity securities of the Company, including
shares issued upon the exercise of currently outstanding options and warrants.
See "Shares Eligible for Future Sale." In addition, the Company's expansion
strategy includes acquisitions of, and affiliations with, physician
organizations and acquisition of related management companies. Such acquisitions
and affiliations may be consummated using newly-issued shares of Common Stock as
consideration. The issuance of additional shares of Common Stock may have a
dilutive effect on the net tangible book value or earnings per share following
such issuance.
SHARES ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of Common
Stock in the public market following this Offering could have an adverse effect
on the market price of the Common Stock. Upon completion of the Offering and
after giving effect to the Yorba Linda Settlement Agreement (see "Business of
the Company--History of the Company"), the Company will have outstanding
approximately 7,449,395 shares of Common Stock (7,899,395 shares if the
Underwriters' over-allotment option is exercised in full), of which 3,000,000
shares offered hereby (3,450,000 shares if the Underwriters' over-allotment
option is exercised in full) will be freely tradeable without restriction or
further registration under the Securities Act to the extent they are not held by
"affiliates" of the Company, as that term is defined in Rule 144 ("Rule 144")
promulgated under the Securities Act of 1933, as amended ("Securities Act"). The
remaining 4,449,395 shares of Common Stock outstanding upon completion of the
Offering will be "restricted securities" as that term is defined in Rule 144, of
which 2,597,083 shares will be eligible for resale without restriction in
compliance with Rule 144(k), 1,025,039 shares will be eligible for resale
subject to the manner of sale, volume, notice and current public information
requirements of Rule 144, and 827,273 shares will subsequently become eligible
for resale under Rule 144 upon expiration of their
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respective one-year holding periods. Additionally, upon completion of the
Offering the Company will have outstanding Warrants, Representative's Warrants
and other options and warrants for the purchase of up to approximately 4,504,559
shares of Common Stock (4,954,559 shares if the Underwriters' over-allotment
option is exercised in full). The existence of a large number of shares eligible
for future sale could have an adverse effect on the Company's ability to raise
additional equity capital or on the price at which such equity capital could be
raised. See "Shares Eligible for Future Sale."
The officers, directors and certain other stockholders of the Company, who
upon completion of the Offering will own in the aggregate 1,649,039 shares of
Common Stock (including all of the shares that will be eligible for resale under
Rule 144 and 624,000 of the shares that will not yet be eligible for resale
under Rule 144 following the Offering) and options and/or warrants to purchase
up to 460,000 shares of Common Stock, are required to agree that they will not,
without the consent of the Underwriters, directly or indirectly, offer, sell,
transfer, pledge, assign, hypothecate or otherwise encumber any of such shares
or securities exercisable or exchangeable for or convertible into shares of
Common Stock, whether or not owned, or otherwise dispose of any interest therein
under Rule 144 promulgated by the Commission or otherwise, for a period of not
less than twelve months following the effective date (the "Effective Date") of
the Registration Statement filed with respect to this Offering (the
"Registration Statement"). In addition, without the consent of the Underwriters,
the Company will not sell or offer for sale any of its securities for a period
commencing on March 24, 1998 through a date twelve months following the
Effective Date, except pursuant to or in connection with (i) the exercise of
options granted by the Company under any incentive stock ownership plan (a
"Plan") authorized by the Company's stockholders, (ii) the exercise of non-Plan
options and warrants granted by the Company prior to March 24, 1998 and/or (iii)
the issuance of shares of Common Stock in transactions involving acquisitions by
the Company of the assets or equity ownership of unrelated business entities.
In connection with obtaining its credit facility, the Company issued to the
Bank warrants to purchase shares of Common Stock of the Company (the "Bank
Warrants"). In the event the Company offers to the Company's shareholders the
right to purchase any securities of the Company, then the holders of the Bank
Warrants are entitled to participate in such rights offering.
Certain holders of warrants to purchase shares of Common Stock have certain
registration rights with respect to such shares and additional shares that may
be issued to such persons upon certain dilutive events (subject to certain
limitations on the numbers of shares such holders are entitled to have
registered under any registration statement).
NO DIVIDENDS. The Company has never paid cash dividends on its Common Stock
and anticipates that for the foreseeable future, all earnings, if any, will be
retained for the operation and expansion of the Company's business. In addition,
under the Company's credit facility, the Company is prohibited from declaring or
paying any dividends or distributions of earnings to its stockholders. See
"Price Range of Common Stock and Dividend Policy."
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER AND OTHER PROVISIONS. The Company's
Certificate of Incorporation and By-laws contain certain provisions that could
have the effect of making it more difficult for a person to acquire, or of
discouraging a third party from attempting to acquire, control of the Company,
including transactions in which stockholders might receive a substantial premium
for their shares over then current market prices, and may limit the ability of
stockholders to approve transactions that they deem to be in their best
interest. The Company's Certificate of Incorporation authorizes the Board of
Directors to issue preferred stock ("Preferred Stock") without stockholder
approval and upon such terms as the Board of Directors may determine. The rights
of the holders of Common Stock will be subject to, and may be adversely affected
by, the rights of the holders of any Preferred Stock that may be issued in the
future. The issuance of Preferred Stock, while providing desirable flexibility
in connection with possible acquisitions and other corporate purposes, could
have the effect of discouraging a person from acquiring a majority of the
outstanding Common Stock of the Company. There are no shares of Preferred Stock
presently
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outstanding and the Company has no present plans to issue any shares of
Preferred Stock. See "Description of Capital Stock--Preferred Stock." The
Company's Certificate of Incorporation further provides for the classification
of its Board of Directors into three classes, with each class of directors
serving staggered terms of three years. In addition, stockholders do not have
the right (i) to take action by written consent without authorization by a
resolution of the Board of Directors or (ii) to call special meetings of
stockholders. Any amendment to the Company's Bylaws or certain provisions of the
Company's Certificate of Incorporation requires the affirmative vote of the
holders of at least 75% of the outstanding shares of the Company. In addition,
the Company will, upon consummation of this Offering, be subject to the anti-
takeover provision of Section 203 of the Delaware General Corporation Law. In
general, this statute prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder unless such business combination is approved in
the prescribed manner. See "Description of Capital Stock."
Provisions in Dr. DeNicola's employment agreement provide for
post-termination compensation, including payment of his salary for two years,
following a merger or consolidation in which the Company is not the consolidated
or surviving corporation or a transfer of substantially all of the assets of the
Company. See "Management of the Company--Employment Arrangements." A change in
control of the Company also constitutes an event of default under the Company's
credit facility. The foregoing matters may, together or separately, have the
effect of discouraging or making more difficult an acquisition or change of
control of the Company.
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THE COMPANY
The Company manages and administers physician organizations (i.e., medical
groups and independent practice associations) that have entered into agreements
with HMOs to provide physician and certain ancillary health care services to HMO
members under capitated or prepaid fee arrangements. Management services are
provided by the Company to each affiliated physician organization pursuant to a
long-term management services agreement. Under this long-term management
services agreement, the Company provides the physician organization with certain
management and administrative support services, such as claims administration,
utilization management and quality assurance, case management, data collection
and management information systems and payor and provider contracting. The
Company also provides its affiliated medical groups with leased premises,
furniture, fixtures, equipment and personnel (which the Company does not provide
to its affiliated independent practice associations, as such associations are
operated as separate businesses with respect to these items). In order to secure
its rights under the management services agreement, the Company enters into an
assignable option agreement with the physician organization which gives the
Company the right to designate the physician or physicians who will own the
physician organization.
Physician organizations increasingly are responding to the cost-containment
pressures within the managed care industry by affiliating with managed care
administrators such as the Company. The Company's management services are
intended to allow affiliated physician organizations to deliver required medical
services in a more cost effective manner. Management believes that cost savings
can be generated without adversely affecting the quality of care provided by the
physician organizations by, for example, managing the risk for hospital services
as well as physician and ancillary health care services, negotiating favorable
HMO and provider contracts, and generating operating efficiencies. The Company's
fee arrangements with affiliated physician organizations are structured so as to
allow the Company to benefit from the savings so obtained.
The Company believes that the managed care industry operates most
effectively on a regional basis, and is affected most by provider competition,
physician referral patterns, custom and practice and local hospital
relationships. Management believes that developing a significant local market
presence permits economies of scale and greater efficiencies through
centralization of operations. Management believes there is more economic
opportunity in developed rather than in undeveloped managed care markets because
(i) physicians and hospitals in developed markets have established practice and
referral patterns that are consistent with providing services within a managed
care framework and (ii) there is generally a higher concentration of physicians
and hospitals in a developed market, creating a more competitive environment
with greater opportunities for the Company and its affiliated physician
organizations to negotiate more favorable provider contracts. The Company has
selected certain counties in Southern California as the initial primary service
area for its operations because management believes that Southern California is
a highly-developed managed care market.
The Company's primary strategy is to grow through acquisition by its
affiliated physician organizations of other medical groups and independent
practice associations. The criteria which the Company has developed to assess
potential acquisition candidates include (i) either a history of profitable
operation or a compelling synergy with opportunities for economies of scale
through combining operations; (ii) either geographic proximity to the Company's
current operations or a material share of the potential acquisition candidate's
own local marketplace; (iii) a favorable hospital relationship; and/or (iv)
willingness of the acquisition candidate's management to continue managing the
acquired entity following its acquisition. The Company is continuously seeking
new acquisition and affiliation candidates as part of its growth strategy. There
can be no assurance that any definitive agreements will be executed or that any
such acquisitions or affiliations will be consummated.
As part of the Company's future growth strategy, the Company through its
affiliated physician organizations intends to seek to provide and manage all
hospital health care services as well as physician and ancillary health care
services to (i) enrollees within the Company's service network and (ii) Medicare
22
<PAGE>
enrollees not currently served through the Company's provider network, in each
case in exchange for a monthly per member capitation payment from the respective
payor. To implement this strategy the Company intends to seek to obtain a
license pursuant to California law to contract with HMOs on a full-risk basis
and certification under federal law to form and develop a Medicare Health Plan
to contract with HCFA on a full-risk basis. The ability of the Company and/or
any affiliated physician organization to assume the financial and managerial
responsibility for hospital as well as physician and ancillary health care
services will also require the Company to obtain contracts with fully-licensed
HMOs or HCFA, as applicable. There can be no assurance that any such license or
federal Medicare Health Plan certification can be obtained. See "Risk
Factors--Risks Associated with Growth Strategy."
Since July 1997, Prospect Medical Group has acquired four physician
organizations for the aggregate consideration of approximately $12,700,000 in
cash, plus promissory notes in the aggregate principal amount of $3,000,000 and
the issuance of 800,000 shares of the Company's Common Stock and options to
purchase 35,000 shares of the Company's Common Stock. These acquisitions
increased the Company's service network in Central Orange County and resulted in
the Company managing one of the largest managed care practices in the Antelope
Valley region of Southern California.
USE OF PROCEEDS
The estimated net proceeds to the Company from the sale of the 3,000,000
shares of Common Stock and Warrants to purchase 3,000,000 shares of Common Stock
offered hereby are $15,524,000 ($17,954,000 if the Underwriters' over-allotment
option is exercised in full), based on an assumed initial public offering price
of $6.00 per share and $0.10 per Warrant and after deducting underwriting
discounts and commissions and costs of the Offering. The Company intends to use
such net proceeds as follows:
<TABLE>
<S> <C>
ANTICIPATED APPLICATION
- ---------------------------------------------------------------
Repayment of acquisition financing(1).......................... $10,000,000
Repayment of Sierra Medical Group notes and other debt(2)...... 3,250,000
Repayment of additional draw down on credit facility(3)........ 1,100,000
Formation of health plans(4)................................... 500,000
Working capital................................................ 674,000
----------
TOTAL FUNDS APPLIED............................................ $15,524,000
----------
----------
</TABLE>
- ------------------------
(1) The Company intends to use a portion of the proceeds of the Offering to pay
the outstanding debt under the Company's credit facility provided by its
commercial lender. Approximately $10,000,000 was drawn under this facility
by the Company as of June 30, 1998 in connection with the acquisitions of
Santa Ana/Tustin Physicians Group, Inc., a California professional
corporation ("Santa Ana/Tustin Physicians Group") and Sierra Primary Care
Medical Group, A Medical Corporation ("Sierra Medical Group"). See "Business
of the Company--History of the Company" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources." Application of proceeds to pay the outstanding balance
will make funds available under the Company's credit facility for future
acquisitions. See "Risk Factors--Need for Additional Capital" and "Business
of the Company--Strategy of the Company." The interest rate on the Company's
credit facility varies based upon the prime rate plus an applicable margin
ranging from 50 to 150 basis points. The credit facility matures on July 3,
1999.
(2) The Company intends to apply approximately $2,250,000 (outstanding balance
at June 30, 1998) of proceeds of the Offering to pay off the outstanding
principal of two promissory notes issued by Prospect Medical Group to
acquire Sierra Medical Group and one promissory note issued by the Company
to acquire Sierra Medical Management and approximately $1,000,000 of
proceeds of the Offering to pay the cash portion and to pay off the
principal of a promissory note that the Company
23
<PAGE>
issued in connection with the acquisition of certain assets of PrimeCare
Medical Group of Antelope Valley, Inc., a California professional
corporation ("Antelope Valley Medical Group").
(3) The Company intends to use approximately $1,100,000 of proceeds of the
Offering to pay an additional draw under the Company's credit facility that
was used for working capital.
(4) The Company intends to apply approximately $500,000 of proceeds of the
Offering to pay certain costs associated with the formation and development
of health plans. See "Business of the Company" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations." Such costs
include organizational expenses and initial operating expenses and making a
deposit into a tangible net equity reserve. The Company intends to use a
draw on its credit facility to pay for any additional costs which the
Company currently estimates will total approximately $2,500,000.
Allocation of the net proceeds of this Offering by the Company, as set forth
above, represents the Company's best estimate, based upon its present plans and
certain assumptions regarding general economic and industry conditions. If any
of such plans or assumptions should change, the Company may find it necessary or
advisable to reallocate some of the Offering proceeds within the above-described
categories, or to other purposes.
Pending any of the other uses described above, the Company intends to apply
the net proceeds of the Offering to pay off any outstanding balances under the
Company's credit facility and then to invest any remaining net proceeds in
short-term, investment grade, interest-bearing securities, certificates of
deposit or direct or guaranteed obligations of the United States.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Prior to this Offering, Prospect Medical Holdings' Common Stock has been the
subject of limited and sporadic trading on the OTC Bulletin Board, a
screen-based electronic bulletin board maintained by the National Association of
Securities Dealers, Inc. Accordingly, there is no established public trading
market for the Company's Common Stock. See "Risk Factors--Inactive Prior Market
for the Common Stock; No Assurance of American Stock Exchange Listing" and
"Description of Capital Stock--Listing on American Stock Exchange."
As of July 1, 1998, the estimated number of beneficial owners of the
Company's Common Stock was approximately 695 and the number of stockholders of
record was 459. See "The Offering."
No cash dividends have been paid by the Company to date and none is expected
to be paid in the near future. In the event the Company becomes profitable,
management currently is of the view that all earnings will be retained for the
operation and expansion of the Company's business. The future dividend policy of
the Company will be subject to the discretion of its Board of Directors and will
depend upon a number of factors, including future earnings, financial
conditions, cash needs and general business conditions. In addition, under the
Company's credit facility, the Company is prohibited from declaring or paying
any dividends or distributions of earnings to its stockholders. See "Risk
Factors--No Dividends."
24
<PAGE>
CAPITALIZATION
The following table sets forth, as of June 30, 1998, the actual and pro
forma capitalization of the Company (i) giving effect to the Yorba Linda
Settlement Agreement (see "Risk Factors--Recent Settlement Agreement with Yorba
Linda Medical Group" and "Business of the Company--History of the Company") and
(ii) as adjusted to reflect the Offering and use of proceeds therefrom. The
capitalization information set forth in the table below is unaudited and is
qualified by and should be read in conjunction with "Unaudited Pro Forma
Financial Information," "Selected Consolidated Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's Consolidated Financial Statements and the Notes thereto included
elsewhere in the Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1998
-------------------------------------------
<S> <C> <C> <C>
PRO FORMA AS
ACTUAL PRO FORMA(1) ADJUSTED
------------- ------------- -------------
Short-term debt..................................................... $ 1,630,582 $ 1,630,582 $ 130,582
------------- ------------- -------------
------------- ------------- -------------
Long-term debt...................................................... $ 13,230,774 $ 13,230,774 380,774
------------- ------------- -------------
Shareholders' equity:
Preferred Stock, $.01 par value per share; 1,000,000 shares
authorized; no shares issued.................................... -- -- --
Common Stock, $.01 par value per share; 40,000,000 shares
authorized, 5,575,718 shares issued and outstanding (actual),
4,449,395 shares issued and outstanding (pro forma); 7,449,395
shares issued and outstanding (as adjusted)..................... 55,757 44,494 74,494
Additional paid-in-capital........................................ 5,554,195 5,622,220 21,117,097
Accumulated deficit............................................... (266,632) (266,632) (266,632)
------------- ------------- -------------
Total shareholders' equity...................................... 5,343,320 5,400,082 20,924,959
------------- ------------- -------------
Total capitalization.......................................... $ 18,574,094 $ 18,630,856 $ 21,305,733
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
- ------------------------
(1) Reflects the reduction of 1,126,323 shares of Common Stock of the Company
which become unissued and authorized shares.
25
<PAGE>
DILUTION
The difference between the initial public offering price per share of Common
Stock and the pro forma net tangible book value per share of Common Stock after
this Offering constitutes the dilution to investors in this Offering. Net
tangible book value per share is determined by dividing the net tangible book
value of the Company (total tangible assets reduced by the amount of total
liabilities) by the number of outstanding shares of Common Stock. The following
discussion allocates no value to the Warrants.
The historical net negative tangible book value of the Company at June 30,
1998 was approximately $(13,939,504), or $(2.50) per share of Common Stock
($(13,882,742) or $(3.12) per share of Common Stock after giving effect to the
Yorba Linda Settlement Agreement (see "Risk Factors--Recent Settlement Agreement
with Yorba Linda Medical Group" and "Business of the Company--History of the
Company")). See "Management's Discussion and Analysis of Financial Condition and
Results of Operations-- Liquidity and Capital Resources." After giving effect to
the Offering and the application of the net proceeds from the Offering (with an
initial public offering price of $6.00 per share), the Company's net tangible
book value at June 30, 1998 would have been approximately $1,962,000, or $0.26
per share. This represents an immediate increase in net tangible book value of
$2.76 per share to existing stockholders and an immediate dilution in net
tangible book value of $5.74 per share to new investors purchasing shares of
Common Stock in the Offering. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share of Common Stock...... $ 6.00
Historical net negative tangible book value per share at
June 30, 1998 after giving effect to Yorba Linda
Settlement Agreement..................................... (3.12)
Increase in net tangible book value per share attributable
to existing investors.................................... 3.38
---------
Adjusted pro forma net tangible book value per share after
the Offering............................................... 0.26
---------
Dilution per share to new investors.......................... $ 5.74
---------
---------
</TABLE>
The following table summarizes, on an adjusted pro forma basis as of June
30, 1998, the number of shares of Common Stock purchased from the Company, the
total consideration paid and the average price paid per share by the existing
stockholders and by new investors at an initial public offering price of $6.00
per share:
<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED(1)(2) CONSIDERATION(1)(2)
--------------------------- ------------------------ AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------------- --------- ------------- --------- ---------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(2)...................... 4,449,395 59.7% $ 5,666,714 23.9% $ 1.27
New investors................................. 3,000,000 40.3 18,000,000 76.1 6.00
---------------- --------- ------------- ---------
Total....................................... 7,449,395 100.0% $ 23,666,714 100.0%
---------------- --------- ------------- ---------
---------------- --------- ------------- ---------
</TABLE>
- ------------------------
(1) Assuming the Underwriters' over-allotment option is exercised in full, sales
of Common Stock by the Company in the Offering will reduce the number of
shares of Common Stock held by existing stockholders to 56.3% of the total
number of shares of Common Stock to be outstanding after the Offering, and
will increase the number of shares held by new investors to 43.7% of the
total number of shares of Common Stock to be outstanding after the Offering.
See "Beneficial Ownership of Capital Stock."
(2) After giving effect to the reduction of 1,126,323 shares of Common Stock
outstanding in conjunction with the Yorba Linda Settlement Agreement.
(3) The above computations assume no exercise after June 30, 1998 of any of the
outstanding options and warrants to purchase shares of the Common Stock. As
of June 30, 1998, there were options and warrants outstanding to purchase a
total of 783,479 shares of Common Stock at a weighted average exercise price
of $2.65 per share, all of which were exercisable on such date. To the
extent that these options and warrants are exercised, there will be further
dilution to new investors.
26
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma consolidated balance sheet at June 30,
1998 and the unaudited pro forma consolidated statements of operations for the
year ended September 30, 1997 and the nine months ended June 30, 1998 have been
prepared to reflect adjustments to the Company's historical financial position
and results of operations to give effect to the following completed transactions
as if such transactions had been consummated at earlier dates.
Effective July 14, 1997, Prospect Medical Group (an affiliate of the
Company) acquired Santa Ana/ Tustin Physicians Group for cash consideration of
$5,000,000. Effective September 25, 1997 Prospect Medical Group and the Company
acquired Sierra Medical Group and Sierra Medical Management, Inc., respectively,
for consideration totaling $9,000,000 in cash and notes and 600,000 shares of
the Company's common stock and options to purchase 35,000 shares of the
Company's common stock. These two acquisitions resulted in goodwill and other
intangible assets of $5,081,343 and $11,127,000, respectively.
Effective as of June 1, 1998, Sierra Medical Group and the Company acquired
certain assets (primarily management rights and provider contracts) of Antelope
Valley Medical Group and its affiliated management company for $1,000,000 in
cash and notes and 200,000 shares of the Company's common stock. This
acquisition resulted in goodwill and other intangible assets of $2,047,375. None
of the personnel or facilities of Antelope Valley Medical Group or its related
management company were acquired by Sierra Medical Group or the Company. The
general and administrative costs shown in the unaudited pro forma consolidated
statements of operations for the year ended September 30, 1997 and the nine
months ended June 30, 1998 for Antelope Valley Medical Group reflect historical
costs incurred by or on behalf of Antelope Valley Medical Group for the year
ended September 30, 1997 and eight months ended May 31, 1998, respectively. The
Company believes that it will be able to integrate the acquired assets into the
existing operations of its affiliated physician organizations utilizing
personnel and facilities already located and operating in the Antelope Valley
and thereby significantly reduce the general and administrative costs associated
with the operations of the assets acquired from Antelope Valley Medical Group.
Therefore, the Company does not believe that the historical general and
administrative costs of Antelope Valley Medical Group are indicative of the
costs likely to be incurred in future periods. In addition, prior to
acquisition, the former management of Antelope Valley Medical Group had
determined that it could not operate Antelope Valley Medical Group profitably,
and therefore a non-recurring expense totaling $3,168,260 was recorded by the
former management of Antelope Valley Medical Group in the twelve-month period
ended December 31, 1997.
The unaudited pro forma financial information also gives effect to the Yorba
Linda Settlement Agreement. Certain physicians employed by Yorba Linda Medical
Group who have provided physician services to enrollees of Prospect Medical
Group sought release from the exclusivity and other noncompetition provisions in
their agreements with Prospect Medical Group. Effective July 1, 1998, the
Company and Prospect Medical Group entered into the Yorba Linda Settlement
Agreement with these physicians who were also stockholders of the Company.
Pursuant to the Yorba Linda Settlement Agreement, the stockholders returned to
the Company an aggregate of 1,126,323 shares of the Company's common stock that
had been issued to them in connection with the 1996 Merger in exchange for a
release by Prospect Medical Group from the non-competition and exclusivity
provisions contained in their agreements. The Company estimates that a maximum
of approximately 13,000 enrollees who were served by the departing physicians
related to Yorba Linda Medical Group may be transferred from Prospect Medical
Group. The effect of the Yorba Linda Settlement Agreement was to reduce
operating revenues on the pro forma consolidated statements of operations as
compared to the historical consolidated statements of operations. Likewise, the
cost of medical services was reduced on the pro forma consolidated statements of
operations as compared to the historical statements of operations because the
costs associated with providing the medical services to the Yorba Linda Medical
Group enrollees would not have been incurred; however, no other adjustments to
reduce operating expenses, except for an estimate of the costs incurred related
to
27
<PAGE>
management fee revenues which will no longer be earned, which might have
resulted from such reduction have been made. See "Risk Factors--Recent
Settlement Agreement with Yorba Linda Medical Group."
The unaudited pro forma consolidated statements of operations for the year
ended September 30, 1997 and the nine months ended June 30, 1998 reflect the pro
forma results of operations of all entities acquired and the impact from the
Yorba Linda Settlement Agreement as if such acquisitions and Settlement
Agreement had been effected as of October 1, 1996.
The pro forma financial information has been prepared by management based on
the historical consolidated audited and unaudited financial statements of the
Company and the affiliated physician organizations as of and for the year ended
September 30, 1997 and as of and for the nine months ended June 30, 1998.
Additional general and administrative expenses, which may have been required to
support the operations of the acquired entities, are not included in the
consolidated pro forma results of operations. The Company and its affiliated
physician organizations have not had any experience prior to June 1, 1998
operating or managing the assets acquired from Antelope Valley Medical Group and
its affiliated management company. These assets will need to be integrated with
those assets currently managed by the Company. Consequently, the Company's
actual results of operations or financial condition may differ from the
information presented in the pro forma financial information as a result of this
acquisition. Similarly, the effect of the Yorba Linda Settlement Agreement on
the Company's actual results of operations or financial condition may differ
from the pro forma financial information since the Company has historically
included the revenues and related expenses derived from the enrollees of Yorba
Linda Medical Group within its affiliated physician organizations' service
network and such enrollees may be transferred from the Company's affiliated
physicians organization in the future. The pro forma financial information is
presented for illustrative purposes and does not purport to represent what the
results of operations or financial condition of the Company for the periods or
at the dates presented would have been if such transactions had been consummated
as of such dates and is not indicative of the results that may be obtained in
the future.
The pro forma statement of operations for the year ended September 30, 1997
also reflects the proposed Offering of Common Stock including the Warrants, at
an assumed initial public offering price of $6.00 per share and $.10 per
Warrant, and gives effect to the receipt and application of the estimated net
proceeds from this Offering, as if such transaction had occurred on October 1,
1996. The pro forma statement of operations for the nine months ended June 30,
1998 also reflects the proposed Offering and gives effect to receipt and
application of the estimated net proceeds from this Offering, including the
repayment of certain indebtedness, as if such transactions had occurred on
October 1, 1997. The pro forma balance sheet as of June 30, 1998 also reflects
the proposed Offering and gives effect to the receipt and application of the
estimated net proceeds from this Offering, as if such transaction had occurred
on June 30, 1998.
The pro forma financial information is based on the financial statements of
the Company, after giving effect to the assumptions and adjustments in the
accompanying notes to the pro forma financial information.
28
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT
OF OPERATIONS DATA
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1997
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SANTA ANA/ SIERRA
TUSTIN MEDICAL
PHYSICIANS GROUP
GROUP FOR FOR THE
THE PERIOD ANTELOPE
PROSPECT PERIOD 10/1/96 VALLEY YORBA LINDA PRO FORMA
MEDICAL 10/1/96 TO MEDICAL SETTLEMENT PRO FORMA OFFERING AS
HOLDINGS TO 7/13/97 9/24/97 GROUP AGREEMENT(1) ADJUSTMENTS TOTAL ADJUSTMENTS(5) ADJUSTED
-------- ---------- ------- -------- ------------ ----------- ------- -------------- ----------
<CAPTION>
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total Operating
Revenues..... $ 29,955 $7,539 $12,899 $ 6,614 $(8,278) $-- $48,729 $-- $48,729
-------- ---------- ------- -------- ------------ ----------- ------- -------------- ----------
Cost of Medical
Services..... 23,202 5,151 7,773 6,246 (5,866) -- 36,506 -- 36,506
General and
Administrative... 7,236 2,507 5,272 1,181 (891) (1,442)(2)(3) 13,863 (1,347)(5) 12,516
Depreciation
and
Amortization... 244 34 45 398 -- 857(4) 1,578 -- 1,578
-------- ---------- ------- -------- ------------ ----------- ------- -------------- ----------
Total Cost of
Operations... 30,682 7,692 13,090 7,825 (6,757) (585) 51,947 (1,347) 50,600
Provision for
Impairment of
Goodwill..... (2,197) -- -- (2,856) -- -- (5,053) -- (5,053)
-------- ---------- ------- -------- ------------ ----------- ------- -------------- ----------
Income (Loss)
Before
Provision for
Income
Taxes........ (2,924) (153) (191) (4,067) (1,521) 585 (8,271) 1,347 (6,924)
Income Tax
Benefit...... (285) (123) (41) -- -- -- (449) -- (449)
-------- ---------- ------- -------- ------------ ----------- ------- -------------- ----------
Net Income
(Loss)..... $ (2,639) $ (30) $ (150) $(4,067) $(1,521) $ 585 $(7,822) $ 1,347 $(6,475)
-------- ---------- ------- -------- ------------ ----------- ------- -------------- ----------
-------- ---------- ------- -------- ------------ ----------- ------- -------------- ----------
Basic and
Diluted
Weighted
Average
Number of
Common
Shares....... 4,801 4,801 4,801
Pro Forma
Adjustments... -- (336) 2,664
-------- ------- ----------
4,801 4,465 7,465
-------- ------- ----------
-------- ------- ----------
Basic and
Diluted Loss
Per
Share........ $ (0.55) $ (1.75) $ (0.87)
-------- ------- ----------
-------- ------- ----------
</TABLE>
See accompanying notes to the unaudited pro forma consolidated statement of
operations data.
29
<PAGE>
(1) The reductions in revenues related to the Yorba Linda Settlement Agreement
include primarily lost capitation and shared risk revenues based on the
estimate of lost enrollees serviced by the specific physicians at their
capitated rates and revenues under the management agreement with Yorba Linda
Medical Group. Medical costs and operating expenses are reduced based upon
the estimated medical loss ratio calculated with respect to the related
capitation revenue and an adjustment to general and administrative costs
related to the provision of management services.
(2) Assumed aggregate interest costs of $1,206,000 with respect to debt incurred
related to the three acquisitions made are as follows:
(i) The $5,000,000 debt incurred related to Santa Ana/Tustin Physicians
Group is for nine and one-half months at an interest rate of 9% per
annum.
(ii) The $9,000,000 debt incurred related to Sierra Medical Group and its
related management company is for 12 months at an average rate of
approximately 8.4% per annum.
(iii) The $1,000,000 debt incurred related to Antelope Valley Medical Group
and its related management company is for 12 months at a rate of 9%
per annum.
(3) Reductions in certain general and administrative expenses of $2,648,000
relate to reductions in certain officer salaries and rent of Santa
Ana/Tustin Physicians Group and Sierra Medical Group and its related
management company due to new employment and rental agreements entered into
concurrent with the closing of the acquisitions. No significant reductions
resulted from the acquisition of the assets of Antelope Valley Medical Group
and its related management company.
(4) Additional amortization of goodwill resulting from acquisitions as follows:
The goodwill acquired in the acquisitions of Santa Ana/Tustin Physicians
Group, Sierra Medical Group and its related management company and certain
assets of Antelope Valley Medical Group and its related management company
totaled $5,081,343, $11,127,000 and $2,047,375, respectively. The Company is
amortizing such goodwill over 20 years.
Consequently, pro forma amortization with respect to the acquisition of
Santa Ana/Tustin Physicians Group from October 1, 1996 to July 13, 1997 was
$201,000, for Sierra Medical Group and its related management company was
$556,000 and for certain assets of Antelope Valley Medical Group and its
related management company was $100,000.
(5) Reduction of $1,347,000 of interest resulting from repayment of all interest
bearing acquisition related debt utilizing the Offering proceeds.
30
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
NINE MONTHS ENDED JUNE 30, 1998
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
ANTELOPE VALLEY
MEDICAL
PROSPECT GROUP
MEDICAL (EIGHT MONTHS YORBA LINDA PRO FORMA
HOLDINGS ENDED SETTLEMENT PRO FORMA OFFERING PRO FORMA AS
(HISTORICAL) MAY 31, 1998) AGREEMENT(4) ADJUSTMENTS TOTAL ADJUSTMENTS(3) ADJUSTED
----------- --------------- ----------- ----------- --------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Total Operating
Revenues............. $ 40,314 $ 5,235 $ (6,213) $ -- $ 39,336 $ -- $ 39,336
----------- ------ ----------- ----------- --------- ------- -------------
Cost of Medical
Services............. 26,854 4,992 (4,440) -- 27,406 -- 27,406
General and
Administrative....... 12,294 477 (631) 60(1) 12,200 (1,088)(3) 11,112
Depreciation and
Amortization......... 786 188 -- 67(2) 1,041 -- 1,041
----------- ------ ----------- ----------- --------- ------- -------------
Total Cost of
Operations......... 39,934 5,657 (5,071) 127 40,647 (1,088) 39,559
Provision for
Impairment of
Goodwill............. -- 312 -- -- 312 -- 312
----------- ------ ----------- ----------- --------- ------- -------------
Income (loss) before
Provision for Income
Taxes................ 380 (734) (1,142) (127) (1,623) 1,088 (535)
Income Tax Expense..... 4 -- -- -- 4 -- 4
----------- ------ ----------- ----------- --------- ------- -------------
Net Income (Loss).... $ 376 $ (734) $ (1,142) $ (127) $ (1,627) $ 1,088 $ (539)
----------- ------ ----------- ----------- --------- ------- -------------
----------- ------ ----------- ----------- --------- ------- -------------
Weighted Average Number
of Common
Shares............... 5,398 5,398 5,398
Pro Forma
Adjustments.......... -- (948) 2,051
----------- --------- -------------
5,398 4,450 7,449
----------- --------- -------------
----------- --------- -------------
Basic and Diluted Net
Loss Per Share....... $ 0.07 $ (0.37) $ (0.07)
----------- --------- -------------
----------- --------- -------------
</TABLE>
- ------------------------
(1) Assumed aggregate interest costs of $60,000 with respect to debt of
$1,000,000 incurred related to the acquisition of certain assets of Antelope
Valley Medical Group and its related management company is based upon 9
months interest at a rate of 9% per annum.
(2) Additional amortization of goodwill resulting from acquisitions as follows:
The goodwill acquired in the acquisition of certain assets of Antelope
Valley Medical Group and its related management company totaled
$2,047,375. The Company is amortizing such goodwill over 20 years.
Consequently pro forma amortization with respect to the acquisition of
Antelope Valley Medical Group and its related management company was
$67,000.
(3) Reduction of $1,088,000 of interest resulting from the repayment of all
interest bearing acquisition related debt utilizing the Offering proceeds.
(4) The reductions in revenues related to the Yorba Linda Settlement Agreement
include primarily lost capitation and shared risk revenues based on the
estimate of lost enrollees serviced by the specific physicians at their
capitated rates and revenues for management services. Medical costs and
operating expenses are reduced based upon the estimated medical loss ratio
calculated with respect to the related capitation revenue and an adjustment
to general and administrative costs related to the provision of management
services.
31
<PAGE>
UNAUDITED PRO FORMA CONSOLITATED BALANCE SHEET DATA AS OF JUNE 30, 1998
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
PROSPECT MEDICAL YORBA LINDA PRO FORMA
HOLDINGS SETTLEMENT OFFERING PRO FORMA
(HISTORICAL) AGREEMENT(1) ADJUSTMENTS(2) AS ADJUSTED
---------------- ------------ ----------------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.................... $ 1,765,408 $ 56,762 $ 1,174,877 $ 2,997,047
Accounts receivable, net of allowance........ 4,864,892 -- -- 4,864,892
Prepaid expenses and other expenses.......... 341,425 -- -- 341,425
Recoverable income taxes..................... 154,655 -- -- 154,655
---------------- ------------ ----------------- ------------
Total current assets........................... 7,126,380 56,762 1,174,877 8,358,019
Property, improvements and equipment:
Land......................................... 40,620 -- -- 40,620
Leasehold improvements....................... 120,000 -- -- 120,000
Equipment.................................... 1,810,460 -- -- 1,810,460
Furniture and fixtures....................... 153,537 -- -- 153,537
---------------- ------------
2,124,617 -- -- 2,124,617
Less: accumulated depreciation and
amortization............................... (501,563) -- -- (501,563)
---------------- ------------ ----------------- ------------
1,623,054 -- -- 1,623,054
Deposits and other assets...................... 109,971 -- -- 109,971
Deferred tax assets............................ 361,121 -- -- 361,121
Deferred financing costs....................... 374,378 -- -- 374,378
Deferred offering costs........................ 320,121 -- (320,121) 0
Goodwill and other intangible assets, net...... 18,588,325 -- -- 18,588,325
---------------- ------------ ----------------- ------------
Total assets................................... $ 28,503,350 $ 56,762 $ 854,756 $ 29,414,868
---------------- ------------ ----------------- ------------
---------------- ------------ ----------------- ------------
Liabilities and Shareholders' Equity
Current Liabilities:
Accrued medical claims....................... $ 6,024,959 $ -- $ -- $ 6,024,959
Accounts payable............................. 2,040,225 -- (320,121) 1,720,104
Notes payable and capital lease obligations,
current portion............................ 1,630,582 -- (1,500,000) 130,582
---------------- ------------ ----------------- ------------
Total current liabilities...................... 9,695,766 -- (1,820,121) 7,875,645
Notes payable and capital lease obligations.... 13,230,774 -- (12,850,000) 380,774
Deferred income taxes.......................... 233,490 -- -- 233,490
---------------- ------------ ----------------- ------------
Total liabilities.............................. 23,160,030 -- (14,670,121) 8,489,909
Shareholders' equity:
Common stock................................. 55,757 (11,263) 30,000 74,494
Additional paid-in capital................... 5,554,195 68,025 15,494,877 21,117,097
Accumulated deficit.......................... (266,632) -- -- (266,632)
---------------- ------------ ----------------- ------------
Total shareholders' equity..................... 5,343,320 56,762 15,524,877 20,924,959
---------------- ------------ ----------------- ------------
Total liabilities and shareholders' equity..... $ 28,503,350 $ 56,762 $ 854,756 $ 29,414,868
---------------- ------------ ----------------- ------------
---------------- ------------ ----------------- ------------
</TABLE>
- ------------------------
(1) Pro forma adjustments to reflect the Yorba Linda Settlement Agreement
pursuant to which 1,126,323 shares of the Company's Common Stock are to be
surrendered to the Company plus $56,762 is to be paid by certain physician
stockholders of the Company and a contracting physician in return for a
release from certain noncompetition provisions in agreements entered into
during the 1996 Merger.
(2) Pro forma adjustments to reflect the closing of the proposed Offering are as
follows:
(a) Estimated proceeds from the Offering of $18,300,000, less
underwriters discount and transactions costs of $2,775,123 (assumes no
over-allotment).
(b) Utilization of proceeds from successful Offering to pay down certain
borrowings.
32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS, AND THE NOTES THERETO AND THE OTHER
FINANCIAL INFORMATION, APPEARING ELSEWHERE IN THIS PROSPECTUS. EXCEPT FOR THE
HISTORICAL INFORMATION CONTAINED HEREIN, THE DISCUSSIONS IN THIS PROSPECTUS
CONTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE
COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN
THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE OR CONTRIBUTE TO SUCH A
DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED BELOW AND IN "RISK
FACTORS" AND ELSEWHERE IN THE PROSPECTUS.
GENERAL
The Company manages and administers medical groups and independent practice
associations that have entered into agreements with HMOs to provide medical
services to enrollees under a capitated or prepaid fee arrangement.
As discussed further in Note 1 to the Company's consolidated financial
statements, under applicable financial reporting requirements the financial
statements of the affiliated physician organizations with which the Company has
long term management services agreements are consolidated with those of the
Company. This consolidation is required under EITF Issue No. 97-2, "Application
of FASB Statement No. 94 and APB Opinion No. 16 to Physician Practice Management
Entities and Certain Other Entities with Contractual Management Arrangements"
issued by the Emerging Issues Task Force of the Financial Accounting Standards
Board because the Company is deemed to hold a controlling financial interest in
such organizations through a nominee shareholder. The Company can (through an
assignable option agreement) change the nominee shareholder at will on an
unlimited basis and for nominal cost. There is no limitation on who may be named
by the Company as a nominee shareholder except that such person must be a
licensed physician or otherwise permitted by law to hold shares in a
professional corporation. See "Business of the Company--The Affiliated Physician
Organizations--Management Services" and "Business of the Company--The Affiliated
Physician Organizations--Assignable Option Agreements" for a description of the
management services agreements and assignable option agreements. As a
consequence of this consolidation, the operations of the Company's affiliated
physician organizations have, and will continue to have, a significant impact
upon the Company's financial statements.
On July 31, 1996, a wholly-owned subsidiary of the Company merged into
Prospect Medical Systems in the 1996 Merger, with Prospect Medical Systems being
the surviving corporation and a wholly-owned subsidiary of the Company.
Concurrently with the 1996 Merger, the name of the Company was changed from
Med-Search, Inc. ("Med-Search") to its current name, Prospect Medical Holdings,
Inc. Under applicable financial reporting requirements, Prospect Medical Group,
Inc. (a medical group that is and was affiliated with Prospect Medical Systems
prior to the 1996 Merger) is considered the predecessor entity to the Company
for periods prior to July 31, 1996 for financial statement reporting purposes.
Prospect Medical Group's subsidiaries, Santa Ana/Tustin Physicians Group and
Sierra Medical Group, were acquired on July 14, 1997, and September 25, 1997,
respectively. As of the dates of acquisition by Prospect Medical Group, Santa
Ana/Tustin Physicians Group and Sierra Medical Group had approximately 12,000
and 15,000 covered lives, respectively. Pegasus Medical Group, a wholly-owned
subsidiary of Prospect Medical Group that was formed on November 7, 1996, had no
medical operations until its acquisition of certain assets of Western Medical
Group on October 31, 1997. Based upon the number of lives served by Western
Medical Group on October 31, 1997, this acquisition provided Pegasus Medical
Group with approximately 5,300 covered lives. Sierra Medical Group acquired
certain assets of Antelope Valley Medical Group effective as of June 1, 1998,
including responsibility for approximately 12,000 covered lives. Such
acquisitions have been accounted for under the purchase method of accounting and
the operations of such acquired physician organizations have been included on a
consolidated basis in the
33
<PAGE>
Company's financial statements for periods after the effective date of such
acquisitions. Consequently, the Company's financial statements for the fiscal
year ending September 30, 1997 reflect only 2.5 months of the operations of
Santa Ana/Tustin Physicians Group and no operations for either Sierra Medical
Group or Pegasus Medical Group. In addition, the Company's balance sheet as of
September 30, 1997 does not reflect the acquisition of certain assets of Western
Medical Group by Pegasus Medical Group or any assets of Antelope Valley Medical
Group and its related management company. The Western Medical Group acquisition
was not considered material when the determination was made for inclusion of
separate historical financial statements.
The Company's consolidated revenues are composed primarily of (1) monthly
payments (capitation) made by HMOs to the Company's affiliated physician
organizations on behalf of the HMOs' members who have chosen or been assigned to
one of these organizations to provide for the HMOs' members' medical needs under
managed care arrangements, (2) fee-for-service collections generated by the
affiliated physician organizations for medical services provided and (3)
incentive payments made under risk-sharing agreements with HMOs utilizing funds
(i.e. "risk pools" or "bonus pools") withheld or paid by the HMOs to promote and
reward savings obtained through the efficient utilization of medical services.
See "Business of the Company--Managed Care Industry Overview" for a brief
description of such payments. Additional revenues are received by the Company in
the form of management fees from non-affiliated physician organizations.
The Company's consolidated cost of medical services consists largely of (1)
monthly capitation payments to those primary care physicians and specialists
contracting with the affiliated independent practice associations who have
elected that means of compensation, (2) mostly discounted fee-for-service
payments made to non-capitated specialists and other providers of medical
services who are not employed by Prospect Medical Group or its medical group
subsidiaries and (3) salaries, benefits and other compensation paid to
physicians and other medical professionals who are employees of Prospect Medical
Group or its medical group subsidiaries.
In order for the Company to implement its growth strategy, the Company has
been required to invest in the expansion of its operating infrastructure.
Approximately 68 additional persons were hired during the period from April 1,
1997 to March 31, 1998, in part to establish separate departments to manage the
areas of (i) clinical operations, including case management and quality control,
(ii) claims and management information systems operations, (iii) contracting,
and (iv) independent practice association/medical management, including billing
and collecting, practice management, medical staff and provider relations. Each
of these departments operates under the supervision of a vice president; since
March 31, 1998 the Company has not significantly increased the number of its
permanent employees.
Other general and administrative expenses incurred in preparation for
implementation of the Company's growth strategy included investment in advanced
management information systems equipment and increased legal and accounting
costs in connection with the Company's acquisition program. In fiscal year 1998,
Prospect Medical Systems acquired the hardware and software for a sophisticated
management information system at an initial investment of approximately
$1,100,000. The Company currently estimates that the total cost will be expended
in fiscal year 1998. The Company commenced using the new system on September 1,
1998. The Company borrowed approximately $600,000 of the total cost from an
unaffiliated lender under a long-term loan agreement at an interest rate of
10.25% per annum. The Company anticipates that any additional costs that are
incurred to install and implement this system will be paid from cash generated
from operations.
RESULTS OF OPERATIONS
Comparison of the Company's historical results of operations for the fiscal
years ended September 30, 1997, 1996 and 1995 and for the nine month periods
ended June 30, 1998 and 1997 will not, in the view of management of the Company,
prove meaningful because of the rapid growth of the Company during such
34
<PAGE>
periods and because the affiliation relationships entered into by the Company
during those periods are not reflected in the Company's historical results of
operations for prior periods. Instead, a summary of the elements which
management of the Company believes essential to an analysis of the results of
operations for such periods is presented below.
FISCAL YEAR ENDED SEPTEMBER 30, 1997 COMPARED WITH FISCAL YEAR ENDED SEPTEMBER
30, 1996
The Company's operating revenues increased to $29,955,000 in the fiscal year
ended September 30, 1997 from $24,435,000 in the fiscal year ended September 30,
1996, representing an increase of $5,520,000. Of this increase, $4,355,000
resulted from an increase in capitation revenue to $24,606,000 in the fiscal
year ended September 30, 1997 from $20,251,000 in the fiscal year ended
September 30, 1996. The increase of $4,355,000 in capitation revenues from 1996
resulted from the addition of 13,000 enrollees or approximately $2,555,000 from
internal growth and approximately 27,000 enrollees or approximately $1,800,000
as a result of the acquisitions. As of September 30, 1997, the number of managed
care patients enrolled in the Company's networks totaled approximately 75,000 as
compared to approximately 35,000 at the same date in 1996.
Fee-for-service revenue increased to $1,188,000 during the fiscal year ended
September 30, 1997 from $705,000 during the fiscal year ended September 30,
1996. This increase is primarily the result of an increase in co-payments made
by enrollees under HMO agreements and fees from non-capitated patients.
Fee-for-service revenue as a percentage of operating revenues increased to
approximately 4.0% during the fiscal year ended September 30, 1997 from
approximately 2.9% during the fiscal year ended September 30, 1996. The Company
believes that this percentage will not increase significantly as the Company and
its affiliated physician organizations undertake additional acquisitions.
Incentive payments consist of bonus pool revenue that is paid to affiliated
physician organizations. Bonus pool revenue increased to $2,509,000 during the
fiscal year ended September 30, 1997 from $1,562,000 during the fiscal year
ended September 30, 1996. This increase was due to increased enrollees and
better risk management.
Revenue from management services provided to unaffiliated physician
organizations ("MSO Revenue") increased to $1,429,000 for the fiscal year ended
September 30, 1997 from $945,000 for the fiscal year ended September 30, 1996.
The increase resulted from the Company managing additional unaffiliated
physician organizations during the year ended September 30, 1997. For the fiscal
year ended September 30, 1997, $891,000 of the MSO Revenue and for the fiscal
year ended September 30, 1996, $901,000 of the MSO Revenue was derived from
management services provided to Yorba Linda Medical Group. A portion of such
revenues terminated as of July 1, 1998. See "Risk Factors--Recent Settlement
Agreement with Yorba Linda Medical Group."
The cost of medical services for the fiscal year ended September 30, 1997
was $23,202,000, representing an increase of $3,710,000 from $19,492,000 in the
prior fiscal year. The total cost of medical services increased from fiscal year
1996 to fiscal year 1997 as a result of the increase in the number of enrollees
from the Company's acquisition program and internal growth. The medical loss
ratio (the ratio of the cost of medical services to operating revenues derived
from medical services) was 82.0% and 86.6% for the fiscal years ended September
30, 1997 and 1996, respectively. The decrease in the medical loss ratio from
fiscal year 1996 to fiscal year 1997 resulted from lower medical costs per
enrollee at the acquired physician organizations.
The Company and its affiliates have taken several additional actions since
October 1, 1997 in an attempt to continue to reduce their respective costs.
These actions include closer monitoring of claims authorizations, renegotiation
of contracts for certain specialty and ancillary health care services, including
obstetrics and gynecology, orthopedics, general surgery, outpatient radiology
and physical therapy and entering into new agreements for certain hospital
services and hospital-based physicians. The Company
35
<PAGE>
has entered into a lease to consolidate the operations of Santa Ana/Tustin
Physicians Group with certain operations of Prospect Medical Group. The Company
has also entered into a lease to consolidate the management and administrative
functions performed by Prospect Medical Systems for Prospect Medical Group and
Santa Ana/Tustin Physicians Group into a single location on or about the end of
the first quarter of fiscal year 1999.
Gross margin for the fiscal year ended September 30, 1997 increased to
$6,753,000 from $4,943,000 for the prior fiscal year, representing 22.5% and
20.2% of total operating revenues for the fiscal years ended September 30, 1997
and 1996, respectively. The increase in gross margin resulted from a larger
increase in total operating revenues than the increase in the cost of medical
services as a result of lower medical costs per enrollee at the acquired
physician organizations.
General and administrative expenses for the fiscal year ended September 30,
1997 rose to $7,300,000 from $4,212,000 for the preceding fiscal year,
representing 24% and 17% of gross revenues for the respective year. The largest
component of such costs is non-physician salaries and benefits. Salaries and
benefits increased to $4,318,000 during the fiscal year ended September 30, 1997
from $2,559,000 during the fiscal year ended September 30, 1996, an increase of
69%. This increase resulted from the increase in the number of management
personnel hired in preparation for implementation of the Company's growth
strategy and cost containment programs.
Other general and administrative expenses incurred in preparation for
implementation of the Company's growth strategy included employee training in
connection with investment in advanced management information systems equipment,
and increased legal and accounting costs. Physician office expenses increased to
$869,000 during the fiscal year ended September 30, 1997 from $696,000 during
the fiscal year ended September 30, 1996. This increase is primarily the result
of additional offices for the medical groups acquired pursuant to the Company's
acquisition program. Other operating expenses increased to $2,113,000 during the
fiscal year ended September 30, 1997 from $957,000 during the fiscal year ended
September 30, 1996, an increase of 121%. This increase is primarily the result
of the Company's acquisition program and an increase in personnel support.
Depreciation and amortization rose to $244,000 for the fiscal year ended
September 30, 1997 as compared to $102,000 for the fiscal year ended September
30, 1996.
The acquisition of the stock of Santa Ana/Tustin Physicians Group, Sierra
Medical Group and Sierra Medical Management (and certain assets of Western
Medical Group and Antelope Valley Medical Group) and related entities have been
accounted for by the Company using the purchase method of accounting, under
which the Company records as goodwill the excess of the purchase price over the
fair value of the net tangible assets of the acquired businesses. As of
September 30, 1997, the Company's total consolidated assets were approximately
$24,511,000, of which approximately $16,530,000, or 67.4% was goodwill. Goodwill
is being amortized on a straight-line basis over a 20 year period.
Substantially all of the goodwill on the Company's consolidated balance
sheet as of September 30, 1997 is related to acquiring the stock of Santa
Ana/Tustin Physicians Group, Sierra Medical Group and Sierra Medical Management.
The Company evaluates each acquisition and establishes an appropriate
amortization period based on the underlying facts and circumstances. Currently,
the Company uses 20 years based on a preliminary allocation of the estimated
fair values of the net assets acquired. Subsequent to each acquisition, the
Company will reevaluate such facts and circumstances to determine if the related
goodwill continues to be realizable and if the amortization period continues to
be appropriate.
Amortization of goodwill for the fiscal year ended September 30, 1997 was
$49,000. In addition, during the fiscal year ended September 30, 1997 the
Company voluntarily terminated one HMO contract related to the provider network
acquired in the 1996 Merger because the capitation payments made under this
contract were not sufficient to cover the cost of medical services provided
thereunder. This HMO contract was the primary asset acquired in that
transaction. Consequently, all intangible assets acquired
36
<PAGE>
from Med-Search were considered impaired and of no continuing value. To reflect
this asset impairment, a loss totaling $2,197,000 was recorded in the fiscal
year ended September 30, 1997.
Affiliations with additional physician organizations which result in the
recognition of additional goodwill would cause amortization expense to increase
further. Any future determination that a significant impairment has occurred
would require the write-down of the impaired portion of unamortized goodwill to
fair value, which would have a material adverse effect on the Company's results
of operations. See "Risk Factors--Risk Related to Intangible Assets and
Amortization of Goodwill."
Interest expense was $152,000 during the fiscal year ended September 30,
1997, as compared to none in the prior year, and was attributable to two and one
half months of interest on funds drawn on the Company's revolving credit
agreement for acquisition purposes.
As a consequence of incurring the foregoing expenses, the Company suffered a
net loss of $2,639,000 for the fiscal year ended September 30, 1997 as compared
to net income of $555,000 for the prior fiscal year.
FISCAL YEAR ENDED SEPTEMBER 30, 1996 COMPARED WITH FISCAL YEAR ENDED SEPTEMBER
30, 1995
The Company's operating revenues increased to $24,435,000 in the fiscal year
ended September 30, 1996 from $14,657,000 in the fiscal year ended September 30,
1995, representing an increase of $9,778,000, as a result of internal growth. As
of September 30, 1996 the number of managed care patients enrolled in the
Company's networks totaled approximately 35,000 as compared to approximately
27,000 at the same date in 1995.
The cost of medical services for the fiscal year ended September 30, 1996
was $19,492,000, representing an increase of $8,832,000 from $10,660,000 the
prior fiscal year. During the fiscal year ended September 30, 1996, the increase
in operating revenues was slightly higher than the increase in the cost of
medical services, resulting in a $946,000 increase in gross profit (from
$3,997,000 to $4,943,000). The gross margin for the fiscal year ended September
30, 1996 was 20.2% as compared to 27.3% for the prior fiscal year. The decrease
in gross margin is attributable to higher costs relating to patient services and
treatment (including higher utilization of specialists that the Company had to
provide).
General and administrative expenses for the fiscal year ended September 30,
1996 increased to $4,212,000 from $3,545,000 for the preceding fiscal year,
representing 17% and 24%, respectively, of operating revenues for such years.
Depreciation and amortization was approximately $102,000 for the fiscal year
ended September 30, 1996 as compared to $125,000 in the prior fiscal year.
Investment income was $175,000 for the fiscal year ended September 30, 1996,
as compared to none in the prior year, and was attributed to the ability of the
Company to invest the surplus cash balances generated by the sale of Company's
common stock in a private placement.
During the fiscal year ended September 30, 1996 the Company incurred a
$240,000 loss from the sale of property and equipment to an affiliate.
As a result of an increase in gross margin and reduced general and
administrative expenses as a percentage of operating revenues the Company
experienced an increase in net income to $555,000 for the fiscal year ended
September 30, 1996 as compared to $188,000 in fiscal year September 30, 1995.
NINE MONTHS ENDED JUNE 30, 1998 COMPARED WITH NINE MONTHS ENDED JUNE 30, 1997
The Company's operating revenues increased to $40,314,000 in the nine months
ended June 30, 1998 from $19,977,000 in the nine months ended June 30, 1997,
representing an increase of $20,337,000 or
37
<PAGE>
101.8%. The majority of this increase resulted from the increase in capitation
revenue during the nine months ended June 30, 1998 to $33,860,000 from
$16,165,000 during the nine months ended June 30, 1997. Approximately 90% of the
increase in the capitation revenues from the nine months ended June 30, 1997
when compared to the nine months ended June 30, 1998 resulted from the increase
in the number of managed care patients served by the Company's affiliated
physician organizations as a result of the Company's acquisition program and
approximately 10% of the increase resulted from internal growth of 9,000
enrollees during periods of open enrollment for HMO plans under contract with
the Company's affiliated physician organizations.
Fee-for-service revenue increased to $2,610,000 during the nine months ended
June 30, 1998 from $762,000 during the nine months ended June 30, 1997. This
increase is largely the result of the Company's acquisition program.
Fee-for-service revenue as a percentage of operating revenues increased to
approximately 6.5% during the nine months ended June 30, 1998 from approximately
3.8% during the nine months ended June 30, 1997.
Incentive payments consist of bonus pool revenue that is paid to affiliated
physician organizations. Bonus pool revenue increased to $2,122,000 during the
nine months ended June 30, 1998 from $1,795,000 during the nine months ended
June 30, 1997. This increase was due to additional bonus pools for which
physician organizations that became affiliated with the Company during fiscal
year 1997 and the first quarter of fiscal year 1998 were eligible.
MSO Revenue increased to $1,467,000 for the nine months ended June 30, 1998
from $924,000 for the nine months ended June 30, 1997. The increase in MSO
Revenue resulted from managing additional unaffiliated physician organizations
when compared to the comparable prior period. For the nine months ended June 30,
1998, $631,000 of the MSO Revenue, and for the nine months ended June 30, 1997,
$668,000 of the MSO Revenue, was derived from management services provided to
Yorba Linda Medical Group. As of July 1, 1998, a portion of such revenues was
terminated. See "Risk Factors--Recent Settlement Agreement with Yorba Linda
Medical Group."
The cost of medical services increased to $26,854,000 during the nine months
ended June 30, 1998 from $16,107,000 during the nine months ended June 30, 1997.
Of such cost, monthly capitation payments to primary care physicians and
specialists increased to $8,656,000 during the nine months ended June 30, 1998
from $5,635,000 during the nine months ended June 30, 1997. This increase was
largely attributable to an increase in the number of physicians receiving
capitation payments as a result of the Company's acquisition program. The
reduction in medical costs as a percentage of total operating revenues derived
from medical services from 86.0% for the nine months ended June 30, 1997 as
compared to 69.6% for the nine months ended June 30, 1998 results from the
acquirees operating at significantly lower medical costs and the Company
implementing new contracts with specialists and ancillary health care providers.
The acquired physician organizations have lower medical costs because they have
more control over the utilization of medical services as a result of employing
primary care physicians rather than paying monthly capitation payments to
independent primary care physicians.
During the nine months ended June 30, 1998, operating revenues rose at a
faster rate than the cost of medical services, resulting in an $9,591,000
increase in gross margin (from $3,869,000 during the nine months ended June 30,
1997 to $13,460,000 during the nine months ended June 30, 1998). The gross
margin was 33.4% of total operating revenues during the nine month period ended
June 30, 1998, as compared to 19.4% for the nine month period ended June 30,
1997. The increase in gross margin is a result of the lower medical cost per
enrollee at the acquired physician organizations and the implementation of new
contracts with specialists and ancillary health care providers.
38
<PAGE>
General and administrative expenses for the nine months ended June 30, 1998
rose to $11,299,000 from $4,503,000 for the nine months ended June 30, 1997,
representing 28.0% and 22.5% of gross revenues for such periods. The largest
component of such costs is salaries and benefits. Salaries and benefits
increased to $6,580,000 during the nine months ended June 30, 1998 from
$2,513,000 during the nine months ended June 30, 1997, an increase of more than
162%. This increase resulted from the increase in the number of management and
other personnel hired in preparation for implementation of the Company's growth
strategy and cost containment programs and the increase in personnel
incorporated from the Company's acquisition program.
Physician office expenses increased to $1,097,000 during the nine months
ended June 30, 1998 from $535,000 during the nine months ended June 30, 1997.
This increase is primarily the result of additional offices for the medical
groups acquired pursuant to the Company's acquisition program. Other operating
expenses increased as a result of the implementation of the Company's growth
strategy to $3,622,000 during the nine months ended June 30, 1998 from
$1,455,000 during the nine months ended June 30, 1997, an increase of 149%.
Depreciation and amortization rose to $786,000 for the nine months ended
June 30, 1998 as compared to $114,000 for the nine months ended June 30, 1997,
an increase of 589%.
Interest expense was $1,028,000 during the nine months ended June 30, 1998,
as compared to none in the prior year. Interest expense during the nine months
ended June 30, 1998 was attributable to nine months of interest on funds drawn
on the Company's credit facility for acquisition purposes, including interest
due on promissory notes made by Prospect Medical Group and the Company to the
sellers of Sierra Medical Group and its related physician practice management
company.
As a consequence of the foregoing, the Company earned a net income of
$376,000 for the nine months ended June 30, 1998 as compared to a net loss of
$2,944,000 for the nine months ended June 30, 1997.
PRO FORMA NINE MONTHS ENDED JUNE 30, 1998 COMPARED WITH HISTORICAL NINE MONTHS
ENDED JUNE 30, 1998
The pro forma consolidated statement of operations gives effect to the
acquisition of assets of Antelope Valley Medical Group, the Yorba Linda
Settlement Agreement in which common stock shares were returned to the Company
and the utilization of proceeds of this Offering to repay debt. During June
1998, Sierra Medical Group acquired certain assets of Antelope Valley Medical
Group and the Company acquired certain assets of its related management company.
None of the personnel or facilities of Antelope Valley Medical Group or its
related management company were acquired by Sierra Medical Group or the Company.
The Company believes that it will be able to integrate the acquired assets into
the existing operations of its affiliated physician organizations, thereby
reducing the costs associated with the operations of the assets acquired from
Antelope Valley Medical Group in future periods. The pro forma statement of
operations data has not been adjusted to reflect any reduction in the historical
operating costs of Antelope Valley Medical Group.
The pro forma financial information for the period also gives effect to the
Yorba Linda Settlement Agreement. Certain physicians employed by Yorba Linda
Medical Group who have provided physician services to enrollees of Prospect
Medical Group sought release from the exclusivity and other noncompetition
provisions in their agreements with Prospect Medical Group. Effective July 1,
1998, the Company and Prospect Medical Group entered into the Yorba Linda
Settlement Agreement pursuant to which these physicians who were also
stockholders of the Company have returned to the Company an aggregate of
1,126,323 shares of the Company's Common Stock in exchange for the release from
the exclusivity and other noncompetition provisions in their agreements with
Prospect Medical Group.
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The Company's pro forma operating revenues decreased by $978,000 as compared
to the historical operating revenues as a result of including the historical
unaudited revenues of Antelope Valley Medical Group and the reduction in
revenues related to the Yorba Linda Settlement Agreement as if they had been
effected at the beginning of the period. These two events resulted in a net
enrollee decrease of approximately 1,000. The increase in the cost of medical
services of $552,000 can be attributed to the higher historical medical cost per
enrollee of Antelope Valley Medical Group as compared to Yorba Linda Medical
Group. The decrease in general and administrative costs results from cost
savings derived from services no longer provided to Yorba Linda Medical Group
physicians, including a reduction in rent expense. In addition, prior to
acquisition, the former management of Antelope Valley Medical Group had
determined that it could not operate Antelope Valley Medical Group profitably,
and therefore a non-recurring expense totaling $312,000 was recorded by such
management in the eight-month period ended May 31, 1998 in addition to a charge
of $2,856,000 recorded prior to September 30, 1997. Lastly, the pro forma
consolidated statements of operations have also been adjusted to give effect to
the utilization of proceeds of the Offering to pay down debt and thereby reduce
interest expense.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL. The Company requires capital primarily to facilitate its
acquisition strategy and to develop the infrastructure necessary to effectively
manage its affiliated physician organizations. Prior to or concurrent with
establishment of an affiliation relationship with a physician organization,
Prospect Medical Holdings may advance funds to one of its wholly-owned
subsidiaries to acquire the non-medical assets used to operate and manage the
physician organization. Prospect Medical Holdings may also advance funds to an
affiliated physician organization to acquire the medical assets or, in some
cases, the stock of another physician organization.
Generally, contractual payments for capitation tend to be received by the
Company's affiliated physician organizations from the HMOs before the dates when
the Company's capitation and claim payments to its providers are due, improving
cash flow. However, the portion of the Company's revenues that is derived from
its share of HMO bonus pools may be settled quarterly, semi-annually or
annually, well after the revenue has been accrued. Generally, bonus pools are
settled after the end of the contract year. Historically, amounts payable to the
Company that are derived from bonus pools are generally paid in the third
quarter of each calendar year. See "Risk Factors--Fluctuations in Quarterly
Results" for further discussion.
The Company's primary sources of cash since 1996 have been funds provided by
borrowing under the Company's credit facility, by the issuance of equity
securities and by operating activities. Upon consummation of the 1996 Merger in
the fiscal year ended September 30, 1996 the Company raised a net of $2,359,000
through a sale of the Company's common stock in a private transaction. During
fiscal year 1997 the Company began to implement its growth strategy through a
series of acquisitions and affiliations for cash, debt and equity securities.
Through June 30, 1998, the Company paid or committed to pay consideration in an
aggregate amount of approximately $15,950,000 in connection with its
acquisitions plus the issuance of approximately 800,000 shares of common stock
and options to purchase 35,000 shares of common stock of the Company.
In July 1997, the Company (through Prospect Medical Group) acquired all of
the stock of Santa Ana/ Tustin Physicians Group for $5,000,000. In September
1997, the Company acquired all of the stock of Sierra Medical Management and
(through Prospect Medical Group) acquired all of the stock of Sierra Medical
Group for an aggregate purchase price of $6,500,000 in cash, plus $2,500,000
payable pursuant to notes issued by Prospect Medical Group to the sellers,
600,000 shares of the Company's common stock and options to purchase 35,000
shares of common stock of the Company. Such notes bear interest at the rate of
7% per annum, require interest to be paid monthly with $125,000 principal
payable quarterly plus annual principal payments of $250,000 until March 1999
when the unpaid principal balance then outstanding, and all accrued but unpaid
interest, is due and payable in full. The notes to the former shareholders of
Sierra
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Medical Group provide that Prospect Medical Group will prepay the principal of
such notes in full from the proceeds of this Offering; the interest on such
notes will be paid from internally generated funds. See "Use of Proceeds."
ACQUISITIONS DURING THE CURRENT FISCAL YEAR. In October 1997 the Company
(through Pegasus Medical Group) acquired certain assets of Western Medical Group
for $700,000. The Company (through Prospect Medical Group) also acquired certain
assets of two medical practices for a total consideration of approximately
$250,000 plus the issuance of up to approximately 10,000 shares of Common Stock
of the Company. As of June 1998 the Company and Sierra Medical Group acquired
certain assets of the Antelope Valley Medical Group and a related entity for
consideration consisting of $500,000 in cash, $500,000 in promissory notes and
200,000 shares of the Company's common stock.
WORKING CAPITAL. The Company had negative working capital of $2,569,000 and
$2,003,000 at June 30, 1998 and September 30, 1997, respectively. The negative
working capital at September 30, 1997 resulted primarily from current
liabilities incurred in connection with acquisitions and the use of cash in
operations. At June 30, 1998, the negative working capital resulted primarily
from current liabilities incurred in connection with acquisitions. At June 30,
1998, the Company had cash and cash equivalents of $1,765,000 and a working
capital ratio (currents assets to current liabilities) of .73 compared to cash
and cash equivalents of $2,822,000 and a working capital ratio of .77 at
September 30, 1997 and cash and cash equivalents of $693,000 and a working
capital ratio of .78 at June 30, 1997. The increase in cash and cash equivalents
of approximately $2,129,000 from June 30, 1997 to September 30, 1997 resulted
primarily from the receipt of risk pool moneys, cash received from the
acquisition of Santa Ana/Tustin Physicians Group and an increase in capitation
revenues received as a result of the Santa Ana/Tustin Physician Group
acquisition. The decrease in cash from $2,822,000 at September 30, 1997 to
$1,765,000 at June 30, 1998 resulted from the utilization of cash to repay a
portion of the outstanding balance under the Company's credit facility resulted
primarily from the use of the Company's credit line and the Company's income. At
September 30, 1997, the Company had cash and cash equivalents of $2,822,000 and
a working capital ratio of .77 compared to cash and cash equivalents of
$5,333,000 and a working capital ratio of 1.81 at September 30, 1996 and cash
and cash equivalents of $822,000 and a working capital ratio of 1.51 at
September 30, 1995. The decrease in cash and cash equivalents of approximately
$2,511,000 from September 30, 1996 to September 30, 1997 resulted primarily from
the use of $2,200,000 for the Company's acquisition activities and the operating
losses. The increase in cash and cash equivalents of approximately $4,511,000
from September 30, 1995 to September 30, 1996 resulted primarily from proceeds
from the private placement and from operations. The only significant current
asset of the Company other than cash comprises accounts receivable. Accounts
receivable consists primarily of the Company's interest in risk sharing pools,
accrued management fees due from managed physician practices which are not
consolidated, and fee-for-service amounts due from patients and third party
payors. These receivable balances increased from $1,328,000 at September 30,
1996 to $3,247,000 at September 30, 1997 to $4,865,000 at June 30, 1998,
increases of $1,919,000 and $1,618,000, respectively, primarily due to (a) the
increase of 44,000 enrollees as a result primarily of the Company's acquisition
program, the most significant portion of which arose as a result of the July
1997 acquisition of Santa/Ana Tustin Physicians Group, the September 1997
acquisition of certain assets of Sierra Medical Group and Sierra Medical
Management and the June 1998 acquisition of Antelope Valley Medical Group; and
(b) the increase in shared risk receivables of $1,947,000 related to Prospect
Medical Group's acquisitions and internal growth due to an increase in
enrollment and timing of the receipt of payments under the shared risk programs
with HMOs which are typically made during the second and third quarter of the
calendar year.
The Company's current liabilities consist of (i) accrued medical claims,
which are amounts accrued as payable to specialty care physicians and ancillary
providers, (ii) accounts payable and (iii) the current portion of notes payable
and capital lease obligations. The Company's accrued medical claims include
claims received by the Company, together with amounts accrued as estimated costs
for covered medical benefits incurred by the enrollees in the Company's network
but not yet reported to the Company by
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providers ("IBNR"). Claims that are not disputed by the Company are typically
paid within 30 days of their receipt. The increase in accrued medical claims
from $2,953,000 at June 30, 1997 to $5,918,000 at September 30, 1997 and to
$6,025,000 at June 30, 1998 resulted primarily from the increased number of
enrollees as a result of the Company's acquisition program. The increase in
accrued medical claims from $1,278,000 at September 30, 1995 to $3,063,000 at
September 30, 1996 resulted from internal growth. The increase in accrued
medical claims from $3,063,000 at September 30, 1996 to $5,918,000 at September
30, 1997 resulted primarily from the increased number of enrollees as a result
of the Company's acquisition program.
CREDIT FACILITY. In July 1997, the Company obtained a credit facility of
$10,000,000 from the Bank in the form of a revolving credit agreement (the
"Facility"). The full Facility was utilized by the Company in connection with
its acquisitions of Santa Ana/Tustin Physicians Group, Sierra Medical Group and
Sierra Medical Management. In February 1998, the Company obtained an increase in
the Facility to $12,500,000. The Facility matures on July 3, 1999, bears
interest at a variable rate based on prime plus applicable margin and is secured
by a first lien on substantially all of the assets of the Company and its
subsidiaries. The Facility is also subject to both affirmative and negative
covenants, including financial covenants. The financial covenants include
maintaining certain financial ratios, such as a current ratio, leverage ratio
and coverage ratio, as well as satisfying a net worth test. As of September 30,
1997, the Company did not meet certain financial ratios. The Bank has waived
compliance with these ratios as of September 30, 1997, and December 31, 1997,
made the waivers effective retroactive to September 1, 1997, and has revised the
ratios for periods thereafter. As of March 31, 1998 and June 30, 1998, the
Company did not meet certain financial ratios and negative covenants. The Bank
has waived compliance with these ratios and negative covenants at those dates.
In connection with the conferral of the Facility and the increase in the amount
available under the Facility, the Company granted seven year warrants to the
Bank for the purchase of 192,725 shares of common stock at $5.00 per share. The
Company intends to renegotiate the terms of or replace the Facility upon
expiration.
As described above, the Company has primarily funded its acquisition program
with draws on its Facility. The assets acquired by the Company and its
affiliated physician organizations have largely been intangible assets. The
result of acquiring such intangible assets with draws on the Facility is
reflected in the significant negative net tangible book value of the Company.
See "Dilution."
EQUIPMENT LOAN. The Company entered into a loan agreement in September 1997
to finance a portion of the cost of a management information system. The loan
agreement had an original principal balance of approximately $600,000 with an
interest rate of 10.25% per annum and a term of seven years.
ADDITIONAL FINANCING. As the Company continues to aggressively pursue its
business strategy, additional financing specifically in connection with the
Company's acquisitions will be required. Establishing a health plan with a
limited license under California law and the formation and development of a
Medicare Health Plan will also require additional financing. In addition, the
operation and expansion of affiliated physician organizations will require
ongoing capital expenditures. The Company anticipates repaying the outstanding
balance on the Facility with proceeds of this Offering. The Company anticipates
applying approximately $500,000 of proceeds of this Offering to pay a portion of
the cost to establish a limited license Knox-Keene health plan and a Medicare
Health Plan. The Company anticipates using a draw on its Facility to pay for any
additional costs to establish such plans which the Company currently estimates
will total approximately $2,500,000. The Company anticipates financing future
acquisitions and potential business expansion with a combination of the proceeds
of this Offering, the Facility, and cash flows from operations. Subsequent to
this Offering, the Company believes that a renewal or replacement of the
Facility, including any additional amounts thereunder and cash flow from
operations will be sufficient to meet the Company's currently anticipated
acquisition, health plan establishment, Medicare Health Plan formation and
development, expansion and working capital needs through September 30, 1999. In
addition, in order to meet its long-term liquidity needs, the Company may incur,
from time to time,
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additional short and long term bank indebtedness and may issue additional equity
and debt securities, the availability and terms of which will depend upon market
and other conditions. Pursuant to the Company's agreements with the
Representative, the Company's ability to issue any securities is restricted for
a period commencing in March 1998 and ending twelve months following the
Effective Date, except for certain specified purposes, which purposes include
acquisitions. See "Risk Factors--Shares Eligible for Future Sale" herein for
further discussion. The Company's ability to issue any convertible debt or
equity securities in a public or private sale may also be restricted under
certain circumstances pursuant to contractual restrictions in the Company's
agreements with its commercial lender. There can be no assurance that such
additional financing will be available upon terms acceptable to the Company, if
at all. The failure to raise the funds necessary to finance its future cash
requirements could adversely affect the Company's ability to pursue its strategy
and could adversely affect its results of operations for future periods.
The Company may require additional financing to the extent the Company
identifies new acquisition candidates that meet its criteria for potential
acquisition candidates and is able to enter into acquisition agreements with
such candidates. The Company may issue shares of its Common Stock for all or a
portion of the consideration to be paid for any such acquisition. There can be
no assurances that the Company will be able to identify any such acquisition
candidates, that the Company will be able to enter into any acquisition
agreements on acceptable terms or that the Company will be able to obtain
sufficient financing to consummate any such future acquisitions.
YEAR 2000. Many existing computer systems and programs process transactions
using two digits rather than four digits for the year of a transaction. Unless
the hardware and/or the software have been or will be modified, a significant
number of those computer systems and programs may process a transaction with a
date of the year 2000 as the year "00", which could cause the system or the
program to fail or create erroneous results before, on or after January 1, 2000
(the "Year 2000 Issue"). The Company has recently explored the effect of the
Year 2000 Issue in connection with its management information systems,
computerized accounting system, computerized telephone system and all of the
Company's personal computers.
The Company has formed a Year 2000 project team that includes members of its
management information systems department, finance department, senior management
and a computer consultant to continue evaluating and analyzing all systems. An
inventory of all systems and programs that could be affected by the Year 2000
date change has been developed and categorized as to importance.
The Company has recently purchased a sophisticated management information
system (including software, licensing, training and support) for approximately
$1,100,000. The management information system is specifically designed for the
managed care segment of the Company's business, which accounts for approximately
89% of the Company's revenue. The vendor of this system is obligated under the
purchase contract to provide and install a Year 2000 module designed to address
the Year 2000 Issue. The Company commenced using the system on September 1,
1998. The Company anticipates that the Year 2000 module will be installed in
February 1999, and will be tested within 90 days thereafter. No assurances can
be given that the Year 2000 module will resolve the Year 2000 Issue. The Company
does not expect any additional costs associated with the installation of its
Year 2000 module.
The Company also uses a computer system which was leased commencing in 1996
for billing and collection of fee-for-service accounts receivable, which
accounts for less than 7.5% of the Company's revenues. This system is not
currently Year 2000 compliant; however, the vendor is scheduled to provide a
software upgrade on October 1, 1998 to enable the computer system to become Year
2000 compliant. The Company anticipates commencing to test the software upgrade
within 30 days after receipt and to complete testing by December 31, 1998 to
confirm that the upgrade will resolve the Year 2000 Issue. No assurance can be
made at this time that the upgrade will resolve the Year 2000 Issue. The vendor
has agreed to provide the upgrade and any technical support required at no cost
to the Company, and has assured the Company that the upgrade has been fully
tested to resolve the Year 2000 Issue. In the event
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the software upgrade will not resolve the Year 2000 Issue, the Company intends
to terminate the lease for the computer system and the Company anticipates that
it will purchase another computer system which is Year 2000 compliant at a cost
of approximately $100,000 to perform these services. The Company anticipates
that any such cost, if incurred, would be paid from cash flow generated by
operations.
The Company's financial and general ledger systems use a licensed software
program. The licensor has provided a software upgrade to address the Year 2000
Issue at a negligible cost. The Company anticipates that the upgrade will be
tested by approximately October 15, 1998. Although no assurance can be given
that the software upgrade will make the financial and general ledger systems
Year 2000 compliant, accounting software has recently been priced by
representatives of the Company who found that new accounting software for the
Company, which is Year 2000 compliant, currently costs under $5,000. The Company
anticipates that any such cost, if incurred, would be paid from cash flow
generated by operations.
In connection with the anticipated relocation of the administrative offices
of Prospect Medical Systems to its new facilities in Santa Ana, California
(approximately November 1, 1998), management will be entering into a contract
for a new state-of-the-art telephone interconnect system. The software in
connection with the operation and management of the telephone system is operated
through Microsoft Windows NT technology, and the Year 2000 module included with
the telephone interconnect software has already been tested by the manufacturer
who reports that the software is Year 2000 compliant. The telephone interconnect
system will be leased directly from the manufacturer and the lease will provide
for a full service guarantee for the life of the lease (8 years). The cost of
the telephone interconnect system will be approximately $130,000, plus lease
charges which include full service of the equipment by the manufacturer for the
8 year term. The Company anticipates that any such cost will be paid from cash
flow generated by operations.
The Company utilizes personal computers that are connected to a network for
all of its employee workstations. These personal computers all utilize Microsoft
Windows NT as their operating system. The Company believes that the Windows NT
operating system is Year 2000 compliant. Management replaces personal computers
after five years, and the Company anticipates replacing a portion of its
personal computers in 1999 and 2000. The cost anticipated is approximately
$75,000 per year. This cost is generally paid from cash flow generated by
operations.
The Company also has facilities in other parts of Orange County, California,
Santa Barbara and the Antelope Valley region of Los Angeles County (Palmdale,
California and Lancaster, California). All of these facilities will be connected
to the management information system and the computer system for billing and
collections by October 1, 1998. These facilities also operate with personal
computers, which use the Windows NT operating system. Telephone systems at each
location are currently being analyzed to determine if they meet the Year 2000
Issue, or whether they will require replacement. The cost associated with
replacement of telephone systems at these offices is negligible.
The medical equipment at the medical offices managed by the Company has all
been tested and the Company has verified that this equipment is Year 2000
compliant, based on testing of the medical equipment and its related software.
The Company primarily does business with hospitals and HMOs. The Company has
contacted all of the hospitals and HMOs with which it does business and has
verified that they are in the process of preparing for the Year 2000. The
Company has been provided assurances that the hospitals and HMOs will be Year
2000 compliant by March 1999, although no assurances can be given by the Company
with respect to these other parties.
Any failure of the HMOs and third-party payors to become prepared for the
Year 2000 could result in substantial adverse difficulties for the Company and
its business. The most reasonably likely worst case scenario for the Company is
the failure of the HMOs to become Year 2000 compliant. In the event the HMOs
that contract with the affiliated physician organizations do not become Year
2000 compliant in a
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timely manner, the impact could severely and adversely affect the Company's
results of operations and financial condition. Additionally, all information
between the Company and its HMOs would have to be prepared and processed
manually, at substantial cost to the Company.
In the case of third-party payors (Medicare, Medicaid, and indemnity
insurance companies) not becoming Year 2000 compliant in a timely manner, there
would be some impact on the Company's revenues and additional cost to manually
prepare and process claims. However, this segment of the Company's business
accounts for less than 7.5% of its revenues, and is not a primary source of the
Company's business.
In the case of the Company's hospital relationships, in the event the
hospitals are not Year 2000 compliant, all claims, authorizations, and
in-patient hospital days would have to be processed manually, which could delay
patients from obtaining needed medical care promptly, and potentially expose the
Company to possible liability from the patients. The Company does not
anticipate, however, that a failure of the hospitals to become Year 2000
compliant would materially adversely affect its business, results of operations
or financial condition.
The Company's project team is in the process of developing a contingency
plan which will be completed by March 31,1999, in the event that a) any of
Company's systems or programs fail to be Year 2000 compliant; or b) that any of
the parties with which the Company has its principal business relationships
(hospitals, HMOs or third-party payors as described above) fail to be Year 2000
compliant. See "Risk Factors--Year 2000 Risks."
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BUSINESS OF THE COMPANY
GENERAL
The Company manages and administers physician organizations (i.e., medical
groups and independent practice associations) that have entered into agreements
with HMOs to provide physician and certain ancillary health care services to HMO
members under capitated or prepaid fee arrangements. Management services are
provided by the Company to each affiliated physician organization pursuant to a
long-term management services agreement. Under this long-term management
services agreement, the Company provides the physician organization with certain
management and administrative support services, such as claims administration,
utilization management and quality assurance, case management, data collection
and management information systems and payor and provider contracting. The
Company also provides its affiliated medical groups with leased premises,
furniture, fixtures, equipment and personnel (which the Company does not provide
its affiliated independent practice associations, as such associations are
operated as separate businesses with respect to these items). In order to secure
its rights under the management services agreement, the Company enters into an
assignable option agreement with the physician organization which gives the
Company the right to designate the physician or physicians who will own the
physician organization. See "The Affiliated Physician Organizations--Management
Services", below.
Physician organizations increasingly are responding to the cost-containment
pressures within the managed care industry (see "Managed Care Industry
Overview", below) by affiliating with organizations such as the Company. The
Company's management services are intended to allow affiliated physician
organizations to deliver required medical services in a more cost effective
manner. Management believes that cost savings can be generated without adversely
affecting the quality of care provided by the physician organizations by, for
example, managing the risk for hospital services as well as physician and
ancillary health care services, negotiating favorable HMO and provider
contracts, and generating operating efficiencies. See "Strategy of the Company",
below. The Company's fee arrangements with affiliated physician organizations
are structured so as to allow the Company to benefit from the savings so
obtained. See "The Affiliated Physician Organizations--Management Services",
below.
The Company's management and administrative functions are performed by its
wholly-owned subsidiaries, Prospect Medical Systems and Sierra Medical
Management. Prospect Medical Systems conducts its operations in Orange, Los
Angeles, Ventura and Santa Barbara Counties of Southern California and currently
manages Prospect Medical Group and Santa Ana/Tustin Physicians Group. Sierra
Medical Management conducts its operations in the Antelope Valley region of Los
Angeles County and currently manages Sierra Medical Group (including the assets
acquired from Antelope Valley Medical Group) and Pegasus Medical Group. Under
California law, the Company and its subsidiaries are prohibited both from
engaging in the corporate practice of medicine and from contracting directly
with HMOs. Therefore, the physician organizations with which the Company
affiliates (see "The Affiliated Physician Organizations," below) enter into all
HMO contracts and hire and contract with physicians and ancillary health care
service providers in order to provide the medical services which such physician
organizations are obligated to provide under their HMO contracts. See "The
Affiliated Physician Organizations--Provider Agreements", below. The
non-physician components of hospitalization are provided to the enrollees by
hospitals that contract with and are paid by the HMOs. Currently, the Company's
affiliated physician organizations have contracts with approximately 17 HMOs,
from which the Company's revenue is primarily derived.
The Company's primary growth strategy includes the acquisition by its
affiliated physician organizations of other medical groups and independent
practice associations. See "Strategy of the Company", below. Since July 31,
1996, when current management assumed control of the Company, the number of
enrollees served by the Company's affiliated physician organizations has
increased from approximately 6,800 to approximately 97,000 as of June 30, 1998,
and over 100,000 as of July 31, 1998, principally through four strategic
acquisitions. As of June 30, 1998, the affiliated physician organizations
provided services
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through approximately 350 primary care physicians and 1,390 specialists in the
Company's provider network. See "History of the Company", below.
The Company believes that one of its strengths is its experienced
management, which has provided a foundation to develop and manage the Company's
current operations and future growth. See "Management of the Company."
Management believes that the Company is viewed more favorably by potential
acquisition candidates because its Chief Executive Officer and President have
been practicing physicians. Its Chief Executive Officer, Jacob Y. Terner, M.D.,
previously served as Chairman of the Board and Chief Executive Officer of
Century MediCorp, a publicly-traded corporation operating through three wholly-
owned HMO subsidiaries, hospitals and an affiliated independent practice
association until its October 1992 merger with a major publicly-traded HMO. The
Company believes that physician management fosters better relationships with
providers, thereby enhancing existing operations as well as appealing to
potential acquisition candidates. In keeping with the Company's strategy of
"corporate clout/local control," the Company typically retains senior management
of the entities which it acquires.
MANAGED CARE INDUSTRY OVERVIEW
Medical services have traditionally been provided on a fee-for-service basis
with insurance companies assuming responsibility for paying all or a portion of
such fees. Over the past decade, however, the costs of medical services have
generally risen at a higher rate than the consumer price index. As a result,
insurers, employers, state and federal governments and other health insurance
payors have been seeking to reduce or control the sustained increases in health
care costs. The response to these cost increases has been a shift away from the
traditional fee-for-service method of paying for health care, and the resultant
emergence of HMOs and other managed health care organizations which rely on the
concept that prepayment based on prior negotiation is an effective way of
controlling health care costs.
HMOs offer a comprehensive health care benefits package in exchange for a
fixed, prepaid monthly fee or premium per enrollee that does not vary through
the contract period regardless of the quantity or quality of medical services
used. HMOs enroll members by entering into contracts with employer groups or
directly with individuals to provide a broad range of health care services for a
prepaid charge, with minimal or no deductibles or co-payments required of the
members. HMOs, in turn, contract directly with physicians, physician groups,
hospitals and other health care providers to administer medical care to HMO
members. These contracts provide for payment to the provider on either a
discounted fee-for-service or per diem basis, or through a fixed monthly payment
(also referred to as a capitation payment) based on the number of members
covered, regardless of the actual need for and utilization of covered services.
Under these contracts the provider assumes the financial risk that all necessary
health care services can be provided at a cost less than the amount paid to the
provider by the HMO. These contracts may also include incentive arrangements
from HMOs for efficient utilization of hospital services or specialist services.
Such arrangements include incentive payments to be made by the HMO or amounts
withheld by the HMO from the contracted payment amounts. These payments or
amounts are distributed to the physician organization and other participants
(e.g., the hospital) following a reconciliation of budgeted expenses against
actual expenses. To the extent actual expenses exceed budgeted expenses, the
physician organization and other participants may be required to contribute
additional amounts to pay such expenses.
In states such as California, a provider can only accept risk from an HMO
for those services which the provider is authorized to perform within the scope
of its licensure. Thus, a physician or physician group cannot accept risk for
the provision of hospital services, and a hospital cannot accept risk for
physician or certain ancillary health care services. A provider in California,
however, may obtain a license under Knox-Keene, the same California law that
governs HMOs, and thereby accept risk for both physician and certain ancillary
health care and hospital services.
Practitioners in small to mid-sized physician organizations find themselves
at a competitive disadvantage in the managed care environment. They generally do
not have the market presence, expertise, or
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sophisticated cost accounting and quality management systems required for
capitated risk-sharing arrangements. In addition, they often lack the capital
required to purchase new medical equipment and information systems to enhance
the efficiency and quality of their practices. Administrative burdens have been
exacerbated by the proliferation of HMOs, which require physicians to comply
with multiple formats for claims processing, credentialing and other
administrative reporting requirements. As a result, physicians' operating
expenses and the number of hours devoted to non-medical activities have
increased.
Physician organizations increasingly are responding to the cost-containment
pressures within the managed care industry by affiliating with organizations,
such as the Company, to control economic risk and perform the non-medical
management and administrative tasks that arise from the practice of medicine in
a managed care setting. These organizations provide management and other
administrative services to physician organizations, including personnel,
utilization management and quality assurance, case management and data
collection and management information systems. These organizations also help
physician organizations by negotiating capitation rates and incentive payment
arrangements with HMOs and other payors. These organizations may manage a
portion of the economic risks involved in providing health care or assist
physician organizations that accept full financial risk for all physician and
ancillary health care services to be provided under HMO agreements.
HISTORY OF THE COMPANY
The Company was formed on May 12, 1993 as a Delaware corporation. Following
its formation, the Company (then named Med-Search, Inc.) provided managed care
and medical practice management services to a California professional
corporation doing business as Interstate Care Providers ("ICP"). As of July 31,
1996, ICP had managed care contracts with four HMOs, through which it managed
approximately 6,800 capitated lives, primarily in Ventura County, California.
On July 31, 1996, control of the Company was transferred to certain
investors (including Jacob Y. Terner, M.D.) in a private transaction and to
former physician stockholders of Prospect Medical Systems (including Gregg
DeNicola, M.D.). A new Board of Directors was elected and the new Board of
Directors appointed Dr. Terner as the Chairman of the Board and Chief Executive
Officer and Dr. DeNicola as the President. Concurrently with the change of
control, the 1996 Merger was completed. Upon consummation of the 1996 Merger,
the Company's name was changed to Prospect Medical Holdings, Inc. The Company
raised $2,500,000 in the private transaction to finance short-term working
capital needs immediately after the 1996 Merger.
Following the 1996 Merger, management began to implement the Company's
growth strategy through a series of acquisitions and affiliations. On July 14,
1997, Prospect Medical Group acquired all of the outstanding shares of stock of
Santa Ana/Tustin Physicians Group for the cash consideration of $5,000,000. The
founder and former sole shareholder of Santa Ana/Tustin Physicians Group
continues to serve as its president pursuant to the terms of a two-year
employment agreement. Concurrently, Santa Ana/Tustin Physicians Group signed a
long-term management services agreement with Prospect Medical Systems.
On September 25, 1997, Prospect Medical Group acquired all of the
outstanding shares of stock of Sierra Medical Group. Sierra Medical Management,
Inc. ("Old Sierra") concurrently merged into a wholly-owned subsidiary of
Prospect Medical Holdings, Inc., which subsidiary signed an amended and restated
management services agreement with Sierra Medical Group. The aggregate
consideration paid was $6,500,000 plus promissory notes in the aggregate
principal amount of $2,500,000 and the issuance of 600,000 shares of the
Company's common stock and options to purchase 35,000 shares of the Company's
common stock. The founders and former shareholders of Sierra Medical Group,
Sinnadurai E. Moorthy, M.D. and Karunyan Arulanantham, M.D., executed three-year
consulting and employment agreements, respectively, with Sierra Medical Group
subsequent to the acquisition. Jayaratnam Jayakumar, the administrator of Sierra
Medical Group, executed a three-year employment agreement with Sierra Medical
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Management and has primary responsibility for the day-to-day management of
Sierra Medical Management.
On October 31, 1997, Pegasus Medical Group, a wholly-owned subsidiary of
Prospect Medical Group, acquired certain assets of Western Medical Group located
in the same service area as Sierra Medical Group for the aggregate cash
consideration of $700,000. Concurrently, Pegasus Medical Group signed a
long-term management services agreement with Sierra Medical Management.
During June 1998, Sierra Medical Group acquired certain assets of Antelope
Valley Medical Group and the Company acquired certain assets of its related
management company for the aggregate consideration of $500,000 in cash and
$500,000 payable pursuant to promissory notes issued by the Company plus the
issuance of 200,000 shares of the Common Stock of the Company. Antelope Valley
Medical Group is located in the same service area as Sierra Medical Group.
As of July 1, 1998, the Company and Prospect Medical Group entered into the
Yorba Linda Settlement Agreement. Pursuant to the Yorba Linda Settlement
Agreement the physicians who were released from their exclusivity and
noncompetition agreements with Prospect Medical Group returned to the Company an
aggregate of 1,126,323 shares of the Company's Common Stock that was previously
issued to them and repaid approximately $60,000. See "Risk Factors--Recent
Settlement Agreement with Yorba Linda Medical Group" and "Unaudited Pro Forma
Financial Information" for a description of the anticipated effect of the Yorba
Linda Settlement Agreement on the results of operations, financial condition and
cash flows of the Company.
STRATEGY OF THE COMPANY
The Company believes that the managed care industry operates most
effectively on a regional basis, and is affected most by provider competition,
physician referral patterns, custom and practice and local hospital
relationships. Management believes that developing a significant local market
presence permits economies of scale and greater efficiencies through
centralization of operations. Management believes there is more economic
opportunity in developed rather than in undeveloped managed care markets because
(i) physicians and hospitals in developed markets have established practice and
referral patterns that are consistent with providing services within a managed
care framework and (ii) there is generally a higher concentration of physicians
and hospitals in a developed market, creating a more competitive environment
with greater opportunities for the Company and its affiliated physician
organizations to negotiate more favorable provider contracts. The Company has
selected Southern California as the initial primary service area for its
operations because management believes that Southern California is a highly-
developed managed care market.
Management of the Company intends to focus on the following factors in
seeking to achieve its business strategy. These factors relate primarily to the
expansion of the Company's business through acquisitions and establishment of a
licensed health plan as well as increasing operational efficiencies.
ACQUISITIONS. The Company views the acquisition and incorporation of
additional physician organizations with a concentration of managed care patients
into its provider network as the most direct route to size and stability. The
Company is focusing on physician organizations with approximately 10,000 or more
capitated HMO enrollees as possible acquisition candidates. The criteria which
the Company has developed to assess potential acquisitions include (i) either a
history of profitable operation or a compelling synergy with opportunities for
economies of scale through combining operations; (ii) either geographic
proximity to the Company's current operations or a material share of the
potential acquisition candidate's own local marketplace; (iii) a favorable
hospital relationship; and/or (iv) willingness of the acquisition candidate's
management to continue managing the acquired entity following its acquisition.
The Company also intends to increase its operations through the acquisition of
additional management companies in order to create a regional network to provide
management services to additional physician organizations.
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However, there can be no assurance that any definitive agreements will be
executed or that any such acquisitions or affiliations will be consummated.
The Company believes that it will be able to continue to attract physician
organizations by (i) offering the affiliated physicians of the incorporated
entities the benefits of payor contracts negotiated by the Company on behalf of
one of the Company's affiliated physician organizations, together with the
opportunity to build a larger patient base; (ii) allowing physicians who are
otherwise reluctant to associate with management companies (a) substantial
control over the provision of medical services and operations in their
geographic areas according to the needs of their patients, thus providing
flexibility in a continually changing market, and (b) an opportunity to play an
ongoing role in the management of their practices; and (iii) relieving
physicians from the administrative burden imposed by compliance with a variety
of HMO contracts. At the same time, the Company can offer to these physicians
the benefits of improved information resulting from its centralized management
information systems, accounting and other financial services.
INTERNAL GROWTH. Management of the Company also intends to grow through the
addition of new enrollees to its service network. The Company provides marketing
services to its affiliated physician organizations to promote such growth. With
respect to Prospect Medical Group, the Company seeks to increase its enrollment
through the development of relationships with sales representatives and
marketing directors of HMOs and marketing directors and administrators of
hospitals. Representatives of Prospect Medical Group attend health fairs and
community and other events directed at commercial and Medicare enrollees and
seek to attend these fairs and events as the sole physician organization
whenever possible. The Company has also established a speakers bureau to make
the physicians of Prospect Medical Group available to speak at public events. In
addition, the Company has set up a Web page for Prospect Medical Group and is in
the process of expanding its Web page. The Company intends to develop similar
marketing programs for Sierra Medical Group, Santa Ana/Tustin Physicians Group
and Pegasus Medical Group.
EXPANDING SCOPE OF LICENSURE; ESTABLISHING FULL-RISK HEALTH PLANS. Under
applicable California law, the Company's affiliated physician organizations can
accept risk under their contracts with HMOs only with respect to services which
are within the scope of their licensure, such as physician and ancillary health
care services. The affiliated physician organizations cannot accept risk from an
HMO with respect to services which are currently outside of the scope of their
licensure, such as hospital services. The HMOs which now contract with the
Company's affiliated physician organizations for physician services must
contract directly with hospitals for hospital services, which deprives the
Company and its affiliated physician organizations of control over the way in
which such services are provided.
As part of its future strategy, the Company or an affiliated physician
organization may seek to obtain the state and federal regulatory approvals
necessary to establish a licensed health plan in order to manage both hospital
and physician and ancillary health care services. As a health plan, the Company
or its affiliate would receive a fixed payment in return for full responsibility
to provide and pay for all hospital, physician and ancillary health care
services. By managing full risk the Company believes that it can achieve greater
control over patient care through its utilization management and quality
assurance protocols.
The Company intends to seek to allocate the risk for hospital services to
the hospitals within its inpatient provider network by entering into fixed fee
or capitated payment arrangements. All other services not provided directly by
an affiliated physician organization would be subcontracted out to other
providers; the Company intends to seek to use fixed fee schedules that include
per diems, case rates and other favorable arrangements. The profitability of any
licensed health plan established by the Company will be dependent upon the
ability of the Company to negotiate favorable arrangements with hospitals and
other subcontractors. There can be no assurance, however, that any hospital or
other subcontractor will agree to provide such services on a fixed fee or
capitated payment basis or upon terms otherwise favorable to the Company.
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In order to be able to provide hospital, physician and ancillary health care
services on a full-risk basis under California law, the Company expects to seek
a form of Knox-Keene HMO licensure known as a "limited license" or a "license
with waivers". The holder of a limited license under Knox-Keene may provide
services on a full-risk basis to commercial, Medicare and/or Medicaid members of
other (fully-licensed) plans and is precluded from contracting directly with
subscribers. A limited Knox-Keene health care service plan license, unlike a
full Knox-Keene health care service plan license, would not permit the Company
to market directly to employer groups to promote its health plan. With such a
license, the Company must enter into contracts with fully-licensed health plans
and can provide services only to the members of the plans with which it
contracts. The fully-licensed HMO performs all advertising and marketing
functions, collects all premiums from the purchasers of plan services and
performs certain administrative services that vary by HMO. The Company expects
that such a limited license would be easier to obtain than a full license,
although no assurances can be given, and would forestall direct competition
between the Company and the HMOs with which it contracts. Upon obtaining the
required licensure, the Company believes that it or its affiliate will be able
to obtain full-risk contracts with HMOs, although no assurances can be given.
The Company might alternatively seek a full Knox-Keene license in order to
market directly to, and collect premiums from, Medicare enrollees (but not
commercial enrollees). It is expected that this form of license would permit the
Company to both operate as a Medicare Health Plan and to accept full risk from
other fully-licensed plans as if it held a limited license as described above.
To date, however, no health plan has received such a license, and no assurance
can be given that such a license can be obtained. While such a license may be
harder to obtain, it would enable the Company's health plan to contract directly
with HCFA (the federal governmental agency responsible for administering and
overseeing the Medicare program) to serve Medicare beneficiaries under the
Medicare+Choice program which was established under the Federal Balanced Budget
Act of 1997 (the "Budget Act"). The Medicare+Choice program was formulated to
give Medicare beneficiaries health plan options in addition to the original
Medicare fee-for-service program and already existing Medicare HMOs.
The Company believes that formation and development of a Medicare+Choice
health plan may provide opportunities for future growth. According to an article
in the Winter 1998 edition of the California Health Care Financial Management
journal, enrollment growth in managed care plans by Medicare beneficiaries has
been increasing at an annual rate of approximately 25% nationwide, with HMOs
enrolling approximately 13% of all Medicare beneficiaries nationwide. The same
article indicated that enrollment in managed care plans by Medicare
beneficiaries in the State of California increased 9.8% during the year ending
June 30, 1997, bringing the total enrollment to nearly 1.4 million
beneficiaries, or 35% of the eligible population.
One of the plan categories available to members under the Medicare+Choice
program is the Coordinated Care Plan, which includes HMO plans,
provider-sponsored organization ("PSO") plans, and preferred-provider
organization plans. A PSO is an entity that is established or organized and
operated by a provider or group of affiliated health care providers and must be
majority-owned by affiliated health care providers. The Budget Act defined
"health care provider" as an individual who is engaged in the delivery of health
care services and is required by state law or regulation to be licensed or
certified to deliver such services, or an entity which is engaged in the
delivery of health care services and is licensed or certified to provide such
services, if so required.
A Medicare+Choice Coordinated Care Plan (a "Medicare Health Plan") contracts
directly with HCFA to provide hospital, physician and ancillary health care
services to Medicare beneficiaries. A Medicare Health Plan is allowed to provide
services on behalf of only one payor (HCFA) and only one enrollee population
(Medicare beneficiaries). A Medicare Health Plan performs all advertising and
marketing functions and collects all premiums from enrollees. As a result, the
formation of a Medicare Health Plan could potentially place the Company in
competition for Medicare beneficiaries with the HMOs now contracting with the
Company's affiliated physician organizations. The Company intends to
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avoid competing with such HMOs by marketing its Medicare Health Plan only in
areas where the Company's affiliated physician organizations do not serve
Medicare beneficiaries. The Company does not intend to operate a Medicare Health
Plan in a manner that would interfere with the established relationships of its
affiliated physician organizations with their contracting HMOs. However, no
assurances can be given as to the response of existing HMOs to any perceived
competition by a new Medicare Health Plan.
A Medicare Health Plan is required to obtain certification from HCFA. The
Company or an affiliated physician organization may apply for licensure as a
Medicare Health Plan to serve Medicare beneficiaries within its service area who
currently are not served by providers within its network. In addition, in
California, Medicare Health Plans which are HMO plans or PSO plans must be
licensed as Knox-Keene health care service plans. To date, however, no PSO has
been licensed under Knox-Keene, and no assurances can be given that such a
license can be obtained.
As described under "Governmental Regulation" below, once the Company or its
affiliate has obtained a license under Knox-Keene, whatever its form, the
Company or its affiliate will be subject to continuing regulation by the DOC and
must continue to meet certain operating requirements. The Company believes that
the management information system that it is currently implementing and the
infrastructure that it has developed will satisfy a substantial portion of the
data reporting and organizational and administrative capacity requirements to
assume full risk as a limited license Knox-Keene plan or additional HCFA
requirements for a Medicare Health Plan, or to assist an affiliated physician
organization to meet such requirements, although management is aware that HCFA
has not yet established specific reporting requirements for Medicare Health
Plans. There can be no assurance, however, that the Company or its affiliate
will be able to obtain the required licenses or certification or to satisfy any
other regulatory requirements. See "Governmental Regulation," below.
Management of the Company anticipates that state licensure for a health plan
under Knox-Keene could occur in six to twelve months and the federal Medicare
certification process would take four to six months following submission of the
application to HCFA. To finance all or a portion of the cost of formation and
development of a licensed health plan, the Company intends to apply, or lend to
its affiliated physician organization, a portion of the proceeds from this
Offering; the Company intends to finance the remainder of such cost from
borrowings under its revolving credit agreement (the "Facility"). No assurance
can be given that the Company or an affiliated physician organization will be
able to obtain a Knox-Keene license or Medicare Health Plan certification or
that sufficient funds will be available to finance the associated costs which
would satisfy regulatory reserve and working capital requirements.
ABILITY TO NEGOTIATE FAVORABLE HMO AND PROVIDER CONTRACTS. Management
believes that the most significant benefit of increased size of its affiliated
physician organizations may be the ability to negotiate HMO and specialist
contracts on a more favorable basis. The Company believes that as its affiliated
physician organizations provide services to a larger number of members of each
of their contracting HMOs, the Company's bargaining power will increase and, as
a result, the Company may be able to negotiate more favorable contract terms,
including capitation rates. The Company believes that the ability to offer a
larger number of enrollees to specialist physicians may also enable the
affiliated independent practice associations to contract with specialist
physicians at more competitive rates.
STRENGTHEN PROVIDER NETWORK. Management of the Company also recognizes the
importance of contractual arrangements that strengthen relationships with the
providers. The Company assists its affiliated independent practice associations
in negotiating agreements with contracting physicians and other medical
providers. The Company seeks to include in these agreements provisions under
which (i) a contracting physician agrees to refrain from providing physician
services to members of HMOs except through Company-affiliated physician
organizations (an exclusivity provision), and (ii) a contracting physician is
required to refrain from soliciting or diverting an enrollee of a
Company-affiliated physician organization to enroll with a physician
organization unaffiliated with the Company (a non-solicitation or
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non-diversion provision). Providers are offered higher capitation rates as an
incentive to become an exclusive provider. The Company believes that as of June
30, 1998 approximately 9 of the physicians within its provider network had
exclusivity provisions in their contracts with an affiliated independent
practice association (see "The Affiliated Physician Organizations," below).
Certain other physicians have non-diversion or non-solicitation provisions in
their contracts with an affiliated independent practice association. The Company
believes the inclusion of these provisions, particularly exclusivity,
non-solicitation and non-diversion provisions, strengthens and differentiates
its provider network. No assurances can be given as to the enforceability of
these provisions.
OPERATING EFFICIENCIES. The Company believes that consolidating additional
physician organizations that are acquired by the Company's affiliates will
enable the Company to provide improved management services to the affiliated
physician organizations on a more cost-effective basis. To integrate the newly
acquired physician organizations, the Company intends to centralize the
functions of credentialing, claims, finance, utilization management, quality
assurance and management information systems with the assistance of an on-site
person for quality assurance and utilization review. The Company will evaluate
each acquired physician organization on a case-by-case basis in order to
determine which, if any, administrative and management functions are most
efficiently handled locally.
Since August 1996, the Company has taken several significant steps to
develop its management and operations infrastructure and improve its operational
efficiencies. Infrastructure development has included creation of distinct
departments with specific responsibilities for clinical operations, including
quality management and case management; claims and management information
systems operations; contracting; and independent practice association/medical
management and the appointment of experienced managers for each such department.
DECENTRALIZED MANAGEMENT STRUCTURE. In keeping with the Company's strategy
of "corporate clout/ local control," the Company believes that each physician
organization presents unique management issues and therefore is best served by
decentralized management. As described above, the Company typically retains
senior management of the entities which it acquires or with which it affiliates,
adding additional management personnel as the entity expands. Each physician
organization's physicians continue to maintain full professional control of the
practice of medicine.
ALIGNMENT OF ECONOMIC INTERESTS. The Company intends to issue shares of its
common stock as all or a portion of the consideration for most future
acquisitions as part of its strategy to give management of entities acquired by
the Company or its affiliates a stake in the Company's future. No assurances can
be given, however, that potential future acquisition candidates or affiliates
will accept shares of the Company's common stock.
THE AFFILIATED PHYSICIAN ORGANIZATIONS
The Company provides management and administrative services to the
affiliated physician organizations under long-term management services
agreements that, together with the assignable option agreements, establish an
affiliation relationship. See "Management Services" below for a description of
the management services agreements and "Assignable Option Agreements" below for
a description of the assignable option agreements. The affiliated physician
organizations include medical groups that employ physicians and independent
practice associations that contract with physicians and other medical providers.
As of June 30, 1998, the affiliated physician organizations employed
approximately 28 primary care physicians and 1 specialist and contracted with
approximately 326 primary care physicians and 1,389 specialists.
Currently, the Company provides management and administrative services to
the four affiliated physician organizations described below (the "Physician
Organizations"). Dr. DeNicola is currently the
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sole shareholder, a director and officer of Prospect Medical Group and Prospect
Medical Group is the sole shareholder of the three remaining Physician
Organizations.
PROSPECT MEDICAL GROUP. Prospect Medical Group, which includes a medical
group and independent practice association, operates substantially in Orange
County with smaller operations in Ventura, Santa Barbara and Los Angeles
Counties. As of June 30, 1998, Prospect Medical Group provided professional
medical services to approximately 54,000 enrollees through capitated contracts
with 15 HMOs. If the Yorba Linda Settlement Agreement had been entered into on
or before June 30, 1998, the Company estimates that Prospect Medical Group would
have provided medical services to at least 40,600 enrollees as of June 30, 1998.
In addition, Prospect Medical Group provides limited services on a traditional
fee-for-service basis. See "Management of the Company."
SANTA ANA/TUSTIN PHYSICIANS GROUP. Santa Ana/Tustin Physicians Group is
located in Central Orange County, California. Santa Ana/Tustin Physicians Group
includes a medical group practice composed of primary care physicians located in
Santa Ana, California as well as a physician delivery network consisting of
multiple independent physician practices. As of June 30, 1998, Santa Ana/Tustin
Physicians Group provided professional medical services to approximately 10,400
enrollees through capitated contracts with three HMOs.
SIERRA MEDICAL GROUP. Sierra Medical Group is located in the Antelope
Valley region of Los Angeles County, California. As of June 30, 1998, Sierra
Medical Group provided professional medical services at three offices, located
in the cities of Palmdale and Lancaster, to approximately 27,000 individuals,
including individuals who previously were enrollees of Antelope Valley Medical
Group, assigned to it under contracts with thirteen HMOs as well as other health
care programs. As of June 30, 1998, Sierra Medical Group received approximately
90% of its revenues from managed care contracts with HMOs. The remaining 10% was
made up from fee-for-service revenues.
PEGASUS MEDICAL GROUP. Pegasus Medical Group is located in the Antelope
Valley region of Los Angeles County, California. As of June 30, 1998, Pegasus
Medical Group provided professional medical services to approximately 5,600
persons through capitated contracts with four HMOs.
Set forth below is a chart showing each of the HMOs contracting with the
affiliated Physician Organizations, the number of enrollees of the Physician
Organizations served pursuant to each HMO's contracts and the percentage of the
total number of enrollees of the Physician Organizations served pursuant to each
HMO's contracts as of June 30, 1998. The chart below shows the contracts
covering commercial members, Medicare beneficiaries and Medicaid beneficiaries
as separate contracts although the contracts may be held by the same HMO.
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HMO ENROLLMENT
AS OF JUNE 30, 1998(1)
<TABLE>
<CAPTION>
NUMBER % OF TOTAL NUMBER
HMO CONTRACTS OF ENROLLEES OF ENROLLEES
- -------------------------------------------------------------------------------- ------------- -----------------
<S> <C> <C>
COMMERCIAL
Aetna U.S. Healthcare of California, Inc...................................... 1,834 1.90
California Physicians' Service dba Blue Shield of California/Care America
Southern California, Inc.................................................... 8,815 9.11
Vivahealth, Inc., dba BPS HMO................................................. 364 0.38
Blue Cross of California...................................................... 16,890 17.46
Cigna Healthcare of California, Inc........................................... 10,556 10.91
Foundation Health/Health Net.................................................. 7,291 7.54
Inter Valley Health Plan...................................................... 144 0.15
Maxicare of California, Inc................................................... 2,407 2.49
United Healthcare of California, Inc., formerly known as Metrahealth.......... 3,392 3.51
PacifiCare of California/FHP, Inc............................................. 21,522 22.24
Prudential Health Care Plan of California, Inc................................ 6,967 7.20
Universal Care................................................................ 1,057 1.09
One Health Plan............................................................... 198 .20
Other(1)...................................................................... 43 .04
------ ------
SUBTOTAL...................................................................... 81,480 84.22
MEDICARE
Aetna U.S. Healthcare of California, Inc. Senior.............................. 1,013 1.05
Blue Shield of California/CareAmerica Southern California Inc. Sr............. 374 0.39
Cigna Healthcare of California, Inc. Sr....................................... 371 0.38
FHP, Inc. Sr./PacificCare (Secure Horizons)................................... 6,790 7.02
Other(2)...................................................................... 39 .04
------ ------
SUBTOTAL...................................................................... 8,587 8.88
MEDICAID
California Physicians Service dba Blue Shield of California................... 848 .88
Cal Optima.................................................................... 3,100 3.20
Molina Medical Centers........................................................ 2,731 2.82
------ ------
SUBTOTAL........................................................................ 6,679 6.90
------ ------
GRAND TOTAL..................................................................... 96,746(3) 100.00
------ ------
------ ------
</TABLE>
- ------------------------
(1) Other includes members under Greater Pacific HMO, Inc., HMO California and
UHP Healthcare.
(2) Other includes members under Foundation Health Sr./Health Net Sr., United
Healthcare of California, Inc. Sr., formerly known as Metrahealth Sr. and
Prudential Health Care Plan of California, Inc. Sr.
(3) Does not reflect the potential loss of a maximum of approximately 13,000
enrollees as a result of the Yorba Linda Settlement Agreement.
PROVIDER AGREEMENTS
Decisions regarding patient health care are made exclusively by physicians
who are employees of or contract with the Company's affiliated Physician
Organizations and are rendered in connection with guidelines and policies
developed and administered by the medical director of the affiliated medical
group.
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Each independent practice association enters into the following types of
contracts for the provision of physician and ancillary health care services:
PRIMARY CARE PHYSICIAN AGREEMENT. This agreement provides that primary care
physicians contracting with an independent practice association are responsible
both for the provision of primary care services to enrollees and for the
referral of enrollees to specialists affiliated with the independent practice
association when appropriate. Primary care physicians receive monthly capitation
or reduced fee-for-service payments for the provision of primary care services
to enrollees. An independent practice association can terminate the primary care
physician agreement immediately upon the occurrence of certain specified events,
including suspension, restriction or revocation of the physician's license to
practice medicine in California, denial, restriction or revocation of medical
staff privileges at any hospital for medical disciplinary reasons, and loss of
professional liability insurance, among others. Either party may terminate the
agreement, with cause, upon 30 days' prior written notice. During the term of
the agreement, neither party may terminate the agreement without cause.
SPECIALIST AGREEMENT. This agreement provides that specialty care
physicians contracting with an independent practice association receive either
(i) discounted fee-for-service or case rate payments, or (ii) subcapitated
payments for the provision of specialty services to those enrollees referred to
them by the independent practice association's primary care physicians. An
independent practice association can terminate the specialist agreement
immediately upon the occurrence of certain specified events, including
suspension, restriction or revocation of the physician's license to practice
medicine in California, denial, restriction or revocation of medical staff
privileges at any hospital for medical disciplinary reasons, and loss of
professional liability insurance, among others. Generally, either party may
terminate the agreement, with or without cause, upon 90 days' prior written
notice.
ANCILLARY PROVIDER AGREEMENT. This agreement provides that ancillary
service providers (generally non-physician providers such as physical
therapists, laboratories, etc.) contracting with an independent practice
association receive monthly capitation or discounted fee-for-service payments
for the provision of services to enrollees on an as-needed basis. Generally,
either party can terminate the ancillary provider agreement with or without
cause upon 60-90 days' written notice.
MANAGEMENT SERVICES
Prospect Medical Systems has executed separate long-term management services
agreements with each of Prospect Medical Group and Santa Ana/Tustin Physicians
Group. Sierra Medical Management has executed separate long-term management
services agreements with Sierra Medical Group and Pegasus Medical Group. Each of
the management services agreements contains terms substantially similar to those
summarized below.
Pursuant to the management services agreements, each Physician Organization
has delegated to the Company the non-physician administrative, management and
support functions that are required by the Physician Organization in the
practice of medicine. As compensation for the services provided to each
Physician Organization pursuant to its respective management services agreement,
the Company receives from the revenues of each Physician Organization (i) the
costs of the Company in providing services and satisfying its obligations
thereunder, plus (ii) an additional percentage of the gross revenues, a fixed
fee for marketing and public relations services and a portion of net pre-tax
income of the Physician Organization. Under certain circumstances, the Company
may defer the amount of gross revenues to be paid to the Company.
To secure the payment of all accrued management fees, each Physician
Organization has granted to the Company a security interest in its accounts and
rights to payment. The management services agreements have a thirty (30) year
term and will renew automatically for successive ten-year terms unless either
party elects to terminate them. The management services agreements are
terminable by the
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unilateral action of the applicable Physician Organization prior to their normal
expiration only for the breach by the Company of its obligations thereunder or
for certain bankruptcy events.
The management services agreements specifically obligate the Company to
provide suitable facilities, fixtures and equipment and non-physician support
personnel (including marketing, clerical, administrative and maintenance
personnel) to each of its affiliated medical groups so that the affiliated
medical groups can adequately provide for all medical services. The Company is
further obligated to provide to the Physician Organizations (including
affiliated independent practice associations) administrative, accounting and
billing services and to assist in all phases of contract administration and
marketing. The Company provides management and administrative functions that do
not constitute the practice of medicine. Under the management services
agreements, the Physician Organizations continue to be solely and exclusively in
control of and responsible for all aspects of the practice of medicine.
The management and administrative services provided under the management
services agreements to the Physician Organizations include the following:
UTILIZATION MANAGEMENT/QUALITY ASSURANCE. Pursuant to the management
services agreements, the Company assists the Physician Organizations with
development and implementation of a utilization and quality management plan. The
Company further implements systems, programs and procedures necessary for the
Physician Organizations and participating providers to perform utilization and
quality management; organizes procedures for prior authorization of elective,
urgent and emergent out-patient ambulatory surgery and hospital procedures;
assists the Physician Organizations with prospective, concurrent and
retrospective review of medical procedures in accordance with their policies and
HMO health plan requirements; provides data regarding the use of outpatient and
inpatient services by the provider to the Physician Organizations and the use of
noncontracting providers; and assists the medical director and the utilization
review/quality assurance committee of each affiliated medical group in
responding to the HMO plan member grievances based on the instructions of such
medical director.
CASE MANAGEMENT. Case management is administered by the clinical operations
department and is the clinical and administrative process by which health care
service referrals to specialists and ancillary health care providers are
evaluated, coordinated and implemented on an ongoing basis for both acute
illnesses and enrollees experiencing chronic disability, complex medical cases
or problems requiring long-term care. The latter involve coordination by case
management. The goal of case management is to provide a continuum of quality
care throughout the enrollee's treatment period.
PHYSICIAN CREDENTIALING. The Company's physician credentialing program
seeks to monitor the physicians within the network. The physician credentialing
program includes the investigation and verification of physicians'
qualifications, credentials and medical staff privileges at the time they are
brought into the network, as well as periodically reviewing competency and
continuing medical education.
MANAGED CARE CONTRACTING. The Company's services are aimed at evaluating,
negotiating and administering agreements with payors, such as prepaid health
plans; negotiating agreements with specialist and ancillary service providers;
negotiating agreements with out-of-area hospital and ancillary providers; and
coordinating each Physician Organization's network and, with respect to
affiliated medical groups, their office operations.
CLAIMS ADMINISTRATION. The Company possesses complete medical claims
processing capabilities. These capabilities include determining enrollee
eligibility, identifying appropriate benefits, issuing payments to providers,
processing hospital and outpatient facility charges for the payment of claims
and providing and analyzing encounter data.
FINANCIAL SERVICES. The Company has exclusive decision-making authority
with respect to the establishment and preparation of annual budgets for the
practice of each affiliated medical group that reflect in reasonable detail
anticipated revenues and expenses. In consultation with each affiliated medical
group the
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Company establishes bank accounts for the deposit of all sums received by each
affiliated medical group for services provided to members. In addition the
Company may endorse all checks made payable to each affiliated medical group and
deposit checks and funds; prepare financial statements on a monthly basis;
receive and deposit capitation and other payments received by the Physician
Organizations; calculate primary care capitation and specialty, ancillary and
other payable claims based on the records provided by the participating plans
and prepare checks to pay the amounts due; monitor subscribers or enrollees
exceeding stop loss deductibles and communicate with HMOs orally or in writing
to seek reimbursement on behalf of the Physician Organizations; bill other
payors for coordination of benefits and other third party liability payments;
administer capitation and other distributions from HMOs including auditing and
monitoring of HMO incentive payments; negotiate and settle the Physician
Organization's share of such payments; establish and maintain IBNR reserves for
the Physician Organization; and assist the Physician Organizations in
establishing and administering a physician incentive system and a system to
establish and adjust reserves for medical expenses.
BILLING SERVICES. The Company also provides bookkeeping and accounting
services including the preparation, distribution and recording of all bills and
statements for fee-for-service professional services rendered by the Physician
Organizations as well as all reports and forms required by applicable third
party payors; collection of accounts receivable; and submission, processing and
collection of all claims for payment to, and receipt of payments from,
third-party payors. The Physician Organizations at all times have the ultimate
responsibility for setting all fees for professional services provided on a fee
for service basis to patients of the practice, as well as establishing the terms
of each managed care contract.
PROVIDER RELATIONS. The Company's services include the preparation,
negotiation and renewal of agreements with each Physician Organization's
providers, and the maintenance of eligibility data in a computerized database.
The Company provides resources to train providers in each Physician
Organization's policies and procedures and assist each Physician Organization in
developing and updating manuals.
MANAGEMENT INFORMATION SYSTEMS. The Company's management information
systems, which support both practice-oriented and administrative functions,
assist management in maintaining control over the significant growth experienced
during the last two years and are critical to the growth which is anticipated in
the future. The Company's newly acquired management information system is a
sophisticated software system specifically designed for managed care. The
Company commenced using the new system on September 1, 1998. Further, the
Company maintains an on-line database that provides inpatient and outpatient
utilization statistics, and patient encounter reporting. The Company believes
that the availability of timely information on utilization patterns improves
physician productivity and effectiveness. This data also plays an integral role
in the physician utilization control process by enabling the medical directors
and utilization control nurses of the affiliated medical groups to monitor case
management decisions, evaluate patient outcomes and monitor utilization trends.
In addition, the Company's management information systems are capable of
performing various administrative functions including insurance verification,
billing, accounts payable and receivable, outside service referrals and
verification, and all third party claims processing. See "Risk
Factors--Dependence on Information Systems."
PATIENT ELIGIBILITY AND SERVICES. The Company provides a variety of
services related to patient eligibility, including obtaining eligibility lists
from health plans, assisting with the determination of eligibility of patients
for health care coverage prior to the provision of medical services, maintaining
a computerized eligibility database, distributing eligibility reports and
coordinating health education and wellness programs to enrollees of each
Physician Organization.
PATIENT AND PHYSICIAN RELATIONS. The Company employs staff to aid patients
and physicians in understanding managed care and the nature and extent of
coverages, assist patients in making informed decisions concerning their medical
care and treatment alternatives, and provide support in resolving financial
questions.
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MARKETING AND PUBLIC RELATIONS SERVICES. The Company will assist each
Physician Organization in the Physician Organization's marketing, public
relations and advertising of the health care services provided by the Physician
Organization. The Company shall provide and be principally responsible for
marketing and advertising services for each Physician Organization. In providing
its marketing services, the Company is acting solely in its capacity as
administrator for the Physician Organization. All such marketing services are to
be conducted in accordance with the laws, rules, regulations and guidelines of
all applicable governmental and quasi-governmental agencies, including but not
limited to the Medical Board of California.
The Company has the right to decline to manage new medical facilities which
a Physician Organization desires to establish or acquire. Consistent with a
Physician Organization's exclusive control of all aspects of patient medicine,
the Physician Organization retains the right to purchase from outside providers
any equipment, facilities or services not provided by the Company. The Company
is obligated to provide all medical and non-medical supplies reasonably
requested by the Physician Organization.
ASSIGNABLE OPTION AGREEMENTS
The assignable option agreements give the Company the assignable right to
designate a successor physician or physicians, which person or persons must be
duly-licensed physicians in the State of California or otherwise permitted by
law to be a shareholder in a professional corporation, to purchase all or any
portion of the stock of an affiliated medical group. The Company may elect to
exercise the option at any time. Dr. DeNicola is currently the sole shareholder,
a director and an officer of Prospect Medical Group (the "nominee shareholder")
and a director and officer of the Company. Prospect Medical Group is the sole
shareholder of Santa/Ana Tustin Physicians Group, Sierra Medical Group and
Pegasus Medical Group. Under the assignable option agreement between Prospect
Medical Systems, Prospect Medical Group and Dr. DeNicola, Prospect Medical
Systems has the right to designate a successor physician or physicians to
purchase for nominal consideration all of the stock of Prospect Medical Group
from Dr. DeNicola. The assignable option agreements effectively give the Company
the ability to protect its rights under the management services agreements.
COMPETITION
The managed care industry is highly competitive and is subject to continuing
changes with respect to the manner in which services are provided and how
providers are selected and paid. The Company is subject to significant
competition both in affiliating with physician organizations and in seeking
managed care contracts on behalf of its affiliated Physician Organizations.
Generally, the Company and the Physician Organizations compete with any entity
that contracts with payors for the provision of prepaid health care services,
including but not limited to (i) other companies that provide management
services to health care providers, (ii) hospitals that affiliate with one or
more physician organizations, (iii) HMOs that employ or contract directly with
physicians and (iv) other physician organizations. Additionally, the Physician
Organizations with which the Company is affiliated compete with other medical
practices in the areas in which the Company does business, or is expected to do
business in the future. Pressures to reduce the cost of medical care, through
legal reform of the health care system or through market forces such as the
continued expansion of managed care, could adversely impact the Company's
revenues. Further, increased enrollment in prepaid plans because of health care
reform or for other reasons, increased participation by physicians in group
practices and other factors may attract new entrants into the managed care
industry and result in increased competition for the Company. Certain
competitors, including but not limited to MedPartners, Inc., and Phy Cor, Inc.
and certain of its subsidiaries are significantly larger and better capitalized
than the Company, provide a wider variety of services, have greater experience
in providing health care management services and have longer-established
relationships with buyers of such services than does the Company. There can be
no assurance that the Company will be able to compete effectively with such
competitors, that additional competitors will not enter the market, or that such
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competition will not make it more difficult to enter into affiliations with
physician organizations on terms beneficial to the Company.
The Company also experiences competition in the recruitment and retention of
qualified physicians and other health care professionals on behalf of its
affiliated Physician Organizations. There can be no assurance that the Company
will be able to recruit or retain a sufficient number of qualified physicians
and other health care professionals to continue to expand its operations. See
"Risk Factors--Highly Competitive Market."
GOVERNMENTAL REGULATION
GENERAL HEALTH CARE REGULATIONS. The health care industry is highly
regulated, and there can be no assurance that the regulatory environment in
which the Company operates will not change significantly in the future.
Generally, regulation of health care companies is increasing and health care
transactions continue to be subject to substantial scrutiny by regulatory
authorities. The Health Insurance Portability and Accountability Act of 1996 is
among the most significant and comprehensive anti-fraud laws to be enacted. Its
provisions create new anti-fraud programs, amend existing anti-fraud statutes to
cover more health care providers and to impose greater penalties for violations,
and create new crimes to combat health care fraud and abuse. In addition to
increased scrutiny of fraud and abuse activity, legislation has been introduced,
and in some cases enacted, which may significantly affect the reimbursement of
health care services under certain health care programs. The recently-enacted
Budget Act will reduce funds available to the Medicare program by $115 billion
over five years. Federal, state and local officials and legislators continue to
propose a variety of reforms to the health care system. Certain reforms could,
if adopted, have a material adverse effect on the Company.
Both federal and state law, including California law, generally specify who
may practice medicine and limit the scope of relationships between medical
practitioners and other parties. Under these laws, the Company is prohibited
from practicing medicine or exercising control over the provision of medical
services. To comply with such laws, the provider network is organized so that
all physician services are offered by the physicians who are employed by or
contract with a Physician Organization. The Company does not employ physicians
to provide medical services, exert control over medical decision-making or
represent to the public that it offers medical services. The Company has entered
into a separate management services agreement with each of the Physician
Organizations which delegates to the Company the performance of administrative,
management and support functions. These agreements specifically reserve
exclusive control and responsibility for all aspects of the practice of medicine
and the delivery of medical services to the Physician Organizations. See "The
Affiliated Physician Organizations--Management Services."
Further, state law imposes licensing requirements on individual physicians
and on facilities operated by physicians. In addition, federal and state laws
regulate HMOs and other managed care organizations with which the Physician
Organizations may have contracts. Some states also require licensing of third-
party administrators and collection agencies. This may affect the Company's
operations in states in which the Company may seek to do business in the future.
In connection with its existing operations and its expansion into new markets,
the Company believes it is in compliance with all such laws and regulations and
current interpretations thereof, but there can be no assurance that such laws,
regulations or interpretations will not change in the future or that additional
laws and regulations will not be enacted. The ability of the Company to operate
profitably will depend in part upon the Company and its affiliated Physician
Organizations obtaining and maintaining all necessary licenses and other
approvals and operating in compliance with applicable health care regulations.
Subject to limited exceptions, federal anti-kickback legislation prohibits
the offer, payment, solicitation or receipt of any form of remuneration, whether
direct or indirect, in return for, or in order to induce: (i) the referral of a
person for services; (ii) the furnishing or arranging for the furnishing of
items or
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services; or (iii) the purchase, lease or order of, arranging or recommending
purchasing, leasing or ordering of, any item or service, in each case,
reimbursable under any federally-funded health care programs, including the
Medicare or Medicaid programs. A violation of the federal anti-kickback statute
generally requires several elements: (i) the offer, payment, solicitation, or
receipt of remuneration; (ii) the intent to induce referrals; and (iii) the
ability of the parties to make or influence referrals of patients for services
reimbursable under federally-funded health care programs or to provide items
reimbursable under such programs. Noncompliance with, or violation of, the
federal anti-kickback legislation can result in exclusion from the Medicare and
Medicaid programs and civil and criminal penalties. Many states, including
California, have similar anti-kickback prohibitions with similar penalties.
In addition to the statutory exceptions to the federal anti-kickback
statute, the accompanying regulations set forth certain "safe harbor"
arrangements which are protected from scrutiny under the legislation. Although
satisfaction of the requirements of any of these safe harbors generally provides
a guarantee of compliance with the law, failure to meet the safe harbor does not
necessarily mean that a transaction violates the prohibitions. Included among
the safe harbor regulations is a safe harbor for management contracts which meet
certain criteria. The Company believes its activities are not in violation of
the anti-kickback legislation. Further, the Company believes that the business
operations of its affiliated Physician Organizations do not involve the offer,
payment, solicitation or receipt of remuneration to induce referrals of patients
because compensation arrangements between the Physician Organizations and the
primary care physicians who make referrals are designed to discourage referrals
to the extent they are medically unnecessary. These physicians are paid either
on a capitation or fee-for-service basis and do not receive any financial
benefit from making referrals. Although the Company believes its activities do
not violate the anti-kickback legislation, no assurances can be given that its
operations will not ultimately be construed to fall within the ambit of such
prohibitions.
Federal legislation also restricts the ability of physicians to refer
patients to entities in which they or one of their immediate family members has
an ownership interest or compensation arrangement for the provision of certain
designated health services reimbursable under federally-funded health plans.
Further, the entity providing health care services is also prohibited from
presenting, or causing to be presented, a claim or bill for the designated
services furnished pursuant to a prohibited referral. Penalties for violations
include, without limitation, denial of reimbursement, forfeiture of amounts
collected in violation of the provision, civil monetary penalties and exclusion
from the Medicare and Medicaid programs. Many states, including California, have
similar self-referral laws which provide for similar penalties.
The Company believes that its business arrangements do not involve the
referral of patients to entities with whom referring physicians have an
ownership interest or compensation arrangement within the meaning of federal and
state self-referral laws, because referrals are made directly to other providers
rather than to entities in which referring physicians have an ownership interest
or compensation arrangement. The Company further believes its financial
arrangements with physicians fall within various exceptions to state and federal
self-referral laws, including exceptions for ownership or compensation
arrangements with certain managed care organizations and for physician incentive
plans that limit referrals. In addition, the Company believes that the methods
that it uses to acquire existing physician organizations and to recruit new
physicians do not violate such laws and regulations.
The federal government continues to engage in increased scrutiny of joint
ventures and other transactions among health care providers in an effort to
reduce potential fraud and abuse relating to patients of federal health care
programs, and no assurances can be given that the Company's operations will not
fall within the ambit of the anti-kickback or self-referral prohibitions or that
other laws or regulations will not be enacted that will have a material adverse
effect on the Company. The application of the anti-kickback and self-referral
laws and regulations to many kinds of business transactions in the health care
industry has not been subject to regulatory or judicial interpretation. Should
any of the Company's business arrangements be deemed to constitute arrangements
designed to induce the referral of Medicare or Medicaid patients or to involve
referrals to entities with which the referring physician has an ownership
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interest or compensation arrangement, then such arrangements could be viewed as
violating anti-kickback or self-referral laws and regulations. A determination
of liability under any such law could have a material adverse effect on the
Company's financial condition and results of operations.
Upon written request, the OIG is authorized to issue advisory opinions,
which clarify whether a proposed arrangement implicates the Medicare/Medicaid
anti-kickback statute and, if so, whether it fits within a statutory exception
or safe harbor. In April 1998, the OIG issued an advisory opinion under the
Medicare/Medicaid anti-kickback statute regarding a proposed management services
contract between a medical practice management company and a primary care
physician practice. Pursuant to the agreement, the management company would
provide facilities, equipment, billing services, and marketing services to the
physician practice, as well as negotiate on behalf of the physician practice
with managed care plans and establish specialty physician networks to which
referrals may be made by the primary care physicians. The compensation paid to
the management company included a fee based on a percentage of the physician
practice's net revenues, including revenues from business derived from managed
care contracts arranged by the management company. The OIG concluded that the
proposed arrangement was problematic because: (1) percentage of revenue
compensation arrangements may include financial incentives to increase patient
referrals since the revenue includes revenue from business derived from managed
care contracts arranged by the management company and the management company
would be establishing networks of specialist physicians to whom the primary care
physicians would be required to make referrals in some circumstances; (2) the
proposed arrangement contained no safeguards against utilization which is
particularly problematic in light of the proposed establishment of provider
networks with required referral arrangements; and (3) percentage of revenue
compensation arrangements may include financial incentives that encourage
abusive billing practices since the management company had an incentive to
maximize the physician practice's revenue. However, the OIG did not rule that
the proposed contract was illegal, noting that it had not received any
information on the proposed arrangement from the management company and that the
legality of the arrangement might depend on the intent of the parties. After
studying the legal implications of the advisory opinion, the Company has revised
its standard management agreement with its affiliated physician organizations to
specify a flat fee payable on a monthly basis as compensation for marketing
services. The Company is also in the process of adopting a corporate compliance
program designed to prevent violation of the anti-kickback statute in both its
acquisitions and day-to-day operations. The Company believes that, although it
continues to receive percentage of revenue remuneration under management
services agreements, it is not in a position to make or influence the referral
of patients or services reimbursed under government programs to the Physician
Organizations, and therefore, believes that its compensation arrangements do not
violate the anti-kickback statute. However, there can be no assurances that the
OIG or any other health care regulatory agency will not interpret the Company's
compensation arrangements under its management services agreements to be in
violation of the prohibitions of the anti-kickback statute.
Federal and state laws prohibit anti-competitive conduct among health care
providers within the same or overlapping markets, such as price-fixing
agreements between competitors, agreements allocating or dividing geographic
market areas in which competitors will separately operate, or agreements to
boycott or refuse to deal with another competitor. Such antitrust laws also
prohibit the monopolization of markets, or mergers and other agreements among
competitors intended to monopolize markets. Because the Physician Organizations
remain separate legal entities, they may be deemed to be competitors, and
therefore may be subject to these antitrust laws. In such case, their
activities, including the coordination of their contracting efforts, could
violate antitrust prohibitions. The Company intends to comply with state and
federal antitrust laws, but there is no assurance that the review of the
Company's operations by courts or regulatory authorities will not result in a
determination that could adversely affect the operation of the Company and the
Physician Organizations.
Federal and state laws regulate insurance companies, HMOs and other managed
care organizations. Generally, these laws apply to entities that accept
financial risk. Certain of the risk arrangements entered
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into by the affiliated Physician Organizations could be characterized by some
states as the business of insurance or of an HMO. The Company, however, believes
that the acceptance of capitation payments by a health care provider does not
constitute the conduct of the business of insurance or of an HMO. The Company
believes that it is in compliance with these laws in California where it
conducts its business, but there can be no assurance that interpretations of
these laws by the regulatory authorities in California will not require
licensure or a restructuring of some or all of the Company's operations. In the
event that the Company is required to become licensed under these laws, the
Company would be required to obtain a license under Knox-Keene and comply with
the requirements thereunder as described under "--Regulatory Requirements for a
Limited License Knox-Keene Health Plan and Medicare Health Plan."
REGULATORY REQUIREMENTS FOR A LIMITED LICENSE KNOX-KEENE HEALTH PLAN AND
MEDICARE HEALTH PLAN. To operate a health plan in the State of California, an
organization must apply for a license under Knox-Keene from the DOC. All
Knox-Keene health care service plan applicants must demonstrate the projected
financial viability of the plan in the marketplace, and that the proposed
business will "break even" within a reasonable period of time. Traditionally,
this is accomplished through market feasibility studies and letters of interest
that support enrollment projections, actuarial studies that justify medical
utilization costs, and comprehensive financial projections. The DOC requires all
plans to demonstrate fiscal soundness and full assumption of financial risk,
which includes (i) demonstrating that health care rates and charges are
financially sound and will provide for achievement and maintenance of a positive
cash flow; (ii) showing that adequate working capital will be available,
including provisions for contingencies; (iii) providing adequate insurance for
extraordinary losses; (iv) substantiating enrollment projections; (v) projecting
financial viability; (vi) listing the entity's sources of tangible net equity;
and (vii) demonstrating that the overall business plan has been validated by
feasibility studies and actuarial reports.
The organization must also meet certain quality assurance and utilization
review standards and will be subject to audit by its contracting HMOs or HCFA
(in the case of a Medicare Health Plan). These audits may be performed by the
individual HMOs or HCFA, or by an independent auditor on behalf of the HMO or
HCFA, as applicable. The organization must also implement grievance and
complaint procedures to identify, evaluate and remedy problems relating to
access, continuity and quality of care, and utilization management, and to
document that provider reimbursement exceeds the costs of services expected to
be provided. The organization must also continually demonstrate sufficient
organizational and administrative capacity.
Newly licensed plans are required to maintain a minimum tangible net equity
of $1,000,000. The DOC also expects that a plan will have at least another
$2,000,000 to $3,000,000 available for working capital and expansion needs,
including an amount sufficient to pay for all obligations incurred through a
projected break even date. After the plan becomes operational, tangible net
equity requirements may exceed the above-listed amounts if the annualized
revenues or enrollment of the plan exceed certain criteria.
Once an entity has obtained a license under Knox-Keene, it will be subject
to continuing regulation by the DOC; to assume full risk for the provision of
hospital, physician and ancillary health care services to enrollees, it must
continue to meet certain operating requirements. These requirements include
significant data reporting specifications, particularly regarding financial
viability, quality management and general organizational and administrative
capacity. These requirements may involve significant investment in management
information systems and organizational and administrative capacity.
In addition to compliance with the foregoing requirements of the DOC, a
Medicare Health Plan is also required to meet certain requirements of HCFA.
These requirements generally cover similar areas (finance, quality management
and organizational and administrative capacity) that the DOC underscores.
GENERAL REGULATORY REQUIREMENTS. In addition to the regulations referred to
above, significant aspects of the Company's and its affiliated physician
organizations' operations are subject to state and federal statutes and
regulations governing workplace health and safety, dispensing of controlled
substances and the disposal of medical waste. The Company's operations may also
be affected by changes in ethical
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guidelines and operating standards of professional and trade associations such
as the American Medical Association. Accordingly, changes in existing laws and
regulations, adverse judicial or administrative interpretations of such laws and
regulations or enactment of new legislation could have a material adverse effect
on the operating results and financial condition of the Company.
MALPRACTICE INSURANCE
The Company currently is not covered by malpractice insurance but does carry
general liability insurance. Each of the Company's affiliated medical groups
maintains malpractice insurance as well as managed care professional liability
insurance for the corporate entity and its employees. The Company requires all
physicians who contract with an affiliated independent practice association to
carry malpractice insurance coverage. See "Legal Proceedings" below.
EMPLOYEES
At June 30, 1998, Prospect Medical Holdings had approximately 10 full-time
employees. Prospect Medical Systems had approximately 134 full-time and 17
part-time employees. Sierra Medical Management had approximately 95 full-time
and 5 part-time employees. None of such employees is subject to a collective
bargaining agreement. Management believes that its employee relations are good.
PROPERTIES
The Company does not own any real property. The Company or its affiliated
Physician Organizations currently lease space for medical and administrative
offices as described in the following charts. The space described below may be
shared space used for medical and administrative office purposes or separate
space used for medical and/or administrative offices located at the same address
and may be leased under the same or separate leases.
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MEDICAL OFFICES
<TABLE>
<CAPTION>
AGGREGATE
SQUARE
FOOTAGE
PRACTICE GROUP (APPX) LOCATION EXPIRATION CURRENT RENT PER MONTH
- ------------------------------------ ----------- -------------------------- ---------- -----------------------
<S> <C> <C> <C> <C>
Prospect Medical Group.............. 9,786 Yorba Linda, California (5 Between Between $2,506 and
Offices) 10/31/98 $5,046 (aggregating
and $15,005 per month)
09/27/00
1,688 Dana Point, California 06/01/01 $3,101
2,800 Mission Viejo, California 06/01/03 $5,320
2,303 Laguna Hills, California 07/31/00 $4,162
1,100 Fullerton, California 06/01/00 (1) $1,002
4,490 Santa Barbara, California 11/30/97 (2) --
Santa Ana/Tustin Physicians Group... 6,005 Santa Ana, California 07/31/03 $9,608(3)
Sierra Medical Group................ 7,500(4) Lancaster, California 09/24/02 $6,412
3,500 Lancaster, California 09/24/02 $3,600
12,542 Palmdale, California 11/30/01 $12,291
Pegasus Medical Group............... 4,200 Lancaster, California 10/31/02 $3,360
6,500 Palmdale, California 10/30/00 $7,800
</TABLE>
- ------------------------
(1) Prospect Medical Group has subleased the entire premises through the
expiration of the term of the lease.
(2) Landlord is paying Prospect Medical Group $70,000 to vacate the premises by
December 31, 1998. There is no rent due and payable under this lease. The
Company on behalf of Prospect Medical Group has entered into a letter of
intent to lease approximately 5,400 square feet in Santa Barbara, California
at a monthly rental of approximately $12,800.
(3) Since June, 1998, Santa Ana/Tustin Physicians Group, Inc. has been occupying
temporary space on an interim basis at a monthly rental of $6,021 prior to
occupying permanent space (aggregating approximately 6,005 square feet) in
the same building at a monthly rental of $9,608. The anticipated date for
occupancy of the permanent space is prior to October 1, 1998.
(4) The total square footage of the premises is 10,000, of which 7,500 square
feet is used for medical office space and 2,500 square feet is used for
administrative office space. The rent for the entire premises is $8,550,
which amount is apportioned $6,412 for medical office space and $2,137 for
administrative office space for purposes of this chart.
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ADMINISTRATIVE OFFICES
<TABLE>
<CAPTION>
AGGREGATE
SQUARE
FOOTAGE
(APPX) LOCATION EXPIRATION RENT PER MONTH
----------- -------------------------- ----------- -----------------------
<S> <C> <C> <C> <C>
Prospect Medical Holdings............ 2,546 Los Angeles, California 09/30/00 $3,910
(headquarters)
Prospect Medical Group............... 11,393 Yorba Linda, California (6 09/20/98 Between $1,584 and
offices) $3,903 per month
(aggregating $15,351
per month)
19,446 Santa Ana, California 10/31/05 $20,807(6)
Santa Ana/Tustin Physicians Group.... 3,000 Santa Ana, California 03/31/98(7) $6,756
Sierra Medical Group................. 500 Lancaster, California 09/24/02 $567
2,500(8) Lancaster, California 09/24/02 $2,137
2,200 Lancaster, California 07/31/01 $1,500
</TABLE>
- ------------------------
(6) The lease for this space commences on or about November 1, 1998. This space
will replace the general office space currently leased in Yorba Linda,
California and Santa Ana, California.
(7) This space is currently leased on a month-to-month basis.
(8) See footnote 5 above.
Sierra Medical Group owns an approximately 10,000 square foot undeveloped
lot located near its offices in Palmdale, California that is currently used as a
parking lot.
The Company has entered into a lease for approximately 19,446 square feet in
Santa Ana to replace the general office space leased in Santa Ana, California
and in Yorba Linda, California. The Company believes that the new general office
space, together with the general office space that will continue to be leased by
the Company, will be sufficient to serve its operational needs for the
foreseeable future, although the growth which is intended as part of the ongoing
business plan of the combined companies, if successful, may require additional
space. Further, as the Company affiliates with, and the Physician Organizations
acquire, additional physician organizations, management expects that the Company
will enter into additional medical office space leases.
LEGAL PROCEEDINGS
In addition, the Company is a party to certain legal actions arising in the
ordinary course of business. In the opinion of the Company's management,
liability, if any, under these claims is adequately covered by insurance or will
not have a material effect on the Company's financial position or results of
operations.
Effective July 1, 1998, a settlement agreement was entered into among the
Company, Prospect Medical Group, Yorba Linda Medical Group, and the
physician-shareholders of Yorba Linda Medical Group (the "Yorba Linda Settlement
Agreement"). On July 31, 1998, certain parties related to the Company filed a
motion to enforce the Yorba Linda Settlement Agreement (the "Company's Motion"),
in a pending action entitled DENICOLA V. MCGINTY, Orange County Superior Court
Case No. 795018. The opposing parties, consisting of Yorba Linda Medical Group
and the members of its Board of Directors, responded by filing a cross-motion
for enforcement (the "YLMG Motion"). On or about August 14, 1998, prior to a
ruling on either motion, Yorba Linda Medical Group and its remaining
physician-shareholders filed a lawsuit against the Company, Prospect Medical
Group, Prospect Medical Systems, Dr. DeNicola
66
<PAGE>
and certain other individual physicians seeking damages and injunctive relief
based upon allegations of breach of contract, fraud and certain related claims
with respect to the Yorba Linda Settlement Agreement (MCGINTY V. PROSPECT
MEDICAL GROUP, ET AL., Orange County Superior Court Case No. 798208 (the
"MCGINTY Lawsuit")). The court on September 1, 1998 granted the material
portions of the Company's Motion to enforce the Yorba Linda Settlement
Agreement, denied the material portions of the YLMG Motion, and ordered the
parties to mediate the remaining unresolved issues. The Company believes the
MCGINTY Lawsuit is without merit and is barred by the Yorba Linda Settlement
Agreement. See "Risk Factors-- Recent Settlement Agreement with Yorba Linda
Medical Group" and "Business of the Company--History of the Company" for further
discussion of the recently executed Yorba Linda Settlement Agreement.
67
<PAGE>
BENEFICIAL OWNERSHIP OF CAPITAL STOCK
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock, as of July 1, 1998, after giving effect
to the Yorba Linda Settlement Agreement by: (i) each person or entity known by
the Company to own beneficially more than five percent of the Company's Common
Stock, (ii) each of the Company's Directors who beneficially owns shares, (iii)
each executive officer identified in the Summary Compensation Table under
"Management of the Company-- Executive Compensation" who beneficially owns
shares, and (iv) all executive officers and Directors as a group. The
information presented in the table is based upon information provided by such
persons to the Company. The share totals reflect a one-for-forty-four reverse
stock split which was effected on July 31, 1996.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF SHARES PERCENTAGE
BENEFICIAL OWNER BENEFICIALLY OWNED(1) OWNED
- ---------------------------------------------- ---------------------------------- ----------
<S> <C> <C>
Paul Amir, Trustee, Herta and ................ 400,406 9.00
Paul Amir Family Trust
8730 Wilshire Blvd, Suite 300
Beverly Hills, California 90211
Karunyan Arulanantham, M.D. .................. 285,750(2) 6.40
44725 10th Street West, Suite 250
Lancaster, California 93534
Jacob Y. Terner, M.D. ........................ 441,295(3) 9.59
Gregg DeNicola, M.D. ......................... 275,127(4) 5.98
David A. Levinsohn ........................... 268,211(5) 5.95
Sinnadurai E. Moorthy, M.D. .................. 285,750(6) 6.40
Kenneth Schwartz ............................. 10,000(7) .22
Thomas A. Maloof(8) .......................... 222,238(9) 4.87
All Executive Officers and Directors ......... 1,708,633(2)(3)(4)(5)(6)(7)(10) 34.80
as a Group (9 persons)
</TABLE>
- ------------------------
(1) Beneficial ownership is determined in accordance with the rules of the
Securities Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of Common Stock subject to options
or warrants currently exercisable or exercisable within 60 days are deemed
outstanding for purposes of computing the percentage ownership of the person
holding such options or warrants but are not deemed outstanding for purposes
of computing the percentage ownership of any other person. Except as may be
indicated otherwise, and subject to community property laws where
applicable, the persons named in the table above have sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by them.
(2) Includes 15,750 shares of Common Stock of the Company issuable upon exercise
of options. Dr. Arulanantham is employed by and is a director of Sierra
Medical Group and is the President of Sierra Medical Management.
(3) Includes 150,000 shares of Common Stock of the Company issuable upon
exercise of options.
(4) Includes 150,000 shares of Common Stock of the Company issuable upon
exercise of options.
(5) Includes 60,000 shares of Common Stock of the Company issuable upon exercise
of options.
(6) Includes 15,750 shares of Common Stock of the Company issuable upon exercise
of options.
(7) Includes 10,000 shares of Common Stock of the Company issuable upon exercise
of options.
(8) Thomas A. Maloof resigned as Chief Financial Officer of Prospect Medical
Holdings as of February 28, 1998.
(9) Includes 117,119 shares of Common Stock of the Company issuable upon
exercise of options.
(10) Includes 58,500 shares of Common Stock of the Company issuable upon
exercise of options held by executive officers not named above.
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<PAGE>
MANAGEMENT OF THE COMPANY
DIRECTORS AND EXECUTIVE OFFICERS
The Board of Directors is classified into three classes. The first class was
elected pursuant to stockholder written consent effective as of the 1996 Merger
to serve until the annual meeting of stockholders to be held in 1997 ("Class I
Directors"), the second class to serve until the annual meeting of stockholders
to be held in 1998 ("Class II Directors") and the third class to serve until the
annual meeting of stockholders to be held in 1996 ("Class III Directors").
Directors will be elected by the stockholders of the Company at each annual
meeting of stockholders and serve until the third annual meeting of stockholders
following their election and until their successors are elected and qualified or
until their earlier removal or resignation. The Company's Certificate of
Incorporation provides that the Board of Directors shall consist of not less
than three nor more than seven persons. David Levinsohn and Kenneth Schwartz
serve as Class I Directors, Dr. Terner and Dr. DeNicola serve as Class II
Directors and Sinnadurai E. Moorthy, M.D. serves as a Class III Director.
Officers of the Company are elected by the Board of Directors and hold office
until their successors are chosen and qualified, or until they resign or have
been removed from office. There are no family relationships between any
directors or current officers of the Company. Officers serve at the discretion
of the Board of Directors.
The following sets forth certain biographical information, the present
occupation and business experience for the past five years of each director and
executive officer:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ---------------------------------------- --- ---------------------------------------------
<S> <C> <C>
Jacob Y. Terner, M.D.................... 64 Chairman of the Board and Director
Gregg DeNicola, M.D..................... 44 President and Director
R. Stewart Kahn......................... 47 Executive Vice President and Secretary
Donna Vigil............................. 50 Chief Financial Officer
Karunyan Arulanantham, M.D.............. 54 President of Sierra Medical Management
Jayaratnam Jayakumar.................... 49 Executive Vice President of Sierra Medical
Management
Sinnadurai E. Moorthy, M.D.............. 57 Director and Consultant
David Levinsohn......................... 64 Director
Kenneth Schwartz........................ 62 Director
</TABLE>
JACOB Y. TERNER, M.D. Jacob Y. Terner, M.D. is the Chairman of the Board,
Chief Executive Officer and a director of Prospect Medical Holdings. Dr. Terner
has served as a director of Prospect Medical Holdings since July 31, 1996. Dr.
Terner has held the position of Clinical Professor of Obstetrics and Gynecology
at the University of Southern California School of Medicine since 1972. Dr.
Terner also served as Chairman of the Board and Chief Executive Officer of
Century MediCorp, a publicly-traded corporation until its October 1992 merger
with Foundation Health Corporation. Following such merger, Dr. Terner was named
to Foundation's Board of Directors and served as its Executive Vice President
and as a director, until his resignation in December 1992. Foundation Health
Corporation merged with Health Systems International, Inc. in April 1997.
In September 1992, Dr. Terner entered into an agreement relating to the
issuance of an order by the SEC concerning the late filing of reports of
transactions in the securities of Century MediCorp of which Dr. Terner was then
Chairman of the Board of Directors and Chief Executive Officer. The order found
that Dr. Terner filed reports on Form 4 under Section 16(a) of the Securities
Exchange Act of 1934, as amended, in an untimely fashion between 1987 and 1991
and required that Dr. Terner cease and desist from any further late filings.
On June 30, 1997, Dr. Terner consented, without admitting or denying any of
the allegations in a complaint relating to an insider trading investigation by
the SEC, except as specifically set forth therein, to the entry of a final
judgment of permanent injunction and other relief. The SEC's investigation
involved
69
<PAGE>
the trading of Century MediCorp stock in June and/or July 1992 by persons other
than Dr. Terner prior to the public announcement of Century MediCorp's merger
with Foundation Health, a California Health Plan. The judgment permanently
restrained and enjoined Dr. Terner from employing any fraudulent device, scheme
or artifice, making material misstatements or omitting material statements of
fact or engaging in fraudulent or deceitful acts, practices or courses of
business in violation of Section 10(b) of the 1934 Act and Rule 10b-5
thereunder. No allegations were made that Dr. Terner had personally engaged in
the trading of Century MediCorp stock. Dr. Terner was further ordered to pay a
civil penalty in the amount of $225,750 under the Insider Trading and Securities
Fraud Enforcement Act of 1988.
GREGG DENICOLA, M.D. Gregg DeNicola, M.D. has served as President and as a
director of Prospect Medical Holdings since July 31, 1996. Dr. DeNicola is also
a director and the President of Prospect Medical Systems. Dr. DeNicola was one
of the founders of Prospect Medical Group in 1986, and is the sole shareholder
and serves as an officer and director of Prospect Medical Group. Dr. DeNicola
also serves as the Medical Director of Continuing Medical Education at
Placentia-Linda Hospital, is one of the Medical Directors of the Pain program at
St. Jude Hospital, is a clinical faculty volunteer at the University of Southern
California and is Assistant Professor of Medicine, Department of Family
Practice, at the University of California at Irvine.
R. STEWART KAHN. R. Stewart Kahn was appointed by the Board of Directors to
serve as the Executive Vice President of Prospect Medical Holdings effective as
of March 1, 1998 and as Secretary of Prospect Medical Holdings in July 1998.
From 1987 until his appointment as Executive Vice President of Prospect Medical
Holdings, Mr. Kahn was the President and Chief Executive Officer of Legend
Capital Corporation, a consulting firm specializing in financial, marketing and
accounting services in the health care industry.
DONNA VIGIL. Donna Vigil was appointed to serve as the Chief Financial
Officer of the Company effective July 15, 1998. Ms. Vigil served as Chief
Financial Officer of NetSoft from January 1989 to September 1997. She served as
Corporate Controller of Ready Temp Inc. from February 1986 to January 1989. Ms.
Vigil is a certified public accountant.
KARUNYAN ARULANANTHAM, M.D. Karunyan Arulanantham, M.D. currently serves as
the President of Sierra Medical Management and was appointed to this position as
of the closing of the merger of Old Sierra into Sierra Medical Management. Dr.
Arulanantham was a shareholder, practicing physician and officer of Sierra
Medical Group from its formation in 1984 to the date of its acquisition by
Prospect Medical Group. Dr. Arulanantham is Board certified in Pediatrics,
Pediatric Endocrinology and Quality Assurance and Utilization Review. Dr.
Arulanantham is a Fellow of the American Academy of Pediatrics and the American
College of Endocrinologists. He currently serves as an Assistant Clinical
Professor of Pediatrics at the University of California at Los Angeles and is a
member of the Board of Trustees of Palmdale Hospital Medical Center. He
continues to practice medicine and is a provider for Sierra Medical Group.
JAYARATNAM JAYAKUMAR. Jayaratnam Jayakumar currently serves as Executive
Vice President of Sierra Medical Management. Mr. Jayakumar was appointed to
serve as Executive Vice President of Sierra Medical Management effective as of
the closing of the merger of Old Sierra into Sierra Medical Management on
September 25, 1997. Mr. Jayakumar received a Masters in Business Administration
from the University of California at Irvine. From May 15, 1987 to September 25,
1997, Mr. Jayakumar served as the administrator of Old Sierra.
SINNADURAI E. MOORTHY, M.D. Sinnadurai E. Moorthy, M.D. was elected to the
Board of Directors of the Company as of May 1998. Dr. Moorthy was a shareholder,
practicing physician and officer of Sierra Medical Group from its formation in
1984 to the date of its acquisition by Prospect Medical Group. Dr. Moorthy is
currently the Director of Gastroenterology at Lancaster Community Hospital. He
continues to practice medicine and is a provider for Sierra Medical Group.
70
<PAGE>
DAVID LEVINSOHN. David Levinsohn has served as a director of Prospect
Medical Holdings since July31, 1996. Mr.Levinsohn has been the President and
Chief Executive Officer of Sherman Oaks Health Systems, Inc., d/b/a Sherman Oaks
Hospital and Medical Center ("Sherman Oaks Health Systems") since March 1995.
Prior to being named to such positions, Mr. Levinsohn served as the Chief
Operating Officer of Sherman Oaks Health Systems since May 1994. From November
1993 to May 1994, Mr. Levinsohn was the Vice President of Encino Tarzana Medical
Center. From 1989 until November 1993, Mr. Levinsohn was Executive Director of
Sherman Oaks Hospital. Mr. Levinsohn currently serves on the Board of Directors
of the Coalition of Burn Centers of America.
KENNETH SCHWARTZ. Kenneth Schwartz was elected to the Board of Directors of
the Company in June 1998. Mr. Schwartz served as a director of Deloitte & Touche
LLP from December 1990 to June 1998. He previously served as a member of the
National Management Committee and Managing Partner of the Los Angeles office of
Spicer & Oppenheimer CPA.
The Board may increase the number of its members and appoint one or two
additional independent directors upon consummation of the Offering. The Company
has adopted an Insider Trading Policy to establish guidelines relating to
purchases and sales of the Company's Common Stock.
COMPENSATION OF DIRECTORS
Prospect Medical Holdings compensates its non-employee Directors for their
attendance at Board and committee meetings at $500 per Board meeting and $250
per committee meeting. Employees of the Company who serve on the Board receive
no compensation for attending Board or Board committee meetings.
During the fiscal year ended September 30, 1997, Prospect Medical Holdings
awarded options to purchase 60,000 shares of the Common Stock of Prospect
Medical Holdings at an exercise price of $1.25 per share exercisable for six
years to Mr. Levinsohn in consideration for his services as a director.
During the fiscal year ended September 30, 1998, Prospect Medical Holdings
awarded options to purchase 10,000 shares of the Common Stock of Prospect
Medical Holdings at an exercise price of $5.00 per share exercisable for five
years to Mr. Schwartz in consideration for his services as a director.
COMMITTEES OF THE BOARD OF DIRECTORS
AUDIT COMMITTEE. The Board of Directors has recently established an audit
committee (the "Audit Committee") to make recommendations to management
concerning the engagement of independent public accountants, review with the
independent public accountants the plans and results of the audit engagement,
approve professional services provided by the independent public accountants,
review independence of the independent public accountants, consider the range of
audit and non-audit fees and review the adequacy of the Company's internal
accounting controls. The Board of Directors has appointed Mr. Levinsohn and Mr.
Schwartz to serve on the Audit Committee.
COMPENSATION COMMITTEE. The Board of Directors has established a
compensation committee (the "Compensation Committee") to determine salaries and
incentive compensation of the Company's executive officers and to administer the
Company's Stock Option Plan. The current executive officer salaries were set by
the Board of Directors. The Board of Directors has appointed Mr. Levinsohn and
Mr. Schwartz to serve on the Compensation Committee.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to July 1, 1998, the Board of Directors, consisting of Dr. Terner and
Dr. DeNicola who are also each officers of the Company, Mr. Maloof (who, until
his resignation on February 28, 1998, was also an officer of the Company) and
Mr. Levinsohn, together acted as the Compensation Committee of the Board.
71
<PAGE>
Certain of the physician executive officers of the Company and its
subsidiaries are the sole stockholder and officers and directors of Prospect
Medical Group, Santa Ana/Tustin Physicians Group, Sierra Medical Group and
Pegasus Medical Group, all of which are Physician Organizations.
The ownership, control and continuous management of the Physician
Organizations are governed in part by agreements (the "Assignable Option
Agreements") entered into by the Company's subsidiaries, the stockholder of the
Physician Organization and each such Physician Organization. The Assignable
Option Agreements prohibit the transfer of stock of the applicable Physician
Organization without the prior written consent of the Company's subsidiary. Each
Assignable Option Agreement terminates upon termination of the management
services agreement between the Physician Organization and the Company's
subsidiary that are parties to such Assignable Option Agreement.
Each Assignable Option Agreement grants to the Company's subsidiary an
assignable right to designate a successor physician(s), which person(s) must be
duly licensed physicians in the State of California or otherwise permitted by
law to be a shareholder in a professional corporation, to purchase all or part
of the stock of the Physician Organization in its sole discretion. Gregg
DeNicola, M.D., who is a stockholder, director and President of the Company, is
the sole shareholder, President, Chief Financial Officer and Secretary of
Prospect Medical Group. Jacob Y. Terner, M.D., who is a stockholder, director,
Chairman of the Board and Chief Executive Officer of the Company, is a Vice
President of Prospect Medical Group. Prospect Medical Group is the sole
shareholder of the other Physician Organizations.
During July and September 1997, the Company made two loans of $5,000,000
each to Prospect Medical Group in connection with the acquisitions of Santa
Ana/Tustin Physicians Group and Sierra Medical Group. In October 1997, the
Company made a loan of $700,000 to Pegasus Medical Group in connection with the
acquisition of Western Medical Group. In June 1998, the Company made a loan of
$25,000 to Sierra Medical Group in connection with the acquisition of assets of
Antelope Valley Medical Group. None of such amounts have been repaid. Of these
loans, a loan for a portion of one $5,000,000 loan (in the principal amount of
$3,000,000), a loan for $5,000,000 and a loan for $700,000 are required to be
repaid on or before July 3, 1999. These loans were structured to require
repayment on July 3, 1999 in accordance with the terms of the Facility. The
Company may seek to extend the maturity of these loans in connection with an
extension of the maturity of the Facility, which will be subject to the consent
of the Bank. Each of these three loans bears interest at the rate of 6% per
annum. The remaining loans currently bear interest at the rate of 10% per annum
and are repayable on demand. Since these loans are payable from revenues of the
affiliated physician organizations, the Company does not anticipate that
sufficient funds will available to repay such loans or that such organizations
will be able to obtain financing to repay these loans. As the Company prepares
its financial statements on a consolidated basis for financial statement
reporting purposes, these loans are eliminated in the consolidation. See "Risk
Factors--Need for Additional Capital." All of the loans are collateralized by
the accounts and rights to payment of the applicable Physician Organization.
So long as the Facility is outstanding, the Company is required to comply
with the covenants in its agreements with the Bank. The Facility prohibits the
Company from incurring any further debt without the approval of the Bank.
EXECUTIVE COMPENSATION
The tables and discussion below set forth information about the compensation
awarded to, earned by, or paid to the Company's Chief Executive Officer and all
of its other executive officers during the fiscal year ended September 30, 1997.
No other compensation was paid to the executive officers of the Company during
the fiscal year ended September 30, 1997.
72
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION AWARDS
ANNUAL COMPENSATION SHARES UNDERLYING
NAME AND PRINCIPAL POSITION FISCAL YEAR ENDED SALARY BONUS OPTIONS
- ---------------------------------- ---------------------- ---------- --------- ------------------------------
<S> <C> <C> <C> <C>
Jacob Y. Terner, M.D.
Chief Executive Officer......... September 30, 1997 $ -- (1) $ -- 150,000
Gregg DeNicola, M.D. (2)
President and Secretary......... September 30, 1997 $ 300,000 $ -- 150,000
Thomas A. Maloof (3)
Chief Financial Officer......... September 30, 1997 $ 127,000 $ -- 117,119
</TABLE>
- ------------------------
(1) Dr. Terner received an expense reimbursement of $600 per month commencing in
April 1997.
(2) R. Stewart Kahn was appointed to serve as Executive Vice President of
Prospect Medical Holdings effective as of March 1, 1998 and as Secretary of
Prospect Medical Holdings in July 1998.
(3) Thomas A. Maloof resigned as Chief Financial Officer of Prospect Medical
Holdings as of February 28, 1998. Donna Vigil was appointed to serve as
Chief Financial Officer of Prospect Medical Holdings in July 1998.
OPTION GRANTS IN FISCAL YEAR ENDED SEPTEMBER 30, 1997
The following table sets forth information with respect to grants of stock
options to certain executive officers during fiscal year 1997.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED
TOTAL ANNUAL RATES OF
NUMBER OPTIONS STOCK PRICE
OF SHARES GRANTED TO APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE PRICE MARKET PRICE OPTION TERM
OPTIONS IN FISCAL PER SHARE ON DATE OF --------------------
NAME GRANTED(1) YEAR ($/SH) GRANT 0% 5%
- --------------------------------------- ----------- --------------- --------------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Jacob Y. Terner, M.D................... 150,000 31 $ 1.25 $ 1.25 $ -0- $ 64,500
Gregg DeNicola, M.D.................... 150,000 31 $ 1.25 $ 1.25 $ -0- $ 64,500
Thomas A. Maloof(2).................... 117,119 25 $ 1.25 $ 1.25 $ -0- $ 50,361
<CAPTION>
NAME 10%
- --------------------------------------- ----------
<S> <C>
Jacob Y. Terner, M.D................... $ 144,000
Gregg DeNicola, M.D.................... $ 144,000
Thomas A. Maloof(2).................... $ 112,434
</TABLE>
- ------------------------
(1) All options were exercisable on October 15, 1996, the date of grant.
(2) Thomas A. Maloof resigned as Chief Financial Officer of Prospect Medical
Holdings as of February 28, 1998. (3) On the date of grant of the options,
there was no active trading market for the Company's Common Stock. The
options were granted with an exercise price which was determined to be equal
to fair market value on the date of grant based on the per share price in a
recent private sale of the Company's Common Stock.
73
<PAGE>
AGGREGATE OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
The following table sets forth certain information regarding the year-end
value of options held by certain executive officers. No options were exercised
by such officers during fiscal year 1997.
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL YEAR OPTIONS AT FISCAL YEAR
END END
SEPTEMBER 30, 1997 SEPTEMBER 30, 1997
NAME (ALL EXERCISABLE) (ALL EXERCISABLE)(2)
- ---------------------------------------------------------------- ------------------------ ------------------------
<S> <C> <C>
Jacob Y. Terner, M.D............................................ 150,000 $ 112,500
Gregg DeNicola, M.D............................................. 150,000 $ 112,500
Thomas A. Maloof(1)............................................. 117,119 $ 87,842
</TABLE>
- ------------------------
(1) Thomas A. Maloof resigned as Chief Financial Officer of Prospect Medical
Holdings as of February 28, 1998.
(2) At September 30, 1997, there was no active trading market for the Company's
Common Stock. Therefore, for illustrative purposes, valuations at that date
have been based on the $2.00 per share price in a recent private sale of the
Company's Common Stock.
STOCK OPTION PLAN
The Board of Directors has recently approved the Stock Option Plan. A total
of 166,000 shares of the Company's Common Stock has been reserved for issuance
upon the exercise of options pursuant to the Stock Option Plan. Such shares may
be either authorized but unissued shares or shares acquired by the Company and
held in its treasury. The Stock Option Plan will be administered by the
Compensation Committee of at least two members of the Board of Directors, who
are not officers or employees of the Company and who are appointed by the Board
of Directors, or by the entire Board of Directors.
Each option granted under the Stock Option Plan will be a qualified
incentive stock option evidenced by a Stock Option Agreement between the Company
and the optionee. The price to be paid for shares of stock upon exercise of each
option will be determined by the Compensation Committee at the time such option
is granted, but shall be not less than the fair market value of the stock, as
determined in accordance with the Stock Option Plan, on the date the option is
granted. The maximum term of each option will be ten years. The aggregate fair
market value of the Common Stock with respect to which options are first
exercisable by any single optionee in any calendar year will be limited to
$100,000.
An option under the Stock Option Plan will terminate in the event the holder
ceases to be employed by the Company, except in the case of death or disability.
In the case of death or disability, the option will be permitted to be exercised
within 12 months by the holder, holder's legal representative, executor,
administrator, legatee or heirs, as the case may be. The Board has approved the
grant of options to purchase 111,000 shares of Common Stock under the Stock
Option Plan. The Company may issue options to Mr. Kahn and Ms. Vigil under the
Stock Option Plan in replacement for the options previously granted to him or
her.
EMPLOYMENT ARRANGEMENTS
Dr. Terner is compensated pursuant to an Employment Agreement with the
Company effective upon the change of control of management on July 31, 1996.
Under the terms of this agreement, as amended, Dr. Terner received no
compensation until September 30, 1997, after which time he is to be compensated
at the discretion of the Board. On April 17, 1997, the Board (with Dr. Terner
abstaining) approved an expense reimbursement of $600 per month to Dr. Terner.
In September, 1997 the Board (with Dr. Terner abstaining) approved compensation
of $100,000 per annum effective as of October 1, 1997. Dr. Terner's
74
<PAGE>
compensation may be increased at the discretion of the Company based on
performance criteria established by the Company.
Dr. DeNicola is compensated pursuant to an Employment Agreement with the
Company effective upon the change of control of management on July 31, 1996
which provides for base compensation of $300,000 per annum. Dr. DeNicola's
compensation may be increased at the discretion of the Company based on
performance criteria established by the Company. In addition, in the event of a
merger or consolidation in which the Company is not the consolidated or
surviving corporation or a transfer of substantially all of the assets of the
Company, Dr. DeNicola may decide to terminate his Employment Agreement with the
Company. In such event, the Company is obligated to pay Dr. DeNicola an amount
equal to two (2) years salary at the then current rate of compensation.
Mr. Kahn is compensated at an annual salary of $100,000. Mr. Kahn was
granted options to purchase 30,000 shares of common stock of Prospect Medical
Holdings at an exercise price of $5.00 per share. Options to purchase 10,000
shares vest on each of October 1, 1998, October 1, 1999 and October 1, 2000.
All options are exercisable for five years from the date of grant. Mr. Kahn owns
24,000 shares of common stock of Prospect Medical Holdings.
Ms. Vigil is compensated at an annual salary of $100,000. Ms. Vigil was
granted options to purchase 25,000 shares of common stock of Prospect Medical
Holdings at an exercise price of $5.00 per share. Options to purchase 8,333
shares vest on each of October 1, 1998 and October 1, 1999 and options to
purchase 8,334 shares vest on October 1, 2000. All options are exercisable for
five years from the date of grant.
Dr. Arulanantham is compensated pursuant to an Employment Agreement with
Sierra Medical Group executed on September 25, 1997 which provides for base
compensation of $200,000 pre annum. Dr. Arulanantham's compensation may be
increased at the discretion of Sierra Medical Group based on performance
criteria established by Sierra Medical Group.
CONSULTING AGREEMENTS
Dr. Moorthy is compensated pursuant to a Consulting Agreement with Sierra
Medical Group effective March 1, 1998 which provides for base compensation of
$84,400 per annum. Dr. Moorthy's compensation may be increased at the discretion
of Sierra Medical Group based on performance criteria established by Sierra
Medical Group.
CERTAIN TRANSACTIONS
Dr. Moorthy is the sole shareholder and officer and director of S.E.
Moorthy, M.D., Inc., a California professional corporation that provides medical
services, including gastroenterology services, to Sierra Medical Group. During
the period from January 1, 1998 to June 1, 1998, Sierra Medical Group paid
approximately $80,000 to S.E. Moorthy, M.D., Inc., a portion of which was paid
to Dr. Moorthy.
75
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
Prospect Medical Holdings is a Delaware corporation. The Company has two
classes of stock: Common Stock and Preferred Stock.
COMMON STOCK
The Company's Certificate of Incorporation currently authorizes the issuance
of 40,000,000 shares of $.01 par value Common Stock, of which 4,449,395 of such
shares are currently validly issued and outstanding, and 904,559 shares are
reserved for issuance (i) upon the exercise of outstanding options and warrants,
(ii) pursuant to the proposed Stock Option Plan and (iii) in connection with a
completed medical asset acquisition. Holders of Common Stock are entitled to one
vote, either in person or by proxy, for each share held of record on all matters
submitted to a vote of stockholders.
Except as otherwise provided by law and by the Company's Certificate of
Incorporation, action can be taken by a majority of shares entitled to vote at a
meeting. Holders of Common Stock are entitled to dividends when and as may be
declared by the Board of Directors out of funds legally available therefor, and,
in the event of liquidation or dissolution of the Company, are entitled to share
ratably in the assets of the Company remaining after payment of liabilities and
payment in respect of any preferred stock. Holders of Common Stock have no
conversion, preemptive or other subscription rights, and there are no redemption
or sinking fund provisions with respect to the Common Stock. The outstanding
shares of Common Stock of the Company are fully paid and nonassessable.
PREFERRED STOCK
The Company's Certificate of Incorporation currently authorizes the issuance
of 1,000,000 shares of preferred stock, $.01 par value ("Preferred Stock"),
which may be issued from time to time in one or more series as determined by the
Board of Directors without stockholder approval. The Board of Directors has been
authorized to fix the designation, powers, preferences, and rights of the shares
of each such series and any qualifications, limitations or restrictions thereon.
Preferred Stock could be given voting and conversion rights which would dilute
the voting power and equity of holders of Common Stock and could rank prior to
the Common Stock or a newly created series of Preferred Stock with respect to
dividend rights, rights on liquidation or other rights. The Company has no
current plans for the issuance of any of the shares of authorized Preferred
Stock, and as of the date of this Prospectus, no shares of Preferred Stock are
outstanding.
Such Preferred Stock could create impediments to persons seeking to gain
control of the Company, although there is no present intention to do so. The
issuance of such shares could prevent holders of the Company's Common Stock from
receiving a premium for their shares from a potential third-party acquiror. See
"Risk Factors--Anti-Takeover Effect of Certain Charter and Other Provisions."
WARRANTS
The following summary description of certain provisions of the Warrants is
believed to reflect the material provisions of the Warrants but is not
necessarily complete and is qualified in all respects by reference to the actual
text of the Warrant Agreement between the Company and American Stock Transfer &
Trust Company (the "Warrant Agent"), a copy of which has been filed as an
exhibit to the Registration Statement of which this Prospectus is a part. See
"Available Information."
EXERCISE PRICE AND TERMS. Each Warrant entitles the registered holder
thereof to purchase, at any time commencing , 1999 [the first anniversary
of the effective date of the registration statement filed with respect to the
Warrants]until , 2003 [the day immediately preceding the fifth anniversary
of such effective date], one share of Common Stock at a price of $8.40 per
share, subject to adjustment in
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accordance with the anti-dilution and other provisions referred to below. The
holder of any Warrant may exercise such Warrant by surrendering the certificate
representing the Warrant to the Warrant Agent, with the subscription form
thereon properly completed and executed, together with payment of the exercise
price. No fractional shares will be issued upon the exercise of the Warrants.
The exercise price of the Warrants bears no relationship to any objective
criteria of value and should in no event be regarded as an indication of any
future market price of the Securities offered hereby.
ADJUSTMENTS. The exercise price and the number of shares of Common Stock
purchasable upon the exercise of the Warrants are subject to adjustment upon the
occurrence of certain events, including stock dividends, stock splits,
combinations or reclassifications of the Common Stock or the sale by the Company
of its Common Stock or other securities convertible into Common Stock at a price
below the exercise price of the Warrants. Additionally, an adjustment would be
made in the case of a reclassification or exchange of Common Stock,
consolidation or merger of the Company with or into another corporation (other
than a consolidation or merger in which the Company is the surviving
corporation) or sale of all or substantially all of the assets of the Company,
in order to enable warrantholders to acquire the kind and number of shares of
stock or other securities or property receivable in such event by a holder of
the number of shares of Common Stock that might otherwise have been purchased
upon the exercise of the Warrant.
REDEMPTION PROVISIONS. Commencing , 1999 [the first anniversary of
the effective date of the registration statement filed with respect to the
Securities], the Warrants are subject to redemption by the Company, in whole but
not in part, at $.10 per Warrant on not less than thirty (30) days' prior
written notice to the warrantholders, if the average closing sale price of the
Common Stock as reported on the American Stock Exchange equals or exceeds $18.00
per share for any twenty (20) trading days within a period of thirty (30)
consecutive trading days ending on the fifth trading day prior to the date of
the notice of redemption. In the event the Company exercises the right to redeem
the Warrants, such Warrants will be exercisable until 5:00 p.m. (New York time)
on the business day immediately preceding the date for redemption fixed in such
notice. If any Warrant called for redemption is not exercised by such time, it
will cease to be exercisable and the holder will be entitled only to the
redemption price.
TRANSFER, EXCHANGE AND EXERCISE. The Warrants are in registered form and
may be presented to the Warrant Agent for transfer, exchange or exercise at any
time on or prior to their expiration date which is the day immediately preceding
the fifth anniversary of the date of this Prospectus, at which time the Warrants
will become wholly void and of no value. If a market for the Warrants develops,
the holder may sell the Warrants instead of exercising them. There can be no
assurance, however, that a market for the Warrants will develop or continue.
WARRANTHOLDER NOT A STOCKHOLDER. The Warrants do not confer upon holders
thereof any voting, dividend, or other rights as stockholders of the Company.
MODIFICATION OF WARRANTS. The Company and the Warrant Agent may make such
modifications to the Warrants as they deem appropriate to cure ambiguities or to
make certain corrections or as they deem necessary or desirable that do not
adversely affect the interests of the warrantholders; any other modifications,
supplements or alterations can only be made with the consent in writing of the
warrantholders representing not less than 66 2/3% of the Warrants then
outstanding. The Company may, in its sole discretion, lower the exercise price
of the Warrants for a period of not less than thirty (30) days on not less than
thirty (30) days' prior written notice to the warrantholders and the
Representative. Modification of the number of securities purchasable upon the
exercise of any Warrant, an increase in the exercise price or acceleration of
the expiration date with respect to any Warrant requires the consent of the
applicable warrantholder.
The Warrants are not exercisable unless, at the time of the exercise, the
Company has a current prospectus covering the shares of Common Stock issuable
upon exercise of the Warrants, and such shares
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have been registered, qualified or deemed to be exempt under the securities or
"blue sky" laws of the state of residence of the exercising holder of the
Warrants.
LISTING ON AMERICAN STOCK EXCHANGE
There is no established public trading market for the Company's Common
Stock. See "Risk Factors-- Inactive Prior Market for the Common Stock; No
Assurance of American Stock Exchange Listing." The Company intends to make an
application for a listing on the American Stock Exchange. As of the date of this
Prospectus, to obtain an American Stock Exchange listing a company must have a
three-year history of operations; and minimum public distribution of 500,000
shares together with a minimum of 800 public holders or 1,000,000 shares
together with a minimum of 400 public holders; the minimum bid price for the
listed securities must be $3.00 per share; the minimum market value of the
public float (the shares held by non-insiders) must be at least $15,000,000; and
stockholders equity must be at least $4,000,000. In the event that the Company
is able to sell all 3,000,000 Shares being offered hereby, it is hoped that the
Company will (on a pro forma basis) satisfy all American Stock Exchange
requirements for new listing. There can be no assurances however, as to when, if
ever, such a listing may be obtained or if obtained, that an active trading
market will develop. See "Risk Factors--Inactive Prior Market for the Common
Stock; No Assurance of American Stock Exchange Listing."
CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
Under the Company's Certificate of Incorporation, the Board of Directors is
divided into three classes which are to be as nearly equal in number as
reasonably possible. The initial term of office of the first class expired at
the 1994 annual meeting of stockholders, the initial term of office of the
second class expired at the 1995 annual meeting of stockholders and the initial
term of office of the third class expired at the 1996 annual meeting of
stockholders. At each annual meeting of stockholders coinciding with the
expiration of the term of office of class of directors, successor directors are
elected for a term of office to expire at the third succeeding annual meeting of
stockholders after their election. Under the Company's Certificate of
Incorporation, a director holds office until the annual meeting of stockholders
for the year in which his term expires and until his successor shall be elected
and shall qualify. The Company has not held an annual meeting of its
stockholders to elect members to the Board of Directors since the 1996 Merger
that was consummated on July 31, 1996. Under the Delaware General Corporation
Law, or under the California General Corporation Law, to the extent that such
law is applicable, if an annual meeting has not been held to elect directors,
for a period of 13 months (15 months under California law), upon application of
any stockholder or director (a director may apply only under Delaware law), the
Court of Chancery in the State of Delaware or the Superior Court in the State of
California may summarily order a meeting to be held to elect directors. The
directors elected at the 1996 Merger have continued to serve as directors, other
than Thomas A. Maloof who has since resigned. Having a classified Board of
Directors may make it more difficult to effect a change in control of the
Company than if the Board of Directors were not classified with staggered terms.
See "Risk Factors--Anti-Takeover Effect of Certain Charter and Other
Provisions."
Under the Company's Certificate of Incorporation special meetings of the
stockholders for any purpose or purposes may be called at any time only by the
Board of Directors, the Chairman of the Board, or by the Chief Executive Officer
or President of the Company. The Company's Certificate of Incorporation further
provides that any action required or permitted to be taken at any annual or
special meeting of stockholders may not be taken by a written consent of the
stockholders pursuant to the Delaware Corporation Law, unless such action by
written consent is authorized by resolution of the Board of Directors of the
Company. Since the stockholders of the Company do not have the right to call a
special stockholders' meeting, this requirement in the Company's Certificate of
Incorporation for Board of Directors authorization of stockholders' action by
written consent eliminates the ability of stockholders of the Company to take
any actions independently of the Board of Directors of the Company. See "Risk
Factors--Anti-Takeover Effect of Certain Charter and Other Provisions."
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The Company's Certificate of Incorporation also provides that certain
provisions thereof may not be amended, altered, changed or repealed without the
affirmative vote of the holders of not less than 75% of the outstanding shares
of Company stock entitled to vote. Under the Company's Certificate of
Incorporation and the Company's Bylaws, the Company's Bylaws may be adopted,
amended or repealed by the affirmative vote of the holders of 75% of the
outstanding shares and, subject to the rights of the Company's stockholders to
adopt, amend or repeal bylaws pursuant to the Delaware Corporation Law, the
Board of Directors may adopt, amend or repeal the Company's Bylaws.
LIMITATION OF LIABILITY OF DIRECTORS
Under the Delaware Corporation Law, a director's liability cannot be
eliminated or limited: (i) for breaches of duty of loyalty, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) for the payment of unlawful dividends or expenditure of
funds for unlawful stock purchases or redemptions, or (iv) for transactions from
which the director derived an improper personal benefit. Under the Company's
Certificate of Incorporation no director of the Company shall be personally
liable to the Company or its stockholders for monetary damages for any breach of
fiduciary duty by such director as a director. The Company's Certificate of
Incorporation further provides that notwithstanding the foregoing a director
shall be liable to the extent provided by applicable law as described in clauses
(i) through (iv) above. This provision, in effect, eliminates the rights of the
Company and its stockholders (through stockholders' derivative suits on behalf
of the Company) to recover monetary damages from a director for breach of his or
her fiduciary duty of care as a director, except in the situations set forth in
clauses (i) through (iv) above. In addition, the Certificate of Incorporation
does not alter the liability of directors under federal securities laws, and
does not limit or eliminate the rights of the Company or any stockholder to seek
non-monetary relief, such as an injunction or rescission, in the event of a
breach in a director's duty of care. The Certificate of Incorporation requires
the Company to indemnify all directors and officers of the Company to the
fullest extent permitted by law, provided, however, that, with certain limited
exceptions, the Company will only indemnify an officer or director in connection
with a proceeding that was authorized by the Board of Directors. The Bylaws also
authorize the Company to indemnify and advance indemnification expenses to the
Company's officers and directors.
The Company's Certificate of Incorporation further provides that if and to
the extent final legal determination is ever made that and for so long as
Section 204(a)(10) or Section 317 of the California Corporations Code are
applicable to the Company, the provision of the Company's Certificate of
Incorporation relating to limitation of a director's liability for monetary
damages and the provisions relating to indemnification set forth therein will
apply only to the extent permissible under Sections 204(a)(10) and 317 of the
California Corporations Code.
TRANSACTIONS WITH INTERESTED PERSONS
Section 203 of the Delaware Corporation Law regulates certain "business
combinations" involving Delaware corporations. Generally, Section 203 of the
Delaware Corporation Law prohibits a publicly held Delaware corporation from
engaging in a broad range of "business combinations" with an "interested
stockholder" (defined generally as a person owning 15% or more of the
corporation's outstanding voting stock) for three years following the date such
person became an interested stockholder unless (i) before the person becomes an
interested stockholder, the transaction resulting in such person becoming an
interested stockholder or the business combination is approved by the board of
directors of the corporation, (ii) upon consummation of the transaction which
resulted in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the outstanding voting stock of the
corporation (excluding shares owned by directors who are also officers of the
corporation or shares held by employee stock plans that do not provide employees
with the right to determine confidentially whether
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shares held subject to the plan will be tendered in a tender offer or exchange
offer) or (iii) on or after such date on which such person became an interested
stockholder the business combination is approved by the board of directors and
authorized at an annual or special meeting, and not by written consent, by the
affirmative vote of at least 66 2/3% of the outstanding voting stock excluding
shares owned by the interested stockholder. The restrictions of Section 203 do
not apply, among other reasons, if a corporation, by action of its stockholders,
adopts an amendment to its certificate of incorporation or bylaws expressly
electing not to be governed by Section 203, provided that, in addition to any
other vote required by law, such amendment to the certificate of incorporation
or bylaws must be approved by the affirmative vote of a majority of the shares
entitled to vote. Moreover, an amendment so adopted generally is not effective
until twelve months after its adoption and does not apply to any business
combination between the corporation and any person who became an interested
stockholder of such corporation on or prior to such adoption. The Company's
Certificate of Incorporation and Bylaws do not currently contain any provisions
electing not to be governed by Section 203 of the Delaware Corporation Law.
These provisions are intended to make unsolicited takeover bids more
difficult, even if desired by holders of a majority of the outstanding shares.
However, these provisions also make it more difficult to remove incumbent
directors.
Section 203 applies only to Delaware corporations that have a class of
voting stock that is listed on a national securities exchange, are quoted on an
inter-dealer quotation system such as Nasdaq or are held of record by more than
2,000 stockholders. Since the Company currently does not have a class of voting
stock that is listed on a national securities exchange or is quoted on an
inter-dealer quotation system such as Nasdaq, and has fewer than 2,000
stockholders of record, Section 203 does not currently apply to the Company.
Following the Offering, however, if the Company's application for listing on the
American Stock Exchange is granted or the Company has 2,000 or more stockholders
of record, Section 203 would apply to the Company in the absence of an amendment
to the Company's Certificate of Incorporation or Bylaws as described above.
Section 203 is subject to possible challenge in takeover disputes, and it is
not yet clear whether and to what extent its constitutionality will be upheld by
the courts. Although the United States District Court for the District of
Delaware has consistently upheld the constitutionality of Section 203, the
Delaware Supreme Court has not yet considered the issue. The Company believes
that so long as the constitutionality of Section 203 is upheld, Section 203 will
(if applicable to the Company) encourage any potential acquiror to negotiate
with the Company's Board of Directors. Section 203 would also have the effect of
limiting the ability of a potential acquiror to make a two-step bid for the
Company in which all stockholders are not treated equally. The application of
Section 203 to the Company would confer upon the Board of Directors the power to
reject a proposed business combination, even though a potential acquiror may be
offering a substantial premium for the Company's shares over the then current
market price. Section 203 could also discourage certain potential acquirors
unwilling to comply with its provisions.
Apart from the restrictions set forth in the Delaware Corporation Law
Section 203, the Company Certificate includes restrictions on transactions
between "Interested Persons" (as described below) and the Company. In general,
these provisions prevent an "Interested Person" from engaging in these business
combinations with the Company, unless certain stockholder approvals, including
approval by stockholders other than the interested stockholders, have been
obtained.
Under the Company Certificate, an "Interested Person" is any person, firm or
corporation, or any group thereof, acting or intending to act in concert,
including any person directly or indirectly controlling or controlled by or
under direct or indirect common control with such person, firm, or corporation
or group, which owns of record or beneficially, directly or indirectly, five
percent (5%) or more of the shares of any class of voting securities of the
Company.
Under the Company Certificate, except as set forth in the following
paragraph, the affirmative vote of the holders of 75% of the outstanding shares
of the Company entitled to vote on the applicable record date
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is required for: (i) any merger or consolidation to which the Company, or any of
its subsidiaries, and an Interested Person are parties; (ii) any sale, lease,
exchange or other disposition by the Company, or any of its subsidiaries, of all
or substantially all of the Company's or its subsidiaries' assets to an
Interested Person; (iii) any purchase or other acquisition by the Company, or
any of its subsidiaries, of assets or stock of an Interested Person, the
aggregate purchase price of which exceeds $20,000,000; and (iv) any other
transaction with an Interested Person which requires the approval of the
stockholders of the Company under the Delaware Corporation Law, as in effect
from time to time.
The provisions of the preceding paragraph are not applicable to any
transaction described therein if the transaction is approved by resolution of
the Board of Directors, provided that a majority of the members of the Board of
Directors voting for the approval of such transaction are duly elected and
acting members of the Board of Directors prior to the time that the person, firm
or corporation, or any group thereof, with whom such transaction is proposed,
became an Interested Person.
CERTAIN PROVISIONS OF CALIFORNIA LAW
The Company is a corporation organized under the laws of Delaware and
generally the laws of the state of incorporation govern the corporate operations
of a corporation and the rights of its stockholders. Certain provisions of the
California Corporations Code may become applicable to a corporation incorporated
outside of California, however, if (i) the corporation transacts intrastate
business in California and the average of its California property, payroll and
sales factors (as defined in the California Revenue and Taxation Code) with
respect to it is more than 50% during its latest fiscal year, (ii) more than
one-half of its outstanding voting securities are held of record by persons
having addresses in California and (iii) the corporation is not otherwise
exempt. An exemption is provided if the corporation has outstanding securities
listed on the American Stock Exchange (a "Listed Corporation").
The Company intends to apply to list its Common Stock on the American Stock
Exchange. However, no assurances can be given that the Company's application
will be granted. If granted, the Company would be exempt as a Listed
Corporation.
Except as discussed herein, provisions of California law which could be
applicable to the Company if the Company meets these tests and is not exempt as
a listed company include, without limitation, those provisions relating to the
stockholders' right to cumulative votes in elections of directors (cumulative
voting is mandatory under California law), and the Company's ability to
indemnify its officers, directors and employees (which is more limited in
California than in Delaware). Notwithstanding the foregoing, a corporation may
provide for a classified board of directors, or eliminate cumulative voting, or
both if it is a Listed Corporation.
TRANSFER AGENT, REGISTRAR AND WARRANT AGENT
The transfer agent and registrar for the Company's Common Stock and the
warrant agent for the Warrants is American Stock Transfer & Trust Company, New
York, New York.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have approximately
7,449,395 shares of Common Stock outstanding (7,899,395 shares if the
Underwriters' over-allotment option is exercised in full), as well as Warrants,
Representative's Warrants and other options and warrants for the purchase of up
to approximately 4,504,559 additional shares of Common Stock (5,954,559 shares
if the Underwriters' over-allotment option is exercised in full).
Of the shares that will then be outstanding, the 3,000,000 shares sold in
the Offering (3,450,000 shares if the Underwriters' over-allotment option is
exercised in full) will be freely tradable without restriction under the
Securities Act, unless they are held by an "affiliate" of the Company, as that
term is defined in
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Rule 144 under the Securities Act, in which case resales would be subject to
certain limitations and restrictions described below.
The remaining 4,449,395 shares of Common Stock outstanding upon completion
of the Offering will be "restricted securities" as defined in Rule 144 and may
be sold in the public market only if registered under the Securities Act or sold
in accordance with an applicable exemption from registration, such as Rule 144.
Of these restricted shares, 2,597,083 shares (the "Rule 144(k) Shares") will be
eligible for resale without restriction under the Securities Act in compliance
with Rule 144(k) as described below, 1,025,039 shares (the "Rule 144 Shares")
will be eligible for resale subject to the other provisions of Rule 144
described below, and 827,273 shares (the "Non-Rule 144 Shares") will
subsequently become eligible for resale under Rule 144 upon expiration of their
respective one-year holding periods. However, all of the Rule 144 Shares and
624,000 of the Non-Rule 144 Shares will be subject to contractual lock-up
agreements between the holders of such shares and the Company or the
Underwriters. The lock-up agreements will prohibit the Company's officers,
directors and beneficial owners of 5% or more of the Common Stock from directly
or indirectly offering, selling or otherwise transferring a beneficial interest
in securities of the Company without the prior written consent of the Company
and the Representative for a period of twelve months after the Effective Date.
The Company has also agreed, with limited exceptions, not to sell or offer for
sale any of its securities without the consent of the Underwriters until twelve
months after the Effective Date.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned restricted shares for at
least one year is entitled to sell, within any three-month period, a number of
such shares that does not exceed the greater of (i) 1% of the then-outstanding
shares of Common Stock (approximately 74,494 shares immediately after the
Offering) and (ii) the average weekly trading volume during the four calendar
weeks preceding the sale. Sales under Rule 144 are also currently subject to
certain requirements as to the manner of sale, the filing of a notice of
proposed sale, and the availability of current public information about the
Company. Rule 144 also provides that affiliates who own securities that are not
restricted shares must nonetheless comply with the same restrictions applicable
thereunder to restricted shares, with the exception of the one-year holding
period requirement. A person who has not been an affiliate of the Company at any
time within three months prior to the sale and has beneficially owned the
restricted shares for at least two years is entitled to sell such shares under
Rule 144(k) without regard to the volume limitations or any of the other
requirements described above.
Prior to the Offering, there has been no established public trading market
for the Company's Common Stock. See "Price Range of Common Stock and Dividend
Policy." Any sale of substantial amounts of Common Stock, or the perception that
such sales could occur, could adversely affect the prevailing market price for
the Common Stock and could impair the Company's future ability to raise capital
through an offering of its equity securities. See "Risk Factors--Shares Eligible
for Future Sale."
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UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom Security Capital
Trading, Inc., is acting as representative (in such capacity, the
"Representative"), have severally agreed, subject to the terms and conditions of
the Underwriting Agreement (the "Underwriting Agreement") to purchase from the
Company and the Company has agreed to sell to the Underwriters on a firm
commitment basis, the respective numbers of Shares and Warrants set forth
opposite their names:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
UNDERWRITERS SHARES WARRANTS
- -------------------------------------------------------------------- ---------- ----------
<S> <C> <C>
Security Capital Trading, Inc.......................................
Total............................................................. 3,000,000 3,000,000
</TABLE>
The Underwriters are committed to purchase all the Shares of Common Stock
and Warrants offered hereby, if any of such securities are purchased. The
Underwriting Agreement provides that the obligations of the several Underwriters
are subject to conditions precedent specified therein.
The Company has been advised by the Representative that the Underwriters
propose initially to offer the Securities to the public at the initial public
offering prices set forth on the cover page of this Prospectus and to certain
dealers at such prices less concessions not in excess of $ per Share and
$ per Warrant. Such dealers may reallow a concession not in excess of
$ per Share and $ per Warrant to certain other dealers. After
the initial public offering, the offering prices, concessions and reallowances
to dealers may be changed by the Representative. No such change, however, shall
change the amount of proceeds to be received by the Company as set forth on the
cover page of this Prospectus.
The Representative has informed the Company that it does not expect sales to
discretionary accounts by the Underwriters to exceed five percent of the
Securities offered hereby.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments that the Underwriters may be required to make. The Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. The Company has also agreed to pay to the
Representative a non-accountable expense allowance equal to 2.5% of the gross
proceeds derived from the sale of the Securities underwritten, of which $50,000
has been paid to date.
The Company has granted to the Underwriters an over-allotment option,
exercisable during the forty-five (45) day period from the date of this
Prospectus, to purchase up to an additional 450,000 shares of Common Stock
and/or 450,000 Warrants at the initial public offering price per Share and
Warrant, respectively, offered hereby, less underwriting discounts and the
non-accountable expense allowance. Such option may be exercised only for the
purpose of covering over-allotments, if any, incurred in the sale of the
Securities offered hereby. To the extent such option is exercised in whole or in
part, each Underwriter will have a firm commitment, subject to certain
conditions, to purchase the number of the additional Securities proportionate to
its initial commitment.
In connection with this Offering, the Company has agreed to sell to the
Representative, for nominal consideration, warrants (the "Representative's
Warrants") to purchase from the Company up to 300,000 shares of Common Stock
and/or 300,000 Warrants (the "Underlying Warrants"). The Representative's
Warrants are initially exercisable at a price of $7.20 per share of Common Stock
and $.12 per Warrant for a period of four (4) years, commencing at the beginning
of the second year after their issuance and sale and are restricted from sale,
transfer, assignment or hypothecation for a period of twelve (12) months from
the date hereof, except to officers of the Representative. The Representative's
Warrants provide for adjustment in the number of shares of Common Stock and
Warrants issuable upon the exercise thereof and in
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the exercise price of the Representative's Warrants as a result of certain
events, including subdivisions and combinations of the Common Stock. The
Representative's Warrants grant to the holders thereof certain rights of
registration for the securities issuable upon exercise thereof. The Underlying
Warrants are initially exercisable at a price of $8.40 per share of Common Stock
for a period of four (4) years, commencing at the beginning of the second year
after their issuance and sale and otherwise have substantially the same terms
and provisions as the Warrants.
In connection with this Offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market prices of the Securities.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase the Common Stock and/or Warrants for the purpose of stabilizing their
respective market prices. The Underwriters also may create a short position for
the account of the Underwriters by selling more Securities in connection with
the Offering than they are committed to purchase from the Company, and in such
case may purchase Securities in the open market following completion of the
Offering to cover all or a portion of such short position. The Underwriters may
also cover all or a portion of such short position, up to 450,000 shares of
Common Stock and/or 450,000 Warrants, by exercising the over-allotment option
referred to above. In addition, the Representative may impose "penalty bids"
under contractual arrangements with the Underwriters whereby it may reclaim from
an Underwriter (or dealer participating in the Offering) for the account of
other Underwriters, the selling concession with respect to the Securities that
are distributed in the Offering but subsequently purchased for the account of
the Underwriters in the open market. Any of the transactions described in this
paragraph may result in the maintenance of the prices of the Securities at a
level above which might otherwise prevail in the open market. None of the
transactions described in this paragraph is required, and, if they are
undertaken, they may be discontinued at any time.
Prior to this Offering, there has been no active trading market for the
Common Stock or the Warrants. Consequently, the initial public offering prices
of the Securities and the exercise price of the Warrants have been determined
arbitrarily by negotiations between the Company and the Representative and do
not necessarily bear any relationship to the Company's asset value, net worth,
or other established criteria of value. The factors considered in such
negotiations, in addition to prevailing market conditions, included the history
of and prospects for the industry in which the Company competes, an assessment
of the Company's management, the prospects of the Company, its capital structure
and the market for initial public offerings.
Securities Capital Trading, Inc., the Representative, commenced operations
in June 1995. The Representative has co-managed and participated as an
underwriter in only two previous public offerings of securities. Accordingly,
the Representative has limited experience as a co-manager or underwriter of
public offerings of securities. In addition, the Representative is a relatively
small firm and no assurance can be given that the Representative will be able to
participate as a market maker of the Securities. No assurance can be given that
any broker-dealer will be a market maker in any of the Securities. See "Risk
Factors-- Lack of Experience of Representative."
LEGAL MATTERS
Certain legal matters with respect to the Common Stock offered hereby will
be passed upon for the Company by Miller & Holguin, Los Angeles, California.
Miller & Holguin owns 160,162 shares of the Company's outstanding Common Stock.
Certain legal matters in connection with the Offering will be passed upon for
the Underwriters by Hall Dickler Kent Friedman & Wood LLP, New York, New York.
EXPERTS
The consolidated financial statements of the Company at September 30, 1997
and the year then ended appearing in this Prospectus and Registration Statement
have been audited by Ernst & Young LLP,
84
<PAGE>
independent auditors, as set forth in their report thereon appearing elsewhere
herein, and are included in reliance upon such report given on the authority of
such firm as experts in accounting and auditing. No adverse opinion, disclaimer
of opinion, qualification or modification as to uncertainty, audit scope or
accounting principles was contained in said report.
The consolidated financial statements of the Company at September 30, 1996
and for each of the two years in the period ended September 30, 1996 appearing
in this Prospectus and Registration Statement have been audited by BDO Seidman,
LLP, independent certified public accountants and are included in reliance upon
such report given on the authority of such firm as experts in accounting and
auditing. No adverse opinion, disclaimer of opinion, qualification or
modification as to uncertainty, audit scope or accounting principles was
contained in said report.
The financial statements of Antelope Valley Medical Group at December 31,
1997 and 1996 and for each of the years ended December 31, 1997 and 1996
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
on the authority of such firm as experts in accounting and auditing.
The financial statements of Sierra Medical Group at December 31, 1996 and
for the year ended December 31, 1996 and a statement of operations of Sierra
Medical Group for the period from January 1, 1997 through September 25, 1997
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
on the authority of such firm as experts in accounting and auditing.
The statement of operations of Santa Ana/Tustin Physicians Group for the ten
month period ended December 31, 1996 and for the year ended February 28, 1996
have been audited by BDO Seidman, LLP, independent certified public accountants,
as set forth in their report thereon appearing elsewhere herein, and are
included in reliance upon such report given on the authority of such firm as
experts in accounting and auditing. A statement of operations of Santa
Ana/Tustin Physicians Group for the period from January 1, 1997 through July 14,
1997 appearing in this Prospectus and Registration Statement has been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
on the authority of such firm as experts in accounting and auditing.
In September 1997, the Board appointed Ernst & Young LLP as the Company's
independent certified public accounts. Prior thereto, BDO Seidman, LLP,
independent certified public accountants served as the Company's independent
accountants. BDO Seidman, LLP, independent certified public accountants, was
replaced in September 1997. The change in accountants from BDO Seidman, LLP,
independent certified public accountants, to Ernst & Young LLP was effective for
fiscal 1997, was unanimously approved by the Board and was not due to any
disagreements between the Company and BDO Seidman, LLP, independent certified
public accountants, on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedures.
85
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") the Registration Statement (on Form S-1) under the Securities Act
with respect to the Common Stock and Warrants offered hereby. This Prospectus
does not contain all of the information set forth in the Registration Statement
and the exhibits and schedules thereto. For further information with respect to
the Company and the Common Stock and Warrants offered hereby, reference is made
to the Registration Statement and the schedules and exhibits filed therewith.
Statements contained in this Prospectus concerning the contents of contracts or
other documents are summaries of the material provisions thereof. A copy of the
Registration Statement, including exhibits and schedules thereto, may be
inspected without charge at the public reference facilities maintained by the
Commission at Room 1024, 450 5th Street, N.W., Washington, D.C. 20549, and at
the Commission's regional offices located at 7 World Trade Center, Suite 1300,
New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of all or any part of the Registration
Statement may be obtained from such offices after payment of fees prescribed by
the Commission. The Commission maintains a Web site (http:// www.sec.gov) that
contains registration statements, reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission.
86
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Index to Audited Consolidated Financial Statements of Prospect Medical Holdings, Inc. included in this
Prospectus:
Reports of Independent Auditors.......................................................................... F-2
Consolidated Balance Sheets as of September 30, 1996 and 1997 and June 30, 1998.......................... F-4
Consolidated Statements of Operations for the Years Ended September 30, 1995, 1996 and 1997 and the Nine
Months Ended June 30, 1997 and 1998.................................................................... F-5
Consolidated Statements of Shareholders' Equity.......................................................... F-6
Consolidated Statements of Cash Flows for the Years Ended September 30, 1995, 1996 and 1997 and the Nine
Months Ended June 30, 1997 and 1998.................................................................... F-7
Notes to Consolidated Financial Statements............................................................... F-9
Index to Audited Financial Statements of Antelope Valley Medical Group, Inc. included in this Prospectus:
Report of Independent Auditors........................................................................... F-23
Balance Sheets as of December 31, 1996 and 1997 and March 31, 1998....................................... F-24
Statements of Operations for the Years Ended December 31, 1996 and 1997, and the Three Months Ended March
31, 1997 and 1998...................................................................................... F-25
Statements of Shareholder's Equity (Deficit)............................................................. F-26
Statements of Cash Flows for the Years Ended December 31, 1996 and 1997 and the Three Months Ended March
31, 1997 and 1998...................................................................................... F-27
Notes to Financial Statements............................................................................ F-28
Index to Audited Combined Financial Statements of Sierra Primary Care Medical Group, a Medical Corporation
and Sierra Medical Management, Inc. included in this Prospectus:
Report of Independent Auditors........................................................................... F-36
Combined Statements of Operations and Accumulated Deficit for the Nine Months Ended September 30, 1997
and the Year Ended December 31, 1996................................................................... F-37
Combined Statements of Cash Flows for the Nine Months Ended September 30, 1997 and the Year Ended
December 31, 1996...................................................................................... F-38
Notes to Combined Financial Statements................................................................... F-39
Index to Audited Financial Statements of Santa Ana-Tustin Physicians Group, Inc. included in this
Prospectus:
Reports of Independent Auditors.......................................................................... F-44
Statements of Operations and Retained Earning for the Period from January 1 to July 13, 1997, for the Ten
Months Ended December 31, 1996 and the Year Ended February 29, 1996.................................... F-46
Statements of Cash Flows for the Period from January 1 to July 13, 1997, for the Ten Months Ended
December 31, 1996 and the Year Ended February 29, 1996................................................. F-47
Notes to Financial Statements............................................................................ F-48
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Prospect Medical Holdings, Inc.
We have audited the consolidated balance sheet of Prospect Medical Holdings,
Inc., as of September 30, 1997, and the related consolidated statements of
operations, shareholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit. The financial statements of Prospect Medical
Holdings, Inc. for the years ended September 30, 1996 and 1995, were audited by
other auditors whose report dated November 20, 1996, expressed an unqualified
opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Prospect Medical Holdings, Inc., at September 30, 1997, and the consolidated
results of their operations and their cash flows for the year then ended, in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Los Angeles, California
December 8, 1997,
except for Note 4, as to
which the date is February 6, 1998,
and Note 7, as to which the date is July 1, 1998
F-2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Prospect Medical Holdings, Inc.
Yorba Linda, California
We have audited the accompanying combined balance sheet of Prospect Medical
Holdings, Inc. (a Delaware corporation) and Prospect Medical Group, Inc.
(predecessor business) as of September 30, 1996, and the related combined
statements of operations, stockholders' equity and cash flows for each of the
two years then ended. These financial statements are the responsibility of the
respective Company's manage-ment. 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 ac-counting 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 combined financial statements referred to above present
fairly, in all material respects, the financial position of Prospect Medical
Holdings, Inc. and Prospect Medical Group, Inc. (predecessor business) at
September 30, 1996, and the results of their operations and their cash flows for
each of the two years then ended, in conformity with generally accepted
accounting principles.
<TABLE>
<S> <C> <C>
By: /s/ BDO SEIDMAN, LLP
------------------------
BDO Seidman, LLP
</TABLE>
Los Angeles, California
November 20, 1996
F-3
<PAGE>
PROSPECT MEDICAL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30
----------------------- JUNE 30
1996 1997 1998
---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............... $5,333,144 $ 2,821,700 $ 1,765,408
Accounts receivable, net of allowance of
$128,000, $640,000 and $802,680 at
September 30, 1996 and 1997, and at
June 30, 1998, respectively........... 1,327,863 3,246,901 4,864,892
Prepaid expenses and other.............. 78,896 341,842 341,425
Recoverable income taxes................ 243,967 154,655 154,655
---------- ----------- -----------
Total current assets...................... 6,983,870 6,565,098 7,126,380
Property, improvements and equipment:
Land.................................... -- 40,620 40,620
Leasehold improvements.................. -- 120,000 120,000
Equipment............................... 665,762 1,010,601 1,810,460
Furniture and fixtures.................. -- 141,113 153,537
---------- ----------- -----------
665,762 1,312,334 2,124,617
Less accumulated depreciation and
amortization.......................... (157,799) (330,309) (501,563)
---------- ----------- -----------
507,963 982,025 1,623,054
Deposits and other assets................. 50,000 58,750 109,971
Deferred tax assets....................... 192,583 374,967 361,121
Goodwill and other intangible assets,
net..................................... 2,196,612 16,530,207 19,282,824
---------- ----------- -----------
Total assets.............................. $9,931,028 $24,511,047 $28,503,350
---------- ----------- -----------
---------- ----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accrued medical claims.................. $3,063,461 $ 5,917,716 $ 6,024,959
Accounts payable........................ 517,405 1,676,927 2,040,225
Notes payable and capital lease
obligations, current portion.......... 274,962 972,965 1,630,582
---------- ----------- -----------
Total current liabilities................. 3,855,828 8,567,608 9,695,766
Notes payable and capital lease
obligations............................. 307,616 11,830,800 13,230,774
Deferred income taxes..................... 469,630 233,490 233,490
---------- ----------- -----------
4,633,074 20,631,898 23,160,030
Shareholders' equity:
Preferred stock, $.01 par value,
1,000,000 shares authorized, none
issued................................ -- -- --
Common stock, $.01 par value, 40,000,000
shares authorized, 4,767,079,
5,367,079 and 5,575,718 issued and
outstanding at September 30, 1996 and
1997 and June 30, 1998,
respectively.......................... 47,670 53,670 55,757
Additional paid-in capital.............. 3,253,017 4,467,627 5,554,195
Retained earnings (deficit)............. 1,997,267 (642,148) (266,632)
---------- ----------- -----------
5,297,954 3,879,149 5,343,320
---------- ----------- -----------
Total liabilities and shareholders'
equity.................................. $9,931,028 $24,511,047 $28,503,350
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
See accompanying notes.
F-4
<PAGE>
PROSPECT MEDICAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30 NINE MONTHS ENDED JUNE 30
------------------------------------------- ----------------------------
1995 1996 1997 1997 1998
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Total operating revenues............. $ 14,657,332 $ 24,434,980 $ 29,955,073 $ 19,976,709 $ 40,314,037
Cost of medical services............. 10,660,160 19,492,159 23,202,223 16,107,412 26,853,785
------------- ------------- ------------- ------------- -------------
Medical profit margin................ 3,997,172 4,942,821 6,752,850 3,869,297 13,460,252
Operating expenses:
General and administrative......... 3,544,512 4,212,449 7,299,696 4,502,583 11,299,200
Depreciation and
amortization..................... 124,993 101,541 243,937 114,019 785,842
------------- ------------- ------------- ------------- -------------
3,669,505 4,313,990 7,543,633 4,616,602 12,085,042
------------- ------------- ------------- ------------- -------------
Operating income (loss).............. 327,667 628,831 (790,783) (747,305) 1,375,210
Interest expense..................... -- -- (151,654) -- (1,027,888)
Investment income.................... -- 174,792 215,110 172,761 32,410
Loss on sale of property and
equipment to affiliate............. -- (240,000) -- -- --
Other income (expense)............... -- (13,951) -- -- --
Provision for impairment of goodwill
and other intangible assets........ -- -- (2,196,612) (2,196,612) --
------------- ------------- ------------- ------------- -------------
-- (79,159) (2,133,156) (2,023,851) (995,478)
------------- ------------- ------------- ------------- -------------
Income (loss) before income taxes.... 327,667 549,672 (2,923,939) (2,771,156) 379,732
Income tax provision (benefit)....... 139,417 (5,756) (284,524) 173,241 4,216
------------- ------------- ------------- ------------- -------------
Net income (loss).................... $ 188,250 $ 555,428 $ (2,639,415) $ (2,944,397) $ 375,516
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Net income (loss) per common share
(NOTE 1)
Basic:
Basic income (loss) per share.... $ .10 $ 0.22 $ (0.55) $ (0.62) $ 0.07
Weighted average number of common
shares outstanding............. 1,975,835 2,486,866 4,800,942 4,767,079 5,397,696
Diluted:
Diluted income (loss) per
share.......................... $ .10 $ 0.22 $ (0.55) $ (0.62) $ 0.07
Weighted average number of common
and common dilutive shares
outstanding.................... 1,975,835 2,486,907 4,800,942 4,767,079 5,765,421
</TABLE>
See accompanying notes.
F-5
<PAGE>
PROSPECT MEDICAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
NUMBER OF COMMON PAID-IN RETAINED
SHARES STOCK CAPITAL EARNINGS TOTAL
---------- --------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1994................... 70,000 $ 17,500 $ 84,926 $ 1,253,589 $ 1,356,015
Issuance of common stock...................... 10,000 2,500 57,993 -- 60,493
Net income.................................... -- -- -- 188,250 188,250
---------- --------- ------------ ------------ ------------
Balance at September 30, 1995................... 80,000 20,000 142,919 1,441,839 1,604,758
Repurchase and cancellation of stock.......... (80,000) (20,000) (206,688) -- (226,688)
Issuance of common stock to former PMG
shareholders................................ 2,002,023 20,020 -- -- 20,020
Purchase of Med-Search in reverse
acquisition................................. 763,033 7,630 946,161 -- 953,791
Shares issued in connection with private
placement................................... 2,002,023 20,020 2,339,123 -- 2,359,143
Other......................................... 31,502 -- 31,502
Net income.................................... -- -- -- 555,428 555,428
---------- --------- ------------ ------------ ------------
Balance at September 30, 1996................... 4,767,079 47,670 3,253,017 1,997,267 5,297,954
Issuance of stock............................. 600,000 6,000 1,214,610 -- 1,220,610
Net loss...................................... -- -- -- (2,639,415) (2,639,415)
---------- --------- ------------ ------------ ------------
Balance at September 30, 1997................... 5,367,079 53,670 4,467,627 (642,148) 3,879,149
Issuance of stock............................. 208,639 2,087 1,045,913 -- 1,048,000
Other......................................... -- -- 40,655 -- 40,655
Net income.................................... -- -- -- 375,516 375,516
---------- --------- ------------ ------------ ------------
Balance at June 30, 1998 (UNAUDITED)............ 5,575,718 $ 55,757 $ 5,554,195 $ (266,632) $ 5,343,320
---------- --------- ------------ ------------ ------------
---------- --------- ------------ ------------ ------------
</TABLE>
See accompanying notes.
F-6
<PAGE>
PROSPECT MEDICAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30 NINE MONTHS ENDED JUNE 30
----------------------------------------- ----------------------------
1995 1996 1997 1997 1998
----------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)....................... $ 188,250 $ 555,428 $ (2,639,415) $ (2,944,397) $ 375,516
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization......... 124,993 101,541 243,937 114,019 785,842
Provision for bad debts............... 9,000 32,000 512,000 135,427 186,890
Loss on disposal of assets............ -- 240,000 -- -- --
Noncash impairment charge............. -- -- 2,196,612 2,196,612 --
Changes in assets and liabilities:
Accounts receivable................. (343,811) 1,306,152 (1,039,410) (1,520,311) (1,804,881)
Prepaid expenses and other.......... 70,217 47,703 (225,380) (179,974) (50,804)
Recoverable income taxes............ -- -- 237,158 89,312 --
Deferred income taxes............... (174,398) (662,800) (429,759) (418,524) 13,846
Accrued medical claims.............. 445,857 1,645,587 (152,018) (110,178) 107,243
Accounts payable.................... 168,751 276,897 273,698 800,259 363,298
Income taxes........................ 221,388 86,581 -- -- --
----------- ------------- ------------- ------------- -------------
Net cash provided by (used in) operating
activities............................ 710,247 3,629,089 (1,022,577) (1,837,755) (23,050)
INVESTING ACTIVITIES
Purchase of property, improvements and
equipment............................. (166,737) (266,249) (329,352) (258,557) (812,283)
Acquisition of subsidiaries and other
investment activities (net of cash
acquired)............................. -- (1,036,086) (10,549,539) (2,335,735) (1,390,955)
----------- ------------- ------------- ------------- -------------
Net cash used in investing
activities............................ (166,737) (1,302,335) (10,878,891) (2,594,292) (2,203,238)
FINANCING ACTIVITIES
Proceeds from issuance of notes
payable............................... -- -- 9,648,227 -- 1,649,539
Principal payments on notes payable and
capital lease obligation.............. (60,253) (92,628) (278,813) (208,158) (568,198)
Issuances of common stock, net of
repurchases........................... 60,493 2,277,301 20,610 -- 88,655
----------- ------------- ------------- ------------- -------------
Net cash provided by (used in) financing
activities............................ 240 2,184,673 9,390,024 (208,158) 1,169,996
----------- ------------- ------------- ------------- -------------
Increase (decrease) in cash and cash
equivalents........................... 543,750 4,511,427 (2,511,444) (4,640,205) (1,056,292)
Cash and cash equivalents at beginning
of period............................. 277,967 821,717 5,333,144 5,333,144 2,821,700
----------- ------------- ------------- ------------- -------------
Cash and cash equivalents at end of
period................................ $ 821,717 $ 5,333,144 $ 2,821,700 $ 692,939 $ 1,765,408
----------- ------------- ------------- ------------- -------------
----------- ------------- ------------- ------------- -------------
</TABLE>
F-7
<PAGE>
PROSPECT MEDICAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30 NINE MONTHS
--------------------------- ENDED JUNE 30
1996 1997 1998
------------ ------------- -------------
<S> <C> <C> <C>
Supplemental schedule of noncash investing and financing activities:
Issuance of promissory note for repurchase and cancellation of
stock............................................................ $ 113,344 $ -- $ --
Capital leases.....................................................
Details of businesses acquired in purchase transactions:
Fair value of assets acquired...................................... 2,484,612 19,560,691 2,000,000
Less:
Issuance of promissory notes..................................... (288,000) (2,500,000) (976,250)
Other liabilities assumed........................................ (206,735) (3,903,332) --
Common stock issued.............................................. (953,791) (1,200,000) (1,000,000)
------------ ------------- -------------
Cash paid for acquisition............................................ 1,036,086 11,957,359 23,750
Cash of acquired businesses.......................................... -- (1,407,820) --
------------ ------------- -------------
Net cash paid........................................................ $ 1,036,086 $ 10,549,539 $ 23,750
------------ ------------- -------------
------------ ------------- -------------
</TABLE>
There were no noncash activities in fiscal 1995 and for the nine months ended
June 30, 1997.
See accompanying notes.
F-8
<PAGE>
PROSPECT MEDICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND BASIS OF PRESENTATION
Prospect Medical Holdings, Inc., a Delaware corporation (the Company or
Prospect), was incorporated on May 12, 1993. Prospect is a health care
management services organization which develops integrated delivery systems, and
provides medical management systems and services to affiliated and unaffiliated
medical organizations. The affiliated medical organizations employ and/or
contract with physicians and professional medical corporations, and contract
with managed care payors.
Prospect currently manages the provision of prepaid health care services for
their affiliated medical organizations in Southern California. The Network
consists of the following related medical organizations as of September 30,
1997:
Prospect Medical Group, Inc. (PMG)
Sierra Primary Care Medical Group, a Medical Corporation (SPCMG)
Santa Ana-Tustin Physicians Group, Inc. (SATPG)
Each of the medical organizations listed above is owned by a nominee
physician shareholder who is also an employee, member of management and a
shareholder of Prospect. Under the nominee shareholder agreements, Prospect has
the unilateral right to establish or effect change of the nominee, at will, and
without consent of the nominee on an unlimited basis and at nominal cost
throughout the term of the Agreements described below. Effective June 5, 1996,
for Prospect Medical Group, Inc., and upon acquisition, the remaining network
affiliates (the Affiliates), each entered into a long-term management agreement
(the Agreements) whereby the Affiliates have agreed to pay a management fee to
Prospect Medical Systems or Sierra Medical Management, Inc., as applicable (each
of which is a wholly owned subsidiary of Prospect). The fee is based on a
percentage of revenues the Affiliate is entitled to receive for the performance
of medical services by the Affiliate's employees and independent contractor
physicians and physician extenders, and for all other services performed by the
Affiliates. This includes medical capitation, all sums earned from participation
in any risk pools and all fee revenue earned. The Agreements have initial terms
of 30 years renewable for successive 10-year periods thereafter unless
terminated by either party for cause. In return for payment of the management
fee, Prospect has agreed to provide financial management, information systems,
marketing, advertising and public relations, risk management, and administrative
support for utilization review and quality of care. The Company has exclusive
decision making authority with respect to the establishment and preparation of
operating and capital budgets and the establishment of policies and procedures
for the Affiliates and makes recommendations for the development of guidelines
for selection and hiring of health care professionals, compensation payable to
such personnel, scope of services to be provided, patient acceptance policies,
pricing of services, and contract negotiation and execution. At its cost,
Prospect has assumed the obligations for all facilities, medical and nonmedical
supplies for its affiliated medical groups, and employment of nonphysician
personnel. All remaining funds are remitted to the Affiliate, from which the
Affiliate pays for the cost of all medical services. The management fee earned
by Prospect fluctuates based on the profitability of the affiliated medical
groups as Prospect retains a 50% residual interest in the profits of the groups,
including proceeds from the sale of assets or the merger or other business
combination of the Affiliate.
F-9
<PAGE>
PROSPECT MEDICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Agreements are not terminable by the Affiliates except in the case of
gross negligence, fraud or other illegal acts of Prospect, or bankruptcy of the
Company. Through the Company's nominee shareholder, Prospect has exclusive
authority over all decision making related to the ongoing major or central
operations of the physician practices, including compensation of the physicians
and physician extenders. The Company, however, does not engage in the practice
of medicine.
Further, Prospect's rights under the Agreements are unilaterally salable or
transferable. Based on the provisions of the Agreements, Prospect has determined
that it has a controlling financial interest in the Affiliates and consequently
consolidates the revenue and expenses of the Affiliates from the date of
execution of the agreements. All significant inter-entity balances have been
eliminated in consolidation.
As of September 30, 1997, Prospect managed health care services to
approximately 62,000 commercial, 7,300 senior and 6,000 Medicaid enrollees under
contracts with various health plans.
REVERSE ACQUISITION
In July 1996, Prospect changed its name from Med-Search, Inc. (Med-Search)
in connection with an Agreement and Plan of Reorganization (the Merger
Agreement). Under the Merger Agreement, Med-Search Acquisition Corporation, a
wholly owned subsidiary of Med-Search, a physician practice management company,
was merged with and into Prospect Medical Systems (PMS), with PMS being the
surviving corporation. The transaction has been accounted for as a reverse
acquisition as the shareholders of PMS became the majority shareholders of
Med-Search after the combination of the companies. Therefore, the assets
acquired and liabilities assumed of Med-Search were recorded at fair value as of
the acquisition date. Concurrent with the merger, Prospect completed a private
placement offering raising $2,500,000 in cash ($2,359,143 net of costs) in
exchange for 2,002,023 shares of Prospect's common stock. Med-Search
shareholders were issued 763,033 shares of Prospect common stock in connection
with the merger and, based on the share price of the private placement, were
valued at $1.25 per share or $953,791.
In addition to the issuance of shares, Prospect incurred costs totaling
$489,784 in attorneys' fees and other costs, and incurred $526,327 of costs to
settle litigation and costs related to former shareholders/ officers of
Med-Search. The excess of costs over the fair value of Med-Search's net assets
totaled $2,196,612, and has been reflected in goodwill and other intangible
assets as of September 30, 1996.
MEDICAL REVENUES AND COST RECOGNITION
Operating revenue of the Company consists primarily of fees for medical
services provided by the Affiliates under capitated contracts with various
managed care payors including health maintenance organizations (HMOs) or under
fee-for-service type arrangements. During the year ended September 30, 1997, the
Company received approximately 33%, 16% and 11% of its total revenue from
contracts with three HMOs. Capitation revenue under HMO contracts is prepaid
monthly to the Affiliates (and assigned to Prospect) based on the number of
enrollees electing any one of the Affiliates as their health care provider. HMO
contracts also include provisions to share in the risk for hospitalization
whereby Prospect can earn additional incentive revenue or incur penalties based
upon the utilization of hospital services. Estimated shared-risk amounts
receivable from the HMOs are recorded based upon estimated hospital utilization
and estimated associated costs incurred by assigned HMO enrollees, compared to
budgeted costs. Differences between actual contract settlements and estimated
receivables relating to HMO risk-sharing arrangements are recorded in the year
of final settlement.
F-10
<PAGE>
PROSPECT MEDICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In connection with providing services to HMO enrollees, the Affiliates are
responsible for the medical services their affiliated physicians provide to
assigned HMO enrollees. The cost of health services is recognized in the period
in which it is provided and includes an estimate of the cost of services which
have been incurred but not yet reported. The estimate for accrued medical costs
is based on actuarial projections of costs using historical studies of claims
paid. Estimates are continually monitored and reviewed and, as settlements are
made or estimates adjusted, differences are reflected in current operations.
The Affiliates participate in reinsurance protection programs which limit
the amount of risk they ultimately bear by providing reimbursement payments once
medical services provided to an individual enrollee exceed an agreed-upon
deductible amount. Estimates of reinsurance recoveries are included in accounts
receivable in the accompanying financial statements and, in the opinion of
management, adjustments, if any, would not have a material effect on the
consolidated financial position of the Company.
PROPERTY, IMPROVEMENTS AND EQUIPMENT
Property, improvements and equipment are stated on the basis of cost.
Depreciation of equipment is provided using the straight-line method over the
estimated useful lives of the assets, and amortization of leasehold improvements
is provided using the straight-line basis over the shorter of the lease period
or the estimated useful lives of the leasehold improvements. Capitalized lease
obligations are amortized over the life of the lease. Lease amortization is
included in depreciation expense.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets totaling $16,208,343 arose as the
result of the acquisition of Sierra Medical Management, Inc., Sierra Primary
Care Medical Group and Santa Ana-Tustin Physicians Group, Inc. Other intangible
assets consist of the fair value of acquired HMO contracts, covenants not to
compete and workforce in place. Goodwill represents the excess of the
consideration paid and liabilities assumed over the fair value of the assets
acquired including identifiable intangible assets. The fair values of these
assets have been preliminarily allocated to such assets. Such acquisitions are
discussed in Note 2 following.
Goodwill and other intangible assets have been recorded at cost and are
being amortized on the straight-line method over an average life of 20 years
based on a preliminary allocation of the estimated fair values of the net assets
acquired. Accumulated amortization was $49,292 at September 30, 1997.
The Company periodically evaluates the realization of these assets and they
are written down to estimated fair value when appropriate. During fiscal 1997,
Prospect terminated the HMO contract supporting the network acquired in the
Med-Search combination discussed above. Consequently, all intangible assets
acquired from Med-Search were considered impaired and of no continuing value. An
impairment loss totaling $2,196,612 has been recorded in fiscal 1997 related to
this circumstance.
MEDICAL MALPRACTICE LIABILITY INSURANCE
Certain of the Affiliates maintain claims-made basis medical malpractice
insurance coverage of up to $2,000,000 per incident and $4,000,000 in the
aggregate on an annual basis. Claims-made coverage covers only those claims
reported during the policy period. An estimate of losses, if any, for incurred
but
F-11
<PAGE>
PROSPECT MEDICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
unreported claims is recorded based upon historical experience. In 1997,
Prospect caused its affiliates to renew their existing policies and expects to
be able to continue to obtain coverage in future years. Further, it has been the
Company's experience that substantially all claims are reported within a year of
the incident date.
The individual physicians who contract with the Affiliates carry their own
medical malpractice insurance.
EARNINGS (LOSS) PER SHARE
Effective December 15, 1997, the Company was required to adopt Statement of
Financial Accounting Standards (SFAS) No. 128 "Earnings per Share." SFAS No. 128
requires the presentation of "basic earnings per share" (which excludes
dilution) and "diluted earnings per share." All earnings per share calculations
presented in the financial statements have been presented in accordance with
SFAS No. 128.
Basic earnings (loss) per share is computed by dividing net income (loss) by
the weighted average number of common shares outstanding. Diluted earnings
(loss) per share is computed by dividing net income (loss) by the weighted
average number of common shares outstanding, after giving effect to potentially
dilutive shares computed using the treasury stock method. Such shares are
excluded if determined to be anti-dilutive. Common stock issued at below
estimated fair value on the issuance date is included in weighted average number
of common shares as if such shares have been outstanding for all periods
presented.
F-12
<PAGE>
PROSPECT MEDICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following is a reconciliation of the numerators and denominators used in
the calculation of basic and diluted earnings per share for each period
presented in the financial statements.
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30 NINE MONTHS ENDED JUNE 30
----------------------------------------- ---------------------------
1995(1) 1996(1) 1997(2) 1997(2) 1998
------------ ------------ ------------- ------------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Basic earnings (loss) per common share:
Numerator--Net income (loss)........... $ 188,250 $ 555,428 $ (2,639,415) $ (2,944,397) $ 375,516
------------ ------------ ------------- ------------- ------------
------------ ------------ ------------- ------------- ------------
Denominator--
Weighted average number of common
shares outstanding................. 1,975,835 2,486,866 4,800,942 4,767,079 5,397,696
------------ ------------ ------------- ------------- ------------
------------ ------------ ------------- ------------- ------------
Basic earnings (loss) per common
share.............................. $ 0.10 $ 0.22 $ (0.55) $ (0.62) $ 0.07
------------ ------------ ------------- ------------- ------------
------------ ------------ ------------- ------------- ------------
Diluted earnings (loss) per common share:
Numerator--Net income (loss)........... $ 188,250 $ 555,428 $ (2,639,415) $ (2,944,397) $ 375,516
------------ ------------ ------------- ------------- ------------
------------ ------------ ------------- ------------- ------------
Denominator--
Weighted average number of common
shares outstanding................. 1,975,835 2,486,866 4,800,942 4,767,079 5,397,696
Dilutive stock options and
warrants........................... -- 41 -- -- 367,725
------------ ------------ ------------- ------------- ------------
1,975,835 2,486,907 4,800,942 4,767,079 5,765,421
------------ ------------ ------------- ------------- ------------
------------ ------------ ------------- ------------- ------------
Diluted earnings (loss) per common
share.............................. $ 0.10 $ 0.22 $ (0.55) $ (0.62) $ 0.07
------------ ------------ ------------- ------------- ------------
------------ ------------ ------------- ------------- ------------
</TABLE>
- ------------------------
(1) The shares outstanding with respect to periods prior to July 1996 have been
adjusted to reflect the approximate 25:1 dilution of shares as a result of
the exchange of stock by holders of PMG with the Company.
(2) Stock options and warrants are excluded from the calculation of diluted loss
per share for the fiscal year ended September 30, 1997, and the nine months
ended June 30, 1997, because the inclusion of stock options and warrants
would have an anti-dilutive effect.
F-13
<PAGE>
PROSPECT MEDICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK OPTIONS
In October 1995, SFAS No. 123 "Accounting for Stock-Based Compensation" was
issued which provides an alternative to Accounting Principles Board (APB)
Opinion 25 "Accounting for Stock Issued to Employees." SFAS No. 123 encourages,
but does not require, that compensation expense for grants of stock, stock
options and other equity instruments to employees be based on the fair value of
such instrument. The statement also allows companies to continue to measure
compensation expense using the intrinsic value method prescribed by APB Opinion
No. 25. The Company has elected to continue using the intrinsic value based
method.
With respect to stock options granted at an exercise price which is less
than the fair market value on the date of grant, the difference between the
option exercise price and market value at date of grant is charged to operations
over the period the options vest. Income tax benefits attributable to stock
options are credited to additional paid-in capital when exercised.
CASH AND CASH EQUIVALENTS
Cash equivalents are considered to be all liquid investments with a maturity
of three months or less when purchased.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The financial instruments reported in the accompanying consolidated balance
sheets consist primarily of cash and cash equivalents, accounts receivable,
notes payable and capital lease obligations and all other liabilities. The
carrying amounts of current assets and liabilities approximate their fair value
due to the relatively short period of time between the origination of the
instruments and their expected realization.
The carrying amounts of notes payable and capital lease obligations
approximate fair value since the outstanding debt relates primarily to revolving
bank loans which bear interest at the prime rate plus applicable margin. The
carrying amounts of the remaining notes payable approximate their fair value as
interest rates used in valuing these instruments approximate interest rates
currently available to the Company.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist of shared-risk and stop-loss receivables.
The Company's credit risk with respect to shared-risk and stop-loss receivables
is limited since amounts are generally due from large HMOs.
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, liabilities, revenues
and expenses at the date and for the periods that the financial statements are
prepared. Actual results could differ from those estimates.
F-14
<PAGE>
PROSPECT MEDICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS
SANTA ANA--TUSTIN PHYSICIAN GROUP, INC.
Effective July 14, 1997, Prospect Medical Group, Inc. purchased SATPG for a
cash consideration totaling $5,000,000. Simultaneous with this purchase
transaction, Prospect Medical Systems, Inc. entered into a long-term management
agreement with Santa Ana--Tustin Physician Group, Inc. with an initial 30-year
term, renewable for additional 10 year terms thereafter, unless terminated by
either party. The acquisition resulted in goodwill and other intangible assets
of $5,081,343.
SIERRA MEDICAL GROUP, INC. AND SIERRA MEDICAL MANAGEMENT, INC.
Effective September 25, 1997, Prospect, together with a physician
shareholder, purchased Sierra Medical Group, Inc. (SMG) and Sierra Medical
Management, Inc. (SMM) for consideration totaling $10,200,000 consisting of
$6,500,000 in cash, promissory notes of $2,500,000 bearing interest at 7%, and
600,000 shares valued at $2 per share of Prospect common stock. Principal on the
notes is due in quarterly installments of $125,000 and an annual payment of
$250,000 (see Note 5). Simultaneous with this purchase transaction, Sierra
Medical Management, Inc. entered into a long-term management agreement with
SPCMG with an initial 30-year term, renewable for successive 10-year periods
thereafter, unless terminated by either party. The acquisition resulted in
goodwill and other intangible assets of $11,127,000.
Summarized below are the unaudited pro forma consolidated results of
operations for Prospect as if the acquisitions of SATPG, SMG and SMM had taken
place as of October 1, 1995 (amounts in thousands, except per share data).
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER
30
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Operating revenues...................................................... $ 45,120 $ 50,393
Net income (loss)....................................................... 617 (2,044)
Basic income (loss) per share........................................... .20 (.38)
Diluted income (loss) per share......................................... .20 (.38)
</TABLE>
3. INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109),
under which deferred income tax assets and liabilities are recognized for the
differences between financial and income tax reporting bases of assets and
liabilities based on enacted tax rates and laws.
F-15
<PAGE>
PROSPECT MEDICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INCOME TAXES (CONTINUED)
The components of the provision (benefit) for income tax are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
----------- ---------- -----------
<S> <C> <C> <C>
Current:
Federal................................................................... $ 243,235 $ 37,663 $ --
State..................................................................... 68,696 37,468 --
----------- ---------- -----------
311,931 75,131 --
Deferred:
Federal................................................................... (132,404) (49,633) (246,164)
State..................................................................... (40,110) (31,254) (38,360)
----------- ---------- -----------
(172,514) (80,887) (284,524)
----------- ---------- -----------
Total:
Federal................................................................... 110,831 (11,970) (246,164)
State..................................................................... 28,586 6,214 (38,360)
----------- ---------- -----------
$ 139,417 $ (5,756) $ (284,524)
----------- ---------- -----------
----------- ---------- -----------
</TABLE>
Temporary differences and carryforwards that result in deferred income tax
balance as of September 30, are as follows:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Deferred income tax assets:
State taxes....................................................... $ 12,739 $ --
Allowances for bad debts.......................................... 26,800 94,849
Net operating loss................................................ 61,732 151,841
Depreciation...................................................... 91,312 128,277
----------- -----------
192,583 374,967
Deferred income tax liabilities:
Section 481 adjustment for cash to accrual reporting.............. (469,630) (233,490)
----------- -----------
(277,047) 141,477
Valuation allowance............................................... -- --
----------- -----------
Net deferred income taxes........................................... $ (277,047) $ 141,477
----------- -----------
----------- -----------
</TABLE>
F-16
<PAGE>
PROSPECT MEDICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INCOME TAXES (CONTINUED)
The differences between the provision for income tax expense at the federal
statutory rate of 34% and that showing in the consolidated statements of
operations are summarized as follows for the years ended September 30:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Tax provision (credit) at statutory rate................................................. 34% 34% (34%)
State taxes, net of federal benefit...................................................... 6% 1% (1%)
Goodwill................................................................................. -- -- 25%
Accounting method change................................................................. -- (36%) --
Other.................................................................................... 3% -- --
--- --------- ---------
43% (1%) (10%)
--- --------- ---------
--- --------- ---------
</TABLE>
Taxes paid totaled approximately $538,737, $208,000 and $502,000 in 1995,
1996 and 1997, respectively.
4. NOTES PAYABLE
Notes payable consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30
------------------------- JUNE 30
1996 1997 1998
---------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Note payable to former shareholder, interest at 9% payable monthly,
maturing in July 1998................................................ $ 264,000 $ 120,000 $ 57,946
Note payable to former shareholder, interest at 5.05% payable monthly,
maturing in May 1998................................................. 96,563 39,890 --
Revolving loan to bank, interest per annum at prime rate plus
applicable margin.................................................... -- 10,000,000 11,100,000
Note payable to former shareholders for the acquisition of Sierra
Primary Care Medical Group, interest at 7% per annum, $112,500
payable quarterly plus annual payments of $225,000 until March
1999................................................................. -- 2,250,000 2,025,000
Note payable to former shareholder of Sierra Medical Management,
interest at 7% per annum ($12,500 payable quarterly plus annual
payments of $25,000 until March 1999)................................ -- 250,000 225,000
Notes payable to former shareholder for the acquisition of Antelope
Valley Medical Group, interest at 8% per year, final maturity in 180
days................................................................. -- -- 976,250
Capital lease obligations and equipment loans.......................... 222,015 143,875 477,160
---------- ------------- -------------
582,578 12,803,765 14,861,356
Less current maturities................................................ 274,962 972,965 1,630,582
---------- ------------- -------------
$ 307,616 $ 11,830,800 $ 13,230,774
---------- ------------- -------------
---------- ------------- -------------
</TABLE>
F-17
<PAGE>
PROSPECT MEDICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. NOTES PAYABLE (CONTINUED)
At September 30, 1997, the Company has a revolving credit agreement with a
bank for $10,000,000 with interest at the bank's prime rate, plus an applicable
margin (ranging from .50% to 1.50%). As of February 6, 1998, the Company
increased the principal available under the revolving credit agreement to
$12,500,000. Interest is payable monthly on a 360-day basis. The line expires
July 3, 1999. The line is collateralized by the stock of Prospect's subsidiaries
and the Company's accounts receivable, inventory and unencumbered equipment. The
line is also subject to financial covenants, including maintaining certain
financial ratios. As of September 30, 1997, the Company did not meet certain
financial ratios. The bank has waived compliance with these ratios as of
September 30, 1997, and December 31, 1997, made the waivers effective
retroactive to September 1, 1997, and has revised the ratios for periods
thereafter (see Note 8). The Company expects to be able to meet the revised
ratios in the future. The line has a facility fee of 0.5% per year on the unused
balance of the line. In connection with the revolving credit agreement, Prospect
granted a warrant to the bank to purchase 192,725 (132,375 as of September 30,
1997), shares of common stock at $5.00 per share (see Note 5). The fair value of
notes payable approximates the carrying value due either to the short-term
nature of such notes or the fact that the notes bear interest at rates currently
available to the Company under similar terms.
Interest paid totaled $36,850, $36,313, and $151,654 in 1995, 1996 and 1997,
respectively.
Payments under long-term notes as of September 30, 1997, follow:
<TABLE>
<S> <C>
1998................................................... $ 972,965
1999................................................... 11,830,800
2000................................................... --
2001................................................... --
2002................................................... --
Thereafter............................................. --
----------
$12,803,765
----------
----------
</TABLE>
5. STOCK TRANSACTIONS AND OPTION PLANS
STOCK TRANSACTIONS
All Prospect capital stock transactions discussed below have been adjusted
to reflect the July 1996 reverse stock split of 1:44.
F-18
<PAGE>
PROSPECT MEDICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. STOCK TRANSACTIONS AND OPTION PLANS (CONTINUED)
STOCK OPTIONS
The Company has stock option agreements with certain directors and officers.
A summary of the option agreements which exist at September 30, 1997, is as
follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
-------------- -----------------
<S> <C> <C>
Outstanding, beginning of year................................................. --
Granted...................................................................... 512,119 $ 1.51
Exercised.................................................................... -- --
Forfeited.................................................................... -- --
-------------- -----
Outstanding, end of year....................................................... 512,119 $ 1.51
-------------- -----
-------------- -----
Exercisable, end of year....................................................... 512,119 $ 1.51
-------------- -----
-------------- -----
Price.......................................................................... $ 1.25 - $5.00
--------------
--------------
Weighted average fair value of options granted during the year................. $ .30
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------------------------
WEIGHTED OPTIONS EXERCISABLE
AVERAGE ------------------------
REMAINING WEIGHTED WEIGHTED
NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
OUTSTANDING LIFE (# OF EXERCISE EXERCISABLE EXERCISE
RANGE OF EXERCISE PRICE AT 9/30/97 MONTHS) PRICE AT 9/30/97 PRICE
- ---------------------------------------------------- ----------- --------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$1.25-$5.00 512,119 60 $ 1.51 512,119 $ 1.51
</TABLE>
The Company has elected to follow APB Opinion No. 25 and related
interpretations in accounting for its stock options because, as discussed below,
the alternative fair value accounting provided for under SFAS No. 123 requires
use of option valuation models that were not developed for use in valuing stock
options. Under APB No. 25, because the exercise price of the Company's stock
options equals or exceeds the market price of the underlying stock on the date
of grant, no compensation expense is recognized.
Pro forma information regarding net loss and loss per share is required by
SFAS No. 123, and has been determined as if the Company had accounted for its
stock options under the fair value method of that Statement. The fair value of
these options was estimated at the date of grant using a Minimum Value option
pricing model with the following weighted average assumptions for 1997: expected
market price of the Company's common stock at $1.25 for 477,119 option shares
and $2 for 35,000 option shares on the respective dates of grant, a weighted
average expected life of the options of five years, risk-free interest rate of
6%, and dividend yield of 0%.
The Minimum Value option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock options.
F-19
<PAGE>
PROSPECT MEDICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. STOCK TRANSACTIONS AND OPTION PLANS (CONTINUED)
Pro forma disclosures required by SFAS No. 123 include the effects of all
stock option awards granted by the Company in fiscal 1997. During the initial
phase-in period, the effects of applying this Statement for generating pro forma
disclosures are not likely to be representative of the effects on pro forma net
income or loss for future years, for example, because options may vest over
several years and additional awards generally are made for each year. For
purposes of pro forma disclosures, the estimated fair value of the options is
amortized to expense over the options' vesting period. The Company's pro forma
information is as follows for the year ended September 30, 1997.
<TABLE>
<S> <C>
Pro forma net loss.............................................. $(2,792,000)
Pro forma basic and diluted loss per share...................... $ (.58)
</TABLE>
The Company has reserved 512,119 shares in connection with the stock option
agreements.
WARRANTS
As of July 31, 1996, warrants to purchase 13,635 shares of the Company's
common stock at $1.375 per share were issued to finders in connection with the
Med-Search merger. The warrants are exercisable at the date of grant and expire
in July 2001. In connection with the $10 million revolving line of credit,
Prospect granted a warrant in July 1997 to the bank to purchase 192,725 (132,375
at September 30, 1997), shares of common stock at $5.00 per share. The warrants
are immediately exercisable. The warrant to purchase 132,375 common shares
expires in July 2004 and the warrant to purchase 60,350 common shares expires in
February 2005.
6. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases certain buildings and equipment under operating leases.
Leases with related parties had future obligations totaling $1,500,000 as of
September 30, 1997. Certain building leases contain renewal options for two
consecutive five-year periods at the then market rent. Future minimum rental
payments required under operating leases that have initial or remaining
noncancelable lease terms in excess of one year as of September 30, 1997, are as
follows:
<TABLE>
<S> <C>
1998............................................................ $ 988,563
1999............................................................ 635,309
2000............................................................ 583,248
2001............................................................ 300,096
2002............................................................ 300,096
Thereafter...................................................... --
---------
$2,807,312
---------
---------
</TABLE>
Consolidated rent expense for 1995, 1996 and 1997, was approximately $261,000,
$396,000, and $529,000, respectively.
REGULATORY MATTERS
Laws and regulations governing the Medicare program are complex and subject
to interpretation. Prospect and its affiliates believe that they are in
compliance with all applicable laws and regulations and are not aware of any
pending or threatened investigations involving allegations of potential
wrongdoing.
F-20
<PAGE>
PROSPECT MEDICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
While no such regulatory inquiries have been made, compliance with such laws and
regulations can be subject to future government review and interpretation as
well as significant regulatory action including fines, penalties, and exclusion
from the Medicare and Medicaid programs.
LITIGATION
Prospect is involved in various legal proceedings in the ordinary course of
business. Management believes that the ultimate resolution of such legal
proceedings will not have a material adverse effect on the financial position
and results of operations of the Company.
YEAR 2000 - UNAUDITED
The Company has formed a Year 2000 project team which has completed an
inventory of all systems and programs, categorized as to importance, which could
be affected by the Year 2000 date change.
The Company has recently purchased a sophisticated management information
system for approximately $1,100,000 for its managed care segment which accounts
for 89% of the Company's revenue. The purchase agreement requires the vendor to
install a Year 2000 module to handle the Year 2000 issue at no additional cost.
The Company expects to install this module in February 1999 and complete testing
within 90 days. The billing and collection system currently leased by the
Company for its fee-for-service segment, which accounts for less than 7.5% of
its revenues, is not Year 2000 compliant. A Year 2000 software upgrade is
scheduled in October 1998 at no additional cost from the vendor with testing to
be completed within 30 days. In addition, the Company has obtained a Year 2000
software upgrade for its financial and general ledger systems at negligible cost
to be installed and tested by October 15, 1998. The Company tested and
determined all medical equipment to be Year 2000 compliant. Management believes
that its personal computers which utilize the Windows NT operating system are
capable of handling the Year 2000 date change. In addition to replacing or
modifying its programs and systems, the Company has also contacted all hospitals
and health plans with which it transacts business and has been provided
assurance that they will be Year 2000 compliant by March 1999.
Since no assurance can be provided that the Year 2000 issue will be
successfully resolved, the Company's project team will complete a contingency
plan by March 31, 1999 to address potential problems in the event the Company's
systems or programs or principal business partners fail to be Year 2000
compliant. Costs of modifying the software to remediate Year 2000 problems are
charged to expense as incurred.
7. SUBSEQUENT EVENTS
COMPLETED AND PENDING ACQUISITIONS
In October 1997, Pegasus Medical Group Inc., an affiliate of Prospect,
purchased substantially all the assets of AV Western Medical Group, Inc. The
acquisition price of $700,000 was allocated to goodwill.
On December 17, 1997, the Company executed a binding commitment letter to
purchase certain assets of Antelope Valley Medical Group, Inc. for consideration
totaling $500,000 in cash and $500,000 in a short-term promissory note bearing
interest at 8% per year and 200,000 shares of the Company's common stock. The
acquisition was completed effective as of June 1, 1998.
F-21
<PAGE>
PROSPECT MEDICAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. SUBSEQUENT EVENTS (CONTINUED)
SHAREHOLDER SETTLEMENT
The Company maintains an administrative service agreement with Yorba Linda
Medical Group (YLMG) under which the Company provides administrative and
operational services such as contract management, utilization review, case
management, claims processing and payment and quality assurance. Pursuant to the
agreement, YLMG and the professional physician groups have agreed to pay to the
Company a management fee for its services. A majority of the YLMG shareholders
are also shareholders of Prospect.
On July 1, 1998, the Company entered into a settlement agreement with a
group of YLMG physicians whereas the physicians surrendered 1,126,323 shares of
the Company's common stock previously issued to them in return for a release
from noncompetition and nondiversion provisions contained in certain agreements.
Prospect estimates a loss of approximately 13,000 enrollees who were served by
these physicians. Revenues, medical costs and operating expenses related to
these enrollees in fiscal 1997 were estimated at approximately $8,278,000,
$5,866,000 and $891,000, respectively.
8. NOTE TO UNAUDITED INTERIM FINANCIAL STATEMENTS
The unaudited financial information for the nine-month periods ended June
30, 1997, and June 30, 1998, has been prepared in accordance with generally
accepted accounting principles for interim financial information. In the opinion
of management, all adjustments considered necessary for a fair presentation,
which consist solely of normal recurring adjustments, have been included. The
interim information should be read in conjunction with the financial statements
for the years ended September 30, 1995, 1996, and 1997. Operating results for
interim periods are not necessarily indicative of the results which may be
expected for the entire year.
The Company was not in compliance with certain financial covenants at March
31, 1998 and June 30, 1998, respectively. The Company has received waivers from
its lender with respect to compliance with those covenants as of those dates.
Effective July 1, 1998, a settlement agreement was entered into among the
Company, Prospect Medical Group, Yorba Linda Medical Group, and the
physician-shareholders of Yorba Linda Medical Group (the "Yorba Linda Settlement
Agreement"). On July 31, 1998, certain parties related to the Company filed a
motion to enforce the Yorba Linda Settlement Agreement (the "Company's Motion"),
in a pending action entitled DENICOLA V. MCGINTY, Orange County Superior Court
Case No. 795018. The opposing parties, consisting of Yorba Linda Medical Group
and the members of its Board of Directors, responded by filing a cross-motion
for enforcement (the "YLMG Motion"). On or about August 14, 1998, prior to a
ruling on either motion, Yorba Linda Medical Group and its remaining
physician-shareholders filed a lawsuit against the Company, Prospect Medical
Group, Prospect Medical Systems, Dr. DeNicola and certain other individual
physicians seeking damages and injunctive relief based upon allegations of
breach of contract, fraud and certain related claims with respect to the Yorba
Linda Settlement Agreement (MCGINTY V. PROSPECT MEDICAL GROUP, ET AL., Orange
County Superior Court Case No. 798208 (the "MCGINTY Lawsuit")). The court on
September 1, 1998 granted the material portions of the Company's Motion to
enforce the Yorba Linda Settlement Agreement, denied the material portions of
the YLMG Motion, and ordered the parties to mediate the remaining unresolved
issues. The Company believes the MCGINTY Lawsuit is without merit and is barred
by the Yorba Linda Settlement Agreement.
F-22
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Prospect Medical Holdings, Inc.
We have audited the accompanying balance sheets of Antelope Valley Medical
Group, Inc. as of December 31, 1997 and 1996, and the related statements of
operations, changes in shareholder's equity (deficit) and cash flows for the
years then ended. 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 Antelope Valley Medical
Group, Inc. as of December 31, 1997 and 1996, and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
Los Angeles, California
June 26, 1998
F-23
<PAGE>
ANTELOPE VALLEY MEDICAL GROUP, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
----------------------- MARCH 31
1996 1997 1998
----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 604,659 $ 159,241 $ --
Accounts receivable, net...................................... 210,437 572,006 725,034
Prepaid expenses.............................................. 3,335 -- 7,000
----------- ---------- -----------
Total current assets............................................ 818,431 731,247 732,034
Property and equipment, net..................................... 44,318 -- --
Due from affiliates (NOTE 5).................................... -- 162,159 --
Deposits and other assets....................................... 42,631 -- --
Goodwill, net................................................... 4,413,821 1,400,000 1,400,000
----------- ---------- -----------
Total assets.................................................... $ 5,319,201 $2,293,406 $ 2,132,034
----------- ---------- -----------
----------- ---------- -----------
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Bank overdraft................................................ $ -- $ 509,938 $ 23,931
Accrued medical claims........................................ 730,364 1,299,750 1,617,980
Accounts payable and accrued expenses......................... 77,138 1,786 --
Due to former shareholders (NOTES 1 AND 5).................... 2,300,000 -- --
Due to affiliates (NOTE 5).................................... -- -- 723,731
Other liabilities (NOTE 6).................................... 800,000 1,128,257 397,558
----------- ---------- -----------
Total current liabilities....................................... 3,907,502 2,939,731 2,763,200
Due to affiliates (NOTE 5)...................................... 293,000 634,391 755,574
Medical malpractice liability................................... 148,000 24,000 24,000
----------- ---------- -----------
4,348,502 3,598,122 3,542,774
Shareholder's equity (deficit):
Common stock, Class A (voting), no par value: 750,000 shares
authorized, issued and outstanding at December 31, 1997 and
1996........................................................ 500,000 1,500,000 1,500,000
Common stock, Class B (voting), no par value: 750,000 shares
authorized, issued and outstanding at December 31, 1997 and
1996........................................................ 500,000 1,500,000 1,500,000
Accumulated deficit........................................... (29,301) (4,304,716) (4,410,740)
----------- ---------- -----------
Total shareholder's equity (deficit)............................ 970,699 (1,304,716) (1,410,740)
----------- ---------- -----------
Total liabilities and shareholder's equity (deficit)............ $ 5,319,201 $2,293,406 $ 2,132,034
----------- ---------- -----------
----------- ---------- -----------
</TABLE>
See accompanying notes.
F-24
<PAGE>
ANTELOPE VALLEY MEDICAL GROUP, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31 MARCH 31
--------------------------- --------------------------
1996 1997 1997 1998
------------ ------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Net patient service revenue........................... $ 6,023,732 $ 6,556,139 $ 1,591,976 $ 1,948,434
Shared risk and stop-loss revenue..................... 421,105 436,964 41,091 157,428
------------ ------------- ------------ ------------
Total revenues.......................................... 6,444,837 6,993,103 1,633,067 2,105,862
Expenses:
Medical provider expense.............................. 5,435,702 6,806,957 1,335,008 1,959,695
Non-physician compensation and benefits............... 349,522 385,548 128,540 66,577
Occupancy............................................. 70,914 74,795 16,768 16,560
Supplies.............................................. 24,919 19,680 9,469 12,441
Purchased services and other.......................... 614,134 392,595 134,839 156,613
Provision for impairment of goodwill (NOTE 2)......... -- 3,168,260 -- --
Depreciation and amortization......................... 171,268 420,683 80,999 --
------------ ------------- ------------ ------------
Total expenses.......................................... 6,666,459 11,268,518 1,750,623 2,211,886
------------ ------------- ------------ ------------
Net loss................................................ $ (221,622) $ (4,275,415) $ (72,556) $ (106,024)
------------ ------------- ------------ ------------
------------ ------------- ------------ ------------
</TABLE>
See accompanying notes.
F-25
<PAGE>
ANTELOPE VALLEY MEDICAL GROUP, INC.
STATEMENTS OF SHAREHOLDER'S EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK
------------------------- ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
---------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995............................ 1,500,000 $ 1,450,000 $ (735,162) $ 714,838
Capital transactions with former shareholders (NOTE
5).................................................. -- (1,300,000) -- (1,300,000)
Application of push-down accounting upon acquisition
by PCAV (NOTES 1 AND 5)............................. -- 850,000 927,483 1,777,483
Net loss.............................................. -- -- (221,622) (221,622)
---------- ------------- ------------- -------------
Balance at December 31, 1996............................ 1,500,000 1,000,000 (29,301) 970,699
Capital contribution from PCAV (NOTE 5)............... -- 2,000,000 -- 2,000,000
Net loss.............................................. -- -- (4,275,415) (4,275,415)
---------- ------------- ------------- -------------
Balance at December 31, 1997............................ 1,500,000 3,000,000 (4,304,716) (1,304,716)
Net loss.............................................. -- -- (106,024) (106,024)
---------- ------------- ------------- -------------
Balance at March 31, 1998 (unaudited)................... 1,500,000 $ 3,000,000 $ (4,410,740) $ (1,410,740)
---------- ------------- ------------- -------------
---------- ------------- ------------- -------------
</TABLE>
See accompanying notes.
F-26
<PAGE>
ANTELOPE VALLEY MEDICAL GROUP, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31 MARCH 31
------------------------ ------------------------
1996 1997 1997 1998
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................... $ (221,622) $(4,275,415) $ (72,556) $ (106,024)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 171,268 420,683 80,999 --
Provision for impairment of goodwill...................... -- 3,168,260 -- --
Write-off of other assets................................. -- 43,461 -- --
Cancellation of note to former shareholders............... -- (150,000) -- --
Changes in operating assets and liabilities:
Accounts receivable..................................... 172,920 (361,569) (200,497) (153,028)
Prepaid expenses and other.............................. 140 2,504 3,335 (7,000)
Accrued medical claims.................................. (169,546) 569,386 225,000 318,230
Accounts payable and other liabilities.................. 35,338 266,218 223,792 (1,218,492)
Due to affiliates....................................... 293,000 179,232 (135,596) 1,007,073
Medical malpractice liability........................... -- (124,000) -- --
----------- ----------- ----------- -----------
Net cash provided by (used in) operating activities......... 281,498 (261,240) 124,477 (159,241)
INVESTING ACTIVITIES
Purchases of property and equipment......................... (2,088) (34,178) (3,459) --
----------- ----------- ----------- -----------
Net cash used in investing activities....................... (2,088) (34,178) (3,459) --
FINANCING ACTIVITIES
Payment of note to former shareholders...................... -- (150,000) -- --
Distributions to former shareholders........................ (615,000) -- -- --
----------- ----------- ----------- -----------
Net cash used in financing activities....................... (615,000) (150,000) -- --
----------- ----------- ----------- -----------
Decrease in cash and cash equivalents....................... (335,590) (445,418) 121,018 (159,241)
Cash and cash equivalents at beginning of period............ 940,249 604,659 604,659 159,241
----------- ----------- ----------- -----------
Cash and cash equivalents at end of period.................. $ 604,659 $ 159,241 $ 725,677 $ --
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES
Payment of acquisition debt by PCAV reflected as a capital
contribution.............................................. -- $ 2,000,000 $ 2,000,000 --
Capital transactions with former shareholders:
Distribution of non-cash assets........................... $ 385,000 -- -- --
Distribution declared payable to shareholders............. 300,000 -- -- --
PURCHASE PRICE ADJUSTMENTS
Litigation liability........................................ -- $ 312,143 -- --
Other liabilities........................................... -- 185,236 -- --
-----------
Total increase to goodwill.................................. -- $ 497,379 -- --
-----------
-----------
PURCHASE ACCOUNTING
Acquisition debt............................................ $ 2,000,000 -- -- --
Employee severance arising from acquisition................. 800,000 -- -- --
Application of push-down accounting......................... 1,777,483 -- -- --
-----------
Goodwill recorded at acquisition............................ $ 4,577,483 -- -- --
-----------
-----------
</TABLE>
See accompanying notes.
F-27
<PAGE>
ANTELOPE VALLEY MEDICAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. BACKGROUND AND ORGANIZATION
Antelope Valley Medical Group, Inc. (AVMG or the Group) was incorporated as
a not-for-profit organization in 1985 as Antelope Valley Group (AVG). In 1987,
AVG reorganized as a mutual benefit organization. In June 1995, AVG became a
for-profit corporation through a statutory merger with a for-profit entity and
was renamed Antelope Valley Medical Group, Inc. The Group is a primary care
physicians group which services patients in the communities of Lancaster and
Palmdale, California. AVMG is organized as a professional corporation under the
Internal Revenue Code.
In June 1996, the outstanding common stock of the Group was purchased by
PrimeCare Medical Group of Antelope Valley, Inc. (PCAV), which is solely owned
by the controlling physician shareholder of PrimeCare International, Inc. (PCI).
Concurrent with the acquisition, AVMG entered into a management services
agreement (MSA) with PCI.
The MSA has an initial term of 30 years renewable for successive 15-year
periods unless terminated by either party for cause. Under the agreement, PCI
provides centralized non-medical administrative and operational services such as
accounting, information systems, quality assurance, billing and collections,
claims processing and payment, utilization and review, contract management,
provider and member services, marketing, financial reporting, and case
management. As compensation for services rendered, PCI receives a management fee
equal to the Group's capitation and incentive program revenues less provider
expenses.
At December 31, 1997, AVMG provides health services to approximately 11,100
commercial and 1,000 Medicare enrollees under contracts with various health
plans.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PUSH-DOWN ACCOUNTING
As discussed further in Note 6, all of the common stock of AVMG was acquired
by PCAV as of June 30, 1996, for total consideration of $3 million including $1
million in cash and a non-interest bearing note for $2 million. The purchase
consideration and resulting goodwill has been recorded on the books of AVMG. The
push-down entries resulted in an increase in shareholder's equity of $1,777,000,
notes payable of $2 million, $800,000 liability associated with an employee
termination and goodwill of $4,577,000 as of the acquisition date. In January
1997, the $2 million note was paid to the former shareholders and recorded by
PCI as a capital contribution to AVMG in the accompanying financial statements.
The financial statements reflect the combined operating results of the Group
as well as non-medical expenses incurred by PCI in the management of the Group's
operations (see Note 5).
MEDICAL REVENUE AND COST RECOGNITION
Net patient service revenue consists primarily of fees for medical services
provided by the Group under capitated contracts with health maintenance
organizations (HMOs). Capitation revenue is prepaid monthly to the Group based
on the number of enrollees electing the Group as their health care provider. In
1997, four contracts accounted for 63% of the Group's capitated enrollees and
68% of its revenue. These contracts accounted for 74% of the Group's capitated
enrollees and 79% of its revenue in 1996.
HMO contracts include provisions to share in the risk for hospitalization
whereby the Company can earn additional incentive revenue or incur penalties
based upon the utilization of hospital services. Shared-
F-28
<PAGE>
ANTELOPE VALLEY MEDICAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
risk amounts receivable from the HMOs or hospitals are recorded based upon
estimated hospital utilization and associated costs incurred by assigned HMO
enrollees, compared to budgeted costs. Differences between actual contract
settlements and estimated receivables relating to HMO risk-sharing arrangements
are recorded in the year of final settlement. In 1997 and 1996, the Group
recorded shared-risk revenue from HMOs and unaffiliated hospitals totaling
$99,000 and $155,000, respectively.
Included in net patient service revenue in 1997 was net institutional
revenue of $317,000, relating to Desert Valley Hospital (DVH), an affiliated
medical facility owned by PCI. The institutional revenue represents capitation
payments received by DVH relating to the Group's enrollees less medical expenses
for institutional services rendered. Such net revenues are allocated to the
Group under an intercompany risk sharing agreement.
In connection with providing services to HMO enrollees, the Group is
responsible for all covered medical services provided to assigned HMO enrollees.
The cost of medical services is recognized in the period in which it is provided
and includes an estimate of the cost of services which have been incurred but
not yet reported. The estimate for accrued medical costs is based on actuarial
projections of costs using historical studies of claims payments. Estimates are
continually monitored and reviewed and, as settlements are made or estimates
adjusted, differences are reflected in current operations.
The Group participates in reinsurance protection programs which limit the
amount of risk it ultimately bears by providing reimbursement payments once
medical services provided to an individual enrollee exceed an agreed-upon
amount. Estimates of reinsurance recoveries are included in accounts receivable
and are reflected as a reduction of medical provider expense in the accompanying
financial statements.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
ACCOUNTS RECEIVABLES, NET
A summary of accounts receivable at December 31 is as follows:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Shared risk receivables............................................... $ 138,163 $ 102,148
Full risk receivables................................................. -- 316,926
Stop-loss and other receivables....................................... 72,274 152,932
---------- ----------
$ 210,437 $ 572,006
---------- ----------
---------- ----------
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, and are depreciated using the
straight-line method over the useful lives of the assets which range from five
to seven years. Leasehold improvements are amortized using the straight-line
method over the shorter of the lease period or the estimated useful lives of the
leasehold improvements.
F-29
<PAGE>
ANTELOPE VALLEY MEDICAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MEDICAL MALPRACTICE LIABILITY INSURANCE
The Group purchases claims-made basis professional liability coverage of up
to $1,000,000 per incident and $3,000,000 in the aggregate on an annual basis,
with a $25,000 deductible per case. Claims-made coverage covers only those
claims reported during the policy period. The recorded liability for claim
losses not covered by insurance, including losses incurred but not reported, is
estimated by an independent actuary based on the Group's claims experience using
a discount rate of 9% for both 1997 and 1996. There is no assurance that the
amount accrued will be adequate to cover actual claims settled.
GOODWILL
Goodwill totaling $5,074,000 arose as the result of the acquisition of the
Group by PCAV. The amount represents the excess of the consideration paid and
liabilities assumed over the fair value of the assets acquired. Included in
total goodwill was an adjustment in 1997 of $497,000 to reflect the resolution
of an acquisition contingency which was primarily related to the resolution of
litigation arising from the Group's acquisition (see Note 6). Goodwill is being
amortized over 15 years.
At each reporting period, management reviews the carrying value of goodwill
to determine if facts and circumstances exist which would suggest that goodwill
may be impaired or that the amortization period needs to be modified. Among the
factors considered in making the evaluation are changes in the payor or
physician contracts, local market developments, changes in regulations, national
health care trends, changes in third-party payment patterns and other factors.
In December 1997, PCI adopted a formal plan to exit the Lancaster market and
subsequently entered into an agreement in June 1998 to sell certain assets to
Prospect Medical Holdings, Inc. (Prospect--see Note 7).
The sale of AVMG was based on PCI's assessment that it could not operate
AVMG profitably. Consequently, as a result of these factors, PCI determined that
the goodwill of AVMG was impaired and a write-down was necessary. Since PCI
entered into an agreement with Prospect to sell AVMG's management services
agreement and physician contracts of AVMG, PCI has determined that the sale
price represents the fair value of AVMG's goodwill as of December 31, 1997.
Therefore, an impairment adjustment of $3,168,000 was recorded as of December
31, 1997, and has been reflected in the accompanying statements of operations.
Amortization expense totaled $343,000 and $163,000 for 1997 and 1996,
respectively. Accumulated amortization, exclusive of the impairment charge, was
$506,000 and $163,000 at December 31, 1997 and 1996, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments reported in the accompanying
balance sheets (consisting primarily of cash and cash equivalents, accounts
receivable, and all liabilities) approximate their fair value due to the
relatively short period of time between the origination of the instruments and
their expected realization.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject AVMG to concentrations of
credit risk consist primarily of cash and cash equivalents, accounts receivable
shared risk and reinsurance receivable. Concentration of credit risk with
respect to accounts receivable is limited, due to the large number of
F-30
<PAGE>
ANTELOPE VALLEY MEDICAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
payors comprising AVMG's customer base. Concentration of credit risk with
respect to shared risk and reinsurance receivable is limited since amounts are
generally due from large HMOs.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the financial
statements. Estimates also affect the reported amounts of revenues and expenses
during the reporting period. Estimates made by the Group relate primarily to
valuation of receivables and deferred tax assets, recoverability of intangibles,
accrued medical claims and medical malpractice liability. Actual results could
differ from these estimates.
3. PROPERTY AND EQUIPMENT
A summary of property and equipment at December 31 follows:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Medical equipment..................................................... $ 3,610 $ --
Computer equipment.................................................... 112,048 --
Furniture and equipment............................................... 28,152 --
Leasehold improvements................................................ 12,085 --
---------- ----------
155,895 --
Less accumulated depreciation......................................... 111,577 --
---------- ----------
Property and equipment, net........................................... $ 44,318 $ --
---------- ----------
---------- ----------
</TABLE>
Depreciation expense totaled $21,000 and $19,000 for 1997 and 1996,
respectively. In 1997, the Group recorded a charge of $57,000 to write off the
net carrying value of its property and equipment due to impairment of such
assets. The amount is included in depreciation and amortization expense.
4. INCOME TAXES
The Group accounts for income taxes using the liability method as required
by Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (SFAS No. 109). SFAS No. 109 is an asset and liability method which
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in the Group's
financial statements or tax returns. Deferred income taxes reflect the net tax
effects of the temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
return purposes. Deferred income taxes may also be recognized for operating
losses incurred that will be available to offset future federal and state
taxable income. In estimating future tax consequences, SFAS No. 109 generally
considers all expected future events other than enactments of changes in the tax
law or rates.
The Group did not record a provision for income taxes for the years ended
December 31, 1997 and 1996, due to operating losses incurred.
F-31
<PAGE>
ANTELOPE VALLEY MEDICAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES (CONTINUED)
The differences between the provision for income taxes at the federal
statutory rate of 35% and that shown in the statements of operations are
summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------
1996 1997
---------- -------------
<S> <C> <C>
Federal benefit at statutory rate.................................. $ 78,000 $ 1,496,000
State tax benefit.................................................. 13,000 258,000
Goodwill........................................................... (62,000) (1,440,000)
Management fee in excess of (less than) manager cost............... 57,000 (264,000)
Other.............................................................. (12,000) (19,000)
Valuation allowance................................................ (74,000) (31,000)
---------- -------------
Provision for income taxes......................................... $ -- $ --
---------- -------------
---------- -------------
</TABLE>
Significant components of the Group's federal and state deferred tax assets
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1996 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts................................... $ 143,000 $ --
Employee severance................................................ 328,000 456,000
Net operating losses.............................................. 376,000 376,000
Depreciation...................................................... -- 5,000
Other............................................................. -- 41,000
----------- -----------
847,000 878,000
Valuation allowance................................................. (847,000) (878,000)
----------- -----------
$ -- $ --
----------- -----------
----------- -----------
</TABLE>
At December 31, 1997, the Group has net operating losses (NOLs) for income
tax purposes of approximately $917,000. The federal and state carryforwards,
unless utilized, will expire at various dates through 2011. The Tax Reform Act
of 1986 includes provisions which may limit the net operating loss carryforwards
available for use in any given year if certain events, including changes in
stock ownership could occur. Management believes that a portion of the NOLs may
be subject to an annual limitation under the provisions of Section 382 of the
Internal Revenue Code and may not be available during the 15-year carryforward
period. As such, a valuation allowance is provided for all deferred tax assets.
Benefits of deferred tax assets will be recognized when realized. Taxes paid in
1997 and 1996 were not significant.
5. RELATED PARTY TRANSACTIONS
ACQUISITION DEBT
In June 1996, PCAV acquired all of the outstanding common stock of AVMG for
$3 million. $1 million was paid upon closing and recorded as paid in capital at
December 31, 1996. The remaining $2 million in a non-interest bearing note was
paid in January 1997. Prior to the acquisition, AVMG made distributions of cash
and other assets to the shareholders totaling $1.3 million. $1 million was
distributed
F-32
<PAGE>
ANTELOPE VALLEY MEDICAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. RELATED PARTY TRANSACTIONS (CONTINUED)
prior to closing and the remaining $300,000 was held pending the outcome of the
Group's litigation with a former officer (see Note 6). $150,000 was paid in
October 1997, and the remaining $150,000 was canceled due to the adverse outcome
of such legal matter. Total amounts due to former shareholders at December 31,
1996, of $2,300,000 were included in current liabilities in the accompanying
balance sheet. All amounts due were paid or canceled as of December 31, 1997.
MANAGEMENT COST
PCI incurs certain expenses for the provision of management services to the
Group. Pursuant to the MSA, these costs are not separately reimbursable and are
included in the management fee. As discussed in Note 1, manager costs are
included in the accompanying financial statements to reflect the operating
results of the Group on a stand-alone basis. Direct expenses are recorded as
non-medical operating costs and general expenses of PCI allocable to the Group
are included in purchased services in the statements of operations. Total direct
and allocable expenses of PCI (excluding depreciation and amortization), were
$873,000 for 1997 and $448,000 for the six-month period from the acquisition
date to December 31, 1996. Payables to PCI for costs incurred in the amount of
$634,000 and $293,000 are included in due to affiliates (non-current) at
December 31, 1997 and 1996, respectively. Management fees computed in accordance
with the MSA were $186,000 and $587,000 for 1997 and the six months ended
December 31, 1996, respectively.
FULL RISK INCOME
AVMG shares certain institutional revenue with Desert Valley Hospital (DVH),
a wholly owned subsidiary of PCI. Under an intercompany agreement, capitation
revenue received by DVH attributable to the Group's enrollees, net of the
related cost of institutional services, is allocated to the Group. Net revenues
totaled $317,000 in 1997, all of which were outstanding at year end. No amounts
were allocated to the Group in 1996.
OTHER
Due to/from affiliates included in current assets (liabilities) arise from
the ordinary course of business and relates primarily to cash transfers between
the Group and PCI as the Group is included in PCI's centralized cash management
system.
6. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases certain office space and equipment under operating leases
which expire through 1998. Minimum rental payments required in 1998 under the
operating leases that have initial or remaining noncancelable lease terms in
excess of one year at December 31, 1997, totaled $43,000. Rental expense for
1997 and 1996 was $40,000 and $71,000, respectively.
LITIGATION
In June 1996, the Group terminated a former officer upon acquisition by PCAV
and recorded a liability of $800,000 for certain obligations pursuant to the
officer's employment agreement, although PCI had disputed its obligation to pay
such amount. This amount was included in goodwill recorded upon the
F-33
<PAGE>
ANTELOPE VALLEY MEDICAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
acquisition of the Group by PCI. In February 1998, the dispute was settled and
the Group received an adverse ruling totaling $1,112,000 in binding arbitration.
The award in excess of the amount accrued was recorded as an increase to
goodwill in 1997. Outstanding amounts due to the former officer included in
other current liabilities were $398,000, $1,112,000, and $800,000 at March 31,
1998, December 31, 1997 and December 31, 1996, respectively.
ASSETS PLEDGED
In May 1997, PCI obtained a $75 million senior secured credit facility from
a commercial bank. At December 31, 1997, $55 million principal amount was
outstanding under this facility. To secure this facility, PCI, its subsidiaries
and affiliated professional corporations, including AVMG, provided to the bank a
first priority perfected security interest in all real and personal assets.
AVMG's outstanding common stock was also pledged to the bank. On May 19, 1998,
this credit facility was fully repaid, and all security interests and stock
pledges, including those of AVMG, were fully released.
REGULATORY MATTERS
Laws and regulations governing the Medicare program are complex and subject
to interpretation. The Company believes that it is in compliance with all
applicable laws and regulations and is not aware of any pending or threatened
investigations involving allegations of potential wrongdoing. While no such
regulatory inquiries have been made, compliance with such laws and regulations
can be subject to future government review and interpretation as well as
significant regulatory action including fines, penalties, and exclusion from the
Medicare program.
YEAR 2000--UNAUDITED
The Group processes its financial and operating data using PCI's centralized
computer systems. As certain assets of the Group were acquired on June 1, 1998
(see Note 7), and the operations of the Group's business were assumed by
Prospect Medical Holdings, Inc. (Prospect) on such date, subsequent financial
and operational transaction processing will be performed using separate computer
systems implemented for the Group by Prospect.
Prospect's accounting software is currently capable of processing
transactions in the year 2000 and beyond. Prospect is implementing a purchase
contract for its management information system which provides for a software
upgrade to be installed in February 1999 to address year 2000 matters.
Implementation costs are not expected to be significant.
7. SUBSEQUENT EVENT AND CURRENT LIQUIDITY ISSUES
On June 1, 1998, Prospect acquired certain assets of AVMG (primarily
goodwill and management rights to the Group). Of the total purchase price,
$500,000 is payable in cash, $500,000 in a short-term promissory note at an
annual interest rate of 8% and the balance in 200,000 shares of Prospect common
stock. Prospect intends to provide necessary funds to finance the Group's
working capital deficiency.
F-34
<PAGE>
ANTELOPE VALLEY MEDICAL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. NOTE TO UNAUDITED INTERIM FINANCIAL STATEMENTS
The unaudited financial information for the three-month periods ended March
31, 1998 and 1997, has been prepared in accordance with generally accepted
accounting principles for interim financial information. In the opinion of
management, all adjustments considered necessary for a fair presentation, which
consist solely of normal recurring adjustments, have been included. The interim
information should be read in conjunction with the financial statements for the
years ended December 31, 1997 and 1996. Operating results for interim periods
are not necessarily indicative of the results which may be expected for the
entire year.
F-35
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Boards of Directors of
Sierra Primary Care Medical Group, a Medical Corporation
Sierra Medical Management, Inc.
Prospect Medical Group, Inc.
We have audited the accompanying combined statements of operations and
accumulated deficit, and cash flows of Sierra Primary Care Medical Group, a
Medical Corporation and Sierra Medical Management, Inc. for the nine months
ended September 30, 1997, and the year ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our 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 combined results of operations and cash flows of
Sierra Primary Care Medical Group, a Medical Corporation and Sierra Medical
Management, Inc. for the nine months ended September 30, 1997, and the year
ended December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
Los Angeles, California
March 2, 1998
F-36
<PAGE>
SIERRA PRIMARY CARE MEDICAL GROUP,
A MEDICAL CORPORATION
AND SIERRA MEDICAL MANAGEMENT, INC.
COMBINED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31 SEPTEMBER 30
1996 1997
------------- -------------
<S> <C> <C>
Revenues:
Net patient service revenue...................................................... $ 11,996,995 $ 9,247,655
Risk-share and stop loss revenue................................................. 716,544 408,175
------------- -------------
Total revenues..................................................................... 12,713,539 9,655,830
Expenses:
Medical provider expense:
Physician shareholders......................................................... 1,776,000 1,380,533
Other.......................................................................... 6,587,298 4,936,293
Non-physician compensation and benefits.......................................... 2,533,820 2,041,874
Occupancy........................................................................ 627,386 483,040
Supplies......................................................................... 266,294 283,426
Purchased services and other..................................................... 812,877 1,094,962
Depreciation and amortization.................................................... 58,298 32,976
Loss on sale of property and equipment........................................... -- 26,710
------------- -------------
Total expenses..................................................................... 12,661,973 10,279,814
------------- -------------
Income (loss) before income taxes.................................................. 51,566 (623,984)
Income tax expense (benefit)....................................................... 52,407 (244,360)
------------- -------------
Net loss........................................................................... (841) (379,624)
Accumulated deficit at beginning of period......................................... (212,373) (213,214)
------------- -------------
Accumulated deficit at end of period............................................... $ (213,214) $ (592,838)
------------- -------------
------------- -------------
</TABLE>
See accompanying notes.
F-37
<PAGE>
SIERRA PRIMARY CARE MEDICAL GROUP,
A MEDICAL CORPORATION
AND SIERRA MEDICAL MANAGEMENT, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31 SEPTEMBER 30
1996 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss............................................................................. $ (841) $ (379,624)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization...................................................... 58,298 32,976
Loss on sale of property and equipment............................................. -- 26,710
Changes in operating assets and liabilities:
Accounts receivable.............................................................. 39,046 (25,973)
Shared risk receivable........................................................... 25,000 200,000
Other receivables................................................................ -- (10,916)
Refundable income taxes.......................................................... (94,279) 95,429
Deferred tax asset............................................................... -- (203,776)
Claims payable................................................................... (41,911) 297,439
Accounts payable and other....................................................... 15,240 45,096
Salaries and benefits payable.................................................... 35,115 29,955
------------ ------------
Net cash provided by operating activities............................................ 35,668 107,316
INVESTING ACTIVITIES
Purchases of property and equipment.................................................. (22,996) --
Proceeds from sale of property and equipment......................................... -- 105,706
------------ ------------
Net cash provided by (used in) investing activities.................................. (22,996) 105,706
FINANCING ACTIVITIES
Issuance of common stock of Sierra Medical Management, Inc........................... -- 10,000
Proceeds from borrowings............................................................. 54,135 --
Principal payments on long-term debt................................................. (2,225) (51,910)
------------ ------------
Net cash (used in) provided by financing activities.................................. 51,910 (41,910)
------------ ------------
Net increase in cash and cash equivalents............................................ 64,582 171,112
Cash and cash equivalents at beginning of period..................................... 324,071 388,653
------------ ------------
Cash and cash equivalents at end of period........................................... $ 388,653 $ 559,765
------------ ------------
------------ ------------
</TABLE>
See accompanying notes.
F-38
<PAGE>
SIERRA PRIMARY CARE MEDICAL GROUP,
A MEDICAL CORPORATION
AND SIERRA MEDICAL MANAGEMENT, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
1. BACKGROUND AND ORGANIZATION
Sierra Primary Care Medical Group, a Medical Corporation (SPCMG) was
incorporated in 1984 as a primary care physician group which serves patients in
the communities of Lancaster and Palmdale, California. SPCMG is organized as a
C-corporation under the Internal Revenue Code.
Sierra Medical Management, Inc. (SMM) was incorporated in April 1997, as a
healthcare management services organization which provides comprehensive medical
management services, organizational development and contracting support to
SPCMG. SMM is organized as a C-corporation under the Internal Revenue Code and
it commenced operations on June 1, 1997.
SPCMG and SMM are owned and managed by two physician shareholders. Effective
May 21, 1997, SPCMG and SMM (collectively the Company) entered into a management
services agreement with an initial term of 30 years renewable for successive
10-year periods thereafter, unless terminated by either party with advance
written notice.
Under the management services agreement, SMM agrees to provide
administrative and operational services such as contract management, network
development, provider and member services, marketing, financial reporting,
utilization review, case management, claims processing and payment, and quality
assurance for a fee, based upon a contractual formula.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The combined financial statements include the accounts of SPCMG and SMM from
commencement of operations in April 1997. SPCMG and SMM are under common
ownership and management for all periods presented and these financial
statements represent the results of a single business enterprise. All
significant intercompany transactions and balances have been eliminated in
combination.
MEDICAL REVENUE AND COST RECOGNITION
Net patient service revenue consists primarily of fees for medical services
provided by the Company under capitated contracts with health maintenance
organizations (HMOs). Capitation revenue under HMO contracts is prepaid monthly
to the Company based on the number of enrollees electing the Company as their
health care provider. The Company received approximately 92% of its net patient
service revenue under capitated arrangements for the nine months ended September
30, 1997, and the year ended December 31, 1996. The remainder of the Company's
revenue is derived under fee-for-service arrangements. For the nine months ended
September 30, 1997, three contracts accounted for 73% of the Company's capitated
enrollees and 49% of its revenue. These contracts accounted for 55% of the
Company's capitated enrollees and 47% of its revenue in 1996. HMO contracts
include provisions to share in the risk for hospitalization whereby the Company
can earn additional revenue or incur penalties based upon the utilization of
hospital services. Shared-risk revenues are estimated based upon hospital
utilization and associated costs incurred by assigned HMO enrollees, compared to
budgeted costs. Differences between actual contract settlements and estimated
amounts relating to HMO risk-sharing arrangements are recorded in the year of
final settlement.
F-39
<PAGE>
SIERRA PRIMARY CARE MEDICAL GROUP,
A MEDICAL CORPORATION
AND SIERRA MEDICAL MANAGEMENT, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In connection with providing services to HMO enrollees, the Company is
responsible for all covered medical services provided to assigned HMO enrollees.
The cost of medical services is recognized in the period in which it is provided
and includes an estimate of the cost of services which have been incurred but
not yet reported. The estimate for accrued medical costs is based on actuarial
projections of costs using historical studies of claims paid. Estimates are
continually monitored and reviewed and, as settlements are made or estimates
adjusted, differences are reflected in current operations.
The Company participates in reinsurance protection programs with the HMOs
which limit the amount of risk the Company ultimately bears by providing
reimbursement payments once medical services provided to an individual enrollee
exceed an agreed-upon amount. Reinsurance recoveries are recorded once the
attachment point is achieved and the amounts are collected from the HMOs.
DEPRECIATION
Property and equipment are depreciated using the straight-line method over
the useful lives of the assets which range from five to seven years. Leasehold
improvements are amortized over the shorter of the useful lives or the lease
period.
MEDICAL MALPRACTICE LIABILITY INSURANCE
The Company procures professional liability coverage on behalf of its
physicians on a claims-made basis of up to $1,000,000 per claim and a $3,000,000
annual aggregate. The insurance contract specifies that coverage is available
only during the term of each insurance contract and covers only those claims
reported while the policies are in force. The Company has renewed its policy
through September 30, 1998. Based on a review of prior claims experience,
including reporting patterns and the number and severity of claims, and in
consideration of the cost of available tail coverage, the Company has recorded
an estimate for incurred but not reported claims at September 30, 1997. There is
no assurance that the amount accrued will be adequate to cover actual claims
settled.
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 revenues and expenses during the
reporting period. Actual results could differ from these estimates.
REGULATORY MATTERS
Laws and regulations governing the Medicare program are complex and subject
to interpretation. The Company believes that it is in compliance with all
applicable laws and regulations and is not aware of any pending or threatened
investigations involving allegations of potential wrongdoing. Compliance with
such laws and regulations can be subject to future government review and
interpretation as well as significant regulatory action including fines,
penalties, and exclusion from the Medicare and Medicaid programs.
F-40
<PAGE>
SIERRA PRIMARY CARE MEDICAL GROUP,
A MEDICAL CORPORATION
AND SIERRA MEDICAL MANAGEMENT, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
3. BENEFIT PLANS
The Company sponsors a defined contribution plan (the Plan) for employees
who meet the minimum length of service and age requirements. The plan was
adopted in 1990. Eligible employees may contribute up to the statutory limit in
the Plan year. The Company may, at its discretion, match up to 25% of employee
contributions not to exceed 4% of an employee's compensation. The Company is
responsible for the administration of the Plan as the Plan administrator and
trustee.
The Company's contributions totaled $8,742 for the nine months ended
September 30, 1997, and $11,377 for the year ended December 31, 1996.
4. INCOME TAXES
The Company accounts for income taxes using the liability method as required
by Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (SFAS No. 109). SFAS No. 109 is an asset and liability method which
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in the Company's
financial statements or tax returns. In estimating future tax consequences, SFAS
No. 109 generally considers all expected future events other than enactments of
changes in the tax law or rates.
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31 SEPTEMBER 30
1996 1997
------------ ------------
<S> <C> <C>
Current:
Federal........................................................ $ 157,090 $
State.......................................................... 38,960 --
------------ ------------
196,050 --
------------ ------------
Deferred:
Federal........................................................ (143,643) (195,565)
State.......................................................... -- (48,795)
------------ ------------
(143,643) (244,360)
------------ ------------
Provision for income taxes (benefits)............................ $ 52,407 $ (244,360)
------------ ------------
------------ ------------
</TABLE>
Deferred income taxes represent the net effects of the temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes, and the amounts used for income tax purposes. Deferred tax assets and
liabilities were not significant at December 31, 1996 and September 30, 1997.
F-41
<PAGE>
SIERRA PRIMARY CARE MEDICAL GROUP,
A MEDICAL CORPORATION
AND SIERRA MEDICAL MANAGEMENT, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES (CONTINUED)
The differences between the provision for income taxes at the federal
statutory rate of 34% and that shown in the statements of operations and
accumulated deficit are summarized as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31 SEPTEMBER 30
1996 1997
------------ ------------
<S> <C> <C>
Federal provision (benefit) at statutory rate.................... $ 18,048 $ (212,155)
State income taxes............................................... 7,695 (36,241)
IRS audit assessment............................................. 131,690 --
Additional state franchise taxes for 1995 and 1994............... 31,265 --
Other............................................................ 7,352 4,036
Benefit from net operating loss carryback........................ (143,643) --
------------ ------------
Provision (benefit) for income taxes............................. $ 52,407 $ (244,360)
------------ ------------
------------ ------------
</TABLE>
During fiscal 1996, the Internal Revenue Service (IRS) assessed additional
taxes of $131,690 and interest of $26,704 in the course of an audit of the
Company's tax returns for the years ended June 30, 1995 and 1994. These
assessments were paid in 1996. In fiscal 1997, the Company utilized its net
operating loss (NOL) carrybacks to reduce the additional taxable income in 1995
and 1994 as a result of the audit, and consequently received a refund of
$143,643. In January 1997, the Company also amended its 1995 and 1994 state
franchise tax returns to reflect the federal tax adjustments and paid additional
taxes of $31,265. Total assessments and additional taxes, net of the NOL
benefit, of $19,312 have been included in the provision for income taxes for
1996.
5. RELATED PARTY TRANSACTIONS
The shareholders of the Company are partners in Sierra Medical Group
Partnership (the Partnership), an affiliated medical group which comprises
primary care and specialist physicians. The Partnership's sole contract is a
provider services agreement with the Company to provide medical services to its
HMO enrollees. As consideration for its services, the Partnership receives a
percentage of the Company's total capitation revenue, which is determined at the
discretion of the Company's board of directors and is adjusted periodically
(13.5% for the nine months ended September 30, 1997, and the year ended December
31, 1996). Payments to the Partnership totaled $1,152,943 for the nine months
ended September 30, 1997, and $1,419,526 for the year ended December 31, 1996.
The Company also contracts with other non-affiliated specialists, who are
reimbursed on a discounted fee-for-service basis.
One physician shareholder also provides specialty services to the Company's
patients. Fees paid to the physician shareholder totaled $142,296 for the nine
months ended September 30, 1997, and $218,415 for the year ended December 31,
1996.
The Company leases medical facilities and office space from companies owned
by the physician shareholders. The leases expire between 1998 and 2001 at total
monthly payments of $52,124. Total rental expense under these leases for the
nine months ended September 30, 1997, was $469,116 and $625,488 for the year
ended December 31, 1996.
F-42
<PAGE>
SIERRA PRIMARY CARE MEDICAL GROUP,
A MEDICAL CORPORATION
AND SIERRA MEDICAL MANAGEMENT, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
6. SUBSEQUENT EVENT
Effective September 25, 1997, Prospect Medical Holdings, Inc. (Prospect),
together with a physician shareholder, purchased the outstanding common stock of
SPCMG and SMM for total consideration of $10,200,000 consisting of $6,500,000 in
cash, promissory notes of $2,500,000 bearing interest at 7%, and 600,000 shares
valued at $2 per share of Prospect common stock. Principal on the notes is due
in quarterly installments of $125,000 and an annual payment of $250,000.
Simultaneous with this purchase transaction, Prospect Medical Systems, Inc.
(Systems), a subsidiary of Prospect, entered into a long-term management and
assignment of revenues agreement with SPCMG with an initial 30-year term,
renewable for successive 10-year periods thereafter. All revenues for the
performance of medical services are assigned to Systems. In exchange, Systems
has agreed to provide financial, management, information systems, marketing,
advertising and public relations, risk management, and administrative support
for utilization review and quality care. Additionally, Systems at its cost, has
assumed the obligations of the facilities, medical and non-medical supplies, and
employment of non-physician personnel. All remaining funds are remitted to the
Company, from which the costs of all medical services are paid. The management
fee earned by Systems fluctuates based on the profitability of the Company as
Systems retains a 50% residual interest in the net profits of the Company.
F-43
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors of
Santa Ana-Tustin Physicians Group, Inc.
Prospect Medical Group, Inc.
We have audited the accompanying statements of operations and retained
earnings, and cash flows of Santa Ana-Tustin Physicians Group, Inc. for the
period January 1, 1997 to July 13, 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 audit. The financial
statements of Santa Ana-Tustin Physicians Group, Inc. for the ten months ended
December 31, 1996 and the year ended February 29, 1996, were audited by other
auditors whose report dated February 11, 1997, expressed an unqualified opinion
on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of Santa
Ana-Tustin Physicians Group, Inc. for the period January 1, 1997 to July 13,
1997, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Los Angeles, California
March 23, 1998
F-44
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Santa Ana-Tustin Physicians Group, Inc.
Santa Ana, California
We have audited the accompanying related statements of income, changes in
stockholder's equity and cash flows of Santa Ana-Tustin Physicians Group, Inc.
(the "Company") for the ten month period ended December 31, 1996 and year ended
February 29, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our 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 present fairly, in all
material respects, the results of operations, changes in stockholders equity and
cash flows of Santa Ana-Tustin Physicians Group, Inc. for the ten month period
ended December 31, 1996 and year ended February 29, 1996, in conformity with
generally accepted accounting principles.
<TABLE>
<S> <C> <C>
By: /s/ BDO SEIDMAN, LLP
------------------------
BDO Seidman, LLP
</TABLE>
Los Angeles, California
February 11, 1997
F-45
<PAGE>
SANTA ANA-TUSTIN PHYSICIANS GROUP, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
PERIOD
YEAR TEN MONTHS FROM
ENDED ENDED JANUARY 1 TO
FEBRUARY 29 DECEMBER 31 JULY 13,
1996 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Net patient service revenue.......................................... $ 5,398,822 $5,428,784 $4,722,264
Management fee revenue............................................... 16,412 537,999 352,347
Shared-risk revenue.................................................. 596,139 510,015 233,654
Other revenues....................................................... 524,821 174,667 82,114
------------ ------------ ------------
Total revenues......................................................... 6,536,194 6,651,465 5,390,379
Expenses:
Medical provider
Physician shareholder.............................................. 791,500 830,609 180,000
Other.............................................................. 3,410,752 3,648,893 3,691,939
Non-physician compensation and benefits.............................. 1,115,050 1,209,257 930,513
Occupancy............................................................ 154,872 117,619 96,394
Supplies............................................................. 64,773 49,649 42,992
Purchased services and others........................................ 689,943 673,485 751,022
Depreciation and amortization........................................ 38,224 35,085 23,009
------------ ------------ ------------
Total expenses......................................................... 6,265,114 6,564,597 5,715,869
------------ ------------ ------------
Income (loss) before income tax expense (benefit)...................... 271,080 86,868 (325,490)
Income tax expense (benefit) (NOTE 2).................................. 108,794 35,100 (122,520)
------------ ------------ ------------
Net income (loss)...................................................... 162,286 51,768 (202,970)
Retained earnings at beginning of period............................... 245,109 407,395 459,163
------------ ------------ ------------
Retained earnings at end of period..................................... $ 407,395 $ 459,163 $ 256,193
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes.
F-46
<PAGE>
SANTA ANA-TUSTIN PHYSICIANS GROUP, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD
YEAR TEN MONTHS FROM
ENDED ENDED JANUARY 1 TO
FEBRUARY 29 DECEMBER 31 JULY 13,
1996 1996 1997
----------- ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)....................................................... $ 162,286 $ 51,768 $ (202,970)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization......................................... 38,224 35,085 23,009
Change in operating assets and liabilities:
Shared-risk receivable.............................................. -- (5,753) (176,658)
Other receivables................................................... (46,188) (119,035) (154,830)
Prepaid expenses.................................................... -- -- (21,244)
Deferred tax asset.................................................. 48,000 (81,000) (160,720)
Other assets........................................................ 84,348 11,018 (333)
Claims payable...................................................... (95,000) 240,000 553,240
Accounts payable and accrued expenses............................... 10,327 51,514 228,331
Deferred revenue.................................................... -- -- 263,785
Income taxes payable................................................ (36,099) 90,964 (109,333)
----------- ------------ ------------
Net cash provided by operating activities............................... 165,898 274,561 242,277
INVESTING ACTIVITIES
Purchases of property and equipment..................................... (39,147) (46,438) (13,338)
----------- ------------ ------------
Net cash used in investing activities................................... (39,147) (46,438) (13,338)
FINANCING ACTIVITIES
Capital lease payments.................................................. (12,158) -- --
----------- ------------ ------------
Net cash used in financing activities................................... (12,158) -- --
----------- ------------ ------------
Increase in cash and cash equivalents................................... 114,593 228,123 228,939
Cash and cash equivalents at beginning of period........................ 276,400 390,993 619,116
----------- ------------ ------------
Cash and cash equivalents at end of period.............................. $ 390,993 $ 619,116 $ 848,055
----------- ------------ ------------
----------- ------------ ------------
</TABLE>
See accompanying notes.
F-47
<PAGE>
SANTA ANA-TUSTIN PHYSICIANS GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS DESCRIPTION
Santa Ana-Tustin Physicians Group, Inc. (the Company) is an independent
physicians association (IPA) incorporated in 1981 which operates in Orange
County, California, and provides medical services primarily through capitated
contracts with health maintenance organizations (HMOs). The Company's healthcare
services are performed by employed physicians, independent providers and by IPAs
under contract with the Company. In addition, the Company provides management
services to various unaffiliated medical groups and IPAs. The Company is
organized as a C-corporation under the Internal Revenue Code.
MEDICAL REVENUES AND COST RECOGNITION
Net patient service revenue consists primarily of fees for medical services
provided by the Company under capitated contracts with HMOs. Capitated revenue
under HMO contracts is prepaid monthly to the Company based on the number of
enrollees electing the Company as their health care provider. The Company
received approximately 97% of its net patient service revenue under capitated
arrangements for the period January 1, 1997 to July 13, 1997, and the ten months
ended December 31, 1996. The remainder of the Company's revenue is derived under
fee-for-service arrangements. Three contracts accounted for 97% and 95% of the
Company's revenue for the period January 1, 1997 to July 13, 1997, and for the
ten months ended December 31, 1996, respectively. HMO contracts include
provisions to share in the risk for hospitalization whereby the Company can earn
additional revenue or incur penalties based upon the utilization of hospital
services. Estimated shared-risk amounts due from the HMOs are estimated based
upon hospital utilization and associated costs incurred by the assigned HMO
enrollees, compared to budgeted costs. Differences between actual contract
settlements and estimated amounts relating to HMO risk-sharing arrangements are
recorded in the year of final settlement.
In connection with providing services to HMO enrollees, the Company is
responsible for all covered medical services provided to assigned HMO enrollees.
The costs of medical services are recognized in the period in which they are
provided and include an estimate of the costs of services which have been
incurred but not yet reported. The estimate for accrued medical costs is based
on actuarial projections of costs using historical studies for claims paid.
Estimates are continually monitored and reviewed and, as settlements are made or
estimates adjusted, differences are reflected in current operations.
The Company participates in reinsurance protection programs with the HMOs
which limit the amount of risk the Company ultimately bears by providing
reimbursement payments once the medical services provided to an individual
enrollee exceed an agreed-upon amount. Reinsurance recoveries are recorded once
the attachment point is achieved and the amounts are collected from the HMOs.
MANAGEMENT FEE REVENUE
Management fee revenue consists of management fees from Western Individual
Practice Association and Premier Medical Group for provision of non-medical
practice support services. Management fees are recorded in the period the
services are rendered.
F-48
<PAGE>
SANTA ANA-TUSTIN PHYSICIANS GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEPRECIATION
Property and equipment are depreciated using the Modified Cost Recovery
System (MACRS) method, which method is similar to an accelerated method of
depreciation, over the estimated useful life of each class of depreciable
assets.
MEDICAL MALPRACTICE LIABILITY INSURANCE
The Company procures professional liability coverage on behalf of its
physicians on a claims-made basis of up to $2,000,000 per claim and a $4,000,000
annual aggregate with no deductible. The insurance contract specifies that
coverage is available only during the term of each insurance contract and covers
only those claims reported while the policies are in force. The Company has
renewed its policy through June 1, 1998. Based on a review of prior claims
experience, including reporting patterns and the number and severity of claims,
and in consideration of the cost of available tail coverage, the Company
determined that incurred but not reported claims were not significant at
September 30, 1997. There is no assurance that actual claims will not exceed
management's estimate.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the financial
statements. Estimates also affect the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
REGULATORY MATTERS
Laws and regulations governing the Medicare program are complex and subject
to interpretation. The Company believes that it is in compliance with all
applicable laws and regulations and is not aware of any pending or threatened
investigations involving allegations of potential wrongdoing. Compliance with
such laws and regulations can be subject to future government review and
interpretation as well as significant regulatory action including fines,
penalties, and exclusion from the Medicare and Medicaid programs.
RECLASSIFICATIONS
Certain prior period account balances have been reclassified to conform with
the 1997 financial statements presentation.
2. INCOME TAXES
The Company accounts for income taxes using the liability method as required
by Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (SFAS No. 109). SFAS No. 109 is an asset and liability method which
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in the Company's
financial statements or tax returns. In estimating future tax consequences, SFAS
No. 109 generally considers all expected future events other than enactments of
changes in the tax law or rates.
F-49
<PAGE>
SANTA ANA-TUSTIN PHYSICIANS GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. INCOME TAXES (CONTINUED)
The provision for income taxes (benefits) is as follows:
<TABLE>
<CAPTION>
PERIOD FROM
YEAR TEN MONTHS JANUARY 1
ENDED ENDED 1997 TO
FEBRUARY 29 DECEMBER 31 JULY 13,
1996 1996 1997
----------- ------------ ------------
<S> <C> <C> <C>
Current:
Federal........................................... $ 46,991 $ 90,400 $ --
State............................................. 13,803 25,700 --
----------- ------------ ------------
60,794 116,100
----------- ------------ ------------
Deferred:
Federal........................................... 38,000 (64,000) (96,920)
State............................................. 10,000 (17,000) (25,600)
----------- ------------ ------------
48,000 (81,000) (122,520)
----------- ------------ ------------
Provision for income taxes (benefits)............... $ 108,794 $ 35,000 $ (122,520)
----------- ------------ ------------
----------- ------------ ------------
</TABLE>
The differences between the provision for income taxes at the federal
statutory rate of 34% and that shown in the statements of operations and
retained earnings are summarized as follows:
<TABLE>
<CAPTION>
PERIOD FROM
YEAR TEN MONTHS JANUARY 1
ENDED ENDED 1997 TO
FEBRUARY 29 DECEMBER 31 JULY 13,
1996 1996 1997
----------- ------------ ------------
<S> <C> <C> <C>
Federal provision (benefit) at statutory rate....... $ 92,167 $ 29,535 $ (110,667)
State income taxes.................................. 15,744 5,045 (18,904)
Other............................................... 883 520 7,051
----------- ------------ ------------
Provision (benefit) for income taxes................ $ 108,794 $ 35,100 $ (122,520)
----------- ------------ ------------
----------- ------------ ------------
</TABLE>
3. RELATED PARTY TRANSACTIONS
Salaries paid to the sole physician shareholder totaled $180,000 for the
period January 1, 1997 to July 13, 1997, and $830,609 for the ten months ended
December 31, 1996.
4. COMMITMENTS
The Company leases medical and office space under an operating lease. The
lease is for a three-year period expiring on February 28, 1998. Rental expense
totaled $96,394 for the period January 1, 1997 to July 13, 1997, and $135,564
for the ten months ended December 31, 1996.
5. SUBSEQUENT EVENT
Effective July 14, 1997, Prospect Medical Group, Inc. (Prospect) purchased
the outstanding common stock of the Company for cash consideration of
$5,000,000. Concurrent with this purchase transaction, Prospect Medical Systems,
Inc. (Systems), an affiliate of Prospect, entered into a long-term management
and assignment of revenues agreement with the Company with an initial 30-year
term, renewable for 10 years thereafter. All revenues for the performance of
medical services are assigned to Systems. In
F-50
<PAGE>
SANTA ANA-TUSTIN PHYSICIANS GROUP, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. SUBSEQUENT EVENT (CONTINUED)
exchange, Systems has agreed to provide financial, management, information
systems, marketing, advertising and public relations, risk management, and
administrative support for utilization review and quality care. Additionally,
Systems, at its cost, has assumed the obligations of the facilities, medical and
non-medical supplies, and employment of non-physician personnel. All remaining
funds are remitted to the Company, from which the costs of all medical services
are paid. The management fee earned by Systems fluctuates based on the
profitability of the Company as Systems retains a 50% residual interest in the
net profits of the Company.
F-51
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON IS AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY TO ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD
BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 1
Risk Factors.............................................................. 8
The Company............................................................... 22
Use of Proceeds........................................................... 23
Price Range of Common Stock and Dividend Policy........................... 24
Capitalization............................................................ 25
Dilution.................................................................. 26
Unaudited Pro Forma Financial Information................................. 27
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 33
Business of the Company................................................... 46
Beneficial Ownership of Capital Stock..................................... 68
Management of the Company................................................. 69
Certain Transactions...................................................... 75
Description of Capital Stock.............................................. 76
Shares Eligible for Future Sale........................................... 81
Underwriting.............................................................. 83
Legal Matters............................................................. 84
Experts................................................................... 84
Available Information..................................................... 86
Index to Financial Statements............................................. F-1
</TABLE>
-------------------
UNTIL , 1998 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING),
ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK AND WARRANTS, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
PROSPECT MEDICAL
HOLDINGS, INC.
3,000,000 SHARES OF
COMMON STOCK
3,000,000 WARRANTS
--------------
PROSPECTUS
--------------
SECURITY CAPITAL TRADING, INC.
, 1998
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The Registrant estimates that expenses in connection with the distribution
described in this Registration Statement will be as shown below. All expenses
incurred with respect to the distribution will be paid by the Registrant. See
"Underwriting."
<TABLE>
<S> <C>
SEC registration fee.............................................. $ 16,149
NASD filing fee................................................... 5,974
American Stock Exchange listing fee............................... 60,000
Printing and engraving expenses................................... 100,000
Transfer and warrant agent and registrar fees..................... 3,500
Accounting fees and expenses...................................... 160,000
Legal fees and expenses........................................... 275,000
Other expenses.................................................... 50,000
---------
Total......................................................... $ 670,623
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant is a Delaware corporation. Section 145 of the Delaware
General Corporation Law ("DGCL") provides that a corporation may indemnify any
person who was or is a party or is threatened tobe made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the corporation) by reason of the fact that such person is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding if such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe such person's conduct was
unlawful.
Section 145 further provides that a corporation may indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that such person is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees) actually and reasonably incurred by
such person in connection with the defense or settlement of such action or suit
if such person acted in good faith and in a manner such person reasonably
believed to be in or not opposed to the best interests of the corporation and
except that no indemnification shall be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the Delaware Court of Chancery or
the court in which such action or suit was brought shall determine that, despite
an adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper.
Additionally, Section 145 provides that indemnification pursuant to its
provisions ("permissive indemnification") shall not be deemed exclusive of any
other rights to which a person seeking indemnification may be entitled under any
bylaw, agreement, vote of stockholders or disinterested directors or
II-1
<PAGE>
otherwise, both as to action in such person's official capacity and as to action
in another capacity while holding such office.
The indemnification provisions in Article V of the Registrant's Bylaws are
substantially consistent with the permissive indemnification provisions of
Section 145 of the DGCL.
Paragraph 8 of the Registrant's Certificate of Incorporation provides
generally that each person who was or is made a party or is threatened to be
made a party to or is otherwise involved in any action, suit or proceeding by
reason of the fact that he or she is or was a director or officer of the
Registrant or, while a director or officer of the Registrant, is or was serving
at the request of the Registrant as a director, officer, employee or agent of
another entity or enterprise, shall be indemnified and held harmless by the
Registrant to the fullest extent authorized by the DGCL against all expense,
liability and loss reasonably incurred or suffered in connection therewith. Such
right to indemnification is deemed a contract right and is not exclusive of any
right which any person may have or acquire under any statute, provision of the
Certificate of Incorporation, Bylaw, agreement, vote of stockholders or
disinterested directors or otherwise. In any suit brought against the Registrant
to enforce such indemnification right, it shall be a defense that the person
seeking indemnification has not met the applicable standard of conduct set forth
in the DGCL. Further, no person who is entitled to indemnification under
Paragraph 8 shall be entitled to payment of consequential damages, including,
without limitation, damages for inconvenience, emotional distress, lost profits,
injury to privacy, publicity or reputation, or punitive damages.
Paragraph 7 of the Registrant's Certificate of Incorporation provides that
no director of the Registrant shall be personally liable to the Registrant or
its stockholders for monetary damages for any breach of fiduciary duty by such
director as a director. Notwithstanding the foregoing sentence, a director shall
be liable to the extent provided by applicable law (i) for any breach of the
director's duty of loyalty to the Registrant or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) pursuant to Section 174 of the DGCL, or (iv) for
any transaction from which the director derived an improper personal benefit.
The Registrant also has purchased a liability insurance policy which insures
its directors and officers against certain liabilities, including liabilities
under the Securities Act of 1933, as amended ("Securities Act").
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Except as otherwise indicated, the Registrant believes that each of the
transactions described in the table below was exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) as a transaction not
involving any public offering. In each case, the number of investors was
limited, the investors were either accredited or otherwise qualified and had
access to material information about the Registrant, and restrictions were
placed on the resale of the securities sold. Where appropriate, the numbers of
securities shown in the table have been adjusted to reflect the 1:44 reverse
stock split which became effective on July 31, 1996.
<TABLE>
<CAPTION>
DATE TITLE AMOUNT CONSIDERATION RECIPIENT(S)
- --------- ------------------------ --------------------- --------------------------- ---------------------------
<C> <S> <C> <C> <C>
2/96 Common Stock 2,273 shares Services rendered to James Howatt, M.D.
associated medical group
3/96 Common Stock 45,455 shares Settlement of claims Earl F. Jordan, M.D.
3/96 Common Stock 68,864 shares(1)(2) Services rendered and Terry Worthylake
settlement of claims
3/96 Common Stock 68,864 shares(1)(2) Services rendered and James Crowell
settlement of claims
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
DATE TITLE AMOUNT CONSIDERATION RECIPIENT(S)
- --------- ------------------------ --------------------- --------------------------- ---------------------------
<C> <S> <C> <C> <C>
7/96 Common Stock 68,864 shares(2) Settlement of claims John Raffeto
7/96 Common Stock 68,864 shares(2) Settlement of claims Roger L. Rothrock
7/96 Common Stock 160,162 shares Services rendered Miller & Holguin, counsel
to Registrant
7/96 Common Stock 1,534,488 shares $1,916,166 Private investors
7/96 Common Stock 307,379 shares Reimbursement of expenses Certain directors and
totaling $383,834 officers of the Registrant
7/96 Common Stock 2,002,032(3) shares Shares of Prospect Medical Former stockholders of
Systems, Inc. Prospect Medical Systems,
Inc.
7/96 Warrants to purchase 13,635 warrants Services in connection with Finders
Common Stock merger of
Prospect Medical Systems,
Inc.
10/96 Options to purchase 477,119 options Services rendered Certain directors of the
Common Stock Registrant
7/97 Warrants to purchase 132,375 warrants Extension of credit Imperial Bank
Common Stock
9/97 Common Stock and Options 600,000 shares and Shares of Sierra Medical Former stockholders of
to purchase Common Stock 35,000 options Management, Inc. Sierra Medical Management,
Inc.
1/98 Common Stock 50,000 shares(4) Sale of assets of Suncrest Barbara Noble
Medical Group, Inc.
1/98 Common Stock 1,000 shares(4) Services rendered Legal counsel
1/98 Common Stock 24,000 shares $3,000 R. Stewart Kahn
2/98 Warrants to purchase 60,350 warrants Modification of terms of Imperial Bank
Common Stock credit agreement
4/98 to Options to purchase 55,000 options Services rendered Certain officers of the
7/98 Common Stock Registrant
6/98 Common Stock 200,000 Shares Assets of PrimeCare PrimeCare International,
International, Inc. Inc.
7/98 Options to purchase 10,000 options Services rendered A director of the
common stock Registrant
</TABLE>
- ------------------------
(1) 34,091 of such shares were issued in reliance on the exemption provided by
Rule 701 under the Securities Act pursuant to a written compensation
agreement between the Registrant and the recipient.
(2) Shares issued in connection with transactions related to the merger of a
subsidiary of the Registrant into Prospect Medical Systems, Inc., a Delaware
corporation, in a reverse triangular merger (the "1996 Merger").
(3) Approximately 1,126,323 of these shares were returned to the Company
pursuant to the Yorba Linda Settlement Agreement.
(4) The obligation to issue these shares arose on or about the time of the 1996
Merger.
II-3
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS
The following exhibits are filed as part of this Registration Statement:
1.1 Form of Underwriting Agreement by and between Security Capital Trading,
Inc. and Prospect Medical Holdings, Inc.
2.1 Agreement and Plan of Reorganization, dated as of June 10, 1996, among
Med- Search, Inc., Med-Search Acquisition Corporation and Prospect Medical
Systems, Inc.
2.2 Agreement for the Purchase and Sale of Stock of Santa Ana/Tustin
Physicians Group, Inc., made and entered into as of June 23, 1997, among
Prospect Medical Group, Inc., Melvin L. Reich, D.O. and Santa Ana/Tustin
Physicians Group, Inc.
2.3 Agreement for the Purchase and Sale of Stock of Sierra Primary Care
Medical Group, Inc., made and entered into as of September 23, 1997, among
Prospect Medical Group, Inc., Sierra Primary Care Medical Group, Inc.,
Sinnadurai E. Moorthy, M.D., Karunyan Arulanantham, M.D. and the Arulanantham
Charitable Remainder Trust
2.4 Agreement and Plan of Reorganization made and entered into as of
September 23, 1997, among Prospect Medical Holdings, Inc., Sierra Medical
Management, Inc. and Sinnadurai E. Moorthy, M.D., Karunyan Arulanantham, M.D.
and Jayaratnam Jayakumar
2.5 Asset Purchase Agreement made and entered into as of October 29, 1997,
among Pegasus Medical Group, Inc., Marvin L. Ginsburg, M.D. Medical Corporation
d/b/a A.V. Western Medical Group, Inc., and J. Robert West
2.6 Agreement for the Purchase and Sale of Assets/Transfer of Member
Responsibility, entered into as of May 13, 1998, by and among PrimeCare
International, Inc., PrimeCare Medical Group of Antelope Valley, Inc., Prospect
Medical Holdings, Inc. and Sierra Primary Care Medical Group, A Medical
Corporation.
2.7 First Amendment to Agreement for Purchase and Sale of Assets/Transfer
of Member Responsibility, dated, for reference purposes only, June 5, 1998, by
and among PrimeCare International, Inc., PrimeCare Medical Group of Antelope
Valley, Inc., Prospect Medical Holdings, Inc. and Sierra Primary Care Medical
Group, A Medical Corporation.
3.1 Certificate of Incorporation of Prospect Medical Holdings, Inc. as
amended to date
3.2 Bylaws of Prospect Medical Holdings, Inc.
4.1 Specimen Common Stock Certificate(1)
4.2 Form of Warrant Agreement between Prospect Medical Holdings, Inc. and
American Stock Transfer & Trust Company, Inc., including form of Warrant
4.3 Form of Representative's Warrant
5.1 Opinion of Miller and Holguin(1)
10.1 Form of Amended and Restated Management Services Agreement, made as of
September 15, 1998 and deemed to have been effective as of June 4, 1996, between
Prospect Medical Systems, Inc. and Prospect Medical Group, Inc.(2)
10.2 Amended and Restated Assignable Option Agreement, made as of September
2, 1998 and deemed to have been effective as of June 5, 1996, among Prospect
Medical Systems, Inc., Prospect Medical Group, Inc. and Gregg DeNicola
II-4
<PAGE>
10.3 Individual Non-Competition Agreement, dated as of June 5, 1996,
between Prospect Medical Group, Inc. and Gregg DeNicola, M.D.
10.4 Employment Agreement dated as of July 31, 1996 between Med-Search,
Inc. and Gregg A. DeNicola, M.D., as amended
10.5 Employment Agreement dated as of July 31, 1996 between Med Search,
Inc. and Jacob Y. Terner, M.D.
10.6 Investment Agreement dated as of July 31, 1996 between Jacob Y. Terner
and Med-Search, Inc.
10.7 Agreement dated as of July 31, 1996 among Jacob Y. Terner and Barbara
Noble, both individually and as representative of Joseph W. Noble, M.D.,
deceased, and the Noble 1992 Family Trust
10.8 Intentionally Omitted
10.9 Intentionally Omitted
10.10 Revolving Credit Agreement, dated as of July 3, 1997, between
Prospect Medical Holdings, Inc. and Imperial Bank
10.11 Security Agreement, dated as of July 3, 1997, between Prospect
Medical Holdings, Inc. and Imperial Bank
10.12 Continuing Guaranty, dated as of July 3, 1997, executed by Prospect
Medical Systems, Inc. in favor of Imperial Bank
10.13 Security Agreement, dated as of July 3, 1997, between Prospect
Medical Systems and Imperial Bank
10.14 Security Agreement - Stock Pledge, dated as of July 3, 1997, between
Prospect Medical Holdings, Inc. and Imperial Bank
10.15 Collateral Assignment of Transaction Documents, dated as of July 3,
1997, between Prospect Medical Systems, Inc. and Imperial Bank
10.16 Security Agreement (Physician Group), dated as of July 3, 1997,
between Prospect Medical Systems, Inc. and Prospect Medical Group, Inc.
10.17 Credit Succession Agreement, dated as of July 3, 1997, among Prospect
Medical Holdings, Inc., Prospect Medical Systems, Inc., Prospect Medical Group,
Inc., Imperial Bank and Gregg DeNicola
10.18 Amended and Restated Warrant, dated as of July 3, 1997, issued by
Prospect Medical Holdings, Inc. to Imperial Bank
10.19 Amended and Restated Assignable Option Agreement made as of September
2, 1998 and deemed to have been effective as of July 14, 1997, among Prospect
Medical Systems, Inc., Prospect Medical Group, Inc. and Santa Ana/Tustin
Physicians Group, Inc.
10.20 Non-Competition Agreement effective as of July 14, 1997 between
Prospect Medical Group, Inc. and Melvin L. Reich, D.O.
10.21 Personal Guaranty of Payment and Performance by Melvin L. Reich,
D.O., dated as of July 14, 1997, made in favor of Prospect Medical Group, Inc.
10.22 Personal Guaranty of Payment and Performance by Jacob Y. Terner,
M.D., dated as of June 23, 1997, made in favor of Melvin L. Reich, D.O. and
Santa Ana/Tustin Physicians Group, Inc.
10.23 Form of Amended and Restated Management Services Agreement, made as
of September 15, 1998 and deemed to have been effective as of July 14, 1997,
between Prospect Medical Systems, Inc. and Santa Ana/Tustin Physicians Group,
Inc.(2)
II-5
<PAGE>
10.24 Amendment Number One to Revolving Credit Agreement, dated as of July
14, 1997, between Prospect Medical Holdings, Inc. and Imperial Bank
10.25 Amendment Number One to Security Agreement, dated as of July 14,
1997, between Prospect Medical Systems, Inc. and Imperial Bank
10.26 Intentionally Omitted
10.27 Secured Promissory Note, dated as of July 14, 1997, in the original
amount of $3,000,000, executed by Prospect Medical Systems, Inc., made payable
to Prospect Medical Holdings, Inc., together with Endorsement Allonge in favor
of Imperial Bank executed by Prospect Medical Holdings, Inc.
10.28 Inter-Company Security Agreement, dated as of July 14, 1997, between
Prospect Medical Holdings, Inc. and Prospect Medical Systems, Inc.
10.29 Collateral Assignment of Transaction Documents, dated as of July 14,
1997, between Prospect Medical Systems, Inc. and Imperial Bank
10.30 Security Agreement (Physician Group), dated as of July 14, 1997,
between Prospect Medical Systems, Inc. and Santa Ana/Tustin Physicians Group,
Inc.
10.31 Promissory Note, dated as of July 14, 1997, in the original amount of
$3,000,000, executed by Prospect Medical Group, Inc., made payable to Prospect
Medical Systems, Inc., together with Endorsement Allonge in favor of Imperial
Bank executed by Prospect Medical Systems, Inc.
10.32 Amended and Restated Credit Succession Agreement, dated as of July
14, 1997, among Prospect Medical Holdings, Inc., Gregg DeNicola, M.D., Santa
Ana/Tustin Physicians Group, Inc., Prospect Medical Systems, Inc., Prospect
Medical Group, Inc. and Imperial Bank
10.33 Amended and Restated Assignable Option Agreement, made as of
September 2, 1998 and deemed to have been effective as of September 25, 1997, by
and among Sierra Primary Care Medical Group, Inc., Sierra Medical Management,
Inc. and Prospect Medical Group, Inc.
10.34 $1,125,000 Contingent Promissory Note, dated September 25, 1997,
payable to Karunyan Arulanantham, M.D. by Prospect Medical Group, Inc.
10.35 $1,125,000 Contingent Promissory Note, dated September 25, 1997,
payable to Sinnadurai E. Moorthy, M.D. by Prospect Medical Group, Inc.
10.36 Option to Purchase Common Stock, dated September 25, 1997, issued by
Prospect Medical Holdings, Inc. to Sinnadurai E. Moorthy, M.D.
10.37 Option to Purchase Common Stock, dated September 25, 1997, issued by
Prospect Medical Holdings, Inc. to Karunyan Arulanantham, M.D.
10.38 Security Agreement (Guarantor), dated as of September 25, 1997,
entered into between Prospect Medical Holdings, Inc. and Karunyan Arulanantham,
M.D.
10.39 Form of Second Amended and Restated Management Services Agreement,
made as of September 15, 1998 and deemed to have been effective as of September
25, 1997, between Sierra Medical Management, Inc. and Sierra Primary Care
Medical Group, Inc.(2)
10.40 Subordinate Guaranty, dated as of September 25, 1997, executed by
Prospect Medical Holdings, Inc. in favor of Karunyan Arulanantham, M.D.
10.41 Subordinate Guaranty, dated as of September 25, 1997, executed by
Prospect Medical Holdings, Inc. in favor of Sinnadurai E. Moorthy, M.D.
10.42 Employment Agreement, dated September 25, 1997, between Sierra
Primary Care Medical Group, Inc. and Karunyan Arulanantham, M.D.
II-6
<PAGE>
10.43 Employment Agreement, dated September 25, 1997, between Sierra
Primary Care Medical Group, Inc. and Sinnadurai E. Moorthy, M.D.
10.44 Non-Competition Agreement, effective as of September 25, 1997,
between Prospect Medical Group, Inc. and Karunyan Arulanantham, M.D.
10.45 Non-Competition Agreement, effective as of September 25, 1997,
between Prospect Medical Group, Inc. and Sinnadurai E. Moorthy, M.D.
10.46 Employment Agreement, dated as of September 25, 1997, between Sierra
Medical Management, Inc. and Jayaratnam Jayakumar
10.47 Non-Competition Agreement, effective as of September 25, 1997,
between Sierra Medical Management, Inc. and Jayaratnam Jayakumar
10.48 $250,000 Subordinated Promissory Note, dated September 25, 1997,
payable to Jayaratnam Jayakumar by Prospect Medical Holdings, Inc.
10.49 Option to Purchase Common Stock, dated September 25, 1997, issued by
Prospect Medical Holdings, Inc. to Jayaratnam Jayakumar
10.50 Security Agreement, dated September 25, 1997, entered into between
Prospect Medical Holdings, Inc. and Jayaratnam Jayakumar
10.51 Amendment Number Two to Revolving Credit Agreement, dated as of
September 25, 1997, between Prospect Medical Holdings, Inc. and Imperial Bank
10.52 Secured Promissory Note, dated as of September 25, 1997, in the
original amount of $5,000,000 executed by Prospect Medical Systems, Inc. and
made payable to Prospect Medical Holdings, Inc., together with Endorsement
Allonge in favor of Imperial Bank executed by Prospect Medical Holdings, Inc.
10.53 Amendment Number One to Inter-Company Security Agreement, dated as of
September 25, 1997, between Prospect Medical Holdings, Inc. and Prospect Medical
Systems, Inc.
10.54 Continuing Guaranty, dated as of September 25, 1997, delivered by
Sierra Medical Management, Inc. to Imperial Bank
10.55 Security Agreement, dated as of September 25, 1997, between Sierra
Medical Management, Inc. and Imperial Bank
10.56 Security Agreement - Stock Pledge, dated as of September 25, 1997,
between Prospect Medical Holdings, Inc. and Imperial Bank
10.57 Promissory Note, dated as of September 25, 1997, in the original
amount of $5,000,000, executed by Prospect Medical Group, Inc. and made payable
to Prospect Medical Systems, Inc., together with Endorsement Allonge in favor of
Imperial Bank executed by Prospect Medical Systems, Inc.
10.58 Collateral Assignment of Transaction Documents, dated as of September
25, 1997, between Sierra Medical Management, Inc. and Imperial Bank
10.59 Security Agreement, dated as of September 25, 1997, between Sierra
Primary Care Medical Group, Inc. and Sierra Medical Management, Inc.
10.60 Joinder Agreement, dated as of September 25, 1997, among Sierra
Medical Management, Inc., Sierra Primary Care Medical Group, Inc., Gregg
DeNicola, M.D., Prospect Medical Systems, Inc. Prospect Medical Group, Inc.,
Santa Ana/Tustin Physicians Group, Inc., Prospect Medical Holdings, Inc. and
Imperial Bank
II-7
<PAGE>
10.61 Subordination and Note Cancellation Agreement, dated as of September
25, 1997, among Karunyan Arulanantham, M.D., Sinnadurai E. Moorthy, M.D.,
Prospect Medical Systems, Inc., Prospect Medical Group, Inc., Prospect Medical
Holdings, Inc. and Imperial Bank
10.62 Subordination Agreement, dated as of September 25, 1997, among
Jayaratnam Jayakumar, Prospect Medical Holdings, Inc. and Imperial Bank
10.63 Intentionally Omitted
10.64 Form of Amended and Restated Management Services Agreement, made as
of September 15, 1998 and deemed to have been effective as of October 31, 1997,
by and between Sierra Medical Management, Inc. and Pegasus Medical Group,
Inc.(2)
10.65 Amended and Restated Assignable Option Agreement, made as of
September 2, 1998 and deemed to have been effective as of October 31, 1997,
among Sierra Medical Management, Inc., Pegasus Medical Group, Inc. and Prospect
Medical Group, Inc.
10.66 Assignment and Assumption Agreement, by Marvin L. Ginsburg, M.D.
Medical Corporation d/b/a A.V. Western Medical Group, Inc. to Pegasus Medical
Group, Inc.
10.67 Collateral Assignment of Transaction Documents, dated as of October
31, 1997, between Sierra Medical Management, Inc. and Imperial Bank
10.68 Security Agreement (Physician Group), dated as of October 31, 1997,
between Pegasus Medical Group, Inc. and Sierra Medical Management, Inc.
10.69 $700,000 Secured Promissory Note, dated October 31, 1997, executed by
Prospect Medical Systems, Inc. and made payable to Prospect Medical Holdings,
Inc., together with Endorsement Allonge in favor of Imperial Bank by Prospect
Medical Holdings, Inc.
10.70 $700,000 Promissory Note, dated October 31, 1997, executed by
Prospect Medical Group, Inc. and made payable to Prospect Medical Systems, Inc.,
together with Endorsement Allonge in favor of Imperial Bank executed by Prospect
Medical Systems, Inc.
10.71 $700,000 Promissory Note, dated October 31, 1997, executed by Pegasus
Medical Group, Inc., made payable to Prospect Medical Group, Inc., together with
Endorsement Allonge in favor of Prospect Medical Systems, Inc. executed by
Prospect Medical Group, Inc., together with Endorsement Allonge in favor of
Imperial Bank executed by Prospect Medical Systems, Inc.
10.72 Joinder Agreement, dated as of October 31, 1997, among Pegasus
Medical Group, Inc., Sierra Medical Management, Inc., Sierra Primary Care
Medical Group, Inc., Gregg DeNicola, M.D., Prospect Medical Holdings, Inc.,
Prospect Medical Systems, Inc., Prospect Medical Group, Inc., Santa Ana/Tustin
Physicians Group, Inc. and Imperial Bank
10.73 Amended and Restated Amendment Number Three to Revolving Credit
Agreement, dated as of February 6, 1998, between Prospect Medical Holdings, Inc.
and Imperial Bank, together with consent of Prospect Medical Systems, Inc. and
Sierra Medical Management, Inc. as guarantors
10.74 $12,500,000 Replacement Secured Revolving Note, dated February 6,
1998, executed by Prospect Medical Holdings, Inc. and made payable to Imperial
Bank
10.75 Amended and Restated Warrant, issued as of February 6, 1998, by
Prospect Medical Holdings, Inc. to Imperial Bank.
10.76 Intentionally Omitted.
10.77 Consulting Agreement, dated as of March 1, 1998, between Sierra
Primary Care Medical Group, Inc. and Sinnadurai E. Moorthy, M.D.
II-8
<PAGE>
10.78 Prospect Medical Holdings, Inc. 1998 Stock Option Plan(1)
10.79 Intentionally Omitted
10.80 Non-Competition Agreement, made as of June 1, 1998, by and between
Sierra Primary Care Medical Group and Prospect Medical Holdings, Inc., on the
one hand, and PrimeCare Medical Group of Antelope Valley, Inc. and PrimeCare
International, on the other hand.
10.81 IPA Medicare Shared Risk Services Agreement effective on September 1,
1989, by and between PacifiCare of California and Santa Ana-Tustin Physicians
Group, Inc.(2)
10.82 Point-of-Service Amendment to IPA Medicare Shared Risk Services
Agreement, effective on January 1, 1996 by and between PacifiCare of California
and Santa Ana-Tustin Physicians Group, Inc.(2)
10.83 Amendment to IPA Medicare Shared Risk Services Agreement, effective
on January 1, 1996 by and between PacifiCare of California and Santa Ana-Tustin
Physicians Group, Inc.(2)
10.84 1995 Amendment to IPA Medicare Shared Risk Services Agreement,
effective on January 1, 1995, by and between PacifiCare of California and Santa
Ana-Tustin Physicians Group, Inc.(2)
10.85 1994 Amendment to IPA Medicare Shared Risk Services Agreement,
effective on January 1, 1994, by and between PacifiCare of California and Santa
Ana-Tustin Physicians Group, Inc.(2)
10.86 1993 Amendment to IPA Medicare Shared Risk Services Agreement,
effective on January 1, 1993, by and between PacifiCare of California and Santa
Ana-Tustin Physicians Group, Inc.(2)
10.87 1992 Amendment to IPA Medicare Shared Risk Services Agreement,
effective on January 1, 1992, by and between PacifiCare of California and Santa
Ana-Tustin Physicians Group, Inc.(2)
10.88 Amendment to IPA Medicare Shared Risk Services Agreement, effective
on January 1, 1991, by and between PacifiCare of California and Santa Ana-Tustin
Physicians Group, Inc.(2)
10.89 Amendment to PacificCare IPA Medicare Shared Risk Services Agreement,
effective on January 1, 1990, by and between PacifiCare, Inc. and Santa
Ana-Tustin Physicians Group, Inc.(2)
10.90 Amendment to PacifiCare IPA Medicare Shared Risk Services Agreement,
effective on August 31, 1990, by and between PacifiCare of California and Santa
Ana-Tustin Physicians Group, Inc.
10.91 PacifiCare IPA Commercial Services Agreement, made and entered into
on January 1, 1990, by and between PacifiCare of California and Santa Ana-Tustin
Physicians Group, Inc.(2)
10.92 Amendment to IPA Commercial Services Agreement, effective on January
1, 1996, between PacifiCare of California and Santa Ana-Tustin Physicians Group,
Inc.
10.93 1995 Amendment to IPA Commercial Services Agreement, effective on
January 1, 1995, between PacifiCare of Calfornia, Inc. and Santa Ana-Tustin
Physicians Group, Inc.(2)
10.94 1994 Amendment to IPA Commercial Services Agreement, effective on
January 1, 1994, between PacifiCare of California and Santa Ana-Tustin
Physicians Group, Inc.(2)
10.95 1993 Amendment to IPA Commercial Services Agreement, effective on
January 1, 1993, between PacifiCare of California and Santa Ana-Tustin
Physicians Group, Inc.(2)
10.96 1993 Amendment to IPA Commercial Services Agreement, effective on
January 1, 1993, between between PacifiCare of California, Inc. and Santa
Ana-Tustin Physicians Group, Inc.(2)
10.97 PacifiCare Choice Amendment to PacifiCare IPA Commercial Services
Agreement, effective on January 1, 1993, between PacifiCare of California, Inc.
and Santa Ana-Tustin Physicians Group, Inc.(2)
10.98 1992 Amendment to IPA Commercial Services Agreement, effective on
January 1, 1992, between PacifiCare of California and Santa Ana-Tustin
Physicians Group, Inc.(2)
II-9
<PAGE>
10.99 Amendment to IPA Commercial Services Agreement, effective on January
1, 1991, between PacifiCare of California and Santa Ana-Tustin Physicians Group,
Inc.(2)
10.100 IPA Medicare Partial Risk Services Agreement, made and entered into
August 1, 1993, between PacifiCare of California and Prospect Medical Group,
Inc.(2)
10.101 Amendment to IPA Medicare Partial Risk Services Agreement, effective
November 1, 1993, between PacifiCare of California and Prospect Medical Group,
Inc.(2)
10.102 IPA Medicare Shared Risk Services Agreement, made and entered into
July 1, 1996, between PacifiCare, Inc. and Prospect Medical Group, Inc.(2)
10.103 Point-of-Service Amendment to IPA Medicare Shared Risk Services
Agreement, made effective July 1, 1996, by and between PacifiCare of California
and Prospect Medical Group, Inc.(2)
10.104 CaliforniaCare Medical Services Agreement, effective January 1,
1997, between Blue Cross of California and Prospect Medical Group.(2)
10.105 Amendment to CaliforniaCare Medical Services Agreement, effective as
of May 1, 1997, between Blue Cross of California and affiliates and Prospect
Medical Group.
10.106 Letter of Agreement Serving as Addendum to the 1997 Medical Services
Agreement Between Blue Cross of California and Prospect Medical Group for
CaliforniaCare, Blue Cross Plus and Personal CaliforniaCare, effective January
1, 1997, between Blue Cross of California and Prospect Medical Group.(2)
10.107 Letter of Agreement Serving as Addendum to the 1997 Medical Services
Agreement Between Blue Cross of California and Prospect Medical Group for
CaliforniaCare, Blue Cross Plus and Personal CaliforniaCare, effective January
1, 1997, between Blue Cross of California and Prospect Medical Group.(2)
10.108 PacifiCare of California Medical Group/IPA Services Agreement (Split
Capitation), entered into March 1, 1998, between PacifiCare of California, Inc.
and Sierra Medical Group.(2)
10.109 PacifiCare IPA Commercial Risk Services Agreement, made and entered
into as of January 1, 1996, by and between PacifiCare of California and Prospect
Medical Group, Inc.(1)
16.1 Letter from BDO Seidman LLP
21.1 List of Subsidiaries of Registrant
23.1 Consent of Ernst & Young LLP
23.2 Consent of BDO Seidman LLP
23.3 Consent of BDO Seidman LLP
23.4 Consent of Miller & Holguin (included in Exhibit 5.1)
27.1 Financial Data Schedule
- ------------------------
(1) To be filed by amendment
(2) Registrant has requested confidential treatment from the Securities and
Exchange Commission for portions of this exhibit, which confidential
portions have been filed separately.
II-10
<PAGE>
ITEM 17. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement.
Notwithstanding the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed
with the Securities and Exchange Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price
represent no more than 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee"
table in the effective Registration Statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration
Statement or any material change to such information in the
registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(f) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement
certificates in such denominations and registered in such names as
required by the Underwriters to permit prompt delivery to each purchaser.
(h) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such
issue.
(i) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
II-11
<PAGE>
Rule 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Los Angeles, State of
California, on September 18, 1998.
<TABLE>
<S> <C> <C>
PROSPECT MEDICAL HOLDINGS, INC.
By: /s/ JACOB Y. TERNER, M.D.
-----------------------------------------
Jacob Y. Terner, M.D.
CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ JACOB Y. TERNER, M.D. Chairman of the Board,
- ------------------------------ Chief Executive Officer September 18, 1998
Jacob Y. Terner, M.D. and Director
/s/ GREGG A. DENICOLA, M.D.
- ------------------------------ President and Director September 18, 1998
Gregg A. DeNicola, M.D.
/s/ SINNADURAI E. MOORTHY,
M.D.
- ------------------------------ Director September 18, 1998
Sinnadurai E. Moorthy, M.D.
/s/ DAVID A. LEVINSOHN
- ------------------------------ Director September 18, 1998
David A. Levinsohn
/s/ KENNETH SCHWARTZ
- ------------------------------ Director September 18, 1998
Kenneth Schwartz
/s/ DONNA VIGIL Chief Financial Officer
- ------------------------------ (Principal Financial and September 18, 1998
Donna Vigil Accounting Officer)
</TABLE>
II-13
<PAGE>
INDEX TO EXHIBITS
1.1 Form of Underwriting Agreement by and between Security Capital Trading,
Inc. and Prospect Medical Holdings, Inc.
2.1 Agreement and Plan of Reorganization, dated as of June 10, 1996, among
Med- Search, Inc., Med-Search Acquisition Corporation and Prospect Medical
Systems, Inc.
2.2 Agreement for the Purchase and Sale of Stock of Santa Ana/Tustin
Physicians Group, Inc., made and entered into as of June 23, 1997, among
Prospect Medical Group, Inc., Melvin L. Reich, D.O. and Santa Ana/Tustin
Physicians Group, Inc.
2.3 Agreement for the Purchase and Sale of Stock of Sierra Primary Care
Medical Group, Inc., made and entered into as of September 23, 1997, among
Prospect Medical Group, Inc., Sierra Primary Care Medical Group, Inc.,
Sinnadurai E. Moorthy, M.D., Karunyan Arulanantham, M.D. and the Arulanantham
Charitable Remainder Trust
2.4 Agreement and Plan of Reorganization made and entered into as of
September 23, 1997, among Prospect Medical Holdings, Inc., Sierra Medical
Management, Inc. and Sinnadurai E. Moorthy, M.D., Karunyan Arulanantham, M.D.
and Jayaratnam Jayakumar
2.5 Asset Purchase Agreement made and entered into as of October 29, 1997,
among Pegasus Medical Group, Inc., Marvin L. Ginsburg, M.D. Medical Corporation
d/b/a A.V. Western Medical Group, Inc., and J. Robert West
2.6 Agreement for the Purchase and Sale of Assets/Transfer of Member
Responsibility, entered into as of May 13, 1998, by and among PrimeCare
International, Inc., PrimeCare Medical Group of Antelope Valley, Inc., Prospect
Medical Holdings, Inc. and Sierra Primary Care Medical Group, A Medical
Corporation.
2.7 First Amendment to Agreement for Purchase and Sale of Assets/Transfer
of Member Responsibility, dated, for reference purposes only, June 5, 1998, by
and among PrimeCare International, Inc., PrimeCare Medical Group of Antelope
Valley, Inc., Prospect Medical Holdings, Inc. and Sierra Primary Care Medical
Group, A Medical Corporation.
3.1 Certificate of Incorporation of Prospect Medical Holdings, Inc. as
amended to date
3.2 Bylaws of Prospect Medical Holdings, Inc.
4.1 Specimen Common Stock Certificate(1)
4.2 Form of Warrant Agreement between Prospect Medical Holdings, Inc. and
American Stock Transfer & Trust Company, Inc., including form of Warrant
4.3 Form of Representative's Warrant
5.1 Opinion of Miller and Holguin(1)
10.1 Form of Amended and Restated Management Services Agreement, made as of
September 15, 1998 and deemed to have been effective as of June 4, 1996, between
Prospect Medical Systems, Inc. and Prospect Medical Group, Inc.(2)
10.2 Amended and Restated Assignable Option Agreement, made as of September
2, 1998 and deemed to have been effective as of June 5, 1996, among Prospect
Medical Systems, Inc., Prospect Medical Group, Inc. and Gregg DeNicola
10.3 Individual Non-Competition Agreement, dated as of June 5, 1996,
between Prospect Medical Group, Inc. and Gregg DeNicola, M.D.
10.4 Employment Agreement dated as of July 31, 1996 between Med-Search,
Inc. and Gregg A. DeNicola, M.D., as amended
<PAGE>
10.5 Employment Agreement dated as of July 31, 1996 between Med Search,
Inc. and Jacob Y. Terner, M.D.
10.6 Investment Agreement dated as of July 31, 1996 between Jacob Y. Terner
and Med-Search, Inc.
10.7 Agreement dated as of July 31, 1996 among Jacob Y. Terner and Barbara
Noble, both individually and as representative of Joseph W. Noble, M.D.,
deceased, and the Noble 1992 Family Trust
10.8 Intentionally Omitted
10.9 Intentionally Omitted
10.10 Revolving Credit Agreement, dated as of July 3, 1997, between
Prospect Medical Holdings, Inc. and Imperial Bank
10.11 Security Agreement, dated as of July 3, 1997, between Prospect
Medical Holdings, Inc. and Imperial Bank
10.12 Continuing Guaranty, dated as of July 3, 1997, executed by Prospect
Medical Systems, Inc. in favor of Imperial Bank
10.13 Security Agreement, dated as of July 3, 1997, between Prospect
Medical Systems and Imperial Bank
10.14 Security Agreement - Stock Pledge, dated as of July 3, 1997, between
Prospect Medical Holdings, Inc. and Imperial Bank
10.15 Collateral Assignment of Transaction Documents, dated as of July 3,
1997, between Prospect Medical Systems, Inc. and Imperial Bank
10.16 Security Agreement (Physician Group), dated as of July 3, 1997,
between Prospect Medical Systems, Inc. and Prospect Medical Group, Inc.
10.17 Credit Succession Agreement, dated as of July 3, 1997, among Prospect
Medical Holdings, Inc., Prospect Medical Systems, Inc., Prospect Medical Group,
Inc., Imperial Bank and Gregg DeNicola
10.18 Amended and Restated Warrant, dated as of July 3, 1997, issued by
Prospect Medical Holdings, Inc. to Imperial Bank
10.19 Amended and Restated Assignable Option Agreement made as of September
2, 1998 and deemed to have been effective as of July 14, 1997, among Prospect
Medical Systems, Inc., Prospect Medical Group, Inc. and Santa Ana/Tustin
Physicians Group, Inc.
10.20 Non-Competition Agreement effective as of July 14, 1997 between
Prospect Medical Group, Inc. and Melvin L. Reich, D.O.
10.21 Personal Guaranty of Payment and Performance by Melvin L. Reich,
D.O., dated as of July 14, 1997, made in favor of Prospect Medical Group, Inc.
10.22 Personal Guaranty of Payment and Performance by Jacob Y. Terner,
M.D., dated as of June 23, 1997, made in favor of Melvin L. Reich, D.O. and
Santa Ana/Tustin Physicians Group, Inc.
10.23 Form of Amended and Restated Management Services Agreement, made as
of September 15, 1998 and deemed to have been effective as of July 14, 1997,
between Prospect Medical Systems, Inc. and Santa Ana/Tustin Physicians Group,
Inc.(2)
10.24 Amendment Number One to Revolving Credit Agreement, dated as of July
14, 1997, between Prospect Medical Holdings, Inc. and Imperial Bank
10.25 Amendment Number One to Security Agreement, dated as of July 14,
1997, between Prospect Medical Systems, Inc. and Imperial Bank
10.26 Intentionally Omitted
<PAGE>
10.27 Secured Promissory Note, dated as of July 14, 1997, in the original
amount of $3,000,000, executed by Prospect Medical Systems, Inc., made payable
to Prospect Medical Holdings, Inc., together with Endorsement Allonge in favor
of Imperial Bank executed by Prospect Medical Holdings, Inc.
10.28 Inter-Company Security Agreement, dated as of July 14, 1997, between
Prospect Medical Holdings, Inc. and Prospect Medical Systems, Inc.
10.29 Collateral Assignment of Transaction Documents, dated as of July 14,
1997, between Prospect Medical Systems, Inc. and Imperial Bank
10.30 Security Agreement (Physician Group), dated as of July 14, 1997,
between Prospect Medical Systems, Inc. and Santa Ana/Tustin Physicians Group,
Inc.
10.31 Promissory Note, dated as of July 14, 1997, in the original amount of
$3,000,000, executed by Prospect Medical Group, Inc., made payable to Prospect
Medical Systems, Inc., together with Endorsement Allonge in favor of Imperial
Bank executed by Prospect Medical Systems, Inc.
10.32 Amended and Restated Credit Succession Agreement, dated as of July
14, 1997, among Prospect Medical Holdings, Inc., Gregg DeNicola, M.D., Santa
Ana/Tustin Physicians Group, Inc., Prospect Medical Systems, Inc., Prospect
Medical Group, Inc. and Imperial Bank
10.33 Amended and Restated Assignable Option Agreement, made as of
September 2, 1998 and deemed to have been effective as of September 25, 1997, by
and among Sierra Primary Care Medical Group, Inc., Sierra Medical Management,
Inc. and Prospect Medical Group, Inc.
10.34 $1,125,000 Contingent Promissory Note, dated September 25, 1997,
payable to Karunyan Arulanantham, M.D. by Prospect Medical Group, Inc.
10.35 $1,125,000 Contingent Promissory Note, dated September 25, 1997,
payable to Sinnadurai E. Moorthy, M.D. by Prospect Medical Group, Inc.
10.36 Option to Purchase Common Stock, dated September 25, 1997, issued by
Prospect Medical Holdings, Inc. to Sinnadurai E. Moorthy, M.D.
10.37 Option to Purchase Common Stock, dated September 25, 1997, issued by
Prospect Medical Holdings, Inc. to Karunyan Arulanantham, M.D.
10.38 Security Agreement (Guarantor), dated as of September 25, 1997,
entered into between Prospect Medical Holdings, Inc. and Karunyan Arulanantham,
M.D.
10.39 Form of Second Amended and Restated Management Services Agreement,
made as of September 15, 1998 and deemed to have been effective as of September
25, 1997, between Sierra Medical Management, Inc. and Sierra Primary Care
Medical Group, Inc.(2)
10.40 Subordinate Guaranty, dated as of September 25, 1997, executed by
Prospect Medical Holdings, Inc. in favor of Karunyan Arulanantham, M.D.
10.41 Subordinate Guaranty, dated as of September 25, 1997, executed by
Prospect Medical Holdings, Inc. in favor of Sinnadurai E. Moorthy, M.D.
10.42 Employment Agreement, dated September 25, 1997, between Sierra
Primary Care Medical Group, Inc. and Karunyan Arulanantham, M.D.
10.43 Employment Agreement, dated September 25, 1997, between Sierra
Primary Care Medical Group, Inc. and Sinnadurai E. Moorthy, M.D.
10.44 Non-Competition Agreement, effective as of September 25, 1997,
between Prospect Medical Group, Inc. and Karunyan Arulanantham, M.D.
10.45 Non-Competition Agreement, effective as of September 25, 1997,
between Prospect Medical Group, Inc. and Sinnadurai E. Moorthy, M.D.
<PAGE>
10.46 Employment Agreement, dated as of September 25, 1997, between Sierra
Medical Management, Inc. and Jayaratnam Jayakumar
10.47 Non-Competition Agreement, effective as of September 25, 1997,
between Sierra Medical Management, Inc. and Jayaratnam Jayakumar
10.48 $250,000 Subordinated Promissory Note, dated September 25, 1997,
payable to Jayaratnam Jayakumar by Prospect Medical Holdings, Inc.
10.49 Option to Purchase Common Stock, dated September 25, 1997, issued by
Prospect Medical Holdings, Inc. to Jayaratnam Jayakumar
10.50 Security Agreement, dated September 25, 1997, entered into between
Prospect Medical Holdings, Inc. and Jayaratnam Jayakumar
10.51 Amendment Number Two to Revolving Credit Agreement, dated as of
September 25, 1997, between Prospect Medical Holdings, Inc. and Imperial Bank
10.52 Secured Promissory Note, dated as of September 25, 1997, in the
original amount of $5,000,000 executed by Prospect Medical Systems, Inc. and
made payable to Prospect Medical Holdings, Inc., together with Endorsement
Allonge in favor of Imperial Bank executed by Prospect Medical Holdings, Inc.
10.53 Amendment Number One to Inter-Company Security Agreement, dated as of
September 25, 1997, between Prospect Medical Holdings, Inc. and Prospect Medical
Systems, Inc.
10.54 Continuing Guaranty, dated as of September 25, 1997, delivered by
Sierra Medical Management, Inc. to Imperial Bank
10.55 Security Agreement, dated as of September 25, 1997, between Sierra
Medical Management, Inc. and Imperial Bank
10.56 Security Agreement - Stock Pledge, dated as of September 25, 1997,
between Prospect Medical Holdings, Inc. and Imperial Bank
10.57 Promissory Note, dated as of September 25, 1997, in the original
amount of $5,000,000, executed by Prospect Medical Group, Inc. and made payable
to Prospect Medical Systems, Inc., together with Endorsement Allonge in favor of
Imperial Bank executed by Prospect Medical Systems, Inc.
10.58 Collateral Assignment of Transaction Documents, dated as of September
25, 1997, between Sierra Medical Management, Inc. and Imperial Bank
10.59 Security Agreement, dated as of September 25, 1997, between Sierra
Primary Care Medical Group, Inc. and Sierra Medical Management, Inc.
10.60 Joinder Agreement, dated as of September 25, 1997, among Sierra
Medical Management, Inc., Sierra Primary Care Medical Group, Inc., Gregg
DeNicola, M.D., Prospect Medical Systems, Inc. Prospect Medical Group, Inc.,
Santa Ana/Tustin Physicians Group, Inc., Prospect Medical Holdings, Inc. and
Imperial Bank
10.61 Subordination and Note Cancellation Agreement, dated as of September
25, 1997, among Karunyan Arulanantham, M.D., Sinnadurai E. Moorthy, M.D.,
Prospect Medical Systems, Inc., Prospect Medical Group, Inc., Prospect Medical
Holdings, Inc. and Imperial Bank
10.62 Subordination Agreement, dated as of September 25, 1997, among
Jayaratnam Jayakumar, Prospect Medical Holdings, Inc. and Imperial Bank
10.63 Intentionally Omitted
10.64 Form of Amended and Restated Management Services Agreement, made as
of September 15, 1998 and deemed to have been effective as of October 31, 1997,
by and between Sierra Medical Management, Inc. and Pegasus Medical Group,
Inc.(2)
<PAGE>
10.65 Amended and Restated Assignable Option Agreement, made as of
September 2, 1998 and deemed to have been effective as of October 31, 1997,
among Sierra Medical Management, Inc., Pegasus Medical Group, Inc. and Prospect
Medical Group, Inc.
10.66 Assignment and Assumption Agreement, by Marvin L. Ginsburg, M.D.
Medical Corporation d/b/a A.V. Western Medical Group, Inc. to Pegasus Medical
Group, Inc.
10.67 Collateral Assignment of Transaction Documents, dated as of October
31, 1997, between Sierra Medical Management, Inc. and Imperial Bank
10.68 Security Agreement (Physician Group), dated as of October 31, 1997,
between Pegasus Medical Group, Inc. and Sierra Medical Management, Inc.
10.69 $700,000 Secured Promissory Note, dated October 31, 1997, executed by
Prospect Medical Systems, Inc. and made payable to Prospect Medical Holdings,
Inc., together with Endorsement Allonge in favor of Imperial Bank by Prospect
Medical Holdings, Inc.
10.70 $700,000 Promissory Note, dated October 31, 1997, executed by
Prospect Medical Group, Inc. and made payable to Prospect Medical Systems, Inc.,
together with Endorsement Allonge in favor of Imperial Bank executed by Prospect
Medical Systems, Inc.
10.71 $700,000 Promissory Note, dated October 31, 1997, executed by Pegasus
Medical Group, Inc., made payable to Prospect Medical Group, Inc., together with
Endorsement Allonge in favor of Prospect Medical Systems, Inc. executed by
Prospect Medical Group, Inc., together with Endorsement Allonge in favor of
Imperial Bank executed by Prospect Medical Systems, Inc.
10.72 Joinder Agreement, dated as of October 31, 1997, among Pegasus
Medical Group, Inc., Sierra Medical Management, Inc., Sierra Primary Care
Medical Group, Inc., Gregg DeNicola, M.D., Prospect Medical Holdings, Inc.,
Prospect Medical Systems, Inc., Prospect Medical Group, Inc., Santa Ana/Tustin
Physicians Group, Inc. and Imperial Bank
10.73 Amended and Restated Amendment Number Three to Revolving Credit
Agreement, dated as of February 6, 1998, between Prospect Medical Holdings, Inc.
and Imperial Bank, together with consent of Prospect Medical Systems, Inc. and
Sierra Medical Management, Inc. as guarantors
10.74 $12,500,000 Replacement Secured Revolving Note, dated February 6,
1998, executed by Prospect Medical Holdings, Inc. and made payable to Imperial
Bank
10.75 Amended and Restated Warrant, issued as of February 6, 1998, by
Prospect Medical Holdings, Inc. to Imperial Bank.
10.76 Intentionally Omitted.
10.77 Consulting Agreement, dated as of March 1, 1998, between Sierra
Primary Care Medical Group, Inc. and Sinnadurai E. Moorthy, M.D.
10.78 Prospect Medical Holdings, Inc. 1998 Stock Option Plan(1)
10.79 Intentionally Omitted
10.80 Non-Competition Agreement, made as of June 1, 1998, by and between
Sierra Primary Care Medical Group and Prospect Medical Holdings, Inc., on the
one hand, and PrimeCare Medical Group of Antelope Valley, Inc. and PrimeCare
International, on the other hand.
10.81 IPA Medicare Shared Risk Services Agreement effective on September 1,
1989, by and between PacifiCare of California and Santa Ana-Tustin Physicians
Group, Inc.(2)
10.82 Point-of-Service Amendment to IPA Medicare Shared Risk Services
Agreement, effective on January 1, 1996 by and between PacifiCare of California
and Santa Ana-Tustin Physicians Group, Inc.(2)
10.83 Amendment to IPA Medicare Shared Risk Services Agreement, effective
on January 1, 1996 by and between PacifiCare of California and Santa Ana-Tustin
Physicians Group, Inc.(2)
<PAGE>
10.84 1995 Amendment to IPA Medicare Shared Risk Services Agreement,
effective on January 1, 1995, by and between PacifiCare of California and Santa
Ana-Tustin Physicians Group, Inc.(2)
10.85 1994 Amendment to IPA Medicare Shared Risk Services Agreement,
effective on January 1, 1994, by and between PacifiCare of California and Santa
Ana-Tustin Physicians Group, Inc.(2)
10.86 1993 Amendment to IPA Medicare Shared Risk Services Agreement,
effective on January 1, 1993, by and between PacifiCare of California and Santa
Ana-Tustin Physicians Group, Inc.(2)
10.87 1992 Amendment to IPA Medicare Shared Risk Services Agreement,
effective on January 1, 1992, by and between PacifiCare of California and Santa
Ana-Tustin Physicians Group, Inc.(2)
10.88 Amendment to IPA Medicare Shared Risk Services Agreement, effective
on January 1, 1991, by and between PacifiCare of California and Santa Ana-Tustin
Physicians Group, Inc.(2)
10.89 Amendment to PacificCare IPA Medicare Shared Risk Services Agreement,
effective on January 1, 1990, by and between PacifiCare, Inc. and Santa
Ana-Tustin Physicians Group, Inc.(2)
10.90 Amendment to PacifiCare IPA Medicare Shared Risk Services Agreement,
effective on August 31, 1990, by and between PacifiCare of California and Santa
Ana-Tustin Physicians Group, Inc.
10.91 PacifiCare IPA Commercial Services Agreement, made and entered into
on January 1, 1990, by and between PacifiCare of California and Santa Ana-Tustin
Physicians Group, Inc.(2)
10.92 Amendment to IPA Commercial Services Agreement, effective on January
1, 1996, between PacifiCare of California and Santa Ana-Tustin Physicians Group,
Inc.
10.93 1995 Amendment to IPA Commercial Services Agreement, effective on
January 1, 1995, between PacifiCare of Calfornia, Inc. and Santa Ana-Tustin
Physicians Group, Inc.(2)
10.94 1994 Amendment to IPA Commercial Services Agreement, effective on
January 1, 1994, between PacifiCare of California and Santa Ana-Tustin
Physicians Group, Inc.(2)
10.95 1993 Amendment to IPA Commercial Services Agreement, effective on
January 1, 1993, between PacifiCare of California and Santa Ana-Tustin
Physicians Group, Inc.(2)
10.96 1993 Amendment to IPA Commercial Services Agreement, effective on
January 1, 1993, between between PacifiCare of California, Inc. and Santa
Ana-Tustin Physicians Group, Inc.(2)
10.97 PacifiCare Choice Amendment to PacifiCare IPA Commercial Services
Agreement, effective on January 1, 1993, between PacifiCare of California, Inc.
and Santa Ana-Tustin Physicians Group, Inc.(2)
10.98 1992 Amendment to IPA Commercial Services Agreement, effective on
January 1, 1992, between PacifiCare of California and Santa Ana-Tustin
Physicians Group, Inc.(2)
10.99 Amendment to IPA Commercial Services Agreement, effective on January
1, 1991, between PacifiCare of California and Santa Ana-Tustin Physicians Group,
Inc.(2)
10.100 IPA Medicare Partial Risk Services Agreement, made and entered into
August 1, 1993, between PacifiCare of California and Prospect Medical Group,
Inc.(2)
10.101 Amendment to IPA Medicare Partial Risk Services Agreement, effective
November 1, 1993, between PacifiCare of California and Prospect Medical Group,
Inc.(2)
10.102 IPA Medicare Shared Risk Services Agreement, made and entered into
July 1, 1996, between PacifiCare, Inc. and Prospect Medical Group, Inc.(2)
10.103 Point-of-Service Amendment to IPA Medicare Shared Risk Services
Agreement, made effective July 1, 1996, by and between PacifiCare of California
and Prospect Medical Group, Inc.(2)
10.104 CaliforniaCare Medical Services Agreement, effective January 1,
1997, between Blue Cross of California and Prospect Medical Group.(2)
<PAGE>
10.105 Amendment to CaliforniaCare Medical Services Agreement, effective as
of May 1, 1997, between Blue Cross of California and affiliates and Prospect
Medical Group.
10.106 Letter of Agreement Serving as Addendum to the 1997 Medical Services
Agreement Between Blue Cross of California and Prospect Medical Group for
CaliforniaCare, Blue Cross Plus and Personal CaliforniaCare, effective January
1, 1997, between Blue Cross of California and Prospect Medical Group.(2)
10.107 Letter of Agreement Serving as Addendum to the 1997 Medical Services
Agreement Between Blue Cross of California and Prospect Medical Group for
CaliforniaCare, Blue Cross Plus and Personal CaliforniaCare, effective January
1, 1997, between Blue Cross of California and Prospect Medical Group.(2)
10.108 PacifiCare of California Medical Group/IPA Services Agreement (Split
Capitation), entered into March 1, 1998, between PacifiCare of California, Inc.
and Sierra Medical Group.(2)
10.109 PacifiCare IPA Commercial Risk Services Agreement, made and entered
into as of January 1, 1996, by and between PacifiCare of California and Prospect
Medical Group, Inc.(1)
16.1 Letter from BDO Seidman LLP
21.1 List of Subsidiaries of Registrant
23.1 Consent of Ernst & Young LLP
23.2 Consent of BDO Seidman LLP
23.3 Consent of BDO Seidman LLP
23.4 Consent of Miller & Holguin (included in Exhibit 5.1)
27.1 Financial Data Schedule
- ------------------------
(1) To be filed by amendment
(2) Registrant has requested confidential treatment from the Securities and
Exchange Commission for portions of this exhibit, which confidential
portions have been filed separately.
<PAGE>
EXHIBIT 1.1
3,000,000 Shares of Common Stock and
3,000,000 Redeemable Common Stock Purchase Warrants
PROSPECT MEDICAL HOLDINGS, INC.
UNDERWRITING AGREEMENT
New York, New York
, 1998
SECURITY CAPITAL TRADING, INC.
As Representative of the several Underwriters
named in Schedule A annexed hereto
520 Madison Avenue
10th Floor
New York, New York 10022
Ladies and Gentlemen:
Prospect Medical Holdings, Inc., a Delaware corporation (the "Company"),
confirms its agreement with Security Capital Trading, Inc. ("Security Capital")
and each of the underwriters named in Schedule A hereto (collectively, the
"Underwriters," which term shall also include any underwriter substituted as
hereinafter provided in Section 11), for whom Security Capital is acting as
Representative (in such capacity, Security Capital shall hereinafter be referred
to as "you" or the "Representative"), with respect to the sale by the Company
and the purchase by the Underwriters, acting severally and not jointly, of the
respective number of shares ("Shares") of the Company's common stock, $0.01 par
value per share ("Common Stock"), and redeemable common stock purchase warrants
(the "Redeemable Warrants"), each to purchase one share of Common Stock, set
forth in Schedule A hereto. The aggregate 3,000,000 shares of Common Stock and
3,000,000 Redeemable Warrants will be separately tradable upon issuance and are
hereinafter referred to as the "Firm Securities." Each Redeemable Warrant is
exercisable commencing on _____________________, 1999 [one year from the date
of this Agreement] until ____________________, 2003 [60 months from the date
of this Agreement], unless previously redeemed by the Company, at an initial
exercise price of $______________ [140% of the initial public offering price per
share of Common Stock] per share of Common Stock. The Redeemable Warrants may be
redeemed by the Company at a redemption price of $.10 per Redeemable Warrant at
any time after _________________, 1999 [one year from the date of this
Agreement] on thirty (30) days' prior written notice, provided that the closing
bid price of the Common Stock equals or exceeds $18.00 per share, for any twenty
(20) trading days within a period of thirty (30) consecutive trading days ending
on the fifth trading day prior to the notice of
<PAGE>
redemption, all in accordance with the terms and conditions of the Warrant
Agreement (as hereinafter defined).
Upon your request, as provided in Section 2(b) of this Agreement, the
Company shall also issue and sell to the Underwriters, acting severally and
not jointly, up to an additional 450,000 shares of Common Stock and/or
450,000 Redeemable Warrants for the purpose of covering over-allotments, if
any. Such 450,000 shares of Common Stock and 450,000 Redeemable Warrants are
hereinafter collectively referred to as the "Option Securities." The Company
also proposes to issue and sell to you warrants (the "Representative's
Warrants") pursuant to the Representative's Warrant Agreement (the
"Representative's Warrant Agreement") for the purchase of an additional
300,000 shares of Common Stock and/or 300,000 Redeemable Warrants. The shares
of Common Stock and Redeemable Warrants issuable upon exercise of the
Representative's Warrants are hereinafter referred to as the
"Representative's Securities." The Firm Securities, the Option Securities,
the Representative's Warrants and the Representative's Securities
(collectively, hereinafter referred to as the "Securities") are more fully
described in the Registration Statement and the Prospectus referred to below.
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to, and agrees with, each of the Underwriters as of
the date hereof, and as of the Closing Date (as hereinafter defined) and each
Option Closing Date (as hereinafter defined), if any, as follows:
(a) The Company has prepared and filed with the Securities and
Exchange Commission (the "Commission") a registration statement, and an
amendment or amendments thereto, on Form S-1 (No. 333-_______________),
including any related preliminary prospectus ("Preliminary Prospectus"), for the
registration of the Firm Securities, the Option Securities and the
Representative's Securities under the Securities Act of 1933, as amended (the
"Act"), which registration statement and amendment or amendments have been
prepared by the Company in conformity with the requirements of the Act, and the
rules and regulations (the "Regulations") of the Commission under the Act.
Except as the context may otherwise require, such registration statement, as
amended, on file with the Commission at the time the registration statement
becomes effective (including the prospectus, financial statements, schedules,
exhibits and all other documents filed as a part thereof or incorporated therein
(including, but not limited to, those documents or information incorporated by
reference therein) and all information deemed to be a part thereof as of such
time pursuant to paragraph (b) of Rule 430(A) of the Regulations), is
hereinafter called the "Registration Statement", and the form of prospectus in
the form first filed with the Commission pursuant to Rule 424(b) of the
Regulations, is hereinafter called the "Prospectus." For purposes hereof, "Rules
and Regulations" mean the rules and regulations adopted by the Commission under
either the Act or the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), as applicable.
(b) Neither the Commission nor any state regulatory authority has
issued any order preventing or suspending the use of any Preliminary Prospectus,
the Registration Statement or Prospectus or any part of any thereof and no
proceedings for a stop order suspending the effectiveness of the Registration
Statement or any of the Company's securities have been instituted
2
<PAGE>
or are pending or threatened. Each of the Preliminary Prospectus, the
Registration Statement and Prospectus at the time of filing thereof conformed
with the requirements of the Act and the Regulations, and none of the
Preliminary Prospectus, the Registration Statement or Prospectus at the time
of filing thereof contained an untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading, except that this representation and warranty does not
apply to statements made in reliance upon and in conformity with written
information furnished to the Company with respect to the Underwriters by or
on behalf of the Underwriters expressly for use in such Preliminary
Prospectus, Registration Statement or Prospectus or any amendment thereof or
supplement thereto.
(c) When the Registration Statement becomes effective and at all
times subsequent thereto up to the Closing Date (as defined herein) and each
Option Closing Date (as defined herein), if any, and during such longer period
as the Prospectus may be required to be delivered in connection with sales by
the Underwriters or a dealer, the Registration Statement and the Prospectus will
contain all statements which are required to be stated therein in accordance
with the Act and the Regulations, and will conform to the requirements of the
Act and the Regulations; neither the Registration Statement nor the Prospectus,
nor any amendment or supplement thereto, will contain any 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, in light of the circumstances under
which they were made, not misleading, provided, however, that this
representation and warranty does not apply to statements made or statements
omitted in reliance upon and in strict conformity with information furnished to
the Company in writing by or on behalf of any Underwriter expressly for use in
the Preliminary Prospectus, Registration Statement or Prospectus or any
amendment thereof or supplement thereto.
(d) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the state of its incorporation.
Except as set forth in the Prospectus, the Company does not own an interest in
any corporation, partnership, trust, joint venture or other business entity. The
Company is duly qualified and licensed and in good standing as a foreign
corporation in each jurisdiction in which its ownership or leasing of any
properties or the character of its operations requires such qualification or
licensing. The Company has all requisite power and authority (corporate and
other), and has obtained any and all necessary authorizations, approvals,
orders, licenses, certificates, franchises and permits of and from all
governmental or regulatory officials and bodies (including, without limitation,
those having jurisdiction over environmental or similar matters), to own or
lease its properties and conduct its business as described in the Prospectus;
the Company is and has been doing business in compliance with all such
authorizations, approvals, orders, licenses, certificates, franchises and
permits and all applicable federal, state, local and foreign laws, rules and
regulations; and the Company has not received any notice of proceedings relating
to the revocation or modification of any such authorization, approval, order,
license, certificate, franchise, or permit which, singly or in the aggregate, if
the subject of an unfavorable decision, ruling or finding, would materially and
adversely affect the condition, financial or otherwise, or the earnings,
position, prospects, value, operation, properties, business or results of
operations of the Company. The disclosures in the Registration Statement
concerning the effects of federal, state, local, and foreign laws, rules and
regulations on the Company's business as currently
3
<PAGE>
conducted and as contemplated are correct in all material respects and do not
omit to state a material fact required to be stated therein or necessary to
make the statements contained therein not misleading in light of the
circumstances under which they were made.
(e) The Company has a duly authorized, issued and outstanding
capitalization as set forth in the Prospectus under "Capitalization" and
"Description of Capital Stock" and will have the adjusted capitalization set
forth therein under "Capitalization" on the Closing Date and each Option Closing
Date, if any, based upon the assumptions set forth therein, and the Company is
not a party to or bound by any instrument, agreement or other arrangement
providing for it to issue any capital stock, rights, warrants, options or other
securities, except for this Agreement, the Warrant Agreement, the
Representative's Warrant Agreement and as described in the Prospectus. The
Securities and all other securities issued or issuable by the Company conform
or, when issued and paid for, will conform, in all respects to all statements
with respect thereto contained in the Registration Statement and the Prospectus.
All issued and outstanding securities of the Company have been duly authorized
and validly issued and are fully paid and non-assessable and the holders
thereof have no rights of rescission with respect thereto, and are not subject
to personal liability by reason of being such holders; and none of such
securities were issued in violation of the preemptive rights of any holders of
any security of the Company or similar contractual rights granted by the
Company. The Securities are not and will not be subject to any preemptive or
other similar rights of any stockholder, have been duly authorized and, when
issued, paid for and delivered in accordance with the terms hereof, will be
validly issued, fully paid and non-assessable and will conform to the
description thereof contained in the Prospectus; the holders thereof will not be
subject to any liability solely as such holders; all corporate action required
to be taken for the authorization, issuance and sale of the Securities has been
duly and validly taken; and the certificates representing the Securities will be
in due and proper form. Upon the issuance and delivery pursuant to the terms
hereof of the Securities to be sold by the Company hereunder, the Underwriters
or the Representative, as the case may be, will acquire good and marketable
title to such Securities free and clear of any lien, charge, claim, encumbrance,
pledge, security interest, defect or other restriction or equity of any kind
whatsoever.
(f) The financial statements of the Company, together with the
related notes and schedules thereto, included in the Registration Statement,
each Preliminary Prospectus and the Prospectus fairly present the financial
position, changes in cash flow, changes in stockholders' equity and the results
of operations of the Company at the respective dates and for the respective
periods to which they apply and such financial statements have been prepared in
conformity with generally accepted accounting principles and the Rules and
Regulations, consistently applied throughout the periods involved and such
financial statements have been examined by Ernst & Young LLP and BDO Seidman,
LLP, who are independent certified public accountants with respect to the
Company. There has been no adverse change or development involving a prospective
adverse change in the condition, financial or otherwise, or in the earnings,
position, prospects, value, operation, properties, business, or results of
operations of the Company, whether or not arising in the ordinary course of
business, since the date of the financial statements included in the
Registration Statement and the Prospectus and the outstanding debt, the
property, both tangible and intangible, and the business of the Company, conform
in all material respects to the descriptions thereof contained in the
Registration Statement and the Prospectus. The financial disclosures (including,
without limitation,
4
<PAGE>
any pro forma financial information) set forth in the Prospectus under the
headings "Selected Consolidated Financial Data," "Capitalization," and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," fairly present, on the basis stated in the Prospectus, the
information set forth therein, and have been derived from or compiled on a
basis consistent with that of the audited financial statements included in
the Prospectus; and, in the case of pro forma financial information, if any,
the assumptions used in the preparation thereof are reasonable and the
adjustments used therein are appropriate to give effect to the transactions
and circumstances referred to therein. The amounts shown as accrued for
current and deferred income and other taxes in such financial statements are
sufficient for the payment of all accrued and unpaid federal, state, local
and foreign income taxes, interest, penalties, assessments or deficiencies
applicable to the Company, whether disputed or not, for the applicable period
then ended and periods prior thereto; adequate allowance for doubtful
accounts has been provided for unindemnified losses due to the operations of
the Company; and the statements of income do not contain any items of special
or nonrecurring income not earned in the ordinary course of business, except
as specified in the notes thereto.
(g) The Company (i) has paid all due and payable federal, state,
local, and foreign taxes for which it is liable, including, but not limited to,
withholding taxes and amounts payable under Chapters 21 through 24 of the
Internal Revenue Code of 1986, as amended (the "Code"), and has furnished all
information returns it is required to furnish pursuant to the Code, (ii) has
established adequate reserves for such taxes which are not due and payable, and
(iii) does not have any tax deficiency or claims outstanding, proposed or
assessed against it.
(h) No transfer tax, stamp duty or other similar tax is payable by or
on behalf of the Underwriters in connection with (i) the issuance by the Company
of the Securities, (ii) the purchase by the Underwriters of the Firm Securities
and the Option Securities from the Company and the purchase by the
Representative of the Representative's Warrants from the Company, (iii) the
consummation by the Company of any of its obligations under this Agreement, or
(iv) resales of the Firm Securities and the Option Securities in connection with
the distribution contemplated hereby.
(i) The Company maintains insurance policies, including, but not
limited to, general liability, malpractice and property insurance, which insures
each of the Company and its employees, against such losses and risks generally
insured against by comparable businesses. The Company (A) has not failed to
give notice or present any insurance claim with respect to any matter, including
but not limited to the Company's business, property or employees, under any
insurance policy or surety bond in a due and timely manner, (B) does not have
any disputes or claims against any underwriter of such insurance policies or
surety bonds and has not failed to pay any premiums due and payable thereunder,
and (C) has not failed to comply with all conditions contained in such insurance
policies and surety bonds. There are no facts or circumstances under any such
insurance policy or surety bond which would relieve any insurer of its
obligation to satisfy in full any valid claim of the Company.
(j) There is no action, suit, proceeding, inquiry, arbitration,
investigation, litigation or governmental proceeding (including, without
limitation, those relating to environmental or similar matters), domestic or
foreign, pending or threatened against (or circumstances that are reasonably
likely to give rise to the same), or involving the properties or business of,
the Company
5
<PAGE>
which (i) questions the validity of the capital stock of the Company, this
Agreement, the Warrant Agreement or the Representative's Warrant Agreement,
or of any action taken or to be taken by the Company pursuant to or in
connection with this Agreement, the Warrant Agreement or the Representative's
Warrant Agreement, (ii) is required to be disclosed in the Registration
Statement which is not so disclosed (and such proceedings as are summarized
in the Registration Statement are accurately summarized in all material
respects), or (iii) might materially and adversely affect the condition,
financial or otherwise, or the earnings, position, prospects, stockholders'
equity, value, operation, properties, business or results of operations of
the Company.
(k) The Company has full legal right, power and authority to
authorize, issue, deliver and sell the Securities, enter into this Agreement,
the Warrant Agreement and the Representative's Warrant Agreement and to
consummate the transactions provided for in this Agreement, the Warrant
Agreement and the Representative's Warrant Agreement; and this Agreement, the
Warrant Agreement and the Representative's Warrant Agreement have each been duly
and properly authorized, executed and delivered by the Company. Each of this
Agreement, the Warrant Agreement and the Representative's Warrant Agreement
constitutes a legal, valid and binding agreement of the Company enforceable
against the Company in accordance with its terms, and none of the Company's
issuance and sale of the Securities, execution or delivery of this Agreement,
the Warrant Agreement or the Representative's Warrant Agreement, its performance
hereunder and thereunder, its consummation of the transactions contemplated
herein and therein, or the conduct of its business as described in the
Registration Statement, the Prospectus, and any amendments or supplements
thereto, conflicts with or will conflict with or results or will result in any
breach or violation of any of the terms or provisions of, or constitutes or will
constitute a default under, or result in the creation or imposition of any lien,
charge, claim, encumbrance, pledge, security interest, defect or other
restriction or equity of any kind whatsoever upon, any property or assets
(tangible or intangible) of the Company pursuant to the terms of (i) the
certificate of incorporation or by-laws of the Company, (ii) any license,
contract, collective bargaining agreement, indenture, mortgage, deed of trust,
lease, voting trust agreement, stockholders agreement, note, loan or credit
agreement or any other agreement or instrument to which the Company is a party
or by which the Company is or may be bound or to which it or its assets
(tangible or intangible) is or may be subject, or any indebtedness, or (iii) any
statute, judgment, decree, order, rule or regulation applicable to the Company
of any arbitrator, court, regulatory body or administrative agency or other
governmental agency or body (including, without limitation, those having
jurisdiction over environmental or similar matters), domestic or foreign, having
jurisdiction over the Company or any of its activities or properties.
(l) No consent, approval, authorization or order of, and no filing
with, any court, regulatory body, government agency or other body, domestic or
foreign, is required for the issuance of the Securities in the manner described
in the Prospectus and the Registration Statement, the performance of this
Agreement, the Warrant Agreement and the Representative's Warrant Agreement and
the transactions contemplated hereby and thereby, including without limitation,
any waiver of any preemptive, first refusal or other rights that any entity or
person may have for the issuance and/or sale of any of the Securities, except
such as have been or may be obtained under the Act or may be required under
state securities or Blue Sky laws or by the National Association of Securities
Dealers, Inc. ("NASD") in connection with the Underwriters' purchase and
distribution
6
<PAGE>
of the Firm Securities and the Option Securities, and the Representative's
Warrants to be sold by the Company hereunder.
(m) All executed agreements, contracts or other documents or copies
of executed agreements, contracts or other documents filed as exhibits to the
Registration Statement to which the Company is a party or by which it may be
bound or to which its assets, properties or business may be subject have been
duly and validly authorized, executed and delivered by the Company and
constitute the legal, valid and binding agreements of the Company, as the case
may be, enforceable against it in accordance with their respective terms. The
descriptions in the Registration Statement of agreements, contracts and other
documents are accurate and fairly present the information required to be shown
with respect thereto by Form S-1, and there are no contracts or other documents
which are required by the Act to be described in the Registration Statement or
filed as exhibits to the Registration Statement which are not described or filed
as required, and the exhibits which have been filed are complete and correct
copies of the documents of which they purport to be copies.
(n) Subsequent to the respective dates as of which information is set
forth in the Registration Statement and Prospectus, and except as may otherwise
be indicated or contemplated herein or therein, the Company has not (i) issued
any securities or incurred any liability or obligation, direct or contingent,
for borrowed money, (ii) entered into any transaction other than in the ordinary
course of business, or (iii) declared or paid any dividend or made any other
distribution on or in respect of its capital stock of any class, and there has
not been any change in the capital stock, or any change in the debt (long or
short term) or liabilities, or material adverse change in or affecting the
general affairs, management, financial operations, stockholders' equity or
results of operations, of the Company.
(o) No default exists in the due performance and observance of any
term, covenant or condition of any license, contract, collective bargaining
agreement, indenture, mortgage, installment sale agreement, lease, deed of
trust, voting trust agreement, stockholders agreement, partnership agreement,
note, loan or credit agreement, purchase order, or any other agreement or
instrument evidencing an obligation for borrowed money, or any other material
agreement or instrument to which the Company is a party or by which the Company
may be bound or to which the property or assets (tangible or intangible) of the
Company is subject or affected which might materially and adversely affect the
business, financial condition or operations of the Company.
(p) The Company has generally enjoyed a satisfactory
employer-employee relationship with its employees and is in compliance with all
federal, state, local and foreign laws and regulations respecting employment and
employment practices, terms and conditions of employment and wages and hours.
There are no pending investigations involving the Company by the U.S. Department
of Labor, or any other governmental agency responsible for the enforcement of
such federal, state, local, or foreign laws and regulations. There is no unfair
labor practice charge or complaint against the Company pending before the
National Labor Relations Board or any lockout, strike, picketing, boycott,
dispute, slowdown or stoppage pending or threatened against or involving the
Company, or any predecessor entity, and none has ever occurred. No
representation question exists respecting the employees of the Company, and no
collective bargaining agreement
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or modification thereof is currently being negotiated by the Company. No
grievance or arbitration proceeding is pending under any expired or existing
collective bargaining agreements of the Company. No labor dispute with the
employees of the Company exists or is imminent.
(q) The Company does not maintain, sponsor or contribute to any
program or arrangement that is an "employee pension benefit plan," an "employee
welfare benefit plan," or a "multiemployer plan" as such terms are defined in
Sections 3(2), 3(1) and 3(37), respectively, of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA") ("ERISA Plans"). The Company does
not maintain or contribute, now or at any time previously, to a defined benefit
plan, as defined in Section 3(35) of ERISA. No ERISA Plan (or any trust created
thereunder) has engaged in a "prohibited transaction" within the meaning of
Section 406 of ERISA or Section 4975 of the Code, which could subject the
Company to any tax penalty on prohibited transactions and which has not
adequately been corrected. Each ERISA Plan is in compliance with all reporting,
disclosure and other requirements of the Code and ERISA as they relate to any
such ERISA Plan. Determination letters have been received from the Internal
Revenue Service with respect to each ERISA Plan which is intended to comply with
Code Section 401(a), stating that such ERISA Plan and the attendant trust are
qualified thereunder. The Company has never completely or partially withdrawn
from a "multiemployer plan."
(r) Neither the Company, nor any of its employees, directors,
stockholders, partners, or affiliates (within the meaning of the Regulations) of
any of the foregoing has taken or will take, directly or indirectly, any action
designed to or which has constituted or which might be expected to cause or
result in, under the Exchange Act, or otherwise, stabilization or manipulation
of the price of any security of the Company to facilitate the sale or resale of
the Securities or otherwise.
(s) Except as otherwise disclosed in the Prospectus, none of the
patents, patent applications, trademarks, service marks, trade names and
copyrights, and licenses and rights to the foregoing presently owned or held by
the Company, so far as known by the Company, are in dispute or are in any
conflict with the right of any other person or entity. The Company (i) owns or
has the right to use, free and clear of all liens, charges, claims,
encumbrances, pledges, security interests, defects or other restrictions or
equities of any kind whatsoever, all patents, trademarks, service marks, trade
names and copyrights, technology and licenses and rights with respect to the
foregoing, used in the conduct of its business as now conducted or proposed to
be conducted without infringing upon or otherwise acting adversely to the right
or claimed right of any person, corporation or other entity under or with
respect to any of the foregoing and (ii) is not obligated or under any liability
whatsoever to make any payment by way of royalties, fees or otherwise to any
owner or licensee of, or other claimant to, any patent, trademark, service mark,
trade name, copyright, know-how, technology or other intangible asset, with
respect to the use thereof or in connection with the conduct of its business or
otherwise.
(t) The Company has good and marketable title to, or valid and
enforceable leasehold estates in, all material items of real and personal
property stated in the Prospectus to be owned or leased by it, free and clear of
all liens, charges, claims, encumbrances, pledges, security interests, defects,
or other restrictions or equities of any kind whatsoever, other than those
referred
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to in the Prospectus and liens for taxes not yet due and payable, which
might materially and adversely affect the business, financial condition or
operations of the Company.
(u) Ernst & Young LLP and BDO Seidman, LLP, whose reports are filed
with the Commission as a part of the Registration Statement, are independent
certified public accountants with respect to the Company as required by the Act
and the Rules and Regulations.
(v) The Company has caused to be duly executed legally binding and
enforceable agreements pursuant to which each of the Company's officers and
directors, and all persons or entities who, immediately prior to the declaration
of effectiveness of the Registration Statement are (a) holders of 5% or more of
the shares of Common Stock; and/or (b) holders of securities exercisable or
exchangeable for or convertible into 5% or more of the shares of Common Stock,
has agreed not to, directly or indirectly, offer, sell, grant any option for the
sale or purchase of, assign, transfer, pledge, hypothecate or otherwise encumber
or dispose of any shares of Common Stock or securities convertible into,
exercisable or exchangeable for or evidencing any right to purchase or subscribe
for any shares of Common Stock (either pursuant to Rule 144 of the Regulations
or otherwise) or dispose of any beneficial interest therein for a period of not
less than twelve (12) months following the effective date of the Registration
Statement (the "Lock-Up Period") without the prior written consent of the
Representative and the Company. The Company will cause the Transfer Agent (as
hereinafter defined) to mark an appropriate legend on the face of stock
certificates representing all of such securities and to place "stop transfer"
orders on the Company's stock ledgers. During the 12 month period commencing on
the effective date of the Registration Statement, the Company shall not sell or
offer for sale any of its securities without the prior consent of the
Representative, except pursuant to or in connection with (i) the exercise of
options granted by the Company under any incentive stock ownership plan (a
"Plan") authorized by the Company's stockholders prior to the date hereof, (ii)
the exercise of non-Plan options and warrants granted by the Company prior to
the date hereof and/or (iii) the issuance of shares of Common Stock in
transactions involving acquisitions by the Company of the assets or equity
ownership of unrelated business entities.
(w) There are no claims, payments, issuances, arrangements or
understandings, whether oral or written, for services in the nature of a
finder's or origination fee with respect to the sale of the Securities hereunder
or any other arrangements, agreements, understandings, payments or issuance with
respect to the Company, or any of its officers, directors, stockholders,
partners, employees or affiliates, that may affect the Underwriters'
compensation, as determined by the NASD.
(x) The Common Stock and Redeemable Warrants have been approved for
listing on the American Stock Exchange (the "ASE").
(y) None of the Company, nor any of its officers, employees, agents
or any other person acting on behalf of the Company has, directly or indirectly,
given or agreed to give any money, gift or similar benefit (other than legal
price concessions to customers in the ordinary course of business) to any
customer, supplier, employee or agent of a customer or supplier, or official or
employee of any governmental agency (domestic or foreign) or instrumentality of
any government
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<PAGE>
(domestic or foreign) or any political party or candidate for office
(domestic or foreign) or other person who was, is, or may be in a position to
help or hinder the business of the Company (or assist the Company in
connection with any actual or proposed transaction) which (a) might subject
the Company, or any other such person to any damage or penalty in any civil,
criminal or governmental litigation or proceeding (domestic or foreign), (b)
if not given in the past, might have had a material adverse effect on the
assets, business or operations of the Company, or (c) if not continued in the
future, might adversely affect the assets, business, financial condition or
operations of the Company. The Company's internal accounting controls are
sufficient to cause the Company to comply with the Foreign Corrupt Practices
Act of 1977, as amended.
(z) Except as set forth in the Prospectus, no officer, director or
stockholder of the Company, or any "affiliate" or "associate" (as these terms
are defined in Rule 405 promulgated under the Regulations) of any of the
foregoing persons or entities has or has had, either directly or indirectly, (i)
a material interest in any person or entity which (A) furnishes or sells
services or products which are furnished or sold or are proposed to be furnished
or sold by the Company, or (B) purchases from or sells or furnishes to the
Company any goods or services, or (ii) a material beneficial interest in any
contract or agreement to which the Company is a party or by which it may be
bound or affected, in either case of a value equal to or greater than $25,000 in
any fiscal year of the Company. Except as set forth in the Prospectus under
"Certain Transactions," there are no existing agreements, arrangements,
understandings or transactions, or proposed agreements, arrangements,
understandings or transactions, between or among the Company, and any officer,
director, or 5% or greater stockholder of the Company, or any partner, affiliate
or associate of any of the foregoing persons or entities.
(aa) Any certificate signed by any officer of the Company, and
delivered to the Underwriters or to Underwriters' Counsel (as defined herein)
shall be deemed a representation and warranty by the Company to the Underwriters
as to the matters covered thereby.
(bb) The minute books of the Company have been made available to the
Underwriters and contain a complete summary of all meetings and actions of the
directors (including committees thereof) and stockholders of the Company, since
the time of its incorporation, and reflect all transactions referred to in such
minutes accurately in all material respects.
(cc) Except and to the extent described in the Prospectus, no holders
of any securities of the Company or of any options, warrants or other
convertible or exchangeable securities of the Company have the right to include
any securities issued by the Company in the Registration Statement or any
registration statement to be filed by the Company or to require the Company to
file a registration statement under the Act and no person or entity holds any
anti-dilution rights with respect to any securities of the Company.
(dd) The Company has entered into an employment agreement with each of
Dr. Gregg A. DeNicola and Dr. Jacob Y. Terner in the forms filed as Exhibits
10.4 and 10.5, respectively, to the Registration Statement.
(ee) The Company is not, and upon the issuance and sale of the
Securities as herein
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contemplated and the application of the net proceeds therefrom as described
in the Prospectus under the caption "Use of Proceeds" will not be, an
"investment company" or an entity "controlled" by an "investment company" as
such terms are defined in the Investment Company Act of 1940, as amended (the
"1940 Act").
(ff) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurance that (i) transactions are executed in
accordance with management's general or specific authorizations; (ii)
transactions are recorded as necessary to permit preparations of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorizations; and (iv) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(gg) The Company has entered into a warrant agreement substantially in
the form filed as Exhibit 4.2 to the Registration Statement (the "Warrant
Agreement") with American Stock Transfer and Trust Company, as Warrant Agent, in
form and substance satisfactory to the Representative, with respect to the
Redeemable Warrants.
2. PURCHASE, SALE AND DELIVERY OF THE SECURITIES.
(a) On the basis of the representations, warranties, covenants and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company agrees to sell to each Underwriter, and each Underwriter,
severally and not jointly, agrees to purchase from the Company at a price of
$______ [91% of the initial public offering price per share of Common Stock]
per share of Common Stock and $_______ [91% of the initial public offering
price per Redeemable Warrant] per Redeemable Warrant, that number of Firm
Securities set forth in Schedule A opposite the name of such Underwriter,
subject to such adjustment as the Representative in its sole discretion shall
make to eliminate any sales or purchases of fractional shares, plus any
additional number of Firm Securities which such Underwriter may become obligated
to purchase pursuant to the provisions of Section 11 hereof.
(b) In addition, on the basis of the representations, warranties,
covenants and agreements herein contained, but subject to the terms and
conditions herein set forth, the Company hereby grants an option to the
Underwriters, severally and not jointly, to purchase all or any part of an
additional 450,000 shares of Common Stock at a price of $ _________ per share
of Common Stock [91% of the initial public offering price per share of Common
Stock] and/or an additional 450,000 Redeemable Warrants at a price of
$________ per Redeemable Warrant [91% of the initial public offering price per
Redeemable Warrant]. The option granted hereby will expire forty-five (45) days
after (i) the date the Registration Statement becomes effective, if the
Company has elected not to rely on Rule 430A under the Regulations, or (ii)
the date of this Agreement if the Company has elected to rely upon Rule 430A
under the Regulations, and may be exercised in whole or in part from time to
time only for the purpose of covering over-allotments which may be made in
connection with the offering and distribution of the Firm Securities upon
notice by the Representative to the Company setting forth the number of
Option Securities as to which the several Underwriters are then
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<PAGE>
exercising the option and the time and date of payment and delivery for any
such Option Securities. Any such time and date of delivery (an "Option
Closing Date") shall be determined by the Representative, but shall not be
later than three (3) full business days after the exercise of said option,
nor in any event prior to the Closing Date, as hereinafter defined, unless
otherwise agreed upon by the Representative and the Company. Nothing herein
contained shall obligate the Underwriters to make any over-allotments. No
Option Securities shall be delivered unless the Firm Securities shall be
simultaneously delivered or shall theretofore have been delivered as herein
provided.
(c) Payment of the purchase price for, and delivery of certificates
for, the Firm Securities shall be made at the offices of Security Capital at 520
Madison Avenue, 10th Floor, New York, New York 10022, or at such other place as
shall be agreed upon by the Representative and the Company. Such delivery and
payment shall be made at 10:00 a.m. (New York City time) on _______________,
1998 or at such other time and date as shall be agreed upon by the
Representative and the Company, but not less than three (3) nor more than five
(5) full business days after the effective date of the Registration Statement
(such time and date of payment and delivery being herein called the "Closing
Date"). In addition, in the event that any or all of the Option Securities are
purchased by the Underwriters, payment of the purchase price for, and delivery
of certificates for, such Option Securities shall be made at the above-mentioned
office of the Representative or at such other place as shall be agreed upon by
the Representative and the Company on each Option Closing Date as specified in
the notice from the Representative to the Company relating thereto. Delivery of
the certificates for the Firm Securities and the Option Securities, if any,
shall be made to the Underwriters against payment by the Underwriters, severally
and not jointly, of the purchase price for the Firm Securities and the Option
Securities, if any, to the order of the Company for the Firm Securities and the
Option Securities, if any, by New York Clearing House funds. In the event such
option is exercised, each of the Underwriters, acting severally and not jointly,
shall purchase that proportion of the total number of Option Securities then
being purchased which the number of Firm Securities set forth in Schedule A
hereto opposite the name of such Underwriter bears to the total number of Firm
Securities, subject in each case to such adjustments as the Representative in
its discretion shall make to eliminate any sales or purchases of fractional
shares. Certificates for the Firm Securities and the Option Securities, if any,
shall be in definitive, fully registered form, shall bear no restrictive legends
and shall be in such denominations and registered in such names as the
Underwriters may request in writing at least two (2) business days prior to the
Closing Date or the relevant Option Closing Date, as the case may be. The
certificates for the Firm Securities and the Option Securities, if any, shall be
made available to the Representative at such office or such other place as the
Representative may designate for inspection, checking and packaging no later
than 9:30 a.m. on the last business day prior to the Closing Date or the
relevant Option Closing Date, as the case may be.
(d) On the Closing Date, the Company shall issue and sell to the
Representative Representative's Warrants at a purchase price of $.0001 per
warrant, which Representative's Warrants shall entitle the holders thereof to
purchase an aggregate of 300,000 shares of Common Stock and/or 300,000
Redeemable Warrants. The Representative's Warrants shall be exercisable for a
period of four years commencing one year from the effective date of the
Registration Statement at a price equaling 120% of the respective initial public
offering price of the Shares and the
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Redeemable Warrants. The Representative's Warrant Agreement and form of
Warrant Certificate shall be substantially in the form filed as Exhibit 4.3
to the Registration Statement. Payment for the Representative's Warrants
shall be made on the Closing Date.
3. PUBLIC OFFERING OF THE SHARES AND REDEEMABLE WARRANTS. As soon after
the Registration Statement becomes effective as the Representative deems
advisable, the Underwriters shall make a public offering of the Shares and
Redeemable Warrants (other than to residents of or in any jurisdiction in which
qualification of the Securities is required and has not become effective) at the
price and upon the other terms set forth in the Prospectus. The Representative
may from time to time increase or decrease the public offering price after
distribution of the Shares and Redeemable Warrants has been completed to such
extent as the Representative, in its sole discretion, deems advisable. The
Underwriters may enter into one of more agreements as the Underwriters, in each
of their sole discretion, deem advisable with one or more broker-dealers who
shall act as dealers in connection with such public offering.
4. COVENANTS AND AGREEMENTS OF THE COMPANY. The Company covenants and
agrees with each of the Underwriters as follows:
(a) The Company shall use its best efforts to cause the Registration
Statement and any amendments thereto to become effective as promptly as
practicable and will not at any time, whether before or after the effective date
of the Registration Statement, file any amendment to the Registration Statement
or supplement to the Prospectus or file any document under the Act or Exchange
Act before termination of the offering of the Shares and the Redeemable Warrants
by the Underwriters of which the Representative shall not previously have been
advised and furnished with a copy, or to which the Representative shall have
objected or which is not in compliance with the Act, the Exchange Act or the
Regulations.
(b) As soon as the Company is advised or obtains knowledge thereof,
the Company will advise the Representative and confirm the notice in writing (i)
when the Registration Statement, as amended, becomes effective, if the
provisions of Rule 430A promulgated under the Act will be relied upon, when the
Prospectus has been filed in accordance with said Rule 430A and when any post-
effective amendment to the Registration Statement becomes effective; (ii) of the
issuance by the Commission of any stop order or of the initiation, or the
threatening, of any proceeding suspending the effectiveness of the Registration
Statement or any order preventing or suspending the use of the Preliminary
Prospectus or the Prospectus, or any amendment or supplement thereto, or the
institution of proceedings for that purpose; (iii) of the issuance by the
Commission or by any state securities commission of any proceedings for the
suspension of the qualification of any of the Securities for offering or sale in
any jurisdiction or of the initiation, or the threatening, of any proceeding for
that purpose; (iv) of the receipt of any comments from the Commission; and (v)
of any request by the Commission for any amendment to the Registration Statement
or any amendment or supplement to the Prospectus or for additional information.
If the Commission or any state securities commission shall enter a stop order or
suspend such qualification at any time, the Company will make every effort to
obtain promptly the lifting of such order.
(c) The Company shall file the Prospectus (in form and substance
satisfactory to
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<PAGE>
the Representative) or transmit the Prospectus by a means reasonably
calculated to result in filing with the Commission pursuant to Rule 424(b)(1)
(or, if applicable and if consented to by the Representative, pursuant to
Rule 424(b)(4)) not later than the Commission's close of business on the
earlier of (i) the second business day following the execution and delivery
of this Agreement and (ii) the fifth business day after the effective date of
the Registration Statement.
(d) The Company will give the Representative notice of its intention
to file or prepare any amendment to the Registration Statement (including any
post-effective amendment) or any amendment or supplement to the Prospectus
(including any revised prospectus which the Company proposes for use by the
Underwriters in connection with the offering of the Securities which differs
from the corresponding prospectus on file at the Commission at the time the
Registration Statement becomes effective, whether or not such revised prospectus
is required to be filed pursuant to Rule 424(b) of the Regulations), and will
furnish the Representative with copies of any such amendment or supplement a
reasonable amount of time prior to such proposed filing or use, as the case may
be, and will not file any such prospectus to which the Representative or Hall
Dickler Kent Friedman & Wood, LLP ("Underwriters' Counsel") shall object.
(e) The Company shall endeavor in good faith, in cooperation with the
Representative, at or prior to the time the Registration Statement becomes
effective, to qualify the Securities for offering and sale under the securities
laws of such jurisdictions as the Representative may designate to permit the
continuance of sales and dealings therein for as long as may be necessary to
complete the distribution, and shall make such applications, file such documents
and furnish such information as may be required for such purpose; provided,
however, the Company shall not be required to qualify as a foreign corporation
or file a general or limited consent to service of process in any such
jurisdiction. In each jurisdiction where such qualification shall be effected,
the Company will, unless the Representative agrees that such action is not at
the time necessary or advisable, use all reasonable efforts to file and make
such statements or reports at such times as are or may reasonably be required by
the laws of such jurisdiction to continue such qualification.
(f) During the time when a prospectus relating to the Securities is
required to be delivered under the Act, the Company shall use all reasonable
efforts to comply with all requirements imposed upon it by the Act and the
Exchange Act, as now and hereafter amended and by the Regulations, as from time
to time in force, so far as necessary to permit the continuance of sales of or
dealings in the Securities in accordance with the provisions hereof and the
Prospectus, or any amendments or supplements thereto. If at any time when a
prospectus relating to the Securities is required to be delivered under the Act,
any event shall have occurred as a result of which, in the opinion of counsel
for the Company or Underwriters' Counsel, the Prospectus, as then amended or
supplemented, includes 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, in the light of the circumstances under which they were
made, not misleading, or if it is necessary at any time to amend the Prospectus
to comply with the Act, the Company will notify the Representative promptly and
prepare and file with the Commission an appropriate amendment or supplement in
accordance with Section 10 of the Act, each such amendment or supplement to be
satisfactory to Underwriters' Counsel, and the Company will furnish to the
Underwriters copies of such amendment or supplement as soon as available and in
such quantities as the Underwriters may request.
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(g) As soon as practicable, but in any event not later than 45 days
after the end of the 12-month period beginning on the day after the end of the
fiscal quarter of the Company during which the effective date of the
Registration Statement occurs (90 days in the event that the end of such fiscal
quarter is the end of the Company's fiscal year), the Company shall make
generally available to its security holders, in the manner specified in Rule
158(b) of the Regulations, and to the Representative, an earnings statement
which will be in the detail required by, and will otherwise comply with, the
provisions of Section 11(a) of the Act and Rule 158(a) of the Regulations, which
statement need not be audited unless required by the Act, covering a period of
at least 12 consecutive months after the effective date of the Registration
Statement.
(h) During a period of five years after the date hereof, the Company
will furnish to its stockholders, as soon as practicable, annual reports
(including financial statements audited by independent public accountants) and
unaudited quarterly reports of earnings, and will deliver to the Representative:
(i) copies of such unaudited quarterly reports concurrently
with furnishing such quarterly reports to its stockholders, accompanied by a
certificate thereon by the Company's principal financial or accounting
officer;
(ii) copies of such annual reports concurrently with
furnishing such reports to its stockholders;
(iii) as soon as they are available, copies of all reports
(financial or other) mailed to stockholders;
(iv) as soon as they are available, copies of all reports and
financial statements furnished to or filed with the Commission, the NASD or
any securities exchange;
(v) every press release and every material news item or
article of interest to the financial community in respect of the Company, or
its affairs, which was released or prepared by or on behalf of the Company;
and
(vi) any additional information of a public nature concerning
the Company (and any future subsidiary) or its businesses which the
Representative may request.
During such five-year period, if the Company has an active subsidiary,
the foregoing financial statements will be on a consolidated basis to the extent
that the accounts of the Company and its subsidiary(ies) are consolidated, and
will be accompanied by similar financial statements for any significant
subsidiary which is not so consolidated.
(i) The Company will maintain a transfer agent and warrant agent
("Transfer Agent") and, if necessary under the jurisdiction of incorporation of
the Company, a Registrar (which may be the same entity as the Transfer Agent)
for its Common Stock and Redeemable Warrants.
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<PAGE>
(j) The Company will furnish to the Representative or on the
Representative's order, without charge, at such place as the Representative may
designate, copies of each Preliminary Prospectus, the Registration Statement and
any pre-effective or post-effective amendments thereto (two of which copies will
be signed and will include all financial statements and exhibits), the
Prospectus, and all amendments and supplements thereto, including any prospectus
prepared after the effective date of the Registration Statement, in each case as
soon as available and in such quantities as the Representative may request.
(k) On or before the effective date of the Registration Statement,
the Company shall provide the Representative with true original copies of duly
executed, legally binding and enforceable agreements from each of the Company's
officers and directors, and all persons or entities who, immediately prior to
the declaration of effectiveness of the Registration Statement are (a) holders
of 5% or more of the shares of Common Stock; and/or (b) holders of securities
exercisable or exchangeable for or convertible into 5% or more of the shares of
Common Stock, providing that such persons or entities shall not, directly or
indirectly, offer, sell, grant any option for the sale or purchase of, assign,
transfer, pledge, hypothecate or otherwise encumber or dispose of any shares of
Common Stock or securities convertible into, exercisable or exchangeable for or
evidencing any right to purchase or subscribe for any shares of Common Stock
(either pursuant to Rule 144 of the Regulations or otherwise) or dispose of any
beneficial interest therein during the Lock-Up Period without the prior written
consent of the Representative and the Company (collectively, the "Lock-up
Agreements"). During the 12 month period commencing on the effective date of the
Registration Statement, the Company shall not sell or offer for sale any of its
securities without the prior consent of the Representative, except pursuant to
or in connection with (i) the exercise of options granted by the Company under a
Plan, (ii) the exercise of non-Plan options and warrants granted by the Company
prior to the date hereof and/or (iii) the issuance of shares of Common Stock in
transactions involving acquisitions by the Company of the assets or equity
ownership of unrelated business entities. On or before the Closing Date, the
Company shall deliver instructions to the Transfer Agent authorizing it to place
appropriate legends on the certificates representing the securities subject to
the Lock-up Agreements and to place appropriate stop transfer orders on the
Company's ledgers.
(l) None of the Company, nor any of its officers, directors,
stockholders, nor any of its affiliates (within the meaning of the Regulations)
will take, directly or indirectly, any action designed to, or which might in the
future reasonably be expected to cause or result in, stabilization or
manipulation of the price of any securities of the Company.
(m) The Company shall apply the net proceeds from the sale of the
Securities in the manner, and subject to the conditions, set forth under "Use of
Proceeds" in the Prospectus. No portion of the net proceeds will be used,
directly or indirectly, to acquire any securities issued by the Company.
(n) The Company shall timely file all such reports, forms or other
documents as may be required from time to time, under the Act, the Exchange Act,
and the Regulations, and all such reports, forms and documents filed will comply
as to form and substance with the applicable requirements under the Act, the
Exchange Act, and the Regulations.
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(o) The Company shall furnish to the Representative as early as
practicable prior to each of the date hereof, the Closing Date and each Option
Closing Date, if any, but no later than two full business days prior thereto, a
copy of the latest available unaudited interim financial statements of the
Company (which in no event shall be as of a date more than 30 days prior to the
date of the Registration Statement) which have been read by the Company's
independent public accountants, as stated in their letters to be furnished
pursuant to Sections 6(j) and 6(k) hereof.
(p) The Company shall cause the Common Stock and Redeemable Warrants
to be listed on the ASE and, for a period of five years from the date hereof,
use its reasonable best efforts to maintain the ASE listing of the Common Stock
and the Redeemable Warrants to the extent outstanding.
(q) As and when reasonably requested by the Representative from time
to time during the period of five years from the Closing Date, the Company shall
furnish to the Representative at the Company's sole expense, (i) daily
consolidated transfer sheets relating to the Common Stock and Redeemable
Warrants (ii) the list of holders of all of the Company's securities and (iii) a
Blue Sky "Trading Survey" for secondary sales of the Company's securities
prepared by counsel to the Company.
(r) As soon as practicable, (i) but in no event more than five
business days before the effective date of the Registration Statement, the
Company shall file a Form 8-A with the Commission providing for the registration
under the Exchange Act of the Securities and (ii) but in no event more than 30
days after the effective date of the Registration Statement, in the event that
the Securities are not listed on a national securities exchange, the Company
shall take all necessary and appropriate actions to be included in Standard and
Poor's Corporation Descriptions and Moody's OTC Manual and to continue such
inclusion for a period of not less than five years.
(s) The Company hereby agrees that it will not, for a period of 12
months from the effective date of the Registration Statement, adopt, propose to
adopt or otherwise permit to exist any employee, officer, director, consultant
or compensation plan or similar arrangement permitting (i) the grant, issue,
sale or entry into any agreement to grant, issue or sell any option, warrant or
other contract right (x) at an exercise price that is less than the greater of
the public offering price of the Shares set forth herein and the fair market
value on the date of grant or sale or (y) to any of its executive officers or
directors or to any holder of 5% or more of the Common Stock; (ii) the maximum
number of shares of Common Stock or other securities of the Company issuable
under any Plan to exceed, in the aggregate, __________ shares; (iii) the
payment for such securities with any form of consideration other than cash; or
(iv) the existence of stock appreciation rights, phantom options or similar
arrangements.
(t) Until the completion of the distribution of the Securities, the
Company shall not, without the prior written consent of the Representative and
Underwriters' Counsel, issue, directly or indirectly, any press release or other
communication or hold any press conference with respect to the Company or its
activities or the offering contemplated hereby, other than trade releases issued
in the ordinary course of the Company's business consistent with past practices
with respect to the Company's operations.
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(u) For a period equal to the lesser of (i) five years from the date
hereof, and (ii) the period ending on the date of sale to the public of the
Representative's Securities, the Company will not take any action or actions
which may prevent or disqualify the Company's use of Form S-1 (or other
appropriate form) for the registration under the Act of the Representative's
Securities. The Company further agrees to use its reasonable best efforts to
file such post-effective amendments to the Registration Statement, as may be
necessary, in order to maintain its effectiveness and to keep such Registration
Statement effective while any of the Redeemable Warrants or Representative's
Warrants remain outstanding.
5. PAYMENT OF EXPENSES.
(a) The Company hereby agrees to pay on the later of the invoiced due
date or the Closing Date or the applicable Option Closing Date, to the extent
not paid at the Closing Date) all expenses and fees (other than fees of
Underwriters' Counsel, except as provided in (iv) below) incident to the
performance of the obligations of the Company under this Agreement, the Warrant
Agreement and the Representative's Warrant Agreement, including, without
limitation, (i) the fees and expenses of accountants and counsel for the
Company, (ii) all costs and expenses incurred in connection with the
preparation, duplication, printing (including mailing and handling charges),
filing, delivery and mailing (including the payment of postage with respect
thereto) of the Registration Statement and the Prospectus and any amendments and
supplements thereto and the printing, mailing (including the payment of postage
with respect thereto) and delivery of this Agreement, the Warrant Agreement, the
Representative's Warrant Agreement, the Agreement Among Underwriters, the
Selected Dealer Agreements, and related documents, including the cost of all
copies thereof and of the Preliminary Prospectuses and of the Prospectus and any
amendments thereof or supplements thereto supplied to the Underwriters and such
dealers as the Underwriters may request, in quantities as hereinabove stated,
(iii) the costs and expenses of printing, engraving, issuance and delivery of
the Securities including, but not limited to those incurred in connection with,
(x) the purchase by the Underwriters of the Firm Securities and the Option
Securities and the purchase by the Representative of the Representative's
Warrants from the Company, (y) the consummation by the Company of any of its
obligations under this Agreement, the Warrant Agreement and the Representative's
Warrant Agreement, and (z) resale of the Firm Securities and the Option
Securities by the Underwriters in connection with the distribution contemplated
hereby, (iv) the fees and expenses incurred in connection with qualification of
the Securities under state or foreign securities or "Blue Sky" laws and
determination of the status of such securities under legal investment laws,
including the costs of printing and mailing the "Preliminary Blue Sky
Memorandum", the "Supplemental Blue Sky Memorandum" and "Legal Investments
Survey," if any, and disbursements and fees of counsel in connection therewith,
(v) costs and expenses incurred by the Company, but not any Underwriter, in
connection with the "road show", (vi) fees and expenses of the Transfer Agent
and registrar and all issue and transfer taxes, if any, (vii) any applications
made prior to the Closing Date (or applicable Option Closing Date) for
assignment of a rating of the Securities by qualified rating agencies, (viii)
the fees payable to the Commission and the NASD, and (ix) the fees and expenses
incurred in connection with the listing of the Securities on the ASE and any
other exchange.
(b) If this Agreement is terminated by the Representative or by the
Underwriters
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in accordance with the provisions of Section 6 or Section 12, the Company
shall reimburse and indemnify the Underwriters for all of their actual
out-of-pocket expenses, including the fees and disbursements of Underwriters'
Counsel, less any amounts already paid pursuant to Section 5(c) hereof.
(c) The Company further agrees that, in addition to the expenses
payable pursuant to subsection (a) of this Section 5, it will pay to the
Representative on the Closing Date by certified or bank cashier's check or, at
the election of the Representative, by deduction from the proceeds of the
offering of the Firm Securities, a non-accountable expense allowance equal to
2.5% of the gross proceeds received by the Company from the sale of the Firm
Securities, $50,000 of which has been paid to date. In the event the
Representative elects to exercise the overallotment option described in Section
2(b) hereof, the Company further agrees to pay to the Representative on each
Option Closing Date, by certified or bank cashier's check, or at the
Representative's election, by deduction from the proceeds of the Option
Securities purchased on such Option Closing Date, a non-accountable expense
allowance equal to 2.5% of the gross proceeds received by the Company from the
sale of such Option Securities.
6. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The obligations of the
Underwriters hereunder shall be subject to the continuing accuracy of the
representations and warranties of the Company herein as of the date hereof and
as of the Closing Date and each Option Closing Date, if any, as if they had been
made on and as of the Closing Date or each Option Closing Date, as the case may
be; the accuracy on and as of the Closing Date or Option Closing Date, if any,
of the statements of the officers of the Company made pursuant to the provisions
hereof; and the performance by the Company on and as of the Closing Date and
each Option Closing Date, if any, of its covenants and obligations hereunder and
to the following further conditions:
(a) The Registration Statement shall have become effective not later
than 12:00 P.M., New York time, on the date of this Agreement or such later date
and time as shall be consented to in writing by the Representative, and at the
Closing Date and each Option Closing Date, if any, no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been instituted or shall be pending or
contemplated by the Commission and any request on the part of the Commission for
additional information shall have been complied with to the reasonable
satisfaction of Underwriters' Counsel. If the Company has elected to rely upon
Rule 430A of the Regulations, the price of the Firm Securities and any
price-related information previously omitted from the effective Registration
Statement pursuant to such Rule 430A shall have been transmitted to the
Commission for filing pursuant to Rule 424(b) of the Regulations within the
prescribed time period and, prior to the Closing Date, the Company shall have
provided evidence satisfactory to the Representative of such timely filing, or a
post-effective amendment providing such information shall have been promptly
filed and declared effective in accordance with the requirements of Rule 430A of
the Regulations.
(b) The Representative shall not have advised the Company that the
Registration Statement, or any amendment thereto, contains an untrue statement
of fact which, in the Representative's opinion, is material, or omits to state a
fact which, in the Representative's opinion, is material and is required to be
stated therein or is necessary to make the statements therein not
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misleading, or that the Prospectus, or any supplement thereto, contains an
untrue statement of fact which, in the Representative's opinion, is material,
or omits to state a fact which, in the Representative's opinion, is material
and is required to be stated therein or is necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
(c) On or prior to each of the Closing Date and each Option Closing
Date, if any, the Representative shall have received from Underwriters' Counsel,
such opinion or opinions with respect to the organization of the Company, the
validity of the Securities, the Registration Statement, the Prospectus and other
related matters as the Representative may request and Underwriters' Counsel
shall have received such papers and information as they request to enable them
to pass upon such matters.
(d) At the Closing Date, the Underwriters shall have received the
favorable opinion of Miller & Holguin ("M&H"), counsel to the Company, dated the
Closing Date, addressed to the Underwriters and in form and substance
satisfactory to Underwriters' Counsel, to the effect that:
(i) The Company (A) has been duly organized and is validly
existing as a corporation in good standing under the laws of its jurisdiction,
(B) is duly qualified and licensed and in good standing as a foreign corporation
in each jurisdiction in which its ownership or leasing of any properties or the
character of its operations requires such qualification or licensing (except
where the failure to so qualify would not have a material adverse effect on the
business, financial condition or operations of the Company), and (C) has all
requisite corporate power and authority to own or lease its properties and
conduct its business as described in the Prospectus, and has obtained any and
all necessary authorizations, approvals, orders, licenses, certificates,
franchises and permits of and from all governmental or regulatory officials and
bodies to conduct its business as described in the Prospectus, and, to the
current actual knowledge of such counsel, has not received any notice of
proceedings relating to the revocation or modification of any such
authorization, approval, order, license, certificate, franchise, or permit
which, singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would materially adversely affect the business, financial
condition or operations of the Company. The disclosures in the Registration
Statement concerning the effects of federal, state and local laws, rules and
regulations on the Company's business as described in the Prospectus are correct
in all material respects and do not omit to state a fact required to be stated
therein or necessary to make the statements contained therein not misleading in
light of the circumstances in which they were made.
(ii) To the current actual knowledge of such counsel, except as
described in the Prospectus, the Company does not own an interest in any other
corporation, partnership, joint venture, trust or other business entity.
(iii) The Company has a duly authorized, and issued and
outstanding capitalization as set forth in the Prospectus, and any amendment
or supplement thereto, under "Capitalization", and the Company is not, to the
current actual knowledge of such counsel, a party to or bound by any
instrument, agreement or other arrangement providing for it to issue, sell,
transfer, purchase or redeem any capital stock, rights, warrants, options or
other securities, except
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for this Agreement, the Warrant Agreement and the Representative's Warrant
Agreement and as described in the Prospectus. The Securities and all other
securities issued or issuable by the Company conform in all material respects
to all statements with respect thereto contained in the Registration
Statement and the Prospectus. All issued and outstanding securities of the
Company have been duly authorized and validly issued and are fully paid (to
the current actual knowledge of such counsel) and non-assessable; the holders
thereof do not have any rights of rescission with respect thereto, and are
not subject to personal liability by reason of being such holders; and none
of such securities were issued in violation of the preemptive rights of any
holders of any security of the Company or any similar rights imposed by the
Company's certificate of incorporation. The Securities to be sold by the
Company hereunder and under the Warrant Agreement and the Representative's
Warrant Agreement are not and will not be subject to any preemptive or other
similar rights of any stockholder imposed by the Company's certificate of
incorporation or, to the current actual knowledge of such counsel, by any
agreement or other instrument binding upon the Company, have been duly
authorized and, when issued, paid for and delivered in accordance with the
terms hereof and thereof, will be validly issued, fully paid and
non-assessable and conform to the description thereof contained in the
Prospectus; the holders thereof will not be subject to any liability solely
as such holders; all corporate action required to be taken for the
authorization, issuance and sale of the Securities has been duly and validly
taken; and the certificates representing the Securities are in due and proper
form. The Representative's Warrants and the Redeemable Warrants will, when
issued, paid for and delivered in accordance with the terms set forth herein
and in the Warrant Agreement and Representative's Warrant Agreement,
constitute valid and binding obligations of the Company to issue and sell,
upon exercise thereof and payment therefor, the number and type of securities
of the Company called for thereby. Upon the issuance and delivery pursuant to
this Agreement of the Firm Securities and the Option Securities and the
Representative's Warrants to be sold by the Company, the Underwriters and the
Representative, respectively, will acquire good title to the Firm Securities
and the Option Securities and the Representative's Warrants free and clear of
any pledge, lien, charge, claim, encumbrance, pledge, security interest, or
other restriction or equity of any kind whatsoever created by or imposed
against the Company.
(iv) The Registration Statement is effective under the Act, and,
if applicable, filing of all pricing information has been timely made in the
appropriate form under Rule 430A of the Regulations, and no stop order
suspending the use of the Preliminary Prospectus, the Registration Statement or
Prospectus or any part of any thereof or suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that purpose, to
the current actual knowledge of such counsel, have been instituted or are
pending or, to the current actual knowledge of such counsel, threatened or
contemplated under the Act.
(v) Each of the Preliminary Prospectus, the Registration
Statement, and the Prospectus and any amendments or supplements thereto (other
than the financial statements and other financial and statistical data included
therein, as to which no opinion need be rendered) complies as to form in all
material respects with the requirements of the Act and the Regulations.
(vi) To the current actual knowledge of such counsel (A) there is
not any agreement, contract or other document required by the Act to be
described in the Registration Statement and the Prospectus and filed as an
exhibit to the Registration Statement other than those
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<PAGE>
described in the Registration Statement (or required to be filed under the
Exchange Act if upon such filing they would be incorporated, in whole or in
part, by reference therein) and the Prospectus and filed as an exhibit
thereto, and the exhibits which have been filed are correct copies of the
documents of which they purport to be copies; (B) the descriptions in the
Registration Statement and the Prospectus and any supplement or amendment
thereto of contracts and other documents to which the Company is a party or
by which it is bound, including any document to which the Company is a party
or by which it is bound, incorporated by reference into the Prospectus and
any supplement or amendment thereto, are accurate and fairly present in all
material respects the information required to be shown by Form S-1; (C) there
is not pending or threatened against the Company any action, arbitration,
suit, proceeding, inquiry, investigation, litigation, governmental or other
proceeding (including, without limitation, those having jurisdiction over
environmental or similar matters), domestic or foreign, pending or threatened
against (or circumstances that may give rise to the same), or involving the
properties or business of, the Company which (x) is required to be disclosed
in the Registration Statement which is not so disclosed (and such proceedings
as are summarized in the Registration Statement are accurately summarized in
all respects), or (y) questions the validity of the capital stock of the
Company or this Agreement, the Warrant Agreement or the Representative's
Warrant Agreement, or of any action taken or to be taken by the Company
pursuant to or in connection with any of the foregoing; (D) there is no
statute or regulation or legal or governmental proceeding required to be
described in the Prospectus which is not described as required; and (E) there
is no action, suit or proceeding pending, or threatened, against or affecting
the Company before any court or arbitrator or governmental body, agency or
official (or any basis thereof known to such counsel) in which there is a
reasonable possibility of a decision which would result in a material adverse
change in the business, financial condition or operations of the Company,
which would adversely affect the present or prospective ability of the
Company to perform its obligations under this Agreement, the Warrant
Agreement or the Representative's Warrant Agreement or which in any manner
would draw into question the validity or enforceability of this Agreement,
the Warrant Agreement or the Representative's Warrant Agreement.
(vii) The Company has full legal right, power and authority
to enter into each of this Agreement, the Warrant Agreement and the
Representative's Warrant Agreement, and to consummate the transactions provided
for therein; and each of this Agreement, the Warrant Agreement and the
Representative's Warrant Agreement has been duly authorized, executed and
delivered by the Company. Each of this Agreement, the Warrant Agreement and the
Representative's Warrant Agreement, assuming due authorization, execution and
delivery by and enforceability against each other party thereto, constitutes a
legal, valid and binding agreement of the Company enforceable against the
Company in accordance with its terms (except as such enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other laws of general application relating to or affecting enforcement of
creditors' rights and the application of equitable principles in any action,
legal or equitable, and except as rights to indemnity or contribution may be
limited by applicable law), and none of the Company's execution or delivery of
this Agreement, the Warrant Agreement and the Representative's Warrant
Agreement, its performance hereunder or thereunder, its consummation of the
transactions contemplated herein or therein, or the conduct of its business as
described in the Registration Statement, the Prospectus, and any amendments or
supplements thereto, conflicts with or will conflict with or results or will
result in any breach or violation of any of the terms or provisions of, or
constitutes or will constitute a default under, or
22
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results or will result in the creation or imposition of any lien, charge,
claim, encumbrance, pledge, security interest, defect or other restriction or
equity of any kind whatsoever upon, any property or assets (tangible or
intangible) of the Company pursuant to the terms of, (A) the certificate of
incorporation or by-laws of the Company, or (B) to the current actual
knowledge of such counsel, any license, contract, collective bargaining
agreement, indenture, mortgage, deed of trust, lease, voting trust agreement,
stockholders agreement, note, loan or credit agreement or any other agreement
or instrument to which the Company is a party or by which it is or may be
bound or to which any of its properties or assets (tangible or intangible) is
or may be subject, or any indebtedness of the Company, or (C) to the current
actual knowledge of such counsel, any statute, judgment, decree, order, rule
or regulation applicable to the Company of any arbitrator, court, regulatory
body or administrative agency or other governmental agency or body
(including, without limitation, those having jurisdiction over environmental
or similar matters), domestic or foreign, having jurisdiction over the
Company or any of its activities or properties.
(viii) Except for the order of the Commission declaring the
Registration Statement to be effective, no consent, approval, authorization or
order, and no filing with, any court, regulatory body, government agency or
other body (other than such as may be required under Blue Sky laws, as to which
no opinion need be rendered) is required in connection with the issuance of the
Firm Securities and the Option Securities pursuant to the Prospectus and the
Registration Statement, the issuance of the Representative' Warrants, the
performance of this Agreement, the Warrant Agreement and the Representative's
Warrant Agreement, and the transactions contemplated hereby and thereby.
(ix) Except to the extent that it would not have a material
adverse effect on the business, financial condition or operations of the
Company, the Company has good and marketable title to, or valid and enforceable
leasehold estates in, all items of real and personal property stated in the
Prospectus to be owned or leased by it, in each case free and clear of all
liens, charges, claims, encumbrances, pledges, security interests, defects or
other restrictions or equities of any kind whatsoever, other than those referred
to in the Prospectus and liens for taxes not yet due and payable.
(x) The Company is not, to the current actual knowledge of such
counsel, in breach of, or in default under, any term or provision of any
license, contract, collective bargaining agreement, indenture, mortgage,
installment sale agreement, deed of trust, lease, voting trust agreement,
stockholders' agreement, partnership agreement, note, loan or credit agreement
or any other agreement or instrument evidencing an obligation for borrowed
money, or any other agreement or instrument to which the Company is a party or
by which the Company may be bound or to which the properties or assets (tangible
or intangible) of the Company is subject or affected which, individually or in
the aggregate, is material to the business, properties, condition (financial or
otherwise), prospects or results of operations of the Company; and the Company
is not, to the current actual knowledge of such counsel, in violation of any
term or provision of its certificate of incorporation or By-Laws or in violation
of any franchise, license, permit, judgment, decree, order, statute, rule or
regulation.
(xi) The statements in the Prospectus under "Risk Factors," "The
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Company," "Business of the Company," "Management of the Company," "Beneficial
Ownership of Capital Stock," "Certain Transactions," "Description of Capital
Stock " and "Shares Eligible for Future Sale" have been reviewed by such
counsel, and insofar as they refer to statements of law, descriptions of
statutes, regulatory permits, licenses, rules or regulations or legal
conclusions, are correct in all material respects.
(xii) The Securities have been accepted for listing on the
ASE.
(xiii) To the current actual knowledge of such counsel, no
person, corporation, trust, partnership, association or other entity has the
right to include and/or register any securities of the Company in the
Registration Statement, require the Company to file any registration statement
or, if filed, to include any security in such registration statement.
(xiv) To the current actual knowledge of such counsel, except
as described in the Prospectus, there are no claims, payments, issuances,
arrangements or understandings for services in the nature of a finder's or
origination fee with respect to the sale of the Securities hereunder or
financial consulting arrangements or any other arrangements, agreements,
understandings, payments or issuances that may affect the Underwriters'
compensation, as determined by the NASD.
(xv) Assuming due authorization, execution and delivery by the
parties thereto, the Lock-up Agreements in the form of Exhibit A annexed hereto
are legal, valid and binding obligations of the parties thereto, enforceable
against such parties in accordance with their respective terms (except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application relating to or
affecting enforcement of creditors' rights and the application of equitable
principles in any action, legal or equitable, and except as rights to indemnity
or contribution may be limited by applicable law).
(xvi) To the current actual knowledge of such counsel, except
as described in the Prospectus, the Company does not (A) maintain, sponsor or
contribute to any ERISA Plans, (B) maintain or contribute, now or at any time
previously, to a defined benefit plan, as defined in Section 3(35) of ERISA, and
(C) has ever completely or partially withdrawn from a "multiemployer plan".
(xvii) The Company shall not, solely as a result of the offer
and sale of the Securities as described in the Prospectus, be deemed to be an
"Investment Company," pursuant to and as defined under the Investment Company
Act of 1940.
Such counsel shall state that such counsel has participated in conferences
with officers and other representatives of the Company, and representatives of
the independent public accountants for the Company, at which conferences such
counsel made inquiries of such officers, representatives and accountants and
discussed the contents of the Preliminary Prospectus, the Registration
Statement, the Prospectus, and related matters and, although such counsel is not
passing upon and does not assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the Preliminary
Prospectus, the Registration Statement or the Prospectus, on the basis of the
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foregoing, no facts have come to the attention of such counsel which lead them
to believe that either the Registration Statement or any amendment thereto, at
the time such Registration Statement or amendment became effective, or the
Preliminary Prospectus or Prospectus or amendment or supplement thereto as of
the date of such opinion, contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances in which they were
made, not misleading(it being understood that such counsel need express no
opinion with respect to the financial statements and schedules and other
financial and statistical data included in the Preliminary Prospectus, the
Registration Statement and the Prospectus). Such counsel shall further state
that its opinions may be relied upon by Underwriters' Counsel in rendering its
opinion to the Underwriters.
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws other than the laws of the United States and
jurisdictions in which they are admitted, to the extent such counsel deems
proper and to the extent specified in such opinion, if at all, upon an opinion
or opinions (in form and substance satisfactory to Underwriters' Counsel) of
other counsel acceptable to Underwriters' Counsel, familiar with the applicable
laws; (B) as to matters of fact, to the extent they deem proper, on certificates
and written statements of responsible officers of the Company and certificates
or other written statements of officers of departments of various jurisdictions
having custody of documents respecting the corporate existence or good standing
of the Company, provided that copies of any such statements or certificates
shall be delivered to Underwriters' Counsel if requested. The opinion of such
counsel for the Company shall state that the opinion of any such other counsel
is in form satisfactory to such counsel and that the Representative,
Underwriters' Counsel and they are each justified in relying thereon. Such
opinion may state that whenever a statement therein is qualified to such
counsel's current actual knowledge, it is intended to indicate that, during the
course of such counsel's representation of the Company in connection with the
offer and sale of the Securities, no information that would give such counsel
awareness of the inaccuracy of such statement has come to the attention of those
attorneys in the firm who have rendered legal services in connection therewith.
Any opinion of counsel for the Company shall not state that it is to be governed
or qualified by, or that it is otherwise subject to, any treatise, written
policy or other document relating to legal opinions, including, without
limitation, the Legal Opinion Accord of the ABA Section of Business Law (1991)
or any comparable state accord.
(e) At each Option Closing Date, if any, the Underwriters shall have
received the favorable opinion of M&H dated such Option Closing Date, addressed
to the Underwriters and in form and substance satisfactory to Underwriters'
Counsel, confirming as of such Option Closing Date the statements made by M&H in
its opinion delivered on the Closing Date.
(f) On or prior to the Closing Date and each Option Closing Date, if
any, Underwriters' Counsel shall have been furnished such documents,
certificates and opinions as they may reasonably require for the purpose of
enabling them to review or pass upon the matters referred to in subsection (c)
of this Section 6, or in order to evidence the accuracy, completeness or
satisfaction of any of the representations, warranties or covenants of the
Company.
(g) As of the Closing Date and each Option Closing Date, if any, (i)
there shall have been no material adverse
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change in the business, financial condition or operations of the Company,
whether or not in the ordinary course of business, from the latest dates as
of which such condition is set forth in the Registration Statement and
Prospectus; (ii) there shall have been no transaction, not in the ordinary
course of business, entered into by the Company, from the latest date as of
which the financial condition of the Company is set forth in the Registration
Statement and Prospectus which is adverse to the Company; (iii) the Company
shall not be in default under any provision of any instrument relating to any
outstanding indebtedness of the Company which default could have a material
adverse effect upon the business, operations or financial condition of the
Company; (iv) the Company shall not have issued any securities (other than
the Securities) or declared or paid any dividend or made any distribution in
respect of its capital stock of any class and there shall not have been any
change in the capital stock or any material change in the debt (long or short
term) or liabilities or obligations of the Company (contingent or otherwise),
in each case, since the date hereof; (v) no material amount of the assets of
the Company shall be pledged or mortgaged, except as set forth in the
Registration Statement and Prospectus; (vi) no action, suit or proceeding, at
law or in equity, shall be pending or threatened (or circumstances giving
rise to same) against the Company, or affecting any of its properties or
business before or by any court or federal, state or foreign commission,
board or other administrative agency wherein an unfavorable decision, ruling
or finding may adversely affect the business, operations, earnings, position,
value, properties, results of operations, prospects or financial condition or
income of the Company; and (vii) no stop order relating to the offer and sale
of the Securities shall be in effect under the Act and no proceedings
therefor shall be pending, threatened or contemplated by the Commission.
(h) At the Closing Date and each Option Closing Date, if any, the
Underwriters shall have received a certificate of the Company signed by the
principal executive officer and by the principal financial or principal
accounting officer of the Company, dated the Closing Date or Option Closing
Date, as the case may be, to the effect that each of such persons has carefully
examined the Registration Statement, the Prospectus and this Agreement, and
that:
(i) The representations and warranties of the Company in this
Agreement are true and correct, as if made on and as of the Closing Date or the
Option Closing Date, as the case may be, and the Company has complied in all
material respects with all agreements and covenants and satisfied all conditions
contained in this Agreement on its part to be complied with or satisfied at or
prior to such Closing Date or Option Closing Date, as the case may be;
(ii) No stop order suspending the effectiveness of the
Registration Statement or any part thereof has been issued, and no proceedings
for that purpose have been instituted or are pending or, to the best of each of
such person's knowledge, are contemplated or threatened under the Act;
(iii) The Registration Statement and the Prospectus and, if
any, each amendment and each supplement thereto, contain all statements and
information required to be included therein, and none of the Registration
Statement, the Prospectus nor any amendment or supplement thereto includes
any 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 and neither the Preliminary Prospectus or any supplement thereto
included any untrue statement of a material
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<PAGE>
fact or omitted to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading; and
(iv) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, (A) the Company has
not incurred up to and including the Closing Date or the Option Closing Date, as
the case may be, other than in the ordinary course of its business, any material
liabilities or obligations, direct or contingent; (B) the Company has not paid
or declared any dividends or other distributions on its capital stock; (C) the
Company has not entered into any transactions not in the ordinary course of
business; (D) there has not been any change in the capital stock or long-term
debt or any increase in the short-term borrowings (other than any increase in
the short-term borrowings in the ordinary course of business) of the Company;
(E) the Company has not sustained any material loss or damage to its properties
or assets, whether or not insured; (F) there is no litigation which is pending
or threatened (or circumstances giving rise to same) against the Company or any
affiliated party which is required to be set forth in an amended or supplemented
Prospectus which has not been set forth; and (G) there has occurred no event
required to be set forth in an amended or supplemented Prospectus which has not
been so set forth.
References to the Registration Statement and the Prospectus in this subsection
(h) are to such documents as amended and supplemented at the date of such
certificate.
(i) By the Closing Date, the Underwriters will have received
clearance from the NASD as to the amount of compensation allowable or payable to
the Underwriters, as described in the Registration Statement.
(j) At the time this Agreement is executed, the Underwriters shall
have received "cold comfort" letters, dated such date, addressed to the
Underwriters in form and substance customary for initial public offerings of
securities, and satisfactory (including the non-material nature of the changes
or decreases, if any, referred to in clause (iii) below) in all respects to the
Underwriters and Underwriters' Counsel, from (i) Ernst & Young LLP addressing
the matters set forth in sub-sections (i) - (vi) hereof as they relate to the
Company's financial statements and disclosures for the year ended December 31,
1997 and any interim period set forth in the Prospectus which are contained in
the Prospectus; and (ii) from BDO Seidman LLP addressing the matters set forth
in sub-sections (i) - (vi) hereof as they relate to the Company's financial
statements and disclosures for the two years ended December 31, 1996 which are
contained in the Prospectus:
(i) confirming that they are independent certified public
accountants with respect to the Company within the meaning of the Act and the
applicable Regulations;
(ii) stating that it is their opinion that the financial
statements and supporting schedules of the Company included in the Registration
Statement comply as to form in all material respects with the applicable
accounting requirements of the Act and the Regulations thereunder and that the
Representative may rely upon the opinion of Ernst & Young LLP or BDO Seidman
LLP, as the case may be, with respect to the financial statements and supporting
schedules included in the Registration Statement;
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<PAGE>
(iii) stating that, on the basis of a limited review which
included a reading of the latest available unaudited interim financial
statements of the Company, a reading of the latest available minutes of the
stockholders and board of directors and the various committees of the board of
directors of the Company, consultations with officers and other employees of the
Company responsible for financial and accounting matters and other specified
procedures and inquiries, nothing has come to their attention which would lead
them to believe that (A) the unaudited financial statements and supporting
schedules of the Company included in the Registration Statement do not comply as
to form in all material respects with the applicable accounting requirements of
the Act and the Regulations or are not fairly presented in conformity with
generally accepted accounting principles applied on a basis substantially
consistent with that of the audited financial statements of the Company included
in the Registration Statement, or (B) at a specified date not more than five
days prior to the effective date of the Registration Statement, there has been
any change in the capital stock or long-term debt of the Company, or any
decrease in the stockholders' equity or net current assets or net assets of the
Company as compared with amounts shown in the December 31, 1997 balance sheet
included in the Registration Statement, other than as set forth in or
contemplated by the Registration Statement, or, if there was any change or
decrease, setting forth the amount of such change or decrease, and (C) during
the period from December 31, 1997 to a specified date not more than five days
prior to the effective date of the Registration Statement, there was any
decrease in net revenues, net earnings or net earnings per common share of the
Company, in each case as compared with the corresponding period from December
31, 1996, other than as set forth in or contemplated by the Registration
Statement, or, if there was any such decrease, setting forth the amount of such
decrease;
(iv) setting forth, at a date not later than five days prior to
the date of the Registration Statement, the total amount of liabilities of the
Company (including a break-down of commercial paper and notes payable to banks);
(v) stating that they have compared specific dollar amounts,
numbers of shares, percentages of revenues and earnings, statements and other
financial information pertaining to the Company set forth in the Prospectus in
each case to the extent that such amounts, numbers, percentages, statements and
information may be derived from the general accounting records, including work
sheets, of the Company and excluding any questions requiring an interpretation
by legal counsel, with the results obtained from the application of specified
readings, inquiries and other appropriate procedures (which procedures do not
constitute an examination in accordance with generally accepted auditing
standards) set forth in the letter and found them to be in agreement; and
(vi) statements as to such other matters incident to the
transaction contemplated hereby as the Representative may reasonably request.
(k) At the Closing Date and each Option Closing Date, if any, the
Underwriters shall have received from each of Ernst & Young LLP and BDO Seidman
LLP a letter, dated as of the Closing Date or the Option Closing Date, as the
case may be, to the effect that they reaffirm that statements made in the
letters respectively furnished by them pursuant to subsection (j) of this
Section, except that the specified date referred to shall be a date not more
than five days prior to the Closing Date or the Option Closing Date, as the case
may be, and, if the Company has elected to rely
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<PAGE>
on Rule 430A of the Regulations, to the further effect that they have carried
out procedures as specified in clause (v) of subsection (j) of this Section
with respect to certain amounts, percentages and financial information as
specified by the Representative and deemed to be a part of the Registration
Statement pursuant to Rule 430A(b) and have found such amounts, percentages
and financial information to be in agreement with the records specified in
such clause (v).
(l) On each of the Closing Date and each Option Closing Date, if any,
there shall have been duly tendered to the Representative for the several
Underwriters' accounts the appropriate number of Securities.
(m) No order suspending the sale of the Securities in any
jurisdiction designated by the Representative pursuant to subsection (e) of
Section 4 hereof shall have been issued on either the Closing Date or the Option
Closing Date, if any, and no proceedings for that purpose shall have been
instituted or shall be contemplated.
(n) On or before the Closing Date, the Company shall have executed
and delivered to the Representative, (i) the Representative's Warrant Agreement
substantially in the form filed as Exhibit 4.3 to the Registration Statement, in
final form and substance satisfactory to the Representative, and (ii) the
Representative's Warrants in such denominations and to such designees as shall
have been provided to the Company.
(o) On or before the Closing Date, the Firm Securities and Option
Securities shall have been duly approved for listing on the ASE, subject to
official notice of issuance.
(p) On or before the Closing Date, there shall have been delivered to
the Representative all of the Lock-up Agreements, in form and substance
satisfactory to Underwriters' Counsel.
(q) On or before the Closing Date, the Company shall have executed
and delivered to the Representative and the Transfer Agent the Warrant Agreement
substantially in the form filed as Exhibit 4.2 the Registration Statement, in
final form and substance satisfactory to the Representative.
If any condition to the Underwriters' obligations hereunder to be fulfilled
prior to or at the Closing Date or the relevant Option Closing Date, as the case
may be, is not so fulfilled, the Representative may terminate this Agreement or,
if the Representative so elects, it may waive any such conditions which have not
been fulfilled or extend the time for their fulfillment.
7. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless each of the
Underwriters (for purposes of this Section 7 "Underwriter" shall include the
officers, directors, partners, employees, agents and counsel of an Underwriter,
including specifically each person who may be substituted for an Underwriter as
provided in Section 11 hereof), and each person, if any, who controls the
Underwriter ("controlling person") within the meaning of Section 15 of the Act
or
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<PAGE>
Section 20(a) of the Exchange Act, from and against any and all losses,
claims, damages, expenses or liabilities, joint or several (and actions,
proceedings, investigations, inquiries, suits and litigation in respect
thereof), whatsoever (including but not limited to any and all expenses
whatsoever reasonably incurred in investigating, preparing or defending against
any such claim, action, proceeding, investigation, inquiry, suit or litigation,
commenced or threatened, or any claim whatsoever), as such are incurred, to
which the Underwriter or such controlling person may become subject under the
Act, the Exchange Act or any other statute or at common law or otherwise or
under the laws of foreign countries, arising out of or based upon (A) any untrue
statement or alleged untrue statement of a material fact contained (i) in any
Preliminary Prospectus, the Registration Statement or the Prospectus (as from
time to time amended and supplemented); (ii) in any post-effective amendment or
amendments or any new registration statement and prospectus in which is included
securities of the Company issued or issuable upon exercise of the Securities; or
(iii) in any application or other document or written communication (in this
Section 7 collectively called "application") executed by the Company or based
upon written information furnished by the Company in any jurisdiction in order
to qualify the Securities under the securities laws thereof or filed with the
Commission, any state securities commission or agency, ASE or any other
securities exchange; (B) the omission or alleged omission therefrom of a
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; or (C) any breach of any representation, warranty, covenant or
agreement of the Company contained herein or in any certificate by or on behalf
of the Company or any of its officers delivered pursuant hereto, unless, in the
case of clause (A) or (B) above, such statement or omission was made in reliance
upon and in strict conformity with written information furnished to the Company
with respect to any Underwriter by or on behalf of such Underwriter expressly
for use in any Preliminary Prospectus, the Registration Statement or Prospectus,
or any amendment thereof or supplement thereto, or in any application, as the
case may be.
The indemnity agreement in this subsection (a) shall be in addition to any
liability which the Company may have at common law or otherwise.
(b) Each of the Underwriters agrees severally, but not jointly, to
indemnify and hold harmless the Company, each of its directors, each of its
officers who has signed the Registration Statement, and each other person, if
any, who controls the Company within the meaning of the Act, to the same extent
as the foregoing indemnity from the Company to the Underwriters but only with
respect to statements or omissions, if any, made in any Preliminary Prospectus,
the Registration Statement or Prospectus or any amendment thereof or supplement
thereto or in any application made in reliance upon, and in strict conformity
with, written information furnished to the Company with respect to any
Underwriter by such Underwriter expressly for use in such Preliminary
Prospectus, the Registration Statement or Prospectus or any amendment thereof or
supplement thereto or in any such application, provided that such written
information or omissions only pertain to disclosures in the Preliminary
Prospectus, the Registration Statement or Prospectus directly relating to the
transactions effected by the Underwriters in connection with this Offering. The
Company acknowledges that the statements with respect to the public offering of
the Firm Securities and the Option Securities set forth under the heading
"Underwriting" and the stabilization legend in the Prospectus and the last
sentence of the front cover page of the Prospectus have been furnished by the
Underwriters expressly for use therein and constitute the only information
furnished in writing
30
<PAGE>
by or on behalf of the Underwriters for inclusion in the Prospectus.
(c) Promptly after receipt by an indemnified party under this Section
7 of notice of the commencement of any claim, action, suit, investigation,
inquiry, proceeding or litigation, such indemnified party shall, if a claim in
respect thereof is to be made against one or more indemnifying parties under
this Section 7, notify each party against whom indemnification is to be sought
in writing of the commencement thereof (but the failure so to notify an
indemnifying party shall not relieve it from any liability which it may have
under this Section 7 except to the extent that it has been prejudiced in any
material respect by such failure or from any liability which it may have
otherwise). In case any such claim, action, suit, investigation, inquiry,
proceeding or litigation is brought against any indemnified party, and it
notifies an indemnifying party or parties of the commencement thereof, the
indemnifying party or parties will be entitled to participate therein, and to
the extent it may elect by written notice delivered to the indemnified party
promptly after receiving the aforesaid notice from such indemnified party, to
assume the defense thereof with counsel reasonably satisfactory to such
indemnified party. Notwithstanding the foregoing, the indemnified party or
parties shall have the right to employ its or their own counsel in any such case
but the fees and expenses of such counsel shall be at the expense of such
indemnified party or parties unless (i) the employment of such counsel shall
have been authorized in writing by the indemnifying parties in connection with
the defense thereof at the expense of the indemnifying party, (ii) the
indemnifying parties shall not have employed counsel reasonably satisfactory to
such indemnified party to have charge of the defense thereof within a reasonable
time after notice of commencement thereof, or (iii) such indemnified party or
parties shall have reasonably concluded that there may be defenses available to
it or them which are different from or additional to those available to one or
all of the indemnifying parties (in which case the indemnifying parties shall
not have the right to direct the defense thereof on behalf of the indemnified
party or parties), in any of which events such fees and expenses of one
additional counsel shall be borne by the indemnifying parties. In no event shall
the indemnifying parties be liable for fees and expenses of more than one
counsel (in addition to any local counsel) separate from their own counsel for
all indemnified parties in connection with any one claim, action, suit,
investigation, inquiry, proceeding or litigation or separate but similar or
related claims, actions, suits, investigations, inquiries, proceedings or
litigation in the same jurisdiction arising out of the same general allegations
or circumstances. Anything in this Section 7 to the contrary notwithstanding,
an indemnifying party shall not be liable for any settlement of any claim,
action, suit, investigation, inquiry, proceeding or litigation effected without
its written consent; provided, however, that such consent was not unreasonably
withheld. An indemnifying party will not, without the prior written consent of
the indemnified parties, settle, compromise or consent to the entry of any
judgment with respect to any pending or threatened claim, action, suit,
investigation, inquiry, proceeding or litigation in respect of which
indemnification or contribution may be sought hereunder (whether or not the
indemnified parties are actual or potential parties to such claim, action, suit,
investigation, inquiry, proceeding or litigation), unless such settlement,
compromise or consent (i) includes an unconditional release of each indemnified
party from all liability arising out of such claim, action, suit, investigation,
inquiry, proceeding or litigation and (ii) does not include a statement as to or
an admission of fault, culpability or a failure to act by or on behalf of any
indemnified party.
(d) In order to provide for just and equitable contribution in any
case in which
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<PAGE>
(i) an indemnified party makes claim for indemnification pursuant to this
Section 7, but it is judicially determined (by the entry of a final judgment
or decree by a court of competent jurisdiction and the expiration of time to
appeal or the denial of the last right of appeal) that such indemnification
may not be enforced in such case notwithstanding the fact that the express
provisions of this Section 7 provide for indemnification in such case, or
(ii) contribution under the Act may be required on the part of any
indemnified party, then each indemnifying party shall contribute to the
amount paid as a result of such losses, claims, damages, expenses or
liabilities (or actions in respect thereof) (A) in such proportion as is
appropriate to reflect the relative benefits received by each of the
contributing parties, on the one hand, and the party to be indemnified on the
other hand, from the offering of the Firm Securities and the Option
Securities or (B) if the allocation provided by clause (A) above is not
permitted by applicable law, in such proportion as is appropriate to reflect
not only the relative benefits referred to in clause (i) above but also the
relative fault of each of the contributing parties, on the one hand, and the
party to be indemnified, on the other hand, in connection with the statements
or omissions that resulted in such losses, claims, damages, expenses or
liabilities, as well as any other relevant equitable considerations. In any
case where the Company is the contributing party and the Underwriters are the
indemnified party, the relative benefits received by the Company on the one
hand, and the Underwriters, on the other, shall be deemed to be in the same
proportion as the total net proceeds from the offering of the Firm Securities
and the Option Securities (before deducting expenses) bear to the total
underwriting discounts received by the Underwriters hereunder, in each case
as set forth in the table on the Cover Page of the Prospectus. Relative fault
shall be determined by reference to, among other things, whether the untrue
or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the
Company, or by the Underwriters, and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such untrue
statement or omission. The amount paid or payable by an indemnified party as
a result of the losses, claims, damages, expenses or liabilities (or actions
in respect thereof) referred to above in this subsection (d) shall be deemed
to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this subsection (d), the
Underwriters shall not be required to contribute any amount in excess of the
underwriting discount applicable to the Firm Securities and the Option
Securities purchased by the Underwriters hereunder. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. For purposes of this Section 7, each person, if
any, who controls the Company or the Underwriter within the meaning of the
Act, each officer of the Company who has signed the Registration Statement,
and each director of the Company shall have the same rights to contribution
as the Company or the Underwriter, as the case may be, subject in each case
to this subsection (d). Any party entitled to contribution will, promptly
after receipt of notice of commencement of any action, suit or proceeding
against such party in respect to which a claim for contribution may be made
against another party or parties under this subsection (d), notify such party
or parties from whom contribution may be sought, but the omission so to
notify such party or parties shall not relieve the party or parties from whom
contribution may be sought from any obligation it or they may have hereunder
or otherwise than under this subsection (d), or to the extent that such party
or parties were not adversely affected by such omission. The contribution
agreement set forth above shall be in addition to any liabilities which any
indemnifying party may have at common law or otherwise.
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8. REPRESENTATIONS AND AGREEMENTS TO SURVIVE DELIVERY. All
representations, warranties and agreements contained in this Agreement or
contained in certificates of officers of the Company submitted pursuant
hereto, shall be deemed to be representations, warranties and agreements at
the Closing Date and the Option Closing Date, as the case may be, and such
representations, warranties and agreements of the Company and the indemnity
and contribution agreements contained in Section 7 hereof, shall remain
operative and in full force and effect regardless of any investigation made
by or on behalf of any Underwriter, the Company, any controlling person of
any Underwriter or the Company, and shall survive termination of this
Agreement or the issuance and delivery of the Securities to the Underwriters
and the Representative, as the case may be.
9. EFFECTIVE DATE. This Agreement shall become effective at 10:00 a.m.,
New York City time, on the next full business day following the date hereof, or
at such earlier time after the Registration Statement becomes effective as the
Representative, in its discretion, shall release the Securities for sale to the
public; provided, however, that the provisions of Sections 5, 7 and 10 of this
Agreement shall at all times be effective. For purposes of this Section 9, the
Securities to be purchased hereunder shall be deemed to have been so released
upon the earlier of dispatch by the Representative of telegrams to securities
dealers releasing such securities for offering or the release by the
Representative for publication of the first newspaper advertisement which is
subsequently published relating to the Securities.
10. TERMINATION.
(a) Subject to subsection (b) of this Section 10, the Representative
shall have the right to terminate this Agreement, (i) if any domestic or
international event or act or occurrence has materially adversely disrupted, or
in the Representative's opinion will in the immediate future materially
adversely disrupt, the financial markets; or (ii) if any material adverse change
in the financial markets shall have occurred; or (iii) if trading generally
shall have been suspended or materially limited on or by, as the case may be,
any of the New York Stock Exchange, the American Stock Exchange, the Nasdaq
Stock Market, the Boston Stock Exchange, the Commission or any governmental
authority having jurisdiction over such matters; or (iv) if trading of any of
the securities of the Company shall have been suspended, or any of the
securities of the Company shall have been delisted, on any exchange or in any
over-the-counter market; or (v) if the United States shall have become involved
in a war or major hostilities, or if there shall have been an escalation in an
existing war or major hostilities or a national emergency shall have been
declared in the United States; or (vi) if a banking moratorium has been declared
by a state or federal authority; or (vii) if a moratorium in U.S. foreign
exchange trading has been declared; or (viii) if the Company shall have
sustained a loss material or substantial to the Company by fire, flood,
accident, hurricane, earthquake, theft, sabotage or other calamity or malicious
act which, whether or not such loss shall have been insured, will, in the
Representative's opinion, make it inadvisable to proceed with the offering, sale
and/or delivery of the Securities; or (ix) if there shall have been such a
material adverse change in the conditions or prospects of the Company, or such
material adverse change in the general market, political or economic conditions,
in the United States or elsewhere, that, in each case, in the Representative's
judgment, would make it inadvisable to proceed with the offering, sale and/or
delivery of the Securities or (x) if either Dr. Jacob Y. Terner or Dr. Gregg A.
DeNicola shall no longer serve the Company in their respective present
capacities.
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(b) If this Agreement is terminated by the Representative in
accordance with the provisions of Section 10(a) the Company shall promptly
reimburse and indemnify the Representative for all of its actual out-of-pocket
expenses, including the fees and disbursements of counsel for the Underwriters
(less amounts previously paid pursuant to Section 5(c) above). Notwithstanding
any contrary provision contained in this Agreement, if this Agreement shall not
be carried out within the time specified herein, or any extension thereof
granted by the Representative, by reason of any failure on the part of the
Company to perform any undertaking or satisfy any condition of this Agreement by
it to be performed or satisfied (including, without limitation, pursuant to
Section 6 or Section 12) then, the Company shall promptly reimburse and
indemnify the Representative for all of its actual out-of-pocket expenses,
including the fees and disbursements of counsel for the Underwriters (less
amounts previously paid pursuant to Section 5(c) above). In addition, the
Company shall remain liable for all Blue Sky counsel fees and disbursements,
expenses and filing fees. Notwithstanding any contrary provision contained in
this Agreement, any election hereunder or any termination of this Agreement
(including, without limitation, pursuant to Sections 6, 10, 11 and 12 hereof),
and whether or not this Agreement is otherwise carried out, the provisions of
Section 5 and Section 7 shall not be in any way affected by such election or
termination or failure to carry out the terms of this Agreement or any part
hereof.
11. SUBSTITUTION OF THE UNDERWRITERS. If one or more of the Underwriters
shall fail (otherwise than for a reason sufficient to justify the termination of
this Agreement under the provisions of Section 6, Section 10 or Section 12
hereof) to purchase the Securities which it or they are obligated to purchase on
such date under this Agreement (the "Defaulted Securities"), the Representative
shall have the right, within 24 hours thereafter, to make arrangement for one or
more of the non-defaulting Underwriters, or any other underwriters, to purchase
all, but not less than all, of the Defaulted Securities in such amounts as may
be agreed upon and upon the terms herein set forth; if, however, the
Representative shall not have completed such arrangements within such 24-hour
period, then:
(a) if the number of Defaulted Securities does not exceed 10% of the
total number of Firm Securities to be purchased on such date, the non-
defaulting Underwriters shall be obligated to purchase the full amount thereof
in the proportions that their respective underwriting obligations hereunder bear
to the underwriting obligations of all non-defaulting Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the total
number of Firm Securities, this Agreement shall terminate without liability on
the part of any non-defaulting Underwriters (or, if such default shall occur
with respect to any Option Securities to be purchased on an Option Closing Date,
the Underwriters may at the Representative's option, by notice from the
Representative to the Company, terminate the Underwriters' obligation to
purchase Option Securities from the Company on such date).
No action taken pursuant to this Section 11 shall relieve any defaulting
Underwriter from liability in respect of any default by such Underwriter under
this Agreement.
In the event of any such default which does not result in a termination of this
Agreement, the Representative shall have the right to postpone the Closing Date
for a period not exceeding seven
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<PAGE>
(7) business days in order to effect any required changes in the Registration
Statement or Prospectus or in any other documents or arrangements.
12. DEFAULT BY THE COMPANY. If the Company shall fail at the Closing Date
or at any Option Closing Date, as applicable, to sell and deliver the number of
Securities which it is obligated to sell hereunder on such date, then this
Agreement shall terminate (or, if such default shall occur with respect to any
Option Securities to be purchased on an Option Closing Date, the Underwriters
may at the Representative's option, by notice from the Representative to the
Company, terminate the Underwriters' obligation to purchase Option Securities
from the Company on such date) without any liability on the part of any non-
defaulting party other than pursuant to Section 5, Section 7 and Section 10
hereof. No action taken pursuant to this Section 12 shall relieve the Company
from liability, if any, in respect of such default.
13. NOTICES. All notices and communications hereunder, except as herein
otherwise specifically provided, shall be in writing and shall be deemed to have
been duly given if mailed or transmitted by any standard form of
telecommunication. Notices to the Underwriters shall be directed to the
Representative at 520 Madison Avenue, 10th Floor, New York, New York 10022,
Attention: Ronald M. Heineman, President, with a copy to Hall Dickler Kent
Friedman & Wood, LLP, 909 Third Avenue, New York, New York 10022, Attention:
Steven D. Dreyer, Esq. Notices to the Company shall be directed to the Company
at 515 South Flower Street, Suite 1640, Los Angeles, California 90071,
Attention: Jacob Y. Terner, M.D., Chief Executive Officer, with a copy to:
Miller & Holguin, 1801 Century Park East, Seventh Floor, Los Angeles, California
90067, Attention: Dale S. Miller, Esq.
14. PARTIES. This Agreement shall inure solely to the benefit of and
shall be binding upon, the Underwriters, the Company and the controlling
persons, directors and officers referred to in Section 7 hereof, and their
respective successors, legal representatives and assigns, and no other person
shall have or be construed to have any legal or equitable right, remedy or claim
under or in respect of or by virtue of this Agreement or any provisions herein
contained. No purchaser of Securities from any Underwriter shall be deemed to be
a successor by reason merely of such purchase.
15. CONSTRUCTION. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of New York without giving
effect to its choice of law or conflict of laws principles.
16. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, and all of which
taken together shall be deemed to be one and the same instrument.
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17. ENTIRE AGREEMENT; AMENDMENTS. This Agreement, the Warrant Agreement
and the Representative's Warrant Agreement constitute the entire agreement of
the parties hereto and supersede all prior written or oral agreements,
understandings and negotiations with respect to the subject matter hereof. This
Agreement may not be amended except in a writing, signed by the Representative
and the Company.
If the foregoing correctly sets forth the understanding between the
Underwriters and the Company, please so indicate in the space provided below for
that purpose, whereupon this letter shall constitute a binding agreement among
us.
Very truly yours,
PROSPECT MEDICAL HOLDINGS, INC.
By:
-----------------------------------
Jacob Y. Terner, M.D.,
Chief Executive Officer
Confirmed and accepted as of
the date first above written.
SECURITY CAPITAL TRADING, INC.
For itself and as Representative of the several Underwriters named in Schedule A
hereto.
By:
-----------------------------
Ronald M. Heineman, President
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SCHEDULE A
NUMBER OF SHARES NUMBER OF REDEEMABLE
NAME OF UNDERWRITERS TO BE PURCHASED WARRANTS TO BE PURCHASED
- -------------------- ---------------- ------------------------
Security Capital Trading, Inc.
--------- ---------
Total 3,000,000 3,000,000
A-1
<PAGE>
EXHIBIT A
________________, 1998
Security Capital Trading, Inc.
520 Madison Avenue
New York, New York 10022
Gentlemen:
The undersigned understands that Security Capital Trading, Inc. (the
"Representative") is considering acting as Representative for an initial public
offering (the "Offering") of securities of Prospect Medical Holdings, Inc., a
Delaware corporation (the "Company"), pursuant to a registration statement on
Form S-1 (the "Registration Statement") filed with the Securities and Exchange
Commission (the "Commission").
The Representative has informed the Company that the Representative's
obligation to execute an underwriting agreement with respect to the Offering,
and to purchase the securities which the Company will be offering to the public,
will be conditioned upon the Company's receipt of agreements from all persons or
entities who, immediately prior to the declaration of effectiveness of the
Registration Statement are (a) holders of 5% or more of the shares of the
Company's common stock, par value $.01 per share (the "Common Stock"); and/or
(b) holders of securities exercisable or exchangeable for or convertible into 5%
or more of the shares of Common Stock, regarding the imposition of restrictions
on the sale or other disposition of their respective securities.
In consideration of the foregoing, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
undersigned agrees that the undersigned will not, for a period of 12 months
following the date the Registration Statement is declared effective by the
Commission, without the prior written consent of the Company and the
Representative, directly or indirectly, offer, sell, transfer, pledge, assign,
hypothecate or otherwise encumber any of the shares of Common Stock or
securities exercisable or exchangeable for or convertible into shares of Common
Stock ("Derivative Securities") held by the undersigned, or otherwise dispose of
any interest therein under Rule 144 promulgated by the Commission or otherwise,
except as to transfers by gift or under the laws of descent and distribution
when the donee or transferee enters into an agreement of like tenor herewith.
<PAGE>
The number of shares of Common Stock and Derivative Securities to which
this agreement relates is set forth below.
Very truly yours,
--------------------------------
Number of shares of Common Stock held:
--------------------------------------
Number and type of Derivative Securities held:
--------------------------------
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
MED-SEARCH, INC.,
MED-SEARCH ACQUISITION CORPORATION,
AND
PROSPECT MEDICAL SYSTEMS, INC.
JUNE 10, 1996
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ARTICLE 1
<S> <C>
DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
1.1 CERTAIN DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . .2
1.2 OTHER DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . .3
ARTICLE 2
THE MERGER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
2.1 EFFECTIVE TIME OF THE MERGER . . . . . . . . . . . . . . . . . . . . . .3
2.2 EFFECTS OF THE MERGER. . . . . . . . . . . . . . . . . . . . . . . . . .3
2.3 EFFECT ON CAPITAL STOCK. . . . . . . . . . . . . . . . . . . . . . . . .3
2.4 EXCHANGE OF CERTIFICATES . . . . . . . . . . . . . . . . . . . . . . . .4
2.5 BOARD OF DIRECTORS, OFFICERS . . . . . . . . . . . . . . . . . . . . . .5
2.6 NO FURTHER OWNERSHIP RIGHTS IN PROSPECT MEDICAL SYSTEMS COMMON . . . . .6
2.7 TAX TREATMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
2.8 SECTION 203 OF THE DGCL NOT APPLICABLE . . . . . . . . . . . . . . . . .6
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF
PROSPECT MEDICAL SYSTEMS AND PROSPECT
MEDICAL GROUP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
3.1 ORGANIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
3.2 CAPITAL STRUCTURE. . . . . . . . . . . . . . . . . . . . . . . . . . . .6
3.3 AUTHORITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
3.4 FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . .8
3.5 BUSINESS CHANGES . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
3.6 CONDUCT OF BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . . . .9
3.7 PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.8 REAL PROPERTY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.9 ACCOUNTS RECEIVABLE. . . . . . . . . . . . . . . . . . . . . . . . . . 11
3.10 TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
3.11 COMPLIANCE WITH LAW. . . . . . . . . . . . . . . . . . . . . . . . . . 11
3.12 LICENSURE AND REIMBURSEMENT. . . . . . . . . . . . . . . . . . . . . . 12
3.13 FRAUD AND ABUSE. . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
3.14 LITIGATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
3.15 CONTRACTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
3.16 PROPRIETARY RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . 14
3.17 INSURANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
3.18 CERTAIN ADVANCES . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
3.19 RELATED PARTIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
3.20 UNDERLYING DOCUMENTS . . . . . . . . . . . . . . . . . . . . . . . . . 15
3.21 EMPLOYEES AND UNION ACTIVITIES . . . . . . . . . . . . . . . . . . . . 15
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3.22 EMPLOYEE BENEFIT PLANS . . . . . . . . . . . . . . . . . . . . . . . . 15
3.23 ACTIVITIES OF PROVIDERS AND ENROLLEE GROUPS. . . . . . . . . . . . . . 17
3.24 INSPECTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
3.25 SECTION 203 OF THE DGCL NOT APPLICABLE . . . . . . . . . . . . . . . . 17
3.26 REPRESENTED BY COUNSEL . . . . . . . . . . . . . . . . . . . . . . . . 17
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF MED-SEARCH,
MS ACQUISITION CORPORATION AND
SUNCREST. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
4.1 ORGANIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
4.2 MS ACQUISITION CORPORATION CAPITAL STRUCTURE . . . . . . . . . . . . . 18
4.3 AUTHORITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
4.4 CAPITAL STRUCTURE. . . . . . . . . . . . . . . . . . . . . . . . . . . 19
4.5 FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . 20
4.6 CONDUCT OF BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . . . 20
4.7 BUSINESS CHANGES . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
4.8 PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
4.9 REAL PROPERTY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
4.10 ACCOUNTS RECEIVABLE. . . . . . . . . . . . . . . . . . . . . . . . . . 23
4.11 TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
4.12 COMPLIANCE WITH LAW. . . . . . . . . . . . . . . . . . . . . . . . . . 23
4.13 LICENSURE AND REIMBURSEMENT. . . . . . . . . . . . . . . . . . . . . . 24
4.14 FRAUD AND ABUSE. . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
4.15 LITIGATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
4.16 CONTRACTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
4.17 PROPRIETARY RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . 26
4.18 INSURANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
4.19 CERTAIN ADVANCES . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
4.20 RELATED PARTIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
4.21 UNDERLYING DOCUMENTS . . . . . . . . . . . . . . . . . . . . . . . . . 27
4.22 EMPLOYEES AND UNION ACTIVITIES . . . . . . . . . . . . . . . . . . . . 27
4.23 EMPLOYEE BENEFIT PLANS . . . . . . . . . . . . . . . . . . . . . . . . 27
4.24 ACTIVITIES OF PROVIDERS AND ENROLLEE GROUPS. . . . . . . . . . . . . . 28
4.25 INSPECTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
4.26 SECTION 203 OF THE DGCL NOT APPLICABLE . . . . . . . . . . . . . . . . 29
4.27 REPRESENTED BY COUNSEL . . . . . . . . . . . . . . . . . . . . . . . . 29
4.28 REPRESENTED BY COUNSEL . . . . . . . . . . . . . . . . . . . . . . . . 29
ARTICLE 5
COVENANTS RELATING TO CONDUCT OF BUSINESS . . . . . . . . . . . . . . . . . . 29
5.1 ORDINARY COURSE. . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
5.2 DIVIDENDS; CHANGES IN STOCK. . . . . . . . . . . . . . . . . . . . . . 29
5.3 ISSUANCE OF SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . 30
5.4 GOVERNING DOCUMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . 30
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<PAGE>
5.5 NO SOLICITATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
5.6 NO ACQUISITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
5.7 NO DISPOSITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
5.8 INDEBTEDNESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
5.9 PROVIDER AND BUSINESS RELATIONS. . . . . . . . . . . . . . . . . . . . 30
5.10 OTHER ACTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
5.11 ADVICE OF CHANGES; GOVERNMENT FILINGS. . . . . . . . . . . . . . . . . 31
5.12 ACCOUNTING METHODS . . . . . . . . . . . . . . . . . . . . . . . . . . 31
5.13 TAXFREE REORGANIZATION TREATMENT . . . . . . . . . . . . . . . . . . . 31
5.14 COMPENSATION, BENEFIT PLANS. . . . . . . . . . . . . . . . . . . . . . 31
5.15 PROSPECT MANAGEMENT AGREEMENT. . . . . . . . . . . . . . . . . . . . . 32
ARTICLE 6
ADDITIONAL AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
6.1 ACCESS TO INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . 32
6.2 LEGAL CONDITIONS TO THE MERGER . . . . . . . . . . . . . . . . . . . . 32
6.3 MED-SEARCH STOCKHOLDERS' APPROVAL. . . . . . . . . . . . . . . . . . . 32
6.4 PROSPECT MEDICAL SYSTEMS STOCKHOLDERS' APPROVAL. . . . . . . . . . . . 33
6.5 DISSENTING SHARES. . . . . . . . . . . . . . . . . . . . . . . . . . . 33
6.6 BLUE SKY LAWS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
6.7 COMMUNICATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
6.8 DELIVERY OF STOCK CERTIFICATES . . . . . . . . . . . . . . . . . . . . 33
6.9 UPDATE TO DISCLOSURES. . . . . . . . . . . . . . . . . . . . . . . . . 33
6.10 GOOD FAITH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
6.11 STATE STATUTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
6.12 COMPOSITION OF MED-SEARCH BOARD. . . . . . . . . . . . . . . . . . . . 34
6.13 SETTLEMENT OF CLAIMS . . . . . . . . . . . . . . . . . . . . . . . . . 34
6.14 MAINTENANCE/ASSIGNMENT OF HMO CONTRACTS. . . . . . . . . . . . . . . . 34
6.15 FINDERS FEE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
6.16 FAIRNESS OPINION . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
6.17 INCREASE IN NUMBER OF AUTHORIZED SHARES OF MED-SEARCH COMMON . . . . . 34
ARTICLE 7
CONDITIONS PRECEDENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
7.1 CONDITIONS TO EACH PARTY'S OBLIGATIONS TO EFFECT THE MERGER. . . . . . 35
7.2 CONDITIONS TO OBLIGATIONS OF MED-SEARCH AND MS ACQUISITION
CORPORATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
7.3 CONDITIONS TO OBLIGATIONS OF PROSPECT MEDICAL SYSTEMS. . . . . . . . . 37
ARTICLE 8
CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
8.1 CLOSING DATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
8.2 FILING DATE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
8.3 PRIVATE PLACEMENT OF MED-SEARCH COMMON . . . . . . . . . . . . . . . . 38
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<PAGE>
8.4 APPOINTMENT OF NEW BOARD OF DIRECTORS. . . . . . . . . . . . . . . . . 39
8.5 CLOSING CERTIFICATES . . . . . . . . . . . . . . . . . . . . . . . . . 39
ARTICLE 9
SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS . . . . . . . . . . . . 39
ARTICLE 10
PAYMENT OF EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
ARTICLE 11
TERMINATION, AMENDMENT AND WAIVER . . . . . . . . . . . . . . . . . . . . . . 40
11.1 TERMINATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
11.2 EFFECT OF TERMINATION. . . . . . . . . . . . . . . . . . . . . . . . . 41
11.3 AMENDMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
11.4 EXTENSION, WAIVER. . . . . . . . . . . . . . . . . . . . . . . . . . . 41
ARTICLE 12
GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
12.1 NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
12.2 HEADINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
12.3 COUNTERPARTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
12.4 BINDING NATURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
12.5 MERGER OF DOCUMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . 43
12.6 INTEGRATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
12.7 INCORPORATION OF EXHIBITS. . . . . . . . . . . . . . . . . . . . . . . 43
12.8 GOOD FAITH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
12.9 APPLICABLE LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
12.10 DISPUTE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
12.11 SEVERABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
12.12 THIRD PARTY BENEFICIARIES. . . . . . . . . . . . . . . . . . . . . . . 44
12.13 BEST EFFORTS; FURTHER ASSURANCES . . . . . . . . . . . . . . . . . . . 44
EXHIBIT A CERTIFICATE OF MERGER
EXHIBIT B ASSET PURCHASE AGREEMENT
EXHIBIT C INVESTMENT AGREEMENT
EXHIBIT D PROSPECT MANAGEMENT AGREEMENT
EXHIBIT E MED-SEARCH LITIGATION
EXHIBIT F ISSUANCE OF SECURITIES
EXHIBIT G ACQUISITIONS
EXHIBIT H CONSULTING AGREEMENTS
</TABLE>
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<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and
entered into as of the 10th day of June, 1996 by and among MED-SEARCH, INC., a
Delaware corporation ("Med-Search"), MED-SEARCH ACQUISITION CORPORATION, a
Delaware Corporation ("MS Acquisition Corporation"), and PROSPECT MEDICAL
SYSTEMS, INC., a Delaware corporation ("Prospect Medical Systems").
RECITALS
A. Med-Search is a provider of medical practice management and
administrative services which is currently operating in a severely distressed
financial condition;
B. Med-Search has previously engaged in discussions with Jacob Y. Terner,
M.D. (Terner and his assigns or designees shall collectively be referred to as
"Investor") regarding the merger of Med-Search with another, more financially
viable provider of managed care services and the raising of capital for such
ventures;
C. Med-Search and Investor have entered into a binding memorandum of
intent dated as of October 13, 1995 ("Memorandum of Intent") which provides for
the merger of a wholly owned subsidiary of Med-Search with a management services
organization in a tax-free, stock for stock exchange;
D. In connection with the Memorandum of Intent and to effectuate the
proposed merger, Med-Search has caused the formation of a wholly owned
subsidiary, MS Acquisition Corporation, and Investor has (i) advanced
significant funds on behalf of Med-Search to resolve certain claims and
litigation against Med-Search and to maintain Med-Search's ongoing operations
until the closing of the merger; (ii) entered into a memorandum of intent with
Prospect Medical Group, Inc., a California professional medical corporation
("Prospect Medical Group"), pursuant to which Prospect Medical Group has caused
the formation of Prospect Medical Systems for the purpose of transferring all of
Prospect Medical Group's non-professional assets and administrative and
management functions to Prospect Medical Systems; and (iii) agreed to arrange a
$2,500,000 infusion of equity working capital at the closing of the Merger;
E. Subject to the provisions of this Agreement, immediately following (i)
approval of the transactions contemplated herein by the stockholders of
Med-Search and Prospect Medical Systems pursuant to a Joint Information
Statement and (ii) the filing of a Certificate of Amendment to Med-Search's
Certificate of Incorporation increasing the number of authorized shares of
Med-Search's $0.01 par value common stock ("Med-Search Common") from 29,000,000
to 250,000,000, Prospect Medical Systems shall execute a Certificate of Merger
(the "Certificate of Merger") in substantially the form attached hereto as
Exhibit A, which provides for the merger (the "Merger") of MS Acquisition
Corporation with and into Prospect Medical Systems at the time provided for in
Article II thereof (the "Merger Date").
<PAGE>
F. Following the Merger, in accordance with the terms of this Agreement,
Prospect Medical Systems shall be a wholly-owned subsidiary of Med-Search.
Pursuant to the Stock Exchange Ratio set forth in Section 2.3(b) of this
Agreement, 1,600 shares of Common Stock, $.01 par value, of Prospect Medical
Systems issued and outstanding ("Prospect Medical Systems Common") will be
converted into 88,089,312 shares of Med-Search Common. Concurrent with the
Merger, Prospect Medical Group shall purchase certain assets of Suncrest Medical
Group, Inc., a California professional corporation doing business as Interstate
Care Providers ("Suncrest") pursuant to the Asset Purchase Agreement, as defined
in Section 1.1 herein.
G. The parties hereto desire to enter into this Agreement for the purpose
of setting forth certain representations, warranties and covenants made by each
to the other as an inducement to the execution and delivery of this Agreement
and the conditions precedent to the consummation of the Merger.
NOW, THEREFORE, in consideration of the premises and of the mutual
provisions, agreements and covenants herein contained, the parties hereby agree
as follows:
ARTICLE 1
DEFINITIONS
1.1 CERTAIN DEFINITIONS. The terms defined in this Section 1 shall, for
all purposes of this Agreement, have the meanings herein specified, unless the
context expressly or by necessary implication otherwise requires:
(a) "Asset Purchase Agreement" shall mean that certain Agreement for
the Purchase and Sale of Assets, by and among Prospect Medical Group, Suncrest,
Barbara Noble and the Estate of Joseph Noble, M.D. (together "Noble") and the
Noble 1992 Family Trust, a copy of which is set forth as Exhibit B ("Asset
Purchase Agreement").
(b) "Dissenting Shares" means shares of Med-Search Common or Prospect
Medical Systems Common which shall be owned by stockholders of either of them
who shall duly perfect and pursue their appraisal rights with respect to such
shares in accordance with Section 1300 of the California General Corporation
Law.
(c) "Dissenting Stockholders" means those stockholders of Med-Search
or Prospect Medical Systems who are holders of and are entitled to acquire
Dissenting Shares.
(d) "Investment Agreement" shall mean that certain agreement by and
between Med-Search and Investor, a copy of which is attached hereto as Exhibit
C, pursuant to which Investor shall be responsible for arranging an equity
infusion of $2,500,000 into Med-Search.
(e) "Joint Information Statement" shall mean the material which shall
describe the transactions contemplated by this Agreement and which shall be
delivered to and solicit the approval by the stockholders of Med-Search and
Prospect Medical Systems, to the extent required, of (i) this
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<PAGE>
Agreement and the Merger, and any amendments or supplements thereto, all as
required by applicable law; (ii) an increase in authorized Med-Search Common to
250,000,000; (iii) a reverse stock split of Med-Search Common of 44 to one; (iv)
the subsequent reduction in the number of authorized shares of Med-Search Common
from 250,000,000 to 40,000,000; and (v) the appointment of a new Board of
Directors of Med-Search as of the Closing.
(f) "SEC" shall mean the Securities and Exchange Commission.
1.2 OTHER DEFINITIONS. In addition to the terms defined in Section 1.1,
certain other terms are defined elsewhere in this Agreement, and, whenever such
terms are used in this Agreement they shall have their respective defined
meanings, unless the context expressly or by necessary implication otherwise
requires.
ARTICLE 2
THE MERGER
2.1 EFFECTIVE TIME OF THE MERGER. Subject to the provisions of this
Agreement and the prior filing with the Delaware Secretary of State of a
Certificate of Amendment of Certificate of Incorporation increasing the number
of authorized shares of Med-Search Common from 29,000,000 to 250,000,000, a
Certificate of Merger shall be duly prepared, executed and acknowledged by the
Surviving Corporation (as defined in Section 2.2) and thereafter delivered to
the Secretary of State of the State of Delaware, for filing, in accordance with
the Delaware General Corporation Law as soon as practicable on or after the
Closing Date (as defined in Article 8 of this Agreement). The Merger shall
become effective upon the filing of the Certificate of Merger with the Delaware
Secretary of State or such time thereafter as is provided by the Certificate of
Merger (the "Effective Time").
2.2 EFFECTS OF THE MERGER. At the Effective Time, (a) MS Acquisition
Corporation shall be merged with and into Prospect Medical Systems, which shall
be the surviving corporation (the "Surviving Corporation"), and the separate
existence of MS Acquisition Corporation shall cease, (b) the Certificate of
Incorporation of Prospect Medical Systems immediately prior to the Effective
Time shall be the Certificate of Incorporation of the Surviving Corporation; (c)
the Bylaws of Prospect Medical Systems shall be the Bylaws of the Surviving
Corporation; (d) the directors of the Surviving Corporation shall be as set
forth in Section 2.5 hereof; (e) the officers of the Surviving Corporation shall
be as set forth in Section 2.5 hereof; and (f) the Merger shall, from and after
the Effective Time, have all the effects provided by applicable law.
2.3 EFFECT ON CAPITAL STOCK. As of the Effective Time, by virtue of the
Merger and without any action on the part of the holder of any shares of the
issued and outstanding shares of Prospect Medical Systems Common:
(a) CAPITAL STOCK OF MS ACQUISITION CORPORATION. All issued and
outstanding shares of capital stock of MS Acquisition Corporation shall continue
to be issued and shall be converted into 1,000 shares of Common Stock of the
Surviving Corporation. Each stock certificate
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<PAGE>
of MS Acquisition Corporation evidencing ownership of any such shares shall
continue to evidence ownership of such shares of capital stock of the Surviving
Corporation.
(b) CONVERSION OF PROSPECT MEDICAL SYSTEMS COMMON. Other than
fractional shares as provided in Section 2.3(e), each share of Prospect Medical
Systems Common issued and outstanding immediately prior to the Effective Time
shall be converted, without any action on the part of the holders thereof, into
approximately 55,056 shares of Med-Search Common (hereinafter the "Stock
Exchange Ratio") such that shareholders of Prospect Medical Systems collectively
will own 88,089,312 shares of the Med-Search Common (which is intended to
represent approximately 42% of Med-Search Common immediately after the Effective
Time, including shares issued in the Med-Search Placement (defined in Section
7.1(g) herein).
(c) ADJUSTMENT OF EXCHANGE RATIO. If between the date of this
Agreement and the Effective Time, the outstanding shares of Med-Search Common or
Prospect Medical Systems Common shall have been changed or are proposed to be
changed into a different number of shares or a different class by reason of any
reclassification, recapitalization, split-up, combination, exchange of shares or
readjustment due to due diligence or other investigation (including but not
limited to the Franklin lawsuit, described more fully in Exhibit D hereto), the
Stock Exchange Ratio shall be correspondingly adjusted, so that the existing
Med-Search Stockholders, Prospect Medical Systems Stockholders and Investor will
hold approximately 16%, 42% and 42%, respectively, of the outstanding Med-Search
Common, at the Closing Date, including shares issued in the Med-Search
Placement.
(d) DISSENTERS' RIGHTS OF STOCKHOLDERS. Any Dissenting Shares shall
receive such consideration as may be determined pursuant to Section 1300 of the
California General Corporation Law. Each of Med-Search and Prospect Medical
Systems agrees that except with the prior written consent of the Investor, or as
required under the California General Corporation Law, it will not voluntarily
make any payment with respect to, or settle or offer to settle, any such demand
for appraisal. Each Dissenting Stockholder who becomes entitled to payment of
the value of shares shall receive payment therefor (but only after the value
therefor shall have been agreed upon or finally determined pursuant to such
provisions).
(e) FRACTIONAL SHARES. No fractional shares of Med-Search Common
shall be issued, but in lieu thereof each holder of shares of Prospect Medical
Systems Common who would otherwise be entitled to receive a fraction of a share
of Med-Search Common (after aggregating all fractional shares of Med-Search
Common to be received by such holder) shall receive from Med-Search an amount of
cash (rounded up to the nearest whole cent) equal to the product of (i) the
fraction of a share to which such holder would otherwise be entitled, multiplied
by (ii) the average closing bid price of a share of Med-Search Common for the
ten (10) most recent days on which Med-Search Common has traded on the OTC
Bulletin Board ending the trading day immediately prior to the Closing Date.
2.4 EXCHANGE OF CERTIFICATES.
(a) EXCHANGE AGENT. Prior to the Effective Time, Med-Search shall
appoint American Stock Transfer & Trust to act as exchange agent (the "Exchange
Agent") in the Merger.
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(b) MED-SEARCH TO PROVIDE COMMON STOCK. Promptly after the Effective
Time, Med-Search shall make available to the Exchange Agent for exchange in
accordance with this Article 2 and the Certificate of Merger, through such
reasonable procedures as Med-Search may adopt, the shares of Med-Search Common
issuable pursuant to Section 2.3 in exchange for outstanding shares of Prospect
Medical Systems Common.
(c) EXCHANGE PROCEDURES. As soon as practicable after the Effective
Time, the Exchange Agent shall mail to each holder of record of a certificate or
certificates which immediately prior to the Effective Time represented
outstanding shares of Prospect Medical Systems Common (the "Certificates") whose
shares are being converted into Med-Search Common pursuant to Section 2.3,
instructions for use in effecting the surrender of the Certificates in exchange
for Med-Search Common. Upon surrender of a Certificate for cancellation to the
Exchange Agent, the holder of such Certificate shall be entitled to receive in
exchange therefor the number of shares of Med-Search Common and payments in lieu
of fractional shares to which the holder of Prospect Medical Systems Common is
entitled pursuant to Section 2.3 and the Certificate of Merger and is
represented by the Certificate so surrendered. The Certificate so surrendered
shall forthwith be canceled. In the event of a transfer of ownership of
Prospect Medical Systems Common which is not registered in the transfer records
of Prospect Medical Systems, the appropriate number of shares of Med-Search
Common may be delivered to a transferee if the Certificate representing the
right to receive such Med-Search Common is presented to the Exchange Agent and
accompanied by all documents required to evidence and effect such transfer and
to evidence that any applicable stock transfer taxes have been paid. Until
surrendered as contemplated by this Section 2.4, each Certificate shall be
deemed at any time after the Effective Time to represent the right to receive
upon such surrender the number of shares of Med-Search Common as provided by
this Section 2.4 and the Delaware General Corporation Law. The Exchange Agent
shall follow the same procedure with respect to lost, stolen or mutilated
Prospect Medical Systems certificates as it follows with respect to lost, stolen
or mutilated Med-Search certificates. Unless and until any such certificates
shall be so surrendered, any dividends paid or other distributions made to
holders of record of Med-Search Common after the Effective Time shall be paid to
and retained by the Exchange Agent and paid over to such holder when such
certificate is surrendered in accordance with this Section 2.4(c).
2.5 BOARD OF DIRECTORS, OFFICERS. Upon the Effective Time:
(a) The directors of the Surviving Corporation shall be as named in
the Certificate of Merger and each shall remain a director from the Effective
Time until such director's successor shall have been elected and shall qualify,
or as otherwise provided in the By-laws of the Surviving Corporation.
(b) The officers of the Surviving Corporation shall be as named in
the Certificate of Merger and shall each hold office from the Effective Time
until such officer's successor shall have been elected and shall qualify, or as
otherwise provided in the By-laws of the Surviving Corporation.
(c) If at the Effective Time a vacancy shall exist in the Board of
Directors or in any of the offices of the Surviving Corporation, such vacancy
may thereafter be filled in the manner provided in the Bylaws of the Surviving
Corporation.
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2.6 NO FURTHER OWNERSHIP RIGHTS IN PROSPECT MEDICAL SYSTEMS COMMON. All
Prospect Medical Systems Common delivered upon the surrender for exchange of
shares of Med-Search Common in accordance with the terms hereof shall be deemed
to have been delivered in full satisfaction of all rights pertaining to such
shares of Prospect Medical Systems Common. There shall be no further
registration of transfers on the stock transfer books of the Surviving
Corporation of the shares of Prospect Medical Systems Common which were
outstanding immediately prior to the Effective Time. If, after the Effective
Time, Certificates are presented to the Surviving Corporation for any reason,
they shall be canceled and exchanged as provided in this Article 2.
2.7 TAX TREATMENT. The parties intend that the Merger will be a
non-taxable transaction to the holders of Prospect Medical Systems Common under
section 368 of the Internal Revenue Code of 1986, as amended (the "Code").
2.8 SECTION 203 OF THE DGCL NOT APPLICABLE. The provisions of Section 203
of the Delaware General Corporation Law will not, prior to the termination of
this Agreement, apply to this Agreement, the Merger or the transactions
contemplated hereby and thereby.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF
PROSPECT MEDICAL SYSTEMS AND PROSPECT MEDICAL GROUP
Each of Prospect Medical Systems and Prospect Medical Group, individually,
hereby represent and warrant to Med-Search and Investor as follows; provided
however, that each such party's representations and warranties contained herein
relate only to those matters which apply to such party:
3.1 ORGANIZATION. Each of Prospect Medical Systems and Prospect Medical
Group is a corporation duly organized, validly existing and in good standing
under the laws of its state of incorporation and in each of the other
jurisdictions in which it owns or leases property or conducts business, except
where the failure to be so qualified will not have a material adverse effect on
the condition (financial or otherwise), net worth, assets, prospects, employees,
operations, obligations or liabilities (a "Material Adverse Effect") of Prospect
Medical Systems or Prospect Medical Group and has all requisite power and
authority to own, lease and operate its properties and to carry on its business,
as now being conducted, and possesses all regulatory and other licenses,
permits, authorizations, franchises, rights and privileges necessary for the
conduct of its business as conducted.
3.2 CAPITAL STRUCTURE. The authorized capital stock of Prospect Medical
Systems consists of 2,500 shares of Common Stock and no shares of Preferred
Stock. At the close of business as of the Effective Time (a) 1,600 shares of
Prospect Medical Systems Common will be issued and outstanding; (b) no shares of
Preferred Stock will be outstanding; and (c) no options to purchase shares of
Prospect Medical Systems, or convertible securities will be outstanding.
All of the Prospect Medical Systems Common has been or will be issued
in compliance with applicable federal and state securities laws. All of the
outstanding shares of Prospect Medical
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Systems Common are or will be duly authorized, validly issued, fully paid and
nonassessable and not subject to preemptive rights created by statute, Prospect
Medical Systems' Certificate of Incorporation or Bylaws or any agreement to
which Prospect Medical Systems is a party or is bound.
3.3 AUTHORITY. Prospect Medical Systems has as of the date hereof all
requisite corporate power and authority to enter into this Agreement and to
execute the Certificate of Merger and, subject to satisfaction of the conditions
set forth herein, to consummate the transactions contemplated hereby and
thereby. The execution and delivery of this Agreement and the Certificate of
Merger and the consummation of the transactions contemplated hereby and thereby
have been duly authorized by all necessary corporate action on the part of
Prospect Medical Systems, subject to approval by the stockholders of Prospect
Medical Systems. This Agreement has been duly executed and delivered by
Prospect Medical Systems and constitutes a valid and binding obligation of
Prospect Medical Systems enforceable in accordance with its terms. The
Certificate of Merger will be duly executed and delivered by Prospect Medical
Systems and will constitute a valid and binding obligation of Prospect Medical
Systems enforceable in accordance with its terms as of the date thereof.
Provided the conditions in Article 7 are satisfied, the execution and delivery
of this Agreement does not and the consummation of the transactions contemplated
hereby will not, conflict with, or result in any violation of or default (with
or without notice or lapse of time, or both) under, or give rise to a right of
termination, cancellation or acceleration of any obligation to or loss of a
material benefit under (a) any provision of the charter documents or Bylaws of
Prospect Medical Systems or Prospect Medical Group or (b) any agreement or
instrument, permit, franchise, license, judgment or order, applicable to
Prospect Medical Systems or Prospect Medical Group or their respective
properties or assets, other than any such conflicts, violations, defaults,
terminations, cancellations or accelerations which individually and in the
aggregate would not have a Material Adverse Effect on Prospect Medical Systems
or Prospect Medical Group. Prospect Medical Systems and Prospect Medical Group
have prepared and delivered to Med-Search a full and complete list of all
necessary regulatory consents, waivers and approvals (together with any other
material consents, waivers or approvals from third parties, the "Consents") of
third parties applicable to the operations of Prospect Medical Systems that are
required to be obtained by Prospect Medical Systems in connection with the
execution and delivery of this Agreement and the Certificate of Merger by
Prospect Medical Systems and the performance of Prospect Medical Systems'
obligations hereunder or thereunder. Prior to the Closing Date, Prospect
Medical Systems or Prospect Medical Group, as applicable, will obtain all such
Consents.
No consent, approval, order or authorization of, or registration,
declaration or filing with, any court, administrative agency or commission or
other governmental authority or instrumentality (a "Governmental Entity"), is
required by or with respect to Prospect Medical Systems in connection with the
execution and delivery of this Agreement or the Certificate of Merger by
Prospect Medical Systems or the consummation by Prospect Medical Systems of the
transactions contemplated hereby or thereby, except for (a) the filing of the
Certificate of Merger with the Delaware Secretary of State, and appropriate
documents with the relevant authorities of other states in which Prospect
Medical Systems is qualified to do business, (b) such consents, approvals,
orders, authorizations, registrations, declarations and filings as may be
required under applicable state securities laws and the laws of any foreign
country, and (c) such other consents, approvals, orders, authorizations,
registrations, declarations and filings which if not obtained or made would not
have a Material Adverse Effect on Prospect Medical Systems.
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3.4 FINANCIAL STATEMENTS. Prior to the Closing, Prospect Medical Systems
will have furnished to Med-Search (i) Prospect Medical Group's audited statement
of operations, statement of stockholders' equity and statement of cash flows for
the two (2) fiscal years ended September 30, 1995 and Prospect Medical Group's
audited balance sheet at September 30, 1994 and September 30, 1995, and, (ii)
Prospect Medical Systems' pro forma statement of operations and balance sheet at
and for the fiscal year ended September 30, 1995. Prospect Medical Group's
balance sheet at September 30, 1995 is hereinafter referred to as the "Prospect
Medical Group Balance Sheet," and all such financial statements are hereinafter
referred to collectively as the "Prospect Medical Group Financial Statements."
The Prospect Medical Group Financial Statements will have been prepared in
accordance with generally accepted accounting principles ("GAAP") applied on a
consistent basis during the periods involved, except as noted in the notes to
the Prospect Medical Group Financial Statements, and will fairly present the
financial position of Prospect Medical Group and the results of its operations
as of the date and for the periods indicated thereon. At September 30, 1995,
the Prospect Medical Group Balance Sheet (the "Prospect Medical Group Balance
Sheet Date") and as of the Closing Date, Prospect Medical Systems will have no
liabilities or obligations, secured or unsecured (whether accrued, absolute,
contingent or otherwise) not reflected on the Prospect Medical Group Balance
Sheet or the accompanying notes thereto except for liabilities incurred in the
ordinary course of business since the date of said Balance Sheet which are usual
and normal in amount. The reserves reflected in the Prospect Medical Group
Financial Statements for incurred but not yet reported claims ("IBNR") make
sufficient provision for such liabilities and have been established in
accordance with GAAP consistently applied.
3.5 BUSINESS CHANGES. Since the Prospect Medical Group Balance Sheet
Date, except as otherwise contemplated by this Agreement, each of Prospect
Medical Systems and Prospect Medical Group has conducted its business only in
the ordinary and usual course and, without limiting the generality of the
foregoing:
(a) There have been no changes in the condition (financial or
otherwise), net worth, assets, properties, employees, operations, obligations or
liabilities of Prospect Medical Systems or Prospect Medical Group which, in the
aggregate, have had or may be reasonably expected to have a materially adverse
effect on the condition, net worth, assets, properties or operations of Prospect
Medical Systems or Prospect Medical Group;
(b) Neither Prospect Medical Systems nor Prospect Medical Group has
issued, or authorized for issuance, or entered into any commitment to issue, any
equity security, bond, note or other security of Prospect Medical Systems or
Prospect Medical Group;
(c) Neither Prospect Medical Systems nor Prospect Medical Group has
incurred additional debt for borrowed money;
(d) Neither Prospect Medical Systems nor Prospect Medical Group has
incurred any obligation or liability except in the ordinary and usual course of
business;
(e) Neither Prospect Medical Systems nor Prospect Medical Group has
paid any obligation or liability, or discharged, settled or satisfied any claim,
lien or encumbrance, except for current liabilities in the ordinary and usual
course of business and prepayment of existing liabilities;
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(f) Neither Prospect Medical Systems nor Prospect Medical Group has
declared or made any dividend, payment or other distribution on or with respect
to any share of capital stock of Prospect Medical Systems or Prospect Medical
Group;
(g) Neither Prospect Medical Systems nor Prospect Medical Group has
purchased, redeemed or otherwise acquired or committed itself to acquire,
directly or indirectly, any share or shares of capital stock of Prospect Medical
Systems or Prospect Medical Group;
(h) Neither Prospect Medical Systems nor Prospect Medical Group has
mortgaged, pledged, or otherwise, voluntarily or involuntarily, encumbered any
of its assets or properties, except for liens for current taxes which are not
yet delinquent and purchase-money liens arising out of the purchase or sale of
products made in the ordinary and usual course of business;
(i) Except as set forth in Exhibit F, neither Prospect Medical
Systems nor Prospect Medical Group has purchased or agreed to purchase or
otherwise acquire any securities of any corporation, partnership, joint venture,
firm or other entity; neither Prospect Medical Systems nor Prospect Medical
Group has made any expenditure or commitment for the purchase, acquisition,
construction or improvement of a capital asset, except in the ordinary and usual
course of business and in any event not in excess of $25,000 for any single item
or $100,000 in the aggregate;
(j) Neither Prospect Medical Systems nor Prospect Medical Group has
entered into any transaction or contract or made any commitment to do the same,
except in the ordinary and usual course of business;
(k) Neither Prospect Medical Systems nor Prospect Medical Group has
sold, assigned, transferred or conveyed, or committed itself to sell, assign,
transfer or convey, any Proprietary Rights (as defined in Section 3.16);
(l) Neither Prospect Medical Systems nor Prospect Medical Group has
adopted or amended any bonus, incentive, profit-sharing, stock option, stock
purchase, pension, retirement, deferred compensation, severance life insurance,
medical or other benefit plan, agreement, trust, fund or arrangement for the
benefit of employees of any kind whatsoever, nor entered into or amended any
agreement relating to employment, services as an independent contractor or
consultant, or severance or termination pay, nor agreed to do any of the
foregoing;
(m) Neither Prospect Medical Systems nor Prospect Medical Group has
effected or agreed to effect any change in its directors, officers or key
employees;
(n) Neither Prospect Medical Systems nor Prospect Medical Group has
effected or committed itself to effect any amendment or modification in its
charter documents or Bylaws, except as contemplated in this Agreement or the
Certificate of Merger.
3.6 CONDUCT OF BUSINESS. Between the date of the execution of this
Agreement and the Effective Time, Prospect Medical Systems and Prospect Medical
Group shall (i) carry on their respective operations in substantially the same
manner as has previously been done, (ii) use best efforts to maintain and
preserve their businesses and operations in good condition and repair, and to
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prevent the imposition of any additional Liens (as defined below) on the Assets,
(iii) use best efforts to preserve their respective businesses and operations
and the relationships with all patients and payors, and (iv) not liquidate or
dissolve, take any steps to do same, or inform any third person or entity that
they have done or intend to do the same.
3.7 PROPERTIES. The Prospect Medical Group Balance Sheet reflects all of
the real and personal property used by Prospect Medical Systems and Prospect
Medical Group in their business or otherwise held by Prospect Medical Systems
and Prospect Medical Group, except (a) for property acquired or disposed of in
the ordinary and usual course of the business of Prospect Medical Systems and
Prospect Medical Group since the date of such balance sheet and (b) personal
property not required under GAAP to be reflected thereon. Prospect Medical
Systems and Prospect Medical Group have good and marketable title to all assets
and properties reflected on the Prospect Medical Group Balance Sheet and
thereafter acquired, free and clear of any imperfections of title, lien, claim,
encumbrance, restriction, charge or equity of any nature whatsoever
(collectively, "Liens"), except for the lien of current taxes not yet delinquent
and except for Liens which, individually or in the aggregate, are not material
to the encumbered property. All of the fixed assets and properties listed on
the Prospect Medical Group Balance Sheet or thereafter acquired are in
satisfactory condition and repair for the requirements of the business as
presently conducted by Prospect Medical Systems and Prospect Medical Group.
3.8 REAL PROPERTY.
(a) Prospect Medical Systems and Prospect Medical Group have provided
Med-Search with a full and complete list of all real property owned and leased
by Prospect Medical Systems or Prospect Medical Group or under option to
purchase by Prospect Medical Systems or Prospect Medical Group. All such
property leased by Prospect Medical Systems or Prospect Medical Group is held
under valid, existing and enforceable leases. Neither real property owned or
leased by Prospect Medical Systems or Prospect Medical Group nor the operations
of Prospect Medical Systems or Prospect Medical Group thereon, violate in any
material respect any applicable building code, zoning requirement or
classification, or pollution control ordinance or statute relating to the
property or to such operations, and such non-violation is not dependent, in any
instance, on so-called non-conforming use exemptions. No notice from any
governmental or public safety authority of any uncorrected condition, unpaid
assessment charge or fine relating to the medical facilities or the conduct of
business thereon or notice of any pending or contemplated condemnation or change
in zoning which would have a Material Adverse Effect on Prospect Medical Systems
or Prospect Medical Group has been received by Prospect Medical Systems or
Prospect Medical Group.
(b) There are no Hazardous Substances in, under or about the air,
soil, sediment, surface water or groundwater on, under or around any properties
at any time owned, leased or occupied by Prospect Medical Systems or Prospect
Medical Group. Neither Prospect Medical Systems nor Prospect Medical Group have
disposed of any Hazardous Substances on or about such property. Neither
Prospect Medical Systems nor Prospect Medical Group have disposed of any
materials at any site being investigated or remediated for contamination or
possible contamination of the environment. "Hazardous Substances" shall mean
any substance regulated or prohibited by any law or designated by any
governmental agency to be hazardous, toxic, radioactive, regulated medical waste
or otherwise a danger to health or the environment.
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(c) Prospect Medical Systems and Prospect Medical Group have
conducted their business in accordance with all applicable laws, regulations,
orders and other requirements of governmental authorities relating to Hazardous
Substances and the use, storage, treatment, disposal, transport, generation,
release and exposure of others to Hazardous Substances (collectively,
"Environmental Regulation"). Neither Prospect Medical Systems nor Prospect
Medical Group has received any notice of any investigation, claim or proceeding
against Prospect Medical Systems or Prospect Medical Group relating to Hazardous
Substances and neither Prospect Medical Systems nor Prospect Medical Group is
aware of any fact or circumstance which could involve Prospect Medical Systems
or Prospect Medical Group in any environmental litigation, proceeding,
investigation or claim or impose any environmental liability upon Prospect
Medical Systems or Prospect Medical Group (collectively, "Environmental
Litigation"). Between the date hereof and Closing, there shall not have
occurred any failure by Prospect Medical Systems or Prospect Medical Group to
comply with any applicable Environmental Regulation and there shall not have
occurred any Environmental Litigation that shall have a Material Adverse Effect
on Prospect Medical Systems or Prospect Medical Group.
3.9 ACCOUNTS RECEIVABLE. All of the accounts receivable of Prospect
Medical Systems and Prospect Medical Group shown on the Prospect Medical Group
Balance Sheet or thereafter arose in the ordinary and usual course of its
business. The values at which accounts receivable are carried effect the
accounts receivable valuation policy of Prospect Medical Systems and Prospect
Medical Group which are consistent with past practice and in accordance with
GAAP applied on a consistent basis.
3.10 TAXES. Prospect Medical Systems and Prospect Medical Group have duly
filed with the appropriate United States, state, local and foreign governmental
agencies all tax returns and reports required to be filed (subject to permitted
extensions applicable to such filings), which returns are accurate and complete,
and have paid or accrued in full all taxes, duties, charges, withholding
obligations and other governmental liabilities as well as any interest,
penalties, assessments or deficiencies, if any, due to, or claimed to be due by,
any governmental authority. (All such items are collectively referred to herein
as "Taxes"). The Prospect Medical Group Balance Sheet fully accrues (and the
balance sheets subsequent to the date of the Prospect Medical Group Balance
Sheet and provided to Med-Search and the Investor prior to the Closing Date will
fully accrue) all current and deferred Taxes. Neither Prospect Medical Systems
nor Prospect Medical Group is a party to any pending action or proceeding, nor,
to the knowledge of Prospect Medical Systems or Prospect Medical Group, is any
such action or proceeding threatened by any governmental authority for the
assessment or collection of Taxes.
3.11 COMPLIANCE WITH LAW. All licenses, franchises, permits, consents,
certificates and other evidences of authority ("Permits") of Prospect Medical
Systems and Prospect Medical Group which are necessary to the conduct of
Prospect Medical Systems and Prospect Medical Group's businesses are in full
force and effect and neither Prospect Medical Systems nor Prospect Medical Group
is in violation of any Permit in any material respect. Prospect Medical Group
has made available to Med-Search and Investor all material filings made to, and
all inspection or compliance survey reports received from, the California
Department of Corporations, Department of Health Services and the Joint
Commission on Accreditation of Health Care Organizations ("JCAHO") for the last
two years and will make available to Med-Search or Investor all other Permits as
requested
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by Med-Search or Investor. Each of such filings was in material compliance with
all applicable laws and regulations; none of the filings contained an untrue
statement of a material fact or omitted to state a material fact. Except for
possible violations which would not have a Material Adverse Effect on Prospect
Medical Systems or Prospect Medical Group, the business of Prospect Medical
Systems and Prospect Medical Group has been conducted in accordance with all
applicable laws, regulations, orders and other requirements of governmental
authorities.
3.12 LICENSURE AND REIMBURSEMENT. As of the Effective Time:
(a) Each of Prospect Medical Group's employee-physicians is duly
licensed to practice his or her profession in the State of California without
restriction; and Prospect Medical Systems and Prospect Medical Group have all
licenses, permits, approvals and authorizations necessary for the conduct of
their business as presently conducted.
(b) Prospect Medical Group is participating in the Medicare and
Medicaid programs and in any other applicable governmental health care payment
programs, and has been and will continue to be authorized to receive
reimbursement from such programs for fees and charges incurred by eligible
patients for their services. Neither Prospect Medical Systems nor Prospect
Medical Group has received any notice on or before the Effective Time that any
such license, participation or authorization has been or is threatened to be
terminated or, in any material respect, restricted, and neither Prospect Medical
Systems nor Prospect Medical Group knows of any basis for any such termination
or restriction. As of the Effective Time there is no federal or state
investigation pending or, to the best of Prospect Medical Systems' and Prospect
Medical Group's knowledge, contemplated, that will have an impact upon Prospect
Medical Group's reimbursement status or Prospect Medical Group's ability to
operate a medical practice in California. Neither Prospect Medical Systems nor
Prospect Medical Group has received any notice of action on or before the
Effective Time nor, to the best of Prospect Medical Systems' and Prospect
Medical Group's knowledge, is there any threatened or likely action by the
Medicare or Medicaid program or any carrier, to recoup or challenge any Medicare
or Medicaid reimbursement that Prospect Medical Group has received or for which
there currently is a claim pending for services rendered at or in connection
with Prospect Medical Group.
3.13 FRAUD AND ABUSE. Each of Prospect Medical System and Prospect Medical
Group, their officers, employees, agents, independent contractors and medical
staff members have not engaged in any activities which are prohibited under
federal Medicare and Medicaid statutes, 42 U.S.C. Section 1320a-7b, or the
regulations promulgated pursuant to such statutes or related state or local
statutes or regulations or which are prohibited by rules of professional conduct
or which otherwise could constitute fraud, including but not limited to the
following: (i) knowingly and willfully making or causing to be made a false
statement or representation of a material fact in any application for any
benefit or payment; (ii) knowingly and willingly making or causing to be made
any false statement or representation of a material fact for use in determining
rights to any benefit or payment, (iii) failing to disclose knowledge by a
claimant of the occurrence of any event affecting the initial or continued right
to any benefit or payment on its behalf or on behalf of another, with intent to
secure such benefit or payment fraudulently, (iv) knowingly and willfully
soliciting or receiving any remuneration (including any kickback, bribe, or
rebate), directly or indirectly, overtly or covertly, in cash or in kind or
offering to pay such remuneration (A) in return for referring an individual to a
person for the
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furnishing or arranging for the furnishing of any item or service for which
payment may be made in whole or in part by Medicare or Medicaid, or (B) in
return for purchasing, leasing, or ordering or arranging for or recommending
purchasing, leasing, or ordering any good, facility, service, or item for which
payment may be made in whole or in part by Medicare or Medicaid.
3.14 LITIGATION. There is no claim, dispute, action, proceeding, suit,
appeal or investigation, at law or in equity, pending against Prospect Medical
Systems or Prospect Medical Group, or involving any of their respective assets
or properties, before any court, agency, governmental department or agency,
commission, authority, arbitration panel or other tribunal (other than those, if
any, with respect to which service of process or similar notice has not yet been
made on Prospect Medical Systems or Prospect Medical Group), and, to the
knowledge of Prospect Medical Systems or Prospect Medical Group, none have been
threatened which would have a Material Adverse Effect on Prospect Medical
Systems or Prospect Medical Group. Neither Prospect Medical Systems nor
Prospect Medical Group is subject to any order, writ, injunction or decree of
any court, agency, authority, arbitration panel or other tribunal, nor is it in
default with respect to any notice, order, writ, injunction or decree.
3.15 CONTRACTS. Prospect Medical Systems and Prospect Medical Group
have made available to Med-Search and Investor each executory contract and
agreement in the following categories to which Prospect Medical Systems or
Prospect Medical Group is a party, or by which either is bound in any
respect: (a) agreements for the purchase, sale, lease or other disposition of
equipment, goods, materials, research and development, supplies, studies or
capital assets, or for the performance of services, which agreements are in
one or more of the following categories: (i) outside the ordinary course of
business, (ii) involving payments by Prospect Medical Systems in excess of
$50,000; (b) contracts or agreements for the joint performance of work or
services, and all other joint venture agreements; (c) management or
employment contracts, consulting contracts, collective bargaining contracts,
termination and severance agreements; (d) notes, mortgages, deeds of trust,
loan agreements, security agreements, guarantees, debentures, indentures,
credit agreements and other evidences of indebtedness; (e) stock option,
stock purchase, warrant, repurchase or other contracts or agreements relating
to any share of capital stock of Prospect Medical Systems or Prospect Medical
Group; (f) contracts or agreements with agents, brokers, solicitors,
consignees, sale representatives or distributors involving terms or
commissions outside the ordinary course of business; (g) contracts or
agreements with any director, officer, employee, consultant or stockholder;
(h) powers of attorney or similar authorizations granted by Prospect Medical
Systems or Prospect Medical Group to third parties; (i) material licenses,
sublicenses, royalty agreements and other contracts or agreements to which
Prospect Medical Systems or Prospect Medical Group is a party, or otherwise
subject, relating to Proprietary Rights; (j) all contracts with third party
payors, including but not limited to, prepaid health plans, preferred
provider organizations and exclusive provider organizations; and (k) other
material contracts, including material contracts relating to Providers (as
defined in Section 3.23 hereof), Medi-Cal, Medicare, and the marketing of
Prospect Medical Systems' business. As of the Closing Date, Prospect Medical
Systems and Prospect Medical Group will have executed a Management Agreement,
including exhibits thereto, in substantially the form attached as Exhibit D
(the "Prospect Management Agreement").
The contracts referred to herein remain in full force and effect in
accordance with their terms as of the Effective Time. Neither Prospect Medical
Systems, Prospect Medical Group nor any
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other party to any such contract or agreement (including, but not limited to,
any landlord), is in default, or alleged to be in default thereunder, and there
exists no condition or event which, with the giving of notice or the lapse of
time or otherwise, would constitute such a default by Prospect Medical Systems
or Prospect Medical Group or by any other party to any such contracts or
agreements. All of the contracts are valid and enforceable by Prospect Medical
Systems or Prospect Medical Group, subject to laws relating to bankruptcy,
insolvency and equitable orders or decrees.
Neither Prospect Medical Systems nor Prospect Medical Group has
entered into any contract or agreement containing covenants limiting the right
of Prospect Medical Systems or Prospect Medical Group to compete in any business
or with any person. As used in this Agreement, the terms "contract" and
"agreement" include every contract, agreement, commitment, understanding and
promise, whether written or oral.
3.16 PROPRIETARY RIGHTS.
(a) Each of Prospect Medical Systems and Prospect Medical Group owns
or possesses licenses or other rights to use all computer software, software
programs, patents, patent applications, trademarks, trademark applications,
trade secrets, service marks, trade names, copyrights, inventions, customer
lists, proprietary information, or other rights with respect thereto
(collectively referred to as "Proprietary Rights"), used in the business of
Prospect Medical Systems and Prospect Medical Group, and the same are sufficient
to conduct the business of Prospect Medical Systems and Prospect Medical Group
as it has been and is now being conducted.
(b) The operations of Prospect Medical Systems or Prospect Medical
Group do not conflict with or infringe, and no one has asserted to Prospect
Medical Systems or Prospect Medical Group that such operations conflict with or
infringe, any Proprietary Rights of any third party. There are no claims,
disputes, actions, proceedings or suits pending against Prospect Medical Systems
or Prospect Medical Group with respect to any Proprietary Rights (other than
those with respect to which service of process or similar notice may not yet
have been made on Prospect Medical Systems or Prospect Medical Group), and, to
the knowledge of Prospect Medical Systems and Prospect Medical Group, none has
been threatened against Prospect Medical Systems or Prospect Medical Group. To
the knowledge of Prospect Medical Systems and Prospect Medical Group, there are
no facts or alleged facts which would reasonably serve as a basis for any claim
that Prospect Medical Systems or Prospect Medical Group does not have the right
to use, free of any rights or claims of others, all Proprietary Rights in the
conduct of the business of Prospect Medical Systems and Prospect Medical Group
as it has been and is now being conducted.
3.17 INSURANCE. Prospect Medical Systems and Prospect Medical Group have
provided Med-Search and Investor with a complete list of all policies of
insurance to which Prospect Medical Systems or Prospect Medical Group is a party
or is a beneficiary or named insured and all claims which have been made to the
insurers. Prospect Medical Systems and Prospect Medical Group have in full
force and effect with all premiums due thereon paid, the policies of insurance
set forth therein. Prospect Medical Systems believes that the insurable
properties of Prospect Medical Systems and Prospect Medical Group are insured in
amounts and coverages and against risks and losses which are adequate and
usually insured against by persons providing or arranging for the provision of
health care services or holding or operating similar properties in similar
businesses. There were no claims
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in excess of policy limits asserted under any of the insurance policies of
Prospect Medical Systems and Prospect Medical Group in respect of all motor
vehicle, general liability, fidelity bonds, professional liability, reinsurance
and workers' compensation, and medical claims. To the knowledge of Prospect
Medical Systems and Prospect Medical Group, the insurers have no right to
terminate or reduce such coverage before the end of applicable policy periods
and Prospect Medical Systems and Prospect Medical Group have complied with their
obligations under such policies. No claim has been made against Prospect
Medical Systems or Prospect Medical Group which is not covered by a policy of
insurance, in whole or in part, or as to which an insurer has denied coverage or
defended under a reservation of rights.
3.18 CERTAIN ADVANCES. There are no receivables of Prospect Medical
Systems owing from directors, officers, employees, consultants or stockholders
of Prospect Medical Systems, or owing by any Affiliate of any director or
officer of Prospect Medical Systems, except for advances in the ordinary and
usual course of business to officers and employees for reimbursable business
expenses.
3.19 RELATED PARTIES. No officer or director of Prospect Medical Systems
or Prospect Medical Group, or any such person, has, either directly or
indirectly, (a) an interest in any corporation, partnership, firm or other
person or entity which furnishes or sells services or products which are similar
to those furnished or sold by Prospect Medical Systems or Prospect Medical
Group, or (b) a beneficial interest in any contract or agreement to which
Prospect Medical Systems or Prospect Medical Group is a party or by which
Prospect Medical Systems or Prospect Medical Group may be bound. For purposes
of this Section 3.19, there shall be disregarded any interest which arose solely
from the ownership of less than a five percent (5%) equity interest in a
corporation whose stock is regularly traded on any national securities exchange
or in the over-the-counter market.
3.20 UNDERLYING DOCUMENTS. Copies of any underlying documents listed or
described as having been disclosed to Med-Search pursuant to this Agreement have
been furnished to Med-Search and Investor. All such documents furnished to
Med-Search are true and correct copies, and there are no amendments or
modifications thereto, that have not been disclosed to Med-Search.
3.21 EMPLOYEES AND UNION ACTIVITIES. Prospect Medical Systems and Prospect
Medical Group have complied with all applicable state and federal laws and
regulations related to employees and employment practices, except where the
failure to comply would have no Material Adverse Effect on Prospect Medical
Systems and Prospect Medical Group. The employee relations of Prospect Medical
Systems and Prospect Medical Group are good and there is no pending or
threatened labor dispute.
3.22 EMPLOYEE BENEFIT PLANS.
(a) Neither Prospect Medical Systems nor any Prospect ERISA Affiliate
(as defined herein), maintains, is a party to, contributes to, or is obligated
to contribute to, and neither Prospect Medical Systems' nor any Prospect ERISA
Affiliate's employees or former employees and their dependents or survivors
receive benefits under, any of the following (whether or not set forth in a
written document):
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(i) Any employee pension benefit plan, as defined in section
3(2) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), including (without limitation) any multiemployer plan, as defined in
section 3(37) of ERISA;
(ii) Any employee welfare benefit plan, as defined in section
3(l) of ERISA,
(iii) Any bonus, deferred compensation, incentive, restricted
stock, stock purchase, stock option, stock appreciation right, phantom stock,
debenture, supplemental pension, profit-sharing royalty pool, commission or
similar plan or arrangement;
(iv) Any plan, program, agreement policy, commitment or other
arrangement relating to severance or termination pay, whether or not published
or generally known;
(v) Any plan, program, agreement, policy, commitment or other
arrangement relating to the provision of any benefit described in section 3(l)
of ERISA to former employees or directors or to their survivors, other than
procedures intended to comply with the Consolidated Omnibus Budget
Reconciliation Act of 1984 ("COBRA");
(vi) Any employment consulting or termination agreement; or
(vii) Any other plan, program, agreement procedure, policy,
commitment understanding or other arrangement relating to employee benefits,
executive compensation, fringe benefits, severance pay, terms of employment or
services as an independent contractor, whether foreign or domestic.
"Prospect ERISA Affiliate" means any entity that, together with
Prospect Medical Systems, is treated as a single employer under section 414(b),
414(c), 414(m) or 414(o) of the Code.
(b) Neither Prospect Medical Systems nor any Prospect ERISA Affiliate
has, since January 1, 1993 terminated, suspended, discontinued contributions to
or withdrawn from any employee pension benefit plan, as defined in section 3(2)
of ERISA, including (without limitation) any multiemployer plan, as defined in
section 3(37) of ERISA.
(c) No payment made to any employee, officer, director or independent
contractor of Prospect Medical Systems or Prospect Medical Group (the
"Recipient") pursuant to any employment contract, severance agreement or other
arrangement (the "Golden Parachute Payment") will be nondeductible by Prospect
Medical Systems or Prospect Medical Group because of the application of sections
28OG and 4999 of the Code to the Golden Parachute Payment, nor will Prospect
Medical Systems or Prospect Medical Group be required to compensate any
Recipient because of the imposition of an excise tax (including any interest or
penalties related thereto) on the Recipient by reason of sections 28OG and 4999
of the Code.
(d) Neither Prospect Medical Systems nor any Prospect ERISA Affiliate
has any unfunded liability relating to retiree life and medical benefits for
Prospect Medical Systems' current or former employees and their dependents.
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3.23 ACTIVITIES OF PROVIDERS AND ENROLLEE GROUPS. Prospect Medical Systems
and Prospect Medical Group have no knowledge:
(a) that any of Prospect Medical Systems' or Prospect Medical Group's
independent practice associations ("IPAs"), physician groups, physicians,
pharmacies, laboratories, home health care agencies, nursing facilities, mental
health providers, therapists and other allied health professionals and health
care institutions (collectively, "Providers") are organized or attempting to
organize any entity (whether or not incorporated) for the purpose of bargaining
or otherwise dealing with Prospect Medical Group on a collective basis (except
with respect to individual providers who have formed professional corporations
or partnerships for the purpose of providing medical services or except with
respect to the IPAs and medical groups which currently contract with Prospect
Medical Group);
(b) that any Providers have expressed an intent (whether or not
legally binding) to terminate or not to renew as Providers to Prospect Medical
Group;
(c) that IPAs, other medical groups, individual doctors which
contract with Prospect Medical Group and which serve individually or in the
aggregate more than 200 enrollees have expressed an intent (whether or not
legally binding) to terminate or not to renew their respective contracts with
Prospect Medical Group; or
(d) of any circumstances likely to result in disenrollment of
enrollees, the loss of which individually and in the aggregate would have a
Material Adverse Effect on Prospect Medical Systems and Prospect Medical Group.
3.24 INSPECTIONS. Prospect Medical Systems and Prospect Medical Group have
accurately and fully described (i) all inspections of their businesses or
operations by any governmental agency or any consultant at any time during the
previous five (5) years; (ii) all matters which were noted by any and all such
governmental agency or consultant as requiring correction or modifications which
were requested or recommended; and (iii) the present status of each such noted
matter.
3.25 SECTION 203 OF THE DGCL NOT APPLICABLE. The provisions of Section 203
of the Delaware General Corporation Law relating to business combinations with
interested stockholders, will not, prior to the termination of this Agreement,
apply to this Agreement, the Stock Option Agreement, the Merger or the
transactions contemplated hereby and thereby.
3.26 REPRESENTED BY COUNSEL. Prospect Medical Systems and Prospect Medical
Group have been represented at all times during the negotiations of this
Agreement and the transactions contemplated herein solely by the Law Offices of
Gaitan & Parks.
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ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF MED-SEARCH,
MS ACQUISITION CORPORATION AND SUNCREST
Each of Med-Search, MS Acquisition Corporation and Suncrest, individually,
hereby represent and warrant to Prospect Medical Systems and Investor as
follows; provided however, that each such party's representations and warranties
contained herein relate only to those matters which apply to such party:
4.1 ORGANIZATION. Each of Med-Search, MS Acquisition Corporation and
Suncrest is a corporation duly organized and validly existing. As of the date
of Closing, each of Med-Search, MS Acquisition Corporation and Suncrest will be
duly qualified to do business and will be in good standing in its state of
incorporation and in each of the other jurisdictions in which it owns or leases
property or conducts business, except where the failure to be so qualified would
not have a Material Adverse Effect on such entity. Each of Med-Search, MS
Acquisition Corporation and Suncrest has all requisite power and authority to
own, lease and operate its properties and to carry on its business as now being
conducted, and possesses all licenses, franchises, rights and privileges
necessary to the conduct of its respective business as conducted.
4.2 MS ACQUISITION CORPORATION CAPITAL STRUCTURE. The authorized capital
stock of MS Acquisition Corporation consists of 2,500 shares of Common Stock,
$.01 par value ("MS Acquisition Corporation Common"). Upon the execution of
this Agreement, 2,500 shares of MS Acquisition Corporation Common were validly
issued and outstanding and were held by Med-Search of record and beneficially.
No options, preferred stock or convertible securities are outstanding.
4.3 AUTHORITY. Each of Med-Search, MS Acquisition Corporation, and
Suncrest has all requisite corporate power and authority to enter into this
Agreement and, subject to satisfaction of the conditions set forth herein, to
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby have
been duly authorized by all necessary corporate action on the part of
Med-Search, MS Acquisition Corporation and Suncrest, subject to approval by the
stockholders of Med-Search. This Agreement has been duly executed and delivered
by Med-Search, MS Acquisition Corporation and Suncrest and constitutes a valid
and binding obligation of each of Med-Search, MS Acquisition Corporation and
Suncrest, enforceable in accordance with its terms. Provided the conditions set
forth in Article 7 are satisfied, the execution and delivery of this Agreement
does not, and the consummation of the transactions contemplated hereby will not,
conflict with, or result in any violation of or default (with or without notice
or lapse of time, or both) under, or give rise to a right of termination,
cancellation or acceleration of any obligation or to loss of a benefit under (a)
any provision of the Certificate of Incorporation or Bylaws of Med-Search, MS
Acquisition Corporation, or Suncrest or (b) any agreement or instrument, permit,
judgment, order, statute, law, ordinance, rule or regulation applicable to
Med-Search, MS Acquisition Corporation, or Suncrest or their respective
properties or assets, other than any such conflicts, violations, defaults,
terminations, cancellations or accelerations which individually or in the
aggregate would not have a Material Adverse Effect on Med-Search, MS Acquisition
Corporation or Suncrest. Med-Search and Prospect Medical Group have prepared
and delivered to Med-Search a full and complete list of all necessary regulatory
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consents, waivers and approvals (together with any other material consents,
waivers or approvals from third parties, the "Consents") of third parties
applicable to the operations of Med-Search that are required to be obtained by
Med-Search in connection with the execution and delivery of this Agreement and
the Certificate of Merger by Med-Search and the performance of Med-Search'
obligations hereunder or thereunder. Prior to the Closing Date, Med-Search or
Prospect Medical Group, as applicable, will obtain all such Consents.
Med-Search has all requisite corporate power and authority to execute
the Certificate of Amendment to Certificate of Incorporation increasing the
authorized number of shares of Med-Search Common from 29,000,000 to 250,000,000.
MS Acquisition Corporation has all requisite corporate power and authority to
execute the Certificate of Merger. The execution and delivery of the
Certificate of Amendment to Certificate of Incorporation increasing the
authorized number of shares of Med-Search Common from 29,000,000 to 250,000,000
and the Certificate of Merger by Med-Search and MS Acquisition Corporation,
respectively, have been duly authorized by all necessary corporate action on the
part of Med-Search and MS Acquisition Corporation, subject to approval by the
stockholders of Med-Search. The Certificate of Amendment to Certificate of
Incorporation increasing the authorized number of shares of Med-Search Common
from 29,000,000 to 250,000,000 and the Certificate of Merger will be duly
executed and delivered by Med-Search and MS Acquisition Corporation and will
constitute valid and binding obligations of Med-Search and MS Acquisition
Corporation, respectively.
No consent, approval, order or authorization of, or registration,
declaration or filing with, any Governmental Entity is required by or with
respect to Med-Search, MS Acquisition Corporation, or Suncrest in connection
with the execution and delivery of this Agreement by Med-Search, MS Acquisition
Corporation and Suncrest or the consummation by Med-Search, MS Acquisition
Corporation and Suncrest of the transactions contemplated hereby, except for (i)
the filing of the Certificate of Merger and the Certificate of Amendment of
Certificate of Incorporation of Med-Search, and related certificates with the
Delaware Secretary of State and appropriate documents with the relevant
authorities of other states in which Med-Search or MS Acquisition Corporation is
qualified to do business, (ii) such consents, approvals, orders, authorizations,
registrations, declarations and filings as may be required under applicable
state securities laws and the law of any foreign country, and (iii) such other
consents, authorizations, filings, approvals and registrations which if not
obtained or made would not have a Material Adverse Effect on Med-Search or MS
Acquisition Corporation.
4.4 CAPITAL STRUCTURE.
(a) The authorized capital stock of Med-Search consists of 29,000,000
shares of Common Stock, $.01 par value, and 1,000,000 shares of Preferred Stock.
28,709,733 shares of Common Stock are issued and outstanding, and no shares of
Preferred Stock, options or convertible securities are outstanding. In
addition, due to certain due diligence and other issues, the board of directors
of Med-Search has authorized the reserve of 4,848,100 shares of Med-Search
Common, which have been added to the total outstanding shares in calculating the
Exchange Ratio, which reserve is subject to further adjustment as provided in
Section 2.3(c).
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Since May 1, 1993, all of the outstanding shares of Med-Search
Common have been duly authorized, validly issued, fully paid and nonassessable,
issued in compliance with applicable state and federal securities laws and not
subject to preemptive rights created by statute, Med-Search's Certificate of
Incorporation or Bylaws or any agreement to which Med-Search is a party or is
bound. The shares of Med-Search Common when issued and delivered to the
stockholders of Prospect Medical Systems in accordance with this Agreement will
be duly authorized, validly issued, fully paid and nonassessable, and issued in
compliance with applicable state and federal securities laws.
(b) The authorized capital stock of Suncrest consists of 75,000
shares of common stock, of which 500 are outstanding and owned by Noble as
representative of the estate of Joseph W. Noble, M.D.
4.5 FINANCIAL STATEMENTS. Med-Search, together with Suncrest, has
furnished to Prospect Medical Systems and Investor, or will furnish prior to the
Closing, (i) their respective audited statement of operations, statement of
stockholders' equity and statement of cash flows for the combined two fiscal
years ended September 30, 1994 and 1995, and Med-Search's audited consolidated
balance sheet at September 30, 1995, and (ii) Med-Search's pro forma statement
of operations and balance sheet at and for the fiscal year ended September
30,1995. The balance sheets of Med-Search and Suncrest at September 30, 1995
are hereinafter referred to as the "Med-Search Balance Sheet" and all such
financial statements are hereinafter referred to collectively as the "Med-Search
Financial Statements." The Med-Search Financial Statements have been, or will
have been prepared in accordance with GAAP applied on a consistent basis during
the periods involved, and fairly present, or will present the combined financial
position of Med-Search and Suncrest and the results of their combined operations
as of the date and for the periods indicated thereon. At the date of the
Med-Search Balance Sheet (the "Med-Search Balance Sheet Date") and as of the
Closing Date, neither Med-Search nor Suncrest had or will have any liabilities
or obligations, secured or unsecured (whether accrued, absolute, contingent or
otherwise) not reflected on the Med-Search Balance Sheet or the accompanying
notes thereto except for liabilities incurred in the ordinary course of business
since the date of said balance sheet which are usual and normal in amount. The
reserves reflected in the Med-Search Financial Statements for incurred but not
yet reported claims ("IBNR") make sufficient provision for such liabilities and
have been established in accordance with GAAP consistently applied.
4.6 CONDUCT OF BUSINESS. Between the date of the execution of this
Agreement and the Effective Time, Med-Search and Suncrest shall (i) carry on
their respective operations in substantially the same manner as has previously
been done, (ii) use best efforts to maintain and preserve their businesses and
operations in good condition and repair, and to prevent the imposition of any
additional Liens (as defined herein) on the Assets, (iii) use best efforts to
preserve their respective businesses and operations and the relationships with
all patients and payors, and (iv) not liquidate or dissolve, take any steps to
do same, or inform any third person or entity that they have done or intend to
do the same.
4.7 BUSINESS CHANGES. Since the Med-Search Balance Sheet Date, except as
otherwise contemplated by this Agreement, MS Acquisition Corporation and
Suncrest have conducted their business only in the ordinary and usual course
and, without limiting the generality of the foregoing:
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(a) Except for the transfer of Suncrest's contract with FHP
HealthPlan, there have been no changes in the condition (financial or
otherwise), net worth, assets, properties, employees, operations, obligations or
liabilities of Med-Search, MS Acquisition Corporation or Suncrest or which, in
the aggregate, have had or may be reasonably expected to have a materially
adverse effect on the condition, net worth, assets, properties or operations of
Med-Search, MS Acquisition Corporation or Suncrest.
(b) Except for the shares of Med-Search Common which are proposed to
be issued to Earl F. Jordan, M.D., neither Med-Search, MS Acquisition
Corporation nor Suncrest has issued, or authorized for issuance, or entered into
any commitment to issue, any equity security, bond, note or other security of
Med-Search, MS Acquisition Corporation or Suncrest.
(c) Neither Med-Search, MS Acquisition Corporation nor Suncrest has
incurred additional debt for borrowed money.
(d) Neither Med-Search, MS Acquisition Corporation nor Suncrest has
incurred any obligation or liability except in the ordinary and usual course of
business.
(e) Neither Med-Search, MS Acquisition Corporation nor Suncrest has
paid any obligation or liability, or discharged, settled or satisfied any claim,
lien or encumbrance, except for current liabilities in the ordinary and usual
course of business and prepayment of existing liabilities.
(f) Neither Med-Search, MS Acquisition Corporation nor Suncrest has
declared or made any dividend, payment or other distribution on or with respect
to any share of capital stock of Med-Search, MS Acquisition Corporation or
Suncrest.
(g) Neither Med-Search, MS Acquisition Corporation nor Suncrest has
purchased, redeemed or otherwise acquired or committed itself to acquire,
directly or indirectly, any share or shares of capital stock of Med-Search, MS
Acquisition Corporation or Suncrest.
(h) Neither Med-Search, MS Acquisition Corporation nor Suncrest has
mortgaged, pledged, or otherwise, voluntarily or involuntarily, encumbered any
of its assets or properties, except for liens for current taxes which are not
yet delinquent and purchase-money liens arising out of the purchase or sale of
products made in the ordinary and usual course of business.
(i) Neither Med-Search, MS Acquisition Corporation nor Suncrest has
purchased or agreed to purchase or otherwise acquire any securities of any
corporation, partnership, joint venture, firm or other entity; neither
Med-Search, MS Acquisition Corporation nor Suncrest has made any expenditure or
commitment for the purchase, acquisition, construction or improvement of a
capital asset, except in the ordinary and usual course of business and in any
event not in excess of $15,000 for any single item or $50,000 in the aggregate.
(j) Neither Med-Search, MS Acquisition Corporation nor Suncrest has
entered into any transaction or contract or made any commitment to do the same,
except in the ordinary and usual course of business.
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(k) Neither Med-Search, MS Acquisition Corporation nor Suncrest has
sold, assigned, transferred or conveyed, or committed itself to sell, assign,
transfer or convey, any Proprietary Rights (as defined in Section 3.16).
(l) Neither Med-Search, MS Acquisition Corporation nor Suncrest has
adopted or amended any bonus, incentive, profit-sharing, stock option, stock
purchase, pension, retirement, deferred compensation, severance, life insurance,
medical or other benefit plan, agreement, trust, fund or arrangement for the
benefit of employees of any kind whatsoever, nor entered into or amended any
agreement relating to employment, services as an independent contractor or
consultant, or severance or termination pay, nor agreed to do any of the
foregoing.
(m) Except as contemplated in Section 6.12 herein, neither
Med-Search, MS Acquisition Corporation nor Suncrest has effected or agreed to
effect any change in its directors, officers or key employees.
(n) Neither Med-Search, MS Acquisition Corporation nor Suncrest has
effected or committed itself to effect any amendment or modification in its
charter documents or Bylaws, except as contemplated in this Agreement, the
Certificate of Amendment of Certificate of Incorporation or the Certificate of
Merger.
4.8 PROPERTIES. The Med-Search Balance Sheet reflects all of the personal
and real property used in its business or otherwise held by Med-Search and
Suncrest, except (a) for property acquired or disposed of in the ordinary and
usual course of the business of Med-Search and Suncrest since the date of such
balance sheet and (b) personal property not required under GAAP to be reflected
thereon. Med-Search and Suncrest each have good and marketable title to all
assets and properties reflected on the Med-Search Balance Sheet and thereafter
acquired, free and clear of Liens, except for the lien of current taxes not yet
delinquent and except for Liens which, individually or in the aggregate, are not
material to the encumbered property. All of the fixed assets and properties
listed on the Med-Search Balance Sheet or thereafter acquired are in
satisfactory condition and repair for the requirements of the business as
presently conducted by Med-Search and Suncrest.
4.9 REAL PROPERTY.
(a) Med-Search and Suncrest each have provided to Prospect Medical
Systems and Investor full and complete list of all real property owned and
leased by them or under option to purchase by Med-Search or Suncrest. All such
property leased by Med-Search or Suncrest is held under valid, existing and
enforceable leases. Neither real property owned or leased by Med-Search or
Suncrest nor the operations of Med-Search or Suncrest thereon, violate in any
material respect any applicable building code, zoning requirement or
classification, or pollution control ordinance or statute relating to the
property or to such operations, and such non-violation is not dependent, in any
instance, on so-called non-conforming use exemptions. No notice from any
governmental or public safety authority of any uncorrected condition, unpaid
assessment charge or fine relating to the conduct of business thereon or notice
of any pending or contemplated condemnation or change in zoning which would have
a Material Adverse Effect on Med-Search, MS Acquisition Corporation or Suncrest
has been received by any of them.
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(b) To the knowledge of Med-Search, there are no Hazardous Substances
in, under or about the air, soil, sediment, surface water of groundwater on,
under or around any properties at any time owned, leased or occupied by
Med-Search or Suncrest. Neither Med-Search nor Suncrest has disposed of any
Hazardous Substances on or about such property. Neither Med-Search nor Suncrest
has disposed of any materials at any site being investigated or remediated for
contamination or possible contamination of the environment.
(c) Med-Search and Suncrest each has conducted its business in
accordance with all applicable laws, regulations, orders and other requirements
of governmental authorities relating to Hazardous Substances and the use,
storage, treatment, disposal, transport, generation, release and exposure of
others to Hazardous Substances. Neither Med-Search nor Suncrest has received
any notice of any investigation, claim or proceeding relating to Hazardous
Substances and neither is aware of any fact or circumstance which could involve
them in any Environmental Litigation. Between the date hereof and Closing,
there shall not have occurred any failure by Med-Search or Suncrest to comply
with applicable Environmental Regulation and there shall not have occurred any
Environmental Litigation that shall have a Material Adverse Effect on Med-Search
or Suncrest.
4.10 ACCOUNTS RECEIVABLE. All of the accounts receivable of each of
Med-Search, MS Acquisition Corporation and Suncrest is shown on its Balance
Sheet or thereafter arose in the ordinary and usual course of its business. The
values at which accounts receivable are carried effect the accounts receivable
valuation policy of Med-Search, MS Acquisition Corporation and Suncrest which is
consistent with past practice and in accordance with GAAP applied on a
consistent basis.
4.11 TAXES. As of the date of Closing, Med-Search, MS Acquisition
Corporation and Suncrest will have duly filed with the appropriate United
States, state, local and foreign governmental agencies all tax returns and
reports required to be filed (subject to permitted extensions applicable to such
filings), which returns are accurate and complete, and have paid or accrued in
full all Taxes. The Med-Search Balance Sheet fully accrues (and the balance
sheets subsequent to the date of the Med-Search Balance Sheet prior to the
Closing Date will fully accrue) all current and deferred Taxes. Neither
Med-Search, MS Acquisition Corporation nor Suncrest is a party to any pending
action or proceeding, nor, to the knowledge of Med-Search, MS Acquisition
Corporation or Suncrest, is any such action or proceeding threatened by any
governmental authority for the assessment or collection of Taxes.
4.12 COMPLIANCE WITH LAW. All Permits of Med-Search, MS Acquisition
Corporation and Suncrest which are necessary to the conduct of their businesses
are in full force and effect and neither Med-Search, MS Acquisition Corporation
nor Suncrest is in violation of any Permit in any material respect. Each of
Med-Search, MS Acquisition Corporation and Suncrest has made available to
Prospect Medical Systems and Investor all material filings made to, and all
inspection or compliance survey reports received from, the California Department
of Corporations, Department of Health Services and the JCAHO for the last two
years and will make available to Prospect Medical Systems and Investor all other
Permits as requested by such party. Each of such filings was in material
compliance with all applicable laws and regulations; none of the filings
contained an untrue statement of a material fact or omitted to state a material
fact. Except for possible violations which would not have a Material Adverse
Effect on Med-Search, MS Acquisition Corporation and Suncrest, the businesses of
Med-Search, MS Acquisition Corporation and Suncrest have been conducted in
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accordance with all applicable laws, regulations, orders and other requirements
of governmental authorities.
4.13 LICENSURE AND REIMBURSEMENT. As of the Effective Time:
(a) Each of Suncrest's employee-physicians is duly licensed to
practice his or her profession in the State of California without restriction;
and Med-Search and Suncrest have all licenses, permits, approvals and
authorizations necessary for the conduct of their business as presently
conducted.
(b) Suncrest is participating in the Medicare and Medicaid programs
and in any other applicable governmental health care payment programs, and has
been and will continue to be authorized to receive reimbursement from such
programs for fees and charges incurred by eligible patients for their services.
Neither Med-Search nor Suncrest has received any notice on or before the
Effective Time that any such license, participation or authorization has been or
is threatened to be terminated or, in any material respect, restricted, and
neither Med-Search nor Suncrest knows of any basis for any such termination or
restriction. As of the Effective Time there is no federal or state
investigation pending or, to the best of Med-Search's and Suncrest's knowledge,
contemplated, that will have an impact upon Suncrest's reimbursement status or
Suncrest's ability to operate a medical practice in California. Neither
Med-Search nor Suncrest has received any notice of action on or before the
Effective Time nor, to the best of Med-Search's and Suncrest's knowledge, is
there any threatened or likely action by the Medicare or Medicaid program or any
carrier, to recoup or challenge any Medicare or Medicaid reimbursement that
Suncrest has received or for which there currently is a claim pending for
services rendered at or in connection with Suncrest.
4.14 FRAUD AND ABUSE. Each of Med-Search, MS Acquisition Corporation and
Suncrest, their officers, employees, agents, independent contractors and staff
members have not engaged in any activities which are prohibited under federal
Medicare and Medicaid statutes, 42 U.S.C. Section 1320a-7b, or the regulations
promulgated pursuant to such statutes or related state or local statutes or
regulations or which are prohibited by rules of professional conduct or which
otherwise could constitute fraud, including but not limited to the following:
(i) knowingly and willfully making or causing to be made a false statement or
representation of a material fact in any application for any benefit or payment;
(ii) knowingly and willingly making or causing to be made any false statement or
representation of a material fact for use in determining rights to any benefit
or payment, (iii) failing to disclose knowledge by a claimant of the occurrence
of any event affecting the initial or continued right to any benefit or payment
on its behalf or on behalf of another, with intent to secure such benefit or
payment fraudulently, (iv) knowingly and willfully soliciting or receiving any
remuneration (including any kickback, bribe, or rebate), directly or indirectly,
overtly or covertly, in cash or in kind or offering to pay such remuneration (A)
in return for referring an individual to a person for the furnishing or
arranging for the furnishing of any item or service for which payment may be
made in whole or in part by Medicare or Medicaid, or (B) in return for
purchasing, leasing, or ordering or arranging for or recommending purchasing,
leasing, or ordering any good, facility, service, or item for which payment may
be made in whole or in part by Medicare or Medicaid.
4.15 LITIGATION. Except as set forth on Exhibit E, there is no claim,
dispute, action, proceeding, suit, appeal or investigation, at law or in equity,
pending against Med-Search, MS
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Acquisition Corporation or Suncrest, or involving any of their respective
assets or properties, before any court, agency, governmental department or
agency, commission, authority, arbitration panel or other tribunal, and, to the
knowledge of each of Med-Search, MS Acquisition Corporation and Suncrest, none
have been threatened which would have a Material Adverse Effect on Med-Search,
MS Acquisition Corporation or Suncrest. Neither Med-Search, MS Acquisition
Corporation nor Suncrest is subject to any order, writ, injunction or decree of
any court, agency, authority, arbitration panel or other tribunal, nor is it in
default with respect to any notice, order, writ, injunction or decree.
4.16 CONTRACTS. Each of Med-Search, MS Acquisition Corporation and
Suncrest has made available to Prospect Medical Systems and Investor each
executory contract and agreement in the following categories to which it is a
party, or by which it is bound in any respect: (a) agreements for the purchase,
sale, lease or other disposition of equipment, goods, materials, research and
development, supplies, studies or capital assets, or for the performance of
services, which agreements are in one or more of the following categories: (i)
outside the ordinary course of business,(ii) involving payments by Med-Search,
MS Acquisition Corporation and Suncrest in excess of $50,000; (b) contracts or
agreements for the joint performance of work or services, and all other joint
venture agreements; (c) management or employment contracts, consulting
contracts, collective bargaining contracts, termination and severance
agreements; (d) notes, mortgages, deeds of trust, loan agreements, security
agreements, guarantees, debentures, indentures, credit agreements and other
evidences of indebtedness; (e) stock option, stock purchase, warrant, repurchase
or other contracts or agreements relating to any share of capital stock of
Med-Search, MS Acquisition Corporation or Suncrest; (f) contracts or agreements
with agents, brokers, solicitors, consignees, sales representatives or
distributors involving terms or commissions outside the ordinary course of
business; (g) contracts or agreements with any director, officer, employee,
consultant or stockholder; (h) powers of attorney or similar authorizations
granted by Med-Search, MS Acquisition Corporation or Suncrest to third parties;
(i) material licenses, sublicenses, royalty agreements and other contracts or
agreements to which Med-Search, MS Acquisition Corporation or Suncrest is a
party, or otherwise subject, relating to Proprietary Rights; (j) all contracts
with third party payors, including but not limited to, prepaid health plans,
preferred provider organizations and exclusive provider organizations; and (k)
other material contracts, including but not limited to material contracts
relating to Providers (as defined in Section 3.23 hereof), Medi-Cal, Medicare,
and the marketing of Med-Search's, MS Acquisition Corporation's and Suncrest's
business.
The contracts referred to herein remain in full force and effect in
accordance with their terms as of the Effective Time. Neither Med-Search, MS
Acquisition Corporation, Suncrest nor any other party to any such contract or
agreement (including, but not limited to, any landlord), is in default, or
alleged to be in default thereunder, and there exists no condition or event
which, with the giving of notice or the lapse of time or otherwise, would
constitute such a default by Med-Search, MS Acquisition Corporation, Suncrest or
by any other party to any such contracts or agreements. All of the contracts
are valid and enforceable by Med-Search, MS Acquisition Corporation, Suncrest,
subject to laws relating to bankruptcy, insolvency and equitable orders or
decrees.
Neither Med-Search, MS Acquisition Corporation nor Suncrest has
entered into any contract or agreement containing covenants limiting the right
of Med-Search, MS Acquisition Corporation or Suncrest to compete in any business
or with any person. As used in this Agreement,
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the terms "contract" and "agreement" include every contract, agreement,
commitment, understanding and promise, whether written or oral.
4.17 PROPRIETARY RIGHTS.
(a) Each of Med-Search, MS Acquisition Corporation and Suncrest owns
or possesses licenses or other rights to use all Proprietary Rights, used in the
business of Med-Search, MS Acquisition Corporation and Suncrest, and the same
are sufficient to conduct the business of Med-Search, MS Acquisition Corporation
and Suncrest as it has been and is now being conducted.
(b) The operations of each of Med-Search, MS Acquisition Corporation
and Suncrest do not conflict with or infringe, and no one has asserted to
Med-Search, MS Acquisition Corporation or Suncrest that such operations conflict
with or infringe, any Proprietary Rights of any third party. There are no
claims, disputes, actions, proceedings or suits pending against Med-Search, MS
Acquisition Corporation or Suncrest with respect to any Proprietary Rights, and,
to the knowledge of each of Med-Search, MS Acquisition Corporation and Suncrest,
none has been threatened. To the knowledge of Med-Search, MS Acquisition
Corporation and Suncrest, there are no facts or alleged facts which would
reasonably serve as a basis for any claim that any of them does not have the
right to use, free of any rights or claims of others, all Proprietary Rights in
the conduct of the business of Med-Search, MS Acquisition Corporation and
Suncrest as it has been and is now being conducted.
4.18 INSURANCE. Med-Search has provided Prospect Medical Systems and
Investor with a complete list of all policies of insurance to which it is a
party or is a beneficiary or named insured and all claims which have been made
to the insurers. Med-Search has in full force and effect with all premiums due
thereon paid, the policies of insurance set forth therein. The insurable
properties of Med-Search are insured in amounts and coverages and against risks
and losses which are adequate and usually insured against by persons providing
or arranging for the provision of health care services or holding or operating
similar properties in similar businesses. There were no claims in excess of
policy limits asserted under any of the insurance policies in respect of all
motor vehicle, general liability, fidelity bonds, professional liability,
reinsurance and workers' compensation, and medical claims. To the knowledge of
Med-Search, the insurers have no right to terminate or reduce such coverage
before the end of applicable policy periods and each of them has complied with
its obligations under such policies.
4.19 CERTAIN ADVANCES. There are no receivables of Med-Search, MS
Acquisition Corporation or Suncrest owing from directors, officers, employees,
consultants or stockholders of Med-Search, MS Acquisition Corporation or
Suncrest, or owing by any Affiliate of any director or officer of Med-Search, MS
Acquisition Corporation or Suncrest, including but not limited to amounts owed
from Med-Search to Suncrest, except for advances in the ordinary and usual
course of business to officers and employees for reimbursable business expenses.
4.20 RELATED PARTIES. Except for the control of Suncrest by Barbara Noble,
as representative of the Estate of Noble, which is the sole stockholder of
Suncrest, neither Med-Search, MS Acquisition Corporation or Suncrest, nor any
officer or director of any of them, or any Affiliate of any such entity, has,
either directly or indirectly, (a) an interest in any corporation, partnership,
firm
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or other person or entity which furnishes or sells services or products which
are similar to those furnished or sold by Med-Search, MS Acquisition Corporation
or Suncrest, or (b) a beneficial interest in any contract or agreement to which
Med-Search, MS Acquisition Corporation and Suncrest is a party or by which it
may be bound. For purposes of this Section 4.20, there shall be disregarded any
interest which arose solely from the ownership of less than a five percent (5%)
equity interest in a corporation whose stock is regularly traded on any national
securities exchange or in the over-the-counter market.
4.21 UNDERLYING DOCUMENTS. Copies of any underlying documents listed or
described as having been disclosed to Prospect Medical Systems and Investor
pursuant to this Agreement have been furnished. All such documents furnished to
Prospect Medical Systems and Investor are true and correct copies, and there are
no amendments or modifications thereto, that have not been disclosed to such
parties.
4.22 EMPLOYEES AND UNION ACTIVITIES. Each of Med-Search, MS Acquisition
Corporation and Suncrest has complied with all applicable state and federal laws
and regulations related to employees and employment practices, except where the
failure to comply would have no Material Adverse Effect on Med-Search, MS
Acquisition Corporation and Suncrest. The employee relations of Med-Search, MS
Acquisition Corporation and Suncrest are good and there is no pending or
threatened labor dispute.
4.23 EMPLOYEE BENEFIT PLANS.
(a) Neither Med-Search nor Suncrest nor any of its Med-Search ERISA
Affiliates (as defined herein) maintains, is a party to, contributes to, is
obligated to contribute to, and neither its nor any of its Med-Search ERISA
Affiliates employees or former employees and their dependents or survivors
receive benefits under, any of the following (whether or not set forth in a
written document):
(i) Any employee pension benefit plan, as defined in section
3(2) of the Employee Retirement Income Security Act of 1974, as amended,
including (without limitation) any multiemployer plan, as defined in section
3(37) of ERISA;
(ii) Any employee welfare benefit plan, as defined in section
3(l) of ERISA,
(iii) Any bonus, deferred compensation, incentive, restricted
stock, stock purchase, stock option, stock appreciation right, phantom stock,
debenture, supplemental pension, profit-sharing royalty pool, commission or
similar plan or arrangement;
(iv) Any plan, program, agreement policy, commitment or other
arrangement relating to severance or termination pay, whether or not published
or generally known;
(v) Any plan, program, agreement. policy, commitment or other
arrangement relating to the provision of any benefit described in section 3(l)
of ERISA to former employees or directors or to their survivors, other than
procedures intended to comply with the Consolidated Omnibus Budget
Reconciliation Act of 1984;
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(vi) Any employment consulting or termination agreement; or
(vii) Any other plan, program, agreement procedure, policy,
commitment, understanding or other arrangement relating to employee benefits,
executive compensation, fringe benefits, severance pay, terms of employment or
services as an independent contractor, whether foreign or domestic.
"Med-Search ERISA Affiliate" means any entity that, together with each
of Med-Search, MS Acquisition Corporation and Suncrest, is treated as a single
employer under section 414(b), 414(c), 414(m) or 414(o) of the Code.
(b) Neither Med-Search nor Suncrest nor any of its Med-Search ERISA
Affiliates has, since 1993 terminated, suspended, discontinued contributions to
or withdrawn from any employee pension benefit plan, as defined in section 3(2)
of ERISA, including (without limitation) any multiemployer plan, as defined in
section 3(37) of ERISA.
(c) No payment made to any employee, officer, director or independent
contractor of Med-Search or Suncrest pursuant to any Golden Parachute Payment
will be nondeductible by Med-Search or Suncrest because of the application of
sections 28OG and 4999 of the Code to the Golden Parachute Payment, nor will
Med-Search or Suncrest be required to compensate any Recipient because of the
imposition of an excise tax (including any interest or penalties related
thereto) on the Med-Search Recipient by reason of sections 28OG and 4999 of the
Code.
(d) Neither Med-Search nor Suncrest nor any Med-Search ERISA
Affiliate has any unfunded liability relating to retiree life and medical
benefits for its current or former employees and their dependents.
4.24 ACTIVITIES OF PROVIDERS AND ENROLLEE GROUPS. Neither Med-Search, MS
Acquisition Corporation nor Suncrest has knowledge:
(a) that any of its IPA Providers are organized or attempting to
organize any entity (whether or not incorporated) for the purpose of bargaining
or otherwise dealing with it on a collective basis (except with respect to
individual providers who have formed professional corporations or partnerships
for the purpose of providing medical services or except with respect to the IPAs
and medical groups which currently contract with them);
(b) that any Providers have expressed an intent (whether or not
legally binding) to disenroll or not to renew as providers;
(c) that IPAs, other medical groups, individual doctors which
contract with Suncrest and which serve individually or in the aggregate more
than 200 enrollees have expressed an intent (whether or not legally binding) to
terminate or not to renew their respective contracts; or
(d) of any circumstances likely to result in disenrollment of
enrollees, the loss of which individually and in the aggregate would have a
Material Adverse Effect on it.
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4.25 INSPECTIONS. Med-Search and Suncrest have accurately and fully
described (i) all inspections of their businesses or operations by any
governmental agency or any consultant at any time since their inception; (ii)
all matters which were noted by any and all such governmental agency or
consultant as requiring correction or modifications which were requested or
recommended; and (iii) the present status of each such noted matter.
4.26 SECTION 203 OF THE DGCL NOT APPLICABLE. The provisions of Section 203
of the Delaware General Corporation Law relating to business combinations with
interested stockholders, will not, prior to the termination of this Agreement,
apply to this Agreement, the Merger or the transactions contemplated hereby and
thereby.
4.27 REPRESENTED BY COUNSEL. Med-Search and MS Acquisition Corporation
have been represented at all times during the negotiation of this Agreement and
the transactions contemplated hereby solely by the Law Offices of David L.
Kagel.
4.28 REPRESENTED BY COUNSEL. Suncrest has been represented at all times
during the negotiation of this Agreement and the transactions contemplated
hereby solely by the Law Offices of Kenneth K. Williams.
ARTICLE 5
COVENANTS RELATING TO CONDUCT OF BUSINESS
During the period from the date of this Agreement and continuing until the
Effective Time, each of Med-Search, MS Acquisition Corporation, Suncrest,
Prospect Medical Systems and Prospect Medical Group agree that:
5.1 ORDINARY COURSE. Med-Search, MS Acquisition Corporation, Suncrest,
Prospect Medical Systems and Prospect Medical Group shall carry on its business
in the usual, regular and ordinary course, including the payment of all state
and federal taxes, in substantially the same manner as heretofore conducted and,
to the extent consistent with such businesses, use all commercially reasonable
efforts consistent with past practice and policies to preserve intact its
present business organization, keep available the services of its present
officers and key employees and preserve its relationship with existing and
potential customers, enrollees, and others having business dealings with it to
the end that its goodwill and ongoing businesses shall be unimpaired at the
Effective Time.
5.2 DIVIDENDS; CHANGES IN STOCK. Except for the proposed reverse split of
Med-Search Common Stock, each of Med-Search, MS Acquisition Corporation,
Suncrest, Prospect Medical Systems and Prospect Medical Group shall not and
shall not propose to (a) declare or pay any dividends on or make other
distributions in respect of any of their capital stock, (b) split, combine or
reclassify any of its capital stock or issue or authorize the issuance of any
other securities in respect of, in lieu of or in substitution for shares of
their capital stock, or (c) repurchase or otherwise acquire any shares of its
capital stock or rights to acquire any shares of their capital stock.
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5.3 ISSUANCE OF SECURITIES. Except as described in Exhibit F and the
proposed issuance of Med-Search Common to Earl F. Jordan, M.D., neither
Med-Search, MS Acquisition Corporation, Suncrest, Prospect Medical Systems or
Prospect Medical Group shall issue, deliver or sell or authorize or propose the
issuance, delivery or sale of, or purchase or propose the purchase of, any
shares of its capital stock of any class or securities convertible into, or
rights, warrants or options to acquire, any such shares or other convertible
securities.
5.4 GOVERNING DOCUMENTS. Except as otherwise contemplated herein, neither
Med-Search, MS Acquisition Corporation, Suncrest, Prospect Medical Systems or
Prospect Medical Group shall amend their charter documents or Bylaws.
5.5 NO SOLICITATIONS. None of Med-Search, MS Acquisition Corporation,
Suncrest, Prospect Medical Systems or Prospect Medical Group shall directly or
indirectly, through any officer, director, employee or agent (including any
investment banker, financial advisor, attorney, accountant or other
representative or agent) or otherwise solicit, initiate or encourage inquiries
or the submission of proposals or offers from any third party relating to any
acquisition or purchase of all or substantially all of the business, properties
or assets of, or any equity interest in such entity or any merger,
consolidation, business combination or similar transaction, other than pursuant
to this Agreement involving such entity (an "Acquisition Transaction"), or shall
participate in any discussions or negotiations regarding, or furnish to any
other person any confidential information with respect to, or otherwise
cooperate in any way with, or participate in, facilitate or agree to endorse or
encourage, any effort or attempt by any other person to do or seek any of the
foregoing.
5.6 NO ACQUISITIONS. Except as set forth in Exhibit G, none of
Med-Search, MS Acquisition Corporation, Suncrest, Prospect Medical Systems or
Prospect Medical Group shall (a) acquire or agree to acquire by merging or
consolidating with or by purchasing a substantial portion of the assets of, or
by any other manner, any business or any corporation, partnership, association
or other business organization or division thereof, or (b) otherwise acquire or
agree to acquire any assets which are material, individually or in the
aggregate, to such party except in the ordinary course of business consistent
with prior practice.
5.7 NO DISPOSITIONS. Except as set forth in the Asset Purchase Agreement,
none of Med-Search, MS Acquisition Corporation, Suncrest, Prospect Medical
Systems or Prospect Medical Group shall sell, lease or otherwise dispose of any
of its assets, individually or in the aggregate, except in the ordinary course
of business consistent with prior practice.
5.8 INDEBTEDNESS. Except for capital leases entered into in the ordinary
course of business, none of Med-Search, MS Acquisition Corporation, Suncrest,
Prospect Medical Systems or Prospect Medical Group shall incur any indebtedness
for borrowed money or guarantee any such indebtedness or issue or sell any debt
securities or guarantee any debt securities of others.
5.9 PROVIDER AND BUSINESS RELATIONS. Each of Med-Search, MS Acquisition
Corporation, Suncrest, Prospect Medical Systems and Prospect Medical Group will
use its best efforts to preserve the business organization and the health plan
provider networks, to keep available the services of present employees, agents
and representatives (except those employees terminated for cause or
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consistent with sound business practices) and to preserve the goodwill and
relationships of physician other medical staff, Providers, suppliers, patients
and others with whom business relationships exist.
5.10 OTHER ACTIONS. None of Med-Search, MS Acquisition Corporation,
Suncrest, Prospect Medical Systems or Prospect Medical Group shall permit any of
their officers, directors, employees or agents to take any action that would, or
reasonably would be expected to, result in any of its representations and
warranties set forth in this Agreement being or becoming untrue in any material
respect, or in any of the conditions set forth in Article 7 not being satisfied.
5.11 ADVICE OF CHANGES; GOVERNMENT FILINGS. Med-Search, MS Acquisition
Corporation, Suncrest, Prospect Medical Systems and Prospect Medical Group shall
confer on a regular and frequent basis, with one another and Investor, report on
operational matters and promptly advise one another and Investor in writing of
any change or event having, or which, insofar as can reasonably be foreseen,
could have, a Material Adverse Effect on such party or which would cause or
constitute a material breach of any of the representations, warranties or
covenants of such party contained herein. Except where prohibited by applicable
statutes and regulations, Med-Search, MS Acquisition Corporation, Suncrest,
Prospect Medical Systems and Prospect Medical Group shall promptly provide the
other party and Investor (or its counsel) with copies of all other filings made
by such party with any state or federal governmental entity in connection with
this Agreement or the transactions contemplated hereby.
5.12 ACCOUNTING METHODS. None of Med-Search, MS Acquisition Corporation,
Suncrest, Prospect Medical Systems or Prospect Medical Group shall change their
methods of accounting in effect as of the date hereof except as required by
changes in GAAP.
5.13 TAX-FREE REORGANIZATION TREATMENT. None of Med-Search, MS Acquisition
Corporation, Suncrest, Prospect Medical Systems or Prospect Medical Group shall
take or cause to be taken any action, whether before or after the Effective
Time, that would disqualify the Merger as a "reorganization" within the meaning
of Section 368(a) of the Code.
5.14 COMPENSATION, BENEFIT PLANS. None of Med-Search, MS Acquisition
Corporation, Suncrest, Prospect Medical Systems or Prospect Medical Group shall
(i) adopt or amend in any material respect any collective bargaining agreement
with employees, (ii) enter into, adopt, amend or terminate any benefit plan or
any other employee benefit plan or any agreement, arrangement, plan or policy
between such party and one or more of its directors or officers, in each case so
as to materially increase benefits thereunder, (iii) increase the compensation
or fringe benefits of any director, officer or employee or provide any other
benefit not required by any plan or arrangement in effect as of the date hereof
from the level set at December 31, 1994 (including, without limitation, the
granting of stock options, stock appreciation rights, restricted stock,
restricted stock units or performance units or shares) or enter into any
contract, agreement, commitment or arrangement to do any of the foregoing, (iv)
create or amend any stock plan or grant any equity based award pursuant to any
stock plan or otherwise other than employee stock options granted consistent
with the preceding clause (iii) and having an exercise price not less than
market value at the time of grant, or (v) enter into or renew any contract,
agreement, commitment or arrangement providing for the payment to any director,
officer or employee of such party of compensation or benefits contingent,
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or the terms of which are materially altered, upon the occurrence of any of the
transactions contemplated by this Agreement.
5.15 PROSPECT MANAGEMENT AGREEMENT. Prospect Medical Systems shall not
amend the Prospect Management Agreement, nor any of the exhibits thereto.
ARTICLE 6
ADDITIONAL AGREEMENTS
6.1 ACCESS TO INFORMATION. Each of Med-Search, Suncrest and Prospect
Medical Systems shall afford the other parties and shall cause its independent
accountants to afford to such persons, and their accountants, counsel and other
representatives, reasonable access during normal business hours during the
period prior to the Effective Time to all of its properties, books, contracts,
commitments and records and to the independent accountants reasonable access to
the audit work papers and other records of its accountants. During such period,
each of Med-Search, Suncrest and Prospect Medical Systems shall use reasonable
efforts to furnish promptly to the other all information concerning the
business, properties and personnel as may be reasonably requested. No party
will use such information for purposes other than this Agreement and will
otherwise hold such information in confidence until such time as such
information otherwise becomes publicly available, and in the event of
termination of this Agreement for any reason each party shall promptly return,
or cause to be returned, to the disclosing party all documents obtained from the
other party and any copies made of such documents, extracts and copies thereof.
6.2 LEGAL CONDITIONS TO THE MERGER. Each of Med-Search, Suncrest and
Prospect Medical Systems will take all reasonable actions necessary to comply
promptly with all legal requirements which may be imposed on such party with
respect to the Merger and will promptly cooperate with and furnish information
to the other parties in connection with any such requirements imposed upon such
other party in connection with the Merger. Each of Med-Search, Suncrest and
Prospect Medical Systems will take all reasonable actions to obtain (and to
cooperate with the other party in obtaining) any consent, authorization, order
or approval of, or any exemption by, any governmental authority, or other third
party, required to be obtained or made by such party in connection with the
Merger or the taking of any action contemplated thereby or by this Agreement.
6.3 MED-SEARCH STOCKHOLDERS' APPROVAL. Med-Search agrees to submit this
Agreement, the Certificate of Merger, the Certificates of Amendment to its
Certificate of Incorporation, and any related matters to its stockholders for
approval, by means of the Joint Information Statement, all as provided by law
and its Certificate of Incorporation and Bylaws. The Board of Directors of
Med-Search has unanimously recommended to the Med-Search stockholders that such
stockholders approve the transactions contemplated by this Agreement and the
Certificate of Merger.
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6.4 PROSPECT MEDICAL SYSTEMS STOCKHOLDERS' APPROVAL. Prospect Medical
Systems agrees to submit this Agreement, Certificates of Amendment to
Certificate of Incorporation, Certificate of Merger and any related matters to
its stockholders for approval, by means of the Joint Information Statement, all
as provided by law and its Certificate of Incorporation and Bylaws. The Board
of Directors of Prospect Medical Systems has unanimously recommended to the
Prospect Medical Systems stockholders that such stockholders approve the
transactions contemplated by this Agreement and the Certificate of Merger.
6.5 DISSENTING SHARES. Med-Search shall provide a notice at the time the
Joint Information Statement is delivered to stockholders for their approval, a
notice as required by Sections 2115 and 1203 of the California Corporations
Code, as amended, informing them of their opportunity to dissent from the terms
of the Merger and related transactions. As promptly as practicable after the
Joint Information Statement and prior to the Closing Date, each party shall
furnish to the other and Investor with the name, address of each Dissenting
Stockholder and number of Dissenting Shares owned by each such Dissenting
Stockholder.
6.6 BLUE SKY LAWS. Each of Med-Search and Prospect Medical Systems shall
take such steps as may be necessary to comply with the securities and Blue Sky
laws of all jurisdictions which are applicable in connection with the Merger.
6.7 COMMUNICATIONS. Between the date hereof and the Effective Time,
neither Prospect Medical Systems, Prospect Medical Group nor Med-Search will
furnish any communication to its stockholders or to the public generally if the
subject matter thereof relates to the other party or to the transactions
contemplated by this Agreement or the Certificate of Merger without the prior
approval of the other party as to the content thereof, which approval shall not
be unreasonably withheld (unless such disclosure is nonetheless required in the
opinion of counsel), and subject to each party's compliance with applicable law.
6.8 DELIVERY OF STOCK CERTIFICATES. Med-Search will issue and deliver as
and when required by the provisions of this Agreement, the certificates
representing the shares of Med-Search Common into which the shares of Prospect
Medical Systems Common outstanding immediately prior to the Effective Time shall
have been converted as provided in this Agreement.
6.9 UPDATE TO DISCLOSURES. Without limiting any party's right to rely on
the representations and warranties as of the date of this Agreement, each of
Med-Search, Suncrest, Prospect Medical Systems and Prospect Medical Group shall
provide the other parties with updates to the disclosures provided or made
available to such other parties as to material facts which arise between the
date of this Agreement and the Closing Date and which, if they had occurred and
been known prior to the date of this Agreement would have been required to have
been disclosed in order to make the representations and warranties contained in
Article 3 or Article 4, as applicable, true and correct as of the date of this
Agreement.
6.10 GOOD FAITH. Each party shall act in good faith in an attempt to cause
all the conditions precedent to its obligations under this Agreement to be
satisfied. Each party will act in good faith and take all reasonable action
within its capability necessary to render accurate as of the Effective Time its
representations and warranties contained in this Agreement.
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6.11 STATE STATUTES. If any state takeover law shall become applicable to
the transactions contemplated by this Agreement, Med-Search and its Board of
Directors shall use their reasonable best efforts to obtain such approvals and
take such actions as are necessary so that the transactions contemplated by this
Agreement may be consummated as promptly as practicable on the terms
contemplated by this Agreement and otherwise to minimize the effects of such
state takeover law on the transactions contemplated by this Agreement.
6.12 COMPOSITION OF MED-SEARCH BOARD. Immediately after the Effective
Time, Med-Search shall reduce the size of the Board of Directors to five (5)
members and appoint to fill such newly-created vacancies with Jacob Y. Terner,
M.D., Gregg De Nicola, M.D., David Levinsohn and two directors to be chosen at
a later date, and in the event of their refusal or inability to serve, such
directors of Prospect Medical Systems who are satisfactory to Med-Search.
Further, Investor shall be named Chairman of the Board and Chief Executive
Officer of Med-Search and Gregg De Nicola shall be named President.
6.13 SETTLEMENT OF CLAIMS. From the date hereof to the Effective time,
Med-Search shall at the direction of Investor settle creditor claims using the
Private Placement Funds which will be available after the Effective Time. No
other settlements shall be made without the agreement of Investor.
6.14 MAINTENANCE/ASSIGNMENT OF HMO CONTRACTS. The parties agree to use
their best efforts to maintain Suncrest's existing Health Maintenance
Organization contracts and to transfer such contracts to Prospect Medical Group
at the Closing. Additionally, Suncrest acknowledges that, due to the fact that
FHP HealthPlan had provided notice of its intention to terminate its agreement
with Suncrest, Suncrest has previously assigned its existing FHP contract to
Prospect Medical Group. In the event that the Merger is not consummated due to
the inability of Med-Search or Suncrest to complete the transaction, the
assignment to Prospect Medical Group shall remain valid and enforceable and no
party shall have any liability resulting from the transfer of such contract.
6.15 FINDERS FEE. At the Closing, Med-Search shall issue to each of David
Zussman, LK Management Inc. and Warner Capital Associates, a warrant to purchase
200,000 pre-split shares of Med-Search Common Stock for a period of five years
at an exercise price of $0.03125 per share. Other than as set forth herein,
each party represents that there are no other finders or brokers entitled to
receive any compensation from any of the transactions contemplated by this
Agreement.
6.16 FAIRNESS OPINION. Med-Search shall include in the Joint Information
Statement as required by Section 1203 of the California Corporations Code, a
written opinion as to the fairness of the consideration being received in the
transaction.
6.17 INCREASE IN NUMBER OF AUTHORIZED SHARES OF MED-SEARCH COMMON. At the
Closing, or as soon as practicable after the Med-Search stockholders have
approved Med-Search's Certificate of Amendment of Certificate of Incorporation
increasing the number of authorized shares of Med-Search Common from 29,000,000
to 250,000,000, as provided in the Joint Information Statement, Med-Search shall
cause the filing of such Certificate of Amendment of Certificate of
Incorporation with the Delaware Secretary of State.
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ARTICLE 7
CONDITIONS PRECEDENT
7.1 CONDITIONS TO EACH PARTY'S OBLIGATIONS TO EFFECT THE MERGER. The
respective obligations of each party to effect the Merger shall be subject to
the satisfaction on or prior to the Closing Date of the following conditions
unless waived by such party:
(a) STOCKHOLDER APPROVAL. This Agreement and the other matters
disclosed in the Joint Information Statement shall have been approved and
adopted by the required affirmative vote of the holders of the outstanding
shares of Med-Search Common and of Prospect Medical Systems.
(b) GOVERNMENT APPROVALS. All authorizations, consents, orders or
approvals of, or declarations of filings with, or expiration of waiting periods
imposed by, any governmental authority necessary for the consummation of the
transactions contemplated by this Agreement, and any such requirements under
applicable state securities laws shall have been filed, occurred or been
obtained, other than filings with and approvals by foreign governments relating
to the Merger, if failure to make such filings or obtain such approvals would
not be materially adverse to Med-Search or Prospect Medical Systems. There
shall be no regulatory action threatened or pending which could result in
suspension or revocation of any Permits held by Prospect Medical Systems,
Prospect Medical Group, or Suncrest.
(c) THIRD-PARTY APPROVALS. Any and all consents or approvals
required from third parties relating to contracts, agreements, permits, leases
and other instruments, material to the respective businesses of Med-Search
(unless waived by Prospect Medical Systems and Investor) or Prospect Medical
Systems (unless waived by Med-Search and Investor) shall have been obtained.
(d) LEGAL ACTION. No temporary restraining order, preliminary
injunction or permanent injunction or other order preventing the consummation of
the Merger shall have been issued by any federal or state court and remain in
effect, and no litigation seeking the issuance of such an order or injunction,
shall be pending which, in the good faith judgment of Prospect Medical Systems'
or Med-Search's Board of Directors has a reasonable probability of resulting in
such order or injunction. In the event any such order or injunction shall have
been issued, each party agrees to use its reasonable efforts to have any such
injunction lifted.
(e) STATUTES. No statute, rule or regulation shall have been enacted
by the government of the United States or any state or agency thereof which
would (i) make the consummation of the Merger illegal, (ii) prohibit
Med-Search's or Surviving Corporation's ownership or operation of all or a
material portion of the business or assets of Prospect Medical Systems, or
compel Med-Search or Surviving Corporation to dispose of or hold separate all or
a material portion of the business or assets of Prospect Medical Systems, as a
result of the Merger, or (iii) render Med-
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Search, Prospect Medical Systems or MS Acquisition Corporation unable to
consummate the Merger, except for any waiting period provisions.
(f) INVESTOR PRIVATE PLACEMENT. Pursuant to the terms of the
Investment Agreement, immediately prior to the Closing, Investor shall have
deposited in trust, $2,500,000, either in cash or in receipts for reimbursable
expenses, as the proceeds of the Med-Search Placement. Unless otherwise waived,
Investor's obligation shall be conditioned on its reliance on representations
and warranties in Articles 3 and 4 of this Agreement.
(g) FILING OF TAX RETURNS. Med-Search shall have filed all federal,
state, local and foreign governmental tax returns for fiscal years 1993, 1994
and 1995, and shall have paid any and all taxes due, including penalties and
fines. Prospect Medical Systems and Investor shall have received adequate
assurances that Med-Search has no further tax liabilities.
(h) ACQUISITIONS OF SUNCREST ASSETS. Pursuant to the terms of the
Asset Purchase Agreement, Suncrest shall have transferred those assets to be
sold under such agreement to Prospect Medical Group.
(i) CERTIFICATE OF INVESTOR. Investor shall have delivered a
certificate evidencing his ability to infuse $2,500,000 into Med-Search
immediately following the Merger pursuant to his obligations under the
Investment Agreement.
7.2 CONDITIONS TO OBLIGATIONS OF MED-SEARCH AND MS ACQUISITION
CORPORATION. The obligations of Med-Search and MS Acquisition Corporation to
effect the Merger are subject to the satisfaction on or prior to the Closing
Date of the following conditions, unless waived by Med-Search and MS Acquisition
Corporation:
(a) REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Prospect Medical Systems and Prospect Medical Group set forth in
this Agreement and the Certificate of Merger shall be true and correct in all
respects as of the date of this Agreement and as if made at and as of the
Closing Date, except as otherwise contemplated by this Agreement, and Med-Search
shall have received a certificate or certificates signed by the chief executive
officer and chief financial officer of Prospect Medical Systems and Prospect
Medical Group to such effect.
(b) PERFORMANCE OF OBLIGATIONS OF PROSPECT MEDICAL SYSTEMS AND
PROSPECT MEDICAL GROUP. Prospect Medical Systems and Prospect Medical Group
shall have performed in all respects all obligations required to be performed by
each under this Agreement and the Certificate of Merger prior to the Closing
Date, and Med-Search shall have received a certificate signed by the chief
executive officer and chief financial officer of Prospect Medical Systems and
Prospect Medical Group to such effect.
(c) OPINION OF PROSPECT MEDICAL SYSTEMS' COUNSEL. Med-Search shall
have received an opinion dated the Closing Date of Gaitan & Parks, counsel to
Prospect Medical Systems, in a form reasonably satisfactory to Med-Search's
counsel, with such qualifications thereto as are customary and reasonable.
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(d) CONSULTING ARRANGEMENTS AND COVENANTS NOT TO COMPETE. Concurrent
with the Closing, each of Terry Worthylake and James Crowell shall execute a
Consulting Agreement, in the form attached hereto as Exhibit H, pursuant to
which they shall serve as consultants to Med-Search for a six month period
pursuant to the terms of a consulting agreement providing for payment of $45,000
to each at the Closing and $5,000 per month for a six month period thereafter.
Messrs. Worthylake and Crowell shall also execute a covenant not to compete for
a period of 18 months from the Closing satisfactory to Investor and Prospect
Medical Systems.
7.3 CONDITIONS TO OBLIGATIONS OF PROSPECT MEDICAL SYSTEMS. The
obligations of Prospect Medical Systems to effect the Merger are subject to the
satisfaction on or prior to the Closing Date of the following conditions unless
waived by Prospect Medical Systems:
(a) REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Med-Search, MS Acquisition Corporation and Suncrest set forth in
this Agreement shall be true and correct in all respects as of the date of this
Agreement and as if made at and as of the Closing Date, except as otherwise
contemplated by this Agreement, and Prospect Medical Systems shall have received
a certificate signed by the chief executive officer and chief financial officer
of Med-Search to such effects as to Med-Search and MS Acquisition Corporation
and of Suncrest as to Suncrest.
(b) DUE DILIGENCE. Prospect shall have completed satisfactory due
diligence of Med-Search, MS Acquisition Corporation and Suncrest. This shall
include the satisfactory resolution or settlement of all outstanding claims,
demands, lawsuits or matters in arbitration.
(c) PERFORMANCE OF 0BLIGATIONS OF MED-SEARCH AND MS ACQUISITION
CORPORATION. Med-Search and MS Acquisition Corporation shall have performed in
all respects all obligations required to be performed by them under this
Agreement prior to the Closing Date, and Prospect Medical Systems shall have
received a certificate signed by the chief executive officer and chief financial
officer of Med-Search to such effect.
(d) OPINION OF MED-SEARCH'S COUNSEL. Prospect Medical Systems shall
have received an opinion dated the Closing Date of David L. Kagel, Esq., outside
counsel to Med-Search, in a form reasonably satisfactory to Prospect Medical
Systems' counsel, with such qualifications thereto as are customary and
reasonable which shall include without limitation an opinion that Med-Search has
observed proper corporate formalities.
(e) RESIGNATIONS. The resignation of officers and directors of
Med-Search and MS Acquisition Corporation, whose replacement shall be designated
by Investor as set forth in Section 6.12 herein or as otherwise determined by
Investor and Prospect Medical Systems.
(f) AUDIT. Completion of audited financial statements of Med-Search
and Suncrest by BDO Seidman, LLP, in accordance with generally accepted
accounting principles for the following periods: a consolidated statement of
operations, statement of stockholders' equity and statement of cash flows for
the three fiscal years ended September 30, 1993, 1994, and 1995, and
Med-Search's audited consolidated balance sheet at September 30, 1995.
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(g) EMPLOYMENT. Gregg De Nicola, M.D. shall have executed an
employment agreement satisfactory to Investors and Prospect Medical Systems.
(h) RELEASES. Each of Terry Worthylake, James Crowell, Barbara
Noble, Roger Rothrock, John Raffeto, William B. Brite, Costa De Oro Medical
Group, Earl F. Jordan, M.D., and Scott Gladstone, M.D. shall have executed a
release satisfactory to Investor and Prospect Medical Systems.
(i) LIABILITY. Receipt of satisfactory evidence that Med-Search has
no liability to Roger Rothrock and John Raffeto or any other party associated
with such claim.
(j) NO MATERIAL ADVERSE CHANGE. Since December 31, 1995, there shall
have been no changes in the condition (financial or otherwise), employees,
operations, obligations or liabilities of Med-Search or Suncrest which, in the
aggregate, have had or may be reasonably expected to have a material adverse
effect on Med-Search or Suncrest.
(k) TERMINATION OF ADMINISTRATIVE SERVICES AGREEMENT. Med-Search and
Suncrest shall have terminated the Administrative Services Agreement dated July
1, 1993, by and between Med-Search and Suncrest.
ARTICLE 8
CLOSING
8.1 CLOSING DATE. The Closing under this Agreement (the "Closing") shall
be held as promptly as practicable, but not more than one (1) business day
following the later of (a) the approval of the Merger by the stockholders of
Med-Search and (b) satisfaction of all other conditions precedent to the Merger
specified in this Agreement, unless duly waived by the party entitled to
satisfaction thereof. In any event, if the Closing has not occurred on or
before July 31, 1996, this Agreement may be terminated as provided in Section
11.1(c). Such date on which the Closing is to be held is herein referred to as
the "Closing Date." The Closing shall be held at the offices of Miller &
Holguin, 1801 Century Park East, 7th Floor, Los Angeles, California, at 10:00
A.M. on such date, or on such other date and at such other time and place as the
parties may agree upon in writing.
8.2 FILING DATE. Subject to the provisions of this Agreement, on the
Closing Date, fully executed and acknowledged copies of the Certificate of
Amendment of Certificate of Incorporation increasing the number of authorized
shares of Med-Search Common from 29,000,000 to 250,000,000 and the Certificate
of Merger meeting the requirements of the Delaware General Corporation Law,
shall be filed with the Delaware Secretary of State, all in accordance with the
provisions of this Agreement.
8.3 PRIVATE PLACEMENT OF MED-SEARCH COMMON. Immediately following
confirmation by the Delaware Secretary of State of receipt and acceptance of (i)
the Certificate of Amendment of Med-Search's Certificate of Incorporation
increasing the number of shares of Med-Search from 29,000,000 to 250,000,000 and
(ii) the Certificate of Merger, the $2,500,000 raised in the Med-
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Search Placement shall be invested in Med-Search in return for the issuance by
Med-Search of 88,089,312 shares of Med-Search Common, representing approximately
42% of the Surviving Corporation's shares outstanding at the completions of the
Merger and the Med-Search Placement.
8.4 APPOINTMENT OF NEW BOARD OF DIRECTORS. As provided in Section 6.12
herein, immediately after the Effective Time, Terry L. Worthylake, James Crowell
and Barbara Noble shall resign as directors and appoint Jacob Y. Terner, M.D.,
Gregg De Nicola, M.D. and David Levinsohn as new directors.
8.5 CLOSING CERTIFICATES. Each of the officers and directors of Prospect
Medical Systems, Prospect Medical Group, Med-Search and Suncrest shall have
executed closing certificates stating that the representations, warranties and
covenants contained in this Agreement are true and correct as of the Closing.
ARTICLE 9
SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS
The representations, warranties and covenants of Prospect Medical Systems,
Prospect Medical Group, Med-Search and Suncrest contained in this Agreement and
in the closing certificates executed as set forth in Section 8.5 herein, shall
survive the Effective Time. All representations, warranties and covenants in or
pursuant to this Agreement shall be deemed to be conditions to the Merger.
ARTICLE 10
PAYMENT OF EXPENSES
Med-Search, MS Acquisition Corporation and Prospect Medical Systems shall
each pay their own fees and expenses incurred incident to the preparation and
carrying out of the transactions herein contemplated (including legal,
accounting and travel). However, Investor has agreed to advance certain
expenses on behalf of Med-Search which shall be liabilities of Med-Search and
shall be reimbursed to Investor from Private Placement Proceeds. Such advances
include, but are not limited to: (a) audit expenses of Med-Search and Suncrest;
(b) Delaware franchise fees of Med-Search up to $30,000; (c) Investor's legal
fees in connection with the transactions contemplated herein, including without
limitation costs of the Merger, Med-Search Placement and due diligence expenses;
and (d) appraisal, printing, mailing, stock transfer and filing fees.
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ARTICLE 11
TERMINATION, AMENDMENT AND WAIVER
11.1 TERMINATION. This Agreement may be terminated at any time prior to
the Effective Time, whether before or after approval of matters presented in
connection with the Merger by the stockholders of Med-Search or Prospect Medical
Systems:
(a) by mutual written consent of Investor, Prospect Medical Systems
and Med-Search;
(b) by Med-Search, Prospect Medical Systems or Investor if there has
been a material breach of any representation, warranty, covenant or agreement
contained in this Agreement on the part of the other party set forth in this
Agreement and, if such breach is curable, such breach has not been promptly
cured after written notice of such breach;
(c) by either Med-Search or Prospect Medical Systems if the Merger
shall not have been consummated before July 31, 1996, (which failure, in the
case of termination by Med-Search or MS Acquisition Corporation, was due to a
failure of any of the conditions to the obligations of Med-Search and MS
Acquisition Corporation set forth in Section 7.2 hereof and, in the case of
termination by Prospect Medical Systems, was due to a failure of any of the
conditions to the obligations of Prospect Medical Systems set forth in Section
7.3 hereof);
(d) by Med-Search, Prospect Medical Systems or Investor if (i) there
shall be a final nonappealable order of a federal or state court in effect
preventing consummation of the Merger or (ii) there shall be any action taken,
or any statute, rule, regulation or order enacted, promulgated or issued or
deemed applicable to the Merger by any governmental authority which would make
consummation of the Merger illegal;
(e) by either Investor or Prospect Medical Systems if any required
approval of the Med-Search stockholders shall not have been obtained by July 31,
1996;
(f) by either Investor or Med-Search if the unanimous approval of the
Prospect Medical Systems stockholders shall not have been obtained by July 31,
1996;
(g) by Prospect Medical Systems if Section 368(a)(2)(E)(ii) of the
Code cannot be satisfied as a result of dissenting stockholders of Prospect
Medical Systems;
(h) by Investor or Med-Search if any condition to Med-Search's
obligation to complete the Merger has not been satisfied or waived by
Med-Search;
(i) by Investor or Prospect Medical Systems if any condition to
Prospect Medical Systems' obligation to complete the Merger has not been
satisfied or waived by Prospect Medical Systems; and
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(j) by Investor or Prospect Medical Systems if the HealthNet or
Franklin litigation, as set forth more fully on Exhibit D hereto, have not been
settled or otherwise resolved.
11.2 EFFECT OF TERMINATION. In the event of termination of this Agreement
by either Prospect Medical Systems or Med-Search as provided in Section 11.1,
this Agreement and the Certificate of Merger shall forthwith become void and
there shall be no liability or obligation on the part of Med-Search or Prospect
Medical Systems or their respective officers or directors except for (i) the
last sentence of Section 6.1, and (ii) the provisions of Article 10, and except
to the extent that such termination results from the breach by a party hereto of
any of its representations, warranties, covenants or agreements set forth in
this Agreement.
11.3 AMENDMENT. This Agreement may be amended by the parties hereto, at any
time before or after approval of matters presented in connection with the Merger
by the stockholders of Prospect Medical Systems, Med-Search and MS Acquisition
Corporation but, after any such stockholder approval, no amendment shall be made
which by law requires the further approval of stockholders without obtaining
such further approval. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto.
11.4 EXTENSION, WAIVER. At any time prior to the Effective Time, any party
hereto, by such corporate action as shall be appropriate, may, to the extent
legally allowed, (i) extend the time for the performance of any of the
obligations or other act of the other parties hereto, (ii) waive any
inaccuracies in the representations and warranties made to such party contained
herein or in any document delivered pursuant hereto and (iii) waive compliance
with any of the agreements or conditions for the benefit of such party contained
herein. Any agreement on the part of a party hereto to any such extension or
waiver shall be valid if set forth in an instrument in writing signed on behalf
of such party.
ARTICLE 12
GENERAL
12.1 NOTICES. Any notice, request, instruction or other document to be
given hereunder by any party to the other shall be in writing and delivered
personally or sent by certified mail, postage prepaid by telecopy, or by courier
service, as follows:
If to Med-Search, to:
Med-Search, Inc.
15102 Bolsa Chica, Suite D
Huntington Beach, California 92649
Attention: Terry L. Worthylake
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With a copy to:
Law Offices of David L. Kagel
1801 Century Park East, 25th Floor
Los Angeles, CA 90067
Attention: David L. Kagel, Esq.
If to Prospect Medical Systems, to:
Prospect Medical Systems, Inc.
18200 Yorba Linda Blvd., Suite 409
Yorba Linda, CA 92686
Attention: Gregg De Nicola, M.D.
With a copy to:
Gaitan & Parks
171 S. Anita Dr., Suit 201
Orange, CA 92568
Attention: Raymond Gaitan, Esq.
If to Investor, to:
Jacob Y. Terner, M.D.
205 Chautauqua Blvd.
Pacific Palisades, CA 90272
With a copy to:
Miller & Holguin
1801 Century Park East, 7th Floor
Los Angeles, CA 90067
Attention: Dale S. Miller, Esq.
If to Barbara Noble or the Estate of Joseph Noble, to:
Barbara Noble
5400 The Toledo, Penthouse, Suite 701
Long Beach, CA 90803
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With a copy to:
Law Offices of Kenneth K. Williams
One World Trade Center, Suite 1600
Long Beach, CA 90831
Attention: Kenneth K. Williams, Esq.
or to such other persons as may be designated in writing by the parties, by a
notice given as aforesaid.
12.2 HEADINGS. The headings of the several sections of this Agreement are
inserted for convenience of reference only and are not intended to affect the
meaning or interpretation of this Agreement.
12.3 COUNTERPARTS. This Agreement may be executed in counterparts, and
when so executed each counterpart shall be deemed to be an original, and said
counterparts together shall constitute one and the same instrument.
12.4 BINDING NATURE. This Agreement shall be binding upon and inure to the
benefit of the parties hereto. Neither Med-Search, MS Acquisition Corporation
nor Prospect Medical Systems may assign or transfer any rights under this
Agreement. Investor shall be entitled to assign his rights to this Agreement to
participants in the Private Placement.
12.5 MERGER OF DOCUMENTS. This Agreement and all agreements and documents
contemplated hereby constitute one agreement and are interdependent upon each
other in an respects.
12.6 INTEGRATION. All prior agreements, representations and understandings
between the parties are incorporated in this Agreement which constitutes the
entire contract between the parties. The terms of this Agreement are intended
by the parties as a final expression of their agreement with respect to such
terms as are included herein and may not be contradicted by evidence of any
prior or contemporaneous written or oral representations, agreements or
understandings, whether express or implied. The parties further intend that
this Agreement constitutes the complete and exclusive statement of its terms and
that no extrinsic evidence whatsoever may be introduced in any judicial
proceeding, if any, involving this Agreement. No amendment or variation of the
terms of this Agreement shall be valid unless made in writing and signed by each
of the parties.
12.7 INCORPORATION OF EXHIBITS. All Exhibits attached hereto are by this
reference incorporated herein and made a part hereof for all purposes as if
fully set forth herein.
12.8 GOOD FAITH. Each of the parties hereto agrees that it shall act in
good faith in an attempt to cause all the conditions precedent to their
respective obligations to be satisfied.
12.9 APPLICABLE LAW. This Agreement shall be governed by, construed and
enforced in accordance with the laws of the State of California as applied to
contracts entered into solely between residents of, and to be performed entirely
in, such state.
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12.10 DISPUTE. The parties acknowledge that the transactions
contemplated by this Agreement are of a special, unique and extraordinary
character, which gives this Agreement a peculiar value, the loss of which cannot
be reasonably or adequately compensated in damages in an action at law, and a
breach by any party of the provisions of this Agreement will cause irreparable
injury. It is, therefore, expressly acknowledged that this Agreement may be
enforced by the parties and by Investor by injunction and other equitable
remedies, without bond. Such relief shall not be exclusive, but shall be in
addition to any other available rights or remedies. If injunctive relief is not
sought, any controversy or claim arising out of or relating to this Agreement,
or breach thereof, including without limitation claims against either party, its
affiliates, employees, professionals, officers or directors shall be settled by
binding arbitration in Los Angeles, California, in accordance with the
Commercial Rules of the American Arbitration Association. The arbitrator shall
be an active member of the California bar. In the proceeding, the arbitrator
shall apply California substantive law and the California Evidence Code, except
that the arbitrator's authority in awarding damages shall be interpreted under
New York law. THE PARTIES AGREE THAT THE ARBITRATOR SHALL HAVE NO AUTHORITY TO
AWARD PUNITIVE DAMAGES, AND THE PARTIES HAVE BEEN ADVISED TO SEEK COUNSEL
CONCERNING THE POSSIBLE WAIVER BY THE PARTIES OF CERTAIN RIGHTS OTHERWISE
AVAILABLE AS A CONSEQUENCE OF SUCH AGREEMENT. The arbitrator shall prepare an
award in writing, which shall include factual findings and any legal conclusions
on which the decision is based. Judgment upon any award rendered by the
Arbitrator(s) may be entered in any court having jurisdiction thereof. In any
such proceeding, the prevailing party shall be entitled, in addition to any
other relief awarded or adjudged, such sum as the Arbitrator(s) may fix as and
for reasonable attorneys' fees and costs, and the same shall be included in the
award and any judgment.
12.11 SEVERABILITY. If for any reason whatsoever, any one or more of
the provisions of this Agreement shall be held or deemed to be inoperative,
unenforceable or invalid as applied to any particular case or in all cases, such
circumstances shall not have the effect of rendering such provision invalid in
any other case or of rendering any of the other provisions of this Agreement
inoperative, unenforceable or invalid.
12.12 THIRD PARTY BENEFICIARIES. Except as expressly set forth herein,
no provision of this Agreement, including the Exhibits and Schedules hereto, is
intended or should be construed to create any third party beneficiaries or to
give any rights, including rights of subrogation, to any person other than the
parties to this Agreement. Notwithstanding the foregoing, Med-Search and
Prospect Medical Systems each hereby agree and acknowledge that Investor is
relying on their respective representations in Articles 3 and 4 and that
Investor or his investor group are relying on the same representations for their
investment in the Med-Search Private Placement.
12.13 BEST EFFORTS; FURTHER ASSURANCES. Subject to the terms and
conditions of this Agreement, each party shall use its best efforts to take, or
cause to be taken, all action and to do, or cause to be done, all things
necessary, proper or advisable consistent with applicable laws and regulations
to consummate the transactions contemplated by this Agreement as promptly as
possible. The parties hereto shall do and perform or cause to be done and
performed all such further actions and things and shall execute and deliver all
such other agreements, certificates, instruments or documents as any other party
hereby may reasonably request in order to carry out the intent and purposes of
this Agreement and the consummation of the transactions contemplated hereby.
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IN WITNESS WHEREOF, Med-Search, MS Acquisition Corporation and Prospect
Medical Systems have caused this Agreement to be signed by their respective
officers thereunto duly authorized, all as of the date first above written.
MED-SEARCH, INC. MED-SEARCH ACQUISITION
CORPORATION
By: /s/ T. L. WORTHYLAKE By: /s/ T. L. WORTHYLAKE
-------------------------------- --------------------------------
Its: President Its: President
------------------------------- -------------------------------
PROSPECT MEDICAL SYSTEMS, INC.
By: /s/ Gregg De Nicola
-------------------------------------
Its:
------------------------------------
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The following signatory enters into this Agreement as to the representations and
warranties set forth in Articles 3 and 4, and the additional agreements set
forth in Articles 5 and 6, relating to Prospect Medical Group and Suncrest, as
the case may be, only.
GREGG DE NICOLA, M.D.
/s/ GREGG DE NICOLA
- ------------------------------------
BARBARA NOBLE THE ESTATE OF JOSEPH W. NOBLE, M.D.
/s/ BARBARA NOBLE By: /s/ BARBARA NOBLE
- ------------------------------------ --------------------------------
Its: Representative
SUNCREST MEDICAL GROUP, INC.
By: /s/ BARBARA NOBLE
-------------------------------------
Its: Director
------------------------------------
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EXHIBITS TO
AGREEMENT AND PLAN OF REORGANIZATION(1)
Exhibit A Certificate of Merger
Exhibit B Asset Purchase Agreement
Exhibit C Investment Agreement -- filed herewith as Exhibit 10.6
Exhibit D Prospect Management Agreement -- filed herewith as Exhibit
10.1
Exhibit E Med-Search Litigation
Exhibit F Issuance of Securities
Exhibit G Acquisitions
Exhibit F Consulting Agreements
(1) The Registrant hereby undertakes to provide to the Securities and Exchange
Commission upon request copies of any of the exhibits listed above not
otherwise filed with this Form S-1 Registration Statement as noted above.
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AGREEMENT FOR
THE PURCHASE AND SALE OF STOCK
OF
SANTA ANA/TUSTIN PHYSICIANS GROUP, INC.
BY AND AMONG
PROSPECT MEDICAL GROUP, INC.
A CALIFORNIA PROFESSIONAL CORPORATION
PURCHASER
AND
SANTA ANA/TUSTIN PHYSICIANS GROUP, INC.
A CALIFORNIA PROFESSIONAL CORPORATION
AND
MELVIN L. REICH, D.O.
SELLER
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. PURCHASE AND SALE OF STOCK: . . . . . . . . . . . . . . . . . . . . . . . . . .1
2. ASSUMPTION OF LIABILITIES:. . . . . . . . . . . . . . . . . . . . . . . . . . .1
3. PURCHASE PRICE OF STOCK:. . . . . . . . . . . . . . . . . . . . . . . . . . . .2
3.1 Consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
3.2 Payment of the Purchase Price . . . . . . . . . . . . . . . . . . . . .2
3.3 Other Consideration . . . . . . . . . . . . . . . . . . . . . . . . . .3
3.4 Fair Market Value . . . . . . . . . . . . . . . . . . . . . . . . . . .3
3.5 Reserve Account . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
3.6 Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF SELLER:. . . . . . . . . . . . . .4
4.1 Organization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
4.2 Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
4.3 No Consent Required; No Violations. . . . . . . . . . . . . . . . . . .5
4.4 No Default. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
4.5 Financial Statements, Books and Records . . . . . . . . . . . . . . . .6
4.6 Conduct of Practice . . . . . . . . . . . . . . . . . . . . . . . . . .6
4.7 No Material Changes . . . . . . . . . . . . . . . . . . . . . . . . . .7
4.8 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
4.9 Title to Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
4.10 Right to Premises; Condition of the Property and Premises . . . . . . .8
4.11 Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
4.12 Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
4.13 Powers of Attorney. . . . . . . . . . . . . . . . . . . . . . . . . . .9
4.14 No Litigation and Insurance . . . . . . . . . . . . . . . . . . . . . .9
4.15 Violation of Laws . . . . . . . . . . . . . . . . . . . . . . . . . . .9
4.16 No Brokers or Finders . . . . . . . . . . . . . . . . . . . . . . . . 10
4.17 No Bankruptcy Proceedings . . . . . . . . . . . . . . . . . . . . . . 10
4.18 Licensure and Reimbursement . . . . . . . . . . . . . . . . . . . . . 10
4.19 Employees and Employee Benefits . . . . . . . . . . . . . . . . . . . 11
4.20 Employee Entitlements . . . . . . . . . . . . . . . . . . . . . . . . 12
4.21 Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
4.22 Inspections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
4.23 Environmental Conditions. . . . . . . . . . . . . . . . . . . . . . . 13
4.24 Primary Care Physicians . . . . . . . . . . . . . . . . . . . . . . . 13
4.25 Bank Accounts; Securities . . . . . . . . . . . . . . . . . . . . . . 14
4.26 Subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
4.27 Articles of Incorporation and Bylaws. . . . . . . . . . . . . . . . . 14
4.28 Leases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
4.29 Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . . 14
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4.30 Securities Law Compliance . . . . . . . . . . . . . . . . . . . . . . 14
4.31 Option to Purchase IPAs.. . . . . . . . . . . . . . . . . . . . . . . 14
4.32 No Untrue Statements. . . . . . . . . . . . . . . . . . . . . . . . . 15
4.33 Due Diligence . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
5. REPRESENTATIONS, WARRANTIES AND COVENANTS OF PURCHASER: . . . . . . . . . . . 15
5.1 Organization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
5.2 Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
5.3 No Brokers or Finders . . . . . . . . . . . . . . . . . . . . . . . . 15
5.4 No Violation of Other Obligations . . . . . . . . . . . . . . . . . . 16
5.5 No Consent Required . . . . . . . . . . . . . . . . . . . . . . . . . 16
5.6 No Bankruptcy Proceedings . . . . . . . . . . . . . . . . . . . . . . 16
5.7 No Untrue Statements. . . . . . . . . . . . . . . . . . . . . . . . . 16
5.8 Financial Resources . . . . . . . . . . . . . . . . . . . . . . . . . 16
5.9 Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
5.10 Investigation and Sophistication. . . . . . . . . . . . . . . . . . . 17
5.11 No Intent To Distribute . . . . . . . . . . . . . . . . . . . . . . . 17
5.12 Strategic Provider. . . . . . . . . . . . . . . . . . . . . . . . . . 17
5.13 Due Diligence . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
6. POST-CLOSING COVENANTS: . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
6.1 Company Employees; Prior Service Credit . . . . . . . . . . . . . . . 17
6.2 Company's Offices . . . . . . . . . . . . . . . . . . . . . . . . . . 18
6.3 Subsequent Sale of Company. . . . . . . . . . . . . . . . . . . . . . 18
6.4 Company's Name. . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
6.5 Board of Directors. . . . . . . . . . . . . . . . . . . . . . . . . . 18
6.6 Choice of Hospitals . . . . . . . . . . . . . . . . . . . . . . . . . 18
7. PURCHASERS' ACCESS TO RECORDS; CONFIDENTIAL INFORMATION;
PUBLICITY:. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
7.1 Access to Records . . . . . . . . . . . . . . . . . . . . . . . . . . 18
7.2 Confidential Information. . . . . . . . . . . . . . . . . . . . . . . 19
7.3 Publicity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
8. CLOSING; CONDITIONS TO OBLIGATIONS TO CLOSE:. . . . . . . . . . . . . . . . . 19
8.1 Closing Date. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
8.2 Deliveries by Seller. . . . . . . . . . . . . . . . . . . . . . . . . 20
8.3 Deliveries by Purchaser . . . . . . . . . . . . . . . . . . . . . . . 21
8.4 Conditions to Purchaser's Obligations . . . . . . . . . . . . . . . . 22
8.5 Conditions to Seller's Obligation . . . . . . . . . . . . . . . . . . 22
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9. INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
9.1 Seller's Indemnity. . . . . . . . . . . . . . . . . . . . . . . . . . 24
9.2 Purchaser's Indemnity . . . . . . . . . . . . . . . . . . . . . . . . 25
9.3 Indemnification Procedure . . . . . . . . . . . . . . . . . . . . . . 25
9.4 Payment; Purchaser's Right to Offset. . . . . . . . . . . . . . . . . 26
9.5 Non-Exclusive Remedy/Mitigation of Damages. . . . . . . . . . . . . . 26
10. PURCHASER'S CANCELLATION OF STOCK PURCHASE AGREEMENT. . . . . . . . . . . . . 27
10.1 Jeopardy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
10.2 Exercise of Cancellation Options. . . . . . . . . . . . . . . . . . . 27
11. MUTUAL RELEASE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
12. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
12.1 Risk of Loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
12.2 No Third Party Beneficiaries. . . . . . . . . . . . . . . . . . . . . 28
12.3 Entire Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . 28
12.4 Successors and Assigns. . . . . . . . . . . . . . . . . . . . . . . . 28
12.5 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
12.6 Headings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
12.7 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
12.8 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
12.9 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
12.10 Specific Performance. . . . . . . . . . . . . . . . . . . . . . . . . 29
12.11 Severability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
12.12 Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 29
12.13 Exhibits and Schedules. . . . . . . . . . . . . . . . . . . . . . . . 30
12.14 Survival of Indemnification, Representations and Warranties . . . . . 30
12.15 Time of Essence . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
12.16 Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
12.17 Arbitration.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
12.18 Construction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
12.19 Further Assurances. . . . . . . . . . . . . . . . . . . . . . . . . . 31
</TABLE>
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<PAGE>
AGREEMENT FOR THE PURCHASE AND SALE OF STOCK
THIS AGREEMENT FOR THE PURCHASE AND SALE OF STOCK ("Stock Purchase
Agreement") is made and entered into as of the 23 day of June, 1997, by and
among Prospect Medical Group, Inc., a California professional corporation
("Purchaser"), as buyer, Melvin L. Reich, D.O. ("Seller") as seller, and Santa
Ana/Tustin Physicians Group, Inc. a California professional corporation
("Company").
R E C I T A L S
This Stock Purchase Agreement is made with reference to the following facts
and circumstances:
A. Seller owns all of the capital stock of the Company, which owns and
operates a medical practice and an independent practice association located at
999 North Tustin Avenue, Suite 120, Santa Ana, California (the "Practice");
B. The Practice provides professional medical services in Orange
County, California, primarily through a capitated contract with PacifiCare, a
health maintenance organization;
C. Seller desires to sell to Purchaser and Purchaser desires to
purchase from Seller all of the issued and outstanding stock (the "Stock") of
the Company on the terms and conditions set forth in this Stock Purchase
Agreement.
NOW, THEREFORE, in consideration of the covenants and conditions
contained herein and for other valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
1. PURCHASE AND SALE OF STOCK:
On the "Closing Date" (as defined in Section 8.1 herein), Seller shall sell
and assign to Purchaser, and Purchaser shall acquire from Seller, all right,
title and interest in and to the Stock, free and clear of all liens, mortgages,
pledges, claims, security interests, title defects, encumbrances, charges and
other restrictions of every kind (collectively, the "Liens") on the terms and
subject to the conditions set forth in this Stock Purchase Agreement. Seller is
the owner of record of all of the Company's issued and outstanding capital
Stock.
2. ASSUMPTION OF LIABILITIES:
Except for trade payables arising in the ordinary course of business, all
of the liabilities of Company or the Practice as of March 31, 1997, exceeding
$5,000 individually, are set forth on Exhibit 2 attached hereto, which Exhibit 2
shall also include aggregate amounts for each category of liabilities. Seller
shall provide for the payment of such liabilities out of the Reserve Account, as
<PAGE>
defined in Section 3.5 herein, and, to the extent that the Reserve Account is
insufficient to pay such liabilities, Seller shall be individually responsible
for payment of all claims or liabilities of the Company or the Practice which
arose or accrued prior to the Closing. Purchaser shall assume no liabilities of
Company or the Practice existing as of the Closing Date, and in the event that
Purchaser is unable to satisfy or pay such liabilities from the Reserve Account
or otherwise, Purchaser shall have a right of indemnification against Seller
with respect to any such liabilities or obligations of the Company which
Purchaser is ultimately required to pay.
3. PURCHASE PRICE OF STOCK:
3.1 CONSIDERATION. Subject to the terms and conditions of this Stock
Purchase Agreement, in reliance on the representations, warranties and covenants
of the parties hereto (including the Non-Competition Agreement of Seller
attached hereto as Exhibit 8.2(f) and incorporated herein by this reference),
and in full consideration of the sale, assignment and delivery of the Stock,
Purchaser shall pay to the Seller Five Million Dollars ($5,000,000) on or before
the Closing, as set forth herein, plus all amounts, if any, which remain in the
Reserve Account, as defined in Section 3.5 herein, on the date one year from the
date of this Stock Purchase Agreement in accordance with Section 3.2 below (the
"Purchase Price"). For the purposes of this Stock Purchase Agreement, the
parties agree that no portion of the sale price shall be apportioned to
Company's CalOPTIMA contract or assets related thereto, although Company is
transferring all right, title and interest to such contracts or assets as
permitted by law. The parties further agree that the restrictions contained in
the Non-Competition Agreement by and between Purchaser and Seller, the form of
which is attached hereto as Exhibit 8.2(f), are incidental to the goodwill being
acquired by Purchaser hereunder and that no separate compensation or
consideration is being paid with respect to the provisions contained in the
Non-Competition Agreement.
3.2 PAYMENT OF THE PURCHASE PRICE.
(a) Purchaser shall pay Seller in the aggregate, Five Million
Dollars ($5,000,000) in cash, plus all amounts, if any, which remain in the
Reserve Account on the date one year from the date of this Stock Purchase
Agreement. Payment shall be made as follows: At the date of the parties'
execution of this Stock Purchase Agreement, Purchaser shall (i) pay One Hundred
Thousand Dollars ($100,000) to Seller, and (ii) deposit One Million Nine Hundred
Thousand Dollars ($1,900,000) into an escrow account established by Purchaser
with Seller's consent, established pursuant to instructions given in the form of
those set forth on Exhibit 3.2(a) ("Escrow Account"). At the conclusion of
twenty-one (21) days from the date hereof, Nine Hundred Thousand Dollars
($900,000) from the Escrow Account shall be paid to Seller. Unless such funds
have already been disbursed to Seller, at the Closing Date Purchaser shall pay
Three Million Dollars ($3,000,000) to Seller and direct the payment of the
remaining One Million Dollars ($1,000,000) in the Escrow Account to Seller. On
the date that is forty-two (42) days from the date of this Stock Purchase
Agreement, the One Million Dollars ($1,000,000) remaining in the Escrow Account
shall be paid to Seller, and the remaining Three Million Dollars ($3,000,000)
owed shall be paid on the Closing Date. It shall be a condition to the
effectiveness of the Stock Purchase Agreement that the $1.9 million to be paid
into the Escrow Account have been wired into the Escrow Account.
2
<PAGE>
(b) Except for the payment of the $100,000 deposit, which shall
be paid through a journal entry transfer from Purchaser's Merrill Lynch account
to Seller's Merrill Lynch account, and which shall be confirmed by facsimile and
telephone, all such sums payable hereunder shall be payable to Seller by way of
wire transfer of immediately available funds into a deposit account designated
in writing by Seller. Purchaser and Seller agree that the $100,000 payment made
as of the date of this Stock Purchase Agreement shall be non-refundable. The
parties further agree that in the event that the transactions contemplated
herein have not been consummated on or before forty-two (42) days from the date
hereof, all remaining funds in the Escrow Account shall be paid to Seller unless
(i) Seller commits fraud related to this Stock Purchase Agreement or the
operation of the Company or the Practice, or (ii) there is a material breach of
the representations, warranties and covenants set forth in Sections 4.1, 4.2,
4.3, 4.4 (solely with respect to agreements with health maintenance
organizations, provider agreements and the leases of Company's facilities, and
in such cases only where the material breach is so severe as to interfere with
Company's business), 4.6, 4.7(a), 4.7(e), 4.12(b), 4.12(c), 4.14 (only to the
extent such undisclosed lawsuit is not covered by insurance), 4.15 (only to the
extent Seller has violated a criminal statute), 4.17, 4.18(b) and 4.32 of this
Stock Purchase Agreement by Company or Seller; provided however, that in the
event of the aforementioned material breaches of the representations, warranties
and covenants of this Stock Purchase Agreement set forth in item (ii), Seller
shall have 20 days from the date of notice of such material breach to cure such
breach ("Cure Period"). During the Cure Period the Purchaser's obligations to
pay any amounts from the Escrow Account shall be suspended.
(c) Prior to the Closing, in the event that any or all of the
amounts in the Escrow Account have been disbursed to Seller and Purchaser
becomes aware of a material breach of this Agreement as set forth in items (i)
or (ii) above, Seller shall immediately return such amounts (except for the
nonrefundable $100,000 deposit) to Purchaser, subject to Seller's Cure Period.
3.3 OTHER CONSIDERATION. As additional consideration for the execution
of this Stock Purchase Agreement and the transactions contemplated hereby, the
parties agree that Seller and Company shall assign to Purchaser the option to
purchase Premier IPA and will assign, if executed, an option to purchase Western
IPA.
3.4 FAIR MARKET VALUE. The parties agree that the Purchase Price
reflects the fair market value of the Stock as valued by a third party,
independent appraiser in accordance with accepted business practices for valuing
the stock of professional medical practices. The parties agree no consideration
is or will be paid for the value of any referrals (direct or indirect) to or
from Purchaser, Seller, or any of his affiliates.
3.5 RESERVE ACCOUNT. Concurrent with the Closing (as hereinafter
defined in Section 8.1), the Company shall establish a reserve account (the
"Reserve Account"). The Reserve Account will be used to offset liabilities of
the Company existing as of the Closing Date. The Reserve Account shall
initially consist of the liquid assets of the Company as of the Closing,
including, but not limited to, the Company's cash, money market accounts,
reserves, securities, checking accounts and Merrill Lynch account. All money
earned or accrued for the period prior to the Closing but received by the
Company after the Closing, including, but not limited to, such items as receipt
of hospital control funds, stop loss payments, maternity guarantee, mammogram
3
<PAGE>
pools, retroactive capitation payments, and the Company's accounts receivable
existing as of the Closing shall be deposited in the Reserve Account.
Additionally, any prepaid liabilities of the Company for the period relating to
after the Closing shall be credited to the amount of the Reserve Account. Any
refunds given to the Company after the Closing which relate to the period prior
to the Closing shall also be deposited into the Reserve Account. Purchaser
shall notify Seller of any such required deposits within five (5) days of
receipt of such funds by Company or Purchaser. The Reserve Account shall be a
separate mutually agreed upon account for which the signatures of both Seller
and Purchaser shall be required, although Seller shall oversee all payments made
from the Reserve Account. Seller shall provide Purchaser with copies of all
checks issued relating to the Reserve Account together with copies of the
supporting bills which are being paid. Except for liabilities related to the
transfer of capitated lives from Seoul Medical Group, Inc. prior to
December 1, 1996 (the "Seoul Liabilities"), any pre-Closing liabilities of the
Company shall be paid by Seller from the Reserve Account, including, but not
limited to, pre-Closing tax liabilities and the premiums for Seller's "tail"
malpractice insurance policy relating to the period prior to the Closing.
Except for the Seoul Liabilities, the pre-Closing liabilities will include any
liability of the Company which has a date of service (regardless of when billed)
prior to the Closing. The funds in the Reserve Account shall not be removed
from the Reserve Account for any purpose other than (i) for the payment of the
pre-Closing liabilities of the Company; (ii) for possible indemnification
purposes pursuant to Section 9 of this Agreement; or (iii) for distribution to
Seller upon liquidation of the Reserve Account. Prior to Seller incurring any
liability for any indemnification pursuant to Section 9 of this Agreement, it
shall be a precondition first that funds in the Reserve Account shall first be
required to be used and applied until all such funds in the Reserve Account have
been exhausted. There shall be no requirement for the Company to deposit any
funds into the Reserve Account other than as required pursuant to this Section
3.5. At any time after the Closing up through the date when the Reserve Account
is liquidated, in the event that the amount of the pre-Closing claims and
pre-Closing liabilities of the Company exceed the amount which is held in the
Reserve Account, Seller shall pay to Purchaser within thirty (30) days the
amount by which such claims and liabilities exceed the amount held in the
Reserve Account. On the first anniversary of the Closing Date, in the event
that the pre-Closing liabilities of the Company and the pre-Closing claims
against the Company are less in the aggregate than the amount held in the
Reserve Account, such surplus shall be distributed from the Reserve Account to
Seller. The Reserve Account will have a balance of at least Five Hundred
Thousand Dollars ($500,000) cash or other liquid securities at the Closing.
3.6 EXPENSES. Seller shall be individually responsible for all federal,
state and local taxes, transfer tax and documentary stamps, if any, through and
including the date of Closing attributable to or arising out of the sale of the
Stock to Purchaser or with respect to the Company, and the arrangements in
connection with the Closing of such sale.
4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF SELLER:
Seller represents and warrants to Purchaser that the statements contained
in this Section 4 are correct and complete as of the Closing Date (as though
made then and as though the Closing Date were substituted for the date of this
Stock Purchase Agreement throughout this Section 4), except
4
<PAGE>
as otherwise specifically set forth in the disclosure schedule delivered by
Seller to Purchaser on the Closing Date and initialed by the parties (the
"Disclosure Schedule") as Exhibit 4 attached hereto. The Disclosure Schedule is
to be arranged in sections corresponding to the numbered and lettered sections
contained in this Section 4. Notwithstanding the foregoing, it is understood
and agreed that the matters set forth in Schedules 4.3, 4.14(b), 4.19, 4.20,
4.22, 4.25, 4.26 and 4.28 are not intended to be exceptions to such
representations and warranties, but are in response to information requested by
such representations and warranties.
4.1 ORGANIZATION. Company is a California professional corporation duly
organized, validly existing and in good standing under the laws of the State of
California. Company has all requisite authority to own, lease, and operate its
business and to carry on its business as currently being conducted. Company is
duly qualified to transact business in the State of California and in each other
state in which such qualification is required by law or in which failure to be
so qualified would have an adverse effect on the Practice, its businesses and
operations, or its ability to transact such business.
4.2 AUTHORIZATION. Seller has good and marketable title to the Stock,
and full legal right, power, authority and legal capacity, without the consent
of any other person, to sell the Stock, to execute and deliver this Stock
Purchase Agreement, and to carry out the transactions contemplated hereby. All
action on the part of Seller and Company necessary for the authorization,
execution, delivery and performance of this Stock Purchase Agreement and the
consummation of the transactions contemplated hereby has been or will be taken
prior to the Closing Date, and this Stock Purchase Agreement (including
exhibits, schedules and the ancillary agreements) constitutes the legal, valid
and binding obligation of Seller, enforceable in accordance with its terms,
except as enforceability may be restricted, limited or delayed by applicable
bankruptcy or other laws affecting creditor's rights generally and except as
enforceability is subject to general principles of equity. Purchaser hereby
acquires good and marketable title to the Stock free and clear of all Liens.
The Seller is the sole shareholder of Company. The authorized number of shares
of Company is One Hundred Thousand (100,000), all of one class, of which One
Thousand (1,000) shares are issued and outstanding, fully paid and nonassessable
and held by Seller. The Stock was issued in compliance with all applicable
federal and state securities laws. Seller has full voting power over the Stock,
subject to no outstanding subscriptions, options, rights, convertible
securities, preemptive rights, buy-sell agreements, or any agreements or
commitments of any kind that obligate Company or the Seller to (a) purchase or
otherwise receive or be issued any shares of Stock or any security or liability
of any kind convertible into or exchangeable for any such Stock, (b) receive any
benefits or rights similar to any rights enjoyed by or accruing to the holder of
shares of capital stock of Company, (c) convert or exchange any securities for
shares of Stock, (d) participate in the equity, income or election of directors
or officers of Company, or (e) take or refrain from taking any actions. Other
than this Agreement, there is no contract, commitment or agreement between
Seller and any other person with respect to the disposition of any shares of the
Stock.
4.3 NO CONSENT REQUIRED; NO VIOLATIONS. Neither the execution of this
Stock Purchase Agreement by Seller, nor the performance by Seller of its
obligations under this Stock Purchase Agreement, requires the consent of any
third party, which has not been obtained and delivered to Purchaser, or will not
have been obtained and delivered to Purchaser, prior to the Closing Date.
5
<PAGE>
Notwithstanding any other provisions contained herein, Seller and Company agree
and acknowledge that, except for the consent of CalOptima, the required consents
listed on Schedule 4.3 shall be obtained and delivered to Purchaser on or prior
to the Closing. Neither this Stock Purchase Agreement nor any of the
transactions contemplated hereunder violates or shall violate any lease,
contract, document, understanding, agreement or instrument to which the Company
or the Seller is a party or by which he may be bound, or any other lease,
contract, document, understanding, agreement or instrument affecting the Seller,
the Company or the Practice. Neither this Stock Purchase Agreement nor any of
the transactions contemplated hereunder violates, shall violate, conflict with,
result in a default under or breach any legally protected right of any
individual or entity or the articles of incorporation or bylaws of the Company.
4.4 NO DEFAULT. Company is not in default under the terms of any lease,
contract, document, understanding, agreement or instrument pertaining to the
Practice, nor has any event occurred that shall constitute a default by Company
or Seller under any of the same following the passage of time or consummation of
any of the transactions contemplated hereunder, nor has Company or Seller
received any notice of any default under any of the same. No acceleration or
other right to accelerate, terminate, modify, cancel, create a security
interest, or otherwise change any existing arrangement, including, but not
limited to, agreements with health maintenance organizations such as PacifiCare,
will be created as a result of the consummation of any of the transactions
contemplated hereunder.
4.5 FINANCIAL STATEMENTS, BOOKS AND RECORDS. Seller has previously
delivered to Purchaser copies of all available unaudited financial statements,
books, and records of Company for the fiscal periods ended February 28, 1994,
February 28, 1995 and February 29, 1996, and for the six month period ended
August 31, 1996 ("Unaudited Company Financial Statements"). Seller has also
delivered an audited statement of operations, statement of stockholders' equity
and statement of cash flows for the fiscal year ended February 29, 1996, and for
the ten months ended December 31, 1996, and Company's audited consolidated
balance sheet at December 31, 1996. The audited balance sheets of Company are
hereinafter referred to as the "Company Balance Sheet," and all such audited
financial statements are hereinafter referred to collectively as the "Company
Financial Statements." As of the Closing, the Company Financial Statements will
have been prepared in accordance with GAAP applied on a consistent basis during
the periods involved, and fairly present, or will present the financial position
of Company and the results of its operations as of the date and for the periods
indicated thereon. At the date of the Company Balance Sheet (the "Company
Balance Sheet Date") and as of the Closing Date, Company will have no
liabilities or obligations, secured or unsecured (whether accrued, absolute,
contingent or otherwise) not reflected on the Company Balance Sheet or the
accompanying notes thereto except for liabilities incurred in the ordinary
course of business since the date of said balance sheet which are usual and
normal in amount. The reserves reflected in the Company Financial Statements
for incurred but not yet reported claims ("IBNR") make sufficient provision for
such liabilities and have been established in accordance with GAAP consistently
applied.
4.6 CONDUCT OF PRACTICE. Between the date of the execution of this
Stock Purchase Agreement and the Closing, Seller (a) shall carry on the Practice
in substantially the same manner as he has previously done, (b) shall use his
best efforts to maintain and preserve the assets of Company in good condition
and repair, and to prevent the imposition of any liens, security interests,
claims,
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leases, encumbrances, covenants and restrictions of any nature whatsoever on
such assets, (c) shall use his best efforts to preserve the Practice and its
relationships with all patients and payors, and (d) shall not liquidate or
dissolve Company, take any steps to do same, or inform any third person or
entity that Company or Seller has done or intends to do the same.
4.7 NO MATERIAL CHANGES. Since the date of this Stock Purchase
Agreement there will not have been, and as of the Closing there shall not be:
(a) Any material adverse change in the Practice. For the purpose
of this Section, "material adverse change" shall mean a net reduction in the
number of the Company's covered lives of more than five percent (5%) from
November 1, 1996.
(b) Any material change in the manner in which the Practice has
been conducted, or any extraordinary transaction involving the assets of
Company.
(c) Any voluntary or involuntary sale, assignment, license or
other disposition, of any kind, of any property or right included in the
Practice, except as contemplated by this Stock Purchase Agreement.
(d) Any debts, liabilities or obligations of any kind, whether
absolute or contingent, due or to become due, or any security interests, liens,
loans encumbering the Practice, or any other encumbrances, incurred by Company
or by Seller in connection with the Practice except for:
(i) current liabilities incurred for services rendered or
goods supplied in the ordinary course of the operations of the Practice;
(ii) liabilities on account of taxes and governmental
charges not yet due, but not penalties, interest or fines in respect thereof; or
(iii) obligations or liabilities incurred by virtue of the
execution of this Stock Purchase Agreement other than as expressly described
herein.
(e) Any extraordinary compensation, bonuses or distributions to
Seller, or any employee of Company or Seller, except as set forth on Schedule
4.7(e) hereto.
4.8 TAXES. There are no delinquent federal or state corporate income or
franchise taxes or any federal, state or local assessments due or owing by
Company or Seller with respect to the Practice. No extensions of time or
requests therefor or waiver thereof have been made or are presently pending or
effective with respect to such reports, returns or taxes. Company has timely
filed or caused to be filed on its own behalf and on behalf of its and Seller's
employees all tax returns (federal, state and local) required to be filed by it
on or before the Closing Date, and all taxes shown to be due and payable on said
returns have been paid. There are no actions, suits, proceedings,
investigations, audits, claims or liens now pending against or related to
Company, Seller, or the Practice regarding any tax or assessment. Further,
Seller shall timely file all tax returns relating to the operation of the
Practice on or before the Closing Date but which are due after the Closing Date,
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and shall timely pay all taxes relating to the Practice on or before the Closing
Date but which are due thereafter. To the extent that any of such tax payments
relate to periods following the Closing Date, there shall be a proration of such
payments, and Seller shall be entitled to an adjustment in the reserve accounts
listed on the Company Balance Sheet equal to the amount of taxes paid on behalf
of the Company after the Closing Date. There are no unpaid taxes, interest or
penalties, or unassessed tax deficiencies which are or could become a lien on
the assets of the Company; no claim for any additional tax, assessment or
reassessment is being asserted against the Company or proposed by any tax
authority; and Seller has not been notified of, and there are no facts or
circumstances known to the Company or Seller which could result in any claim
being asserted with respect to any such taxes. There is no action, dispute,
suit, proceeding, investigation or audit pending or threatened against the
Company in respect of any tax or assessment.
4.9 TITLE TO ASSETS. The assets of the Company are free and clear of
all security interests, encumbrances, covenants and restrictions (collectively,
"Liens") except as expressly described on the Disclosure Schedule.
4.10 RIGHT TO PREMISES; CONDITION OF THE PROPERTY AND PREMISES. Company
either (i) owns in fee simple absolute the premises in which the Practice is
located ("Premises") or (ii) has valid and enforceable leases for the Premises,
and there are no unpaid mortgage payments, rental payments or any other
applicable amounts now due and payable by Company with respect to the premises
or any uncured default by Company, and no governmental condemnation proceedings
threatened or in process. All of Company's fixtures, equipment, furniture, and
Premises are (a) in good repair and operating condition, (b) free from any
material defects, except for normal wear and tear, and (c) fit for the purposes
for which they are intended.
4.11 INVENTORY. On the Closing Date, the inventory used in connection
with the Practice shall consist of items of a quality and quantity normally
maintained on hand by Company and in compliance with all applicable laws and
regulations.
4.12 CONTRACTS.
(a) Seller has furnished to Purchaser, for Purchaser's inspection
and review, true and complete copies of all contracts, agreements, leases,
documents, written understandings, instruments, loan documents and security
agreements relating to the Practice, and any and all other documents concerning
any Liens against the Stock or any aspect of the Practice.
(b) There are no guarantees of any obligations or indebtedness
whatsoever of the Practice, Company, Seller, or any third person or entity by
either Company or Seller.
(c) The Company and Seller are not parties to, or bound by, any
contract which in any manner limits or restricts them from competing in any line
of business or carrying on or expanding the nature or geographical scope of
their business.
(d) The contracts of Company are valid, binding obligations and
in full force and effect and have been entered into in the ordinary course of
business, consistent with past practice,
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except as enforceability may be restricted, limited or delayed by applicable
bankruptcy or other laws affecting creditor's rights generally and except as
enforceability is subject to general principles of equity. Company and Seller
have not received any notice from any other party to a contract of the
termination or threatened termination, thereof, nor any material claim, dispute
or controversy thereon, and have no knowledge of the occurrence of any event
which would allow any other party to terminate any contract of Company, nor has
Seller received notice of any asserted claim of default, breach or violation of,
any note, debt instrument, security agreement, option to purchase, lease, deed
of trust or mortgage, or any other contract or "Lease" (as defined in Section
4.28 below) binding upon the Company or its assets or properties which failure
of performance or default would be material to the business, condition
(financial or otherwise), operations, results of operations, net worth, working
capital, assets, properties, reserves or prospects of Company.
4.13 POWERS OF ATTORNEY. There are no outstanding powers of attorney
executed on behalf of Company or Seller.
4.14 NO LITIGATION AND INSURANCE. There is no pending litigation,
judgment, appeal, investigation or asserted claim or, to Company and Seller's
actual knowledge, threatened investigation, judgment, appeal, unasserted claim,
or governmental investigation, relating to the Company, the Practice, Seller, or
employees thereof and Seller is not aware of any facts or circumstances which
could serve as a basis for an action or proceeding against or affecting the
Company or which seeks or threats to restrain, enjoin or prohibit him or to
obtain damages from the Company. Except as set forth in Exhibit 4.14(a),
neither Company nor Seller is subject to any judgment, decree, order or writ of
any court, agency, authority, arbitration panel or other tribunal. The Company
has maintained with financially responsible insurance companies insurance on the
Practice and its assets in such amounts and against such risks and losses as is
customary for persons or companies engaged in their businesses, including
insurance against personal injury, property damage to third persons and medical
malpractice. Set forth in Exhibit 4.14(b) is a list of all policies of
liability, property damage, fire, workers' compensation, employer's liability,
malpractice, casualty or other forms of insurance owned or carried by the
Company and the names of insurance agents and/or brokers providing this
insurance coverage, and of all performance bonds and letters of credit securing
any of their obligations or maintained in the conduct of their businesses. All
such insurance is in full force and effect on the date hereof as evidenced by
certificates of insurance for each insurance policy listed in Exhibit 4.14(b),
of which true and complete copies dated no more than thirty (30) business days
prior to the date of Closing shall be delivered to Purchaser at the Closing, and
Seller will insure that such insurance will remain in full force and effect.
Neither the Company nor the Seller has received any notification from any
insurance carrier denying or disputing any claim made on any policies, denying
or disputing any coverage for any claim, denying or disputing the amount of any
claim, or regarding the possible cancellation or material limitation of any
policies.
4.15 VIOLATION OF LAWS. Neither Company nor Seller is in violation of
any law, rule, regulation or administrative or judicial order pertaining to the
Practice and which is material to the conduct of the Practice (including,
without limitation, licensing, health care, drug enforcement, securities,
zoning, building, environmental, immigration, civil rights and occupational
health and safety laws, regulations, ordinances and codes) and, to their actual
knowledge, there is no law, rule, regulation or administrative or judicial order
that any of the transactions contemplated by this Stock
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Purchase Agreement or the execution and delivery of this Stock Purchase
Agreement would violate. The Company has not been charged with, threatened
with, nor is under any investigation with respect to, any charge concerning any
violation of any provision of any such law, rule, regulation or order.
4.16 NO BROKERS OR FINDERS. Neither Company nor Seller has incurred any
liability to any broker, finder or agent for any brokerage fees, finder's fees
or commissions with respect to the transactions contemplated by this Stock
Purchase Agreement, and if either Company or Seller incurred any such liability,
such liability shall be and remain the sole responsibility of the Seller, and
Company and Seller shall indemnify, defend and hold Purchaser harmless from and
against any and all liabilities, losses, damages, claims, causes of action,
costs and expenses (including, without limitation, reasonable attorneys' fees),
arising out of or relating to such liability.
4.17 NO BANKRUPTCY PROCEEDINGS. Neither Company nor Seller has (a) made
a general assignment for the benefit of creditors, (b) filed any voluntary
petition in bankruptcy or suffered the filing of an involuntary petition by its
creditors, (c) suffered the appointment of a receiver to take possession of all
or substantially all of its assets, (d) suffered the attachment or other
judicial seizure of all, or substantially all, of its assets, (e) admitted in
writing its inability to pay its debts as they come due, or (f) made an offer of
settlement, extension or compromise to its creditors generally.
4.18 LICENSURE AND REIMBURSEMENT. Seller and Company represent and
warrant that:
(a) Each of Seller's and Company's employee-physicians is duly
licensed to practice his or her profession in the State of California without
restriction; and Company has all licenses, permits, approvals, authorizations,
consents, franchises and orders of all governmental and regulatory authorities
(collectively, the "Permits") necessary for the conduct of its business as
presently conducted. There is no proceeding pending or threatened that disputes
the validity of any such Permit or that may result in the revocation,
cancellation or suspension or any material adverse modification of any of such
Permits.
(b) Company and Seller are participating in the Medicare and
Medicaid programs and in any other applicable governmental health care payment
programs, and have been and will continue to be authorized to receive
reimbursement from such programs for fees and charges incurred by eligible
patients for their services. Neither Company nor Seller has received any notice
that any such license, participation or authorization has been or is threatened
to be terminated or, in any material respect, restricted, and neither Company
nor Seller knows of any basis for any such termination or restriction. There is
no federal or state investigation pending or, to Company's and Seller's
knowledge, contemplated, that will have an impact upon Company's or Seller's
reimbursement status or Seller's license to practice medicine in California.
Neither Company nor Seller has received any notice of action nor is there any
threatened or likely action by the Medicare or Medicaid program or any carrier,
to recoup or challenge any Medicare or Medicaid reimbursement that Company or
Seller has received or for which any of them currently has a claim pending, for
services rendered at or in connection with the Practice.
(c) All billing practices by Company to all third party payors,
including but not limited to the Medicare and Medicaid programs and private
insurance companies, have been true, fair
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and correct and in compliance with all applicable laws, regulations and policies
of all such third party payors, and Company has not billed for or received any
payment or reimbursement in excess of amounts permitted by law.
(d) Neither Company, its directors, officers, employees,
affiliates or agents, nor Seller or its affiliates or agents has directly or
indirectly (i) offered to pay or solicited any remuneration, in cash or in kind,
to, or made any financial arrangements with, any past or present customers, past
or present suppliers, contractors, third parties, or third party payors of
Company in order to obtain business or payments from such persons, other than
entertainment activities in the ordinary and lawful course of business; (ii)
given or received, or agreed to give or receive, or is aware that there has been
made or that there is any agreement to make or receive, any gift or gratuitous
payment of any kind, nature or description (whether in money, property or
services) to any customer or potential customer, supplier or potential supplier,
contractors, third party payor or any other person other than in connection with
promotional or entertainment activities in the ordinary and lawful course of
business; (iii) made or agreed to make, or is aware that there has been made or
that there is any agreement to make, any contribution, payment or gift of funds
or property to, or for the private use of, any governmental official, employee
or agent where either the contribution, payment or gift or the purpose of such
contribution, payment or gift is or was illegal under the laws of the United
States or under the laws of any state thereof or any other jurisdiction under
which such payment, contribution or gift was made; (iv) established or
maintained any unrecorded fund or asset for any purpose or made any false or
artificial entries on any of its books or records for any reason; or (v) made or
agreed to make or is aware that there has been made or that there is any
intention to make, any payment to any person with the intention or understanding
that any part of such payment would be used for any purpose other than that
described in the documents supporting such payment.
(e) Neither Company, its directors, officers, employees or
agents, nor Seller is or in the past twenty-four months has been, a party to any
contract, lease, agreement or arrangement, including but not limited to any
joint venture or consulting agreement with any physician, hospital, nursing
facility, home health agency or other person who is in a position to make,
receive or influence referrals to or from Company, to provide services, lease
space, lease equipment or engage in any other venture or activity.
4.19 EMPLOYEES AND EMPLOYEE BENEFITS. Attached hereto as Exhibit 4.19 is
a complete list of the names, positions and current annual salaries or wage
rates and all bonus and other compensation arrangements of any kind, of all
full-time and part-time employees, directors or officers of the Company,
specifying their names, titles, full or part-time status and compensation
payable, by means of wages, salaries, bonuses, gratuities or otherwise and all
salary increases and/or bonuses paid to any employee between the date of this
Stock Purchase Agreement and the Closing. None of such employees is a family
member of or otherwise related to Seller. Seller shall cause the Company to pay
out of the Reserve Account, with respect to each person listed on Exhibit 4.19,
the aggregate amount of: (a) accrued vacation and sick leave pay, (b) employer
contributions accrued or committed under each pension, profit-sharing, medical,
dental, life insurance or retirement plan or similar arrangement, and (c) any
other accrued benefits to which each person listed on Exhibit 4.19 or such
persons who have been terminated as of the Closing Date may be entitled, as
accrued up to and including the Closing. Seller shall indemnify and hold
Purchaser harmless from and against any and
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all expenses, losses, damages or liabilities, including reasonable attorneys'
fees and court costs, that Purchaser may suffer as a result of any claims,
suits, investigations or charges asserted by or on behalf of any person listed
on Exhibit 4.19 due to any actual or alleged liabilities or obligations,
injuries or damages occurring or arising prior to the Closing, including,
without limitation, any matters arising under laws governing wages and hours,
wage payment and collection, employment discrimination, wrongful discharge,
occupational safety and health, workers' compensation, short and long-term
disability, occupational diseases, unemployment insurance, the payment and
withholding of employment taxes and any alleged violation of the common law;
provided however, that Purchaser agrees to first seek repayment from the Reserve
Account. Company has previously entered into a three year employment agreement
with Jackie Ingels ("Ingels"), pursuant to which Seller has personally
guarantied the remaining amount owed under such agreement in the event of any
termination of Ingels without cause. In connection therewith, except for the
severance benefits payable by Purchaser related to the first year of Ingles'
employment following the Closing, as set forth in Section 6.1, Seller shall
indemnify and hold Purchaser harmless from and against any and all expenses,
losses, damages or liabilities, including reasonable attorneys' fees and court
costs, that Purchaser (or Company, following the Closing) may suffer as a result
of any termination of Ingels without cause pursuant to such employment
agreement. Company was not a party to or bound by any collective bargaining
agreement or any other agreement with a labor union and there has been no effort
by any labor union during the twenty-four (24) months prior to the Closing to
organize any employees of Company or Seller into one or more collective
bargaining units. There has been no strike, walkout or work stoppage involving
any of the employees of Company during the twenty-four (24) months prior to the
date of Closing. There is not pending or threatened, any labor dispute, strike
or work stoppage which affects or which may affect Company or which may
interfere with its continued operation in any manner.
4.20 EMPLOYEE ENTITLEMENTS. Except as described on Exhibit 4.20 attached
hereto, Company does not maintain, contribute to or possess, and has not at any
time maintained, contributed to or possessed: (a) any non-qualified deferred
compensation or retirement plans or arrangements, (b) any qualified defined
contribution retirement plans or arrangements, (c) any qualified defined benefit
pension plan, (d) any other profit-sharing, deferred compensation, bonus, stock
option, stock purchase, vacation pay, holiday pay, employee benefit, health,
welfare, medical, disability, life insurance, stock, stock purchase or stock
option plan, program, agreement, arrangement or policy under which former
employees or beneficiaries are entitled or current employees will be entitled
following termination of employment, to medical, health or life insurance or
other benefits other than pursuant to benefit continuation rights granted by
state or federal law, or (e) any summary description of the foregoing that has
been distributed to employees (collectively, "Benefit Plans"). True and
complete copies of each Benefit Plan, related trust agreements or annuity
contracts (or any other funding instruments), the most recent determination
letter issued by the Internal Revenue Service (the "IRS") with respect to each
Benefit Plan that is a "pension plan" as defined in Section 3 of ERISA, Annual
Reports on Form 5500 Series required to be filed with any governmental agency
for any such Benefit Plan for the two (2) most recent plan years and all
actuarial reports prepared for the last three (3) years of each Benefit Plan
that is a pension plan, other than an "individual account plan," have heretofore
been delivered by Seller to Purchaser. Prior to the Closing, Seller will have
adopted a resolution of its board of directors and sole shareholder terminating
all Benefit Plans.
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4.21 CONFIDENTIALITY. The Company and Seller have maintained the
confidentiality of all business and patient records as required by and in
conformance with all applicable state and federal laws and regulations. The
Company and Seller have not transferred any patient records to any individual or
entity against the request of any patient regarding transferring his or her
patient information or records.
4.22 INSPECTIONS. The Disclosure Schedule sets forth accurately and
fully describes (a) all inspections of Company and the Practice by any
governmental agency at any time during the previous five (5) years; (b) all
matters which were noted by any and all such governmental agency as requiring
correction or modifications which were requested or recommended; and (c) the
present status of each such noted matter.
4.23 ENVIRONMENTAL CONDITIONS. To the actual knowledge of Seller and the
Company, there are no (a) undisclosed material defects in the physical condition
of the Premises; (b) unremediated material incidents of non-compliance regarding
the Premises with zoning, land use, building, safety and fire laws; and
(c) unremediated material incidents of non-compliance of the Premises with
respect to applicable environmental laws, rules and regulations. To the actual
knowledge of Seller, no "Hazardous Substances" (as defined below) have been
released on any part of the Premises and no soil, air, surface water, ground
water or structural contamination exists (a) on any of the Premises or (b) on
property adjacent to the Premises. As used herein "Hazardous Substances" shall
include (i) all of those substances included within the definitions of
"hazardous substances", "hazardous materials", "toxic substances", or "solid
waste" in (a) the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended, 42 U.S.C. Section 9601 ET SEQ. ("CERCLA"),
as amended, (b) the Resource Conservation and Recovery Act of 1976, 42 U.S.C.
Section 6901 ET SEQ. ("RCRA"), and (c) the Hazardous Materials Transportation
Act, 49 U.S.C. Appx. Section 1801, ET SEQ., and in the regulations promulgated
pursuant to said laws or any amendment thereto or replacement thereof; (ii) all
of those substances listed in the United States Department of Transportation
Table (49 CFR 172.101 and amendments thereto) or by the Environmental Protection
Agency (40 CFR Part 302 and amendments thereto) as hazardous substances; (iii)
all of those substances defined as "hazardous wastes" in Sections 25100 ET SEQ.
of the California Health & Safety Code, or as "hazardous substances" in Sections
25316 and 25281 of the California Health & Safety Code or Section 736(f)(3) of
the California Code of Civil Procedure, or as "waste," "pollution," or
"contamination" in Sections 13000 ET SEQ. of the California Water Code, and in
the regulations promulgated pursuant to said laws or any replacement thereof;
and (iv) all other substances, materials and wastes which are regulated under
applicable local, state or federal law, or which are classified as hazardous or
toxic under federal, state, or local laws or regulations, or classified or
identified as posing a threat to human health or the environment, including
without limitation federal laws and regulations and California law set forth
above, and any radioactive wastes or substances. The term "Hazardous
Substances" does not include consumer products which are used in accordance with
their intended use.
4.24 PRIMARY CARE PHYSICIANS. No primary care physician who provides
medical care to 100 or more of Company's covered lives pursuant to the terms of
a provider agreement by and between Company and such primary care physician
("Participating Provider") has informed Company or Seller of his or her
intention to terminate the provider agreement, and Seller has no knowledge,
directly or
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indirectly, that any Participating Provider intends to terminate such provider
agreement. Further, Seller shall cooperate with Purchaser after the Closing to
obtain reasonable amendments to each Participating Provider's provider
agreement, including mutually agreeable language relating to the non-diversion
and non-solicitation of Company's and Purchaser's members.
4.25 BANK ACCOUNTS; SECURITIES. Attached hereto as Exhibit 4.25 is a
true, correct and complete listing of all bank, brokerage, checking, depositary
and similar accounts, lockboxes and safe deposit boxes maintained by the Company
as of the date of Closing and at any time during the twelve (12) month period
preceding the date of Closing; this listing includes with respect to each such
account (a) the account number, (b) the nature or purpose of the account, (c)
the name and address of the institution at which the account is maintained, and
(d) the names of the authorized signatories on the account. Exhibit 4.25 also
contains a complete and accurate list of all investments in and securities of
other corporations or businesses owned by the Company, together with a
description of any restrictions affecting the transfer thereof.
4.26 SUBSIDIARIES. Except as described in Exhibit 4.26, the Company has
no subsidiaries or affiliates and does not directly or indirectly own either an
equity or debt interest in any corporation, partnership, limited liability
company, business trust, joint venture, joint stock company, association or
other business entity.
4.27 ARTICLES OF INCORPORATION AND BYLAWS. Copies of the Articles of
Incorporation and the Bylaws of the Company certified by its Secretary as being
the Articles of Incorporation and Bylaws currently in effect, as well as copies
of the minute books and stock records of the Company which have been delivered
to Purchaser are true and complete copies of such instruments as amended to the
date of this Stock Purchase Agreement and of Closing and are in full force and
effect on such dates.
4.28 LEASES. Exhibit 4.28 attached hereto contains a true and complete
list of all leases pursuant to which the Company leased or leases any real
property interest (the "Leases"), whether as lessor or lessee. To Seller's
knowledge, the Company enjoys peaceful and undisturbed possession under all of
the Leases under which they are lessee, and the Company is not in default in any
material respect under such Leases.
4.29 INTELLECTUAL PROPERTY. Exhibit 4.29 attached hereto sets forth a
true and complete list of all patents, trademarks, trade names or service marks
that the Company is licensed under or uses. None of the Company's business
activities infringes upon the patent, trademark, trade name or service mark
rights of any third party.
4.30 SECURITIES LAW COMPLIANCE. Seller represents and warrants that the
sale of Seller's Stock is (a) exempt from the registration requirements of the
Securities Act of 1933, as amended, and (b) exempt from qualification under the
California Corporate Securities Law of 1968. For purposes of this Section 4.30,
Seller shall be entitled to rely upon the accuracy of the representations and
warranties of Purchaser set forth in this Agreement.
4.31 OPTION TO PURCHASE IPAs. Seller represents and warrants that he has
full right, power and authority to transfer the option to purchase the Premier
IPA to Purchaser. A true, correct and
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complete copy of such option is attached hereto as Exhibit 4.31. Seller
represents and warrants that such option confers the right to purchase a 100%
ownership interest in Premier IPA. Seller covenants to cooperate fully with
Purchaser in attempting to obtain and transfer an option to purchase Western
IPA.
4.32 NO UNTRUE STATEMENTS. Seller represents and warrants to his actual
knowledge that (a) neither Company nor Seller has made any untrue statement or
representation in connection with this Stock Purchase Agreement, (b) all items
to be transferred or delivered and/or given to Purchaser by or from Seller are
true, correct and complete copies of what they purport to be, (c) there are no
undisclosed liabilities of any nature whatsoever in connection with the Practice
or any of the assets, (d) neither Company nor Seller has failed to state or
disclose any material fact in connection with the transactions contemplated by
this Stock Purchase Agreement, and (e) neither Company nor Seller knows of any
facts and Seller has not misrepresented any facts concerning his ability,
financial or otherwise, to consummate the transactions contemplated by this
Stock Purchase Agreement or that would otherwise materially adversely affect
Purchaser's decision to acquire the Stock.
4.33 DUE DILIGENCE. To Seller's actual knowledge, the documents,
agreements and other written materials provided to Purchaser in response to its
due diligence request constitute all of the material documents, agreements and
other written materials that would be material to a purchaser of the Stock of
Company.
5. REPRESENTATIONS, WARRANTIES AND COVENANTS OF PURCHASER:
Purchaser hereby represents and warrants to Seller that:
5.1 ORGANIZATION. Purchaser is a California professional corporation
validly existing and in good standing under the laws of the State of California.
5.2 AUTHORITY. Purchaser has the corporate power and authority to enter
into this Stock Purchase Agreement and to consummate the transactions
contemplated hereby. All action on the part of Purchaser necessary for the
authorization, execution, delivery and performance of this Stock Purchase
Agreement and the consummation of the transactions contemplated hereby has been
or will be taken prior to the Closing Date, and this Stock Purchase Agreement
(including exhibits, schedules and the ancillary agreements) constitutes the
legal, valid and binding obligation of Purchaser, enforceable in accordance with
its terms, except as enforceability may be restricted, limited or delayed by
applicable bankruptcy or other laws affecting creditor's rights generally and
except as enforceability is subject to general principles of equity. Purchaser
hereby indemnifies Seller against any and all liabilities, losses, damages,
claims, causes of action, costs and expenses (including, without limitation,
reasonable attorneys' fees), arising out of or relating to any final
determination by a court of competent jurisdiction that Purchaser's acts in
entering into this Stock Purchase Agreement and consummating the transactions
contemplated thereby were ultra vires acts.
5.3 NO BROKERS OR FINDERS. Purchaser has not incurred any liability to
any broker, finder or agent for any brokerage fees, finder's fees or commissions
with respect to the transactions contemplated by this Stock Purchase Agreement,
and if Purchaser incurred any such liability, such
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liability shall be and remain the sole responsibility of Purchaser, and
Purchaser shall indemnify, defend and hold Seller harmless from and against any
and all liabilities, losses, damages, claims, causes of action, costs and
expenses (including, without limitation, reasonable attorneys' fees), arising
out of or relating to such liability.
5.4 NO VIOLATION OF OTHER OBLIGATIONS. Neither this Stock Purchase
Agreement nor any of the transactions contemplated hereunder violates or shall
violate any lease, contract, document, understanding, agreement or instrument to
which Purchaser is a party or by which it may be bound, or any lease, contract,
document, understanding, agreement or instrument affecting Purchaser. Neither
the execution and delivery of this Stock Purchase Agreement nor the consummation
of the transactions contemplated hereby will conflict with or violate any
provision of the articles of incorporation or bylaws of the Purchaser or of any
law, ordinance or regulation or any decree or order of any court or
administrative or other governmental body which is either applicable to, binding
upon or enforceable against Purchaser.
5.5 NO CONSENT REQUIRED. Neither the execution of this Stock Purchase
Agreement by Purchaser, nor the performance by Purchaser of its obligations
under this Stock Purchase Agreement, requires the consent of any third party
that will not have been obtained and delivered to Seller prior to the Closing
Date.
5.6 NO BANKRUPTCY PROCEEDINGS. Purchaser has not (a) made a general
assignment for the benefit of creditors, (b) filed any voluntary proceeding in
bankruptcy or suffered the filing of any involuntary petition by Purchaser's
creditors, (c) suffered the appointment of a receiver to take possession of all
or substantially all of the assets, properties or business of Purchaser,
(d) suffered the attachment or other judicial seizure of all or substantially
all of the assets, properties or business of Purchaser, (e) admitted in writing
its inability to pay its debts as such debts become due, or (f) made an offer of
settlement, extension or compromise to its creditors generally.
5.7 NO UNTRUE STATEMENTS. Purchaser represents and warrants to its
actual knowledge that (a) Purchaser has made no untrue statement or
representation in connection with this Stock Purchase Agreement, (b) all items
to be transferred or delivered and/or given to Seller by or from Purchaser are
true, correct and complete copies of what they purport to be, (c) Purchaser has
not failed to state or disclose any material fact in connection with the
transactions contemplated by this Stock Purchase Agreement, and (d) Purchaser
knows of no facts and Purchaser has not misrepresented any facts concerning
Purchaser's ability, financial and otherwise, to consummate the transactions
contemplated by this Stock Purchase Agreement or that would otherwise materially
adversely affect Seller's decision to sell the Stock.
5.8 FINANCIAL RESOURCES. Purchaser has the financial resources itself
or through arrangements with its Affiliates (as defined below) to fulfill its
financial obligations under this Stock Purchase Agreement.
5.9 PERFORMANCE. Purchaser shall perform its obligations under this
Stock Purchase Agreement, including the ancillary agreements and the forms of
which are attached hereto as exhibits.
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5.10 INVESTIGATION AND SOPHISTICATION. At the Closing, Purchaser will
represent that it has been furnished with or has had access to the information
Purchaser has requested from Seller and/or the Company and that Purchaser has
had an opportunity to ask questions and receive answers from Seller as Purchaser
has determined to be appropriate. Purchaser has such knowledge, experience, and
skill in business and financial matters with respect to investments and
securities so as to enable Purchaser to understand and evaluate the merits and
risks of the acquisition of the Stock and to form an investment decision with
respect to such investments. The Purchaser is relying upon its own
investigation and analysis and the representations and warranties given by
Seller in this Agreement, in determining whether to enter into this Agreement
and determining whether to purchase the Stock. The Purchaser understands that
investment in and ownership of the Stock involves a degree of risk with no
guarantee of profit or return and the possibility of loss of Purchaser's
investment. Except as set forth in this Agreement, the Seller has made no
representations or warranties to the Purchaser as to the Company and the Company
Stock. The foregoing language in this Section 5.10 is not intended to diminish
or eliminate the reliance by Purchaser on the representations and warranties
contained in Section 4 of this Agreement.
5.11 NO INTENT TO DISTRIBUTE. Purchaser is acquiring the Stock for its
own account and not with a view toward sale or other distribution thereof.
5.12 STRATEGIC PROVIDER. Purchaser is a "strategic provider" of
PacifiCare, pursuant to the terms of that certain 1996 Amendment to IPA Medicare
Shared Risk Services Agreement, dated January 1, 1996, by and between PacifiCare
and Purchaser.
5.13 DUE DILIGENCE. Purchaser has completed its due diligence review of
Company and the Practice.
6. POST-CLOSING COVENANTS:
6.1 COMPANY EMPLOYEES; PRIOR SERVICE CREDIT. Purchaser agrees that for
a period of six (6) months following the Closing Date, none of Company's
employees shall be terminated. Further, all employees of Company shall be given
credit for their prior service on behalf of Company, including, but not limited
to, retirement benefits, vacation pay, holidays and other benefits in accordance
with Purchaser's current policies. With respect to severance benefits,
Purchaser agrees that if any Company employee listed in Section 8.5(e) of this
Stock Purchase Agreement is terminated without cause prior to the end of such
person's employment agreement, such employee shall receive severance pay equal
to (i) the remaining term of his or her employment agreement, plus (ii) one
month's salary for each year of service at Company prior to Closing, pro-rated
for each year of partial service, up to a maximum of six months pay, provided
that such amounts paid for prior service shall be in addition to the amount set
forth in item (i) hereinabove. Additionally, Seller's employees shall be
entitled to receive bonuses for services rendered prior to Closing at the
discretion of Seller from Hospital Bonus Funds to be paid into the Reserve
Account, provided that the payment of any such bonus does not create a
deficiency in the Reserve Account. Provided that Jackie Ingels ("Ingels") has
agreed to terminate her three year employment agreement with Company, Purchaser
agrees to use its best efforts to cause Prospect Medical Systems, Inc., a
Delaware corporation ("Prospect Medical Systems") to enter into a one year
employment agreement with Ingels in the form of that listed on
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Schedule 8.2(h) attached hereto. Notwithstanding the foregoing, in the event
Prospect Medical Systems does not enter into an employment agreement with
Ingels, Purchaser agrees to provide Ingels with health and vacation benefits and
the severance benefits set forth in this Section 6.1, as if Ingels were employed
under the form of employment agreement set forth in Schedule 8.2(h) for one
year. In the event of a termination of Ingels without cause, any such severance
payments paid by Purchaser or Company will offset the remaining amount owed by
Seller to Ingels under Ingel's current employment agreement with Company.
6.2 COMPANY'S OFFICES. Purchaser and Seller agree that for an eighteen
(18) month period following the Closing, Purchaser will maintain Company's
Practice offices at their present location. Purchaser and Seller further agree
that for a six (6) month period following the Closing, Purchaser will maintain
Company's administrative offices at their present location.
6.3 SUBSEQUENT SALE OF COMPANY. Purchaser agrees that for a period of
twenty-four (24) months following the Closing Date, Purchaser will not sell,
offer or otherwise dispose of the shares or assets of Company to St. Joseph's
Hospital Systems, St Joseph's Foundation, St. Joseph's Medical Corporation, or
any of their affiliates (collectively, "St. Joseph's"). Purchaser further
agrees that for a period of six (6) months following the Closing Date, Purchaser
will not sell, offer or otherwise dispose of the shares or assets of Company to
any other purchaser. In the event that Purchaser sells Company after such six
month period, Purchaser agrees that such sale will contain negative covenants
prohibiting the subsequent purchaser of Company from selling Company to St.
Joseph's for a twenty-four (24) month period following the Closing Date of this
transaction. Notwithstanding the foregoing, Seller and Company acknowledge that
nothing herein shall be construed to prevent or otherwise limit the sale of all
or a part of Purchaser to another entity.
6.4 COMPANY'S NAME. Purchaser agrees not to change the Company's name
for a six (6) month period following the Closing.
6.5 BOARD OF DIRECTORS. At the Closing, Purchaser shall name Seller to
Company's and Purchaser's Boards of Directors, and their compensation
committees, if such committee are in existence, for at least two (2) years.
6.6 CHOICE OF HOSPITALS. For a period of two (2) years following the
Closing, Purchaser will allow all patients of Company to use West Med Santa Ana
Hospital, West Med Anaheim Hospital, and/or Chapman General Hospital, and will
take no steps to encourage patients to use St. Joseph Hospital. Company and
Seller agree, however, that patients who request that they be admitted to St.
Joseph's Hospital shall be so permitted.
7. PURCHASERS' ACCESS TO RECORDS; CONFIDENTIAL INFORMATION; PUBLICITY:
7.1 ACCESS TO RECORDS. Between the date of the execution hereof and the
Closing, Purchaser, its appraisers, accountants, consultants, counsel and other
representatives, shall have access after normal business hours, upon reasonable
notice, to the tax returns, books, records, licenses, certifications, contracts,
agreements and all other relevant documentation of Company.
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Neither Purchaser nor its representatives shall disclose the contents of any of
said materials that Purchaser has discovered in the course of its due diligence
("Due Diligence") to any third party without prior written consent of Company,
except: (a) as required by law, including, but not limited to, civil litigation
arising out of this Stock Purchase Agreement or the transactions contemplated
hereunder; (b) except to the extent covered by the Agreement of Confidential
Disclosure by and between Purchaser and Seller, information contained in any
such materials that was already in Purchaser's possession prior to the date
hereof; and (c) information contained in any such materials that is or becomes
generally available to the public other than as a result of a disclosure by
Purchaser or its agents or employees in violation of this Section (collectively,
the "Exceptions").
7.2 CONFIDENTIAL INFORMATION. Each of the parties hereto agrees that at
all times prior to, or following the Closing Date, none of such parties shall
use for its or their benefit or for any third party's benefit, any confidential
information or trade secrets of the other parties or any "Affiliate" (as defined
below), or of any successor or assignee of such parties or any Affiliate, and
shall not disclose or cause to be disclosed to any third party any confidential
information or trade secrets of the other parties, any Affiliate, or any of
their respective successors or assigns at any time prior to or after the Closing
Date. The parties shall maintain and keep confidential and never disclose the
terms of this Stock Purchase Agreement and the negotiations preceding this Stock
Purchase Agreement, except as may be required by applicable law. As used
herein, "Affiliate" shall mean any affiliated or related organization of a party
to this Agreement.
7.3 PUBLICITY. No party shall, at any time on or after the date hereof,
issue any publicity or written or oral statement, or otherwise disclose the
existence of this Stock Purchase Agreement or any of the terms or conditions
hereof, or disclose the contemplation, implementation or consummation of any of
the transactions intended hereby (other than to its directors, officers,
attorneys, financial advisors and other agents and representatives, as necessary
in order to negotiate, evaluate, approve and consummate the transactions
hereunder), without the prior written consent of Purchaser (in the case of
Seller) or Seller (in the case of Purchaser), except in accordance with any of
the Exceptions as set forth in Section 7.1, and except as reasonably required of
Purchaser by any applicable federal or state securities law (or agency's)
disclosure requirements. In the case of any written publicity or statement, the
applicable party with the above right of consent shall have the right to approve
in advance the specific language of any such writing, provided that such
approval may not be unreasonably withheld in the event of occurrence of any of
the Exceptions. The parties shall agree to the language used in the publication
of a joint press release following the Closing.
8. CLOSING; CONDITIONS TO OBLIGATIONS TO CLOSE:
8.1 CLOSING DATE. The transactions contemplated by this Stock Purchase
Agreement shall be consummated at the "Closing." The Closing shall take place
at Miller & Holguin, 1801 Century Park East, Seventh Floor, Los Angeles,
California 90067, or at such other place as may be designated by Seller and
Purchaser, on the Closing Date. The Closing Date shall occur on the first
business day occurring 30 days from the date hereof, or at such other time as is
mutually agreed upon by the parties.
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8.2 DELIVERIES BY SELLER. At the Closing, Seller shall execute (as to
documents calling for execution) and deliver to Purchaser the following:
(a) Stock certificates representing all of the issued and
outstanding shares of the Company, duly executed, endorsed and properly
witnessed for transfer to Purchaser.
(b) A UCC search report dated not more than five (5) days before
the Closing Date issued by the California Secretary of State which shows that
there are no filings under the Uniform Commercial Code on file with such
Secretary of State which name Company or Seller as a debtor or otherwise
indicating any lien on the Stock or on the assets of the Company, other than
those filings specifically approved by Purchaser in writing.
(c) A good standing certificate and tax clearance issued by the
California Secretary of State and Franchise Tax Board, respectively, which shows
Company is in good standing with such agencies.
(d) An officer's certificate signed by Company's president and
its secretary, and a certificate signed by Seller, that all conditions specified
in this Stock Purchase Agreement to be fulfilled by Company have been fulfilled,
and that the Articles of Incorporation and the Bylaws of Company previously
provided to Purchasers are true and complete copies, as currently in effect, in
the form of the certificates attached hereto as Exhibit 8.2(d).
(e) A certificate from California's Employment Development
Department or equivalent confirming that, as of the Closing Date (or as of the
latest date for which such confirmation is available prior to the Closing Date),
neither Company nor Seller is in default with respect to any filing or payment
obligations respecting any employees of Company, and if applicable, a
certificate from the California State Board of Equalization/Taxation or
equivalent showing that no amount is due from Company or Seller on account of
any sales tax permit issued to Company or such Seller for the operation of the
Practice.
(f) Non-Competition Agreement of Seller in the form of Exhibit
8.2(f) attached hereto.
(g) Copies of Employment Agreement between Company and Seller, in
the form of such agreement in the form of Exhibit 8.2(g) hereto.
(h) Copies of Employment Agreements between Prospect Medical
Systems and each of the persons specified in Section 8.5(e), the form of such
agreements in the form of Exhibit 8.2(h) respectively, hereto.
(i) Personal Guaranty Agreement by Seller in the form of Exhibit
8.2(i) attached hereto.
(j) True and complete minute books and the stock register of the
Company, as amended.
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(k) True and complete copies of all contracts pursuant to Section
4.12 and leases of real property listed on Exhibit 4.28.
(l) A true and complete copy of each insurance policy listed in
Exhibit 4.14(b) hereto.
(m) An opinion of counsel, dated as of the Closing Date,
substantially in the form of Exhibit 8.2(m) attached hereto ("Seller's
Opinion").
(n) A board resolution evidencing the termination of all Benefit
Plans (as defined in Section 4.20) as of the Closing.
(o) A board resolution authorizing the terms of this Stock
Purchase Agreement, the transactions contemplated herein and the Closing.
(p) Such other customary instruments, documents and certificates
in forms reasonably satisfactory to Purchaser as shall be necessary to carry out
the intent and effectuate the purposes of this Stock Purchase Agreement and
sufficient to vest in Purchaser good, valid and marketable title to the Stock,
free and clear of all Liens.
8.3 DELIVERIES BY PURCHASER. At the Closing, Purchaser shall deliver to
Seller the following:
(a) Payment of the Purchase Price in accordance with Section 3.3
herein.
(b) A copy of the Employment Agreement between Company and
Seller, the form of such agreement as set forth in Exhibit 8.2(g) attached
hereto.
(c) Copies of the form of Employment Agreements between Prospect
Medical Systems and certain of Seller's employees, the form of such agreement as
set forth in Exhibit 8.2(h) attached hereto.
(d) An officer's certificate setting forth a copy of the
resolutions adopted by the Board of Directors of Purchaser authorizing and
approving the execution and delivery of this Stock Purchase Agreement by
Purchaser and certifying as to the authority of the officers executing this
Stock Purchase Agreement and any documents to be delivered by Purchaser at the
Closing.
(e) All other instruments and documents as Seller may reasonably
request as necessary to carry out the intent and effectuate the purposes of this
Stock Purchase Agreement.
(f) An opinion of counsel, dated as of the Closing Date,
substantially in the form of Exhibit 8.3(f) attached hereto ("Purchaser's
Opinion").
(g) A board resolution authorizing the terms of this Stock
Purchase Agreement, the transactions contemplated herein and the Closing.
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(h) A copy of the Employment Agreement by and between Company and
Geoffrey Furman, M.D., the form of such agreement as set forth in Exhibit 8.2(h)
attached hereto.
8.4 CONDITIONS TO PURCHASER'S OBLIGATIONS. Purchaser's obligation to
consummate the transactions contemplated by this Stock Purchase Agreement is
conditioned upon satisfaction, or waiver by Purchaser in writing, of all of the
following on or before the Closing Date:
(a) The performance by Company and Seller of all of the their
respective promises and agreements under this Stock Purchase Agreement that are
to be performed as of the Closing, including but not limited to the procurement
and delivery to Purchaser of all necessary assignments and consents, provided
however, that the consent of CalOptima shall not be a condition to Closing.
(b) No suit, action, arbitration or legal, administrative or
other proceeding or governmental investigation shall be pending or threatened
against Purchaser, Company or Seller in relation to or affecting the
consummation of the transactions contemplated by this Stock Purchase Agreement,
and no statute, rule, regulation, decree, executive or judicial order shall have
been instituted or threatened by any governmental or regulatory authority which
challenge the validity or enforceability of this Agreement or any of its terms,
or which adversely affects Company.
(c) Written evidence provided to Purchaser that Company's bylaws
have been amended to increase the number of directors to three, and Jacob Y.
Terner M.D. and Gregg DeNicola, M.D. have been named as directors and officers
of Company as of the Closing.
(d) The assets of Company have not been damaged, Seller shall
have maintained Company in the regular course of business and shall have paid
all of its accounts payable as they came due, and there have been no adverse
change from the date of this Agreement or of the Financial Statements, whichever
is later.
(e) Purchaser has not exercised the cancellation option under
Section 10 below.
(f) At the Closing, the Stock shall not be subject to any pledge,
lien or encumbrance.
(g) Company and Seller have given all notices to any third
parties, if any, made all filings, and obtained all required authorizations,
consents and approval of all health plans, (including but not limited to,
PacifiCare) and all governmental agencies in connection with the matters
described herein.
(h) Seller shall have increased the coverage limits on his
malpractice policy related to the period prior to the Closing, to $2 million per
claim, with a $4 million annual aggregate.
8.5 CONDITIONS TO SELLER'S OBLIGATION. Seller's obligation to
consummate the transactions contemplated by this Stock Purchase Agreement is
conditioned upon satisfaction, or waiver by Company in writing, of all of the
following on or before the Closing Date:
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(a) The performance by Purchaser of all of Purchaser's promises
and agreements under this Stock Purchase Agreement that are to be performed as
of Closing.
(b) No suit, action, arbitration or legal, administrative or
other proceeding or governmental investigation shall be pending or threatened
against Purchaser, Company or Seller in relation to or affecting the
consummation of the transactions contemplated by this Stock Purchase Agreement.
(c) Seller shall enter into a two year employment agreement
effective as of the Closing, with Company in the amount of $250,000 per year, as
set forth on Exhibit 8.2(g) attached hereto;
(d) Each of the representations and warranties of Purchaser is
true as of the Closing.
(e) Prospect Medical Systems shall enter into one year employment
agreements effective as of the Closing, with D. Constantine, E. Espinoza, V.
Leath and C. Stienstra, including severance provisions, in the form of that
listed on Exhibit 8.2(h) attached hereto.
(f) Seller and the Company shall have received a certificate of
the respective Secretary or other officer of the Purchaser certifying as true
and correct as of the Closing Date, a copy of the Resolutions of the Board of
Directors which authorize the execution and full performance of the Transaction
Documents and the incumbency of their respective officers.
(g) Purchaser is a corporation duly incorporated, validly
existing, and in good standing under the laws of the State of California and has
all required necessary corporate power to perform its obligations under the
Agreement.
(h) All corporate proceedings required by law or by the
provisions of the Agreement to be taken by Purchaser on or before the Closing
Date, in connection with the execution and delivery of the Agreement and the
consummation that transactions contemplated by the Agreement have been duly and
validly taken.
(i) Every consent, approval, authorization, or order of any
federal or California governmental agency or body that is required for the
consummation by Purchaser of the transactions contemplated by the Agreement has
been obtained and will be in effect on the Closing Date.
(j) The execution and delivery of that certain Personal Guaranty
of Payment and Performance, by and between Jacob Y. Terner, M.D. ("Terner"),
Seller and Company, in the form of that attached hereto as Exhibit 8.4(j),
pursuant to which Terner shall agree to personally fund up to $1 million of the
Purchase Price in the event Purchaser does not timely make such payment when
due.
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(k) Company shall enter into a three year employment agreement
effective as of the Closing, with Geoffrey Furman, M.D. in the amount of
$150,000 per year, as set forth on Exhibit 8.3(h) attached hereto.
(l) Seller shall have received a certificate of the respective
Secretaries or other officers of the Purchaser and Company, certifying as true
and correct as of the Closing Date, copies of the resolutions of the Boards of
Directors of Purchaser and Company, as the case may be, naming Seller to their
respective Boards of Directors.
9. INDEMNIFICATION:
9.1 SELLER'S INDEMNITY.
(a) Except as provided in subsection (b) herein, for a period of
three (3) years from the Closing Date, Seller shall indemnify, defend and hold
Purchaser, its affiliates (including without limitation, Company), and their
directors, officers, employees, attorneys, and agents harmless from and against
any and all liabilities, losses, damages, claims, causes of action, costs and
expenses (collectively "Claims") (including, without limitation, reasonable
attorneys' fees and expenses and court costs), whether known or unknown, whether
suit is instituted or not, and, if instituted, whether at any trial and
appellate level, for the period prior to the Closing, arising out of, relating
to or as a result of: (a) Company's and/or Seller's ownership or operation of
Company or the Practice, including any defects in title; (b) any other actions
or omissions of Company prior to the Closing Date; (c) any default or breach by
Company or Seller of any representation, warranty or any other material term or
condition in this Stock Purchase Agreement (including the exhibits and
attachments) or any ancillary agreement, document, or certificate to be
delivered in connection with this Stock Purchase Agreement; (d) the conduct of
Company's business on or prior to the date of the Closing, including, without
limitation, any litigation now existing or hereafter arising from such conduct
occurring on or prior to the Closing Date, (e) any inaccuracy of the Company
Financial Statements; and (f) any act, conduct, omission or commitment of
Company or Seller occurring on or prior to the Closing Date, which may hereafter
be asserted against Company or Seller, whether or not unknown, unasserted or
undiscovered by Purchaser as of Closing, but only to the extent not actually
reimbursed to Purchaser by insurance and only in an amount up to $1,000,000,
exclusive of any amounts in the Reserve Account. Purchaser agrees that with
respect to any matter for which Seller has the foregoing obligations, Purchaser
shall first attempt to satisfy the amount owed by Seller out of the Reserve
Account. Without limiting the generality of the foregoing, with respect to the
measurement of damages, the Purchaser shall have the right to be put in the same
financial position as it would have been in had the representations and
warranties of Seller been true and correct, had each of the covenants of Company
and Seller been performed in full, and had Company and Seller paid, discharged
and performed all of the liabilities and obligations of the Seller.
(b) Notwithstanding the foregoing, the three year duration of
Seller's indemnification and the limit of $1,000,000 in amount set forth in
subsection (a) above shall not apply to Claims related to (i) fraud, (ii) tax
liabilities, (iii) a violation of state or federal statutes or regulations
governing the practice of medicine, or (iv) Claims of which Seller was aware as
of the Closing Date that were not disclosed to Purchaser, which Claims shall
survive indefinitely.
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9.2 PURCHASER'S INDEMNITY. Purchaser shall indemnify, defend and hold
Seller harmless from and against any and all Claims (including, without
limitation, reasonable attorneys' fees), arising out of (a) Purchaser's
ownership or operation of Company or the Practice following the Closing Date,
(b) any other actions or omissions of Company following the Closing Date; (c)
any default or breach by Purchaser of any representation, warranty or any other
material term or condition in this Stock Purchase Agreement (including the
exhibits and attachments) or any ancillary agreement, document, or certificate
to be delivered in connection with this Stock Purchase Agreement; (d) the
conduct of Company's business following the date of the Closing; and (e) any
act, conduct, omission or commitment of Company occurring following the Closing
Date. Notwithstanding the foregoing, Purchaser's indemnification of Seller
shall be limited to a period of three (3) years from the Closing Date and an
amount up to $1,000,000, except for Claims related to (i) fraud, (ii) tax
liabilities, or (iii) a violation of state or federal statutes or regulations
governing the practice of medicine, which claims shall survive indefinitely.
9.3 INDEMNIFICATION PROCEDURE.
(a) In the event any person or entity not a party to this Stock Purchase
Agreement shall make a demand or Claim or file or threaten to file or continue
any lawsuit, which demand, Claim or lawsuit may result in liability to an
indemnified party under this Stock Purchase Agreement, or in the event that a
potential loss, damage or expense comes to the attention of any party, then the
party receiving notice or aware of such event shall promptly notify the other
party or parties of the demand, Claim or lawsuit. Within ten (10) days after
notice by the indemnified party (the "Notice") to an indemnifying party of such
demand, Claim or lawsuit, except as provided in subsection (b) herein, the
indemnifying party shall have the option, at its cost and expense, to retain
counsel for the indemnified party, to defend any such demand, claim or lawsuit,
provided that counsel who will conduct the defense of such claim or litigation
will be approved by the indemnified party whose approval will not unreasonably
be withheld. The indemnified party shall have the right, at its own expense, to
participate in the defense of any suit, action or proceeding brought against it
with respect to which indemnification may be sought hereunder, provided, (a) if
the named parties to any such proceeding (including any impleaded parties)
include both the indemnifying party and the indemnified party and representation
of both parties by the same counsel would be inappropriate due to actual or
potential differing interests between them, (b) the employment of counsel by
such indemnified party has been authorized in writing by the indemnifying party,
or (c) the indemnifying party has not in fact employed counsel to assume the
defense of such action within a reasonable time; then, the indemnified party
shall have the right to retain its own counsel at the cost and expense of the
indemnifying party. No indemnifying party, in the defense of any such claim or
litigation, will consent to entry of any judgment or enter into any settlement
without the consent of the indemnified party. If any indemnified party will
have been advised by counsel chosen by it that there may be one or more legal
defenses available to such indemnified party which are different from or
additional to those available to and which have not been asserted by the
indemnifying party, the indemnifying party will not have, at the election of the
indemnified party, the right to continue the defense of such claim or action on
behalf of such indemnified party and will reimburse such indemnified party and
any person controlling such indemnified party for the reasonable fees and
expenses of any counsel retained by the indemnified party to undertake the
defense. In the event that the indemnifying party shall fail to respond within
ten (10) days after receipt of the Notice, the indemnified party may retain
counsel and
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conduct the defense of such demand, claim or lawsuit, as it may in its sole
discretion deem proper, at the sole cost and expense of the indemnifying party.
Except as explicitly provided in this Section 9.3, failure to provide Notice
shall not limit the rights of such party to indemnification.
(b) Notwithstanding the foregoing, in the event that any demand, Claim
or lawsuit for which indemnification is payable hereunder relates with respect
to Seller or Company, to a criminal investigation, quasi criminal investigation,
governmental regulatory claim, civil claim involving allegations of criminal
conduct, or a matter in which the licensure of Purchaser or Company could be
jeopardized, Purchaser shall have the sole right to retain counsel to represent
it or the Company in such matter and Seller shall pay the reasonable fees of
such counsel on a current basis; provided however, that Purchaser shall
collaborate in good faith with Seller and his counsel in the handling of such
matters. In the event Purchaser determines to settle any such matter, it shall
provide Seller and his counsel with 30 days prior notice of Purchaser's
intention to settle, specifying the amount payable and other material terms of
the proposed settlement. Within 10 days of such notice, Seller shall notify
Purchaser of its intention to pay such proposed settlement. If Seller elects
not to pay the settlement amount, Purchaser may at its sole discretion elect
either to (i) provide for the payment of such settlement and may seek
reimbursement from Seller for the amount of such settlement and all fees and
costs associated therewith, by submitting a claim in arbitration to determine
whether Purchaser's actions were reasonable actions for a prudent person under
the circumstances under which they were made, or (ii) tender the continuing
defense of such action to Seller and its counsel as provided herein.
9.4 PAYMENT; PURCHASER'S RIGHT TO OFFSET. All amounts paid by either
party pursuant to this Section 9 shall be on a dollar-for-dollar basis as to the
claims for which indemnification is to be paid. All amounts shall be on an
after-tax basis, with such tax effects to be determined within 20 days of the
completion of an audit of Company's financial statements for the first fiscal
period following the Closing Date. With regard to claims of third parties for
which indemnification is payable hereunder, such indemnification shall be paid
by the indemnifying party in advance of settlement or final adjudication thereof
on a current basis within thirty (30) days of receipt from the indemnified party
of such supporting documentation as the indemnifying party may reasonably
request, and any offset of such amounts due to the determination of the tax
effects as set forth herein shall be paid within 30 days of the completion of
such audit of Company's financial statements for the first fiscal period
following the Closing Date. Anything herein to the contrary notwithstanding,
Purchaser shall be required to offset any amounts due to Purchaser from Seller
under this Section 9 by first offsetting the amount of the Reserve Account,
after which Purchaser may seek indemnification directly from the Seller.
Purchaser shall not be permitted to offset any amounts owed hereunder against
sums owed to Seller under the Employment Agreement.
9.5 NON-EXCLUSIVE REMEDY/MITIGATION OF DAMAGES. The provisions of this
Section 9 do not limit the parties' right to choose any and all available
remedies for breach, provided, however, that the parties shall first look to
indemnification to the extent such monetary remedy shall be appropriate.
Notwithstanding the foregoing, before seeking indemnification from Seller,
Purchaser shall be required to mitigate all amounts owed by Seller hereunder.
Such duty to mitigate shall include, but not be limited to, Purchaser's
obligation to satisfy amounts owed out of the Reserve Account.
26
<PAGE>
10. PURCHASER'S CANCELLATION OF STOCK PURCHASE AGREEMENT:
10.1 JEOPARDY. In the event the performance by Seller of any term,
covenant, condition or provision of this Agreement should be in violation of any
statute, ordinance, or be otherwise deemed illegal, by a state or federal court
or governmental agency (collectively, "Jeopardy Event"), then the parties shall
use their best efforts to meet forthwith and attempt to negotiate an amendment
to this Stock Purchase Agreement to remove or negate the effect of the Jeopardy
Event. In the event the parties are unable to negotiate such an amendment
within twenty (20) days following written notice by either party of the Jeopardy
Event, then Purchaser may cancel this Agreement immediately upon written notice
("Cancellation Option"), and except for the $100,000 deposit, all amounts
previously paid by Purchaser to Seller shall be paid within ten (10) days.
10.2 EXERCISE OF CANCELLATION OPTIONS. In the event Purchaser exercises
the Cancellation Option described above, it shall so notify Company in writing
and each party shall return forthwith all originals and copies of any financial
or other records, instruments, or other documents it has received from the other
party and, except as provided in this Agreement, all of the parties' respective
rights and obligations hereunder shall terminate immediately. Notwithstanding
the foregoing, the parties' respective obligations under Section 7.2 above shall
survive Purchaser's exercise of any of said cancellation options.
11. MUTUAL RELEASE
Except as provided in Sections 3.5 and 9 of this Stock Purchase Agreement,
(a) Effective upon the Closing, Seller hereby irrevocably waives,
releases and discharges the Company from any and all liabilities and obligations
of Company to Seller of any kind, or nature whatsoever, whether in his capacity
as the Seller hereunder, as a stockholder, officer, or director of the Company
or otherwise, including, without limitation, in respect of rights of
contribution or indemnification, in each case whether absolute or contingent,
liquidated or unliquidated, and whether arising at law or equity, and Seller
hereby covenants and agrees that he will not seek to recover any amounts in
connection therewith or thereunder from the Company; provided, however, that
nothing in this Section 11 will constitute a waiver of any claims Seller may
have against the Company pursuant to the terms of this Agreement, including but
not limited to a material breach of any representation or warranty contained
herein, and/or any acts or events which occur after the Closing.
(b) Effective upon the Closing, Company hereby irrevocably waives,
releases and discharges Seller from any and all liabilities and obligations of
Seller to the Company of any kind or nature whatsoever, including, without
limitation, in respect of rights of contribution or indemnification, in each
case whether absolute or contingent, liquidated or unqualified, and whether
arising at law or equity, and the Company hereby covenants and agrees that it
will not seek to recover any amounts in connection therewith or thereunder from
Seller; provided, however, that nothing in this Section 11 will constitute a
waiver of any claims that the Company may have against Seller pursuant to the
terms of this Agreement, including but not limited to a material breach of any
representation or warranty contained herein.
27
<PAGE>
It is the intention of the parties hereto that the foregoing releases shall
be effective as of the Closing.
12. MISCELLANEOUS
12.1 RISK OF LOSS. Until the Closing, Seller shall bear all risk of loss,
damage or destruction to the assets.
12.2 NO THIRD PARTY BENEFICIARIES. The parties intend that the benefits
of this Stock Purchase Agreement shall inure only to Purchaser and the Seller
except as expressly so stated herein. Notwithstanding anything contained
herein, or any conduct or course of conduct by any party hereto, before or after
signing this Stock Purchase Agreement, this Stock Purchase Agreement shall not
be construed as creating any right, claim or cause of action against Purchaser,
Company or Seller by any other person or entity.
12.3 ENTIRE AGREEMENT. This Stock Purchase Agreement, together with all
exhibits and schedules hereto, and all documents referred to herein (including
without limitation any ancillary agreements), constitutes the entire agreement
between the parties with respect to the subject matter hereof, supersedes all
other and prior agreements on the same subject, whether written or oral, and
contains all of the covenants and agreements between the parties with respect to
the subject matter hereof. Each party to this Stock Purchase Agreement
acknowledges that no representations, inducements, promises, or agreements,
orally or otherwise, have been made by the other party(ies), or by anyone acting
on behalf of any party, that are not embodied herein, and that no other
agreement, statement, or promise not contained in this Stock Purchase Agreement
shall be valid or binding.
12.4 SUCCESSORS AND ASSIGNS. This Stock Purchase Agreement shall be
binding upon and shall inure to the benefit of the parties and their respective
heirs (as applicable), legal representatives, and permitted successors and
assigns. No party may assign this Stock Purchase Agreement or the rights,
interests or obligations hereunder; provided, however, that Purchaser may, (i)
assign any or all of its rights and interests hereunder to one or more of its
Affiliates, except for the actual purchase of Seller's stock in Company, and
(ii) designate one or more of its Affiliates to perform its obligations
hereunder (in any or all of which cases Purchaser shall remain liable and
responsible for the performance of all of its obligations hereunder). Any
assignment or delegation in contravention of this Section shall be null and
void.
12.5 COUNTERPARTS. This Stock Purchase Agreement, and any amendments
thereto, may be executed in counterparts, each of which shall constitute an
original document, but which together shall constitute one and the same
instrument.
12.6 HEADINGS. The section headings contained in this Stock Purchase
Agreement are inserted for convenience only and shall not affect in any way the
meaning or interpretation of this Stock Purchase Agreement.
12.7 NOTICES. Any notices required or permitted to be given hereunder by
any party to the other shall be in writing and shall be deemed delivered upon
personal delivery; twenty-four (24) hours
28
<PAGE>
following deposit with a courier for overnight delivery; or seventy-two (72)
hours following deposit in the U.S. Mail, registered or certified mail, postage
prepaid, return-receipt requested, addressed to the parties at the following
addresses or to such other addresses as the parties may specify in writing:
If to Seller: Melvin Reich, D.O.
4603 Seashore Drive
Newport Beach, California 92663
with copy to: George Wall, Esq.
Palmieri, Tyler, Wiener, Wilhelm and Waldron
2603 Main Street, Suite 1300
Irvine, California 92714
If to Purchaser: Gregg DeNicola, M.D.
Prospect Medical Group, Inc.
18200 Yorba Linda Blvd., Suite 409
Yorba Linda, California 92686
with copy to: Dale S. Miller, Esq.
Miller & Holguin
1801 Century Park East, 7th Floor
Los Angeles, California 90067
12.8 GOVERNING LAW. This Stock Purchase Agreement shall be governed by
and construed in accordance with the laws of the State of California.
12.9 AMENDMENT. This Stock Purchase Agreement may be amended at any time
by agreement of the parties, provided that any amendment shall be in writing and
executed by all parties.
12.10 SPECIFIC PERFORMANCE. Seller and Purchaser acknowledge and agree
that, in the event either party terminates this Stock Purchase Agreement or
otherwise fails to close, the other party would be irreparably damaged thereby
and that monetary damages would not provide an adequate remedy. Accordingly, it
is agreed that, in addition to any other remedies that the parties may have at
law or in equity, the parties shall be entitled to specific performance and
injunctive relief to prevent such a breach and specifically to enforce the terms
and provisions hereof in any action instituted in a court of competent
jurisdiction.
12.11 SEVERABILITY. If any provision of this Stock Purchase Agreement is
held by a court of competent jurisdiction to be invalid or unenforceable, the
remaining provisions will nevertheless continue in full force and effect, unless
such invalidity or unenforceability would defeat an essential business purpose
of this Stock Purchase Agreement.
12.12 FEES AND EXPENSES. Except for accountant's fees directly related to
the audit of the Company, which fees the parties agree are to be paid by
Purchaser, or as otherwise explicitly set forth otherwise in writing signed by
the parties, Seller and Purchaser agrees to bear their own expenses
29
<PAGE>
including, without limitation, attorneys' fees in connection with the
preparation of this Stock Purchase Agreement and the transactions contemplated
hereby.
12.13 EXHIBITS AND SCHEDULES. All exhibits and schedules attached to this
Stock Purchase Agreement are incorporated herein by this reference and all
references herein to "Stock Purchase Agreement" shall mean this Stock Purchase
Agreement together with all such exhibits and schedules, and all ancillary
agreements to be delivered at Closing.
12.14 SURVIVAL OF INDEMNIFICATION, REPRESENTATIONS AND WARRANTIES. Except
as expressly stated to the contrary herein, the indemnifications,
representations and warranties of Purchaser, Company and the Seller contained in
this Stock Purchase Agreement or in any certificate or document delivered
pursuant to the provisions hereof shall survive the Closing Date for a period of
three (3) years and shall not be affected by any investigation made by or on
behalf of Purchaser, Company or Seller.
12.15 TIME OF ESSENCE. Time is expressly made of the essence of this
Stock Purchase Agreement and each and every provision hereof of which time of
performance is a factor.
12.16 WAIVERS. No waiver by any party, whether express or implied, of its
rights under any provision of this Agreement shall constitute a waiver of the
party's rights under such provisions at any other time or a waiver of the
party's rights under any other provision of this Stock Purchase Agreement. No
failure by any party to take any action against any breach of this Stock
Purchase Agreement or default by another party shall constitute a waiver of the
former party's right to enforce any provision of this Stock Purchase Agreement
or to take action against such breach or default or any subsequent breach or
default by the other party. To be effective any waiver must be in writing and
signed by the waiving party.
12.17 ARBITRATION. The parties firmly desire to resolve all disputes
arising hereunder without resort to litigation in order to protect their
respective business reputations and the confidential nature of certain aspects
of their relationship. Accordingly, any controversy or claim arising out of or
relating to this Agreement, or the breach thereof, shall be settled by
arbitration as set forth below.
(a) All disputes which in any manner arise out of or relate to
this Agreement or the subject matter thereof, shall be resolved exclusively by
arbitration in accordance with the provisions of this Section 12.17. Either
party may commence arbitration by sending a written demand for arbitration to
the other party, setting forth the nature of the controversy, the dollar amount
involved, if any, and the remedies sought, and attaching a copy of this Section
to the demand.
(b) The parties stipulate to arbitration before a single,
mutually agreed upon arbitrator sitting on the Los Angeles, California Judicial
Arbitration Mediation Services (JAMS) panel. In the event that the parties are
unable to agree upon the person chosen as arbitrator within 30 days of the
demand for arbitration, the arbitrator shall be selected in the sole discretion
of the JAMS administrator. The arbitrator shall be a member of the California
bar.
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(c) The parties shall share all costs of arbitration. The
prevailing party shall be entitled to reimbursement by the other party of such
party's attorneys' fees and costs and any arbitration fees and expenses incurred
in connection with the arbitration hereunder.
(d) The substantive law of the State of California shall be
applied by the arbitrator. All proceedings in arbitration shall be in
accordance with the California Code of Civil Procedure, as amended, and the
parties shall have the right to legal discovery in any matter submitted to
arbitration in satisfaction of California Code of Civil Procedure Section
1283.05, as permitted by California Code of Civil Procedure Section 1283.1(b).
(e) Arbitration shall take place in Los Angeles, California
unless the parties otherwise agree. As soon as reasonably practicable, a
hearing with respect to the dispute or matter to be resolved shall be conducted
by the arbitrator. As soon as reasonably practicable thereafter, the arbitrator
shall arrive at a final decision, which shall be reduced to writing, signed by
the arbitrator and mailed to each of the parties and their legal counsel.
(f) All decisions of the arbitrator shall be final, binding and
conclusive on the parties and shall constitute the only method of resolving
disputes or matters subject to arbitration pursuant to this Agreement. The
arbitrator or a court of appropriate jurisdiction may issue a writ of execution
to enforce the arbitrator's judgment. Judgment may be entered upon such a
decision in accordance with applicable law in any court having jurisdiction
thereof.
(g) Notwithstanding the foregoing, because time is of the essence
of this Agreement, the parties specifically reserve the right to seek a judicial
temporary restraining order, preliminary injunction, or other similar equitable
relief.
(h) The decision and award of the arbitrator shall be kept
confidential by the parties to the greatest extent possible. No disclosure of
such decision or award shall be made by the parties except as required by law or
as necessary or appropriate to effect the enforcement thereof.
(i) Should either Employer or Physician institute any action or
procedure to enforce this Agreement or any provision hereof, or for damages by
reason of any alleged breach of this Agreement or of any provision hereof, or
for a declaration of rights hereunder (including without limitation
arbitration), the prevailing party in any such action or proceeding shall be
entitled to receive from the other party all costs and expenses, including
without limitation reasonable attorneys' fees, incurred by the prevailing party
in connection with such action or proceeding.
12.18 CONSTRUCTION. The parties have participated jointly in the
negotiation and drafting of this Stock Purchase Agreement and in the event of
any ambiguity or question of intent or interpretation, no presumption or burden
of proof shall arise favoring or disfavoring any party by virtue of the
authorship of any of the provisions of this Stock Purchase Agreement.
12.19 FURTHER ASSURANCES. The parties shall take such actions and execute
and deliver such further documentation as may reasonably be required in order to
give effect to the transactions contemplated by this Stock Purchase Agreement
and the intentions of the parties hereto.
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IN WITNESS WHEREOF, the undersigned have executed this Stock
Purchase Agreement as of the date first written above.
"PURCHASER"
PROSPECT MEDICAL GROUP, INC.,
a California professional corporation
By: /s/ Jacob Y. Terner, M.D.
------------------------------------------
Jacob Y. Terner, M.D., Vice President
"COMPANY"
SANTA ANA/TUSTIN PHYSICIANS GROUP, INC.
a California professional corporation
By: /s/ Melvin Reich
------------------------------------------
Melvin Reich, D.O., President
"SELLER"
By: /s/ Melvin Reich
------------------------------------------
Melvin Reich, D.O.
32
<PAGE>
EXHIBITS TO
AGREEMENT FOR THE PURCHASE AND SALE OF STOCK
OF
SANTA ANA/TUSTIN PHYSICIANS GROUP, INC.(1)
<TABLE>
<S> <C>
2 Liabilities
3.2(a) Escrow Instructions
4.2 Authorization
4.3 Required Consents
4.4 Defaults
4.5 Books and Records
4.7(a) Changes to Practice
4.7(e) Extraordinary Compensation
4.8 Taxes
4.10 Premises
4.12 Contracts
4.13 Powers of Attorney
4.14(a) Outstanding Judgments
4.14(b) Insurance Policies
4.18 Licensure and Reimbursement
4.19 Employee Information
4.20 Employee Entitlement Programs
4.22 Inspections
4.24 Primary Care Physicians
4.25 Bank Accounts and Investments
4.26 Subsidiaries and Affiliates
4.28 Real Property Leases
4.29 Intellectual Property
4.31 Option to Purchase Premier IPA
8.2(d) Form of Officer's Certificate; and Form of Seller's Certificate
8.2(f) Form of Non-Competition Agreement -- filed herewith as
Exhibit 10.3
8.2(g) Employment Agreement -- Melvin Reich
8.2(h) Form of Employment Agreement
8.2(i) Form of Seller's Personal Guaranty Agreement
8.2(m) Form of Opinion of Seller's Counsel
8.3(f) Form of Opinion of Purchaser's Counsel
8.3(h) Form of Employment Agreement -- Geoffrey Furman, M.D.
8.5(j) Personal Guaranty of Payment and Performance
</TABLE>
(1) The Registrant hereby undertakes to provide to the Securities and Exchange
Commission upon request copies of any of the exhibits listed above not
otherwise filed with this Form S-1 Registration Statement as noted above.
33
<PAGE>
AGREEMENT FOR
THE PURCHASE AND SALE OF STOCK
OF
SIERRA PRIMARY CARE MEDICAL GROUP, INC.
BY AND AMONG
PROSPECT MEDICAL GROUP, INC.,
A CALIFORNIA PROFESSIONAL CORPORATION
PURCHASER
AND
SIERRA PRIMARY CARE MEDICAL GROUP, INC.,
A CALIFORNIA PROFESSIONAL CORPORATION
COMPANY
AND
SINNADURAI E. MOORTHY, M.D.,
KARUNYAN ARULANANTHAM, M.D. AND
THE ARULANANTHAM CHARITABLE REMAINDER TRUST
SELLERS
<PAGE>
TABLE OF CONTENTS
<TABLE>
Page
----
<S> <C>
1. PURCHASE AND SALE OF STOCK:. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
2. PURCHASE PRICE OF STOCK: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
2.1 Consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
2.2 Purchase Price Allocation . . . . . . . . . . . . . . . . . . . . . . . . . . .2
2.3 Payment of the Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . .2
2.4 Other Consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
2.5 Fair Market Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
2.6 Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF SELLERS:. . . . . . . . . . . . . . . . .3
3.1 Organization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
3.2 Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
3.3 No Consent Required; No Violations. . . . . . . . . . . . . . . . . . . . . . .4
3.4 No Default. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
3.5 Financial Statements, Books and Records . . . . . . . . . . . . . . . . . . . .4
3.6 Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
3.7 Conduct of Practice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
3.8 No Material Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
3.9 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
3.10 Title to Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
3.11 Right to Premises; Condition of the Property and Premises . . . . . . . . . . .7
3.12 Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
3.13 Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
3.14 Powers of Attorney. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
3.15 No Litigation and Insurance . . . . . . . . . . . . . . . . . . . . . . . . . .8
3.16 Violation of Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
3.17 No Brokers or Finders . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
3.18 No Bankruptcy Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . .9
3.19 Licensure and Reimbursement . . . . . . . . . . . . . . . . . . . . . . . . . .9
3.20 Employees and Employee Benefits . . . . . . . . . . . . . . . . . . . . . . . 10
3.21 Employee Entitlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
3.22 Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
3.23 Inspections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
3.24 Environmental Conditions. . . . . . . . . . . . . . . . . . . . . . . . . . . 12
3.25 Primary Care Physicians . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
3.26 Bank Accounts; Securities . . . . . . . . . . . . . . . . . . . . . . . . . . 12
3.27 Subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
3.28 Articles of Incorporation and Bylaws. . . . . . . . . . . . . . . . . . . . . 13
3.29 Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
3.30 Securities Law Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . 13
3.31 No Untrue Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
i
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Page
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4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF PURCHASER:. . . . . . . . . . . . . . . 13
4.1 Organization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
4.2 Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
4.3 No Brokers or Finders . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
4.4 No Violation of Other Obligations . . . . . . . . . . . . . . . . . . . . . . 14
4.5 No Consent Required . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
4.6 No Bankruptcy Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . 14
4.7 No Untrue Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
4.8 Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
4.9 No Intent To Distribute . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
4.10 No Litigation and Insurance . . . . . . . . . . . . . . . . . . . . . . . . . 15
4.11 Violation of Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
4.12 Licensure and Reimbursement . . . . . . . . . . . . . . . . . . . . . . . . . 15
4.13 Inspections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
5. OTHER COVENANTS: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
5.1 Leases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
5.2 Guaranty of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
5.3 Audit Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
5.4 Sierra Medical Group Partnership Interests. . . . . . . . . . . . . . . . . . 17
5.5 Sellers' Access to Company Records. . . . . . . . . . . . . . . . . . . . . . 17
5.6 Execution of Assignable Option Agreement. . . . . . . . . . . . . . . . . . . 17
5.7 Merger. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
5.8 Termination of Cross Purchase Agreement . . . . . . . . . . . . . . . . . . . 18
5.9 Company's Employees; Prior Service Credit . . . . . . . . . . . . . . . . . . 18
6. PURCHASERS' ACCESS TO RECORDS; CONFIDENTIAL INFORMATION; PUBLICITY:. . . . . . . . . 18
6.1 Access to Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
6.2 Confidential Information. . . . . . . . . . . . . . . . . . . . . . . . . . . 18
6.3 Publicity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
7. CLOSING; CONDITIONS TO OBLIGATIONS TO CLOSE: . . . . . . . . . . . . . . . . . . . . 19
7.1 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
7.2 Deliveries by Sellers . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
7.3 Deliveries by Purchaser . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
7.4 Conditions to Purchaser's Obligations . . . . . . . . . . . . . . . . . . . . 21
7.5 Conditions to Seller's Obligation . . . . . . . . . . . . . . . . . . . . . . 22
ii
<PAGE>
Page
----
8. INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
8.1 Seller's Indemnity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
8.2 Purchaser's Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
8.3 Indemnification Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . 23
8.4 Payment; Purchaser's Right to Offset. . . . . . . . . . . . . . . . . . . . . 24
8.5 Limitation of Indemnities . . . . . . . . . . . . . . . . . . . . . . . . . . 25
9. PURCHASER'S CANCELLATION OF STOCK PURCHASE AGREEMENT . . . . . . . . . . . . . . . . 25
9.1 Jeopardy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
9.2 Exercise of Cancellation Option . . . . . . . . . . . . . . . . . . . . . . . 25
10. MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
10.1 Risk of Loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
10.2 No Third Party Beneficiaries. . . . . . . . . . . . . . . . . . . . . . . . . 26
10.3 Entire Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
10.4 Successors and Assigns. . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
10.5 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
10.6 Headings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
10.7 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
10.8 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
10.9 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
10.10 Specific Performance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
10.11 Severability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
10.12 Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
10.13 Exhibits and Schedules. . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
10.14 Survival of Indemnification, Representations and Warranties . . . . . . . . . 28
10.15 Time of Essence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
10.16 Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
10.17 Attorneys' Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
10.18 Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
10.19 Construction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
10.20 Further Assurances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
</TABLE>
iii
<PAGE>
AGREEMENT FOR THE PURCHASE AND SALE OF STOCK
THIS AGREEMENT FOR THE PURCHASE AND SALE OF STOCK ("Stock Purchase
Agreement") is made and entered into as of the 23rd day of September, 1997, by
and among Prospect Medical Group, Inc., a California professional corporation
("Purchaser"), as buyer, Sinnadurai E. Moorthy, M.D. ("Dr. Moorthy"), Karunyan
Arulanantham, M.D. ("Dr. Arulanantham") and Karunyan Arulanantham, M.D. as
Trustee of the Arulanantham Charitable Remainder Trust (the "Trust") (each a
"Seller"; together "Sellers") and Sierra Primary Care Medical Group, Inc., a
California professional corporation ("Company").
R E C I T A L S
This Stock Purchase Agreement is made with reference to the following facts
and circumstances:
A. Sellers own all of the capital stock of the Company, which owns and
operates two medical practices (together, the "Practice"), which provide
professional medical services in the cities of Palmdale and Lancaster, located
in Los Angeles County, California;
B. Sellers desire to sell to Purchaser and Purchaser desires to purchase
from Sellers all of the issued and outstanding stock (the "Stock") of the
Company on the terms and conditions set forth in this Stock Purchase Agreement.
NOW, THEREFORE, in consideration of the covenants and conditions
contained herein and for other valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
1. PURCHASE AND SALE OF STOCK:
On the "Closing Date" (as defined in Section 7.1 herein), Sellers shall
sell and assign to Purchaser, and Purchaser shall acquire from Sellers, all
right, title and interest in and to the Stock, free and clear of all liens,
mortgages, pledges, claims, security interests, title defects, encumbrances,
charges and other restrictions of every kind (collectively, the "Liens") on the
terms and subject to the conditions set forth in this Stock Purchase Agreement.
2. PURCHASE PRICE OF STOCK:
2.1 CONSIDERATION. Subject to the terms and conditions of this Stock
Purchase Agreement, in reliance on the representations, warranties and covenants
of the parties hereto and in full consideration of the sale, assignment and
delivery of the Stock, Purchaser shall pay to the Sellers, or cause to be issued
to Sellers, as applicable (i) Five Million Six Hundred Twenty Five Thousand
Dollars ($5,625,000) in cash, plus (ii) two promissory notes ("Notes") in the
aggregate principal amount of Two Million Two Hundred Fifty Thousand Dollars
($2,250,000) in the form of those attached hereto as Exhibits 2.3(a)(i) and
2.3(a)(ii), plus (iii) options to purchase 31,500 shares of the $0.01 par value
common stock (the "Options") of Prospect Medical Holdings, Inc., a Delaware
corporation ("Prospect Medical Holdings") at an exercise price of $5.00 per
share, in the form of
<PAGE>
those attached hereto as Exhibits 2.1(a) and 2.1(b) in accordance with Section
2.3 below (the "Purchase Price").
2.2 PURCHASE PRICE ALLOCATION. The Purchase Price shall be divided and
allocated among the Sellers as follows:
<TABLE>
<CAPTION>
CASH NOTE OPTIONS
---------- ---------- -------
<S> <C> <C> <C>
Dr. Arulanantham $2,025,000 $1,125,000 15,750
Dr. Moorthy $2,812,500 $1,125,000 15,750
Trust $787,500 -0- -0-
</TABLE>
2.3 PAYMENT OF THE PURCHASE PRICE.
(a) Purchaser shall pay Sellers in the aggregate, Five Million Six
Hundred Twenty Five Thousand Dollars ($5,625,000) in cash. Such cash
consideration shall be paid at the Closing, at which time the Notes will be
signed by Purchaser and delivered to Sellers.
(b) All sums payable in cash as set forth in Section 2.1 shall be
payable to Sellers by way of wire transfer or cashier's check of immediately
available funds into a deposit account designated in writing by Sellers.
2.4 OTHER CONSIDERATION. As additional consideration for the execution of
this Stock Purchase Agreement and the transactions contemplated hereby, the
parties agree as follows
(a) Purchaser (or Company) shall enter into three year employment
agreements effective as of the Closing, with each of Dr. Moorthy and Dr.
Arulanantham, respectively, in the form of those set forth as Exhibits 7.2(f)(i)
and 7.2(f)(ii) attached hereto.
(b) Purchaser also agrees to use its best efforts to cause Prospect
Medical Holdings to issue the Options.
(c) Purchaser or its affiliates shall direct, on behalf of Company,
the payment of $250,000 to Sung Yang, M.D. ("Dr. Yang"), in consideration of Dr.
Yang assigning his interest in Sierra Medical Group, a California general
partnership (the "Partnership") to the Company.
2.5 FAIR MARKET VALUE. The parties agree that the Purchase Price reflects
the fair market value of the Stock and Non-Competition Agreements as valued by a
third party, independent appraiser in accordance with accepted business
practices for valuing the stock of professional medical practices. The parties
agree no consideration is or will be paid for the value of any referrals (direct
or indirect) to or from Purchaser, Sellers, or any of their affiliates.
2.6 EXPENSES. Sellers shall be individually responsible for all federal,
state and local taxes, transfer tax and documentary stamps, if any, through and
including the date of Closing attributable to or arising out of the sale of the
Stock to Purchaser and the arrangements in connection with the Closing of such
sale. Further, Sellers agree that the Company's legal fees in excess of $30,000
shall be paid for by them individually.
2
<PAGE>
3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF SELLERS:
Sellers represent and warrant to Purchaser that the statements contained in
this Article 3 will be correct and complete as of the Closing Date (as though
made then and as though the Closing Date were substituted for the date of this
Stock Purchase Agreement throughout this Article 3), except as otherwise
specifically set forth in the schedules attached hereto and initialed by the
parties. The schedules are numbered and lettered to correspond to the numbered
and lettered sections contained in this Article 3. Notwithstanding the
foregoing, it is understood and agreed that the matters set forth in Schedules
3.13(e), 3.15(b), 3.20, 3.21, 3.23, 3.26 and 3.27 are not intended to be
exceptions to such representations and warranties, but are in response to
information requested by such representations and warranties.
3.1 ORGANIZATION. Company is a California professional corporation duly
organized, validly existing and in good standing under the laws of the State of
California. Company has all requisite authority to own, lease, and operate its
business and to carry on its business as currently being conducted. Company is
duly qualified to transact its business in the State of California and does not
conduct business in any other state.
3.2 AUTHORIZATION. Sellers have good title to the Stock, and full right,
power, authority and legal capacity, to sell the Stock, to execute and deliver
this Stock Purchase Agreement, and to carry out the transactions contemplated
hereby without the consent of any other person. All action on the part of
Sellers and Company necessary for the authorization, execution, delivery and
performance of this Stock Purchase Agreement and the consummation of the
transactions contemplated hereby has been or will be taken prior to the Closing
Date, and this Stock Purchase Agreement (including exhibits, schedules and the
ancillary agreements) constitutes the legal, valid and binding obligation of
Sellers, enforceable in accordance with its terms, except as enforceability may
be restricted, limited or delayed by applicable bankruptcy, insolvency,
fraudulent conveyance or other laws affecting creditor's rights generally and
except as enforceability is subject to general principles of equity. At the
Closing, Purchaser will acquire good title to the Stock free and clear of all
Liens. Sellers are the only shareholders of Company. The authorized number of
shares of Company is Five Thousand (5,000), all of one class, of which only One
Thousand (1,000) shares are issued and outstanding, fully paid and nonassessable
and held by Sellers. Of such 1,000 outstanding shares, 500, 400 and 100 shares
are owned by Dr. Moorthy, Dr. Arulanantham and the Trust, respectively. The
Stock was issued in compliance with all applicable federal and state securities
laws. Except as set forth in Schedule 3.2, Sellers have full voting power over
the Stock, subject to no outstanding subscriptions, options, rights, convertible
securities, preemptive rights, buy-sell agreements, or any agreements or
commitments of any kind that obligate Company or the Sellers to (a) purchase or
otherwise receive or be issued any shares of Stock or any security or liability
of any kind convertible into or exchangeable for any such Stock, (b) receive any
benefits or rights similar to any rights enjoyed by or accruing to the holder of
shares of capital stock of Company, (c) convert or exchange any securities for
shares of Stock, (d) participate in the equity, income or election of directors
or officers of Company, or (e) take or refrain from taking any actions as
shareholders of the Company. Other than this Agreement and the transactions
contemplated hereby, there is no contract, commitment or agreement between
Sellers and any other person with respect
3
<PAGE>
to the disposition of any shares of the Stock. At the Closing, the Stock
will represent all right, title and interest in the Practice.
3.3 NO CONSENT REQUIRED; NO VIOLATIONS. Except as set forth in Schedule
3.3, neither the execution of this Stock Purchase Agreement by Sellers, nor the
performance by Sellers of their obligations hereunder requires the consent of
any third party, which has not been obtained and delivered to Purchaser. Except
as set forth in Schedule 3.3, neither this Stock Purchase Agreement nor any of
the transactions contemplated hereunder violates or shall violate any lease,
contract, document, understanding, agreement or instrument to which the Company
or any of the Sellers is a party or by which the Company or a Seller may be
bound. Except as set forth in Schedule 3.3, neither this Stock Purchase
Agreement nor any of the transactions contemplated hereunder violates, or shall,
to the best knowledge of Sellers, violate, conflict with, result in a default
under or breach any legally protected right of any individual or entity or the
articles of incorporation or bylaws of the Company.
3.4 NO DEFAULT. Except as set forth in Schedule 3.4, Company is not in
default under the terms of any lease, contract, document, understanding,
agreement or instrument to which it is a party or by which it is bound, nor has
any event occurred that will constitute a default by Company under any of the
same following the passage of time or consummation of any of the transactions
contemplated hereunder, nor has Company or Sellers received any notice of any
default under any of the same. To the best knowledge of the Sellers, except as
set forth in Schedule 3.4, no acceleration or other right to accelerate,
terminate, modify, cancel, create a security interest, or otherwise change any
existing agreement will be created as a result of the consummation of any of the
transactions contemplated hereunder.
3.5 FINANCIAL STATEMENTS, BOOKS AND RECORDS. Sellers have previously
delivered to Purchaser (i) an audited statement of operations and accumulated
deficit, statement of cash flows and notes for the fiscal year ended
December 31, 1996, and the Company's audited balance sheet at December 31, 1996
(the "Audited Company Financial Statements"); and (ii) an unaudited statement of
operations and accumulated deficit, statement of cash flows for the fiscal
period ended June 30, 1997, and the Company's unaudited balance sheet at
June 30, 1997 (the "Unaudited Company Financial Statements"). The audited
balance sheet of Company is hereinafter referred to as the "Company Balance
Sheet," and the Audited Company Financial Statements and Unaudited Company
Financial Statements are hereinafter referred to collectively as the "Company
Financial Statements." The Audited Company Financial Statements have been
prepared in accordance with GAAP applied on a consistent basis during the
periods involved, and fairly present the financial position of Company and the
results of its operations as of the date and for the periods indicated thereon.
At the date of the Company Balance Sheet (the"Company Balance Sheet Date") and
as of the Closing Date, Company will have no liabilities or obligations, secured
or unsecured (whether accrued, absolute, contingent or otherwise) not reflected
on the Company Balance Sheet or the accompanying notes thereto except for
liabilities incurred in the ordinary course of business since the date of said
balance sheet which are usual and normal in amount and those liabilities which
are set forth in Schedule 3.5. The reserves reflected in the Audited Company
Financial Statements for IBNR are adequate provisions for such liabilities and
have been established in accordance with GAAP consistently applied.
4
<PAGE>
3.6 ACCOUNTS RECEIVABLE. The accounts receivable of the Company in the
Company Financial Statements and arising thereafter (the "Accounts Receivable")
to the extent uncollected as of the date hereof, are valid and existing and
represent monies due for services performed and are not subject to any liens,
pledges, claims, security interests, title defects, encumbrances, charges and
other restrictions other than normal allowances, contractual adjustments and
reserves for uncollectibles; there are no other refunds, discounts or setoffs
payable or assessable with respect to the Accounts Receivable. To the best
knowledge of the Sellers, the Accounts Receivable are not subject to any
defenses, counterclaims or set-offs and collection of the Accounts Receivable
has been in the ordinary course of business.
3.7 CONDUCT OF PRACTICE. Between the date of the execution of this Stock
Purchase Agreement and the Closing, Sellers shall (a) cause the Company to carry
on the Practice in substantially the same manner as it has previously done, (b)
use their best efforts to maintain and preserve the assets of Company in good
condition and repair, and to prevent the imposition of any Liens on such assets,
(c) use their best efforts to preserve the Practice and its relationships with
all patients and payors, (d) not liquidate or dissolve Company, take any steps
to do same, or inform any third person or entity that Company or Sellers have
done or intend to do the same, (e) not permit the Company to enter into any
material agreements without the written consent of Purchaser, which consent
shall not be unreasonably withheld, and (f) not permit the Company to enter into
any material transactions not in the ordinary course of business without the
written consent of Purchaser, which consent shall not be unreasonably withheld.
3.8 NO MATERIAL CHANGES.
(a) Except as contemplated hereby or consented to by Purchaser,
between the date of this Stock Purchase Agreement and the Closing there will not
have been:
(i) any material adverse change in the Practice. For the
purpose of this Section 3.8, "material adverse change" shall mean a net
reduction in the number of the Company's covered lives of more than five percent
(5%) from February 28, 1997. As of such date, Company had 15,102 covered lives.
Covered lives shall be limited to patients who are enrolled in prepaid health
plans with which the Company contracts as a provider;
(ii) any voluntary or involuntary sale, assignment, license or
other disposition, of any kind, of any material property or material right of
the Practice other than as set forth in Schedule 3.8(a)(ii); or
(iii) resignations by, or terminations of, four or more
employee-physicians of the Partnership.
(b) Except as contemplated hereby or consented to by Purchaser,
between the date of this Stock Purchase Agreement and the Closing, neither
Seller nor Company:
(i) shall incur any debts, liabilities or obligations of any
kind, whether absolute or contingent, due or to become due, or any security
interests, liens, loans encumbering the
5
<PAGE>
Practice, or any other encumbrances incurred by Company or by Sellers in
connection with the Practice except for:
A. current liabilities incurred for services rendered or
goods supplied in the ordinary course of the operations of the Practice;
B. liabilities on account of taxes and governmental
charges not yet due, but not penalties, interest or fines in respect thereof; or
C. obligations or liabilities incurred by virtue of the
execution of this Stock Purchase Agreement.
(ii) shall pay any extraordinary compensation, bonuses or
distributions to Sellers, or any employee of Company or Sellers, except as set
forth on Schedule 3.8(b)(ii) hereto. Notwithstanding the foregoing, Purchaser
agrees that Company will pay bonuses to its employees and/or shareholders in a
manner that is consistent with past practices.
(c) Except for the transactions contemplated by this Stock Purchase
Agreement, or consented to by Purchaser, the Company shall have at the Closing:
(i) a current ratio of no less than the current ratio derived
from the Audited Company Financial Statements;
(ii) no increase in the amount of long term liabilities reported
in the Audited Company Financial Statements; and
(iii) no decrease in stockholders' equity reported in the
Audited Company Financial Statements;
3.9 TAXES. Except as set forth in the Company Financial Statements there
are no delinquent federal or state corporate income or franchise taxes or any
federal, state or local corporate income or franchise tax assessments due or
owing by Company. No extensions of time or requests therefor or waiver thereof
have been made or are presently pending or effective with respect to such
reports, returns or taxes ("Taxes"). Company has timely filed or will cause to
be filed on its own behalf and on behalf of the Partnership all tax returns
(federal, state and local) required to be filed on or before the Closing Date,
and all Taxes shown to be due and payable on said returns have been paid. There
are no actions, suits, proceedings, investigations, audits, claims or liens now
pending against or related to Company or the Partnership regarding any tax or
assessment. No claim for any additional tax, assessment or reassessment is
being asserted against the Company or proposed by any tax authority; and Sellers
have not been notified of, and there are no facts or circumstances known to the
Company or Sellers which could result in any claim being asserted with respect
to any such Taxes. There is no action, dispute, suit, proceeding, investigation
or audit pending or threatened against the Company in respect of any Taxes.
6
<PAGE>
3.10 TITLE TO ASSETS. The assets of the Company are free and clear of all
Liens except as expressly described in Schedule 3.10.
3.11 RIGHT TO PREMISES; CONDITION OF THE PROPERTY AND PREMISES. Company
(i) has valid and enforceable leases for the premises in which the offices of
the Practice are located ("Premises") and (ii) there are no unpaid rental
payments or any other applicable amounts now due and payable by Company with
respect to the Premises or any uncured default by Company, and no governmental
condemnation proceedings are threatened or in process. To the best knowledge of
the Sellers, all of Company's fixtures, equipment and furniture in the Premises
are (a) in good repair and operating condition, (b) free from any material
defects, except for normal wear and tear, and (c) fit for the purposes for which
they are being used.
3.12 INVENTORY. On the Closing Date, the inventory set forth in the
Company Financial Statements, and otherwise reflected in the Company books and
records, shall consist of items of a quality and quantity normally maintained on
hand by Company and in compliance with all applicable laws and regulations.
3.13 CONTRACTS.
(a) Sellers have furnished to Purchaser, for Purchaser's inspection
and review, true and complete copies of all contracts, agreements, leases,
documents, written understandings, instruments, loan documents and security
agreements to which the Company is a party, and any and all other documents
concerning any Liens against the Stock or any asset of the Company, in each case
in excess of $10,000.
(b) There are no guarantees by the Company of any obligations or
indebtedness whatsoever of the Sellers, or any third person or entity.
(c) The Company and Sellers are not parties to, or bound by, any
contract which in any manner limits or restricts them from competing in any line
of business or carrying on or expanding the nature or geographical scope of
their business.
(d) The contracts of Company referred to in Section 3.13(a) are
valid, binding and enforceable obligations and in full force and effect and have
been entered into in the ordinary course of business or otherwise, consistent
with past practice, except as enforceability may be restricted, limited or
delayed by applicable bankruptcy, insolvency, fraudulent conveyance, or other
laws affecting creditor's rights generally and except as enforceability is
subject to general principles of equity. Company and Sellers have not received
any notice from any other party to a contract of the termination or threatened
termination, thereof, nor any material claim, dispute or controversy with
respect thereto, and to Seller's best knowledge, no other event has occurred
which would allow any other party to terminate any such contract of Company, nor
have Sellers received notice of any asserted claim of default, breach or
violation of, any such contract which failure of performance or default would be
materially adverse to the business, condition (financial or otherwise),
operations, results of operations, net worth, working capital, assets, reserves
or prospects of Company, taken as a whole, except as set forth in Schedule 3.13.
7
<PAGE>
(e) Schedule 3.13(e) attached hereto contains a true and complete
list of all leases pursuant to which the Company leased or leases any real
property interest (the "Leases"), whether as lessor or lessee. The Company
enjoys peaceful and undisturbed possession under all of the Leases under which
they are lessee, and none of the Leases is in default in any material respect.
3.14 POWERS OF ATTORNEY. There are no outstanding powers of attorney
executed on behalf of Company or Sellers, except as set forth in Schedule 3.14.
3.15 NO LITIGATION AND INSURANCE. Except as set forth in Schedule 3.15,
there is no pending litigation, judgment, appeal, investigation or asserted
claim ("Action") or, to Company's and Sellers' best knowledge, any threatened
Action relating to the Company or employees thereof, and Sellers are not aware
of any facts or circumstances existing as of July 15, 1997, which could serve as
a basis for an Action against or affecting the Company or which seeks or
threatens to restrain, enjoin or prohibit or to obtain damages from the Company.
Except as set forth in Schedule 3.15(a), neither Company nor Sellers are subject
to any judgment, decree, order or writ of any court, agency, authority,
arbitration panel or other tribunal which would materially and adversely affect
the Company. The Company has maintained with financially responsible insurance
companies insurance in such amounts and against such risks and losses as is
customary for persons or companies engaged in its business, including insurance
against personal injury, property damage to third persons and medical
malpractice. Set forth in Schedule 3.15(b) is a list of all policies of
liability, property damage, fire, workers' compensation, employer's liability,
malpractice, casualty or other forms of insurance owned or carried by the
Company and the names of insurance agents and/or brokers providing this
insurance coverage, and of all performance bonds and letters of credit securing
any of their obligations or maintained in the conduct of their businesses. All
such insurance is in full force and effect on the date hereof as evidenced by
certificates of insurance for each insurance policy listed in Schedule 3.15(b),
of which true and complete copies dated no more than twenty (20) business days
prior to the date of Closing shall be delivered to Purchaser at the Closing.
Neither the Company nor the Sellers have received any notification from any
insurance carrier denying or disputing any claim made on any policies, denying
or disputing any coverage for any claim, denying or disputing the amount of any
claim, or regarding the possible cancellation or material limitation of any such
policies, all of which will be in effect at the Closing Date unless provision
has been made for the cancellation thereof as of the Closing Date with the
consent of the Purchaser.
3.16 VIOLATION OF LAWS. To the best knowledge of the Sellers, neither
Company nor Sellers are in violation of any law, rule, regulation or
administrative or judicial order pertaining to the Practice and which is
material to the conduct of the Practice (including, without limitation,
licensing, health care, drug enforcement, securities, zoning, building,
environmental, immigration, civil rights and occupational health and safety
laws, regulations, ordinances and codes) and there is no law, rule, regulation
or administrative or judicial order that any of the transactions contemplated by
this Stock Purchase Agreement would violate where such violation would have a
materially adverse effect on the Company. The Company has not been charged
with, threatened with, nor is under any investigation with respect to, any
charge concerning any violation of any provision of any such law, rule,
regulation or order.
8
<PAGE>
3.17 NO BROKERS OR FINDERS. Neither Company nor Sellers have incurred any
liability to any broker, finder or agent for any brokerage fees, finder's fees
or commissions with respect to the transactions contemplated by this Stock
Purchase Agreement, and if either Company or Sellers incurred any such
liability, such liability shall be and remain the sole responsibility of the
Sellers, and Company and Sellers shall indemnify, defend and hold Purchaser
harmless from and against any and all liabilities, losses, damages, claims,
causes of action, costs and expenses (including, without limitation, reasonable
attorneys' fees), arising out of or relating to such liability.
3.18 NO BANKRUPTCY PROCEEDINGS. Neither Company nor any Seller on behalf
of Company has (a) made a general assignment for the benefit of creditors, (b)
filed any voluntary petition in bankruptcy or suffered the filing of an
involuntary petition by its creditors, (c) suffered the appointment of a
receiver to take possession of all or substantially all of its assets, (d)
suffered the attachment or other judicial seizure of all, or substantially all,
of its assets, (e) admitted in writing its inability to pay its debts as they
come due, or (f) made an offer of settlement, extension or compromise to its
creditors generally.
3.19 LICENSURE AND REIMBURSEMENT. Sellers and Company represent and
warrant that:
(a) Each of Sellers' and Company's (including the Partnership)
employee-physicians is duly licensed to practice medicine in the State of
California; and Company has all licenses, permits, approvals, authorizations,
consents, franchises and orders of all governmental and regulatory authorities
(collectively, the "Permits") necessary for the conduct of its business as
presently conducted. There is no proceeding pending or threatened that disputes
the validity of any such Permit or, to the best knowledge of Sellers, that may
result in the revocation, cancellation or suspension or any material adverse
modification of any of such Permits.
(b) Company is participating as a provider in the Medicare and
Medi-Cal programs and in other governmental health care payment programs, and
has been and will continue to be authorized to receive reimbursement from
such programs for fees and charges incurred for their services by eligible
patients. Neither Company nor Sellers have received any notice that any such
participation or authorization has been or is threatened to be terminated or,
in any material respect, restricted, and neither Company nor Sellers know of
any basis for any such termination or restriction. There is no federal or
state investigation pending or, to the best of Company's and Seller's
knowledge, contemplated, that will have a materially adverse impact upon
Company's reimbursement status or on any employed Physician's license to
practice medicine in California. Neither Company nor Sellers have received
any notice of action nor, to the best of their knowledge, is there any
threatened or likely action by the Medicare or Medi-Cal program or any
carrier, to recoup or challenge any Medicare or Medi-Cal reimbursement that
Company or Sellers have received or for which any of them currently has a
claim pending, for services rendered at or in connection with the Practice,
except in each case adjustments to billed amounts to comply with HCFA
reimbursement rates or other applicable reimbursement schedules.
(c) To the best knowledge of Sellers, all billing practices by
Company to all third party payors, including but not limited to the Medicare and
Medi-Cal programs and private insurance companies, have been correct and in
compliance with all applicable regulations and policies of all
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such third party payors, and Company has not billed for or received any
payment or reimbursement in excess of amounts permitted by law.
(d) To the best knowledge of Sellers, neither Company, its
directors, officers, employees, affiliates or agents, nor Sellers or their
affiliates or agents on behalf of the Company, have directly or indirectly (i)
offered to pay or solicited any remuneration, in cash or in kind, to, or made
any financial arrangements with, any past or present customers, past or present
suppliers, contractors, third parties, or third party payors of Company in order
to obtain business or payments from such persons, not in the ordinary and lawful
course of business; (ii) given or received, or agreed to give or receive, or are
aware that there has been made or that there is any agreement to make or
receive, any gift or gratuitous payment of any kind, nature or description
(whether in money, property or services) to any customer or potential customer,
supplier or potential supplier, contractors, third party payor or any other
person not in the ordinary and lawful course of business; (iii) made or agreed
to make, or are aware that there has been made or that there is any agreement to
make, any contribution, payment or gift of funds or property to, or for the
private use of, any governmental official, employee or agent where either the
contribution, payment or gift or the purpose of such contribution, payment or
gift is or was illegal under the laws of the United States or under the laws of
any state thereof or any other jurisdiction under which such payment,
contribution or gift was made; (iv) established or maintained any unrecorded
fund or asset for any purpose or made any false or artificial entries on any of
its books or records for any reason; or (v) made or agreed to make or are aware
that there has been made or that there is any intention to make, any payment to
any person with the intention or understanding that any part of such payment
would be used for any purpose other than that described in the documents
supporting such payment.
(e) To the best knowledge of Sellers, neither Company, its
directors, officers, employees or agents, nor Sellers are or during the past
twenty-four months have been, a party to any contract, lease, agreement or
arrangement, including but not limited to any joint venture or consulting
agreement with any physician, hospital, nursing facility, home health agency or
other person who is in a position to make and did make, receive or influence
referrals to or from Company, provide services, lease space, lease equipment or
engage in any other venture or activity in any manner which was not in
compliance with applicable law.
3.20 EMPLOYEES AND EMPLOYEE BENEFITS. Schedule 3.20 contains a complete
list of the names, positions and current annual salaries or wage rates and
all bonus and other compensation arrangements of any kind, of all full-time
and part-time employees, directors or officers of the Company (including
physicians employed by the Partnership), specifying their names, titles, full
or part-time status and aggregate compensation payable to each, by means of
wages, salaries, bonuses, or otherwise and all salary increases and/or
bonuses payable to any employee between the date of this Stock Purchase
Agreement and the Closing. Sellers shall fully accrue, prior to the Closing
(assuming the Closing occurs on the date set forth in Section 7.1) with
respect to each person listed on Schedule 3.20, the aggregate amount of: (a)
accrued vacation and sick leave pay, (b) employer contributions accrued or
committed under each pension, profit-sharing, medical, dental, life insurance
or retirement plan or similar arrangement (provided that, with the consent of
Purchaser, which shall be held harmless from liability by Sellers, these
amounts may be paid on the date on which such contributions would be due in
the absence of this Stock Purchase Agreement), and (c)
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any other accrued benefits to which each person listed on Schedule 3.20 or
such persons who have terminated as of the Closing Date may be entitled, as
accrued up to and including the Closing. Company was not a party to or bound
by any collective bargaining agreement or any other agreement with a labor
union and to the best knowledge of Sellers, there has been no effort by any
labor union during the twenty-four (24) months prior to the Closing to
organize any employees of Company (or the Partnership) into one or more
collective bargaining units. There has been no strike, walkout or work
stoppage involving any of the employees of Company during the twenty-four
(24) months prior to the date of Closing. There is not pending or, to the
best knowledge of Sellers, threatened, any labor dispute, strike or work
stoppage which affects or which may affect Company or which may interfere
with its continued operation in any manner.
3.21 EMPLOYEE ENTITLEMENTS. Except as described on Schedule 3.21 Company
does not maintain, contribute to or sponsor, and has not at any time maintained,
contributed to or sponsored: (a) any non-qualified deferred compensation or
retirement plans or arrangements, (b) any qualified defined contribution
retirement plans or arrangements, (c) any qualified defined benefit pension
plan, (d) any other profit-sharing, deferred compensation, bonus, stock option,
stock purchase, vacation pay, holiday pay, employee benefit, health, welfare,
medical, disability, life insurance, stock, stock purchase or stock option plan,
program, agreement, arrangement or policy under which former employees or
beneficiaries are entitled or current employees will be entitled following
termination of employment, to medical, health or life insurance or other
benefits other than pursuant to benefit continuation rights granted by state or
federal law (collectively, "Benefit Plans"), or (e) any summary description of
the foregoing that has been distributed to employees. True and complete copies
of each Benefit Plan, related trust agreements or annuity contracts (or any
other funding instruments), the most recent determination letter issued by the
Internal Revenue Service (the "IRS") with respect to each Benefit Plan that is a
"pension plan" as defined in Section 3 of ERISA, Annual Reports on Form 5500
Series required to be filed with any governmental agency for any such Benefit
Plan for the two (2) most recent plan years and all actuarial reports prepared
for the last three (3) years of each Benefit Plan that is a pension plan, other
than an "individual account plan," have heretofore been delivered by Sellers to
Purchaser. Prior to the Closing, Company will have adopted a resolution of its
board of directors and shareholders terminating or suspending Company's Benefit
Plan and suspending payments thereto, pending confirmation of such termination
or suspension, unless Company and Purchaser arrive at an understanding to enable
participants in Company's Benefit Plan to become participants in Purchaser's
Benefit Plan.
3.22 CONFIDENTIALITY. To the best knowledge of Sellers, the Company has
maintained the confidentiality of all business and patient records as required
by and in conformance with all applicable state and federal laws and regulations
and Company has not transferred any patient records to any individual or entity
against the request of any patient regarding transferring his or her patient
information or records.
3.23 INSPECTIONS. Except as described on Schedule 3.23, (a) neither the
Company nor the Practice have been inspected by any governmental agency during
the five (5) years prior to the date hereof; and (b) all matters which were
noted by any such governmental agency as requiring correction or modifications
which were requested or recommended, have been corrected so that the Company, is
to the best knowledge of Sellers, in compliance. In addition, Schedule 3.23
shows the
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present status of each such noted matter in the event the Company has not
taken or complied with any corrective Action.
3.24 ENVIRONMENTAL CONDITIONS. To the best knowledge of Sellers and the
Company there are no (a) material defects in the physical condition of the
Premises; (b) unremediated material incidents of non-compliance regarding the
Premises with zoning, land use, building, safety and fire laws; and
(c) unremediated material incidents of non-compliance of the Premises with
respect to applicable environmental laws, rules and regulations. To the best
knowledge of Sellers and except as set forth in Schedule 3.24, no "Hazardous
Substances" (as defined below) have been released on any part of the Premises
and no soil, air, surface water, ground water or structural contamination exists
on any of the Premises. As used herein "Hazardous Substances" shall include (i)
all of those substances included within the definitions of "hazardous
substances", "hazardous materials", "toxic substances", or "solid waste" in (a)
the Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended, 42 U.S.C. Section 9601 ET SEQ. ("CERCLA"), as amended,
(b) the Resource Conservation and Recovery Act of 1976, 42 U.S.C. Section 6901
ET SEQ. ("RCRA"), and (c) the Hazardous Materials Transportation Act, 49 U.S.C.
Appx. Section 1801, ET SEQ., and in the regulations promulgated pursuant to
said laws or any amendment thereto or replacement thereof; (ii) all of those
substances listed in the United States Department of Transportation Table (49
CFR 172.101 and amendments thereto) or by the Environmental Protection Agency
(40 CFR Part 302 and amendments thereto) as hazardous substances; (iii) all of
those substances defined as "hazardous wastes" in Sections 25100 ET SEQ. of the
California Health & Safety Code, or as "hazardous substances" in Sections 25316
and 25281 of the California Health & Safety Code or Section 736(f)(3) of the
California Code of Civil Procedure, or as "waste," "pollution," or
"contamination" in Sections 13000 ET SEQ. of the California Water Code, and in
the regulations promulgated pursuant to said laws or any replacement thereof;
and (iv) all other substances, materials and wastes which are regulated under
applicable local, state or federal law, or which are classified as hazardous or
toxic under federal, state, or local laws or regulations, or classified or
identified as posing a threat to human health or the environment, including
without limitation federal laws and regulations and California law set forth
above, and any radioactive wastes or substances. The term "Hazardous
Substances" does not include consumer products which are used in accordance with
their intended use.
3.25 PRIMARY CARE PHYSICIANS. No primary care physician employed by the
Company or the Partnership, on a full-time or part-time basis, has informed
Company or Sellers of his or her intention to terminate such employment, and
Sellers have no actual knowledge, directly or indirectly, that any such
physician intends to terminate such employment.
3.26 BANK ACCOUNTS; SECURITIES. Schedule 3.26 contains a true, correct and
complete listing of all bank, brokerage, checking, depositary and similar
accounts, lockboxes and safe deposit boxes maintained by the Company as of the
date of Closing and at any time during the twelve (12) month period preceding
the date of Closing; this listing includes with respect to each such account (a)
the account number, (b) the nature or purpose of the account, (c) the name and
address of the institution at which the account is maintained, and (d) the names
of the authorized signatories on the account. Schedule 3.26 also contains a
complete and accurate list of all investments in and securities of other
corporations or businesses owned by the Company, together with a description of
any restrictions affecting the transfer thereof.
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3.27 SUBSIDIARIES. Except as described in Schedule 3.27, the Company has
no subsidiaries or affiliates and does not directly or indirectly own either an
equity or debt interest in any corporation, partnership, limited liability
company, business trust, joint venture, joint stock company, association or
other business entity except for the Sellers' interest in the Partnership.
3.28 ARTICLES OF INCORPORATION AND BYLAWS. Copies of the Articles of
Incorporation and the Bylaws of the Company as amended to the date hereof,
certified by its Secretary as well as copies of the minute books and stock
records of the Company which have been delivered to Purchaser are true and
complete copies of such instruments as of the date hereof and as of the Closing
Date are and will be in full force and effect on such dates.
3.29 INTELLECTUAL PROPERTY. Schedule 3.29 sets forth a true and complete
list of all patents, trademarks, trade names or service marks that the Company
is licensed under or uses. To the best knowledge of Sellers, none of the
Company's business activities infringes upon the patent, trademark, trade name
or service mark rights of any third party.
3.30 SECURITIES LAW COMPLIANCE. Sellers represent and warrant that the
sale of the Stock in the manner contemplated hereby and pursuant hereto, is (a)
exempt from the registration requirements of the Securities Act of 1933, as
amended, and (b) exempt from qualification under the California Corporate
Securities Law of 1968, as amended.
3.31 NO UNTRUE STATEMENTS. Sellers represent and warrant that (a) neither
Company nor Sellers have made any materially untrue statement or representation
in connection with this Stock Purchase Agreement, and (b) neither Company nor
Sellers have failed to state or disclose any material fact in connection with
the transactions contemplated by this Stock Purchase Agreement which under the
circumstances, is required to be disclosed.
4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF PURCHASER:
Purchaser hereby represents and warrants to Sellers that:
4.1 ORGANIZATION. Purchaser is a California professional corporation
validly existing and in good standing under the laws of the State of California.
All of Purchaser's outstanding shares of capital stock are owned by a single
registered holder who is duly licensed to practice medicine in the State of
California.
4.2 AUTHORITY. Purchaser has the corporate power and authority to enter
into this Stock Purchase Agreement and to consummate the transactions
contemplated hereby. All action on the part of Purchaser necessary for the
authorization, execution, delivery and performance of this Stock Purchase
Agreement and the consummation of the transactions contemplated hereby has been
or will be taken prior to the Closing Date, and this Stock Purchase Agreement
(including exhibits, schedules and the ancillary agreements) constitutes the
legal, valid and binding obligation of Purchaser, enforceable in accordance with
its terms, except as enforceability may be restricted, limited or delayed by
applicable bankruptcy, insolvency, fraudulent conveyance, or other laws
affecting creditor's rights generally and except as enforceability is subject to
general principles of equity.
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4.3 NO BROKERS OR FINDERS. Except for Legend Capital Corporation,
Purchaser has not incurred any liability to any broker, finder or agent for any
brokerage fees, finder's fees or commissions with respect to the transactions
contemplated by this Stock Purchase Agreement, and if Purchaser incurred any
such liability, such liability shall be and remain the sole responsibility of
Purchaser, and Purchaser shall indemnify, defend and hold Sellers harmless from
and against any and all liabilities, losses, damages, claims, causes of action,
costs and expenses (including, without limitation, reasonable attorneys' fees),
arising out of or relating to such liability.
4.4 NO VIOLATION OF OTHER OBLIGATIONS. Neither this Stock Purchase
Agreement nor any of the transactions contemplated hereunder violates or shall
violate any lease, contract, document, understanding, agreement or instrument to
which Purchaser is a party or by which it may be bound, or any lease, contract,
document, understanding, agreement or instrument affecting Purchaser. Neither
the execution and delivery of this Stock Purchase Agreement nor the consummation
of the transactions contemplated hereby will conflict with or violate any
provision of the articles of incorporation or bylaws of the Purchaser or of any
law, ordinance or regulation or any decree or order of any court or
administrative or other governmental body which is either applicable to, binding
upon or enforceable against Purchaser.
4.5 NO CONSENT REQUIRED. Except for the consent of Imperial Bank, a
California banking corporation ("Imperial Bank"), neither the execution of this
Stock Purchase Agreement by Purchaser, nor the performance by Purchaser of its
obligations under this Stock Purchase Agreement, requires the consent of any
third party that will not have been obtained and delivered to Sellers prior to
the Closing Date.
4.6 NO BANKRUPTCY PROCEEDINGS. Purchaser has not (a) made a general
assignment for the benefit of creditors, (b) filed any voluntary proceeding in
bankruptcy or suffered the filing of any involuntary petition by Purchaser's
creditors, (c) suffered the appointment of a receiver to take possession of all
or substantially all of the assets, properties or business of Purchaser,
(d) suffered the attachment or other judicial seizure of all or substantially
all of the assets, properties or business of Purchaser, (e) admitted in writing
its inability to pay its debts as such debts become due, or (f) made an offer of
settlement, extension or compromise to its creditors generally.
4.7 NO UNTRUE STATEMENTS. To the best of Purchaser's knowledge, (a)
Purchaser has made no untrue statement or representation in connection with this
Stock Purchase Agreement, and (b) Purchaser has not failed to state or disclose
any material fact in connection with the transactions contemplated by this Stock
Purchase Agreement.
4.8 PERFORMANCE. Purchaser shall perform its obligations under this Stock
Purchase Agreement, including the ancillary agreements and the forms of which
are attached hereto as exhibits.
4.9 NO INTENT TO DISTRIBUTE. Purchaser is acquiring the Stock for its own
account and not with a view toward sale or other distribution thereof.
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4.10 NO LITIGATION AND INSURANCE. Except as set forth in Schedule 4.10(a),
there is no pending Action relating to the Purchaser or employees thereof, and
Purchaser is not aware of any facts or circumstances existing as of
July 15, 1997, which could serve as a basis for an Action against or affecting
the Purchaser or which seeks or threatens to restrain, enjoin or prohibit or to
obtain damages from the Purchaser. Purchaser is not subject to any judgment,
decree, order or writ of any court, agency, authority, arbitration panel or
other tribunal which would materially and adversely affect the Purchaser.
Purchaser has maintained with financially responsible insurance companies
insurance in such amounts and against such risks and losses as is customary for
persons or companies engaged in its business, including insurance against
personal injury, property damage to third persons and medical malpractice. Set
forth in Schedule 4.10(b) is a list of all policies of liability, property
damage, fire, workers' compensation, employer's liability, malpractice, casualty
or other forms of insurance owned or carried by the Purchaser and the names of
insurance agents and/or brokers providing this insurance coverage, and of all
performance bonds and letters of credit securing any of their obligations or
maintained in the conduct of their businesses. All such insurance is in full
force and effect on the date hereof as evidenced by certificates of insurance
for each insurance policy listed in Schedule 4.10(b), of which true and complete
copies dated no more than twenty (20) business days prior to the date of Closing
shall be delivered to Seller at the Closing. The Purchaser has not received any
notification from any insurance carrier denying or disputing any claim made on
any policies, denying or disputing any coverage for any claim, denying or
disputing the amount of any claim, or regarding the possible cancellation or
material limitation of any such policies, all of which will be in effect at the
Closing Date unless provision has been made for the cancellation thereof as of
the Closing Date with the consent of the Sellers.
4.11 VIOLATION OF LAWS. To the best knowledge of Purchaser, Purchaser is
not in violation of any law, rule, regulation or administrative or judicial
order pertaining to the Purchaser's business and which is material to the
conduct of the Purchaser's business (including, without limitation, licensing,
health care, drug enforcement, securities, zoning, building, environmental,
immigration, civil rights and occupational health and safety laws, regulations,
ordinances and codes) and there is no law, rule, regulation or administrative or
judicial order that any of the transactions contemplated by this Stock Purchase
Agreement would violate where such violation would have a materially adverse
effect on the Purchaser. Purchaser has not been charged with, threatened with,
nor is under any investigation with respect to, any charge concerning any
violation of any provision of any such law, rule, regulation or order.
4.12 LICENSURE AND REIMBURSEMENT. Purchaser represents and warrants that:
(a) Each of Purchaser's employee-physicians is duly licensed to
practice medicine in the State of California; and Purchaser has all Permits
necessary for the conduct of its business as presently conducted. There is no
proceeding pending or threatened that disputes the validity of any such Permit
or, to the best knowledge of Purchaser, that may result in the revocation,
cancellation or suspension or any material adverse modification of any of such
Permits.
(b) Purchaser is participating as a provider in the Medicare and
Medi-Cal programs and in other governmental health care payment programs, and
has been and will continue to be authorized to receive reimbursement from such
programs for fees and charges incurred for their
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services by eligible patients. Purchaser has not received any notice that any
such participation or authorization has been or is threatened to be
terminated or, in any material respect, restricted, and Purchaser does not
know of any basis for any such termination or restriction. There is no
federal or state investigation pending or, to the best of Purchaser's
knowledge, contemplated, that will have a materially adverse impact upon
Purchaser's reimbursement status or on any employed physician's license to
practice medicine in California. Purchaser has not received any notice of
action nor, to the best of its knowledge, is there any threatened or likely
action by the Medicare or Medi-Cal program or any carrier, to recoup or
challenge any Medicare or Medi-Cal reimbursement that Purchaser has received
or for which any of them currently has a claim pending, for services rendered
at or in connection with Purchaser's business, except in each case
adjustments to billed amounts to comply with HCFA reimbursement rates or
other applicable reimbursement schedules.
(c) To the best knowledge of Purchaser, all billing practices by
Purchaser to all third party payors, including but not limited to the Medicare
and Medi-Cal programs and private insurance companies, have been correct and in
compliance with all applicable regulations and policies of all such third party
payors, and Purchaser has not billed for or received any payment or
reimbursement in excess of amounts permitted by law.
(d) To the best knowledge of Purchaser, neither Purchaser, its
directors, officers, employees, affiliates or agents have directly or indirectly
(i) offered to pay or solicited any remuneration, in cash or in kind, to, or
made any financial arrangements with, any past or present customers, past or
present suppliers, contractors, third parties, or third party payors of
Purchaser in order to obtain business or payments from such persons, not in the
ordinary and lawful course of business; (ii) given or received, or agreed to
give or receive, or are aware that there has been made or that there is any
agreement to make or receive, any gift or gratuitous payment of any kind, nature
or description (whether in money, property or services) to any customer or
potential customer, supplier or potential supplier, contractors, third party
payor or any other person not in the ordinary and lawful course of business;
(iii) made or agreed to make, or are aware that there has been made or that
there is any agreement to make, any contribution, payment or gift of funds or
property to, or for the private use of, any governmental official, employee or
agent where either the contribution, payment or gift or the purpose of such
contribution, payment or gift is or was illegal under the laws of the United
States or under the laws of any state thereof or any other jurisdiction under
which such payment, contribution or gift was made; (iv) established or
maintained any unrecorded fund or asset for any purpose or made any false or
artificial entries on any of its books or records for any reason; or (v) made or
agreed to make or are aware that there has been made or that there is any
intention to make, any payment to any person with the intention or understanding
that any part of such payment would be used for any purpose other than that
described in the documents supporting such payment.
(e) To the best knowledge of Purchaser, none of Purchaser's
directors, officers, employees or agents are or during the past twenty-four
months have been, a party to any contract, lease, agreement or arrangement,
including but not limited to any joint venture or consulting agreement with any
physician, hospital, nursing facility, home health agency or other person who is
in a position to make and did make, receive or influence referrals to or from
Purchaser, provide
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services, lease space, lease equipment or engage in any other venture or
activity in any manner which was not in compliance with applicable law.
4.13 INSPECTIONS. Except as set forth in Schedule 4.13, (a) the Purchaser
has not been inspected by any governmental agency during the five (5) years
prior to the date hereof; and (b) all matters which were noted by any such
governmental agency as requiring correction or modifications which were
requested or recommended, have been corrected so that the Purchaser is, to the
best knowledge of the Purchaser, in compliance. In addition, Schedule 4.13 sets
forth the present status of each such noted matter in the event the Purchaser
has not taken or complied with any corrective Action.
5. OTHER COVENANTS:
5.1 LEASES. At the Closing, Sierra Medical Management, Inc. or an
affiliate shall enter into five (5) year commercial leases ("Amended Leases")
with the Sellers for the three (3) premises at which Company currently conducts
its practice in the cities of Palmdale and Lancaster, in the form of such
Amended Leases set forth in Exhibit 5.1 attached hereto.
5.2 GUARANTY OF NOTES. Purchaser agrees to cause Prospect Medical
Holdings, Inc. to execute and deliver a guaranty of payment of the Notes at the
Closing in the form of Exhibit 5.2 hereto.
5.3 AUDIT COSTS. The cost of the audit related to the Company Financial
Statements as described in Section 3.5 shall be borne exclusively by Purchaser.
5.4 SIERRA MEDICAL GROUP PARTNERSHIP INTERESTS. Prior to the Closing, the
interests of the Sellers and Sung Yang, M.D., in the Partnership will be
acquired by the Company pursuant to assignments of Partnership interests and
related documents, collectively in the form of Exhibit 5.4 attached hereto.
Sellers shall use their best efforts to cause each employee of the Partnership
to assign such employee's employment agreement with the Partnership to the
Company, effective as of the Closing.
5.5 SELLERS' ACCESS TO COMPANY RECORDS. Following the Closing, Sellers
shall be granted access during business hours to Company's books and records to
the extent necessary to prepare Sellers' tax returns.
5.6 EXECUTION OF ASSIGNABLE OPTION AGREEMENT. Immediately following the
Closing, Company and Sierra Medical Management, Inc. shall enter into that
Assignable Option Agreement in the form of that attached hereto as Exhibit 5.6.
5.7 MERGER. The parties agree to use their best efforts to cause,
concurrent with the Closing, the Merger of Sierra Medical Management, Inc. with
and into Prospect Acquisition Corporation, Inc.
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5.8 TERMINATION OF CROSS PURCHASE AGREEMENT. Prior to, or concurrent
with, the Closing, Sellers shall terminate that certain Cross Purchase Agreement
between the shareholders of Sierra Primary Care Associates d/b/a Sierra Medical
Group, dated as of July 15, 1992.
5.9 COMPANY'S EMPLOYEES; PRIOR SERVICE CREDIT. Following the Closing,
Purchaser shall, to the extent possible, provide Company's employees with prior
service credit for any Benefit Plans maintained by Purchaser or Prospect Medical
Holdings in which such employees would otherwise be entitled to participate.
6. PURCHASERS' ACCESS TO RECORDS; CONFIDENTIAL INFORMATION; PUBLICITY:
6.1 ACCESS TO RECORDS. Between the date of the execution hereof and the
Closing, Purchaser, its appraisers, accountants, consultants, counsel and other
representatives, shall have access during or after normal business hours, upon
reasonable notice, to the tax returns, books, records, licenses, certifications,
contracts, agreements and all other relevant documentation of Company. Neither
Purchaser nor its representatives shall disclose the contents of any of said
materials that Purchaser has discovered in the course of its due diligence ("Due
Diligence") to any third party without prior written consent of Company, except:
(a) as required by law, including, but not limited to, civil litigation arising
out of this Stock Purchase Agreement or the transactions contemplated hereunder;
(b) to the extent covered by the Memorandum of Intent by and between Purchaser
and Sellers, but only with respect to information contained in any such
materials that were delivered by Company or Sellers and in Purchaser's
possession prior to the date hereof; and (c) information contained in any such
materials that is or becomes generally available to the public other than as a
result of a disclosure by Purchaser or its agents or employees in violation of
this Section through a third party's breach of its agreement with Company or
Sellers to maintain the confidentiality of such materials (collectively, the
"Exceptions").
6.2 CONFIDENTIAL INFORMATION. Each of the parties hereto agrees that at
all times prior to or following the Closing Date it shall not use for its or
their benefit or for any third party's benefit, any confidential information or
trade secrets of any other party or any "Affiliate" (as defined below), or of
any successor or assignee of such party or any Affiliate, and shall not disclose
or cause to be disclosed to any third party any confidential information or
trade secrets of any other party, any Affiliate, or any of their respective
successors or assigns at any time prior to or after the Closing Date. The
parties shall maintain and keep confidential the terms of this Stock Purchase
Agreement and the negotiations preceding this Stock Purchase Agreement, except
as may be required by applicable law. As used herein, "Affiliate" shall mean
any affiliated or related organization of a party to this Agreement.
6.3 PUBLICITY. No party shall, at any time on or after the date hereof
through the Closing Date, issue any publicity or written or oral statement, or
otherwise disclose the existence of this Stock Purchase Agreement or any of the
terms or conditions hereof, or disclose the contemplation, implementation or
consummation of any of the transactions intended hereby (other than to its
directors, officers, employees, attorneys, financial advisors and other agents
and representatives, as necessary in order to negotiate, evaluate, approve and
consummate the transactions hereunder),
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without the prior written consent of Purchaser (in the case of Sellers) or
Sellers (in the case of Purchaser), except in accordance with any of the
Exceptions as set forth in Section 6.1, and except as reasonably required of
Purchaser by any applicable federal or state securities law (or agency's)
disclosure requirements. In the case of any written publicity or statement,
the applicable party with the above right of consent shall have the right to
approve in advance the specific language of any such writing, provided that
such approval may not be unreasonably withheld in the event of occurrence of
any of the Exceptions.
7. CLOSING; CONDITIONS TO OBLIGATIONS TO CLOSE:
7.1 CLOSING. The transactions contemplated by this Stock Purchase
Agreement shall be consummated at the "Closing." The Closing shall take place
at Miller & Holguin, 1801 Century Park East, Seventh Floor, Los Angeles,
California 90067, or at such other place as may be designated by Sellers and
Purchaser, on or before September 19, 1997 ("Closing Date"), or at such other
time as is mutually agreed upon by the parties.
7.2 DELIVERIES BY SELLERS. At the Closing, Sellers shall execute (as to
documents calling for execution) and deliver to Purchaser the following:
(a) Stock certificates representing all of the issued and outstanding
shares of the Company, duly executed for transfer to Purchaser;
(b) A UCC search report dated not more than five (5) days before the
Closing Date issued by the California Secretary of State which shows that there
are no filings under the Uniform Commercial Code on file with such Secretary of
State which name Company or Sellers as a debtor or otherwise indicating any lien
on the Stock or on the assets of the Company, other than those filings
specifically approved by Purchaser in writing.
(c) A good standing certificate dated not more than two (2) days
before the Closing issued by the California Secretary of State which shows
Company is in good standing with such agency.
(d) An officer's certificate signed by Company's president and its
secretary, and a certificate signed by Sellers, that all of Seller's
representations and warranties in this Stock Purchase Agreement are true,
correct and complete, and that all covenants and conditions specified in this
Stock Purchase Agreement to be fulfilled by Company have been fulfilled, and
that the Articles of Incorporation and the Bylaws of Company previously provided
to Purchaser are true and complete copies, as currently in effect, in the forms
attached hereto as Exhibit 7.2(d).
(e) Non-Competition Agreement of Sellers in the form set forth in
Exhibit 7.2(e) attached hereto.
(f) An Employment Agreement between Company and each of Sellers in
the form of Exhibits 7.2(f)(i) and 7.2(f)(ii) attached hereto.
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(g) True and complete minute books and the stock register of the
Company.
(h) True and complete copies of all contracts described in Section
3.13.
(i) A true and complete copy of each insurance policy listed in
Exhibit 3.15(b) hereto.
(j) An opinion of counsel for Sellers, dated as of the Closing Date
("Sellers Opinion") in the form of Exhibit 7.2(j).
(k) An officers certificate setting forth a copy of the resolutions
adopted by Company's Board of Directors evidencing the intent to terminate all
Benefit Plans (as defined in Section 3.20) as of the Closing.
(l) An officers certificate setting forth a copy of the resolutions
adopted by Company's Board of Directors authorizing the terms of this Stock
Purchase Agreement, the transactions contemplated herein and the Closing and
certifying as to the authority of the officers executing this Stock Purchase
Agreement and any documents to be delivered by Purchaser at the Closing.
(m) Amendments to Company's Articles of Incorporation and Bylaws
allowing for the ownership of the Company's stock by a professional corporation.
(n) Executed copies of the Amended Leases.
(o) The audited Company Financial Statements.
(p) Such other customary instruments, documents and certificates in
forms reasonably satisfactory to Purchaser and Sellers as shall be necessary to
carry out the intent and effectuate the purposes of this Stock Purchase
Agreement and sufficient to vest in Purchaser good title to the Stock, free and
clear of all Liens.
7.3 DELIVERIES BY PURCHASER. At the Closing, Purchaser shall deliver to
Sellers the following:
(a) Payment of the cash portion of the Purchase Price in accordance
with Section 2.3 herein and delivery of the Notes in the form of Exhibit 2.3(a).
(b) The Employment Agreements between Purchaser and Sellers the form
of such agreements as set forth in Exhibits 7.2(f)(i) and 7.2(f)(ii) attached
hereto.
(c) An officer's certificate setting forth a copy of the resolutions
adopted by the Board of Directors of Purchaser authorizing and approving the
execution and delivery of this Stock Purchase Agreement by Purchasers, the
transactions contemplated herein and the Closing and
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certifying as to the authority of the officers executing this Stock Purchase
Agreement and any documents to be delivered by Purchaser at the Closing.
(d) The Guaranty of Prospect Medical Holdings guarantying payment of
the Notes.
(e) All other instruments and documents as Sellers may reasonably
request as necessary to carry out the intent and effectuate the purposes of this
Stock Purchase Agreement.
(f) Executed copies of the Amended Leases.
(g) Written evidence provided to Purchaser that the Company's
officers and directors have resigned, and evidence that Jacob Y. Terner M.D. and
Gregg DeNicola, M.D. have been named as directors and officers of Company.
(h) Payment of $250,000 to Dr. Yang on behalf of Company.
7.4 CONDITIONS TO PURCHASER'S OBLIGATIONS. Purchaser's obligation to
consummate the transactions contemplated by this Stock Purchase Agreement is
conditioned upon satisfaction, or waiver by Purchaser in writing, of all of the
following on or before the Closing Date:
(a) The performance by Company and Sellers of all of their respective
promises and agreements under this Stock Purchase Agreement that are to be
performed as of the Closing, including but not limited to the procurement and
delivery to Purchaser of all assignments and consents referred to in Schedule
3.3.
(b) No suit, action, arbitration or legal, administrative or other
proceeding or governmental investigation shall be pending or threatened against
Purchaser, Company or Sellers seeking to restrain or enjoin the Closing, or
attempting to impose a material obligation liability on Company or Sellers, in
relation to or affecting the consummation of the transactions contemplated by
this Stock Purchase Agreement, and no decree, executive or judicial order shall
have been instituted or threatened by any governmental or regulatory authority
which challenges the validity or enforceability of this Agreement or any of its
terms, or which would have a materially adverse effect on the Company.
(c) Each of the representations and warranties of Company and
Sellers are true and correct in all material respects as of the Closing.
(d) The assets of Company have not suffered any material loss or
damage which is not substantially insured. Sellers shall have maintained
Company in the regular course of business and Company shall have paid all of its
accounts payable as they came due, and there have been no material adverse
changes in the Practice from the date of this Agreement or of the Company
Financial Statements, whichever is later.
(e) Purchaser has not exercised the cancellation option under Section
9 below.
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(f) At the Closing, the Stock shall not be subject to any Lien.
(g) Company and Sellers shall have given all notices to any third
parties, if any, made all filings, and obtained all required authorizations,
consents and approval of all health plans, and all governmental agencies in
connection with the matters described herein.
(h) Sellers shall have received and delivered to Purchaser the
Company Financial Statements.
(i) Purchaser shall have received a certificate of the Secretary or
other officer of the Company certifying as true and correct as of the Closing
Date, a copy of the Resolutions of the Board of Directors which authorize the
execution and full performance of the transaction documents and the incumbency
of their respective officers.
(j) Evidence that the certificate of merger being filed in connection
with the merger of Prospect Acquisition Corporation, Inc. and Sierra Medical
Management, Inc., a Delaware corporation, has been filed, or will be filed
concurrently with the Closing, with the Delaware Secretary of State.
7.5 CONDITIONS TO SELLER'S OBLIGATION. Seller's obligation to consummate
the transactions contemplated by this Stock Purchase Agreement is conditioned
upon satisfaction, or waiver by Company in writing, of all of the following on
or before the Closing Date:
(a) The performance by Purchaser of all of Purchaser's promises and
agreements under this Stock Purchase Agreement that are to be performed as of
Closing.
(b) No suit, action, arbitration or legal, administrative or other
proceeding or governmental investigation shall be pending or threatened against
Purchaser, Company or Sellers in relation to or affecting the consummation of
the transactions contemplated by this Stock Purchase Agreement.
(c) Purchaser's execution and delivery of Employment Agreements with
Sellers, as set forth on Exhibits 7.2(f)(i) and 7.2(f)(ii) attached hereto;
(d) Each of the representations and warranties of Purchaser is true
and correct in all material respects as of the Closing.
(e) Sellers and the Company shall have received a certificate of the
Secretary or other officer of the Purchaser certifying as true and correct the
Closing Date, a copy of the Resolutions of the Board of Directors which
authorize the execution and full performance of the transaction documents and
the incumbency of their respective officers.
(f) Evidence that the certificate of merger being filed in connection
with the merger of Prospect Acquisition Corporation, Inc. and Sierra Medical
Management, Inc., a Delaware
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corporation, has been filed, or will be filed concurrently with the Closing,
with the Delaware Secretary of State.
(g) Purchaser shall have caused Prospect Medical Holdings to issue
the Options to Sellers.
8. INDEMNIFICATION:
8.1 SELLER'S INDEMNITY. Sellers shall indemnify, defend and hold
Purchaser, its affiliates, and their directors, officers, employees, attorneys,
and agents harmless from and against any and all liabilities, losses, damages,
claims, causes of action, costs and expenses (including, without limitation,
reasonable attorneys' fees and expenses and court costs), whether known or
unknown, whether suit is instituted or not, and, if instituted, whether at any
trial and appellate level, exceeding $100,000 in the aggregate, that arise out
of, relate to or result from any default or breach by Company or Sellers of any
representation, warranty, covenant or any other material term or condition in
this Stock Purchase Agreement, including the exhibits and schedules hereto.
Without limiting the generality of the foregoing, except as provided in Section
8.5 herein, with respect to the measurement of damages, the Purchaser shall have
the right to be put in the same financial position as it would have been in had
the representations, warranties and covenants of Sellers been true and correct,
had each of the covenants of Company and Sellers been performed in full, and had
Company and Sellers paid, discharged and performed all of the liabilities and
obligations of the Sellers.
8.2 PURCHASER'S INDEMNITY. Purchaser shall indemnify, defend and hold
Sellers harmless from and against any and all liabilities, losses, damages,
claims, causes of action, costs and expenses (including, without limitation,
reasonable attorneys' fees and expenses and court costs), whether known or
unknown, whether suit is instituted or not, and, if instituted, whether at any
trial and appellate level, exceeding $100,000 in the aggregate, that arise out
of or relate to (a) any default or breach by Purchaser of any representation,
warranty, covenant or any other material term or condition in this Stock
Purchase Agreement, including the exhibits and schedules hereto, or (b) the
conduct of Company's business after the date of the Closing, including, without
limitation, any litigation hereafter arising from such conduct occurring after
the Closing Date.
8.3 INDEMNIFICATION PROCEDURE.
(a) THIRD PARTY CLAIMS.
(i) In the event any person or entity not a party to this
Agreement shall make a demand or claim or file or threaten to file or continue
any lawsuit, which demand, claim or lawsuit may result in liability to an
indemnified party under this Agreement, or in the event that a potential loss,
damage or expense comes to the attention of any party, then the party receiving
notice or aware of such event shall promptly notify the other party or parties
of the claim. Within ten (10) days after notice by such third party or by the
indemnified party (the "Notice") to an indemnifying party of such demand, claim
or lawsuit, the indemnifying party must, at its cost and expense, retain counsel
for the indemnified party to defend any such demand, claim or lawsuit, provided
that counsel who will conduct the defense of such claim or litigation will be
approved by the indemnified party
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whose approval will not unreasonably be withheld. In the event the parties
cannot agree on such counsel within 30 days of the date of the Notice, the
indemnified party may select its own counsel and provide for the payment of
such counsel and its expenses related thereto, during the pendency of such
demand, claim or lawsuit. In such cases, at the conclusion of such demand,
claim or lawsuit, the parties shall select an arbitrator in accordance with
the provisions set forth in Section 10.18 herein for the sole purpose of
determining the responsible party for payment of such fees.
(ii) The indemnified party shall have the right, at its own
expense, to participate in the defense of any suit, action or proceeding brought
against it with respect to which indemnification may be sought hereunder,
provided, that: (a) if the named parties to any such proceeding (including any
impleaded parties) include both the indemnifying party and the indemnified party
and representation of both parties by the same counsel would be inappropriate
due to actual or potential differing interests between them, (b) the employment
of counsel by such indemnified party has been authorized in writing by the
indemnifying party, or (c) the indemnifying party has not in fact employed
counsel to assume the defense of such action within a reasonable time; then, the
indemnified party shall have the right to retain its own counsel at the cost and
expense of the indemnifying party. No indemnifying party, in the defense of any
such claim or litigation, will consent to entry of any judgment or enter into
any settlement without the consent of the indemnified party. If any indemnified
party is advised by counsel chosen by it that there may be one or more legal
defenses available to such indemnified party that are different from or
additional to those available to and which have not been asserted by the
indemnifying party, the indemnifying party will not have, at the election of the
indemnified party, the right to continue the defense of such claim or action on
behalf of such indemnified party and will reimburse such indemnified party and
any person controlling such indemnified party for the reasonable fees and
expenses of any counsel retained by the indemnified party to undertake the
defense. In the event that the indemnifying party shall fail to respond within
ten (10) days after receipt of the Notice, the indemnified party may retain
counsel and conduct the defense of such demand, claim or lawsuit, as it may in
its sole discretion deem proper, at the sole cost and expense of the
indemnifying party. Except as explicitly provided in this Section 8.3, failure
to provide Notice shall not limit the rights of such party to indemnification.
(b) DIRECT BREACH OF AGREEMENT. In the event any party to this Stock
Purchase Agreement makes a direct demand or claim for indemnification against
the other party hereto for a breach or default of any representation, warranty,
covenant or other material term or conditions of this Stock Purchase Agreement,
the parties shall follow the arbitration procedure set forth in Section 10.18
herein.
8.4 PAYMENT; PURCHASER'S RIGHT TO OFFSET. All amounts paid by either
party pursuant to this Section 8.4 shall be on a dollar-for-dollar basis as to
claims for which indemnification is to be paid. With regard to claims of third
parties for which indemnification is payable hereunder, such indemnification
shall be paid by the indemnifying party in advance of settlement or final
adjudication thereof on a current basis within thirty (30) days of receipt from
the indemnified party of such supporting documentation as the indemnifying party
may reasonably request. Notwithstanding anything herein to the contrary, in the
event Purchaser seeks indemnification from Sellers related to claims or matters
that have already been adjudicated or settled with the mutual agreement of the
parties hereto, Purchaser shall have the right to offset any amounts due from
Sellers
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under this Section 8.4 by reducing any other amounts due and payable by
Purchaser to Sellers under the Notes, unless payment is agreed through other
means. In the event Purchaser seeks indemnification from Sellers related to
claims or matters that have not been adjudicated or settled with the mutual
agreement of the parties hereto and Purchaser desires to reduce any other
amounts due and payable by Purchaser to Sellers under the Notes, Purchaser
shall notify Sellers of its intention to settle or pay such claim and offset
payments under the Notes; provided however, that in such circumstances
Purchaser shall only reduce payments to be made under the Notes after
Purchaser has paid an amount equal to the amount proposed to be paid in
settlement of such third party claim into a mutually agreed upon depository
account. The parties shall then follow the arbitration procedures set forth
in Section 10.18 herein to determine the party responsible for making such
payment.
8.5 LIMITATION OF INDEMNITIES. The aggregate liability of (i) Purchaser,
or (ii) Sellers together, shall not exceed Three Million Dollars
($3,000,000.00), including all costs, expenses and attorneys fees; provided
however, that Sellers' liability shall be joint and several. Notwithstanding
the foregoing, the Three Million Dollar ($3,000,000) limitation of Sellers'
liability shall not apply to civil or criminal fraud or tax matters, for which
Sellers' liability shall not exceed Three Million Dollars ($3,000,000)
individually, for an aggregate of Six Million Dollars ($6,000,000). Such
limitation of each party's liability shall include the aggregate amounts paid by
such party as indemnification pursuant to the terms of the Agreement and Plan of
Reorganization by and among Prospect Medical Holdings, Sierra Medical
Management, Inc., Sinnadurai E. Moorthy, M.D., Karunyan Arulanantham, M.D. and
Jayaratnam Jayakumar provided further, that any amounts paid by Prospect Medical
Holdings or any of its affiliates pursuant to such agreement shall count toward
the maximum owed by Purchaser herein.
9. PURCHASER'S CANCELLATION OF STOCK PURCHASE AGREEMENT:
9.1 JEOPARDY. In the event the performance by Sellers of any term,
covenant, condition or provision of this Agreement should be in violation of any
statute, ordinance, or be otherwise deemed illegal, by a state or federal court
or governmental agency (collectively, "Jeopardy Event"), then the parties shall
use their best efforts to meet forthwith and attempt to negotiate an amendment
to this Stock Purchase Agreement to remove or negate the effect of the Jeopardy
Event. In the event the parties are unable to negotiate such an amendment
within thirty (30) days following written notice by either party of the Jeopardy
Event, then Purchaser may cancel this Agreement immediately upon written notice
("Cancellation Option").
9.2 EXERCISE OF CANCELLATION OPTION. In the event Purchaser exercises the
Cancellation Option described above, it shall so notify Company in writing and
each party shall return forthwith all originals and copies of any financial or
other records, instruments, or other documents it has received from the other
party and, except as provided in this Agreement, all of the parties' respective
rights and obligations hereunder shall terminate immediately. Notwithstanding
the foregoing, the parties' respective obligations under Section 6.2 above shall
survive Purchaser's exercise of said Cancellation Option.
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10. MISCELLANEOUS
10.1 RISK OF LOSS. Until the Closing, Sellers shall bear all risk of loss,
damage or destruction to the assets of the Company and Stock which does not
result from a breach by Purchaser of its representations, warranties or
covenants herein set forth.
10.2 NO THIRD PARTY BENEFICIARIES. The parties intend that the benefits of
this Stock Purchase Agreement shall inure only to Purchaser, Company and the
Sellers except as expressly so stated herein. Notwithstanding anything
contained herein, or any conduct or course of conduct by any party hereto,
before or after signing this Stock Purchase Agreement, this Stock Purchase
Agreement shall not be construed as creating any right, claim or cause of action
against Purchaser, Company or Sellers by any other person or entity.
10.3 ENTIRE AGREEMENT. This Stock Purchase Agreement, together with all
exhibits and schedules hereto, and all documents referred to herein (including
without limitation any ancillary agreements), constitutes the entire agreement
between the parties with respect to the subject matter hereof, supersedes all
other and prior agreements on the same subject, whether written or oral, and
contains all of the covenants and agreements between the parties with respect to
the subject matter hereof. Each party to this Stock Purchase Agreement
acknowledges that no representations, inducements, promises, or agreements,
orally or otherwise, have been made by the other party(ies), or by anyone acting
on behalf of any party, that are not embodied herein, and that no other
agreement, statement, or promise not contained in this Stock Purchase Agreement
shall be valid or binding.
10.4 SUCCESSORS AND ASSIGNS. This Stock Purchase Agreement shall be
binding upon and shall inure to the benefit of the parties and their respective
heirs (as applicable), legal representatives, and permitted successors and
assigns. No party may assign this Stock Purchase Agreement or the rights,
interests or obligations hereunder; provided, however, that to the extent
permitted by applicable law Purchaser, after the Closing may, (i) assign any or
all of its rights and interests hereunder to Imperial Bank or its nominees or to
one or more of its Affiliates and (ii) designate one or more of its Affiliates
to perform its obligations hereunder (in any or all of which cases Purchaser
shall remain liable and responsible for the performance of all of its
obligations hereunder). Any assignment or delegation in contravention of this
Section 10.4 shall be null and void.
10.5 COUNTERPARTS. This Stock Purchase Agreement, and any amendments
thereto, may be executed in counterparts, each of which shall constitute an
original document, but which together shall constitute one and the same
instrument.
10.6 HEADINGS. The section headings contained in this Stock Purchase
Agreement are inserted for convenience only and shall not affect in any way the
meaning or interpretation of this Stock Purchase Agreement.
10.7 NOTICES. Any notices required or permitted to be given hereunder by
any party to the other shall be in writing and shall be deemed delivered upon
personal delivery or upon delivery by facsimile or e-mail; twenty-four (24)
hours following deposit with a courier for overnight delivery;
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or seventy-two (72) hours following deposit in the U.S. Mail, registered or
certified mail, postage prepaid, return-receipt requested, addressed to the
parties at the following addresses or to such other addresses as the parties
may specify in writing:
If to Sellers: Sinnadurai E. Moorthy, M.D.
44725 10th Street West, Suite 250
Lancaster, CA 93534
Karunyan Arulanantham, M.D.
1675 Staffordshire Drive
Lancaster, California 93534
The Arulanantham Charitable Remainder Trust
c/o Karunyan Arulanantham, M.D.
1675 Staffordshire Drive
Lancaster, California 93534
with copy to: Jack Goldman, Esq.
Arter & Hadden
700 S. Flower St., Suite 3000
Los Angeles, California 90017
If to Purchaser: Jacob Y. Terner, M.D.
Prospect Medical Group, Inc.
18200 Yorba Linda Blvd., Suite 409
Yorba Linda, California 92686
with copy to: Dale S. Miller, Esq.
Miller & Holguin
1801 Century Park East, 7th Floor
Los Angeles, California 90067
10.8 GOVERNING LAW. This Stock Purchase Agreement shall be governed by and
construed in accordance with the laws of the State of California.
10.9 AMENDMENT. This Stock Purchase Agreement may be amended at any time
by agreement of the parties, provided that any amendment shall be in writing and
executed by all parties.
10.10 SPECIFIC PERFORMANCE. Sellers acknowledge, and agree with
Purchaser that, in the event either Seller terminates this Stock Purchase
Agreement or otherwise fails to close, Purchaser would be irreparably damaged
thereby and that monetary damages would not provide an adequate remedy.
Accordingly, it is agreed that, in addition to any other remedies that Purchaser
may have at law or in equity, Purchaser shall be entitled to specific
performance and injunctive relief to prevent
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such a breach and specifically to enforce the terms and provisions hereof in
any action instituted in a court of competent jurisdiction.
10.11 SEVERABILITY. If any provision of this Stock Purchase Agreement
is held by a court of competent jurisdiction to be invalid or unenforceable, the
remaining provisions will nevertheless continue in full force and effect, unless
such invalidity or unenforceability would defeat an essential business purpose
of this Stock Purchase Agreement.
10.12 FEES AND EXPENSES. Except for accountant's fees directly related
to the audit of the Company, which fees the parties agree are to be paid by
Purchaser, or as otherwise explicitly set forth otherwise in writing signed by
the parties, Sellers and Purchaser agrees to bear their own expenses including,
without limitation, attorneys' fees in connection with the preparation of this
Stock Purchase Agreement and the transactions contemplated hereby. Sellers
further agree that all legal fees exceeding $30,000 incurred in connection with
this Stock Purchase Agreement and the transactions contemplated hereby shall be
the responsibility of Sellers and not Company.
10.13 EXHIBITS AND SCHEDULES. All exhibits and schedules attached to
this Stock Purchase Agreement are incorporated herein by this reference and all
references herein to "Stock Purchase Agreement" shall mean this Stock Purchase
Agreement together with all such exhibits and schedules, and all ancillary
agreements to be delivered at Closing.
10.14 SURVIVAL OF INDEMNIFICATION, REPRESENTATIONS AND WARRANTIES.
Except as expressly stated to the contrary herein, the indemnifications,
representations and warranties of the parties contained in this Stock Purchase
Agreement or in any certificate or document delivered pursuant to the provisions
hereof shall survive the Closing Date for a period of three (3) years and shall
not be affected by any investigation made by or on behalf of Purchaser, Company
or Sellers.
10.15 TIME OF ESSENCE. Time is expressly made of the essence of this
Stock Purchase Agreement and each and every provision hereof of which time of
performance is a factor.
10.16 WAIVERS. No waiver by any party, whether express or implied, of
its rights under any provision of this Agreement shall constitute a waiver of
the party's rights under such provisions at any other time or a waiver of the
party's rights under any other provision of this Stock Purchase Agreement. No
failure by any party to take any action against any breach of this Stock
Purchase Agreement or default by another party shall constitute a waiver of the
former party's right to enforce any provision of this Stock Purchase Agreement
or to take action against such breach or default or any subsequent breach or
default by the other party. To be effective any waiver must be in writing and
signed by the waiving party.
10.17 ATTORNEYS' FEES. Subject to the rights and obligations of the
parties set forth in Article 8, should any party institute any action or
procedure to enforce this Stock Purchase Agreement or any provision hereof, or
for damages by reason of any alleged breach of this Stock Purchase Agreement or
of any provision hereof, or for a declaration of rights hereunder (including
without limitation arbitration), the prevailing party in any such action or
proceeding shall be entitled
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to receive from the other party all costs and expenses, including without
limitation reasonable attorneys' fees, incurred by the prevailing party in
connection with such action or proceeding.
10.18 ARBITRATION. The parties firmly desire to resolve all disputes
arising hereunder without resort to litigation in order to protect their
respective business reputations and the confidential nature of certain aspects
of their relationship. Accordingly, any controversy or claim arising out of or
relating to this Agreement, or the breach thereof, shall be settled by
arbitration as set forth below.
(a) All disputes which in any manner arise out of or relate to this
Agreement or the subject matter thereof, shall be resolved exclusively by
arbitration in accordance with the provisions of this Section 10.18. Either
party may commence arbitration by sending a written demand for arbitration to
the other party, setting forth the nature of the controversy, the dollar amount
involved, if any, and the remedies sought, and attaching a copy of this Section
to the demand.
(b) The parties stipulate to arbitration before a single, mutually
agreed upon arbitrator sitting on the Los Angeles, California Judicial
Arbitration Mediation Services (JAMS) panel. In the event that the parties are
unable to agree upon the person chosen as arbitrator within 30 days of the
demand for arbitration, the arbitrator shall be selected in the sole discretion
of the JAMS administrator. The arbitrator shall be a member of the California
bar.
(c) The parties shall share all costs of arbitration. The prevailing
party shall be entitled to reimbursement by the other party of such party's
attorneys' fees and costs and any arbitration fees and expenses incurred in
connection with the arbitration hereunder.
(d) The substantive law of the State of California shall be applied
by the arbitrator. All proceedings in arbitration shall be in accordance with
the California Code of Civil Procedure, as amended, and the parties shall have
the right to legal discovery in any matter submitted to arbitration in
satisfaction of California Code of Civil Procedure Section 1283.05, as permitted
by California Code of Civil Procedure Section 1283.1(b).
(e) Arbitration shall take place in Los Angeles, California unless
the parties otherwise agree. As soon as reasonably practicable, a hearing with
respect to the dispute or matter to be resolved shall be conducted by the
arbitrator. As soon as reasonably practicable thereafter, the arbitrator shall
arrive at a final decision, which shall be reduced to writing, signed by the
arbitrator and mailed to each of the parties and their legal counsel.
(f) All decisions of the arbitrator shall be final, binding and
conclusive on the parties and shall constitute the only method of resolving
disputes or matters subject to arbitration pursuant to this Agreement. The
arbitrator or a court of appropriate jurisdiction may issue a writ of execution
to enforce the arbitrator's judgment. Judgment may be entered upon such a
decision in accordance with applicable law in any court having jurisdiction
thereof.
(g) Notwithstanding the foregoing, because time is of the essence of
this Agreement, the parties specifically reserve the right to seek a judicial
temporary restraining order,
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preliminary injunction, or other similar equitable relief.
(h) The decision and award of the arbitrator shall be kept
confidential by the parties to the greatest extent possible. No disclosure of
such decision or award shall be made by the parties except as required by law or
as necessary or appropriate to effect the enforcement thereof.
(i) Should either party institute any action or procedure to enforce
this Agreement or any provision hereof, or for damages by reason of any alleged
breach of this Agreement or of any provision hereof, or for a declaration of
rights hereunder (including without limitation arbitration), the prevailing
party in any such action or proceeding shall be entitled to receive from the
other party all costs and expenses, including without limitation reasonable
attorneys' fees, incurred by the prevailing party in connection with such action
or proceeding.
10.19 CONSTRUCTION. The parties have participated jointly in the
negotiation and drafting of this Stock Purchase Agreement and in the event of
any ambiguity or question of intent or interpretation, no presumption or burden
of proof shall arise favoring or disfavoring any party by virtue of the
authorship of any of the provisions of this Stock Purchase Agreement.
10.20 FURTHER ASSURANCES. The parties shall take such actions and
execute and deliver such further documentation as may reasonably be required in
order to give effect to the transactions contemplated by this Stock Purchase
Agreement and the intentions of the parties hereto.
30
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Stock Purchase
Agreement as of the date first written above.
"PURCHASER"
PROSPECT MEDICAL GROUP, INC.,
a California professional corporation
By: /s/ JACOB Y. TERNER M.D.
------------------------------------
Its: VP
------------------------------------
"COMPANY"
SIERRA PRIMARY CARE MEDICAL GROUP, INC.
a California professional corporation
By: /s/ KARUNYAN ARULANANTHAM
------------------------------------
Karunyan Arulanantham, President
---------------------
"SELLERS"
By: /s/ SINNADURAI E. MOORTHY
------------------------------------
Sinnadurai E. Moorthy, M.D.
By: /s/ KARUNYAN ARULANANTHAM
------------------------------------
Karunyan Arulanantham, M.D.
THE ARULANANTHAM CHARITABLE
REMAINDER TRUST
By: /s/ KARUNYAN ARULANANTHAM
------------------------------------
Karunyan Arulanantham, M.D. Trustee
31
<PAGE>
SPOUSAL JOINDER AND CONSENT
I am the spouse of Sinnadurai E. Moorthy, M.D., Seller. To the extent that I
have any interest in any of the Stock (as that term is defined in the Stock
Purchase Agreement), I hereby join in the Stock Purchase Agreement and agree to
be bound by its terms and conditions to the same extent as my spouse. I have
read the Stock Purchase Agreement, understand its terms and conditions, and to
the extent that I have felt it necessary, I have retained independent legal
counsel to advise me concerning the legal effect of this Stock Purchase
Agreement and this Spousal Joinder and Consent.
I understand and acknowledge that Purchaser is significantly relying on the
validity and accuracy of this Spousal Joinder and Consent in entering into this
Stock Purchase Agreement.
Executed this 23rd day of September, 1997
---- ---------
Signature: /s/ C.S. MOORTHY
----------------
Printed or Typed Name: CLAUDIA SHANTHI MOORTHY
-----------------------
32
<PAGE>
SPOUSAL JOINDER AND CONSENT
I am the spouse of Karunyan Arulanantham, M.D., Seller. To the extent that I
have any interest in any of the Stock (as that term is defined in the Stock
Purchase Agreement), I hereby join in the Stock Purchase Agreement and agree to
be bound by its terms and conditions to the same extent as my spouse. I have
read the Stock Purchase Agreement, understand its terms and conditions, and to
the extent that I have felt it necessary, I have retained independent legal
counsel to advise me concerning the legal effect of this Stock Purchase
Agreement and this Spousal Joinder and Consent.
I understand and acknowledge that Purchaser is significantly relying on the
validity and accuracy of this Spousal Joinder and Consent in entering into this
Stock Purchase Agreement.
Executed this 23rd day of September, 1997
---- ---------
Signature: /s/ INPAMANI S. ARULANANTHAM
------------------------------------
Printed or Typed Name: INPAMANI S. ARULANANTHAM
------------------------
33
<PAGE>
EXHIBITS TO
AGREEMENT FOR
THE PURCHASE AND SALE OF STOCK
OF
SIERRA PRIMARY CARE MEDICAL GROUP, INC.
<TABLE>
<S> <C>
2.1(a) Option -- Sinnadurai E. Moorthy, M.D. -- filed herewith as
Exhibit 10.36
2.1(b) Option -- Karunyan Arulanantham, M.D. -- filed herewith as
Exhibit 10.37
2.3(a)(i) Contingent Promissory Note -- Sinnadurai E. Moorthy, M.D. -- filed
herewith as Exhibit 10.35
2.3(a)(ii) Contingent Promissory Note -- Karunyan Arulananthm, M.D. -- filed
herewith as Exhibit 10.34
3.2 Restrictions on Transfers
3.3 Consents
3.4 Default
3.5 Financial Statements
3.8(a)(ii) Material Changes
3.8(b)(ii) Compensation
3.10 Liens
3.11 Personal Property
3.13 Contracts
3.13(e) Company Leases
3.14 Powers of Attorney
3.15(a) Litigation
3.15(b) Insurance Policies of Company
3.20 Employees
3.21 Employee Entitlement Programs
3.23 Governmental Inspections of Company
3.24 Environmental Conditions
3.26 Bank and Financial Accounts and Investments
3.27 Subsidiaries and Affiliates
3.29 Intellectual Property
4.10(a) Litigation of Purchaser
4.10(b) Insurance of Purchaser
4.13 Governmental Inspections of Purchaser
5,1 Amended Leases
5.2 Guaranty of Payment of Notes -- filed herewith as Exhibits 10.40 and
10.41
5.5 Form of Amended and Restated Management Services Agreement -- filed
herewith as Exhibit 10.39
5.6 Form of Assignable Option Agreement -- filed herewith as Exhibit 10.33
7.2(d) Form of Officers' Certificate and Form of Sellers' Certificates
7.2(e) Form of Non-Competition Agreement -- filed herewith as Exhibits
10.44 and 10.45
34
<PAGE>
7.2(f)(i) Form of Sellers' Employment Agreement -- Sinnadurai E. Moorthy,
M.D. -- filed herewith as Exhibit 10.43
7.2(f)(ii) Form of Sellers' Employment Agreement -- Karunyan Arulanantham,
M.D. -- filed herewith as Exhibit 10.42
7.2(j) Form of Opinion of Sellers' Counsel
</TABLE>
1 The Registrant hereby undertakes to provide to the Securities and Exchange
Commission upon request copies of any of the exhibits listed above not
otherwise filed with this Form S-1 Registration Statement as noted above.
35
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
By and among
PROSPECT MEDICAL HOLDINGS, INC.
and
SIERRA MEDICAL MANAGEMENT, INC.
and
SINNADURAI E. MOORTHY, M.D.,
KARUNYAN ARULANANTHAM, M.D.,
and
JAYARATNAM JAYAKUMAR
Sellers
September 23, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
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<S> <C>
ARTICLE 1. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
1.1 Certain Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
1.2 Other Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
ARTICLE 2. THE MERGER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
2.1 Effective Time of the Merger . . . . . . . . . . . . . . . . . . . . . . . .2
2.2 Effects of the Merger. . . . . . . . . . . . . . . . . . . . . . . . . . . .3
2.3 Effect on Capital Stock. . . . . . . . . . . . . . . . . . . . . . . . . . .3
2.4 Exchange of Certificates . . . . . . . . . . . . . . . . . . . . . . . . . .3
2.5 Board of Directors, Officers . . . . . . . . . . . . . . . . . . . . . . . .4
2.6 No Further Ownership Rights in Sierra Medical Management
Common . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
2.7 Payment of Cash Consideration. . . . . . . . . . . . . . . . . . . . . . . .4
2.8 Delivery of Jayakumar Promissory Note. . . . . . . . . . . . . . . . . . . .4
2.9 Issuance of Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
2.10 Tax Treatment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
2.11 Section 203 of the DGCL Not Applicable . . . . . . . . . . . . . . . . . . .4
ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF
SIERRA MEDICAL MANAGEMENT AND SELLERS . . . . . . . . . . . . . . . . . . . . . . .5
3.1 Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
3.2 Authorization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
3.3 No Consent Required; No Violations . . . . . . . . . . . . . . . . . . . . .6
3.4 No Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
3.5 Financial Statements, Books and Records. . . . . . . . . . . . . . . . . . .6
3.6 Conduct of Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
3.7 No Material Changes. . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
3.8 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
3.9 Title to Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
3.10 Right to Premises; Condition of the Property and Premises. . . . . . . . . .8
3.11 Contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
3.12 Powers of Attorney . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
3.13 No Litigation and Insurance. . . . . . . . . . . . . . . . . . . . . . . . .8
3.14 Violation of Laws. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
3.15 No Brokers or Finders. . . . . . . . . . . . . . . . . . . . . . . . . . . .9
3.16 No Bankruptcy Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . .9
3.17 Employees and Employee Benefits. . . . . . . . . . . . . . . . . . . . . . .9
3.18 Confidentiality. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
3.19 Environmental Conditions . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.20 Bank Accounts; Securities. . . . . . . . . . . . . . . . . . . . . . . . . 10
3.21 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
i
<PAGE>
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3.22 Articles of Incorporation and Bylaws . . . . . . . . . . . . . . . . . . . 10
3.23 Intellectual Property. . . . . . . . . . . . . . . . . . . . . . . . . . . 11
3.24 No Untrue Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
3.25 Certain Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
3.26 Section 203 of the DGCL Not Applicable . . . . . . . . . . . . . . . . . . 11
ARTICLE 4. REPRESENTATIONS AND WARRANTIES OF PROSPECTAND PROSPECT
ACQUISITION CORPORATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.1 Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.2 Prospect Acquisition Corporation Capital Structure . . . . . . . . . . . . 11
4.3 Prospect Capital Structure . . . . . . . . . . . . . . . . . . . . . . . . 12
4.4 Authority. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
4.5 No Brokers or Finders. . . . . . . . . . . . . . . . . . . . . . . . . . . 12
4.6 No Violation of Other Obligations. . . . . . . . . . . . . . . . . . . . . 12
4.7 No Consent Required. . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
4.8 No Bankruptcy Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . 13
4.9 No Untrue Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
4.10 Performance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
4.11 No Litigation and Insurance. . . . . . . . . . . . . . . . . . . . . . . . 13
4.12 Violation of Laws. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
4.13 Inspections. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
4.14 Shares of Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . 14
4.15 Section 203 of the DGCL Not Applicable . . . . . . . . . . . . . . . . . . 14
ARTICLE 5. COVENANTS RELATING TO CONDUCT OF BUSINESS . . . . . . . . . . . . . . . . . . . . 14
5.1 Ordinary Course. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
5.2 Dividends; Changes in Stock. . . . . . . . . . . . . . . . . . . . . . . . 14
5.3 Issuance of Securities . . . . . . . . . . . . . . . . . . . . . . . . . . 15
5.4 Governing Documents. . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
5.5 No Solicitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
5.6 No Dispositions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
5.7 Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
5.8 Business Relations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
5.9 Other Actions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
5.10 Advise of Changes; Government Filings. . . . . . . . . . . . . . . . . . . 15
5.11 Accounting Methods . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
5.12 Tax-Deferred Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . 16
5.13 Compensation, Benefit Plans. . . . . . . . . . . . . . . . . . . . . . . . 16
5.14 Sierra Management Agreement. . . . . . . . . . . . . . . . . . . . . . . . 16
ii
<PAGE>
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<S> <C>
ARTICLE 6. ADDITIONAL AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
6.1 Access to Information. . . . . . . . . . . . . . . . . . . . . . . . . . . 16
6.2 Legal Conditions to the Merger . . . . . . . . . . . . . . . . . . . . . . 17
6.3 Sierra Medical Management Stockholders' Approval . . . . . . . . . . . . . 17
6.4 Blue Sky Laws. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
6.5 Communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
6.6 Delivery of Stock Certificates . . . . . . . . . . . . . . . . . . . . . . 17
6.7 Update to Disclosures. . . . . . . . . . . . . . . . . . . . . . . . . . . 17
6.8 Good Faith . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
6.9 State Statutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
6.10 Amended Leases.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
6.11 Securities Issues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
ARTICLE 7. CONDITIONS PRECEDENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
7.1 Conditions to Each Party's Obligations to Effect the
Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
7.2 Conditions to Obligations of Prospect and Prospect
Acquisition Corporation. . . . . . . . . . . . . . . . . . . . . . . . . . 19
7.3 Conditions to Obligations of Sierra Medical Management . . . . . . . . . . 20
ARTICLE 8. CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
8.1 Closing Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
8.2 Filing Date. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
8.3 Closing Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
8.4 Payment of Cash Consideration. . . . . . . . . . . . . . . . . . . . . . . 21
8.5 Execution of Jayakumar Employment Agreement. . . . . . . . . . . . . . . . 21
8.6 Execution of Jayakumar Noncompetition Agreement. . . . . . . . . . . . . . 22
8.7 Delivery of Jayakumar Promissory Note. . . . . . . . . . . . . . . . . . . 22
ARTICLE 9. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND
COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
ARTICLE 10. PAYMENT OF EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
ARTICLE 11. TERMINATION, AMENDMENT AND WAIVER . . . . . . . . . . . . . . . . . . . . . . . . 22
11.1 Termination. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
11.2 Effect of Termination. . . . . . . . . . . . . . . . . . . . . . . . . . . 23
11.3 Amendment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
11.4 Extension, Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
iii
<PAGE>
<CAPTION>
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<S> <C>
ARTICLE 12. GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
12.1 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
12.2 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
12.3 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
12.4 Binding Nature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
12.5 Integration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
12.6 Incorporation of Exhibits. . . . . . . . . . . . . . . . . . . . . . . . . 25
12.7 Good Faith . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
12.8 Applicable Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
12.9 Dispute. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
12.10 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
12.11 Third Party Beneficiaries. . . . . . . . . . . . . . . . . . . . . . . . . 27
12.12 Best Efforts; Further Assurances . . . . . . . . . . . . . . . . . . . . . 27
</TABLE>
iv
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION ("Agreement") is made and
entered into as of the 23rd day of September, 1997 by and among PROSPECT MEDICAL
HOLDINGS, INC., a Delaware corporation ("Prospect"), on the one hand, and SIERRA
MEDICAL MANAGEMENT, INC., a Delaware corporation ("Sierra Medical Management")
and SINNADURAI MOORTHY, M.D., KARUNYAN ARULANANTHAM, M.D. and
JAYARATNAM JAYAKUMAR as shareholders of Sierra Medical Management (each, a
"Seller," collectively, "Sellers"), on the other hand.
RECITALS
A. Prospect Medical Group, Inc., a California professional
corporation ("Prospect Medical Group"), on the one hand, and Sierra Primary Care
Medical Group, Inc., a California professional corporation ("Sierra Medical
Group"), Drs. Moorthy and Arulanantham and the Arulanantham Charitable Remainder
Trust entered into an Agreement for the Purchase and Sale of Stock that provides
for the acquisition by Prospect and Prospect Medical Group of Sierra Medical
Group and Sierra Medical Management (the "Acquisition");
B. Pursuant to the Stock Purchase Agreement and in order to
consummate the Acquisition, Sellers have caused the formation of Sierra Medical
Management and have transferred certain management functions of Sierra Medical
Group to Sierra Medical Management;
C. Under the terms of this Agreement, the parties intend to cause the
merger of Prospect Acquisition Corporation, Inc., a Delaware corporation and a
wholly owned subsidiary of Prospect ("Prospect Acquisition Corporation") with
Sierra Medical Management in what is intended as a partially tax-deferred
exchange;
D. Subject to the provisions of this Agreement, Prospect Acquisition
Corporation shall execute a Certificate of Merger (the "Certificate of Merger")
in substantially the form attached hereto as Exhibit A, which provides for the
merger (the "Merger") of Sierra Medical Management with and into Prospect
Acquisition Corporation at the time provided for in Article Eighth thereof (the
"Merger Date").
E. Concurrent with the filing of the Certificate of Merger, pursuant
to Sections 2.3 and 2.4 of this Agreement, 10,000 shares of Common Stock, $.01
par value of Sierra Medical Management issued and outstanding ("Sierra Medical
Management Common") will be converted into $625,000 cash, a promissory note, in
the principal amount of $250,000, 600,000 shares of Common Stock, $.01 par
value, of Prospect ("Prospect Common"), and options to purchase 3,500 shares of
Prospect Common (the "Option"). Concurrent with the Merger, Prospect Medical
Group shall purchase the shares of Sierra Medical Group pursuant to the terms of
the Stock Purchase Agreement. Following the Merger, in accordance with the
terms of this Agreement, Sierra Medical Management shall be a wholly-owned
subsidiary of Prospect.
<PAGE>
F. The parties hereto desire to enter into this Agreement for the
purpose of setting forth certain representations, warranties and covenants made
by each to the other as an inducement to the execution and delivery of this
Agreement and the conditions precedent to the consummation of the Merger.
NOW, THEREFORE, in consideration of the premises and of the mutual
provisions, agreements and covenants herein contained, the parties hereby agree
as follows:
ARTICLE 1.
DEFINITIONS
1.1 CERTAIN DEFINITIONS. The terms defined in this Section 1 shall,
for all purposes of this Agreement, have the meanings herein specified, unless
the context expressly or by necessary implication otherwise requires:
(a) "Stock Purchase Agreement" shall mean that certain
Agreement for the Purchase and Sale of Stock, by and among Prospect Medical
Group, Sierra Medical Group, Sinnadurai E. Moorthy, M.D., Karunyan Arulanantham,
M.D. and Karunyan Arulanantham, M.D. as Trustee of the Arulanantham Charitable
Remainder Trust.
(b) "SEC" shall mean the Securities and Exchange Commission.
1.2 OTHER DEFINITIONS. In addition to the terms defined in Section
1.1, certain other terms are defined elsewhere in this Agreement and the Stock
Purchase Agreement, and, whenever such terms are used in this Agreement they
shall have their respective defined meanings, unless the context expressly or by
necessary implication otherwise requires. Additionally, certain references to a
disclosure schedule or exhibits that are not attached hereto shall be deemed to
relate to the schedules or exhibits attached to the Stock Purchase Agreement.
ARTICLE 2.
THE MERGER
2.1 EFFECTIVE TIME OF THE MERGER. Subject to the provisions of this
Agreement, a Certificate of Merger shall be duly prepared, executed and
acknowledged by the Surviving Corporation (as defined in Section 2.2) and
thereafter delivered to the Secretary of State of the State of Delaware, for
filing, in accordance with the Delaware General Corporation Law as soon as
practicable on or after the Closing Date (as defined in Article 8 of this
Agreement). The Merger shall become effective upon the filing of the
Certificate of Merger with the Delaware Secretary of State or such time
thereafter as is provided by the Certificate of Merger (the "Effective Time").
2
<PAGE>
2.2 EFFECTS OF THE MERGER. At the Effective Time, (a) Sierra Medical
Management shall be merged with and into Prospect Acquisition Corporation, which
shall be the surviving corporation and which shall be named Sierra Medical
Management (the "Surviving Corporation"), and the separate existence of Sierra
Medical Management shall cease, (b) except for assuming the name of Sierra
Medical Management, the Certificate of Incorporation of Prospect Acquisition
Corporation immediately prior to the Effective Time shall be the Certificate of
Incorporation of the Surviving Corporation; (c) the Bylaws of Prospect
Acquisition Corporation shall be the Bylaws of the Surviving Corporation; (d)
the directors of the Surviving Corporation shall be as set forth in Section 2.5
hereof; (e) the officers of the Surviving Corporation shall be as set forth in
Section 2.5 hereof; and (f) the Merger shall, from and after the Effective Time,
have all the effects provided by applicable law.
2.3 EFFECT ON CAPITAL STOCK. As of the Effective Time, by virtue of
the Merger and without any action on the part of the holder of any shares of the
issued and outstanding shares of Sierra Medical Management Common:
(a) CONVERSION OF SIERRA MEDICAL MANAGEMENT COMMON. Other than
fractional shares as provided in Section 2.3(b), the Sierra Medical Management
Common issued and outstanding immediately prior to the Effective Time shall be
converted, without any action on the part of the holders thereof, into shares of
Prospect Common (hereinafter the "Stock Exchange Ratio") such that shareholders
of Sierra Medical Management collectively will own 600,000 shares of the
Prospect Common.
(b) FRACTIONAL SHARES. No fractional shares of Prospect Common
shall be issued, but in lieu thereof each holder of shares of Sierra Medical
Management Common who would otherwise be entitled to receive a fraction of a
share of Prospect Common (after aggregating all fractional shares of Prospect
Common to be received by such holder) shall receive from Prospect an amount of
cash (rounded up to the nearest whole cent) equal to the product of (i) the
fraction of a share to which such holder would otherwise be entitled, multiplied
by (ii) the average closing bid price of a share of Prospect Common for the ten
(10) most recent days on which Prospect Common has traded on the OTC Bulletin
Board ending the trading day immediately prior to the Closing Date.
2.4 EXCHANGE OF CERTIFICATES.
(a) PROSPECT TO PROVIDE COMMON STOCK. Promptly after the
Effective Time, Prospect shall cause to be issued, the shares of Prospect Common
issuable pursuant to Section 2.3 in exchange for outstanding shares of Sierra
Medical Management Common, to the persons and in the amounts listed hereinbelow.
<TABLE>
<CAPTION>
Holder Number of Shares of Prospect Common
------ -----------------------------------
<S> <C>
Sinnadurai E. Moorthy, M.D. 270,000
Karunyan Arulanantham, M.D. 270,000
Jayaratnam Jayakumar 60,000
</TABLE>
3
<PAGE>
2.5 BOARD OF DIRECTORS, OFFICERS. Upon the Effective Time:
(a) The directors of Prospect Acquisition Corporation shall be
directors of the Surviving Corporation and shall be named in the Certificate of
Merger and each shall remain a director from the Effective Time until such
director's successor shall have been elected and shall qualify, or as otherwise
provided in the By-laws of the Surviving Corporation.
(b) The officers of the Surviving Corporation shall be as named
in the Certificate of Merger and shall each hold office from the Effective Time
until such officer's successor shall have been elected and shall qualify, or as
otherwise provided in the By-laws of the Surviving Corporation.
(c) If at the Effective Time a vacancy shall exist in the Board
of Directors or in any of the offices of the Surviving Corporation, such vacancy
may thereafter be filled in the manner provided in the Bylaws of the Surviving
Corporation.
2.6 NO FURTHER OWNERSHIP RIGHTS IN SIERRA MEDICAL MANAGEMENT COMMON.
All Sierra Medical Management Common delivered upon the surrender for exchange
of shares of Prospect Common in accordance with the terms hereof shall be deemed
to have been delivered in full satisfaction of all rights pertaining to such
shares of Sierra Medical Management Common. There shall be no further
registration of transfers on the stock transfer books of the Surviving
Corporation of the shares of Sierra Medical Management Common which were
outstanding immediately prior to the Effective Time. If, after the Effective
Time, Certificates are presented to the Surviving Corporation for any reason,
they shall be canceled and exchanged as provided in this Article 2.
2.7 PAYMENT OF CASH CONSIDERATION. Concurrent with the filing of the
Certificate of Merger, Prospect shall pay by wire transfer or other immediately
available funds, the aggregate cash consideration of $625,000 to Jayaratnam
Jayakumar.
2.8 DELIVERY OF JAYAKUMAR PROMISSORY NOTE. Concurrent with the filing
of the Certificate of Merger, Prospect Acquisition Corporation shall deliver a
non-negotiable promissory note in the principal amount of $250,000 (the
"Jayakumar Promissory Note") to Jayaratnam Jayakumar, the form of which is
attached hereto as Exhibit C.
2.9 ISSUANCE OF OPTION. Concurrent with the filing of the Certificate
of Merger, Prospect shall issue the Option to Jayaratnam Jayakumar, the form of
which is attached hereto as Exhibit B.
2.10 TAX TREATMENT. The parties intend that the Merger will be a
reorganization under Section 368(a)(2)(D) of the Internal Revenue Code of 1986,
as amended (the "Code").
2.11 SECTION 203 OF THE DGCL NOT APPLICABLE. The provisions of Section
203 of the Delaware General Corporation Law will not, prior to the termination
of this Agreement, apply to this Agreement, the Merger or the transactions
contemplated hereby and thereby.
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<PAGE>
ARTICLE 3.
REPRESENTATIONS AND WARRANTIES OF
SIERRA MEDICAL MANAGEMENT AND SELLERS
Sierra Medical Management and Sellers, individually, hereby represent and
warrant to Prospect and Prospect Acquisition Corporation as follows:
Sellers represent and warrant that the statements contained in this
Article 3 will be correct and complete as of the Closing Date (as though made
then and as though the Closing Date were substituted for the date of this
Agreement throughout this Article 3), except as otherwise specifically set forth
in the schedules attached hereto and initialed by the parties.
3.1 ORGANIZATION. Sierra Medical Management is a Delaware corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware. Sierra Medical Management has all requisite authority to
own, lease, and operate its business and to carry on its business as currently
being conducted. Sierra Medical Management is duly qualified to transact its
business in the State of California as a foreign corporation under the name of
AM Medical Management, Inc. and does not conduct business in any other state.
3.2 AUTHORIZATION. Sellers have good title to the Sierra Medical
Management Common, free and clear of all Liens, and full right, power, authority
and legal capacity, to execute and deliver this Agreement, and to carry out the
transactions contemplated hereby without the consent of any other person. All
action on the part of Sellers and Sierra Medical Management necessary for the
authorization, execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby has been or will be taken
prior to the Closing Date, and this Agreement (including exhibits, schedules and
the ancillary agreements) constitutes the legal, valid and binding obligation of
Sellers, enforceable in accordance with its terms, except as enforceability may
be restricted, limited or delayed by applicable bankruptcy, insolvency,
fraudulent conveyance or other laws affecting creditor's rights generally and
except as enforceability is subject to general principles of equity. Sellers
are the only shareholders of Sierra Medical Management. The authorized number
of shares of Sierra Medical Management is One Hundred Thousand (100,000), all of
one class, of which only Ten Thousand (10,000) shares are issued and
outstanding, fully paid and nonassessable and held by Sellers. Of such Ten
Thousand (10,000) outstanding shares, Three Thousand Four Hundred Eighty Four
(3,484), Three Thousand Four Hundred Eighty Four (3,484), and Three Thousand
Thirty Two (3,032) shares are owned by Dr. Moorthy, Dr. Arulanantham and
Jayaratnam Jayakumar, respectively. The Sierra Medical Management Common was
issued in compliance with all applicable federal and state securities laws.
Except as set forth in Schedule 3.2, Sellers have full voting power over the
Sierra Medical Management Common, subject to no outstanding subscriptions,
options, rights, convertible securities, preemptive rights, buy-sell agreements,
or any agreements or commitments of any kind that obligate Sierra Medical
Management or the Sellers to (a) purchase or otherwise receive or be issued any
shares of Sierra Medical Management Common or any security or liability of any
kind convertible into or exchangeable for any such Sierra Medical Management
Common, (b) receive any benefits or rights similar to any rights enjoyed by or
accruing to the holder of shares of capital stock of Sierra Medical
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<PAGE>
Management, (c) convert or exchange any securities for shares of Sierra Medical
Management Common, (d) participate in the equity, income or election of
directors or officers of Sierra Medical Management, or (e) take or refrain from
taking any actions as shareholders of Sierra Medical Management. Other than
this Agreement and the transactions contemplated hereby, there is no contract,
commitment or agreement between Sellers and any other person with respect to the
disposition of any shares of the Sierra Medical Management Common.
3.3 NO CONSENT REQUIRED; NO VIOLATIONS. Neither the execution of this
Agreement by Sellers, nor the performance by Sellers of their obligations
hereunder requires the consent of any third party, which has not been obtained
and delivered to Purchaser. Neither this Agreement nor any of the transactions
contemplated hereunder violates or shall violate any lease, contract, document,
understanding, agreement or instrument to which Sierra Medical Management or any
of the Sellers is a party or by which Sierra Medical Management or a Seller may
be bound. Neither this Agreement nor any of the transactions contemplated
hereunder violates, or shall, to the best knowledge of Sellers, violate,
conflict with, result in a default under or breach any legally protected right
of any individual or entity or the articles of incorporation or bylaws of Sierra
Medical Management.
3.4 NO DEFAULT. Sierra Medical Management is not in default under the
terms of any lease, contract, document, understanding, agreement or instrument
to which it is a party or by which it is bound, nor has any event occurred that
will constitute a default by Sierra Medical Management under any of the same
following the passage of time or consummation of any of the transactions
contemplated hereunder, nor has Sierra Medical Management or any Seller received
any notice of any default under any of the same. To the best knowledge of
Sellers, no acceleration or other right to accelerate, terminate, modify,
cancel, create a security interest, or otherwise change any existing agreement
will be created as a result of the consummation of any of the transactions
contemplated hereunder.
3.5 FINANCIAL STATEMENTS, BOOKS AND RECORDS. Sellers have previously
delivered to Prospect an initial balance sheet indicating capitalization of
$200,000 (the "Sierra Medical Management Balance Sheet"). At the date of the
Sierra Medical Management Balance Sheet and as of the Closing Date, Sierra
Medical Management will have no liabilities or obligations, secured or unsecured
(whether accrued, absolute, contingent or otherwise) not reflected on the Sierra
Medical Management Balance Sheet or the notes thereto except for liabilities
incurred in the ordinary course of business since the date of said balance sheet
which are usual and normal in amount.
3.6 CONDUCT OF BUSINESS. Between the date of the execution of this
Agreement and the Closing, Sellers shall (a) cause Sierra Medical Management to
carry on its business in substantially the same manner as it has previously
done, (b) use their best efforts to maintain and preserve the assets of Sierra
Medical Management in good condition and repair, and to prevent the imposition
of any Liens on such assets, (c) not liquidate or dissolve Sierra Medical
Management, take any steps to do same, or inform any third person or entity that
Sierra Medical Management or Sellers have done or intend to do the same, (d) not
permit Sierra Medical Management to enter into any material agreements without
the written consent of Prospect, which consent shall not be unreasonably
withheld, and (e) not permit Sierra Medical Management to enter into any
material transactions not
6
<PAGE>
in the ordinary course of business without the written consent of Prospect,
which consent shall not be unreasonably withheld.
3.7 NO MATERIAL CHANGES.
(a) Except as contemplated hereby or consented to by Prospect,
between the date of this Agreement and the Closing there will not have been any
voluntary or involuntary sale, assignment, license or other disposition, of any
kind, of any material property or material right of Sierra Medical Management's
business.
(b) Except as contemplated hereby or consented to by Prospect,
between the date of this Agreement and the Closing, neither Sellers nor Sierra
Medical Management:
(i) shall incur any debts, liabilities or obligations of
any kind, whether absolute or contingent, due or to become due, or any security
interests, liens, loans encumbering Sierra Medical Management's business, or any
other encumbrances incurred by Sierra Medical Management or by Sellers in
connection with Sierra Medical Management's business except for:
a) current liabilities incurred for services
rendered or goods supplied in the ordinary course of the operations of Sierra
Medical Management's business;
b) liabilities on account of taxes and
governmental charges not yet due, but not penalties, interest or fines in
respect thereof; or
c) obligations or liabilities incurred by virtue
of the execution of this Agreement.
(ii) shall pay any extraordinary compensation, bonuses or
distributions to Sellers, or any employee of Sierra Medical Management or
Sellers.
3.8 TAXES. There are no delinquent federal or state corporate income
or franchise taxes or any federal, state or local corporate income or franchise
tax assessments due or owing by Sierra Medical Management. No extensions of
time or requests therefor or waiver thereof have been made or are presently
pending or effective with respect to such reports, returns or taxes ("Taxes").
Sierra Medical Management has timely filed or will cause to be filed on its own
behalf all tax returns (federal, state and local) required to be filed on or
before the Closing Date, and all Taxes shown to be due and payable on said
returns have been paid. There are no actions, suits, proceedings,
investigations, audits, claims or liens now pending against or related to Sierra
Medical Management regarding any tax or assessment. No claim for any additional
tax, assessment or reassessment is being asserted against Sierra Medical
Management or proposed by any tax authority; and Sellers have not been notified
of, and there are no facts or circumstances known to Sierra Medical Management
or Sellers which could result in any claim being asserted with respect to any
such Taxes. There is no action, dispute, suit, proceeding, investigation or
audit pending or threatened against Sierra Medical Management in respect of any
Taxes.
7
<PAGE>
3.9 TITLE TO ASSETS. The assets of Sierra Medical Management are free
and clear of all Liens.
3.10 RIGHT TO PREMISES; CONDITION OF THE PROPERTY AND PREMISES. Sierra
Medical Management (i) lawfully occupies the offices where its business
operations are located ("Premises") and (ii) there are no unpaid rental payments
or any other applicable amounts now due and payable by Sierra Medical Management
with respect to the Premises or any uncured default by Sierra Medical
Management.
3.11 CONTRACTS.
(a) Sellers have furnished to Prospect, for Prospect's
inspection and review, true and complete copies of all contracts, agreements,
leases, documents, written understandings, instruments, loan documents and
security agreements to which Sierra Medical Management is a party, and any and
all other documents concerning any Liens against the Sierra Medical Management
Common or any asset of Sierra Medical Management, in each case in excess of
$10,000.
(b) There are no guarantees by Sierra Medical Management of any
obligations or indebtedness whatsoever of the Sellers, or any third person or
entity.
(c) Sierra Medical Management and Sellers are not parties to,
or bound by, any contract which in any manner limits or restricts them from
competing in any line of business or carrying on or expanding the nature or
geographical scope of their business.
(d) The contracts of Sierra Medical Management referred to in
Section 3.11(a) are valid, binding and enforceable obligations and in full force
and effect and have been entered into in the ordinary course of business or
otherwise, consistent with past practice, except as enforceability may be
restricted, limited or delayed by applicable bankruptcy, insolvency, fraudulent
conveyance, or other laws affecting creditor's rights generally and except as
enforceability is subject to general principles of equity. Sierra Medical
Management and Sellers have not received any notice from any other party to a
contract of the termination or threatened termination, thereof, nor any material
claim, dispute or controversy with respect thereto, and to Seller's best
knowledge, no other event has occurred which would allow any other party to
terminate any such contract of Sierra Medical Management, nor have Sellers
received notice of any asserted claim of default, breach or violation of, any
such contract which failure of performance or default would be materially
adverse to the business, condition (financial or otherwise), operations, results
of operations, net worth, working capital, assets, reserves or prospects of
Sierra Medical Management, taken as a whole.
3.12 POWERS OF ATTORNEY. There are no outstanding powers of attorney
executed on behalf of Sellers and Sierra Medical Management, except as may be
set forth in the schedules to the Stock Purchase Agreement.
3.13 NO LITIGATION AND INSURANCE. Except as may be set forth in the
schedules to the Stock Purchase Agreement, there is no pending litigation,
judgment, appeal, investigation or asserted claim or, to Sierra Medical
Management's and Sellers' best knowledge, any threatened investigation,
8
<PAGE>
judgment, appeal, unasserted claim, or governmental investigation, relating to
Sierra Medical Management ("Action"), and Sellers are not aware of any facts or
circumstances existing as of July 15, 1997, which could serve as a basis for an
Action against or affecting Sierra Medical Management or which seeks or
threatens to restrain, enjoin or prohibit or to obtain damages from Sierra
Medical Management. Neither Sierra Medical Management nor Sellers are subject
to any judgment, decree, order or writ of any court, agency, authority,
arbitration panel or other tribunal which would materially and adversely affect
Sierra Medical Management.
3.14 VIOLATION OF LAWS. To the best knowledge of the Sellers, neither
Sierra Medical Management nor Sellers are in violation of any law, rule,
regulation or administrative or judicial order pertaining to Sierra Medical
Management's business and which is material to the conduct of Sierra Medical
Management's business (including, without limitation, licensing, health care,
drug enforcement, securities, zoning, building, environmental, immigration,
civil rights and occupational health and safety laws, regulations, ordinances
and codes) and there is no law, rule, regulation or administrative or judicial
order that any of the transactions contemplated by this Agreement would violate
where such violation would have a materially adverse effect on Sierra Medical
Management. Sierra Medical Management has not been charged with, threatened
with, nor is under any investigation with respect to, any charge concerning any
violation of any provision of any such law, rule, regulation or order.
3.15 NO BROKERS OR FINDERS. Neither Sierra Medical Management nor
Sellers have incurred any liability to any broker, finder or agent for any
brokerage fees, finder's fees or commissions with respect to the transactions
contemplated by this Agreement, and if either Sierra Medical Management or
Sellers incurred any such liability, such liability shall be and remain the sole
responsibility of the Sellers, and Sierra Medical Management and Sellers shall
indemnify, defend and hold Prospect harmless from and against any and all
liabilities, losses, damages, claims, causes of action, costs and expenses
(including, without limitation, reasonable attorneys' fees), arising out of or
relating to such liability.
3.16 NO BANKRUPTCY PROCEEDINGS. Neither Sierra Medical Management nor
any Seller on behalf of Sierra Medical Management has (a) made a general
assignment for the benefit of creditors, (b) filed any voluntary petition in
bankruptcy or suffered the filing of an involuntary petition by its creditors,
(c) suffered the appointment of a receiver to take possession of all or
substantially all of its assets, (d) suffered the attachment or other judicial
seizure of all, or substantially all, of its assets, (e) admitted in writing its
inability to pay its debts as they come due, or (f) made an offer of settlement,
extension or compromise to its creditors generally.
3.17 EMPLOYEES AND EMPLOYEE BENEFITS. Sierra Medical Management has no
employees.
3.18 CONFIDENTIALITY. To the best knowledge of Sellers, Sierra Medical
Management has maintained the confidentiality of all business records as
required by and in conformance with all applicable state and federal laws and
regulations and has not transferred any patient records to any individual or
entity against the request of any patient regarding transferring his or her
patient information or records.
9
<PAGE>
3.19 ENVIRONMENTAL CONDITIONS. To the best knowledge of Sellers and
the Company and except as set forth in Schedule 3.19 of the Disclosure Schedule,
there are no (a) material defects in the physical condition of the Premises;
(b) unremediated material incidents of non-compliance regarding the Premises
with zoning, land use, building, safety and fire laws; and (c) unremediated
material incidents of non-compliance of the Premises with respect to applicable
environmental laws, rules and regulations. To the best knowledge of Sellers and
except as set forth in Schedule 3.19 of the Disclosure Schedule, no "Hazardous
Substances" (as defined below) have been released on any part of the Premises
and no soil, air, surface water, ground water or structural contamination exists
on any of the Premises. As used herein "Hazardous Substances" shall include (i)
all of those substances included within the definitions of "hazardous
substances", "hazardous materials", "toxic substances", or "solid waste" in (a)
the Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended, 42 U.S.C. Section 9601 ET SEQ. ("CERCLA"), as amended,
(b) the Resource Conservation and Recovery Act of 1976, 42 U.S.C. Section 6901
ET SEQ. ("RCRA"), and (c) the Hazardous Materials Transportation Act, 49 U.S.C.
Appx. Section 1801, ET SEQ., and in the regulations promulgated pursuant to
said laws or any amendment thereto or replacement thereof; (ii) all of those
substances listed in the United States Department of Transportation Table (49
CFR 172.101 and amendments thereto) or by the Environmental Protection Agency
(40 CFR Part 302 and amendments thereto) as hazardous substances; (iii) all of
those substances defined as "hazardous wastes" in Sections 25100 ET SEQ. of the
California Health & Safety Code, or as "hazardous substances" in Sections 25316
and 25281 of the California Health & Safety Code or Section 736(f)(3) of the
California Code of Civil Procedure, or as "waste," "pollution," or
"contamination" in Sections 13000 ET SEQ. of the California Water Code, and in
the regulations promulgated pursuant to said laws or any replacement thereof;
and (iv) all other substances, materials and wastes which are regulated under
applicable local, state or federal law, or which are classified as hazardous or
toxic under federal, state, or local laws or regulations, or classified or
identified as posing a threat to human health or the environment, including
without limitation federal laws and regulations and California law set forth
above, and any radioactive wastes or substances. The term "Hazardous
Substances" does not include consumer products which are used in accordance with
their intended use.
3.20 BANK ACCOUNTS; SECURITIES. Attached hereto as Schedule 3.20 is a
true, correct and complete listing of all bank, brokerage, checking, depositary
and similar accounts, lockboxes and safe deposit boxes maintained by Sierra
Medical Management as of the date of Closing and at any time during the period
preceding the date of Closing; this listing includes with respect to each such
account (a) the account number, (b) the nature or purpose of the account, (c)
the name and address of the institution at which the account is maintained, and
(d) the names of the authorized signatories on the account.
3.21 SUBSIDIARIES. Sierra Medical Management has no subsidiaries or
affiliates and does not directly or indirectly own either an equity or debt
interest in any corporation, partnership, limited liability company, business
trust, joint venture, joint stock company, association or other business entity.
3.22 ARTICLES OF INCORPORATION AND BYLAWS. Copies of the Articles of
Incorporation and the Bylaws of Sierra Medical Management as amended to the date
hereof, certified by its Secretary as well as copies of the minute books and
stock records of Sierra Medical Management which have
10
<PAGE>
been delivered to Prospect are true and complete copies of such instruments as
of the date hereof and as of the Closing Date are and will be in full force and
effect on such dates.
3.23 INTELLECTUAL PROPERTY. Schedule 3.23 attached hereto sets forth a
true and complete list of all patents, trademarks, trade names or service marks
that Sierra Medical Management is licensed under or uses. To the best knowledge
of Sellers, none of Sierra Medical Management's business activities infringes
upon the patent, trademark, trade name or service mark rights of any third
party.
3.24 NO UNTRUE STATEMENTS. Sellers represent and warrant that (a)
neither Sierra Medical Management nor Sellers have made any materially untrue
statement or representation in connection with this Agreement, and (b) neither
Sierra Medical Management nor Sellers have failed to state or disclose any
material fact in connection with the transactions contemplated by this Agreement
which under the circumstances, is required to be disclosed.
3.25 CERTAIN ADVANCES. There are no receivables of Sierra Medical
Management owing from directors, officers, employees, consultants or
stockholders of Sierra Medical Management, or owing by any Affiliate of any
director or officer of Sierra Medical Management, except for advances in the
ordinary and usual course of business to officers for reimbursable business
expenses.
3.26 SECTION 203 OF THE DGCL NOT APPLICABLE. The provisions of Section
203 of the Delaware General Corporation Law relating to business combinations
with interested stockholders, will not, prior to the termination of this
Agreement, apply to this Agreement, the Merger or the transactions contemplated
hereby and thereby.
ARTICLE 4.
REPRESENTATIONS AND WARRANTIES OF PROSPECT
AND PROSPECT ACQUISITION CORPORATION
Prospect and Prospect Acquisition Corporation, individually, hereby
represent and warrant to Sierra Medical Management and Sellers as follows;
provided however, that each such party's representations and warranties
contained herein relate only to those matters which apply to such party:
4.1 ORGANIZATION. Each of Prospect and Prospect Acquisition
Corporation is a Delaware corporation validly existing and in good standing
under the laws of the State of Delaware.
4.2 PROSPECT ACQUISITION CORPORATION CAPITAL STRUCTURE. The
authorized capital stock of Prospect Acquisition Corporation consists of 2,500
shares of Common Stock, $.01 par value ("Prospect Acquisition Corporation
Common"). Upon the execution of this Agreement, 1,000 shares of Prospect
Acquisition Corporation Common were validly issued and outstanding and were held
by Prospect of record and beneficially. No options, preferred stock or
convertible securities are outstanding.
11
<PAGE>
4.3 PROSPECT CAPITAL STRUCTURE. The authorized capital stock of
Prospect consists of 40,000,000 shares of Common Stock, $.01 par value, and
1,000,000 shares of Preferred Stock. 4,698,471 shares of Common Stock are
issued and outstanding, and no shares of Preferred Stock are outstanding.
Prospect has 477,119 and 251,776 outstanding warrants and options, respectively,
to purchase Prospect Common. Since July 31, 1996, all of the outstanding shares
of Prospect Common have been duly authorized, validly issued, fully paid and
nonassessable, issued in compliance with applicable state and federal securities
laws and not subject to preemptive rights created by statute, Prospect's
Certificate of Incorporation or Bylaws or any agreement to which Prospect is a
party or is bound.
4.4 AUTHORITY. Prospect and Prospect Acquisition Corporation have all
corporate power and authority to enter into this Agreement and to consummate the
transactions contemplated hereby. All action on the part of Prospect and
Prospect Acquisition Corporation necessary for the authorization, execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated hereby has been or will be taken prior to the Closing
Date, and this Agreement (including exhibits, schedules and the ancillary
agreements) constitutes the legal, valid and binding obligation of Prospect and
Prospect Acquisition Corporation, enforceable in accordance with its terms,
except as enforceability may be restricted, limited or delayed by applicable
bankruptcy, insolvency, fraudulent conveyance, or other laws affecting
creditor's rights generally and except as enforceability is subject to general
principles of equity.
4.5 NO BROKERS OR FINDERS. Except for Legend Capital Corporation,
neither Prospect nor Prospect Acquisition Corporation has incurred any liability
to any broker, finder or agent for any brokerage fees, finder's fees or
commissions with respect to the transactions contemplated by this Agreement, and
if Prospect or Prospect Acquisition Corporation incurred any such liability,
such liability shall be and remain the sole responsibility of Prospect or
Prospect Acquisition Corporation, and Prospect and Prospect Acquisition
Corporation shall indemnify, defend and hold Sellers harmless from and against
any and all liabilities, losses, damages, claims, causes of action, costs and
expenses (including, without limitation, reasonable attorneys' fees), arising
out of or relating to such liability.
4.6 NO VIOLATION OF OTHER OBLIGATIONS. Neither this Agreement nor any
of the transactions contemplated hereunder violates or shall violate any lease,
contract, document, understanding, agreement or instrument to which Prospect or
Prospect Acquisition Corporation is a party or by which it may be bound, or any
lease, contract, document, understanding, agreement or instrument affecting
Prospect or Prospect Acquisition Corporation. Neither the execution and
delivery of this Agreement nor the consummation of the transactions contemplated
hereby will conflict with or violate any provision of the articles of
incorporation or bylaws of Prospect or Prospect Acquisition Corporation, or of
any law, ordinance or regulation or any decree or order of any court or
administrative or other governmental body which is either applicable to, binding
upon or enforceable against Prospect or Prospect Acquisition Corporation.
4.7 NO CONSENT REQUIRED. Neither the execution of this Agreement by
Prospect or Prospect Acquisition Corporation, nor the performance by Prospect or
Prospect Acquisition
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<PAGE>
Corporation of their obligations under this Agreement, requires the consent of
any third party that will not have been obtained and delivered to Sellers prior
to the Closing Date.
4.8 NO BANKRUPTCY PROCEEDINGS. Neither Prospect nor Prospect
Acquisition Corporation has (a) made a general assignment for the benefit of
creditors, (b) filed any voluntary proceeding in bankruptcy or suffered the
filing of any involuntary petition by Prospect's creditors, (c) suffered the
appointment of a receiver to take possession of all or substantially all of the
assets, properties or business of Prospect, (d) suffered the attachment or other
judicial seizure of all or substantially all of the assets, properties or
business of Prospect, (e) admitted in writing its inability to pay its debts as
such debts become due, or (f) made an offer of settlement, extension or
compromise to its creditors generally.
4.9 NO UNTRUE STATEMENTS. To the best of Prospect's knowledge, (a)
Prospect has made no untrue statement or representation in connection with this
Agreement, and (b) Prospect has not failed to state or disclose any material
fact in connection with the transactions contemplated by this Agreement.
4.10 PERFORMANCE. Prospect shall perform its obligations under this
Agreement, including the ancillary agreements and the forms of which are
attached hereto as exhibits.
4.11 NO LITIGATION AND INSURANCE. Except as set forth in Exhibit 4.11,
there is no pending Action relating to Prospect, Prospect Acquisition
Corporation or employees thereof, and Prospect is not aware of any facts or
circumstances existing as of July 15, 1997, which could serve as a basis for an
Action against or affecting Prospect or which seeks or threatens to restrain,
enjoin or prohibit or to obtain damages from Prospect. Prospect is not subject
to any judgment, decree, order or writ of any court, agency, authority,
arbitration panel or other tribunal which would materially and adversely affect
Prospect. Prospect has maintained with financially responsible insurance
companies insurance in such amounts and against such risks and losses as is
customary for persons or companies engaged in its business, including insurance
against personal injury, property damage to third persons and medical
malpractice. Prospect has not received any notification from any insurance
carrier denying or disputing any claim made on any policies, denying or
disputing any coverage for any claim, denying or disputing the amount of any
claim, or regarding the possible cancellation or material limitation of any such
policies, all of which will be in effect at the Closing Date unless provision
has been made for the cancellation thereof as of the Closing Date with the
consent of the Sellers.
4.12 VIOLATION OF LAWS. To the best knowledge of Prospect, Prospect is
not in violation of any law, rule, regulation or administrative or judicial
order pertaining to Prospect's business and which is material to the conduct of
Prospect's business (including, without limitation, licensing, health care, drug
enforcement, securities, zoning, building, environmental, immigration, civil
rights and occupational health and safety laws, regulations, ordinances and
codes) and there is no law, rule, regulation or administrative or judicial order
that any of the transactions contemplated by this Agreement would violate where
such violation would have a materially adverse effect on Prospect. Prospect has
not been charged with, threatened with, nor is under any investigation with
respect to, any charge concerning any violation of any provision of any such
law, rule, regulation or order.
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4.13 INSPECTIONS. Except as set forth in Schedule 4.13, (a) Prospect
has not been inspected by any governmental agency during the five (5) years
prior to the date hereof; and (b) all matters which were noted by any such
governmental agency as requiring correction or modifications which were
requested or recommended, have been corrected so that Prospect is, to the best
knowledge of Prospect, in compliance. In addition, Schedule 4.13 sets forth the
present status of each such noted matter in the event Prospect has not taken or
complied with any corrective Action.
4.14 SHARES OF COMMON STOCK. The shares of Prospect Common will when
issued and delivered to the Sellers in accordance with this Agreement will be
duly authorized, validly issued, fully paid and nonassessable.
4.15 SECTION 203 OF THE DGCL NOT APPLICABLE. The provisions of Section
203 of the Delaware General Corporation Law relating to business combinations
with interested stockholders, will not, prior to the termination of this
Agreement, apply to this Agreement, the Merger or the transactions contemplated
hereby and thereby.
ARTICLE 5.
COVENANTS RELATING TO CONDUCT OF BUSINESS
During the period from the date of this Agreement and continuing until
the Effective Time, each of Prospect, Prospect Acquisition Corporation, Sierra
Medical Management and Sellers agree that:
5.1 ORDINARY COURSE. Except for the potential acquisition by Prospect
or Prospect Acquisition Corporation of other medical management companies, or
the advancement of funds by Prospect or Prospect Acquisition Corporation to
Prospect Medical Group for the purpose of effecting such acquisitions or other
acquisitions of medical groups or independent practice networks, each party
shall carry on business in the usual, regular and ordinary course, including the
payment of all state and federal taxes, in substantially the same manner as
heretofore conducted and, to the extent consistent with such businesses, use all
commercially reasonable efforts consistent with past practice and policies to
preserve intact its present business organization, keep available the services
of its present officers and key employees and preserve its relationship with
existing and potential customers, enrollees, and others having business dealings
with it to the end that its goodwill and ongoing businesses shall be unimpaired
at the Effective Time.
5.2 DIVIDENDS; CHANGES IN STOCK. Each party shall not and shall not
propose to (a) declare or pay any dividends on or make other distributions in
respect of any of their capital stock, (b) split, combine or reclassify any of
its capital stock or issue or authorize the issuance of any other securities in
respect of, in lieu of or in substitution for shares of their capital stock, or
(c) repurchase or otherwise acquire any shares of its capital stock or rights to
acquire any shares of their capital stock.
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5.3 ISSUANCE OF SECURITIES. Sierra Medical Management shall not
issue, deliver or sell or authorize or propose the issuance, delivery or sale
of, or purchase or propose the purchase of, any shares of its capital stock of
any class or securities convertible into, or rights, warrants or options to
acquire, any such shares or other convertible securities.
5.4 GOVERNING DOCUMENTS. Except as otherwise contemplated herein,
Sierra Medical Management shall not amend its charter documents or Bylaws.
5.5 NO SOLICITATIONS. Sierra Medical Management shall not directly or
indirectly, through any officer, director, employee or agent (including any
investment banker, financial advisor, attorney, accountant or other
representative or agent) or otherwise solicit, initiate or encourage inquiries
or the submission of proposals or offers from any third party relating to any
acquisition or purchase of all or substantially all of the business, properties
or assets of, or any equity interest in such entity or any merger,
consolidation, business combination or similar transaction, other than pursuant
to this Agreement involving such entity (an "Acquisition Transaction"), or
participate in any discussions or negotiations regarding, or furnish to any
other person any confidential information with respect to, or otherwise
cooperate in any way with, or participate in, facilitate or agree to endorse or
encourage, any effort or attempt by any other person to do or seek any of the
foregoing.
5.6 NO DISPOSITIONS. No party shall sell, lease or otherwise dispose
of any of its assets, individually or in the aggregate, except in the ordinary
course of business consistent with prior practice.
5.7 INDEBTEDNESS. Except for capital leases entered into in the
ordinary course of business Sierra Medical Management shall not incur any
indebtedness for borrowed money or guarantee any such indebtedness or issue or
sell any debt securities or guarantee any debt securities of others.
5.8 BUSINESS RELATIONS. Sierra Medical Management will use its best
efforts to preserve the business organization to keep available the services of
present employees, agents and representatives (except those employees terminated
for cause or consistent with sound business practices) and to preserve the
goodwill and relationships of suppliers, staff and others with whom business
relationships exist.
5.9 OTHER ACTIONS. No party shall permit any of their officers,
directors, employees or agents to take any action that would, or reasonably
would be expected to, result in any of its representations and warranties set
forth in this Agreement being or becoming untrue in any material respect, or in
any of the conditions set forth in Article 7 not being satisfied.
5.10 ADVISE OF CHANGES; GOVERNMENT FILINGS. Prospect, Prospect
Acquisition Corporation, Sierra Medical Management and Sellers shall confer with
one another on a regular and frequent basis, and report on operational matters
and promptly advise one another in writing of any change or event having, or
which, insofar as can reasonably be foreseen, could have, a Material Adverse
Effect on such party or which would cause or constitute a material breach of any
of the representations, warranties or covenants of such party contained herein.
Except where prohibited
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by applicable statutes and regulations, each party shall promptly provide the
other party (or its counsel) with copies of all other filings made by such party
with any state or federal governmental entity in connection with this Agreement
or the transactions contemplated hereby.
5.11 ACCOUNTING METHODS. No party shall change their methods of
accounting in effect as of the date hereof except as required by changes in
GAAP.
5.12 TAX-DEFERRED TREATMENT. No party shall take or cause to be taken
any action, whether before or after the Effective Time, that would disqualify
the Merger as a reorganization within the meaning of Section 368(a)(2)(D) of the
Code.
5.13 COMPENSATION, BENEFIT PLANS. Sierra Medical Management shall not
(i) adopt any collective bargaining agreement with employees, (ii) enter into,
adopt, amend or terminate any benefit plan or any other employee benefit plan or
any agreement, arrangement, plan or policy between such party and one or more of
its directors or officers, in each case so as to materially increase benefits
thereunder, (iii) enter into any contract, agreement, commitment or arrangement
to do any of the foregoing, (iv) create or amend any stock plan or grant any
equity based award pursuant to any stock plan or otherwise, or (v) enter into
any contract or agreement providing for the payment to any director, officer or
employee compensation or benefits contingent, or the terms of which are
materially altered, upon the occurrence of any of the transactions contemplated
by this Agreement.
5.14 SIERRA MANAGEMENT AGREEMENT. Sierra Medical Management shall not
amend the Sierra Management Agreement, nor any of the exhibits thereto.
ARTICLE 6.
ADDITIONAL AGREEMENTS
6.1 ACCESS TO INFORMATION. Sierra Medical Management shall afford the
other parties and shall cause its independent accountants to afford to such
persons, and their accountants, counsel and other representatives, reasonable
access during normal business hours during the period prior to the Effective
Time to all of its properties, books, contracts, commitments and records and to
the independent accountants reasonable access to the audit work papers and other
records of its accountants. During such period, Sierra Medical Management shall
use reasonable efforts to furnish promptly to the other parties all information
concerning the business, properties and personnel as may be reasonably
requested. No party will use such information for purposes other than this
Agreement and will otherwise hold such information in confidence until such time
as such information otherwise becomes publicly available, and in the event of
termination of this Agreement for any reason each party shall promptly return,
or cause to be returned, to the disclosing party all documents obtained from the
other party and any copies made of such documents, extracts and copies thereof.
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6.2 LEGAL CONDITIONS TO THE MERGER. Each party will take all
reasonable actions necessary to comply promptly with all legal requirements
which may be imposed on such party with respect to the Merger and will promptly
cooperate with and furnish information to the other parties in connection with
any such requirements imposed upon such other party in connection with the
Merger. Each party will take all reasonable actions to obtain (and to cooperate
with the other party in obtaining) any consent, authorization, order or approval
of, or any exemption by, any governmental authority, or other third party,
required to be obtained or made by such party in connection with the Merger or
the taking of any action contemplated thereby or by this Agreement.
6.3 SIERRA MEDICAL MANAGEMENT STOCKHOLDERS' APPROVAL. Sierra Medical
Management agrees to submit this Agreement and the Certificate of Merger and any
related matters to its stockholders for approval, all as provided by law and its
Certificate of Incorporation and Bylaws. The Board of Directors of Sierra
Medical Management has unanimously recommended to the Sierra Medical Management
stockholders that such stockholders approve the transactions contemplated by
this Agreement and the Certificate of Merger. Prior to the Effective Time,
Sierra Medical Management will have obtained the consent of its stockholders to
the Merger and the transactions contemplated hereunder and the filing of the
Certificate of Merger.
6.4 BLUE SKY LAWS. Each party shall take such steps as may be
necessary to comply with the securities and Blue Sky laws of all jurisdictions
which are applicable with the Merger.
6.5 COMMUNICATIONS. Between the date hereof and the Effective Time,
neither Sierra Medical Management nor Prospect will furnish any communication to
its stockholders or to the public generally if the subject matter thereof
relates to the other party or to the transactions contemplated by this Agreement
or the Certificate of Merger without the prior approval of the other party as to
the content thereof, which approval shall not be unreasonably withheld (unless
such disclosure is nonetheless required in the opinion of counsel), and subject
to each party's compliance with applicable law.
6.6 DELIVERY OF STOCK CERTIFICATES. Prospect will issue and deliver
as and when required by the provisions of this Agreement, the certificates
representing the shares of Prospect Common into which the shares of Sierra
Medical Management Common outstanding immediately prior to the Effective Time
shall have been converted as provided in this Agreement.
6.7 UPDATE TO DISCLOSURES. Without limiting any party's right to rely
on the representations and warranties as of the date of this Agreement, each
party shall provide the other parties with updates to the disclosures provided
or made available to such other parties as to material facts which arise between
the date of this Agreement and the Closing Date and which, if they had occurred
and been known prior to the date of this Agreement would have been required to
have been disclosed in order to make the representations and warranties
contained in Article 3 or Article 4, as applicable, true and correct as of the
date of this Agreement.
6.8 GOOD FAITH. Each party shall act in good faith in an attempt to
cause all the conditions precedent to its obligations under this Agreement to be
satisfied. Each party will act in
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good faith and take all reasonable action within its capability necessary to
render accurate as of the Effective Time its representations and warranties
contained in this Agreement.
6.9 STATE STATUTES. If any state takeover law shall become applicable
to the transactions contemplated by this Agreement, Prospect and its Board of
Directors shall use their reasonable best efforts to obtain such approvals and
take such actions as are necessary so that the transactions contemplated by this
Agreement may be consummated as promptly as practicable on the terms
contemplated by this Agreement and otherwise to minimize the effects of such
state takeover law on the transactions contemplated by this Agreement.
6.10 AMENDED LEASES. At the Closing, Sierra Medical Management shall
enter into amended and restated leases for the four properties being leased as
set forth more fully in the Stock Purchase Agreement.
6.11 SECURITIES ISSUES. Sierra Medical Management and Sellers agree
and acknowledge that the shares of Prospect Common to be issued in the Merger
are "restricted securities," as that term is defined under the Securities Act of
1933, as amended, and are not freely tradeable. Prior to issuing Prospect
Common to the stockholders of Sierra Medical Management, each stockholder of
Sierra Medical Management will be required to execute a Stockholder
Representation Agreement in the form of that attached hereto as Exhibit F, in
order to comply with applicable federal and State securities laws. The
Stockholder Representation Agreement will contain appropriate representations,
warranties and covenants by each holder of Sierra Medical Management Common,
including an agreement not to sell, transfer, or make any other disposition of
Prospect Common unless and until (a) such shares of Prospect Common are included
in a registration statement or a post-effective amendment under the Securities
Act which has been filed by Prospect and declared effective by the SEC or (b) in
the opinion of counsel for Prospect, no such registration statement or
post-effective amendment is required, or (c) the SEC has first issued a "no
action" letter regarding any such proposed disposition of the Prospect Common.
ARTICLE 7.
CONDITIONS PRECEDENT
7.1 CONDITIONS TO EACH PARTY'S OBLIGATIONS TO EFFECT THE MERGER. The
respective obligations of each party to effect the Merger shall be subject to
the satisfaction on or prior to the Closing Date of the following conditions
unless waived by such party:
(a) GOVERNMENT APPROVALS. All authorizations, consents, orders
or approvals of, or declarations of filings with, or expiration of waiting
periods imposed by, any governmental authority necessary for the consummation of
the transactions contemplated by this Agreement and any such requirements under
applicable state securities laws shall have been filed, occurred or been
obtained, if failure to make such filings or obtain such approvals would be
materially adverse to Prospect or Sierra Medical Management. There shall be no
regulatory action threatened or pending
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which could result in suspension or revocation of any Permits held by Sierra
Medical Management, Sierra Medical Group, Prospect, Prospect Acquisition
Corporation or Prospect Medical Group.
(b) THIRD-PARTY APPROVALS. Any and all consents or approvals
required from third parties relating to contracts, agreements, permits, leases
and other instruments, material to the respective businesses of Prospect (unless
waived by Sierra Medical Management and Sellers) or Sierra Medical Management
(unless waived by Prospect) shall have been obtained.
(c) LEGAL ACTION. No temporary restraining order, preliminary
injunction or permanent injunction or other order preventing the consummation of
the Merger shall have been issued by any federal or state court and remain in
effect, and no litigation seeking the issuance of such an order or injunction,
shall be pending which, in the good faith judgment of Prospect's Board of
Directors has a reasonable probability of resulting in such order or injunction.
In the event any such order or injunction shall have been issued, each party
agrees to use its reasonable efforts to have any such injunction lifted.
(d) STATUTES. No statute, rule or regulation shall have been
enacted by the government of the United States or any state or agency thereof
which would (i) make the consummation of the Merger illegal, (ii) prohibit
Prospect's or Surviving Corporation's ownership or operation of all or a
material portion of the business or assets of Sierra Medical Management, or
compel Prospect or Surviving Corporation to dispose of or hold separate all or a
material portion of the business or assets of Sierra Medical Management, as a
result of the Merger, or (iii) render Prospect, Sierra Medical Management or
Prospect Acquisition Corporation unable to consummate the Merger, except for any
waiting period provisions.
(e) ACQUISITION OF SIERRA MEDICAL GROUP STOCK. Pursuant to the
terms of the Stock Purchase Agreement, (i) Sierra shall have transferred the
stock to be sold under such agreement to Prospect Medical Group, (ii) the
parties to the Stock Purchase Agreement shall have otherwise completely
performed their respective obligations under the Stock Purchase Agreement, and
(iii) all transactions contemplated thereby have been consummated.
(f) JAYAKUMAR EMPLOYMENT AGREEMENT. Jayaratnam Jayakumar shall
have executed an employment agreement with Prospect Acquisition Corporation,
effective as of the Closing, a copy of which is attached hereto as Exhibit G.
(g) JAYAKUMAR NON-COMPETITION AGREEMENT. Jayaratnam Jayakumar
shall have executed a non-competition agreement with Prospect Acquisition
Corporation, effective as of the Closing, a copy of which is attached hereto as
Exhibit J.
7.2 CONDITIONS TO OBLIGATIONS OF PROSPECT AND PROSPECT ACQUISITION
CORPORATION. The obligations of Prospect and Prospect Acquisition Corporation
to effect the Merger are subject to the satisfaction on or prior to the Closing
Date of the following conditions, unless waived by Prospect and Prospect
Acquisition Corporation:
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(a) REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Sierra Medical Management and Sellers set forth in this Agreement
and the Certificate of Merger shall be true and correct in all respects as of
the date of this Agreement and as if made at and as of the Closing Date, except
as otherwise contemplated by this Agreement, and Prospect shall have received a
certificate or certificates signed by the chief executive officer and chief
financial officer of Sierra Medical Management to such effect.
(b) PERFORMANCE OF OBLIGATIONS OF SIERRA MEDICAL MANAGEMENT.
Sierra Medical Management shall have performed in all respects all obligations
required to be performed under this Agreement and the Certificate of Merger
prior to the Closing Date, and Prospect shall have received a certificate signed
by the chief executive officer and chief financial officer of Sierra Medical
Management to such effect.
(c) SIERRA MEDICAL MANAGEMENT STOCKHOLDER APPROVAL. This
Agreement and the transactions contemplated herein and hereby shall have been
approved and adopted by the required affirmative vote of the holders of the
outstanding shares of Sierra Medical Management.
7.3 CONDITIONS TO OBLIGATIONS OF SIERRA MEDICAL MANAGEMENT. The
obligations of Sierra Medical Management and the Sellers to effect the Merger
are subject to the satisfaction on or prior to the Closing Date of the following
conditions unless waived by Sierra Medical Management and the Sellers:
(a) REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Prospect and Prospect Acquisition Corporation set forth in this
Agreement shall be true and correct in all respects as of the date of this
Agreement and as if made at and as of the Closing Date, except as otherwise
contemplated by this Agreement, and Sierra Medical Management shall have
received a certificate signed by the chief executive officer and chief financial
officer of Prospect to such effects as to Prospect and Prospect Acquisition
Corporation.
(b) PERFORMANCE OF 0BLIGATIONS OF PROSPECT AND PROSPECT
ACQUISITION CORPORATION. Prospect and Prospect Acquisition Corporation shall
have performed in all respects all obligations required to be performed by them
under this Agreement prior to the Closing Date, and Sierra Medical Management
shall have received a certificate signed by the chief executive officer and
chief financial officer of Prospect to such effect.
(c) PAYMENT OF CASH CONSIDERATION. Prospect shall have paid at
the Closing the aggregate cash consideration of $625,000 to Jayaratnam
Jayakumar.
(d) DELIVERY OF JAYAKUMAR PROMISSORY NOTE. Prospect
Acquisition Corporation shall have delivered at the Closing the Jayakumar
Promissory Note in the principal amount of $250,000, the form of which is
attached hereto as Exhibit C, to Jayaratnam Jayakumar.
(e) DELIVERY OF OPTION. Prospect shall have delivered at the
Closing the Option, the form of which is attached hereto as Exhibit B.
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(f) DELIVERY OF PROSPECT COMMON TO SELLERS. Prospect shall
have issued at the Closing the Prospect Common to Sellers as set forth in
Section 2.4 hereinabove.
(g) JAYAKUMAR EMPLOYMENT AGREEMENT. Jayaratnam Jayakumar shall
have executed an employment agreement with Prospect Acquisition Corporation,
effective as of the Closing, a copy of which is attached hereto as Exhibit G.
(h) JAYAKUMAR NON-COMPETITION AGREEMENT. Jayaratnam Jayakumar
shall have executed a non-competition agreement with Prospect Acquisition
Corporation, effective as of the Closing, a copy of which is attached hereto as
Exhibit J.
ARTICLE 8.
CLOSING
8.1 CLOSING DATE. The Closing under this Agreement (the "Closing")
shall be held as promptly as practicable, but not more than ten (10) business
days following the later of (a) the approval of the Merger by the stockholders
of Sierra Medical Management and (b) satisfaction of all other conditions
precedent to the Merger specified in this Agreement, unless duly waived by the
party entitled to satisfaction thereof. In any event, if the Closing has not
occurred on or before October 31, 1997, this Agreement may be terminated as
provided in Section 11.1(c). Such date on which the Closing is to be held is
herein referred to as the "Closing Date." The Closing shall be held at the
offices of Miller & Holguin, 1801 Century Park East, 7th Floor, Los Angeles,
California, at 10:00 A.M. on such date, or on such other date and at such other
time and place as the parties may agree upon in writing.
8.2 FILING DATE. Subject to the provisions of this Agreement, on the
Closing Date, a fully executed and acknowledged copy of the Certificate of
Merger meeting the requirements of the Delaware General Corporation Law, shall
be filed with the Delaware Secretary of State, all in accordance with the
provisions of this Agreement.
8.3 CLOSING CERTIFICATES. On the Closing Date, each of the officers
and directors of Sierra Medical Management and Prospect shall have executed
closing certificates stating that the representations, warranties and covenants
contained in this Agreement are true and correct as of the Closing.
8.4 PAYMENT OF CASH CONSIDERATION. Prospect shall pay the aggregate
cash consideration of $625,000 in the amounts and to the stockholders of Sierra
Medical Management.
8.5 EXECUTION OF JAYAKUMAR EMPLOYMENT AGREEMENT. Prospect Acquisition
Corporation and Jayaratnam Jayakumar shall execute an employment agreement in
the form of that attached hereto as Exhibit G.
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8.6 EXECUTION OF JAYAKUMAR NONCOMPETITION AGREEMENT. Prospect
Acquisition Corporation and Jayaratnam Jayakumar shall execute a noncompetition
agreement in the form of that attached hereto as Exhibit J.
8.7 DELIVERY OF JAYAKUMAR PROMISSORY NOTE. Prospect Acquisition
Corporation shall execute and deliver the Jayakumar Promissory Note in the form
of that attached hereto as Exhibit C.
ARTICLE 9.
SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS
The representations, warranties and covenants of Sierra Medical
Management, Sellers, Prospect and Prospect Acquisition Corporation contained in
this Agreement and in the certificates executed as set forth in Section 8.3
herein, shall survive the Effective Time. All representations, warranties and
covenants in or pursuant to this Agreement shall be deemed to be conditions to
the Merger.
ARTICLE 10.
PAYMENT OF EXPENSES
Prospect, Prospect Acquisition Corporation and Sierra Medical Management
shall each pay their own fees and expenses incurred incident to the preparation
and carrying out of the transactions herein contemplated (including legal,
accounting and travel). Further, Sierra Medical Management and Sellers agree
that legal fees incurred in connection with the Acquisition, including (i) the
Merger and the transactions contemplated in this Agreement and (ii) the
transactions contemplated by the Stock Purchase Agreement, exceeding $30,000
shall be paid by Sellers individually and not by Sierra Medical Management or
Sierra Medical Group.
ARTICLE 11.
TERMINATION, AMENDMENT AND WAIVER
11.1 TERMINATION. This Agreement may be terminated at any time prior
to the Effective Time, whether before or after approval of matters presented in
connection with the Merger by the stockholders of Sierra Medical Management:
(a) by mutual written consent of Sierra Medical Management and
Prospect;
(b) by either Prospect or Sierra Medical Management if there
has been a material breach of any representation, warranty, covenant or
agreement contained in this Agreement on the
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part of the other party set forth in this Agreement; provided that if such
breach is curable, such breach has not been promptly cured after written notice
of such breach;
(c) by either Prospect or Sierra Medical Management if the
Merger shall not have been consummated before October 31, 1997 (which failure,
in the case of termination by Prospect or Prospect Acquisition Corporation, was
due to a failure of any of the conditions to the obligations of Prospect and
Prospect Acquisition Corporation set forth in Section 7.2 hereof and, in the
case of Termination by Sierra Medical Management, was due to a failure of any of
the conditions to the obligations of Sierra Medical Management set forth in
Section 7.3 hereof);
(d) by either Prospect or Sierra Medical Management if (i)
there shall be a final nonappealable order of a federal or state court in effect
preventing consummation of the Merger or (ii) there shall be any action taken,
or any statute, rule, regulation or order enacted, promulgated or issued or
deemed applicable to the Merger by any governmental authority which would make
consummation of the Merger illegal;
(e) by Prospect if the unanimous approval of the Sierra Medical
Management stockholders shall not have been obtained by October 31, 1997;
(f) by Prospect if Sierra Medical Management shall have
adopted, approved or implemented or taken any action in respect of, entered into
any plan of liquidation agreement with respect to, or commenced or undertaken,
any restructuring or recapitalization plan which contemplates the disposition or
distribution, directly or indirectly, of any material amount of assets or
securities of Sierra Medical Management to some or all of its security holders
either by dividend, share purchase, exchange offer, reclassification, merger,
exchange or otherwise or by Sierra Medical Management if Section 368(a)(2)(D) of
the Code cannot be satisfied as a result of dissenting stockholders of Sierra
Medical Management;
(g) by Prospect if any condition to Prospect's obligation to
complete the Merger has not been satisfied or waived by Prospect;
(h) by Sierra Medical Management if any condition to Sierra
Medical Management's obligation to complete the Merger has not been satisfied or
waived by Sierra Medical Management.
11.2 EFFECT OF TERMINATION. In the event of termination of this
Agreement by either Sierra Medical Management or Prospect as provided in Section
11.1, this Agreement and the Certificate of Merger shall forthwith become void
and there shall be no liability or obligation on the part of Prospect or Sierra
Medical Management or their respective officers or directors except for (i) the
last sentence of Section 6.1, and (ii) the provisions of Article 10, and except
to the extent that such termination results from the breach by a party hereto of
any of its representations, warranties, covenants or agreements set forth in
this Agreement.
11.3 AMENDMENT. This Agreement may be amended by the parties hereto, at
any time before or after approval of matters presented in connection with the
Merger by the stockholders of
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Sierra Medical Management, but, after any such stockholder approval, no
amendment shall be made which by law requires the further approval of
stockholders without obtaining such further approval. This Agreement may not be
amended except by an instrument in writing signed on behalf of each of the
parties hereto.
11.4 EXTENSION, WAIVER. At any time prior to the Effective Time, any
party hereto, by such corporate action as shall be appropriate, may, to the
extent legally allowed, (i) extend the time for the performance of any of the
obligations or other act of the other parties hereto, (ii) waive any
inaccuracies in the representations and warranties made to such party contained
herein or in any document delivered pursuant hereto and (iii) waive compliance
with any of the agreements or conditions for the benefit of such party contained
herein. Any agreement on the part of a party hereto to any such extension or
waiver shall be valid if set forth in an instrument in writing signed on behalf
of such party.
ARTICLE 12.
GENERAL
12.1 NOTICES. Any notice, request, instruction or other document to be
given hereunder by any party to the other shall be in writing and delivered
personally or sent by certified mail, postage prepaid by telecopy, or by courier
service, as follows:
If to Prospect or Prospect Acquisition Corporation, to:
Prospect Medical Holdings, Inc.
18200 Yorba Linda Blvd., Suite 409
Yorba Linda, CA 92686
Attention: Jacob Y. Terner, M.D.
With a copy to: Miller & Holguin
1801 Century Park East, 7th Floor
Los Angeles, CA 90067
Attention: Thomas James Wingard, Esq.
If to Sierra Medical Management or Sellers, to:
Sinnadurai Moorthy, M.D.
44725 10th Street West, Suite 250
Lancaster, California 93534
Karunyan Arulanantham, M.D.
1675 Staffordshire Drive
Lancaster, California 93534
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Jayaratnam Jayakumar
44343 Soft Avenue
Lancaster, California 93536
With a copy to: Arter & Hadden
700 S. Flower St., Suite 3000
Los Angeles, California 90017
Attention: Jack Goldman, Esq.
or to such other persons as may be designated in writing by the parties, by a
notice given as aforesaid.
12.2 HEADINGS. The headings of the several sections of this Agreement
are inserted for convenience of reference only and are not intended to affect
the meaning or interpretation of this Agreement.
12.3 COUNTERPARTS. This Agreement may be executed in counterparts, and
when so executed each counterpart shall be deemed to be an original, and said
counterparts together shall constitute one and the same instrument.
12.4 BINDING NATURE. This Agreement shall be binding upon and inure to
the benefit of the parties hereto. Except for an assignment to Imperial Bank, a
California banking corporation, neither Prospect, Prospect Acquisition
Corporation, Sierra Medical Management nor Sellers may assign or transfer any
rights under this Agreement.
12.5 INTEGRATION. All prior agreements, representations and
understandings between the parties are incorporated in this Agreement which
constitutes the entire contract between the parties. The terms of this
Agreement are intended by the parties as a final expression of their agreement
with respect to such terms as are included herein and may not be contradicted by
evidence of any prior or contemporaneous written or oral representations,
agreements or understandings, whether express or implied. The parties further
intend that this Agreement constitutes the complete and exclusive statement of
its terms and that no extrinsic evidence whatsoever may be introduced in any
judicial proceeding, if any, involving this Agreement. No amendment or
variation of the terms of this Agreement shall be valid unless made in writing
and signed by each of the parties.
12.6 INCORPORATION OF EXHIBITS. All Exhibits attached hereto are by
this reference incorporated herein and made a part hereof for all purposes as if
fully set forth herein.
12.7 GOOD FAITH. Each of the parties hereto agrees that it shall act
in good faith in an attempt to cause all the conditions precedent to their
respective obligations to be satisfied.
12.8 APPLICABLE LAW. This Agreement shall be governed by, construed
and enforced in accordance with the laws of the State of California as applied
to contracts entered into solely between residents of, and to be performed
entirely in, such state.
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12.9 DISPUTE. The parties firmly desire to resolve all disputes
arising hereunder without resort to litigation in order to protect their
respective business reputations and the confidential nature of certain aspects
of their relationship. Accordingly, any controversy or claim arising out of or
relating to this Agreement, or the breach thereof, shall be settled by
arbitration as set forth below.
(a) All disputes which in any manner arise out of or relate to
this Agreement or the subject matter thereof, shall be resolved exclusively by
arbitration in accordance with the provisions of this Section 12.9. Either
party may commence arbitration by sending a written demand for arbitration to
the other party, setting forth the nature of the controversy, the dollar amount
involved, if any, and the remedies sought, and attaching a copy of this Section
to the demand.
(b) The parties stipulate to arbitration before a single,
mutually agreed upon arbitrator sitting on the Los Angeles, California Judicial
Arbitration Mediation Services (JAMS) panel. In the event that the parties are
unable to agree upon the person chosen as arbitrator within 30 days of the
demand for arbitration, the arbitrator shall be selected in the sole discretion
of the JAMS administrator. The arbitrator shall be a member of the California
bar.
(c) The parties shall share all costs of arbitration. The
prevailing party shall be entitled to reimbursement by the other party of such
party's attorneys' fees and costs and any arbitration fees and expenses incurred
in connection with the arbitration hereunder.
(d) The substantive law of the State of California shall be
applied by the arbitrator. All proceedings in arbitration shall be in
accordance with the California Code of Civil Procedure, as amended, and the
parties shall have the right to legal discovery in any matter submitted to
arbitration in satisfaction of California Code of Civil Procedure Section
1283.05, as permitted by California Code of Civil Procedure Section 1283.1(b).
(e) Arbitration shall take place in Los Angeles, California
unless the parties otherwise agree. As soon as reasonably practicable, a
hearing with respect to the dispute or matter to be resolved shall be conducted
by the arbitrator. As soon as reasonably practicable thereafter, the arbitrator
shall arrive at a final decision, which shall be reduced to writing, signed by
the arbitrator and mailed to each of the parties and their legal counsel.
(f) All decisions of the arbitrator shall be final, binding and
conclusive on the parties and shall constitute the only method of resolving
disputes or matters subject to arbitration pursuant to this Agreement. The
arbitrator or a court of appropriate jurisdiction may issue a writ of execution
to enforce the arbitrator's judgment. Judgment may be entered upon such a
decision in accordance with applicable law in any court having jurisdiction
thereof.
(g) Notwithstanding the foregoing, because time is of the
essence of this Agreement, the parties specifically reserve the right to seek a
judicial temporary restraining order, preliminary injunction, or other similar
equitable relief.
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(h) The decision and award of the arbitrator shall be kept
confidential by the parties to the greatest extent possible. No disclosure of
such decision or award shall be made by the parties except as required by law or
as necessary or appropriate to effect the enforcement thereof.
(i) Should either party institute any action or procedure to
enforce this Agreement or any provision hereof, or for damages by reason of any
alleged breach of this Agreement or of any provision hereof, or for a
declaration of rights hereunder (including without limitation arbitration), the
prevailing party in any such action or proceeding shall be entitled to receive
from the other party all costs and expenses, including without limitation
reasonable attorneys' fees, incurred by the prevailing party in connection with
such action or proceeding.
12.10 SEVERABILITY. If for any reason whatsoever, any one or more of
the provisions of this Agreement shall be held or deemed to be inoperative,
unenforceable or invalid as applied to any particular case or in all cases, such
circumstances shall not have the effect of rendering such provision invalid in
any other case or of rendering any of the other provisions of this Agreement
inoperative, unenforceable or invalid.
12.11 THIRD PARTY BENEFICIARIES. Except as expressly set forth herein,
no provision of this Agreement, including the Exhibits and Schedules hereto, is
intended or should be construed to create any third party beneficiaries or to
give any rights, including rights of subrogation, to any person other than the
parties to this Agreement.
12.12 BEST EFFORTS; FURTHER ASSURANCES. Subject to the terms and
conditions of this Agreement, each party shall use its best efforts to take, or
cause to be taken, all action and to do, or cause to be done, all things
necessary, proper or advisable consistent with applicable laws and regulations
to consummate the transactions contemplated by this Agreement as promptly as
possible. The parties hereto shall do and perform or cause to be done and
performed all such further actions and things and shall execute and deliver all
such other agreements, certificates, instruments or documents as any other party
hereby may reasonably request in order to carry out the intent and purposes of
this Agreement and the consummation of the transactions contemplated hereby.
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IN WITNESS WHEREOF, Prospect, Sierra Medical Management and Sellers have
caused this Agreement to be signed by their respective officers thereunto duly
authorized, all as of the date first above written.
SIERRA MEDICAL MANAGEMENT, INC. PROSPECT MEDICAL HOLDINGS, INC.
By: /s/ Sinnadurai Moorthy By: /s/ Jacob Y. Terner, M.D.
------------------------------ ------------------------------
Its: Sinnadurai Moorthy, M.D. Its: CEO
------------------------------ ------------------------------
/s/ Sinnadurai Moorthy
- -----------------------------------
Sinnadurai Moorthy, M.D.
/s/ Karunyan Arulanantham
- -----------------------------------
Karunyan Arulanantham, M.D.
/s/ Jayaratnam Jayakumar
- -----------------------------------
Jayaratnam Jayakumar
28
<PAGE>
EXHIBITS TO
AGREEMENT AND PLAN OF REORGANIZATION(1)
<TABLE>
<CAPTION>
SCHEDULES
<S> <C>
Schedule 3.2 Authorization
Schedule 3.11 Contracts
Schedule 3.19 Environmental Conditions
Schedule 3.20 Bank Account
Schedule 3.23 Intellectual Property
Schedule 4.11 Litigation of Purchaser
Schedule 4.13 Inspections
EXHIBITS
A Certificate of Merger
B Jayakumar Option Agreement -- Exhibit 10.49
C Jayakumar Promissory Note -- Exhibit 10.48
F Stockholder Representation Agreement
G Jayakumar Employment Agreement -- Exhibit 10.46
J Non-Competition Agreement -- Exhibit 10.47
</TABLE>
(1) The Registrant hereby undertakes to provide to the Securities and Exchange
Commission upon request copies of any of the exhibits listed above not
otherwise filed with this Form S-1 Registration Statement as noted above.
29
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ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (this "Agreement") is made and entered into
as of the 29th day of October, 1997 by and among Pegasus Medical Group, Inc, a
California professional corporation, or its assignee ("Buyer"); and Marvin L.
Ginsburg, M.D., Medical Corporation d/b/a A.V. Western Medical Group, Inc., a
California corporation ("Seller"), and J. Robert West, the sole shareholder of
Seller.
RECITALS:
WHEREAS, Seller is the owner and operator of clinics located at 2151 E.
Palmdale Boulevard, Palmdale, California and 2783 W. Avenue L, Lancaster,
California (the "Clinics"); and
WHEREAS, Seller owns or leases certain real estate, and the furniture and
equipment, inventory, supplies and certain other personal property and assets
utilized by Seller in connection with the ownership and operation of the
Clinics; and
WHEREAS, Buyer desires to acquire such property and assets, but no
liabilities other than as set forth in this Agreement; and
WHEREAS, Buyer and Seller desire to provide for the sale of certain
assets to Buyer;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, Seller agrees to sell, assign, transfer and deliver to Buyer
the assets described herein and Buyer agrees to purchase or accept assignment
and transfer of such assets from Seller, on the terms and conditions provided in
the Agreement.
ARTICLE I
DEFINITIONS
"ACCOUNTS RECEIVABLE" means all accounts and notes receivable, negotiable
instruments and chattel paper the rights to which were generated by the Clinics,
and other evidences of indebtedness of, and rights to receive payments from, any
persons that relate to the Business prior to the Closing.
"ASSETS" means all right, title and interest in and to the assets and
properties, tangible and intangible, of and pertaining to or used at or in
connection with the Business, including without limitation all of Seller's
right, title and interest in the following, in each case to the extent
transferable:
(a) Equipment, furniture, office furnishings, tools and similar
property owned by Seller and used in connection with the Business, including,
but not limited to, such assets listed on Schedule 1(a) ("Equipment").
<PAGE>
(b) Current and useable inventory of supplies, pharmaceuticals,
janitorial and office supplies and other disposables and consumables on hand or
under order for use in the Clinics (the "Inventory") as of the Closing Date.
(c) Seller's rights and obligations under the Leases or replacement
leases separately negotiated by Buyer.
(d) Seller's rights and obligations under the Contracts.
(e) Permits, to the extent transferable under applicable law.
(f) Rights of recovery, rights of set-off, claims and causes of action
accruing as a result of the ownership and operation of the Clinics, and all
other claims and rights of Seller under or pursuant to all warranties,
representations and guarantees (express or implied made by suppliers in
connection with the Assets or services furnished to Seller pertaining to the
Business or affecting the Assets).
(g) All other tangible and intangible assets used in connection with
the Business, including specifically trade names, service marks and service
names, and applications therefor, and all intellectual property, telephone
numbers, and goodwill relating to the Business.
(h) To the extent transferrable under applicable law, (i) all books,
records, document, files and other writings used in connection with the
Business, including, without limitation, all patient medical records, and
(ii) all personnel records of employees of Seller hired by Buyer.
(i) Data processing programs, software programs, computer printouts,
data bases and hardware and related items used in the conduct of the Business,
including accounting, invoices, auditing and data processing bases and programs,
but excluding therefrom the Excluded Assets.
"ASSUMED LIABILITIES" has the meaning set forth in Section 2.2.
"BUSINESS" means Seller's business of owning assets in connection with,
and operating, the Clinics.
"CLOSING" means the consummation of the transactions contemplated herein.
"CLOSING DATE" means a mutually agreeable date following Seller meeting
the conditions of Closing of Article 7, but no later than October 31, 1997.
"CODE" means the Internal Revenue Code of 1986, as amended, and the rules
and regulations thereunder.
"CONTRACTS" means those agreements, contracts, Payor Contracts, purchase
orders, licenses, instruments or commitments listed on Schedule 1(b) to which
Seller is a party or by
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<PAGE>
which it is bound that is assumed by Buyer hereunder and that relates to the
Business or the Assets, whether oral or written, but excluding all Leases and
excluding all documents evidencing debt of the Seller to any person.
"DISCLOSURE SCHEDULE" means a schedule jointly prepared by Seller and
Buyer to be attached hereto which sets forth the exceptions to the exceptions to
the representations and warranties contained in Articles III and IV hereof and
certain other information called for by this Agreement. Unless otherwise
specified, each reference in this Agreement to any numbered schedule is a
reference to that numbered schedule that is included in the Disclosure Schedule.
"EFFECTIVE DATE" means the date of this Agreement.
"ENCUMBRANCES" means all security interests, liens, pledges, claims,
charges, encumbrances, encroachments, rights of first refusal, conditional sales
agreements, options, mortgages, indentures, easements, licenses, restrictions or
other covenants, agreements, understandings, obligations, defects or
irregularities affecting title to, or ownership of, any of the Assets.
"ENVIRONMENTAL CLAIMS" means all accusations, allegations, notices of
violation, liens, claims, demands, suits or causes of action for any damage,
including without limitation, personal injury, property damage (including any
depreciation of property values), lost use of property, or consequential
damages, arising directly or indirectly out of Environmental Conditions or
Environmental Laws.
"ENVIRONMENTAL CONDITIONS" means the state of the environment, including
natural resources, soil, surface water, ground water, any present or potential
drinking water supply, subsurface strata, or ambient air, relating to or arising
out of the use, handling, storage, treatment, recycling, generation,
transportation, release, spilling, leaking, pumping, pouring, emptying,
discharging, injecting, escaping, leaching, disposal, dumping, or threatened
release of Hazardous Substances by the Seller or its predecessors or successors
in interest or by their representatives. With respect to Environmental Claims
by third parties, Environmental Conditions also include the exposure of persons
to Hazardous Substances migrating from or otherwise emanating from or located on
property owned or occupied by Seller.
"ENVIRONMENTAL LAWS" means all federal, state, district and local laws,
all rules or regulations promulgated thereunder, and all orders, consent orders,
judgments, notices, permits, or demand letters issued, promulgated, or entered
pursuant thereto, relating to pollution or protection of the environments
(including without limitation ambient air, surface water, ground water, land
surface, or subsurface strata). Environmental Laws shall include without
limitation the Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended ("CERCLA"), the Toxic Substances Control Act, as
amended, the Hazardous Materials Transportation Act, as amended, the Resource
Conservation and Recovery Act, as amended ("RCRA"), the Clean Water Act, as
amended, the Safe Drinking Water Act, as amended, the Clean Air Act, as amended,
the Atomic Energy Act of 1954, as amended, the Occupational Safety and Health
Act, as amended, California Health & Safety code Sections 25100, ET SEQ.,
25249.5 ET SEQ.,
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39000 ET SEQ., as amended, and the California Water Code Section 13000 ET SEQ.,
as amended, and all analogous laws promulgated or issued by any state or other
governmental authority.
"EXCLUDED ASSETS" means the following assets of Seller which are not to
be acquired by Buyer:
(i) All amounts of cash or cash equivalents;
(ii) Any and all Accounts Receivable;
(iii) Artwork belonging to Marvin Ginsburg, M.D. and described on
Schedule 1(c);
(iv) Risk pools, withholds or any profit sharing funds related to
services performed prior to the Closing (prorated for any partial years); and
(v) Any Asset the ownership of which by Buyer is prohibited by Law.
"GAAP" means generally accepted 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 or in such other statements by such
other entity or other practices and procedures as may be approved by a
significant segment of the accounting profession, which are applicable to the
circumstances as of the date of determination.
"HAZARDOUS MATERIALS" means all pollutants, contaminants, chemicals,
wastes, and any other carcinogenic, ignitable, corrosive, reactive, toxic,
radioactive or otherwise hazardous substances or materials including but not
limited to any substances, materials or wastes subject to regulation, control,
or remediation under Environmental Laws.
"LAWS" means all laws, statutes, ordinances, regulations, rules, codes,
orders, consent decrees, settlement agreements, and governmental requirements
(including any ruling or requirement having the effect of law and applicable to
Seller) of any federal, state or local government and any other governmental
department or agency, and any judgment, decision, decree, writ, injunction,
decree, award, ruling or order of any court or governmental agency, department
or authority (including the Internal Revenue Service).
"LEASED REAL PROPERTY" means the real property described in the Leases.
"LEASEHOLD ESTATES" means all Seller's rights and obligations as lessee
under the Leases.
"LEASEHOLD IMPROVEMENTS" means all leasehold improvements situated in or
on the property located at 2151 East Palmdale Boulevard, Palmdale, CA and 2783
W. Avenue L, Lancaster, CA 93536 which is owned by Seller.
4
<PAGE>
"LEASES" means those real and personal property leases, including
operating and capital leases, listed on Schedule 1(d), to which Seller is a
party or by which it is bound, that is assumed by Buyer and that relates to the
Business or Assets, whether oral or written.
"PERMITS" means all permits, licenses, certificates and governmental
authorizations, approvals, license applications or related certifications
necessary for the conduct of, or relating to the operation of, the Business.
"PAYOR CONTRACTS" means all contracts for the provision of professional
medical services, including capitated contracts, with HMOs and other payors
listed on Schedule 3.3.
"SERVICE DATE" means a date on which a patient is rendered service by the
Clinics.
ARTICLE II
SALE AND PURCHASE OF ASSETS
Section 2.1 SALE AND PURCHASE OF ASSETS. Upon the terms and subject to
the conditions contained herein, at the Closing, Seller shall sell, transfer,
assign, convey and deliver to Buyer, and Buyer shall acquire from Seller the
Assets.
Section 2.2 ASSUMPTION OF CERTAIN LIABILITIES. Upon the terms and
subject to the conditions contained herein, at the Closing, Buyer shall assume
those obligations of Seller relating to the Assets set forth on Schedule 2.2,
together with responsibility for the expenses and liabilities associated with
the ownership and operation of the Business incurred on or after the Closing
Date (excluding all indebtedness relating to the Business, the Clinics or the
Assets existing on the Closing Date), (collectively, the "Assumed Liabilities").
Except with respect to the foregoing, no expenses and liabilities of any kind
whatsoever of the Seller or the Business or relating to the Assets incurred
before or existing on the Closing Date shall be assumed by Buyer, and all such
expenses and liabilities shall remain the responsibility of Seller. Except as
specifically agreed by Buyer pursuant to Section 5.3, Buyer will not assume
liability with respect to the employees of Seller, or for any action or inaction
relating to any time prior to their date of employment, nor with respect to any
claims, liabilities or obligations arising out of any pension, profit sharing or
Section 401(k) plan covering such employees or any claims, liabilities or
obligations related in any way to Seller. For purposes of this Section (and
without limiting the generality of foregoing), any and all malpractice claims
arising from events or occurrences prior to the Closing Date shall be deemed to
have been incurred before the Closing Date.
Section 2.3 PURCHASE PRICE. Upon the terms and subject to the
conditions contained herein, Buyer shall deliver to cause to be delivered to
Seller, in exchange for the sale, transfer, assignment, conveyance and delivery
of Assets, the amount of Seven Hundred Thousand Dollars ($700,000) (the
"Purchase Price") which shall be distributed in accordance with Section 3.21
hereof.
Section 2.4 PAYMENT OF PURCHASE PRICE; MANNER OF PAYMENT. Buyer will
deliver the Purchase Price to Seller at the Closing.
5
<PAGE>
Section 2.5 ALLOCATION OF PURCHASE PRICE. Buyer and Seller agree that
the Purchase Price shall be allocated among the Assets in the manner required by
Section 1060 of the Code and regulations thereunder. Buyer and Seller agree to
(i) each prepare and file on a timely basis with the Internal Revenue Service
substantially identical initial and supplemental Internal Revenue Service Forms
8594 "Asset Acquisition Statement Under Section 1060," and (ii) use historical
amounts for all Medicare cost reports and Medi-Cal cost reports.
Section 2.6 PRORATIONS. Seller shall be responsible for all accrued
expenses with respect to the Assets accruing before 12:00 midnight on the
Closing Date and shall be entitled to revenues from the Assets for the period
through 12:00 midnight on the Closing Date. Buyer shall be responsible for and
pay all accrued expenses (other than indebtedness not assumed by Buyer) with
respect to the Assets accruing on or after 12:01 a.m. on the day after the
Closing Date and shall be entitled to receive and retain all revenues from the
Assets accruing on or after the Closing Date. In prorating such costs, payments
or liabilities, the value of all prepayments and deposits by Seller shall be
prorated as of the Closing Date. The balance of such accrued expenses and
revenues shall be paid and allocated as follows:
(a) At the Closing, the following adjustments and prorations
shall be made on the basis of a 30-day month as of midnight, Pacific Standard
time, on the Closing Date: all federal, state, county and municipal personal
property, income, use and employment taxes, and state, county and city license
or permit fees, if any, directly attributable to any of the Assets.
(b) Within sixty (60) days after the Closing Date, the
following adjustments and prorations shall be determined as of the Closing Date
and the party to whom payment is owed shall receive said payment within said
sixty (60) day period:
(i) all income from, and expenses of, the cost of
utilities and services being furnished to the Assets pursuant to the Contracts
or Leases; and
(ii) the obligations accrued under all of the Contracts
or Leases.
Section 2.7 CLOSING COSTS; TRANSFER TAXES AND FEES. Seller shall pay
any and all documentary and transfer taxes, sales, use or other taxes imposed by
reason of the transfers of Assets provided hereunder and any deficiency,
interest or penalty asserted with respect thereto. Buyer shall pay any fees or
costs of recording or filing all applicable conveyancing instruments described
in Section 8.2.
Section 2.8 FAIR MARKET VALUE. The parties agree that the Purchase
Price reflects the fair market value of the Assets and Assumed Liabilities. The
parties agree that no consideration is or will be paid for the value of any
referrals (direct or indirect) to or from Buyer, Seller or West.
6
<PAGE>
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller hereby represents and warrants to Buyer as follows:
Section 3.1 ORGANIZATION AND STANDING OF SELLER. Seller is a
professional corporation duly organized, validly existing and in good standing
under the laws of the State of California and has full power and authority to
own and operate the Assets and to carry on the Business as and where it is now
being conducted.
Section 3.2 OWNERSHIP AND CONDITION OF ASSETS.
(a) TITLE TO CERTAIN ASSETS. Excluding the Leased Real
Property, Seller has and will transfer good and marketable title to the Assets
and upon the consummation of the transactions contemplated hereby, Buyer will
acquire good title to all of the Assets, free and clear of any Encumbrances.
(b) LEASED REAL PROPERTY. Schedule 3.2(b) contains a complete
and accurate list of all Leased Real Property. With respect to the Leased Real
Property, except as disclosed on Schedule 3.2(b), Seller has and will transfer,
subject to the terms and conditions of the Leases, to Buyer at the Closing an
unencumbered interest in the Leasehold Estates. Seller enjoys peaceful and
undisturbed possession of all the Leased Real Property, subject to the rights of
the fee owners, and Seller has in all material respects performed all the
obligations required to be performed by it with respect thereto through the date
hereof.
(c) EQUIPMENT AND LEASEHOLD IMPROVEMENTS. The Equipment, the
Leasehold Improvements and other tangible assets owned, leased or used by Seller
in the operation of the Business (i) have no known material defects, (ii) are,
to the best knowledge of Seller, in good operating condition and repair, subject
to ordinary wear and tear, (iii) are not, to the best knowledge of Seller, in
need of maintenance or repair except for ordinary routine maintenance and
repair, (iv) constitute all assets currently used in the operation of the
Business as presently conducted and (v) are, to the best knowledge of Seller, in
conformity, in all material respects, with all applicable laws, ordinances,
orders, regulations and other requirements relating thereto currently in effect.
Except as contemplated by this Agreement, and the other agreements referred to
herein, none of the Equipment or Leasehold Improvements is subject to any
commitment or other arrangement for its sale.
Section 3.3 CONTRACTS. To the best knowledge of Seller, Schedule 3.3
sets forth a complete and accurate list of all contracts material to the
condition (financial or other), business or results of operation, of the
Business and/or the Assets. Seller has delivered to Buyer true, correct and
complete copies of all of the contracts listed on Schedule 3.3, including all
amendments and supplements thereto.
Section 3.4 ABSENCE OF BREACHES OR DEFAULTS. All of the Contracts are,
with respect to Seller, and to the best knowledge of Seller are, with respect to
all other parties thereto, valid
7
<PAGE>
and binding and in full force and effect in accordance with their terms. Seller
has duly performed all of its obligations under the Contracts to the extent
those obligations to perform have accrued, and no violation of, or default (or
condition or event that with notice or lapse of time or both would constitute a
default) or breach under any Contract by Seller or, to the best knowledge of
Seller, any other party, has occurred and neither Seller nor, to the best
knowledge of Seller, any other party, has repudiated any provisions thereof.
Section 3.5 PERMITS AND GOVERNMENTAL FILINGS.
(a) PERMITS. Seller has delivered to Buyer complete and
correct copies of all Permits material to the Business or to the operations of
the Clinics. All such Permits are valid and in full force and effect. Such
Permits constitute all permits required to conduct the Business as now being
conducted, except such permits whose failure to obtain would not have a material
adverse effect on the Assets or the Business. No notice or warning from any
authority with respect to the suspension, revocation, or termination of any
Permit has been issued or given, nor is Seller aware of the proposed or
threatened issuance of any such notice or warning. Seller has delivered to
Buyer true, correct and complete copies of (a) the most recent fire marshal's
surveys of the Clinics, and (b) the latest reports on the Clinics by any
federal, state, county or local governmental authority. Seller has delivered to
Buyer true, correct and complete copies of all permits reasonably requested by
Buyer.
(b) FILINGS. Except as disclosed on Schedule 3.5(b) hereto, no
notice to, declaration, filing or registration with, or permit from, any
governmental or regulatory body or authority is required to be made or obtained
by Seller in connection with the execution, delivery or performance of this
Agreement and the consummation of the transactions contemplated hereby.
Section 3.6 LITIGATION, ETC. Except as disclosed on Schedule 3.6,
there is no action, order, writ, injunction, judgment or decree outstanding or
any claim, suit, litigation, proceeding, labor dispute or arbitral action
(collectively, "Actions") pending, or to the best knowledge of Seller,
threatened or anticipated (a) against, related to or affecting (i) Seller, the
Business or the Assets, or (ii) any shareholder of Seller as such, (b) seeking
to delay, limit or enjoin the transactions contemplated by this Agreement,
(c) that involves the risk of criminal liability, or (d) in which Seller is a
plaintiff. There are no unsatisfied judgments against Seller, any shareholder
of Seller, the business or the Assets.
Section 3.7 COURT ORDERS, DECREES AND LAWS. There is no outstanding
action, order, writ, injunction, judgment or decree brought or issued by any
governmental authority or claim, suit, litigation, proceeding, governmental
audit or investigation brought by any governmental authority pending, or to the
best knowledge of Seller, threatened or anticipated (a) against, related to or
affecting (i) Seller, the Business or the Assets, or (ii) any shareholder of
Seller as such, (b) seeking to delay, limit or enjoin the transactions
contemplated by this Agreement, or (c) that involves the risk of criminal
liability. Seller is not in default with respect to or subject to any judgment,
order, writ, injunction, arbitration award or decree of any court or
governmental authority, department, agency or instrumentality.
8
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Section 3.8 AUTHORITY; BINDING EFFECT. Seller has all requisite power
and authority to execute and deliver this Agreement, to consummate the
transactions contemplated by this Agreement and to perform its obligations
hereunder. The execution and delivery of this Agreement and the consummation by
Seller of the transactions contemplated hereby have been duly approved by
Seller. No other proceedings on the part of Seller are necessary to authorize
this Agreement and the transactions contemplated hereby. The execution,
delivery and performance of this Agreement and such other documents and
instruments contemplated by this Agreement constitute the legal, valid and
binding obligations of Seller enforceable in accordance with their respective
terms subject to general equitable doctrines and the effect of bankruptcy or
similar laws affecting creditors' right generally.
Section 3.9 INSURANCE; MALPRACTICE. Schedule 3.9 is a list of all
policies or binders of fire, liability and other forms of insurance policies or
binders currently in force relating to the Assets. Seller warrants that it will
not terminate any such policies on or prior to the Closing Date.
Section 3.10 FINDERS OR BROKERS. Seller has not engaged any broker or
finder in connection with the transactions contemplated hereunder.
Section 3.11 ABSENCE OF CHANGES. Except as disclosed in this Agreement
or Schedules and Exhibits thereto, since the date of the Seller's 1996 financial
statements, and except for actions undertaken after written notice to Buyer,
there has not been any:
(a) material adverse change with respect to the Assets or
Business;
(b) material change in accounting methods, principles or
practices by Seller affecting the Assets, its liabilities or the Business;
(c) sale or other disposition, except in the ordinary course of
the Business, of any of the Assets, or replacement of a material Encumbrance on
the Assets;
(d) increase, other than in the ordinary course of the Business
and consistent with past practice, in the rate of compensation payable to or to
become payable to any director, officer or other employee of Seller or any
consultant, representative or agent of Seller, including without limitation the
making of any loan to, or the payment, grant or accrual of any bonus, incentive
compensation, service award or other similar benefit to, any such person, or the
addition to, modification of, or contribution to any Employee Benefit Plan
arrangement or practice other than (i) contributions to Employee Benefit Plans
made for 1996 in accordance with the normal practices of Seller, (ii) the
extension of coverage to participants in Employee Benefit Plans who became
eligible after the date of the 1996 financial statements, (iii) reductions in
health care benefits; or
(e) existence of any other event or condition that in any one
case or in the aggregate has or might reasonably be expected to have a material
adverse effect on the Assets or the business.
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Except as otherwise provided in this Agreement or the exhibits or
Schedules thereto, since the date of the 1996 financial statements, Seller has
operated the business in the ordinary course consistent with Seller's past
practice so as to preserve the business and its goodwill intact, and to keep
available to the Business the services of Seller's employees, except for changes
in the ordinary course of business.
Section 3.12 TAX AND THIRD-PARTY PAYOR DEFICIENCIES.
(a) Seller has timely filed with the appropriate taxing
authorities all returns in respect of Taxes (collectively, the "Tax Returns")
required to be filed through the date hereof and will timely file any such Tax
Returns required to be filed after the date hereof on or prior to the Closing
date. Also all of such Tax Returns are (or when filed, will be) complete and
accurate in all material respects. Seller has not requested any extension of
time within which to file any Tax Returns. Seller has delivered (and will
deliver) to Buyer complete and accurate copies of all of Seller's Tax Returns
filed through the date hereof (and the Closing Date).
(b) All Taxes, in respect of periods beginning before the
Closing Date, have been timely paid or an adequate reserve has been established
therefor, as set forth in the Disclosure Schedule or the Financial Statements
(as defined in Section 3.13), and Seller does not have any liability for Taxes
in excess of the amounts so paid or reserves so established. No material
deficiencies for Taxes have been claimed, proposed or assessed by any taxing or
other governmental authority against Seller. Except as set forth on Schedule
3.12(b), to the best knowledge of Seller, there are no pending, scheduled or
threatened audits, investigations or claims by or discussions with any
governmental authority with respect to Taxes that in the reasonable judgment of
Seller are likely to result in a material increase in its liability for Taxes.
There are no liens for Taxes on any Asset or Assets.
(c) Seller has duly and timely filed all reports and returns
required to be filed with any governmental authority relating in any manner to
any Assets the failure of which to file could materially adversely affect the
Seller's operations.
Section 3.13 FINANCIAL STATEMENTS AND BOOKS OF ACCOUNTS. Seller has
furnished Buyer with financial statements for 1995 and 1996 (the "Financial
Statements"). To the best knowledge of Seller, the Financial Statements (a) are
in accordance with the Seller' books and records pertaining to the Assets or the
Business, (b) have been prepared in accordance with GAAP consistently applied
throughout the periods covered thereby and (c) fairly and accurately present the
assets, liabilities (including all reserves) and financial position of Seller as
of the respective dates thereof and the revenues and expenses and changes in
cash flows for the periods then ended based on the best information available at
the time (subject, in the case of any interim Financial Statements, to normal
year-end adjustments).
Section 3.14 LIABILITIES. Except as disclosed in Schedule 3.14 or
elsewhere on the Disclosure Schedule, Seller has no material liabilities,
obligations or commitments of any nature (whether absolute, accrued, contingent
or otherwise and whether matured or unmatured), including without limitation Tax
liabilities due or to become due, except (a) liabilities that are reflected and
reserved against on the 1996 Financial Statements, that have not been paid or
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discharged since the date thereof, (b) liabilities arising under Contracts,
Leases or Permits described in the Disclosure Schedule and (c) liabilities
incurred since the date of the 1996 Financial Statements in the ordinary course
of the Business and consistent with past practice, none of which individually or
in the aggregate, has or would have a material adverse effect on the Business or
Assets.
Section 3.15 COMPLIANCE WITH LAW AND OTHER REGULATIONS. To the best
knowledge of Seller, (i) Seller has not violated and is in compliance with all
Laws relating to the Assets or the Business, and (ii) the Business has not been
conducted in violation of any Laws relating to the Assets or the Business, and
is in compliance with all such Laws; except in the case of (i) or (ii) above
where the violation or failure to comply, individually or in the aggregate,
would not reasonably be expected to have a material adverse effect on the Assets
or the Business.
Section 3.16 CREDITOR'S ARRANGEMENTS. Seller has no arrangement with
creditors not made in the ordinary course of business except as disclosed in
writing to Buyer, nor has an involuntary or voluntary petition in bankruptcy
been filed by or against Seller.
Section 3.17 EMPLOYEE PLANS.
(a) Schedule 3.17(a) lists each "employee benefit plan" (as
that term is defined in Section 3(s) of Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), that Seller maintains or to which Seller
contributes or is required to contribute with respect to employees of Clinics,
including each "multi-employer plan" as defined in Section 3(37) of ERISA, to
which Seller has contributed or been obligated to contribute with respect to
employees of the Clinics, each "employee pension benefit plan" as defined in
Section 3(2) of ERISA (other than a multi-employer plan) to which Seller
contributes or is required to contribute with respect to employees of Clinics,
each deferred compensation plan, bonus plan, severance or termination plan or
other employee benefit plan with respect to employees of the Clinics.
(b) Schedule 3.17(b) lists any retirement or deferred
compensation plan, incentive compensation plan, stock plan, unemployment
compensation plan, vacation pay, severance pay, bonus or benefit arrangement,
insurance or hospitalization program or any other fringe benefit arrangement for
any employee, director, consultant or agent, whether pursuant to contract,
arrangement, custom, informal understanding or otherwise, which does not
constitute an "employee benefit plan" within the meaning of Section 3(3) of
ERISA.
(c) Schedule 3.17(c) lists any written employment agreement not
terminable upon 30 days' or less written notice without further liability.
(d) A true and correct copy of each of the plans, arrangements
or agreements listed on Schedule 3.17(a), 3.17(b), and 3.17(c) (the "Employee
Benefit Plans") and all contracts relating thereto or the funding thereof, each
as in effect on the date hereof, have been or will be supplied to Buyer by
Seller.
(e) Except as set forth on Schedule 3.17(e), each Employee
Benefit plan complies and has been administered in form and in operation in all
material respects with all
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applicable requirements of Law, and, to the best knowledge of Seller, no event
has occurred which will or could cause any such Employee Benefit Plan to fail to
comply with such requirements. Seller has not engaged in any "prohibited
transaction" within the meaning of ERISA.
Seller has no liability or contingent liability to provide
medical, dental, life, accidental death and dismemberment, or long-term
disability benefits from its general assets (other than to pay insurance
premiums) and, with respect to each Employee Benefit Plan, all required
contributions including, but not limited to, premium payments, have been paid.
(f) Seller has no liability or contingent liability for
providing, under any Employee Benefit Plan or otherwise, any post-retirement
medical or life insurance benefits, other than statutory liability for providing
group health plan continuation coverage under Part 6 of Title I of ERISA and
Section 4980B of the Code or applicable state law.
Section 3.18 LABOR PROBLEMS. Seller is not a party to any collective
bargaining agreement with respect to its employees, nor, to Seller's best
knowledge, are any discussions taking place with respect to any such collective
bargaining agreement. Except as set forth on Schedule 3.18, there is no labor
disturbance pending or, to the best knowledge of Seller, threatened, against
Seller nor is any grievance currently being asserted, and Seller has not
experienced a work stoppage or other labor difficulty. There is no unfair labor
practice charge or complaint pending before any government agency arising out of
the conduct of the Business.
Section 3.19 ENVIRONMENTAL MATTERS.
(a) To the best knowledge of Seller, Seller is in material
compliance with, and at all times has been in material compliance with, all
Environmental Laws, except to the extent that noncompliance would not have a
material adverse effect on Seller.
(b) There are no existing or, to the best knowledge of Seller,
potential Environmental Claims against Seller; nor has Seller received any
notification or knowledge of any allegation of any actual, or potential
responsibility for, or any inquiry or investigation regarding, any disposal,
release, or threatened release at any location of any Hazardous Substance
generated or transported by Seller.
(c) (i) no underground tank or other underground storage
receptacle for Hazardous Substances is currently located on the Leased Real
property and, to the best knowledge of Seller, there have been no releases or
threatened releases of any Hazardous Substances from any such underground tank
or related piping; (ii) there have been no releases or threatened releases of
Hazardous Substances in quantities exceeding the reportable quantities, as
defined under federal or state law, by Seller on, upon, or into the Leased Real
Property other than those authorized by Environmental Laws; (iii) to the best
knowledge of Seller, there have been no such releases or threatened releases by
Seller's predecessors and no releases or threatened releases in quantities
exceeding the reportable quantities as defined under federal or state law on,
upon, or into the Leased Real Property other than those authorized by
Environmental Laws which, through soil or ground water contamination, may have
come to be located on the
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Leased Real Property; and (iv) to the best knowledge of Seller, there are no
PCBs or asbestos located at or on the Leased Real Property.
(d) There are no consent decrees, consent orders, judgments,
judicial or administrative orders, agreements with, or liens by, any
governmental authority relating to any Environmental Laws which regulate,
obligate, or bind Seller.
(e) True, complete and correct copies of any written
environmental reports, audits, or assessments that may have been conducted,
either by Seller or any person engaged by Seller for such purpose, at the Leased
Real property have been delivered to Buyer and a list of all such reports,
audits, and assessments is set forth on Schedule 3.19.
Section 3.20 ACCURACY OF REPRESENTATIONS. No representation or warranty
by Seller in this Article III or elsewhere in this Agreement, or in any
certificate or document furnished or to be furnished by Seller pursuant hereto,
contains or will contain, when read in conjunction with the exhibits hereto, any
untrue statement of a material fact or omits or will omit to state a material
fact necessary to make the statements contained herein or therein not
misleading. This section shall not expand or diminish Seller's representations,
covenants and warranties contained in this Article III or elsewhere in this
Agreement.
Section 3.21 DISTRIBUTION OF PURCHASE PRICE. Seller and J. Robert West
represent and covenant that the entire Purchase Price will be distributed to the
secured and unsecured creditors of Seller in accordance with their respective
interests, and that neither Seller nor J. Robert West shall retain any part of
the Purchase Price. Seller and J. Robert West further agree to use their best
efforts to obtain releases from all unsecured creditors acknowledging that their
respective claims have been paid and that they will not seek further payment
from Buyer.
Section 3.22 UCC SEARCH. The parties acknowledge that a Search Report
evidencing a search of Uniform Commercial Code filings revealed a number of
liens against assets owned by entities with names similar to Seller's. Seller
represents and warrants to Buyer that the liens filed against assets of the
following entities are not liens against any of the assets of Seller, including
particularly the Assets: Western Medical, located in Anaheim, California;
Western Medical Group, a partnership located in Torrance, California; and L.A.
Urgent Medical Center d/b/a Western Medical Group, located in Los Angeles,
California.
Section 3.23 MEDICARE/MEDICAID CONVICTIONS OR INVESTIGATIONS. Neither
Seller nor any physician or other health care professional who renders services
on behalf of the Seller is currently under investigation or prosecution for, nor
has Seller or any such physician or other health care professional has been
convicted of: (i) any offense related to the delivery of an item or service
under the Medicare or Medicaid programs; (ii) a criminal offense related to
neglect or abuse of patients in connection with the delivery of a health care
item or service; (iii) fraud, theft, embezzlement or other financial misconduct
in connection with the delivery of a health care item or service, (iv) unlawful
manufacture, distribution, prescription or dispensing of a controlled substance
or (v) obstructing an investigation of any crime referred to in subparagraphs
(i) through (iv) above.
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Section 3.24 MEDICARE/MEDICAID CERTIFICATION/EXCLUSIONS. Seller is
certified for participation in the Medicare and Medicaid programs and such
certifications are valid and in full force and effect and is not impaired in any
way. Neither Seller nor any physician who renders health services on behalf of
the Seller has been excluded from participating in the Medicare or Medicaid
programs.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants as follows:
Section 4.1 ORGANIZATION AND STANDING OF BUYER. Buyer is a
professional corporation duly organized, validly existing and in good standing
under the laws of the State of California, is qualified to transact business in
all jurisdictions in which such qualification is required and has full corporate
power and authority to own and operate its properties and assets and to carry on
its business as and where it is now being conducted.
Section 4.2 AUTHORITY; BINDING EFFECT. Buyer has full power and
authority to enter into this Agreement and to consummate the transactions
contemplated by this Agreement. Buyer has taken all action required by law in
order to perform the transactions contemplated by this Agreement. The
execution, delivery and performance of this Agreement and such other documents
and instruments contemplated by this Agreement constitute the legal, valid and
binding obligations of Buyer enforceable in accordance with their respective
terms except as limited by general equitable principles and the effect of
bankruptcy or similar laws affecting creditors' rights generally.
Section 4.3 NO FINDERS OR BROKERS. Neither Buyer nor any officer or
director thereof has engaged any finder or broker in connection with the
transactions contemplated hereunder.
Section 4.4 LITIGATION; COURT ORDERS. There is no litigation,
arbitration, proceeding, either pending or threatened, or outstanding orders,
writs, injunctions or decrees of any court, governmental agency or tribunal that
prevents Buyer from consummating the transactions contemplated by this
Agreement.
Section 4.5 ACCURACY OF REPRESENTATIONS. No representation or warranty
by Buyer in this Article IV or elsewhere in this Agreement, or in any
certificate or document furnished or to be furnished by Buyer pursuant hereto,
contains or will contain, when read in conjunction with the exhibits hereto, any
untrue statement of a material fact or omits or will omit to state a material
fact necessary to make the statements contained herein or therein not
misleading. This section shall not expand or diminish Buyer's representations,
covenants and warranties contained in this Article IV or elsewhere in this
Agreement.
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ARTICLE V
COVENANTS OF BUYER AND SELLER
Seller and Buyer each covenant with the other as follows:
Section 5.1 FURTHER ACTS AND ASSURANCES. Upon the terms and subject to
the conditions contained herein, each of the parties hereto agrees, both before
and after the Closing, (i) to use all reasonable efforts to take, or cause to be
taken, all actions and to do, or cause to be done, all things necessary, proper
or advisable to consummate and make effective the transactions contemplated by
this Agreement; (ii) to execute any documents, instruments or conveyances of any
kind that may be reasonably necessary or advisable to carry out any of the
transactions contemplated hereunder or thereunder; and (iii) to cooperate with
each other in connection with the foregoing, including using their respective
best efforts (a) to obtain all necessary waivers, consents and approvals from
other parties to the Contracts and Leases; PROVIDED, HOWEVER, that neither party
shall be required to make any payments, commence litigation or agree to
modifications of the terms thereof in order to obtain any such waivers, consents
or approvals; (b) to obtain all necessary Permits as are required to be obtained
under any applicable Law; (c) to effect all necessary registrations and filings,
including without limitation submissions of information requested by
governmental authorities; and (d) to fulfill all conditions to this Agreement.
Section 5.2 INSPECTIONS. Seller shall give to Buyer and its authorized
representative(s), until the Closing or termination of this Agreement,
reasonable access during normal business hours, after at least 24 hours' prior
notice, to all of the Assets. Seller shall similarly give to Buyer, or its
authorized representative(s), access to all books, contracts, documents,
records, financial statements and tax returns that relate to the Assets,
including the right to photocopy such documents at Buyer's expense, and shall
furnish to such persons any other information concerning said Assets that may be
reasonably requested. All documents and information so furnished by Seller to
Buyer shall be held by Buyer in confidence, and the information contained in
such documents shall not be shown or disclosed to any persons other than Buyer's
employees or authorized representatives and agents.
Section 5.3 EMPLOYEES.
(a) Seller shall provide to Buyer before the Closing a Schedule
5.3 which will contain a complete and correct list of all of Seller's employees
as of the Closing Date and setting forth their job descriptions and compensation
(including all accrued benefits) and Seller will provide a copy of the paid
payroll for the month of September, 1997. Except as set forth in Schedule 5.3,
Seller has no written or oral agreements with any such employees regarding their
employment.
(b) Seller shall terminate the employment of all employees
effective as of midnight on the Closing Date. Effective as of the Closing Date,
Buyer shall offer to hire only those employees of Seller which Buyer shall
select.
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(c) Seller shall pay all salaries and employee contractual
obligations with regard to employee benefits for all employees accrued prior to
the Closing and listed in the attached Schedule 5.3. It is understood that the
employee benefits listed in Schedule 5.3 are estimated benefits outstanding as
of September, 1997 and that, as of the Closing, Seller shall pay all salaries
and employee contractual obligations that have accrued prior to the Closing
Date. Buyer shall not assume any employee benefits obligations for employees
accrued prior to Closing.
Section 5.4 RETURNS, NOTICES AND REPORTS. With respect to closing
returns, notices and reports:
(a) After the Closing, Seller shall promptly file all closing
returns, notices and reports of every kind and nature required by federal, state
and local governments, or any subdivision thereof, with respect to the Assets
and Business, and tender all sums payable relating to Seller's ownership of the
Assets and operation of the business.
(b) After the Closing, Buyer shall promptly file all necessary
returns, notices, reports and applications, and other matters required with
respect to the Assets and Business, by any of the governmental authorities
referred to in the preceding subparagraph 5.4(a) relating to Buyer's ownership
of the Assets and Business and Buyer shall tender all sums payable relating to
Buyer's ownership of the Assets and operation of the Business.
(c) Both Buyer and Seller agree to report this transaction for
third-party reimbursement purposes and to file any other reports required by
appropriate governmental agencies or authorities in accordance with the
allocation established for each of the Assets. Seller shall pay all Medicare
program termination liability resulting from this sale, including all Medicare
program recapture, if any. Notwithstanding any provision in this Agreement to
the contrary, Buyer agrees that any Medicare program recapture which results
from the sale of the Assets shall be retained by Seller. Sales tax resulting
from this sale, if any, shall be borne by Seller.
Section 5.5 CONDUCT OF BUSINESS PRIOR TO CLOSING. Except as otherwise
required by this Agreement or consented to in writing by Buyer, from the date
hereof until the Closing Date, Seller shall:
(a) operate the Business in the ordinary course of business and
consistent with past practice;
(b) maintain the Assets in good repair, order and condition,
except for ordinary wear and tear;
(c) keep in full force and effect insurance comparable in
amount and scope of coverage to insurance now carried by it;
(d) discharge all of its liabilities and obligations and
perform all of its duties as they become due under all Contracts and Leases;
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(e) maintain the books of account and records for the Business
in the usual, regular and ordinary manner;
(f) materially comply with all statutes, laws, ordinances,
rules and regulations applicable to Seller, the Assets and the Business;
(g) maintain all Permits necessary for operation of the
Business in full force and effect and comply with all applicable terms and
conditions of such Permits;
(h) not adopt, amend or terminate any Employee Benefit Plan,
except as may be required by applicable law or regulation and not make any
changes with respect to its practices regarding the accrual or payment of its
obligations under any such plans;
(i) not agree to take any of the actions set forth in the
foregoing clauses (a) through (h) of this paragraph.
Section 5.6 NOTIFICATION OF CERTAIN MATTERS. From the date hereof
through the Closing, Seller shall give prompt notice to Buyer of (a) the
occurrence, or failure to occur, of any event which occurrence or failure would
be likely to cause any representation or warranty contained in this Agreement to
be untrue or inaccurate in any material respect (without duplication of any
materiality standard contained therein) and (b) any material failure of Seller
to comply with any covenant to be complied with by Seller under this Agreement;
PROVIDED, HOWEVER, that such disclosure shall not be deemed to cure any breach
of a representation, warranty, covenant or agreement or to satisfy any
condition. From the date hereof through the Closing, Seller shall promptly
notify Buyer if it becomes aware that a party to a Contract or Lease intends to
terminate such Contract or Lease or refuses to consent to the assignment of such
Contract or Lease in connection with the transactions contemplated hereby.
Section 5.7 CHANGED CIRCUMSTANCES. In the event of a material change
in any Law applicable to the Assets, the Business or this Agreement or the
relationships between the parties hereto rendering any of the same illegal, this
Agreement shall not automatically terminate, but Buyer and Seller shall each
have the right to require the other party to attempt to renegotiate the terms of
this Agreement to bring the transaction into compliance with the Law. To the
maximum extent possible, any such amendment shall preserve the underlying
economic and financial arrangements between Buyer and Seller.
Section 5.8 CERTAIN LIABILITIES. After the execution of this
Agreement, each party agrees to promptly notify the other party of any material
liability or potential material liability of Seller under any item not
constituting an Assumed Liability.
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ARTICLE VI
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF SELLER
The obligations of Seller to consummate the transactions provided for
hereby are subject, in the discretion of Seller, to the satisfaction, on or
prior to the Closing Date, of each of the following conditions, any of which may
be waived by Seller:
Section 6.1 REPRESENTATIONS, WARRANTIES AND COVENANTS. All
representations and warranties of Buyer contained in this Agreement shall be
true and correct in all material respects at and as of the date of this
Agreement and at and as of the Closing Date as though such representations and
warranties were made at and as of such time. Buyer shall have performed in all
material respects all covenants required hereby to be performed by it prior to
the Closing. If any schedule is not completed prior to the Closing Date, the
parties shall use their best efforts to complete such Schedule as soon as
practicable after the Closing.
Section 6.2 LITIGATION. No action by any governmental authority or
other person shall have been instituted or threatened which questions the
validity or legality of the transactions contemplated hereby and which could
reasonably be expected to damage Seller materially if the transactions
contemplated hereby are consummated. There shall not be any Law that makes the
sale of the Business or the Assets contemplated hereby illegal or otherwise
prohibited.
Section 6.3 CERTIFICATES AND CORPORATE DOCUMENTS. Buyer shall furnish
Seller with such certificates of its officers and others to evidence compliance
with the conditions set forth in this Article VI as may be reasonably requested
by Seller.
ARTICLE VII
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF BUYER
The obligations of Buyer to consummated the transactions provided for
hereby are subject, in the discretion of Buyer, to the satisfaction, on or prior
to the Closing Date, of each of the following conditions, any of which may be
waived by Buyer:
Section 7.1 REPRESENTATIONS, WARRANTIES AND COVENANTS. All
representations and warranties of Seller contained in this Agreement shall be
true and correct in all material respects at and as of the date of this
Agreement and at and as of the Closing Date as though such representations and
warranties were made at and as of such time. Seller shall have performed in all
material respects all covenants required hereby to be performed by it prior to
the Closing.
Section 7.2 LITIGATION. No Action by any governmental authority or
other person shall have been instituted or threatened that questions the
validity or legality of the transactions contemplated hereby and that could
reasonably be expected to damage Buyer materially if the transactions
contemplated hereby are consummated, including without limitation any material
adverse effect on the right or ability of Buyer to own, operate, possess or
transfer the Assets after the Closing. There shall not be any Law that makes the
purchase of the Business or the Assets contemplated hereby illegal or otherwise
prohibited.
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Section 7.3 CONSENTS; LEASES. (a) All waivers and consents necessary
to transfer the Contracts and Leases shall have been obtained, and Buyer shall
have been able to negotiate leases of the real property on which the Clinics are
located on terms and conditions satisfactory to Buyer. (b) Each HMO contract
listed on Schedule 3.3 shall be assigned to Buyer in a form satisfactory to
Buyer which shall include the following: (i) agreement by HMO that there will be
no recourse or right of offset of any risk pool funds against Buyer for any
claims of HMO arising prior to the Closing; (ii) agreement to pay any risk pool
funds to Buyer after the Closing (subject to Buyer's obligation to pay the
prorata share of such risk pool funds to Seller which relate to the period of
time prior to the Closing) and (iii) right of Buyer to terminate the contract on
60 days notice.
Section 7.4 PERMITS. Approval of any Permits that need to be obtained
to operate the Business before the Closing shall have been obtained.
Section 7.5 REGULATORY APPROVALS. Buyer shall have received no adverse
comment from any regulatory agency pertaining to the transactions contemplated
by this Agreement prior to the Closing Date that cannot be corrected within a
reasonable period of time following the Closing and without minimal expense.
Section 7.6 DUE DILIGENCE REVIEW. The outcome of Buyer's due diligence
review of the Business and Assets shall have been satisfactory to Buyer.
Section 7.7 FINANCIAL STATEMENTS. Buyer shall have received from
Seller copies of the Financial Statements.
Section 7.8 CERTIFICATES. Seller shall furnish Buyer with such
certificates of its officers and others to evidence compliance with the
conditions set forth in this Article VII as may be reasonably requested by
Buyer.
Section 7.9 RECEIPT OF TRANSFER DOCUMENTS. Seller shall have executed
and delivered each of the documents described in Section 8.2(a) hereof so as to
effect the transfer and assignment to Buyer of all right, title and interest in
and to the Assets, and Seller have filed (where necessary) and delivered to
Buyer all documents necessary to release the Assets from all Encumbrances, which
documents shall be in a form reasonably satisfactory to Buyer's counsel.
Section 7.10 EMPLOYEE TERMINATION. All employees of the Clinics are to
be properly terminated and all liabilities associated with such employees shall
be satisfied.
ARTICLE VIII
CLOSING
Section 8.1 CLOSING. The Closing of the transactions contemplated
herein (the "Closing") shall be held at 10:00 a.m. local time on the Closing
Date at Milller & Holguin, unless the parties hereto otherwise agree. In the
event either Seller or Buyer has not fully and completely performed all of the
terms and conditions of this Agreement
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on their respective parts to be performed at the Closing Date, including, but
not limited to, obtaining government approvals that can be obtained before the
Closing, the Closing Date shall be automatically extended for the period
necessary to complete such performance or satisfy said conditions, but in no
event to exceed thirty (30) days. During such extension, the nonperforming
party shall use good faith, reasonable effort and due diligence to complete such
performance, and all parties shall use good faith, reasonable effort and due
diligence to satisfy all terms and conditions of this Agreement. Nothing stated
in this Section shall constitute a release of a nonperforming party from
liability arising under this Agreement, including but not limited to, damages
arising under this Agreement occasioned by failure of such performance on or
before the Closing date as extended in accordance with this Section.
Section 8.2 CONVEYANCES AT CLOSING.
(a) INSTRUMENTS AND POSSESSION. To effect the sale and
transfer of the Assets, Seller will, at the Closing, execute and deliver to
Buyer:
(i) one or more bills of sale, in the form attached here
to as Exhibit "A," conveying in the aggregate to Buyer all of Seller's owned
personal property included in the Assets;
(ii) assignments of all Contracts;
(iii) such other instruments as shall be requested by
Buyer to vest in Buyer title in and to the Assets in accordance with the
provisions hereof.
(b) FORM OF INSTRUMENTS. If a form of any document to be
delivered hereunder is not attached as an exhibit hereto, such documents shall
be in form and substance, and shall be executed and delivered in a manner
reasonably satisfactory to Buyer and Seller.
(c) CERTIFICATES; CLOSING CONDITIONS. Buyer and Seller shall
deliver the certificates and other items described in Articles VI and VII.
Section 8.3 DELIVERIES BY BUYER. On the Closing Date, Buyer shall
deliver to Seller the Purchase Price as provided for in Section 2.3.
ARTICLE IX
RISK OF LOSS; CERTAIN ASSIGNMENTS
Section 9.1 RISK OF LOSS. From the date hereof through the Closing
Date, all risk of loss or damage to the property included in the Assets shall be
borne by Seller, and thereafter shall be borne by Buyer. If any material
portion of the Assets is destroyed or damaged by fire or any other cause prior
to the Closing, other than use, wear or loss in the ordinary course of the
Business, Seller shall give written notice to Buyer as soon as practicable
after, but in any event within five (5) calendar days of, discovery of such
damage or destruction, the amount of insurance, if any, covering such Assets and
the amount, if any, that Seller is otherwise entitled
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to receive as a consequence. Prior to the Closing, Buyer shall have the option,
which shall be exercised by written notice to Seller within ten (10) calendar
days after receipt of Seller's notice or if there are not ten (10) calendar days
remaining prior to the Closing date, as soon as practicable prior to the Closing
Date, of (a) accepting such Assets in their destroyed or damaged condition in
which event Buyer shall be entitled to the proceeds of any insurance or other
proceeds payable with respect to such loss and the full Purchase Price shall be
paid for such Assets, then after the Closing, any insurance or other proceeds
shall belong, and shall be assigned, to Buyer without any reduction in the
Purchase Price; otherwise, such insurance proceeds shall belong to Seller.
Section 9.2 CERTAIN ASSIGNMENTS. Notwithstanding anything in this
Agreement to the contrary, this Agreement shall not constitute an agreement to
assign or transfer to Buyer any Asset if an attempted assignment thereof,
without the consent of a third party, would constitute a breach thereof or a
breach of Law or in any way adversely affect the rights of Buyer with respect
thereto. If such consent is not obtained, or if an attempted assignment thereof
would be ineffective or would affect the rights with respect thereto so that
Buyer would not receive all such rights, Seller will cooperate with Buyer in all
reasonable respect without liability to Seller, to provide to Buyer the benefits
with respect to any such Asset, including without limitation enforcement for the
benefit of Buyer of any and all rights of Seller against a third party arising
out of the breach or cancellation by such third party or otherwise. If any Asset
determined in the sole discretion of Buyer to be material to the transaction is
not transferable pursuant to the provisions of this Section, Buyer may terminate
this Agreement.
ARTICLE X
ACTIONS BY SELLER AND BUYER
AFTER THE CLOSING
Section 10.1 COLLECTION.
(a) At the Closing, Buyer will acquire hereunder, and
thereafter Buyer shall have the right and authority to collect for Buyer's
account, all receivables accruing after the Closing Date and other items that
constitute a part of the Assets, and Seller shall within forty-eight (48) hours
after receipt of any payment in respect of any of the foregoing, properly
endorse and deliver to Buyer any documents or checks received on account of or
otherwise relating to any such receivables or other items.
(b) Buyer shall pay to Seller (or its assignee as directed in
writing by Seller) any risk pools, withholds or profit sharing funds related to
services performed prior to the Closing within 15 days of its receipt of such
funds.
Section 10.2 BOOKS AND RECORDS. Each party agrees that it will
cooperate with and make available to the other party, during normal business
hours, all books and records, information and employees (without substantial
disruption of employment) retained and remaining in existence after the Closing
that are necessary or useful in connection with any tax inquiry, audit,
investigation or dispute, any litigation or investigation or any other matter
requiring
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any such books and records, information or employees for any reasonable business
purpose. The party requesting any such books and records, information or
employees shall bear all of the out-of-pocket costs and expenses (including
without limitation attorneys' fees, but excluding reimbursement for salaries and
employee benefits) reasonably incurred in connection with providing such books
and records, information or employees. Buyer will retain such books and records
in accordance with its corporate records retention policy or as required by law,
whichever requires retention for a longer period.
Section 10.3 INDEMNIFICATIONS.
(a) BY SELLER. Seller shall indemnify, save and hold harmless
Buyer, its affiliates and subsidiaries, and its and their respective
representatives, from and against any and all costs, losses, Taxes, liabilities,
obligations, damages, lawsuits, deficiencies, claims, demands, and expenses,
including, without limitation interest, penalties, costs of mitigation or
remedial action, lost profits, response costs and other losses resulting from
any shutdown or curtailment of operations, reasonable attorneys' fees and all
amounts paid in defense or settlement of any of the foregoing (herein
"Damages"), incurred in connection with, arising out of, resulting from or
incident to (i) any breach of any representation or warranty made by Seller in
or pursuant to this Agreement; (ii) any breach of any covenant or agreement made
by Seller in or pursuant to this Agreement; or (iii) all liabilities other than
Assumed Liabilities.
Seller's obligation to indemnify Buyer, and Buyer's
obligation to indemnify Seller, shall not limit any other rights, including,
without limitation, rights of contribution, which either party may have under
statute or common law.
(b) BY BUYER. Buyer shall indemnify, save and hold harmless
Seller, its affiliates and their respective representatives from and against any
and all Damages incurred in connection with, arising out of, resulting from or
incident to (i) any breach of any representation or warranty made by Buyer in or
pursuant to this Agreement; (ii) any breach of any covenant or agreement made by
Buyer in or pursuant to this Agreement; or (iii) the operation of the Business
or the Assets from and after the Closing.
(c) COOPERATION. The indemnified party shall cooperate in all
reasonable respects with the indemnifying party in the investigation, trial and
defense of any lawsuit or action that may be subject to this Section 10.3 and
any appeal arising thereform; PROVIDED, HOWEVER, that the indemnified party may,
at its own cost, participate in the investigation, trial and defense of such
lawsuit or action and any appeal arising therefrom. The parties shall cooperate
with each other in any notivications to insurers.
(d) DEFENSE OF CLAIMS. If a claim for Damages (a "Claim") is
to be made by a party entitled to indemnification hereunder against the
indemnifying party, the party claiming such indemnification shall, subject to
Section 10.3, give written notice (a "Claim Notice") to the indemnification may
be sought under this Section 10.3. If any lawsuit or enforcement action is
filed against any party entitled to the benefit of indemnity hereunder, written
notice thereof shall be given to the indemnifying party as promptly as
practicable (and in any event within fifteen (15) calendar days after the
service of the citation or summons). The failure of any indemnified party
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to give timely notice hereunder shall not affect rights to indemnification
hereunder, except to the extent that the indemnifying party demonstrates actual
damage caused by such failure. After such notice, if the indemnifying party
shall acknowledge in writing to the indemnified party that the indemnifying
party shall be obligated under the terms of its indemnity hereunder in
connection with such lawsuit or action, then the indemnifying party shall be
entitled, if it so elects, (i) to take control of the defense and investigation
of such lawsuit or action, (ii) to employ and engage attorneys of its own choice
to handle and defend the same, at the indemnifying party's cost, risk and
expense unless the named parties to such action or proceeding include both the
indemnifying party and the indemnified party and the indemnified party has been
advised in writing by counsel that there may be one or more legal defenses
available to such indemnified party that are different from or additional to
those available to the indemnifying party, and (iii) to compromise or settle
such claim, which compromise or settlement shall be made only with the written
consent of the indemnified party, such consent not to be unreasonably withheld.
If the indemnifying party fails to assume the defense of such claim within
fifteen (15) calendar days after receipt of the Claim Notice, the indemnified
party against which such claim has been asserted will (upon delivering notice to
such effect to the indemnifying party) have the right to undertake, at the
indemnifying party's cost and expense, the defense, compromise or settlement of
such claim on behalf of and for the account and risk of the indemnifying party;
PROVIDED, HOWEVER, that such Claim shall not be compromised or settled without
the written consent of the indemnifying party, which consent shall not be
unreasonably withheld. In the event the indemnified party assumes the defenseof
the lcaim, the indemnified party will keep the indemnifying party reasonably
informed of the progress of any such defense, compromise or settlement. The
indemnifying party shall be liable for any settlement of any action effected
pursuant to and in accordance with this Section 10.3 and for any final judgment
(subject to any right of appeal), and the indemnifying party agrees to indemnify
and hold harmless an indemnified party from and against any Damages by reason of
such settlement or judgment.
(e) BROKERS AND FINDERS. Pursuant to the provisions of this
Section 10.3, each of Buyer and Seller shall indemnify, hold harmless and defend
the other party from the payment of any and all broker's and finder's expenses,
commissions, fees or other forms of compensation that may be due or payable from
or by the indemnifying party, or may have been earned by any third party acting
on behalf of the indemnifying party in connection with the negotiation and
execution hereof and the consummation of the transactions contemplated hereby.
Section 10.4 TAXES. Seller shall pay, or cause to be paid, when due all
Taxes for which Seller is or may be liable or that are or may become payable
with respect to all taxable periods ending on or prior to the Closing Date.
Section 10.5 DEPOSITS AND OTHER PROCEEDS DUE SELLER. Within 10 days of
reeipt by Buyer or Seller of any funds, deposits or other proceeds properly
belonging to the other party hereunder, said funds shall be deposited by the
recipient in the account designated by the other party for such purpose.
Section 10.6 INSURANCE. Seller agrees to maintain and pay all premiums
on "tail" coverage for its malpractice insurance policies for a period of 24
months after the Closing. One-
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half of such cost will be paid at Closing by Seller; the remaining cost will be
paid in monthly installments over a 12 month period.
ARTICLE XI
NONCOMPETE
Seller and the shareholder of Seller acknowledges and agrees that he is
selling all of the operating assets of the Clinics, together with the goodwill
thereof, pursuant to this Agreement. For adequate consideration, the receipt of
which is acknowledged, West covenants and agrees:
(a) that he will not practice medicine within a 15-mile radius
of either Clinic (except as otherwise contemplated in this Agreement) for so
long as Buyer or any person deriving title to the goodwill from the Buyer, owns
or controls the operations of the Clinics; provided, however, that this
restriction shall not exceed a period of ten years after the Closing Date.
Notwithstanding the foregoing, Buyer agrees that J. Robert West may continue his
current dermatology practice located in Lancaster, California.
(b) He agrees not to use or divulge, disclose or communicate to
any person, firm or corporation, in any manner whatsoever, any confidential
information of any kind, nature or description concerning any matters materially
affecting or relating to the business of Clinics, including without limiting the
generality of the foregoing, the names of or data relating to any of its
patients or clients, its marketing methods and related data, utilization data,
provider contract terms, the prices and fees it obtains or has obtained or at
which it sells or has sold its products or services, lists or other written
records used in the business of Clinics, compensation paid to employees and
other terms of employment, or any other confidential information of, about, or
concerning the business of Clinics, its manner of operation or other
confidential data of any kind, nature, or description, the parties hereto
stipulating that as between them, the same are important, material and
confidential trade secrets and affect the successful conduct of the business of
Clinics and its goodwill.
(c) West will not directly or indirectly, either individually
or on behalf of or as a provider for any person or entity other than Buyer whose
business competes with the business of Buyer, (i) advise any plan member or
patient to disenroll from Buyer, or (ii) solicit any plan member or patient or
any plan member's or patient's employer to become enrolled with any other health
maintenance organization, provider organization, or any other similar
hospitalization or medical payment plan or insurance program. West shall use
his, her or its best efforts to ensure that no employee, agent or independent
contractor of West makes any derogatory remarks regarding Buyer to any plan
member, plan member's employer, health plan or health maintenance organization.
(d) If any term or provision of this Section is determined to
be illegal, unenforceable or invalid in whole or in part for any reason, such
illegal, unenforceable or invalid provision or part thereof shall be stricken
from this Agreement, and such provision shall not affect the legality,
enforceability or validity of the remainder of this Agreement. If any provision
or part thereof of this Section is stricken from this Agreement, in accordance
with the provisions
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of this Section, then the stricken provision shall automatically be replaced to
the extent possible, with a legal, enforceable and valid provision which is as
similar in tenor to the stricken provision as is legally possible.
ARTICLE XII
MISCELLANEOUS
Section 12.1 TERMINATION.
(a) TERMINATION. This Agreement may be terminated at any time
prior to the Closing Date (or the Closing Date as extended pursuant to the terms
of Section 8.1;
(i) By mutual written consent of Buyer and Seller;
(ii) By Buyer if there is a material breach of any
representation or warranty set forth in Article III hereof or any covenant or
agreement to be complied with or performed by Seller pursuant to the terms of
this Agreement or the failure of a condition set forth in Article VII to be
satisfied (and such condition is not waived in writing by Buyer) on or prior to
the Closing Date; or
(iii) By Seller if there is a material breach of any
representation or warranty set forth in Article IV hereof or of any covenant or
agreement to be complied with or performed by Buyer pursuant to the terms of
this Agreement or the failure of a condition set forth in Article VI to be
satisfied (and such condition is not waived in writing by Seller) on or prior to
the Closing Date.
(b) IN THE EVENT OF TERMINATION. In the event of termination
of this Agreement pursuant to Section 12.1(a).
(i) Each party will redeliver to the party furnishing
the same all documents, work papers and other material of any other party
relating to the transactions contemplated hereby, whether obtained before or
after the execution hereof;
(ii) The provisions of Sections 12.13 shall continue in
full force and effect; and
(iii) No party hereto shall have any liability or further
obligation to any other party to this Agreement, except as stated in Sections
(i) and (ii) of this Section 12.1(b).
Section 12.2 EXPENSES. Except as otherwise provided in this Agreement,
all expenses of the preparation of this Agreement and of the transactions
contemplated by this Agreement, including, without limitation, counsel fees,
accounting fees, recording fees, investment advisers' fees and disbursements,
shall be borne by the respective parties incurring such expense, whether or not
such transactions are consummated.
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Section 12.3 NOTICES. All notices, demands and other communications
required or permitted hereunder shall be deemed given if delivered in person or
mailed by certified mail, postage prepaid, addressed as follows:
Seller:
------------------------
------------------------
------------------------
Buyer: Pegasus Medical Group, Inc.
18200 Yorba Linda Blvd., Suite 409
Yorba Linda, CA 92686
or to such other address as any party may designate by notice to the other
parties.
Section 12.4 ENTIRE AGREEMENT. This Agreement, the Exhibits and the
Schedules delivered pursuant hereto constitute the entire contract between the
parties hereto pertaining to the subject matter of and thereof and supersede all
prior and contemporaneous agreements, understandings, negotiations and
discussions, whether written or oral, of the parties, and there are no
representations, warranties or other agreements between the parties in
connection with the subject matter hereof or thereof, except as specifically set
forth herein or therein. To the extent that the provisions of the Exhibits or
Schedules to be attached hereto conflict with the provisions of this Agreement,
the provisions of this Agreement shall control.
Section 12.5 THIRD PARTY BENEFICIARIES. The parties intend that the
benefits of this Asset Purchase Agreement shall inure only to Buyer, Seller and
West except as expressly so stated herein. It is expressly agreed that Sierra
Primary Care Medical Group, Inc. ("Sierra") is to be considered a third party
beneficiary of this Agreement. Notwithstanding anything contained herein, or
any conduct or course of conduct by any party hereto, before or after signing
this Asset Purchase Agreement, this Asset Purchase Agreement shall not be
construed as creating any right, claim or cause of action against Buyer, Seller,
West or Sierra by any other person or entity.
Section 12.6 GOVERNING LAW. The validity and construction of this
Agreement shall be governed by the laws of the State of California.
Section 12.7 SECTION HEADINGS. The Section headings are for reference
only and shall not limit or control the meaning of any provision of this
Agreement.
Section 12.8 WAIVER. No delay or omission on the part of any party
hereto in exercising any right hereunder shall operate as a waiver of such right
or any other right under this Agreement.
Section 12.9 EXHIBITS. All Exhibits and Schedules referred to in this
Agreement are integral parts of this Agreement as if fully set forth herein.
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Section 12.10 SUCCESSORS AND ASSIGNS. Neither this Agreement nor any of
the rights or obligations hereunder may be assigned by any party without the
prior written consent of the other party. Subject to the foregoing, this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and permitted assigns, and no other person shall
have any right, benefit or obligation under this Agreement as a third party
beneficiary or otherwise.
Section 12.11 AMENDMENTS. This Agreement may be amended, but only in
writing, signed by the parties hereto.
Section 12.12 COUNTERPARTS. This Agreement may be executed in any number
of counterparts, each of which shall be an original, but all of which together
shall comprise one and the same instrument.
Section 12.13 PRESS RELEASES. Except as may be required by law, neither
Buyer nor Seller shall issue any press release or make any public statement
regarding the transactions contemplated hereby, without the prior written
approval of the other party. Buyer may, at its discretion, issue or make an
appropriate written approval of the other party. Buyer may, at its discretion,
issue or make an appropriate press release or public announcement after the
Closing.
Section 12.14 CONFIDENTIALITY. All information disclosed by either party
to the other pursuant to this Agreement shall be considered confidential and
neither party shall disclose any such information other than: (i) (a) to their
respective officers, directors, employees, attorneys, accountants and agents,
and (b) to government authorities; or (ii) in response to a subpoena or court
order, provided that before such information is so disclosed, the party
subpoenaed or ordered to disclose such information shall first give the other
party notice so that such party may seek a protective order or other appropriate
remedy.
Section 12.15 SEVERABILITY. If any provision of this Agreement shall be
held invalid under any applicable laws, such invalidity shall not affect any
other provision of this Agreement that can be given effect without the invalid
provision, and, to this end, the provisions hereof are severable.
Section 12.16 REMEDIES. All rights and remedies of either party hereto
are cumulative of each other and of every other right or remedy such party may
otherwise have at law or in equity, and the exercise of one or more rights or
remedies shall not prejudice or impair the concurrent or subsequent exercise of
other rights or remedies.
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IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
as of the day and year first above written.
BUYER:
PEGASUS MEDICAL GROUP, INC.
By: /s/ Jacob Y. Terner, M.D.
--------------------------------
Jacob Y. Terner, M.D., President
SELLER:
MARVIN L. GINSBURG, M.D.
Medical Corporation
d/b/a A.V. Western Medical Group, Inc.
By: /s/ J. Robert West
--------------------------------
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The undersigned, being the sole shareholder of Seller, has reviewed and
hereby consents to the transactions contemplated in this Agreement, including
but not limited to, the provisions of Article XI.
/s/ J. Robert West
-------------------------------------
J. ROBERT WEST
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EXHIBITS TO
ASSET PURCHASE AGREEMENT
<TABLE>
<S> <C>
1(a) List of Equipment, Furniture and Other Items
1(b) List of Contracts to be Assumed by Buyer
1(c) Excluded Artwork
1(d) List of Leases and Personal Property to be Assumed by Buyer
2.2 Assumed Liabilities
3.2(b) List of Leased Real Property
3.3 List of All Contracts
3.5(b) Disclosure re Governmental Filings
3.6 Litigation
3.9 List of Insurance Policies
3.12(b) Disclosure re Audits
3.14 Liabilities
3.17(a) Employee Plans
3.17(b) Other Employee Benefits
3.17(c) Employment Agreements
3.17(e) Disclosure re Employee Benefit Plans
3.19 Environmental
5.3 Employee List; Employee Plans to be Assumed by Buyer
</TABLE>
(1) The Registrant hereby undertakes to provide to the Securities and Exchange
Commission upon request copies of any of the exhibits listed above not
otherwise filed with this Form S-1 Registration Statement as noted above.
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<PAGE>
AGREEMENT FOR THE
PURCHASE AND SALE OF ASSETS/
TRANSFER OF MEMBER RESPONSIBILITY
BY AND AMONG
SIERRA PRIMARY CARE MEDICAL GROUP, A MEDICAL CORPORATION
AND
PROSPECT MEDICAL HOLDINGS, INC.
AND
PRIMECARE INTERNATIONAL, INC.
AND
PRIMECARE MEDICAL GROUP OF
ANTELOPE VALLEY, INC.
<PAGE>
AGREEMENT FOR THE PURCHASE AND SALE OF ASSETS/
TRANSFER OF MEMBER RESPONSIBILITY
THIS AGREEMENT FOR THE PURCHASE AND SALE OF ASSETS/TRANSFER OF MEMBER
RESPONSIBILITY ("Agreement") is made and entered into as of May 13, 1998, by and
among Sierra Primary Care Medical Group, A Medical Corporation, a California
professional corporation ("Sierra Group") and Prospect Medical Holdings, Inc., a
Delaware corporation ("Prospect Holdings"), on the one hand, and PrimeCare
Medical Group of Antelope Valley, Inc., a California professional corporation,
("Antelope Valley Group"), and PrimeCare International, Inc., a Delaware
corporation, ("PrimeCare International"), on the other hand.
RECITALS
This Agreement is made with reference to the following facts and
circumstances:
A. Antelope Valley Group is an independent practice association that
contracts with payors and providers with its principal office at 44804 10th St.
West, Lancaster, California (the "Practice"), is also known as Antelope Valley
Medical Group, and is solely owned by Prem Reddy, M.D.
B. PrimeCare International provides management and administrative
services to Antelope Valley Group pursuant to a long-term management services
agreement.
C. Sierra Group is a primary care medical group that contracts with
payors and providers in Southern California.
D. Prospect Medical Group, Inc., a California professional
corporation ("Prospect Group") owns all of the outstanding shares of Sierra
Group's capital stock.
E. Prospect Holdings, through a wholly owned subsidiary, Sierra
Medical Management, Inc., a Delaware corporation, provides management and
administrative services to Sierra Group pursuant to a long-term management
services agreement.
F. PrimeCare International desires to sell certain assets to
Prospect Holdings on the terms and conditions set forth in this Agreement.
G. Antelope Valley Group desires to assign all of its right, title,
and interest in certain primary care provider contracts and certain assets
associated therewith to Sierra Group and transfer responsibility for the members
of all health plans contracting with such providers through Antelope Valley
Group; and Sierra Group desires to assume such contracts and
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<PAGE>
responsibility, and to fully, faithfully and timely pay, perform and discharge
each and every obligation, term, condition, liability and covenant required to
be kept, performed and fulfilled by Antelope Valley Group under such contracts
as of the Effective Time, as defined below.
NOW, THEREFORE, in consideration of the covenants and conditions
contained herein and for other valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
ARTICLE 1
PURCHASE AND SALE OF ASSETS/
TRANSFER OF RESPONSIBILITY FOR MANAGED CARE CONTRACTS
1.1 ASSETS. On the "Closing Date" (as defined below), PrimeCare
International shall sell and assign to Prospect Holdings, and Prospect Holdings
shall acquire from PrimeCare International, all of the assets listed in Exhibit
1.1 attached hereto. Further, PrimeCare International shall assign its contract
rights and, subject to Section 2.1 hereof, delegate its obligations related to
those contracts, agreements, and leases listed in Exhibit 1.1 ("PrimeCare
Contracts") to Prospect Holdings, and Prospect Holdings shall accept such
contract rights and, subject to Section 2.1 hereof, assume such obligations
(collectively, the assets and PrimeCare Contracts listed in Exhibit 1.1 are
referred to herein as "Assets").
1.2 TRANSFER OF MEMBERS/PROVIDER AGREEMENTS.
(a) On the Closing Date, Antelope Valley Group shall (i) assign
all of its right, title, and interest in all of the provider contracts listed in
Schedule "A" of Exhibit 1.2 to Sierra Group ("Provider Agreements"), (ii)
execute and deliver all documents and information requested of Antelope Valley
Group by all health plans ("Health Plans") listed in Schedule "B" of Exhibit
1.2, necessary to transfer responsibility for the members of the Health Plans
("Member Responsibility") currently contracting with said providers through
Antelope Valley Group or an affiliate of Antelope Valley Group ("Payor
Contracts"), (iii) transfer and convey certain assets associated therewith as
listed in Exhibit 1.2 to Sierra Group ("Antelope Valley Group Assets"); and on
the Closing Date, effective as of the Effective Time, Sierra Group shall agree
to assume the Provider Agreements, accept the transfer of Member Responsibility,
and acquire the Antelope Valley Group Assets. As of the Effective Time, Sierra
Group shall, subject to Section 2.2, (i) fully, faithfully and timely pay,
perform and discharge each and every obligation, term, condition, liability and
covenant required to be kept, performed and fulfilled by Antelope Valley Group
under the Provider Agreements, and (ii) shall accept the transfer of Member
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<PAGE>
Responsibility in accordance with the terms and conditions of payor agreements
with such Health Plans.
(b) Notwithstanding the definition of the Effective Time to the
contrary, Antelope Valley Group shall transfer to Sierra Group, and Sierra Group
shall accept, the right to, and responsibility for, any shared risk pool bonus
funds due from, or to be reimbursed to, health maintenance organizations or
hospitals as of 12:01am, May 1, 1998. Other than such risk pool bonus funds,
Sierra Group shall receive all capitation payments from Health Plans in
accordance with its payor contracts with such Health Plans, and shall pay all
claims to providers, attributable to dates of service on or after the Effective
Time.
ARTICLE 2
LIABILITIES
2.1 ASSUMED LIABILITIES/PROSPECT HOLDINGS. Prospect Holdings shall
assume only those liabilities of PrimeCare accruing on or after the Effective
Time, as listed on Exhibit 2.1.
2.2 ASSUMED LIABILITIES/SIERRA GROUP. Sierra Group shall assume only
those liabilities of Antelope Valley Group accruing on or after the Effective
Time, as listed on Exhibit 2.2.
ARTICLE 3
PURCHASE PRICE OF ASSETS
3.1 CONSIDERATION: PAYMENT OF PURCHASE PRICE.
(a) Subject to the terms and conditions of this Agreement and in
full consideration of the sale and transfer of the Assets, Prospect Holdings
shall pay to PrimeCare International a total purchase price in cash and stock,
as set forth below (the "Asset Purchase Price"), as follows:
(i) Prospect Holdings shall pay Four Hundred Seventy-Five
Thousand ($475,000.00) ("PrimeCare Down Payment") to PrimeCare International at
the Closing, as defined in Section 7 herein, payable by way of a wire transfer
of immediately available funds into a deposit account designated in writing by
PrimeCare International prior to the Closing Date;
(ii) Prospect Holdings will execute and deliver to PrimeCare
International at the Closing, a promissory note in the principal amount of Five
Hundred Thousand Dollars
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<PAGE>
($500,000.00), made payable to PrimeCare International, with interest thereon
payable at 8% per annum, and principal due in two (2) equal installments of Two
Hundred Fifty Thousand Dollars ($250,000.00) each, together with accrued
interest thereon, payable at ninety (90) days and one hundred eighty (180) days
from the Closing, the form of which is attached hereto as Exhibit 3.1(a)(ii)
(the "Note") (the obligations of Prospect Holdings under the Note are
subordinated, in accordance with that certain Subordination Agreement of even
date herewith, to the obligations under a note and security agreement made by
Prospect Holdings in favor of Imperial Bank, a California banking corporation);
and
(iii) Prospect Holdings will issue to PrimeCare
International, two hundred thousand (200,000) shares of Prospect Holdings's
$0.01 par value common stock, as adjusted herein (the "Shares"). In the event
that during the Equitable Adjustment Period (as defined below), Prospect
Holdings issues any shares of common stock at a price less than Five Dollars
($5.00) per share or issues any other security that can be converted into common
stock (including, but not limited to, preferred stock, warrants, or options)
with a strike price/exercise price/effective conversion price of less than Five
Dollars ($5.00) per share ("Market Price or Exercise Price"), then Prospect
Holdings shall immediately issue to PrimeCare International the number of shares
of common stock (at no additional consideration) determined as follows
("Equitable Adjustment"): (a) one million (1,000,000) divided by the Market
Price or Exercise Price, less (b) two hundred thousand (200,000). In the event
of further issuances of common stock or additional securities as described above
during the Equitable Adjustment Period, as to which Equitable Adjustment is
required, the Shares shall be subject to further Equitable Adjustment using the
same formula except that two hundred thousand (200,000) shall be replaced by the
total number of shares then issued to, and held by, PrimeCare International.
For purposes of this Section 3.1(a)(iii), "Equitable Adjustment Period" shall
mean the period beginning on the Closing Date and ending on the earlier of: (i)
three (3) years from the Closing Date, or (ii) the date of an initial public
offering of Prospect Holdings stock ("IPO"). In the event of an IPO, Prospect
Holdings shall use reasonable efforts to avoid any restrictions on PrimeCare
International to freely transfer or sell the Shares, except as required by
Prospect Holdings lender or underwriters. Notwithstanding the above, the
following issuances of securities shall not result in an Equitable Adjustment:
(i) the issuance of common stock pursuant to a conversion subsequent to the
Closing of convertible securities issued prior to the Closing; (ii) the
issuances of securities in consideration, in part or in whole, of services
previously rendered or to be rendered (including, without limitation, securities
issued as part of an employee incentive plan), so long as such issuances during
the Equitable Adjustment Period total less than five percent (5%) of the issued
and outstanding stock of Prospect Holdings on the Closing Date; and
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<PAGE>
(iii) the issuance of additional securities by reason of a third-party's
equitable adjustment rights.
(b) Subject to the terms and conditions of this Agreement and in
full consideration of the transfer of Member Responsibility, the transfer and
assignment of the Provider Agreements, and the transfer and sale of Antelope
Valley Group Assets, Sierra Group shall pay to Antelope Valley Group a total
acquisition price of Twenty-Five Thousand Dollars ($25,000.00) ("Contract
Acquisition Price") at the Closing, as defined in Section 7 herein, payable by
way of a wire transfer of immediately available funds into a deposit account
designated in writing by PrimeCare International prior to the Closing Date.
(c) The parties acknowledge that David Jensen, M.D. ("Dr.
Jensen") has entered into that certain Affiliation Agreement dated April 1,
1997, that certain Provider Service Agreement dated January 1, 1998, and that
certain Consent to Assignment of Provider Service Agreement and Affiliation
Agreement dated February 25, 1998. The parties agree that, notwithstanding the
assignment of the Affiliation Agreement as set forth in this Agreement,
PrimeCare International shall continue to be responsible for payments made to
Dr. Jensen referred to in the Affiliation Agreement as "Variable Consideration
Fee", which PrimeCare International and Prospect agree shall be equal to
Twenty-Five Thousand Dollars ($25,000.00) (the "Prepayment Fee"). On the date
of the first payment due under the Note by Prospect Holdings ("First Date"),
Prospect Holdings shall pay to PrimeCare International an amount computed as
follows: the Prepayment Fee multiplied by a fraction, the numerator of which is
(i) the total number of members assigned to Dr. Jensen by Antelope Valley Group
or Sierra Group on the First Date, less (ii) one thousand nine hundred
twenty-one (1,921) (being the number of members assigned to Dr. Jensen by
Antelope Valley Group as the base for determining the Variable Consideration
Fee), and the denominator of which is six hundred (600). On the date of the
second (final) payment due under the Note by Prospect Holdings, Prospect
Holdings shall pay to PrimeCare International an amount computed as set forth
above, less the amount of any payment previously made as set forth above.
Prospect Holdings and Sierra shall provide to PrimeCare International and
Antelope Valley Group capitation reports and enrollment data regarding the total
members assigned to Dr. Jensen during the periods set forth above.
3.2 FAIR MARKET VALUE. The parties agree that the Asset Purchase
Price reflects the fair market value of the Assets, and the Contract Acquisition
Price reflects the fair market value of the transfer of Member Responsibility,
the Provider Agreements, and Antelope Valley Group Assets. The parties agree no
consideration is or will be paid for the value of any referrals (direct or
indirect) to or from Sierra Group or Antelope Valley Group, or any of their
affiliates.
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3.3 SALES AND TRANSFER TAXES. Any sales and transfer taxes related to
this transaction shall be borne by PrimeCare International or Antelope Valley
Group, as the case may be.
3.4 THE SHARES. PrimeCare International agrees and acknowledges that
the Shares to be issued pursuant to this Agreement are "restricted securities,"
as that term is defined under the Securities Act of 1933, as amended, and are
not freely tradeable. Prior to issuing the Shares to PrimeCare International,
PrimeCare International and Prospect Holdings will execute a Stockholder
Representation Agreement in the form of that attached hereto as Exhibit 3.4, in
order to comply with applicable federal and State securities laws. The
Stockholder Representation Agreement shall contain mutually acceptable
representations, warranties and covenants, including an agreement not to sell,
transfer, or make any other disposition of the Shares unless and until (a) such
Shares are included in a registration statement or a post-effective amendment
under the Securities Act which has been filed by Prospect Holdings and declared
effective by the SEC, or (b) in the opinion of counsel for Prospect Holdings, no
such registration statement or post-effective amendment is required, or (c) the
SEC has first issued a "no action" letter regarding any such proposed
disposition of the Shares. Further, the Stockholder Representation Agreement
will contain mutually acceptable registration rights.
ARTICLE 4
REPRESENTATIONS, WARRANTIES AND
COVENANTS OF PRIMECARE INTERNATIONAL AND ANTELOPE VALLEY GROUP
Antelope Valley Group and PrimeCare International, as the case may be,
represent, warrant and covenant to Prospect Holdings and Sierra Group, as
applicable, that the statements in this Section 4 are correct and complete as of
the date hereof.
4.1 ORGANIZATION. Antelope Valley Group is a California professional
medical corporation duly organized, validly existing and in good standing under
the laws of the State of California. Prem Reddy, M.D., is the sole shareholder
of Antelope Valley Group. Antelope Valley Group has all requisite authority to
own, lease, and operate the Antelope Valley Group Assets, and to perform and
operate under the Provider Agreements and Payor Contracts, and to carry on its
business as currently being conducted. PrimeCare International is a Delaware
corporation duly organized, validly existing and in good standing, and is
qualified to do business in the State of California. PrimeCare International
has all requisite authority to own, lease, and operate the Assets and to carry
on its business as currently being conducted.
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4.2 AUTHORIZATION. Antelope Valley Group and PrimeCare International
each has the corporate power and authority to enter into this Agreement and to
consummate the transactions contemplated hereby. All actions on the part of
Antelope Valley Group and PrimeCare International, as the case may be, necessary
for the authorization, execution, delivery and performance of this Agreement and
the consummation of the transactions contemplated hereby, has been or will be
taken prior to the Closing Date, and this Agreement (including exhibits,
schedules and the ancillary agreements) constitutes the legal, valid and binding
obligation of PrimeCare International and Antelope Valley Group, as the case may
be, enforceable in accordance with its terms.
4.3 NO CONSENT REQUIRED. Neither the execution and delivery of this
Agreement by PrimeCare International nor the performance by it of its
obligations under this Agreement requires the consent of any third party that
will not have been obtained and delivered to Prospect Holdings prior to the
Closing Date. Further, neither the execution and delivery of this Agreement by
Antelope Valley Group nor the performance by it of its obligations under this
Agreement requires the consent of any third party that will not have been
obtained and delivered to Sierra Group prior to the Closing Date.
4.4 NO VIOLATION OF OTHER AGREEMENTS. Neither this Agreement nor any
of the transactions contemplated hereunder violates, conflicts with or results
in a breach of, or shall violate, conflict with or result in a breach of any
lease, contract, document, understanding, agreement or instrument to which
Antelope Valley Group or PrimeCare International is a party or by which any of
them may be bound, or any other lease, contract, document, understanding,
agreement or instrument affecting Antelope Valley Group or PrimeCare
International, or the Assets, the Antelope Valley Group Assets, the Payor
Contracts, or the Provider Agreements.
4.5 NO DEFAULT. Neither Antelope Valley Group nor PrimeCare
International is in default under the terms of any lease, contract, document,
understanding, agreement or instrument pertaining to the Assets, the Antelope
Valley Group Assets, the Payor Contracts, or the Provider Agreements, as the
case may be, nor has any event occurred that shall constitute a default by
Antelope Valley Group or PrimeCare International under any of the same following
the passage of time or consummation of any of the transactions contemplated
hereunder, nor has Antelope Valley Group or PrimeCare International received any
notice of any default under any of the same. No acceleration or other right to
accelerate, terminate, modify, cancel, create a security interest, or otherwise
change any existing arrangement will be created as a result of the consummation
of any of the transactions contemplated hereunder.
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4.6 FINANCIAL STATEMENTS, BOOKS AND RECORDS. Prior to the Closing
Date, PrimeCare International, as manager of the Practice, will have delivered
to Sierra Group copies of all available financial statements, books, and records
related to the operations of Antelope Valley Group, and PrimeCare
International's management of the Practice of Antelope Valley Group, including
an unaudited statement of operations for the year ended December 31, 1997, and
the months of January and February, 1998 (the "Financial Statements"). The
Financial Statements fairly and accurately represent the financial condition of
Antelope Valley Group and PrimeCare International's management of the Practice
of Antelope Valley Group, were prepared in accordance with generally accepted
accounting principles applied on a consistent basis throughout the periods
covered thereby, and, to PrimeCare International's and Antelope Valley Group's
actual knowledge, do not or will not contain any statement that is false or
misleading with respect to any material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading. The parties hereto have requested Ernst & Young to audit the
financial books and records related to Antelope Valley Group and PrimeCare
International's management of the Practice of Antelope Valley Group (the
"Audit"). Antelope Valley Group and PrimeCare International agree to provide
all facilities, records, and personnel necessary to complete the Audit. The
cost of the Audit shall be paid by Prospect Holdings; provided, however, that
PrimeCare International shall reimburse Prospect Holdings Seventeen Thousand
Five Hundred Dollars ($17,500.00) to be paid through a credit of the last
payment of the Note.
4.7 CONDUCT OF PRACTICE AND NO MATERIAL CHANGES. Between the date of
the execution of this Agreement and the Closing, PrimeCare International shall
maintain and preserve the Assets in good condition and repair (normal wear and
tear excepted), and prevent the imposition of any additional Liens (as defined
below) on the Assets. Between the date of the execution of this Agreement and
the Closing, Antelope Valley Group shall (i) perform under the Payor Contracts
and Provider Agreements in substantially the same manner as has previously been
done, and (ii) maintain and preserve the Antelope Valley Group Assets, Payor
Contracts and Provider Agreements and its relationships with all patients and
payors, and (iii) prevent the imposition of any additional Liens on the Antelope
Valley Group Assets, Payor Contracts or Provider Agreements.
To the actual knowledge of PrimeCare International, as manager of
the Practice of Antelope Valley Group, since the date of the Financial
Statements there has not been, or will not have been, and as of the Closing
there shall not be:
(a) Any material adverse change in the financial or business
condition of Antelope Valley Group or the Practice.
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(b) Any material change in the manner in which the Practice has
been conducted.
(c) Any voluntary or involuntary sale, assignment, license or
other disposition, of any kind, of the Assets, Antelope Valley Group Assets,
Provider Agreements, or Member Responsibility, except as contemplated by this
Agreement.
(d) Any material debts, liabilities or obligations of any kind,
whether absolute or contingent, due or to become due, or any security interests,
liens, or encumbrances, incurred by Antelope Valley Group or PrimeCare
International, as the case may be, in connection with the Practice except for:
(i) current liabilities incurred for services rendered or
goods supplied in the ordinary course of the operations of the Practice;
(ii) liabilities on account of taxes and governmental
charges not yet due, but not penalties, interest or fines in respect thereof; or
(iii) obligations or liabilities incurred by virtue of the
execution of this Agreement other than as expressly described herein.
4.8 TAXES. To Antelope Valley Group's and to PrimeCare
International's actual knowledge, there are no delinquent federal or state
corporate income or franchise taxes or any federal, state or local assessments
due or owing by Antelope Valley Group or PrimeCare International with respect to
the Practice. To Antelope Valley Group's actual knowledge, there are no
actions, suits, proceedings, investigations, audits, claims or liens now pending
against or related to Antelope Valley Group.
4.9 TITLE TO ASSETS. At the Closing, PrimeCare International shall
deliver title to the Assets, free and clear of all security interests,
encumbrances, covenants and restrictions, and Antelope Valley Group shall
deliver title to the Antelope Valley Group Assets, and assign and deliver the
Provider Agreements, free and clear of all security interests, encumbrances,
covenants and restrictions (collectively, "Liens"). Further, at the Closing,
the transfer of Member Responsibility by Antelope Valley Group to Sierra Group
shall not be limited or restricted in any way by security interests,
encumbrances, covenants or restrictions of Antelope Valley Group.
4.10 CONTRACTS.
(a) PrimeCare International has furnished to Prospect Holdings,
for Prospect Holdings' inspection and review, true and complete copies of all
PrimeCare Contracts. The
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PrimeCare Contracts include all of the contracts pursuant to which PrimeCare
International provides management services to Antelope Valley Group. Antelope
Valley Group has furnished to Sierra Group, for Sierra Group's inspection and
review, true and complete copies of all Provider Agreements.
(b) The PrimeCare Contracts, the Payor Contracts, and the
Provider Agreements will remain in full force and effect in accordance with
their terms as of the Closing Date. Neither PrimeCare International nor
Antelope Valley Group nor any other party to any PrimeCare Contract, Payor
Contract or Provider Agreement, as the case may be (including, but not limited
to, any landlord), is in default, or alleged to be in default thereunder, and
there exists no condition or event which, with the giving of notice or the lapse
of time or otherwise, would constitute such a default by PrimeCare
International, Antelope Valley Group, or by any other party to any such
contracts or agreements. All of the Payor Contracts and Provider Agreements are
valid, legally binding, and enforceable in accordance with their terms by
Antelope Valley Group. All of the PrimeCare Contracts are valid, legally
binding, and enforceable in accordance with their terms by PrimeCare
International.
4.11 CAPITATION REPORTS. To PrimeCare International's actual
knowledge, as the manager of the Practice of Antelope Valley Group, the
capitation reports dated March 25, 1998, attached hereto as Exhibit 4.11, have
been prepared from the reports of the managed care plans, and are true,
accurate, and complete. To PrimeCare International's actual knowledge, as
manager of the Practice of Antelope Valley Group there has not been, or will not
have been, and as of the Closing there shall not be any material adverse change
(in the amount of five percent (5%) or more) in the number of members for which
Antelope Valley Group is responsible as set forth in such capitation reports,
except for those matters specifically set forth in Exhibit 4.11. PrimeCare
International agrees to deliver to Prospect Holdings all capitation reports
prepared after the date of execution of this Agreement, and PrimeCare
International shall at such time certify that, to its actual knowledge, such
reports are true, accurate and complete, or shall describe any limitations to
such certification.
4.12 EMPLOYEES.
(a) All current employees of PrimeCare International located in
Antelope Valley, California and engaged in management of the Practice of
Antelope Valley Group are employees "at will". Antelope Valley Group has no
employees.
(b) To the actual knowledge of PrimeCare International: (i)
there are no threats of strikes or work stoppages by any of such employees, (ii)
PrimeCare International is not a party to any contract or agreement with a labor
union or
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any local or subdivision thereof, and has not been charged with any unresolved
unfair labor practices, (iii) there are no labor grievances or any present union
organizing activity among any of its employees, (iv) there are no workers'
compensation, EEOC or ADA claims against PrimeCare International related to such
employees.
(c) As of the Closing, there will be no material liability of
PrimeCare International for any employee benefit or unpaid compensation, tax
withholdings, Federal Insurance Contribution Act and disability payments of any
kind with respect to any such employees or independent contractor engaged by
PrimeCare International providing services to Antelope Valley Group, including
without limitation, vacation pay, sick leave pay, personal day pay, severance
pay and bonus pay.
4.13 NO LITIGATION; INSURANCE. Except as set forth in Exhibit 4.13,
to PrimeCare International's and Antelope Valley Group's actual knowledge, as
the case may be, there is no pending or threatened litigation, unasserted claim,
or governmental investigation, relating to the Assets, the Practice, the
Antelope Valley Group Assets, the Payor Contracts, or the Provider Agreements.
PrimeCare International or Antelope Valley Group, as the case may be, has
adequately provided insurance for such claims, if any, and, until the Closing
Date, will continue to maintain insurance against all liabilities, claims and
risks against which it is customary to insure.
4.14 VIOLATION OF LAWS. To PrimeCare International's and Antelope
Valley Group's actual knowledge, as the case may be, neither entity is in
violation of any law, rule, regulation or administrative or judicial order
pertaining to the Assets , the Antelope Valley Group Assets, the Payor
Contracts, or the Provider Agreements, and neither the execution, delivery nor
performance of this Agreement, or the consummation of any of the transactions
contemplated hereby, conflicts with, violates or results in a breach of any law,
rule, regulation or administrative judicial order.
4.15 NO BROKERS OR FINDERS. Except for Legend Capital Corporation,
neither PrimeCare International nor Antelope Valley Group has incurred any
liability to any broker, finder or agent for any brokerage fees, finder's fees,
or commissions with respect to the transactions contemplated by this Agreement,
and if any such liability has been incurred, such liability shall be and remain
the sole responsibility of PrimeCare International and Antelope Valley Group,
and PrimeCare International or Antelope Valley Group, as the case may be, shall
indemnify, defend and hold Prospect Holdings and Sierra Group harmless from and
against any and all liabilities, losses, damages, claims, causes of action,
costs and expenses (including without limitation, reasonable attorneys' fees),
arising out of or relating to such liability.
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4.16 NO BANKRUPTCY PROCEEDINGS. Neither PrimeCare International nor
Antelope Valley Group has (i) made a general assignment for the benefit of
creditors,(ii) filed any voluntary petition in bankruptcy or suffered the filing
of an involuntary petition by its creditors,(iii) suffered the appointment of a
receiver to take possession of all or substantially all of its assets, property
or business,(iv) suffered the attachment or other judicial seizure of all or
substantially all of its assets, property or business,(v) admitted in writing
its inability to pay its debts as such debts become due, or (vi) made an offer
of settlement, extension or compromise to its creditors generally.
4.17 LICENSURE AND REIMBURSEMENT. As of the date hereof, to the
actual knowledge of Antelope Valley Group and PrimeCare International, as the
case may be:
(a) All physicians contracting with Antelope Valley Group to
provide medical services are duly licensed to practice his or her profession in
the State of California without restriction; and Antelope Valley Group has all
licenses, permits, approvals and authorizations necessary for the conduct of its
business as presently conducted.
(b) Antelope Valley Group is not currently prevented from
participating in the Medicare and Medicaid programs or in any other applicable
governmental health care payment programs. There are no federal or state
investigations pending or contemplated that will have an impact upon Antelope
Valley Group's reimbursement status or Antelope Valley Group's ability to
operate a medical practice in California.
(c) All billing practices by Antelope Valley Group applicable to
all third parties including, but not limited to, private insurance companies,
have been true, fair and correct and in compliance with all applicable laws,
regulations, and policies of all such third party payors, and Antelope Valley
Group has not billed for or received any payment or reimbursement in excess of
amounts permitted by law.
(d) Antelope Valley Group, PrimeCare International,and their
respective agents have not directly or indirectly (i) offered to pay or
solicited any remuneration, in cash or in kind, to, or made any financial
arrangements with, any past or present customers, past or present suppliers,
contractors, third parties, or third party payors of Antelope Valley Group in
order to obtain business or payments from such persons, other than pursuant to,
and in accordance with, the Payor Contracts and Provider Agreements, and other
than entertainment activities in the ordinary and lawful course of business;(ii)
given or received, or agreed to give or receive, or is aware that there has been
made or that there is any agreement to make or receive, any gift or gratuitous
payment of any kind, nature or description (whether in money, property or
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services) to any customer or potential customer, supplier or potential supplier,
contractors, third party payor or any other person other than in connection with
promotional, entertainment, or charitable activities in the ordinary and lawful
course of business;(iii) made or agreed to make, or is aware that there has been
made or that there is any agreement to make any contribution, payment or gift of
funds or property to, or for the private use of, any governmental official,
employee or agent where either the contribution, payment or gift or the purpose
of such contribution, payment or gift is or was illegal under the law of the
United States or under the laws of any state thereof or any other jurisdiction
under which such payment, contribution or gift was made;(iv) established or
maintained any unrecorded fund or asset for any purpose or made any false or
artificial entries on any of its books or records for any reason; or (v) made or
agreed to make or is aware that there has been made or that there is any
intention to make, any payment to any person with the intention or understanding
that any part of such payment would be used for any purpose other than that
described in the documents supporting such payment.
(e) Neither Antelope Valley Group nor its agents is a party to
any contract, lease, agreement or arrangement, including but not limited to any
joint venture or consulting agreement with any physician, hospital, nursing
facility, home health agency or other person who is in a position to make,
receive or influence referrals to or from Antelope Valley Group, to provide
services, lease space, lease equipment or engage in any other venture or
activity, other than pursuant to, and in accordance with, the Payor Contracts
and Provider Agreements.
4.18 CONFIDENTIALITY. To Antelope Valley Group's actual knowledge, it
has maintained, and agrees to continue to maintain, the confidentiality of all
patient records as required by and in conformance with all applicable state and
federal laws and regulations. Antelope Valley Group shall, at Closing, transfer
custody of any patient records in its possession to Sierra Group in accordance
with applicable state and federal laws and regulations.
4.19 BULK SALES. Neither PrimeCare International or Antelope Valley
Group is an enterprise subject to Division 6 of the Commercial Code of
California, and the transactions contemplated hereby are not subject to Division
6 of the Commercial Code of California.
4.20 INSPECTIONS. Exhibit 4.20 sets forth accurately and fully
describes (i) all inspections of the Assets or the Practice by any governmental
agency or any consultant at any time during the previous five (5) years;(ii) all
matters that were noted by any and all such governmental agency or consultant as
requiring correction or modifications that were requested or
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recommended; and (iii) the present status of each such noted matter.
4.21 NO UNTRUE STATEMENTS. (i) Neither Antelope Valley Group nor
PrimeCare International, as the case may be, has made any untrue statement or
representation in connection with this Agreement,(ii) all written instruments or
documents transferred or delivered and/or given to Prospect Holdings or Sierra
Group by or from Antelope Valley Group or PrimeCare International, as the case
may be, are true, correct and complete copies of what they purport to be,(iii)
to their actual knowledge, neither Antelope Valley Group nor PrimeCare
International has failed to state or disclose any material fact in connection
with the transactions contemplated by this Agreement, and (iv) neither Antelope
Valley Group nor PrimeCare International, as the case may be, knows of any fact
or has misrepresented any facts concerning its ability, financial or otherwise,
to consummate the transactions contemplated by this Agreement or that would
otherwise materially adversely affect Prospect Holding's decision to acquire the
Assets, or Sierra Group's decision to acquire the Antelope Valley Group Assets,
assume the Provider Agreements, and accept Member Responsibility.
4.22 NAMES. Neither PrimeCare International nor Antelope Valley Group
has operated during the past five (5) years under any name other than as set
forth in the preamble above.
4.23 COVENANT NOT TO COMPETE.
(a) The parties acknowledge and agree that Antelope Valley Group
and PrimeCare International, as the case may be, are parties to certain
covenants not to compete related to that certain Stock Purchase Agreement dated
June 14, 1996 ("Provider Covenants"). Such Provider Covenants are not
assignable to Sierra Group or Prospect Holdings. However, in the event of an
alleged breach of a Provider Covenant by a party at or after the Effective Time
and upon the written request of Prospect Holdings, PrimeCare International shall
exercise any and all remedies available to PrimeCare International at the
direction and supervision of Prospect Holdings, although PrimeCare International
makes no representation or warranty regarding the successfulness of any
litigation or PrimeCare International's legal right to enforce such covenants.
PrimeCare International and Prospect Holdings shall mutually agree upon the
costs and fees to be incurred and the actions to be taken in the exercise of
such remedies, and Prospect Holdings agrees to pay all costs (including all
attorneys' fees) and all fees associated with the exercise of remedies by
PrimeCare International in advance. In the event, PrimeCare International and
Prospect Holdings cannot mutually agree upon the actions to be taken in the
exercise of the remedies discussed above, PrimeCare International shall
undertake all actions instructed by Prospect Holdings so long as Prospect
Holdings pays all costs (including
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attorneys' fees) and all fees associated with such instructions in advance, and
so long as such actions do not, in the reasonable opinion of PrimeCare
International, materially and adversely affect the financial condition of
PrimeCare International. The parties hereto acknowledge and agree that a breach
by PrimeCare International of the obligation to enforce such covenants will
cause irreparable damage to Prospect Holdings, the exact amount of which will be
difficult to ascertain, and that remedies at law for any such breach will be
inadequate. Accordingly, PrimeCare International agrees that if it breaches the
obligation to enforce such covenants as set forth above, then Prospect Holdings
shall be entitled to injunctive relief, and PrimeCare International agrees not
to assert in any proceeding that Prospect Holdings has an adequate remedy at
law.
(b) The parties further acknowledge and agree that litigation has
been undertaken to enforce the above-described covenants not to compete, and
PrimeCare International agrees, at its sole cost and expense, to pursue such
litigation as it reasonably determines. Any recovery from such litigation shall
be the sole property of PrimeCare International. Prospect Holdings and Sierra
Group agree to reasonably cooperate (including making officers and directors
familiar with this Agreement available to testify) with PrimeCare International
in such litigation, in order to assist PrimeCare International in establishing
the damages (including the reduction in the value of the assets and rights
transferred in this Agreement) caused by (i) the loss of revenue related to the
actions of the physicians violating the above-described covenant, (ii) the risk
of instability to the Practice caused by the withdrawal of such physicians,
(iii) the damage caused by the loss of a large percentage of available
pediatricians to the Practice, and (iv) the overall damages caused by the breach
of the above-described covenant not to compete by such physicians.
ARTICLE 5
REPRESENTATIONS, WARRANTIES AND COVENANTS
OF SIERRA GROUP AND PROSPECT HOLDINGS
Sierra Group and Prospect Holdings, as the case may be, represent,
warrant and covenant to PrimeCare International and Antelope Valley Group, as
applicable, that the statements in this Section 5 are correct and complete as of
the date hereof:
5.1 ORGANIZATION. Sierra Group is a professional medical corporation
validly existing and in good standing under the laws of the State of California.
Sierra Group has all requisite authority to own, lease, and operate its assets
and to carry on its business as currently being conducted. Prospect Holdings is
a Delaware corporation duly organized, validly existing and in good standing,
and is qualified to do business in
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the State of California. Prospect Holdings has all requisite authority to own,
lease, and operate its assets and to carry on its business as currently being
conducted.
5.2 AUTHORITY. Sierra Group and Prospect Holdings each has the
corporate power and authority to enter into this Agreement and to consummate the
transactions contemplated hereby. All action on the part of Sierra Group or
Prospect Holdings, as the case may be, necessary for the authorization,
execution, delivery and performance of this Agreement and the consummation of
the transactions contemplated hereby has been or will be taken prior to the
Closing Date, and this Agreement (including exhibits, schedules and the
ancillary agreements) constitutes the legal, valid and binding obligation of
Prospect Holdings and Sierra Group, as the case may be, enforceable in
accordance with its terms.
5.3 NO CONSENT REQUIRED. Neither the execution and delivery of this
Agreement by Prospect Holdings nor the performance by it of its obligations
under this Agreement requires the consent of any third party that will not have
been obtained and delivered to PrimeCare International prior to the Closing
Date. Further, neither the execution and delivery of this Agreement by Sierra
Group nor the performance by it of its obligations under this Agreement requires
the consent of any third party that will not have been obtained and delivered to
Antelope Valley Group prior to the Closing Date.
5.4 NO VIOLATION OF OTHER AGREEMENTS. Neither this Agreement nor any
of the transactions contemplated hereunder violates, conflicts with or results
in a breach of, or shall violate, conflict with or result in a breach of any
lease, contract, document, understanding, agreement or instrument to which
Sierra Group or Prospect Holdings is a party or by which any of them may be
bound, or any other lease, contract, document, understanding, agreement or
instrument affecting Sierra Group or Prospect Holdings.
5.5 NO DEFAULT. No acceleration or other right to accelerate,
terminate, modify, cancel, create a security interest, or otherwise change any
existing arrangement will be created as a result of the consummation of any of
the transactions contemplated hereunder.
5.6 FINANCIAL STATEMENTS, BOOKS AND RECORDS. Prior to the Closing
Date, Prospect Holdings will have delivered to PrimeCare International (receipt
of which is hereby acknowledged) copies of an audited statement of operations
for the year ended September 30, 1997, an audited balance sheet at September 30,
1997, an unaudited interim statement of operations for the period from year-end
through January 31, 1998, an unaudited balance sheet at January 31, 1998, and
projections of operations and cash flows through September 30, 2002, a schedule
of note and lease
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payments for the period from January 1, 1998 through December 31, 1998 (the
"Prospect Holdings Financial Statements"). The Prospect Holdings Financial
Statements fairly and accurately represent or will represent the financial
condition of Prospect Holdings, were prepared in accordance with generally
accepted accounting principles applied on a consistent basis throughout the
periods covered thereby, and, to Prospect Holdings' actual knowledge, do not or
will not contain any statement that is false or misleading with respect to any
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading.
5.7 CONDUCT OF PROSPECT HOLDINGS AND NO MATERIAL CHANGES. To the
actual knowledge of Prospect Holdings, since the date of the Financial
Statements there has not been, or will not have been, and as of the Closing
there shall not be:
(a) Any material adverse change in the financial or business
condition of Prospect Holdings.
(b) Any material change in the manner in which the business of
Prospect Holdings has been conducted.
5.8 TITLE TO ASSETS. At the Closing, Prospect Holdings shall deliver
the Shares, free and clear of all security interests, encumbrances, covenants
and restrictions (excepting only the Stockholder Representation Agreement).
5.9 NO LITIGATION; INSURANCE. Prospect Holdings has adequately
provided insurance for pending or threatened litigation, unasserted claims, or
governmental investigations, relating to the assets or business of Prospect
Holdings, if any, and will continue to maintain insurance against all
liabilities, claims and risks against which it is customary to insure.
5.10 NO BROKERS OR FINDERS. Except for Legend Capital Corporation,
neither Sierra Group nor Prospect Holdings has incurred any liability to any
broker, finder, or agent for any brokerage fees, finder's fees or commissions
with respect to the transactions contemplated by this Agreement, and if any such
liability has been incurred, such liability shall be and remain the sole
responsibility of Sierra Group and Prospect Holdings, and Sierra Group and
Prospect Holdings shall indemnify, defend and hold Antelope Valley Group and
PrimeCare International harmless from and against any and all liabilities,
losses, damages, claims, causes of action, costs and expenses (including,
without limitation, reasonable attorneys' fees), arising out of or relating to
such liability.
5.11 NO BANKRUPTCY PROCEEDINGS. Neither Sierra Group nor Prospect
Holdings has (i) made a general assignment for the benefit of creditors,(ii)
filed any voluntary petition in bankruptcy or suffered the filing of any
involuntary petition by
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its creditors,(iii) suffered the appointment of a receiver to take possession of
all or substantially all of its assets, properties or business,(iv) suffered the
attachment or other judicial seizure of all or substantially all of its assets,
properties or business,(v) admitted in writing its inability to pay its debts as
such debts become due, or (vi) made an offer of settlement, extension or
compromise to its creditors generally.
5.12 LICENSURE AND REIMBURSEMENT. As of the date hereof, to the
actual knowledge of Prospect Holdings, except as set forth in Exhibit 5.12:
(a) Both Prospect Holdings and all medical groups managed by
Prospect Holdings have all licenses, permits, approvals and authorizations
necessary for the conduct of their businesses as presently conducted.
(b) No medical group managed by Prospect Holdings or any
affiliate of Prospect Holdings is currently prevented from participating in the
Medicare and Medicaid programs or in any other applicable governmental health
care payment programs. There are no federal or state investigation pending or
contemplated that will have an impact upon any such medical group's
reimbursement status or ability to operate a medical practice in California or a
physician practice management business in California.
(c) All billing practices of Prospect Holdings or its affiliates
on behalf of any medical group applicable to all third parties including, but
not limited to, private insurance companies, have been true, fair and correct
and in compliance with all applicable laws, regulations, and policies of all
such third party payors, and such medical groups have not billed for or received
any payment or reimbursement in excess of amounts permitted by law.
(d) Prospect Holdings, Sierra Group, and their respective agents
have not directly or indirectly (i) offered to pay or solicited any
remuneration, in cash or in kind, to, or made any financial arrangements with,
any past or present customers, past or present suppliers, contractors, third
parties, or third party payors of any medical group managed by Prospect Holdings
or any affiliate of Prospect Holdings in order to obtain business or payments
from such persons, other than pursuant to, and in accordance with, appropriate
managed care contracts, and other than entertainment activities in the ordinary
and lawful course of business;(ii) given or received, or agreed to give or
receive, any gift or gratuitous payment of any kind, nature or description
(whether in money, property or services) to any customer or potential customer,
supplier or potential supplier, contractors, third party payor or any other
person other than in connection with promotional, entertainment, or charitable
activities in the ordinary and lawful course of business;(iii)
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made or agreed to make, or is aware that there has been made or that there is
any agreement to make any contribution, payment or gift of funds or property to,
or for the private use of, any governmental official, employee or agent where
either the contribution, payment or gift or the purpose of such contribution,
payment or gift is or was illegal under the law of the United States or under
the laws of any state thereof or any other jurisdiction under which such
payment, contribution or gift was made;(iv) established or maintained any
unrecorded fund or asset for any purpose or made any false or artificial entries
on any of its books or records for any reason; or (v) made or agreed to make or
is aware that there has been made or that there is any intention to make, any
payment to any person with the intention or understanding that any part of such
payment would be used for any purpose other than that described in the documents
supporting such payment.
(e) No medical group managed by Prospect Holdings or any
affiliate of prospect Holdings, or their agents is a party to any contract,
lease, agreement or arrangement, including but not limited to any joint venture
or consulting agreement with any physician, hospital, nursing facility, home
health agency or other person who is in a position to make, receive or influence
referrals to or from such medical groups, to provide services, lease space,
lease equipment or engage in any other venture or activity, other than pursuant
to, and in accordance with, appropriate managed care contracts.
5.13 CONFIDENTIALITY. Sierra Group shall, at Closing, receive custody
of any patient records in the possession of Antelope Valley Group and shall
maintain such medical records in accordance with applicable state and federal
laws and regulations.
5.14 NO UNTRUE STATEMENTS. (i) Neither Sierra Group nor Prospect
Holdings, as the case may be, has made any untrue statement or representation in
connection with this Agreement, (ii) all written instruments or documents
transferred or delivered and/or given to Antelope Valley Group or PrimeCare
International by or from Prospect Holdings or Sierra Group, as the case may be,
are true, correct and complete copies of what they purport to be, (iii) to their
actual knowledge, neither Sierra Group nor Prospect Holdings has failed to state
or disclose any material fact in connection with the transactions contemplated
by this Agreement, and (iv) neither Sierra Group nor Prospect Holdings knows of
any facts or has misrepresented any facts concerning its respective ability,
financial or otherwise, to consummate the transactions contemplated by this
Agreement or that would adversely affect Antelope Valley Group's decision to
sell the Assets and acquire the Shares.
5.15 LINE OF CREDIT. Notwithstanding the subordinated nature of the
Note, Prospect Holdings has sufficient cash on hand
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from operations or credit available to pay its obligations under the Note as
such obligations become due. Further, Prospect Holdings is not in default under
any line of credit, promissory note, or security agreement nor has any event
occurred that, with notice or the passage of time, or both, would constitute a
default by Prospect Holdings under any such credit agreements, and there is no
basis for any of the other parties to such credit agreements to assert that
Prospect Holdings is in default thereunder.
ARTICLE 6
SIERRA GROUP'S/PROSPECT HOLDINGS' ACCESS TO RECORDS;
PUBLICITY
6.1 ACCESS TO RECORDS.
(a) Between the date of the execution hereof and the Closing,
Sierra Group, Prospect Holdings, Antelope Valley Group and PrimeCare
International shall mutually agree upon the reasonable access to the tax
returns, books, records, licenses, certifications, contracts, agreements, and
employee records (regarding positions, job descriptions, compensation, seniority
level, accrued vacation and sick leave), and all other relevant documentation
specifically identified as related to the Practice of Antelope Valley Group.
Neither Sierra Group, Prospect Holdings, nor its representatives shall disclose
the contents of any said materials that has been discovered in the course of its
due diligence ("Prospect's Due Diligence") to any third party without prior
written consent of Antelope Valley Group or PrimeCare International, as the case
may be, except:(i) as required by law;(ii) as may be reasonably necessary in
connection with any litigation or dispute arising out of this Agreement or any
of the transactions contemplated hereunder; (iii)information contained in any
such materials that was already in Sierra Group's or Prospect Holdings'
possession prior to the date hereof; and (iv) information contained in any such
materials that is or becomes generally available to the public other than as a
result of a disclosure by Sierra Group, Prospect Holdings, or its agents or
employees in violation of this Section.
(b) Between the date of the execution hereof and the Closing,
Antelope Valley Group and PrimeCare International shall be provided reasonable
access to documentation related to the assets and business of Prospect Holdings,
as the parties shall mutually agree. Neither Antelope Valley Group, PrimeCare
International, nor its representatives shall disclose the contents of any said
materials that has been discovered in the course of its due diligence
("PrimeCare's Due Diligence") to any third party without prior written consent
of Sierra Group or Prospect Holdings, as the case may be, except:(i) as required
by
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law; (ii) as may be reasonably necessary in connection with any litigation or
dispute arising out of this Agreement or any of the transactions contemplated
hereunder; (iii) information contained in any such materials that was already in
Antelope Valley Group's or PrimeCare International's possession prior to the
date hereof; and (iv) information contained in any such materials that is or
becomes generally available to the public other than as a result of a disclosure
by Antelope Valley Group, PrimeCare International, or its agents or employees in
violation of this Section.
6.2 PUBLICITY. No party shall, at any time on or after the date
hereof through the Closing Date, issue any publicity or written or oral
statement, or otherwise disclose the existence of this Agreement or any of the
terms or conditions hereof, or disclose the contemplation, implementation or
consummation of any of the transactions intended hereby (other than to its
directors, officers, employees, attorneys, financial advisors and other agents
and representatives, as necessary in order to negotiate, evaluate, approve and
consummate the transactions hereunder), without the prior written consent of all
parties, except in accordance with any of the exceptions as set forth in Section
6.1, and except as reasonably required of any party by any applicable federal or
state securities law (or agency's) disclosure requirements.
ARTICLE 7
CLOSING; CONDITIONS TO OBLIGATIONS TO CLOSE
7.1 CLOSING DATE. The transactions contemplated by this Agreement
shall be consummated at the "Closing". The Closing shall take place at Miller &
Holguin, 1801 Century Park East, 7th Floor, Los Angeles, California, or at such
other place as may be designated by all of the parties on the Closing Date. The
Closing Date shall be the first business day following the date upon which all
conditions to closing as set forth in Article 7 are satisfied or waived, unless
otherwise agreed upon by PrimeCare International and Prospect Holdings. The
"Effective Time" for purposes of this Agreement shall be 12:01am of the day
immediately after the Closing Date.
7.2 DELIVERIES BY PRIMECARE INTERNATIONAL AND ANTELOPE VALLEY GROUP.
At the Closing, PrimeCare International and Antelope Valley Group, as the case
may be, shall execute (as to documents calling for execution) and deliver to
Prospect Holdings and Sierra Group, as the case may be, the following:
(a) A Bill of Sale/Assignment and Assumption Agreement in the
form of Exhibit 7.2(a) attached hereto and such other sufficient instruments and
documents to convey, transfer, assign, or further perfect, title to each of the
Assets
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(including PrimeCare Contracts) as are reasonably requested by Prospect Holdings
to transfer the Assets.
(b) A Bill of Sale/Assignment and Assumption Agreement in the
form of Exhibit 7.2(b) attached hereto and such other sufficient instruments and
documents to convey, transfer, assign, or further perfect, title to each of the
Antelope Valley Group Assets, and to convey, transfer and assign the Provider
Agreements as are reasonably requested by Sierra Group to transfer the Antelope
Valley Group Assets.
(c) The Stockholder Representation Agreement.
(d) Good standing certificates issued by the California
Secretary of State and Franchise Tax Board, respectively, which show that
Antelope Valley Group and PrimeCare International are in good standing with such
agencies.
(e) A certificate signed by a duly authorized officer of
PrimeCare International and Antelope Valley Group, certifying (in the form of
the certificate attached hereto as Exhibit 7.2(e)) that as of the Closing Date,
(i) all of the representations and warranties contained in this Agreement are
true on and as of the Closing Date and (ii) that all conditions specified in
this Agreement to be fulfilled by PrimeCare International and Antelope Valley
Group have been fulfilled.
(f) Executed amendments by and between each of Antelope Valley
Group's participating providers and Antelope Valley Group ("Provider
Amendments") consenting to the assignment of the Provider Agreements to which
they are parties and modifying the agreements as exclusive provider arrangements
for three (3) years, copies of which are attached hereto as Exhibit 7.2(f).
(g) All documents and instruments required of Antelope Valley
Group by the Health Plans to transfer Member Responsibility.
(h) A UCC search report dated not more than fifteen (15) days
prior to the Closing Date issued by the California Secretary of State that shows
that there are no filings under the Uniform Commercial Code on file with such
Secretary of State indicating any liens on the Assets, the Antelope Valley Group
Assets, the Provider Agreements, or any restriction on the transfer of Member
Responsibility, other than those filings specifically approved by Prospect
Holdings and Sierra Group, as the case may be, prior to the Closing.
(i) The Covenant Not To Compete, as set forth in Article 8, and
attached hereto as Exhibit 8.0.
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(j) That certain Interim Services Agreement of Antelope Valley
Group, attached hereto as Exhibit 7.2(j), whereby Sierra Group shall become
financially responsible for those members who have not been transferred as of
the Effective Time ("ISA").
(k) That certain Subordination Agreement with Imperial Bank.
7.3 DELIVERIES BY SIERRA GROUP AND PROSPECT HOLDINGS. At the Closing,
Sierra Group and Prospect Holdings, as the case may be, shall execute (as to
documents calling for execution) and shall deliver to PrimeCare International
and Antelope Valley Group, as the case may be, the following:
(a) The PrimeCare Down Payment shall be delivered to PrimeCare
International.
(b) The Contract Acquisition Price shall be delivered to
Antelope Valley Group.
(c) The Note shall be delivered to PrimeCare International.
(d) The Shares shall be delivered to PrimeCare International, or
(upon the written consent of PrimeCare International), Prospect Holdings shall
deliver written instructions to the designated transfer agent and the Shares
shall be delivered to PrimeCare International as soon as reasonably possible.
(e) The Bill of Sale/Assignment and Assumption Agreement in the
form of Exhibit 7.2(a) attached hereto and such other sufficient instruments and
documents regarding the consent to assignment and assumption of the Provider
Agreements, and the transfer of Membership Responsibility, as are reasonably
requested by Antelope Valley Group.
(f) The Bill of Sale/Assignment and Assumption Agreement in the
form of Exhibit 7.2(b) attached hereto and such other sufficient instruments and
documents regarding the acceptance of the transfer of the Assets as are
reasonably requested by PrimeCare International.
(g) The Stockholder Representation Agreement.
(h) A certificate signed by a duly authorized officer of
Prospect Holdings and Sierra Group, certifying that as of the Closing Date, all
of the representations and warranties contained in this Agreement are true on
and as of the Closing Date and that all conditions specified in this Agreement
to be fulfilled by Prospect Holdings and Sierra Group have been
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fulfilled, in the form of the certificate attached hereto as Exhibit 7.3(h).
(i) Good standing certificates issued by the California
Secretary of State and Franchise Tax Board, respectively, which show that
Prospect Holdings is in good standing with such agencies.
(j) The ISA.
7.4 CONDITIONS TO PROSPECT HOLDINGS AND SIERRA GROUP'S OBLIGATION.
Prospect Holdings' and Sierra Group's obligation to consummate the transactions
contemplated by this Agreement is conditioned upon satisfaction, or waiver by
Prospect Holdings or Sierra Group, as the case may be, in writing, of all of the
following on or before the Closing Date:
(a) The performance by PrimeCare International of all of
PrimeCare International's respective promises and agreements under this
Agreement that are to be performed as of the Closing, including but not limited
to the procurement and delivery to Prospect Holdings of all necessary
assignments and consents (including consents to the assignment of the PrimeCare
Contracts); and the performance by Antelope Valley Group of all of Antelope
Valley Group's respective promises and agreements under this Agreement, that are
to be performed as of the Closing, including but not limited to the procurement
and delivery to Sierra Group of all necessary assignments and consents
(including consents to the assignment of the Provider Agreements).
(b) The execution and delivery of all documents and information
requested of Antelope Valley Group by all Health Plans, necessary to transfer
Member Responsibility currently contracting with said providers through Antelope
Valley Group or an affiliate of Antelope Valley Group, including, without
limitation, the execution and delivery to the Health Plans within two (2)
business days of the date of the execution of this Agreement by both parties of
a notification letter previously approved by Prospect Holdings.
(c) The delivery to Sierra Group of a copy of the master files
for HMO eligibility related to Antelope Valley Group and physician
credentialling records of those physicians executing Provider Agreements at
least fourteen (14) business days prior to Closing.
(d) Prospect Holdings' or Sierra Group's reasonable approval or
satisfaction with each item under this Agreement with respect to which Prospect
Holdings or Sierra Group is entitled to approve or to be satisfied, including,
without limitation, all schedules and exhibits hereto and all items that
Prospect Holdings and Sierra Group reviews pursuant to Prospect's Due Diligence.
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(e) No suit, arbitration or legal, administrative or other
proceeding or governmental investigation shall be pending or threatened against
Sierra Group, Prospect Holdings, PrimeCare International, or Antelope Valley
Group, or any affiliates thereof, in relation to or affecting the consummation
of the transactions contemplated by this Agreement.
(f) Each of the representations and warranties of PrimeCare
International and Antelope Valley Group is true, complete and correct as of the
Closing.
(g) The Assets and the Antelope Valley Group Assets have not
been damaged and there has been no adverse change to the Assets, the Antelope
Valley Group Assets, the Payor Contracts or the Provider Agreements from the
date of this Agreement.
(h) Neither Sierra Group nor Prospect Holdings has exercised any
of the cancellation options under Section 10 below.
(i) Delivery of executed Provider Amendments.
(j) The procurement and delivery by PrimeCare International of
the consent of any lender of PrimeCare International or Antelope Valley Group
holding a security interest in the Assets, the Antelope Valley Group Assets, or
the Provider Agreements, or restricting the transfer of Member Responsibility,
and the release of any related Liens. Such consent and release of Liens shall
be in form and substance reasonably satisfactory to Prospect Holdings or Sierra
Group, as the case may be.
(k) The procurement and delivery by Prospect Holdings of the
consent of any lender of Prospect Holdings or Sierra Group of the transactions
contemplated in this Agreement.
(l) The completion of the Audit by Ernst & Young and delivery to
Prospect Holdings, Sierra Group, PrimeCare International, and Antelope Valley
Group.
7.5 CONDITIONS TO PRIMECARE INTERNATIONAL'S AND ANTELOPE VALLEY
GROUP'S OBLIGATIONS. PrimeCare International's and Antelope Valley Group's
obligation to consummate the transactions contemplated by this Agreement is
conditioned upon satisfaction, or waiver by PrimeCare International and Antelope
Valley Group in writing, of all of the following on or before the Closing Date:
(a) The performance by Prospect Holdings and Sierra Group (or
their affiliates) of all of Prospect Holdings' and Sierra Group's promises and
agreements under this Agreement that are to be performed as of Closing,
including but not limited
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to the procurement and delivery to PrimeCare International and Antelope Valley
Group of all necessary assignments and consents.
(b) PrimeCare International's and Antelope Valley Group's
reasonable approval or satisfaction of each item under this Agreement with
respect to which Prime Care International and Antelope Valley Group is entitled
to approve or to be satisfied, including, without limitation, all schedules and
exhibits hereto and all items that PrimeCare International and Antelope Valley
Group reviews pursuant to PrimeCare's Due Diligence.
(c) No suit, arbitration or legal, administrative or other
proceeding or governmental investigation shall be pending or threatened against
Sierra Group, Prospect Holdings, PrimeCare International, or Antelope Valley
Group in relation to or affecting the consummation of the transactions
contemplated by this Agreement.
(d) Each of the representations and warranties of Prospect
Holdings and Sierra Group is true, complete and correct as of the Closing.
(e) Neither PrimeCare International nor Antelope Valley Group
has exercised any of the cancellation options under Section 10 below.
(f) The procurement and delivery by PrimeCare International of
the consent of any lender of PrimeCare International or Antelope Valley Group
holding a security interest in the Assets , the Antelope Valley Group Assets, or
the Provider Agreements, or restricting the transfer of Member Responsibility,
and the release of any related Liens.
(g) The procurement and delivery by Prospect Holdings of the
consent of any lender of Prospect Holdings or Sierra Group of the transactions
contemplated in this Agreement. Such consents shall be in form and substance
reasonably satisfactory to PrimeCare International or Antelope Valley Group, as
the case may be.
ARTICLE 8
NONCOMPETITION/NON-SOLICITATION
Antelope Valley Group and PrimeCare International agree not to
compete with the business of Sierra Group and Prospect Holdings, respectively,
for a period of three (3) years from the Closing Date in accordance with the
Covenant Not To Compete attached as Exhibit 8.0.
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ARTICLE 9
INDEMNIFICATION
9.1 ANTELOPE VALLEY GROUP/PRIMECARE INTERNATIONAL. Antelope Valley
Group and PrimeCare International shall, jointly and severally, indemnify,
defend and hold Sierra Group, Prospect Holdings, their affiliates, and their
directors, officers, employees, attorneys, and agents harmless from and against
any and all liabilities, losses, damages, claims, causes of action, costs and
expenses (including, without limitation, reasonable attorneys' fees), arising
out of or relating to:
(a) Any misrepresentations or any breach of any representation
or warranty made by Antelope Valley Group or PrimeCare International whether
contained in this Agreement or in any certificate, instrument, Exhibit or
Schedule furnished to Sierra Group or Prospect Holdings at the Closing;
(b) Failure of Antelope Valley Group or PrimeCare International,
as the case may be, to perform any covenant, agreement or obligation made in
this Agreement or any agreement referenced in this Agreement; and
(c) The ownership, use or operation of the Practice, the
Provider Agreements, the Payor Contracts, or the Assets or Antelope Valley Group
Assets, or the conduct of PrimeCare International or Antelope Valley Group, as
the case may be, or any agent, employee, officer, director or representative of
such party prior to the Effective Time.
9.2 SIERRA GROUP/PROSPECT HOLDINGS. Sierra Group and Prospect
Holdings shall, jointly and severally, indemnify, defend and hold Antelope
Valley Group, PrimeCare International, their affiliates, and their directors,
officers, employees, attorneys, and agents harmless from and against any and all
liabilities, losses, damages, claims, causes of action, costs and expenses
(including, without limitation, reasonable attorneys' fees), arising out of or
relating to:
(a) Any misrepresentations or any breach of any representation
or warranty made by Sierra Group or Prospect Holdings whether contained in this
Agreement or in any certificate, instrument, Exhibit or Schedule furnished to
Antelope Valley Group or PrimeCare International at the Closing;
(b) Failure of Sierra Group or Prospect Holdings, as the case
may be, to perform any covenant, agreement or obligation made in this Agreement
or any agreement referenced in this Agreement; and
(c) The ownership, use or operation of the Assets, the Antelope
Valley Group Assets, the Provider
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Agreements, or related to the responsibility for the members, the responsibility
for whom was transferred to Sierra, or the conduct of Sierra Group or Prospect
Holdings, as the case may be, or any agent, employee, officer, director or
representative of such party at and after the Effective Time (including, but not
limited to, those claims, damages and costs of defense arising out of, or
related to, the enforcement of the Provider Covenants as set forth in Section
4.23(a), but not including any award of damages related to a cross-complaint or
other action arising out of, or related to, such enforcement of the Provider
Covenants).
ARTICLE 10
CANCELLATION OF AGREEMENT
10.1 JEOPARDY. In the event the performance by any party hereto of
any term, covenant, condition or provision of this Agreement should jeopardize
(i) the participation of any party in Medicare, Medicaid or other reimbursement
or payment programs; or (ii) if for any other reason said performance should be
in violation of any statue or ordinance, or be otherwise deemed illegal, or be
deemed unethical by any recognized body, agency, or association in the medical
or hospital fields (collectively, "Jeopardy Event"), then the parties shall use
their best efforts to meet forthwith and attempt to negotiate an amendment to
this Agreement to remove or negate the effect of the Jeopardy Event. In the
event the parties are unable to negotiate such an amendment within five (5) days
following written notice by either party of the Jeopardy Event, then any party
may cancel this Agreement immediately upon written notice.
10.2 EXERCISE OF CANCELLATION OPTION. In the event a party exercises
the cancellation option described above, it shall so notify the other parties in
writing and each party shall return forthwith all originals and copies of any
financial or other records, instruments, or other documents it has received from
the other party and, except as provided in this Agreement, all of the parties'
respective rights and obligations hereunder shall terminate immediately.
Notwithstanding the foregoing, the parties' respective obligations under Section
and 6.2 above shall survive a party's exercise of said cancellation option.
ARTICLE 11
MISCELLANEOUS
11.1 RISK OF LOSS. Until the Closing, PrimeCare International shall
bear all risk of loss, damage or destruction to the Assets. Until the Closing,
Antelope Valley Group shall bear all risk of loss, damage or destruction to the
Antelope Valley Group Assets.
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11.2 ENTIRE AGREEMENT. This Agreement, together with all exhibits and
schedules hereto, and all documents referred to herein, constitute the entire
agreement between the parties with respect to the subject matter hereof,
supersedes all other and prior agreements on the same subject, whether written
or oral, and contains all of the covenants and agreements between the parties
with respect to the subject matter hereof. Each party to this Agreement
acknowledges that no representations, inducements, promises, or agreements
orally or otherwise, have been made by the party(ies), or by anyone acting on
behalf of any party, that are not identified herein, and that no other
agreement, statement, or promise not contained in this Agreement shall be valid
or binding.
11.3 SUCCESSORS AND ASSIGNS. This Agreement and all documents and
agreements referred to herein shall be binding upon and shall inure to the
benefit of the parties and their respective heirs (as applicable), legal
representatives, and permitted successors and assigns. No party may assign this
Agreement or the rights, interests or obligations hereunder; provided, however,
that to the extent permitted by applicable law, Sierra Group may (i) assign any
or all of its rights and interests hereunder to one or more of its affiliates
and (ii) designate one or more of its affiliates to perform its obligations
hereunder (in any or all of which cases Sierra Group shall remain liable and
responsible for the performance of all of its obligations hereunder); provided,
further, that to the extent permitted by applicable law, Prospect Holdings may
assign any or all of its rights and interests hereunder to one or more of its
wholly-owned subsidiaries (in any or all of which cases Prospect Holdings shall
remain liable and responsible for the performance of all of its obligations
hereunder); provided further, however, that to the extent permitted by
applicable law, Prospect Holdings and Sierra Group may collaterally assign any
or all of their respective rights and interests hereunder to Prospect Holdings'
primary lender (which, as of the date hereof, is Imperial Bank, a California
banking corporation) ("Lender") and its successors and assigns as collateral
security for the obligations of Prospect Holdings owing to Lender. Any
assignment or delegation in contravention of this Section shall be null and
void.
11.4 NO WAIVER. No waiver of any term, provision or condition of this
Agreement, whether by conduct or otherwise, in any one or more instances, shall
be deemed to be or be construed as a further or continuing waiver of any such
term, provision or condition or as a waiver of any other term, provision or
condition of this Agreement.
11.5 COUNTERPARTS. This Agreement, and any amendments hereto, may be
executed in counterparts, each of which shall constitute an original document,
but which together shall constitute one and the same instrument.
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11.6 HEADINGS. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
11.7 NOTICES. Any notices required or permitted to be given hereunder
by any party to the other shall be in writing and shall be deemed delivered upon
personal delivery; twenty-four (24) hours following deposit with a courier for
overnight delivery; or seventy-two (72) hours following deposit in the U.S.
Mail, registered or certified mail, postage prepaid, return-receipt requested,
addressed to the parties at the following addresses or to such other addresses
as the parties may specify in writing:
If to Antelope Valley Group or PrimeCare International:
PrimeCare International
3281 East Guasti Road
Seventh Floor
Ontario, CA 91761
If to Sierra Group or Prospect Holdings:
Prospect Medical Holdings, Inc.
515 S. Flower Street, Suite 1640
Los Angeles, California 90071
Attention: Jacob Y. Terner, M.D.
With copy to: Miller & Holguin
1801 Century Park East, 7th Floor
Los Angeles, California 90067
Attention: Dale S. Miller, Esq.
11.8 GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of California.
11.9 AMENDMENT. This Agreement may be amended at any time by
agreement of the parties, provided that any amendment shall be in writing and
executed by all parties.
11.10 SEVERABILITY. If any provisions of this Agreement is held by a
court of competent jurisdiction to be invalid or unenforceable, the remaining
provisions will nevertheless continue in full force and effect, unless such
invalidity or unenforceability would defeat an essential business purpose of
this Agreement.
11.11 FEES AND EXPENSES. Except as otherwise explicitly set forth in
a writing signed by the parties, each
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party shall bear its own expenses including, without limitation, attorneys' and
accountants' fees in connection with the preparation of this Agreement and the
transactions contemplated hereby.
11.12 EXHIBITS AND SCHEDULES. All exhibits and schedules attached to
this Agreement are incorporated herein by this reference and all references
herein to "Agreement" shall mean this Agreement together with all such exhibits
and schedules to be delivered at Closing.
11.13 SURVIVAL OF INDEMNITIES, REPRESENTATIONS AND WARRANTIES. Except
as expressly stated to the contrary herein, the indemnities, representations and
warranties of Sierra Group, Prospect Holdings, PrimeCare International, and
Antelope Valley Group contained in this Agreement or in any certificate or
document delivered pursuant to the provisions hereof shall survive for one (1)
year after the Closing Date.
11.14 TIME OF ESSENCE. Time is expressly made of the essence of this
Agreement and each and every provision hereof of which time of performance is a
factor.
11.15 CONSTRUCTION OF AGREEMENT. Ambiguities, if any, in this
Agreement shall be reasonably construed in accordance with all relevant
circumstances, including, without limitation, prevailing practices in the
industry of the parties in the place where the contract is to be performed and
shall not be construed against either party, irrespective of which party may be
deemed to have authored the ambiguous provision.
11.16 DISPUTE RESOLUTION.
(a) In the event that the parties hereto are unable to resolve
any dispute in connection with this Agreement, the parties may mutually agree to
arbitrate in accordance with the following.
(b) There shall be one arbitrator. If the parties shall fail to
select a mutually acceptable arbitrator within ten (10) days after the demand
for arbitration is mailed, the parties stipulate to arbitration before a retired
judge sitting of the Los Angeles Judicial Arbitration Mediation Services (JAMS)
panel.
(c) The parties shall share all costs of arbitration. The
prevailing party shall be entitled to reimbursement by the other party(ies) of
such party(ies') attorney's fees and costs and any arbitration fees and expenses
incurred in connection with the arbitration hereunder.
(d) The substantive law of the State of California shall be
applied by the arbitrator to the resolution
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<PAGE>
of the dispute. The parties shall have the rights of discovery as provided for
in Part 4 of the California Code of Civil Procedure and as provided for in
Section 1283.05 of said Code. The California Code of Evidence shall apply to
testimony and documents submitted to the arbitrator.
(e) Arbitration shall take place in Los Angeles, California,
unless the parties otherwise agree. As soon as reasonably practicable, a
hearing with respect to the dispute or matter to be resolved shall be conducted
by the arbitrator. As soon as reasonably practicable thereafter, the arbitrator
shall arrive at a final decision, which shall be reduced to writing, signed by
the arbitrator and mailed to each of the parties and their legal counsel.
(f) All decisions of the arbitrator shall be final, binding and
conclusive on all parties and shall constitute the only method of resolving
disputes or matter subject to arbitration pursuant to this Agreement. The
arbitrator or a court of appropriate jurisdiction may issue a writ of execution
to enforce the arbitrator's judgment. Judgment may be entered upon such a
decision in accordance with applicable law in any court having jurisdiction
thereof.
(g) Notwithstanding the foregoing, because time is of the
essence of this Agreement, the parties specifically reserve the right to seek a
judicial temporary restraining order, preliminary injunction, or other similar
short term equitable relief, and grant the arbitrator the right to make a final
determination of the parties' rights, including whether to make permanent or
dissolve such court order.
11.17 ATTORNEYS' FEES. Should any party institute any action or
procedure to enforce this Agreement or any provision hereof, or for damages by a
declaration of rights hereunder including without limitation arbitration, the
prevailing party in any such action or proceeding shall be entitled to receive
from the other party all costs and expenses, including without limitation
reasonable attorneys' fees, incurred by the prevailing party in connection with
such action or proceeding.
11.18 FURTHER ASSURANCES. The parties shall take such actions and
execute and deliver such further documentation as may reasonably be required in
order to give effect to the transaction contemplated by this Agreement and the
intentions of the parties hereto.
[SIGNATURE PAGE IMMEDIATELY FOLLOWS]
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<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first written above.
SIERRA PRIMARY CARE MEDICAL GROUP, A MEDICAL
CORPORATION
By: Jacob Y. Terner, M.D.
-----------------------------------
Its: CEO
------------------------------
PROSPECT MEDICAL HOLDINGS, INC.,
a Delaware corporation
By: Jacob Y. Terner, M.D.
-----------------------------------
Its: CEO
------------------------------
PRIMECARE MEDICAL GROUP OF ANTELOPE VALLEY, INC., a
California professional corporation
By: Prem Reddy, M.D.
-----------------------------------
Prem Reddy, M.D.
PRIMECARE INTERNATIONAL, INC.,
a Delaware corporation
By: Kelley White
-----------------------------------
Its: Executive Vice President
------------------------------
33
<PAGE>
EXHIBITS TO
AGREEMENT FOR THE PURCHASE AND SALE OF ASSETS(1)
TRANSFER OF MEMBER RESPONSIBILITY
1.1 Assets
1.2 Provider Agreements/Health Plans and Associated Assets
2.1 Assumed PrimeCare Liabilities
2.2 Assumed Antelope Valley Liabilities
3.1(a)(ii) Notes
3.4 Stockholder Representation Agreement
4.11 Enrollment
4.13 Litigation
4.20 Inspections
5.12 Licensure and Reimbursement
7.2(a) Bill of Sale/Assignment and Assumption Agreement
(PrimeCare International/Prospect Medical Holdings)
7.2(b) Bill of Sale/Assignment and Assumption Agreement
(PrimeCare Medical Group of Antelope Valley/
Sierra Primary Care Medical Group)
7.2(e) Certificate of PrimeCare Medical Group of Antelope Valley, Inc./
PrimeCare International, Inc.
7.2(f) Provider Amendments
7.2(j) Interim Services Agreement
7.3(h) Certificate of Sierra Primary Care Medical Group/
Prospect Medical Holdings
8.0 Covenant Not to Compete
1 The Registrant hereby undertakes to provide to the Securities and
Exchange Commission upon request copies of any of the exhibits listed
above not otherwise filed with this Form S-1 Registration Statement as
noted above.
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<PAGE>
FIRST AMENDMENT TO AGREEMENT FOR PURCHASE
AND SALE OF ASSETS/TRANSFER OF MEMBER RESPONSIBILITY
This First Amendment to Agreement for Purchase and Sale of Assets/Transfer
of Member Responsibility (this "Amendment") is dated, for reference purposes
only, June 5, 1998, by and between Sierra Primary Care Medical Group, A Medical
Corporation, a California professional corporation ("Sierra Group") and Prospect
Medical Holdings, Inc., a Delaware corporation ("Prospect Holdings"), on the one
hand, and PrimeCare Medical Group of Antelope Valley, Inc., a California
professional corporation, ("Antelope Valley Group"), and PrimeCare
International, Inc., a Delaware corporation, ("PrimeCare International").
RECITALS
A. The parties set forth above have previously entered into that certain
Agreement for the Purchase and Sale of Assets/Transfer of Member Responsibility
(the "Purchase Agreement") whereby certain assets of PrimeCare International and
member responsibility of Antelope Valley Group are to be sold and transferred to
Prospect Holdings and Sierra Group, respectively.
B. David Jensen, M.D. ("Dr. Jensen") has entered into that certain
Affiliation Agreement dated April 1, 1997, that certain Provider Service
Agreement dated January 1, 1998, and that certain Consent to Assignment of
Provider Service Agreement and Affiliation Agreement dated February 25, 1998.
In accordance with the terms of the Affiliation Agreement, Dr. Jensen is to
receive monthly payments of One Thousand Two Hundred Fifty Dollars ($1,250.00)
for fifty-nine (59) months from the Effective Date, as defined therein (the
"Fixed Consideration Fee"). PrimeCare International and Dr. Jensen have
executed that certain First Amendment to Affiliation Agreement, whereby
PrimeCare International shall pay to Dr. Jensen Forty-Five Thousand Dollars
($45,000.00) in accordance with the First Amendment to Affiliation Agreement (as
described below) as full and final satisfaction of the Fixed Consideration Fee.
C. The parties now desire to amend and modify the Purchase Agreement as set
forth below.
AGREEMENTS
NOW, THEREFORE, for good and valuable consideration, the sufficiency and
receipt of which is hereby acknowledged, the parties agree as follows:
1. JENSEN.
a. At or before the Closing, PrimeCare International and Dr. Jensen
shall execute that certain First Amendment to Affiliation Agreement, and
PrimeCare International shall pay to Dr. Jensen the sum of Forty-Five Thousand
Dollars ($45,000.00)
1
<PAGE>
(in two (2) installments of $11,250.00 and one (1) installment of $22,500.00
on the dates set forth in said First Amendment to Affiliation Agreement) as
full and final satisfaction of the Fixed Consideration Fee.
b. The PrimeCare Down Payment, as defined in the Purchase Agreement,
is hereby increased by Eleven Thousand Two Hundred Fifty Dollars ($11,250.00) to
a total of Four Hundred Eighty-Six Thousand Two Hundred Fifty Dollars
($486,250.00).
c. On the date of the first payment of the Note (being ninety (90)
days from the Closing), Prospect Holdings shall pay to PrimeCare an additional
sum of Eleven Thousand Two Hundred Fifty Dollars ($11,250.00).
d. On the date of the second payment of the Note (being one hundred
eighty (180) days from the Closing), Prospect Holdings shall pay to PrimeCare an
additional sum of Twenty-Two Thousand Five Hundred Dollars ($22,500.00).
e. Schedule "A" of Exhibit 1.2 of the Purchase Agreement is hereby
modified to include the First Amendment to Affiliation Agreement.
2. VARMA.
a. Schedule "A" of Exhibit 1.2 of the Purchase Agreement is hereby
modified to include the following:
I. Provider Service Agreement by and between PrimeCare Medical Group
Network, Inc. and Penmetsa Varma, M.D., dated June 1, 1997
a. Amendment to Provider Service Agreement by and between
PrimeCare Medical Group of Antelope Valley, Inc., a
California professional corporation, and Penmetsa Varma
dated February 25, 1998
3. DATE OF PURCHASE AGREEMENT. The parties affirm and agree that the date
of the Purchase Agreement is May 13, 1998, and that the Effective Time is hereby
modified to be June 1, 1998, regardless of the Closing Date.
4. CONSIDERATION. Prospect Holdings acknowledges that after the Closing,
PrimeCare International intends to transfer all consideration received under the
Purchase Agreement (including, but not limited to the PrimeCare Down Payment,
the Note, and the Shares) to Discops LLC, a Delaware limited liability company
("Discops"). Prospect Holdings agrees to consent to the transfer of such
consideration to Discops, and to execute such other documents and to take such
other actions as may be reasonably requested by Discops or PrimeCare
International to confirm or effectuate the transfer of said consideration;
2
<PAGE>
provided, however, that Prospect Holdings consent shall be subject to an
agreement by Discops to abide by all of the terms and obligations of
PrimeCare International under the Purchase Agreement, and all documents and
instruments delivered by PrimeCare International at the Closing, to the same
extent as PrimeCare International.
5. DEFINITIONS. All words and phrases that are defined in any of the
referenced agreements or instruments shall have the same meanings when used in
this Amendment, except as any such words and phrases are modified by this
Amendment.
6. EFFECT. The parties hereby confirm and agree that the Purchase
Agreement remains in full force and effect, and that except for the provisions
specifically amended or modified herein, all other provisions of the Purchase
Agreement remain unmodified.
IN WITNESS WHEREOF, this Amendment is executed by and among the
parties hereto on the dates set forth opposite their signatures below.
SIERRA PRIMARY CARE MEDICAL GROUP, A MEDICAL
CORPORATION
By: Jacob Y. Terner, M.D.
-------------------------------------
Its: CEO
-------------------------------
PROSPECT MEDICAL HOLDINGS, INC.,
a Delaware corporation
By: Jacob Y. Terner, M.D.
-------------------------------------
Its: CEO
-------------------------------
PRIMECARE MEDICAL GROUP OF ANTELOPE VALLEY, INC., a
California professional corporation
By: Prem Reddy, MD
-------------------------------------
Its:
-------------------------------
PRIMECARE INTERNATIONAL, INC.,
a Delaware corporation
By: Steve Adams
-------------------------------------
Its: Vice President
-------------------------------
3
<PAGE>
CERTIFICATE OF INCORPORATION
OF
MED-SEARCH, INC.
1. NAME: The name of the corporation is Med-Search, Inc. (hereafter, the
"corporation").
2. REGISTERED OFFICE: The address of the registered office of the
corporation in the State of Delaware is 1013 Centre Road, in the City of
Wilmington, County of New Castle, and its registered agent is Corporate Agents,
Inc.
3. PURPOSE: The purpose of the corporation is to engage in any lawful
act or activity for which a corporation may now or hereafter be organized under
the General Corporation Law of the State of Delaware as set forth in Title 8 of
the Delaware Code (the "GCL").
4. CORPORATE STOCK:
a. The total number of shares of stock which the corporation shall
have authority to issue is Thirty Million (30,000,000) shares, consisting of
Twenty-nine Million (29,000,000) shares of Common Stock, having a par value of
$.01 per share, and One Million (1,000,000) shares of Preferred Stock, having a
par value of $.01 per share.
b. Shares of the Preferred Stock of the corporation may be issued
from time to time in one or more classes or series, each of which class or
series shall have such distinctive designation or title as shall be fixed by the
Board of Directors of the corporation (the "Board of Directors") prior to the
issuance of any shares thereof. Each such class or series of Preferred Stock
shall have such voting powers, full or limited, or no voting powers, and such
preferences and relative, participating, optional or other special rights and
such qualifications, limitations or restrictions thereof, as shall be stated in
such resolution or resolutions providing for the issue of such class or series
of Preferred Stock as may be adopted from time to time by the Board of Directors
prior to the issuance of any shares thereof pursuant to the authority hereby
expressly vested in it, all in accordance with the laws of the State of
Delaware. The number of authorized shares of Preferred Stock may be increased
or decreased (but not below the number of shares thereof then outstanding) by
the affirmative vote of the holders of a majority of the Common Stock, without a
vote of the holders of the Preferred Stock, or of any class or series thereof,
unless a vote of any such holders is required pursuant to the certificate or
certificates establishing the class or series of Preferred Stock.
<PAGE>
c. The shares of Common Stock and Preferred Stock shall be issued
only as fully paid and non-assessable shares.
d. Holders of shares of Common Stock shall be entitled to one (1)
vote for each share held of record. Shares of the Common Stock shall have no
preference over any other shares of capital stock of the corporation with
respect to distribution of assets on dissolution or liquidation or with respect
to payment of dividends.
5. DIRECTORS:
a. The business and affairs of the corporation shall be managed by
or under the direction of the Board of Directors consisting of an odd number of
not less than three (3) directors nor more than seven (7) directors, the exact
number of directors to be determined from time to time by resolution adopted by
the Board of Directors. The directors shall be divided into three classes,
designated Class I, Class II and Class III. The term of the initial Class I
directors shall terminate on the date of the 1994 annual meeting of
stockholders; the term of the initial Class II directors shall terminate on the
date of the 1995 annual meeting of stockholders and the term of the initial
Class III directors shall terminate of the date of the 1996 annual meeting of
stockholders. At each annual meeting of stockholders beginning in 1994,
successors to the class of directors whose term expires at that annual meeting
shall be elected for a three-year term. If the number of directors is changed,
any increase or decrease shall be apportioned among the classes so as to
maintain the number of directors in each class as nearly equal as reasonably
possible, and any additional directors of any class elected to fill a vacancy
resulting from an increase in such class shall hold office for a term that shall
coincide with the remaining term of that class, but in no case will a decrease
in the number of directors shorten the term of any incumbent directors. A
director shall hold office until the annual meeting for the year in which his
term expires and until his successor shall be elected and shall qualify,
subject, however, to prior death, resignation, retirement, disqualification or
removal from office. Any vacancy on the Board of Directors, howsoever
resulting, shall be filled only by a majority of the directors then in office,
even if less than a quorum, or by a sole remaining director and not by the
stockholders. Any director elected to fill a vacancy shall hold office for a
term that shall coincide with the terms of the class to which such director
shall have been elected.
b. Subject to the rights, if any, of the holders of shares of
Preferred Stock then outstanding, any or all of the directors of the corporation
may be removed from office at any time, for cause only, by the affirmative vote
of the holders of seventy-five percent (75%) of the outstanding shares of the
corporation then entitled to vote generally in the election of directors,
considered for purposes of this Paragraph 5(b) as one class.
c. Notwithstanding the foregoing, whenever the holders of any one or
more classes or series of Preferred Stock issued by the corporation shall have
the right, voting separately by class or series, to elect directors at an annual
or special meeting of stockholders, the
2
<PAGE>
election, term of office, filling of vacancies and other features of such
directorships shall be governed by the terms of this Certificate of
Incorporation or the resolution or resolutions adopted by the Board of
Directors pursuant to Paragraph 4(b) applicable thereto, and such directors
so elected shall not be divided into classes pursuant to this Paragraph 5
unless expressly provided by such terms.
6. STOCKHOLDERS:
a. SPECIAL MEETINGS: Special meetings of the stockholders for any
purpose or purposes may be called at any time only by the Board of Directors,
the Chairman of the Board, or by the Chief Executive Officer or President of the
corporation.
b. MEETINGS LOCATION: Meetings of stockholders may be held within
or without the State of Delaware, as the Bylaws may provide. The books of the
corporation may be kept (subject to any provision contained in the GCL) outside
the State of Delaware at such place or places as may be designated from time to
time by the Board of Directors or in the Bylaws of the corporation.
c. POWER OF STOCKHOLDERS: Bylaws may be adopted, amended, or
repealed by the affirmative vote of the holders of seventy-five percent (75%) of
the outstanding shares of the corporation except as otherwise provided by law or
by this Certificate of Incorporation.
d. POWER OF DIRECTORS: Subject to the rights of stockholders as
provided in Paragraph 6(c) to adopt, amend or repeal Bylaws and except as
otherwise provided in Paragraph 6(c), Bylaws may be adopted, amended or repealed
by the Board of Directors at any regular or special meeting thereof.
e. ELECTION OF DIRECTORS BY BALLOT: Election of directors need not
be by ballot unless a stockholder demands election by ballot at the meeting and
before the voting begins.
f. VOTE OF STOCKHOLDERS: Any action required or permitted to be
taken at any annual or special meeting of stockholders may be taken only upon
the vote of the stockholders at an annual or special meeting duly noticed and
called, as provided in the Bylaws of the corporation, and may not be taken by a
written consent of the stockholders pursuant to the GCL unless such action by
consent shall be authorized by resolution of the Board of Directors.
7. LIMITATION ON LIABILITY OF DIRECTORS: No director of the corporation
shall be personally liable to the corporation or its stockholders for monetary
damages for any breach of fiduciary duty by such director as a director.
Notwithstanding the foregoing sentence, a director shall be liable to the extent
provided by applicable law (i) for any breach of the director's duty of loyalty
to the corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) pursuant to Section 174 of the
3
<PAGE>
GCL or (iv) for any transaction from which the director derived an improper
personal benefit. If, and to the extent final legal determination is ever made
that and for so long as Section 204(a)(10) or Section 317 of the California
Corporations Code (as now or hereafter in effect) are applicable to the
corporation, the provisions of Paragraphs 7 and 8 hereof shall apply only to the
extent necessary and permissible under the GCL so that such Paragraphs shall
comply with Sections 204(a)(10) and 317. No amendment to or repeal of this
Paragraph 7 shall apply to or have any effect on the liability or alleged
liability of any director of the corporation for or with respect to any acts or
omissions of such director occurring prior to such amendment or repeal.
8. INDEMNITY:
a. RIGHT TO INDEMNIFICATION: Each person who was or is made a party
or is threatened to be made a party to or is otherwise involved in any action,
suit or proceeding, whether civil, criminal, administrative or investigative
("proceeding"), by reason of the fact that he or she is or was a director or
officer of this corporation or, while a director or officer of this corporation,
is or was serving at the request of this corporation as a director, officer,
employee or agent of another corporation or of a partnership, joint venture,
trust or other enterprise, including service with respect to employee benefit
plans ("indemnitee"), whether the basis of such proceeding is alleged action in
an official capacity as a director, officer, employee or agent, or in any other
capacity while serving as a director, officer, employee or agent, shall be
indemnified and held harmless by this corporation to the fullest extent
authorized by the GCL against all expense, liability and loss (including
attorneys' fees, judgments, fines, excise taxes under the Employee Retirement
Income Security Act of 1974 or penalties, and amounts paid or to be paid in
settlement) reasonably incurred or suffered by indemnitee in connection
therewith and such indemnification shall continue as to any indemnitee who has
ceased to be director, officer, employee or agent and shall inure to the benefit
of his or her heirs, executors or administrators; provided, however, that except
as provided in Paragraph 8(d) with respect to proceedings to enforce rights of
indemnification this corporation shall indemnify any indemnitee seeking
indemnification in connection with a proceeding (or part thereof) initiated by
such indemnitee only if such proceeding (or part thereof) was authorized by the
Board of Directors of this corporation. The right to indemnification conferred
in these Paragraphs 8(a) - (e) shall be a contract right and shall include the
right to be paid by this corporation the expenses incurred in defending such
proceeding in advance of its final disposition; provided, however, that, if the
GCL requires, the payment of such expenses incurred by indemnitee in his or her
capacity as a director or officer (and not in any other capacity in which
service was or is rendered by an indemnitee while a director or officer,
including, without limitation, service with respect to an employee benefit plan)
in advance of the final disposition of such proceeding, shall be made only upon
delivery to this corporation of an undertaking, by or on behalf of such
indemnitee, to repay all amounts so advanced if it shall ultimately be
determined by final judicial determination from which there is no right to
appeal that such indemnitee is not entitled to be indemnified under these
Paragraphs 8(a) - (e) or otherwise. This corporation may, by action of its
Board of Directors, provide indemnification to employees and agents of this
corporation and any subsidiary of this
4
<PAGE>
corporation with the same scope and effect as the foregoing indemnification
of directors and officers.
b. NON-EXCLUSIVITY OF RIGHTS: The right to indemnification and the
payment of expenses incurred in defending a proceeding in advance of its final
disposition conferred in these Paragraphs 8(a) - (e) shall not be exclusive of
any right which any person may have or hereafter acquire under any statute,
provision of this Certificate of Incorporation, Bylaw, agreement, vote of
stockholders or disinterested directors or otherwise.
c. INSURANCE: The corporation may maintain insurance, at its
expense, to protect itself and any director, officer, employee or agent of the
corporation or another corporation, partnership, joint venture, trust or other
enterprise against any such expense, liability or loss, whether or not the
corporation would have the power to indemnify such person against such expense,
liability or loss under the GCL.
d. RIGHT OF INDEMNITEE TO BRING SUIT: If a claim under Paragraph
(a) of this Paragraph 8 is not paid in full by the corporation within sixty days
after a written claim has been received by the corporation, except in the case
of a claim for advancement of expenses, in which case the applicable period
shall be twenty days, the indemnitee may at any time thereafter bring suit
against the corporation to recover the unpaid amount of the claim. If
successful in whole or in part in any such suit or in a suit brought by the
corporation to recover an advancement of expenses pursuant to the terms of the
undertaking, the indemnitee shall be entitled to be paid also the expense of the
prosecuting or defending such suit. In any suit brought by the indemnitee to
enforce a right to indemnification hereunder (but not in a suit brought by the
indemnitee to enforce a right to an advancement of expenses) it shall be a
defense that the indemnitee has not met the applicable standard of conduct set
forth in the GCL, and, in any suit by the corporation to recover an advancement
of expenses pursuant to the terms of an undertaking, the corporation shall be
entitled to recover such expenses upon a final adjudication that the indemnitee
has not met the applicable standard of conduct set forth in the GCL. Neither
the failure of the corporation (including its Board of Directors, independent
legal counsel, or its stockholders) to have made a determination prior to the
commencement of such suit that indemnification of the indemnitee is proper in
the circumstances because the indemnitee has met the applicable standard of
conduct set forth in the GCL, nor an actual determination by the corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) that the indemnitee has not met such applicable standard of
conduct, shall create a presumption that the indemnitee, has not met the
applicable standard of conduct or, in the case of such a suit brought by the
indemnitee, be a defense to such suit. In any suit brought by the indemnitee to
enforce a right hereunder, or by the corporation to recover an advancement of
expenses pursuant to the terms of an undertaking, the burden of proving that the
indemnitee is not entitled to be indemnified or to such advancement of expenses
under this Paragraph 8(d) or otherwise shall be on the corporation.
5
<PAGE>
e. In any suit or proceeding with respect to the corporation's
refusal to grant indemnification, (i) the corporation shall conclusively be
deemed to have acted in good faith and to have fully complied with any implied
covenant of good faith and fair dealing unless the indemnitee affirmatively
proves by clear and convincing evidence that the corporation acted or omitted to
act without any reasonable basis; and (ii) no indemnitees shall be entitled
hereunder or otherwise to consequential damages, including without limitation,
damages for inconvenience, emotional distress, lost profits, injury to privacy,
publicity, or reputation, or punitive damages, all of which are expressly
waived.
9. CERTAIN EXTRAORDINARY TRANSACTIONS:
a. Except as set forth in Paragraph 9(b) the affirmative vote of the
holders of seventy-five percent (75%) of the outstanding shares of the
corporation entitled to vote on the applicable Record Date shall be required
for:
(i) any merger or consolidation to which the corporation, or
any of its subsidiaries, and an Interested Person (as hereinafter
defined) are parties;
(ii) any sale, lease, exchange or other disposition by the
corporation, or any of its subsidiaries, of all or substantially
all of the corporation's or its subsidiaries'assets to an
Interested Person.
(iii) any purchase or other acquisition by the corporation, or
any of its subsidiaries, of assets or stock of an Interested
Person, the aggregate purchase price of which exceeds
$20,000,000.00; and
(iv) any other transaction with an Interested Person which
requires the approval of the stockholders of the corporation
under the Delaware General Corporation Law, as in effect from
time to time.
b. The provisions of Paragraph 9(a) shall not be applicable to any
transaction described therein if such transaction is approved by resolution of
the Board, provided that a majority of the members of the Board voting for the
approval of such transaction were duly elected and acting members of the Board
prior to the time that the person, firm or corporation, or any group thereof,
with whom such transaction is proposed, became an Interested Person.
c. As used in this Paragraph 9, the term "Interested Person" shall
mean any person, firm or corporation, or any group thereof, acting or intending
to act in concert, including any person directly or indirectly controlling or
controlled by or under direct or indirect common control with such person, firm,
or corporation or group, which owns of record or beneficially, directly or
indirectly, five percent (5%) or more of the shares of any class of voting
securities of the corporation.
6
<PAGE>
10. RESERVED POWER TO AMEND: The corporation reserves the right to
amend, alter, change or repeal any provision contained in this Certificate of
Incorporation, in the manner now or hereafter prescribed by statute, provided
that, no such amendment, alteration, change or repeal shall be made without the
affirmative vote of the holders of not less that seventy-five percent (75%) of
the outstanding shares of stock of the corporation entitled to vote in order to
alter, amend or repeal this Paragraph 10 or Paragraphs 5(b), 6, 7, 8 and 9, and
all rights conferred herein are granted subject to this reservation.
The undersigned incorporator hereby acknowledges that the foregoing
Certificate of Incorporation is her act and deed and that the facts stated
therein are true.
By: /s/ Amy A. Ruhl
-------------------------------------
Amy A. Ruhl, Incorporator
14724 Ventura Boulevard, #610
Sherman Oaks, CA 91403
7
<PAGE>
CERTIFICATE OF AMENDMENT
OF CERTIFICATE OF INCORPORATION
OF MED-SEARCH, INC.
MED-SEARCH, INC., a corporation organized and existing under and by virtue
of the General Corporation Law of the State of Delaware (the "Corporation"),
does hereby certify that:
1. The name of the Corporation is Med-Search, Inc.
2. On March 25, 1996, the Board of Directors of the Corporation adopted
by unanimous written consent a resolution proposing and declaring advisable an
amendment to the certificate of incorporation of the Corporation as follows:
"4. CORPORATE STOCK:
a. The total number of shares of stock which the corporation
shall have authority to issue is Two Hundred Fifty-One Million
(251,000,000) shares, consisting of Two Hundred Fifty Million
(250,000,000) shares of Common Stock, having a par value of $.01 per
share, and One Million (1,000,000) shares of Preferred Stock, having a
par value of $.01 per share."
3. The amendment of the certificate of incorporation herein certified has
been duly adopted by the stockholders of the Corporation in accordance with the
provisions of Sections 228 and 242 of the General Corporation Law of the State
of Delaware and any notice required to be given thereunder has been given.
Signed and attested to on July 15, 1996.
/s/ T.L. Worthylake
-------------------------------------
Terry L. Worthylake, President
ATTEST:
/s/ Barbara Noble
- ---------------------------------
Barbara Noble, Secretary
<PAGE>
CERTIFICATE OF AMENDMENT
OF CERTIFICATE OF INCORPORATION
OF MED-SEARCH, INC.
MED-SEARCH, INC., a corporation organized and existing under and by virtue
of the General Corporation Law of the State of Delaware (the "Corporation"),
does hereby certify that:
1. The name of the Corporation is Med-Search, Inc.
2. On March 25, 1996, the Board of Directors of the Corporation adopted
by unanimous written consent resolutions proposing and declaring advisable
amendments to the certificate of incorporation of the Corporation as follows:
"1. NAME: The name of the corporation is Prospect Medical Holdings,
Inc. (hereafter, the "corporation")."
"4. CORPORATE STOCK:
a. The total number of shares of stock which the corporation
shall have authority to issue is Forty-One Million (41,000,000)
shares, consisting of Forty Million (40,000,000) shares of Common
Stock, having a par value of $.01 per share, and One Million
(1,000,000) shares of Preferred Stock, having a par value of $.01 per
share. Upon the amendment of this Paragraph to read as herein set
forth, each forty-four (44) outstanding shares of Common Stock shall
be converted and combined into one (1) outstanding share of Common
Stock. No fractional shares shall be issued pursuant to this
amendment. Each stockholder who would otherwise be entitled to
receive a fractional share shall receive, in lieu thereof, a cash
payment from the Corporation determined by multiplying such fractional
share of Common Stock by forty-four times the average last reported
bid price of a share of previously existing Common Stock on the OTC
Bulletin Board for the ten trading days immediately preceding the
effective date, and upon such other terms as the officers of the
Corporation, in their sole discretion, deem to be advisable and in the
best interests of the Corporation."
3. The amendments of the certificate of incorporation herein certified
have been duly adopted by the stockholders of the Corporation in accordance with
the provisions of Sections 228 and 242 of the General Corporation Law of the
State of Delaware and any notice required to be given thereunder has been given.
<PAGE>
4. The amendments of the certificate of incorporation set forth herein
shall be effective on the date this Certificate of Amendment is filed and
accepted by the Secretary of State of the State of Delaware.
Signed and attested to on July 31, 1996.
/s/ Jacob Y. Terner, M.D.
-------------------------------------
Jacob Y. Terner, M.D.
Chief Executive Officer
ATTEST:
/s/ Gregg DeNicola
- ---------------------------------
Gregg DeNicola, M.D.
Secretary
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BYLAWS
OF
MED-SEARCH, INC.
A Delaware Corporation
ARTICLE I
CORPORATE OFFICES
Section 1. REGISTERED OFFICE. The registered office of the Corporation
in the State of Delaware shall be located at Corporate Trust Center, 1209 Orange
Street, Wilmington, County of New Castle.
Section 2. Principal Office. The principal office of the Corporation
shall be located at 5400 The Toledo, Suite 701, Long Beach, California, 90803
The Board of Directors (herein referred to as the "Board") is hereby granted the
full power and authority, by a resolution of a majority of the directors, to
change the principal office from one location to another. Any such change shall
be noted in these Bylaws opposite this section, and this section may be amended
to state the new location.
Section 3. OTHER OFFICES. The corporation may establish any additional
offices, at any place or places, as the Board may designate, or as the business
of the Corporation shall require.
ARTICLE II
STOCKHOLDERS MEETINGS
Section 1. PLACE OF MEETING. Meetings of the Stockholders of the
Corporation shall be held at the principal office or at such place, within or
without the State of Delaware, as may from time to time be designated for that
purpose by the Board.
Section 2. ANNUAL MEETINGS. The annual meeting of the Stockholders
shall be held on such date and at such time designated, from time to time, by
resolution of the Board.
Section 3. SPECIAL MEETINGS. Special Meetings of the Stockholders for
the purpose of taking any action which the Stockholders are permitted to take
under the General Corporation Law of the State of Delaware (herein, as the same
may from time to time be amended, referred to as the "General Corporation Law")
may be called at any time by the Chief Executive Officer, the President, the
Chairman of the Board or the Board.
Section 4. NOTICE OF MEETINGS. Except as otherwise provided by
statute, written or printed notice of each meeting of the Stockholders of the
Corporation, whether annual or special, shall be given not less than ten or more
than sixty days prior to the date upon which the meeting
<PAGE>
is to be held to each stockholder entitled to vote at such meeting by leaving
such notice with him personally at, or by transmitting such notice with
confirmed recorded communication, provided that delivery (including telex,
telegraph, cable or other form of recorded communication, provided that delivery
of such notice in written form is confirmed in a writing) to, his residence or
usual place of business. If mailed, such notice shall be deemed delivered when
deposited in the United States mail in a sealed envelope addressed to the
stockholder at his address as it appears on the stock records of the
Corporation, with postage thereon prepaid. Such notice shall state the place,
date and hour of the meeting, and, in the case of a special meeting, the purpose
or purposes for which the meeting is called. If a meeting is adjourned to
another time or place, notice need not be given of the adjourned meeting if the
time and place thereof are announced at the meeting at which the adjournment is
taken and, at the adjourned meeting, such business may be transacted as might
properly have been transacted at the original meeting. If the adjournment is
for more than 30 days, or if after the adjournment a new record date is fixed
for the adjourned meeting, a notice of the adjourned meeting shall be given to
each stockholder of record entitled to vote at such meeting.
Notice of a Stockholders' meeting or adjournment thereof is waived upon the
occurrence of the following:
(a) A Stockholders' meeting is adjourned and a time and place for
readjournment is announced at the meeting at which the adjournment is taken, and
such date of readjournment is no more than 30 days from the date of adjournment;
(b) Receipt by the Corporation of a written notice of waiver, signed by
the person entitled to notice before or after the time stated therein;
(c) Attendance by the person entitled to notice and failure of such person
to object to the transaction of any business because the meeting is not lawfully
called or convened.
Wherever notice is required to be given under any statute or the
Certificate of Incorporation or these Bylaws to any Stockholder to whom (a)
notice of two consecutive annual meetings, and all notices of meetings or of the
taking of action by written consent without a meeting to such person during the
period between such two consecutive annual meetings or (b) all, and at least
two, payments (if sent by first class mail) of dividends or interest on
securities during a twelve month period, have been mailed addressed to such
person at his address as shown on the records of the Corporation and have been
returned because undeliverable, the giving of notice to such person shall not be
required. Any action or meeting which shall be taken or held without notice to
such person shall have the same force and effect as if such notice had been duly
given. If any such person shall deliver to the Corporation a written notice
setting forth his then current address, the requirement that notice be given to
such person shall be reinstated. In the event that the action taken by the
Corporation is such as to require the filing of a certificate under
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any of the other sections of the General Corporation Law, the certificate need
not state that notice was not given to persons to whom notice was not required
to be given pursuant to this Section 4.
Section 5. QUORUM. On all questions, the presence of the holders of a
majority of the shares entitled to vote, in person or by proxy, shall constitute
a quorum for the transaction of business at any meeting of the Stockholders. On
all questions, the Stockholders present at a duly called or held meeting at
which a quorum is present may continue to do business until adjournment,
notwithstanding the withdrawal of enough Stockholders to leave less than a
quorum, if any action taken (other than adjournment) is approved by at least a
majority of the shares required to constitute a quorum.
Section 6. ADJOURNED MEETING. Any Stockholders' meeting, annual or
special, whether or not a quorum is present, may be adjourned by vote of a
majority of the shares present, either in person or by proxy, but in the absence
of a quorum no other business may be transacted at such meeting, except as
expressly provided in Section 5 of this Article.
Section 7. VOTING.
(a) The Stockholders entitled to notice of any meeting or to vote at such
meeting shall only be persons whose names stand on the stock records of the
Corporation on the record date determined in accordance with the provisions of
Section 12 of this Article, provided, however, that if no such record date shall
be fixed by the Board, only persons in whose names shares stand on the stock
records of the corporation at the close of business on the business day next
preceding the day on which notice of the meeting is given or if such notice is
waived, at the close of business on the business day next preceding the day on
which the meeting of Stockholders is held, shall be entitled to vote at such
meeting, and such day shall be the record date for such meeting.
(b) Voting shall in all cases be subject to the provisions of Sections 217
and 128 of the General Corporation Law (relating to voting of shares held by
fiduciaries or pledgors, held in joint ownership, and voting of shares by voting
trusts or in accordance with other voting agreements).
(c) At each meeting of the Stockholders of the Corporation, holders of a
majority of the voting power of the Corporation entitled to vote thereat,
present either in person or by proxy, shall constitute a quorum for the
transaction of business. In the absence of quorum, the Stockholders of the
Corporation present in person or by proxy and entitled to vote at the meeting
may, by majority vote, or, in the absence of all Stockholders, any officer
entitled to preside or act as Secretary at such meeting, shall have the power to
adjourn the meeting from time to time until Stockholders holding the requisite
amount of stock shall be present in person or by proxy. At any
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such adjourned meeting at which a quorum may be present, any business may be
transacted which might have been transacted at the meeting as originally called.
(d) On all questions, each Stockholder of the Corporation entitled to vote
on such questions shall be entitled to vote in person or by proxy one vote for
each share of Common Stock of the Corporation held by such Stockholder. Unless
otherwise provided in the Certificate of Incorporation or by statute, the
affirmative vote of a majority of the shares represented and voting at a duly
held meeting at which a quorum is present shall be the act of the Stockholders.
Unless demanded by a Stockholder present in person or by proxy at any meeting
and entitled to vote thereat, the vote on any question need not be by ballot.
Upon demand for a vote by ballot upon any question by any Stockholder present in
person or by proxy at any meeting and entitled to vote thereat, such vote shall
be taken by ballot. On any vote taken by ballot, each ballot shall be signed by
the Stockholder voting, or by his lawful proxy, and shall state the number and
kind of shares voted.
Section 8. PROXIES. Each Stockholder entitled to vote at a meeting of
Stockholders may authorize another person or persons to act for him by proxy,
but no such proxy shall be voted or acted upon after three years from its date,
unless the proxy provides for a longer period. Any such proxy shall be
delivered to the secretary of such meeting, at or prior to the time designated
in the order of business for so delivering such proxies. A duly elected proxy
shall be irrevocable if it states that it is irrevocable and if, and only so
long as, it is coupled with an interest sufficient in law to support an
irrevocable power. A proxy may be made irrevocable regardless of whether the
interest with which it is coupled is an interest in the stock itself or and
interest in the Corporation generally.
Section 9. STOCKHOLDER LIST. The officer who has charge of the stock
ledger of the Corporation shall prepare and make, at least ten days before every
meeting of Stockholders, a complete list of the Stockholders entitled to vote at
the meeting, arranged in alphabetical order, and showing the address of each
Stockholder and the number of shares registered in the name of each Stockholder.
Such list shall be open to the examination of any Stockholder, for any purposes
germane to the meeting, during ordinary business hours, for a period of at least
ten days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by an Stockholder who is
present.
Section 10. INSPECTORS OF ELECTION. In advance of any meeting of the
Stockholders, the Board shall appoint at least one person, other than nominees
for office, as inspector of election to act at such meeting or any adjournment
thereof. The number of such inspectors of election shall be one or three. In
case any person appointed as inspector fails to appear or refuses to act, the
vacancy shall be filled by appointment by the Board in advance of the meeting,
or at the
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meeting by the chairman of the meeting. If there are three inspectors of
election, the decision, act or certificate of a majority is effective in all
respects as the decision, act or certificate of all.
The duties of each such inspector of election shall include:
(a) determining the number of shares outstanding and the voting power of
each;
(b) determining the shares represented at the meeting;
(c) determining the existence of a quorum;
(d) determining the authenticity, validity and effect of proxies;
(e) receiving votes, ballots or consents;
(f) hearing and determining all challenges and questions in any way
arising in connection with the right to vote;
(g) retaining for a reasonable period the disposition of any challenges
made to the inspector's determinations;
(h) counting and tabulating all votes;
(i) determining when the polls shall close;
(j) determining the result of any election;
(k) certifying the determination of the number of shares represented at
the meeting, and the count of all votes and ballots;
(l) certifying any information considered in determining the validity and
counting of proxies and ballots if that information is used for the purpose of
reconciling proxies and ballots submitted by or on behalf of banks, brokers,
their nominees or similar persons which represent more votes than the
Stockholder holds of record; and
(m) performing such acts as may be proper to conduct the election or vote
with fairness to all Stockholders.
Section 11. RECORD DATE. In order that the Corporation may determine
the Stockholders entitled to notice of or to vote at any meeting of Stockholders
or any adjournment thereof, or entitled to receive payment of any dividend or
other distribution or allotment of any rights, or
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entitled to exercise any rights in respect of any change, conversion or exchange
of stock or for the purpose of any other lawful action, the Board may fix, in
advance, a record date, which shall not be more than sixty nor less than ten
days before the date of such meeting, nor more than sixty days prior to any
other action.
If no record date is fixed:
(a) The record date for determining Stockholders entitled to notice of or
to vote at a meeting of Stockholders shall be at the close of business on the
day next preceding the day on which notice is given, if notice is waived, at the
close of business on the day next preceding the day on which the meeting is
held;
(b) The record date for determining Stockholders for any other purpose
shall be at the close of business on the day on which the Board adopts the
resolution relating thereto.
A determination of Stockholders of record entitled to notice of or to vote
at a meeting of Stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board may fix a new record date for the adjourned
meeting.
Section 12. PROCEDURES FOR MEETINGS. All meetings of Stockholders shall
be conducted according to such rules and procedures as the Board of Directors
may establish by resolution or, absent such a resolution, which the person
presiding over the meeting shall determine from time to time as being in the
best interests of the Stockholders and as may be deemed appropriate for insuring
that such meetings are conducted in a fair and orderly manner and in accordance
with the Certificate of Incorporation and these Bylaws.
Section 13. OPENING AND CLOSING OF POLLS. An announcement shall be made
at each meeting of the Stockholders by the Chairman of the meeting of the date
and time of the opening and closing of polls for each matter upon which the
Stockholders will vote at the meeting. No ballots, proxies or votes, nor any
revocations thereof or changes thereto, shall be accepted by the inspectors of
election after the closing of the polls unless the Delaware Court of Chancery
upon application by a Stockholder shall determine otherwise.
ARTICLE III
BOARD OF DIRECTORS
Section 1. POWERS. The business and affairs of the Corporation shall
be managed by, or under the direction of the Board, except as may be otherwise
provided by the General Corporation Law or in the Certificate of Incorporation
or these Bylaws. Without prejudice to
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such powers, but subject to the same limitation, it is hereby expressly declared
that the directors shall have the following powers in addition to other powers
enumerated in these Bylaws:
(a) To select and remove all officers, agents and employees of the
Corporation; prescribe any powers and duties for them that are consistent with
law, with the Certificate of Incorporation, and with these Bylaws; fix their
compensation; and require from them security for faithful service;
(b) To conduct, manage and control the affairs and business of the
Corporation, and to make rules and regulations therefor consistent with law,
with the Certificate of Incorporation and with these Bylaws;
(C) To change the offices of the Corporation from one location to another;
to fix and locate from time to time one or more other offices of the Corporation
within or without the State of Delaware; to cause the Corporation to be
qualified to do business and to conduct business in any other state, territory,
dependency or country; and to designate any place within or without the State of
Delaware for the holding of any Stockholders' meeting or meetings, including
annual meetings;
(d) To adopt, make and use a corporate seal; to prescribe the forms and
certificates of stock; and to alter the form of the seal and certificates;
(e) To authorize the issuance of shares of stock of the Corporation from
time to time, upon such terms and for such consideration as may be lawful;
(f) To borrow money and incur indebtedness for the purposes of the
Corporation, and to cause to be executed and delivered therefor, in the
corporate name, promissory notes, bonds, debentures, deeds of trust, mortgages,
pledges, hypothecations, and other evidences of debt and securities therefor.
Section 2. NUMBER AND QUALIFICATIONS. The number of directors of the
Corporation shall be as specified in the Certificate of Incorporation.
Directors need not be Stockholders of the Corporation unless required by the
Certificate of Incorporation.
Section 3. ELECTION AND TERM OF OFFICE. Members of the Board of
Directors shall hold office for the terms specified in the Certificate of
Incorporation and until their successors have been elected as provided in the
Certificate of Incorporation.
Section 4. VACANCIES.
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(a) Any vacancy on the Board of Directors however resulting, shall be
filled only by a majority of the directors then in office, although less than a
quorum, or by a sole remaining director, and not by the Stockholders. Any
director elected to fill a vacancy shall hold office for a term that shall
coincide with the term of the class to which such director shall have been
elected.
(b) If at any time, by reason of death, resignation or other cause, the
Corporation should have no directors in office, then any officer or any
Stockholder or an executor, administrator, trustee or guardian of a Stockholder,
or other fiduciary entrusted with like responsibility of the person or estate of
a Stockholder, may call a special meeting of Stockholders in accordance with the
provisions of the Certificate of Incorporation and the Bylaws or may apply to
the Delaware Court of Chancery for a decree summarily ordering an election as
provided in Section 211 of the General Corporation Law.
(c) If, at the time of filling any vacancy or any newly created
directorship, the directors then in office shall constitute less than a majority
of the whole Board (as constituted immediately prior to any such increase), the
Delaware Court of Chancery may, upon application of any Stockholder or
Stockholders holding at least 10 percent of the total number of shares at the
time outstanding having the right to vote for such directors, summarily order an
election to be held to fill any such vacancies or newly created directorships,
or to replace the directors chosen by the directors then in office as aforesaid,
which election shall be governed by Section 211 of the General Corporation Law.
(d) Any of all of the directors of the Corporation may be removed from
office at any time, for cause only, by the affirmative vote of the holders of
75% of the shares of the Corporation then entitled to vote generally in the
election of directors, considered for purposes of this Section 4(a) as one
class.
(e) Any director may resign effective upon giving written notice to the
Chairman of the Board, the President, the Secretary or the Board, unless the
notice specifies a later date for the effectiveness of such resignation.
Section 5. PLACE OF MEETING. Unless otherwise provided in the
Certificate of Incorporation, or by unanimous written consent of all action
directors, meetings, both regular and special, of the Board shall be held at the
Corporation's principal executive offices or at such other place or places
within or without the State of Delaware, as the Board may from time to time
determine.
Section 6. REGULAR MEETINGS. Immediately following each annual meeting
of the Stockholders of the Corporation the Board shall hold a regular meeting at
the same time at which
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such Stockholders' meeting is held, or any other place as may be fixed from time
to time by the Board of Directors. Notice of such meeting need not be given.
Other regular meetings of the Board shall be held without call at such time
and place as the Board may from time to time by resolution determine. If any
day fixed for a regular meeting shall be a legal holiday at the place where the
meeting is to be held, then the meeting which would otherwise be held on that
day shall be held at the same hour on the next succeeding business day not a
legal holiday. Notice of a regular meeting need not be given.
Section 7. SPECIAL MEETINGS. Except as otherwise provided in the
Certificate of Incorporation, special meetings of the Board for any purpose or
purposes may be called at any time by the Chairman of the Board, the Chief
Executive Officer, the President, the Secretary or by any three directors.
Written notice of the time and place of special meetings shall be delivered
personally to each director or communicated to each director by telephone,
telegraph, telex, facsimile transmission, courier service, cable or mail or
other form of recorded communication, charges prepaid, addressed to each
director at that director's address as it is shown on the records of the
Corporation or, if it is not so shown on such records or is not readily
ascertainable, at the director's residence or usual place of business. In case
such notice is mailed, it shall be deposited in the United States mail at least
seven days prior to the time of the holding of the meeting. In case such notice
is delivered personally or by other form of written communication, it shall be
delivered at least 48 hours before the time of the holding of the meeting. The
notice shall state the time of the meeting, but need not specify the place of
the meeting if the meeting is to be held at the principal executive office of
the Corporation. The notice need not state the purpose of the meeting unless
expressly provided otherwise by statute.
Section 8. MEETINGS BY COMMUNICATION EQUIPMENT. Members of the Board
of the Corporation, or any committee designated by the Board, may participate in
a meeting of the Board or committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other. Participation in a meeting pursuant to this
section shall constitute presence in person at such meeting.
Section 9. QUORUM AND MANNER OF ACTING. The presence of a majority of
the total number of directors shall constitute a quorum for the transaction of
business, and the act of a majority of the directors present at a meeting duly
held shall be the act of the Board. In the absence of a quorum, a majority of
the directors present may adjourn any meeting from time to time until a quorum
is present. Notice of a adjourned meeting need not be given.
Section 10. VALIDATION OF DEFECTIVELY CALLED OR NOTICED MEETINGS. The
transactions of any meeting of the Board, however called and noticed and
wherever held, shall be as valid as
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though made or performed at a meeting duly held after regular call and notice,
if, either before or after the meeting, each of the directors not present or
who, though present, has prior to the meeting or at its commencement protested
the lack of proper notice to such director, signs a written waiver of notice or
a consent to holding such meeting or approval of the minutes thereof. All such
waivers, consents or approvals shall be filed with the corporate records or made
a part of the minutes of the meeting.
Section 11. ACTION WITHOUT MEETING. Any action required or permitted to
be taken at any meeting of the Board, or of any committee thereof, may be taken
without a meeting if all members of the Board or committee, as the case may be,
consent thereto in writing and the writings are filed with the minutes of
proceedings of the Board or committee.
Section 12. COMPENSATION OF DIRECTORS. Directors and members of
committees may receive such compensation, if any, for their services, and such
reimbursement for expenses incurred by them, as may be fixed or determined by
resolution of the Board of Directors.
Section 13. COMMITTEES. The Board may, by resolution passed by a
majority of the directors, designate one or more committees, each committee to
consist of one or more directors of the Corporation, and the directors
constituting such committee. The Board may designate one or more directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of the committee. Any such committee, to the extent
provided in the resolution of the Board, shall have and may exercise all the
powers and authority of the Board in the management of the business and affairs
of the Corporation, and may authorize the seal of the Corporation to be affixed
to all papers which may require it, but no such committee shall have power or
authority in reference to amending the consolidation, recommending to the
Stockholders the sale, lease or exchange of all or substantially all of the
Corporation's property and assets, recommending to the Stockholders a
dissolution of the Corporation or a revocation of a dissolution, or amending the
Bylaws of the Corporation; and, unless the resolution expressly so provides, no
such committee shall have the power or authority to declare a dividend or to
authorize the issuance of stock or to adopt a certificate of ownership and
merger. Any director may be removed from a committee with or without cause by
the affirmative vote of a majority of the entire Board of Directors.
ARTICLE IV
OFFICERS
Section 1. OFFICERS. The officers of the Corporation shall be a
Chairman, a President, a Chief Executive Officer, a Chief Operating Officer, a
Treasurer, and a Secretary. The Corporation may also have, at the discretion of
the Board, one or more Vice Presidents, one or more Assistant Secretaries, one
or more Assistant Treasurers, and such other officers as may be
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appointed in accordance with the provisions of Section 3 of this Article. Any
number of offices may be held by the same person.
Section 2. ELECTION OF OFFICERS. The officers of the corporation,
except such officers as may be appointed in accordance with the provisions of
Section 3 or Section 5 of this Article, shall be chosen annually by the Board,
and each shall serve at the pleasure of the Board.
Section 3. SUBORDINATE OFFICERS. The Board may appoint, and may
empower the Chief Executive Officer to appoint, such other officers as the
business of the Corporation may require, each of whom shall hold office for such
period, have such authority and perform such duties as are provided in these
Bylaws or as the Board or Chief Executive Officer may from time to time
determine.
Section 4. REMOVAL AND RESIGNATION OF OFFICERS. Without prejudice to
the rights, if any, of an officer under any contract of employment, any officer
may be removed, either with or without cause, by the Board, at any regular or
special meeting or the Board, or by any officer upon whom such power of removal
may be conferred by the Board.
Any officer may resign at any time by giving written notice to the
Corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; the acceptance of the
resignation shall not be necessary to make it effective. Any resignation is
without prejudice to the rights, if any, of the Corporation under any contract
to which the officer is a party.
Section 5. VACANCIES IN OFFICES. A vacancy in any office because of
death, resignation, removal, disqualification or any other cause shall be filled
in the manner prescribed in these Bylaws for regular election or appointment to
such office.
Section 6. CHAIRMAN OF THE BOARD. The Chairman of the Board, or
Co-Chairman, if such an officer or officers be elected, shall, if present,
preside at all meetings of the Board and exercise and perform such other powers
and duties as may be from time to time assigned to him or them by the Board. If
there shall be Co-Chairmen of the Board they shall agree between themselves who
shall preside at meetings of the Board and, if there shall be no agreement, the
Secretary shall preside.
Section 7. CHIEF EXECUTIVE OFFICER. Subject to such supervisory
powers, if any, as may be given by the Board to the Chairman of the Board, the
Chief Executive Officer, if such an officer be elected, shall, subject to the
control of the Board, and the Chairman, have general supervision, direction and
control of the business and the officers of the Corporation. The Chief
Executive Officer, shall preside at all meetings of the Stockholders and, in the
absence of the Chairman of the Board, or both Co-Chairmen, or if there be none,
at all meetings of the Board.
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The Chief Executive Officer shall exercise and perform such other powers and
duties as may be from time to time assigned to him by the Board.
Section 8. PRESIDENT. Subject to such supervisory powers, if any, as
may be given by the Board to the Chairman of the Board and the Chief Executive
Officer, if there be such officers, the President shall be the chief operating
officer of the Corporation and shall, subject to the control of the Board have
general supervision, direction and control of the business and the officers of
the Corporation (other than the Chairman and Chief Executive Officer). The
President shall preside at all meetings of the Stockholders in the absence of
the Chairman and the Chief Executive Officer, and, in the absence of the
Chairman and the Chief Executive Officer, at all meetings of the Board. The
President shall have the general powers and duties of management usually vested
in the office of president and general manager of a Corporation, and shall have
such other powers and duties as may be prescribed by the Board and the Chief
Executive Officer.
Section 9. VICE PRESIDENT. In the absence or disability of the
Chairman, the Chief Executive Officer and the President, the Vice Presidents, or
any, in order of their rank as fixed by the Board, or, if not ranked, the Vice
President designated by the Board shall perform all the duties of such officer,
and when so acting shall have all the powers of, and be subject to all the
restrictions upon, such offices. The Vice Presidents shall have such other
powers and perform such other duties as from time to time amy be prescribed for
them respectively by the Board, the Chief Executive Officer or the President.
Section 10. SECRETARY. The Secretary shall keep, or cause to be kept,
at the principal executive office or such other place as the Board may direct, a
book of minutes of all meetings and actions of directors, committees of
directors, and Stockholders, with the time and place of holding, whether regular
or special, and, if special, how authorized, the notice given, the names of
those present at directors' meetings or committee meetings, the number of shares
present or represented at Stockholders' meetings, and the proceedings.
The Secretary shall give, or cause to be given, notice of all meetings of
the Stockholders and of the Board required by the Bylaws or by law to be given,
and he shall keep the seal of the Corporation, if one be adopted, in safe
custody, and shall have such other powers and perform such other duties as may
be prescribed by the Board.
Section 11. TREASURER. The Treasurer shall be the Chief Financial and
Accounting Officer and shall keep and maintain, or cause to be kept and
maintained, adequate and correct books and records of accounts of the properties
and business transactions of the Corporation, including accounts of its assets,
liabilities, receipts, disbursements, gains, losses, capital, retained earnings
and shares, and shall send or cause to be sent to the Stockholders of the
Corporation such financial statements and reports as are by law or these Bylaws
required to be sent to them. The books of account shall at all reasonable times
be open to inspection by any director.
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The Treasurer shall deposit all monies and other valuables in the name or
to the credit of the Corporation with such depositories as may be designated by
the Board. The Treasurer shall disburse the funds of the Corporation as may be
ordered by the Board, shall render to the President and directors, whenever they
request it, an account of all transactions undertaken as Chief Financial Officer
and of the financial condition of the Corporation, and shall have such other
powers and perform such other duties as may be prescribed by the Board.
ARTICLE V
INDEMNIFICATION OF DIRECTORS,
OFFICERS, EMPLOYEES AND OTHER AGENTS
Section 1. AGENTS, PROCEEDINGS AND EXPENSES. for the purposes of this
Article, "agent" means any person who is or was a director, officer, employee or
other agent of the corporation, or is or was a director, officer, employee or
agent of corporation as a director, officer, employee or agent of another
foreign or domestic corporation, partnership, joint venture, trust or other
enterprise, or was a director, officer, employee or agent of a foreign or
domestic corporation which was a predecessor corporation of the corporation or
of another enterprise at the request of such predecessor corporation;
"proceeding" means any threatened, pending or complete action or proceeding,
whether civil, criminal, administrative, or investigative; and "expenses"
includes, without limitation, attorneys' fees and any expenses of establishing a
right to indemnification under Section 2 or Section 3 of this Article.
Section 2. ACTIONS OTHER THAN BY THE CORPORATION. The Corporation
shall have power to indemnify any person who was or is a party or is threatened
to be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (other than
a action by or in the right of the Corporation) by reason of the fact that he is
or was a director, officer, employee or agent of the Corporation, or is or was
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interest of the
Corporation, and with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
Section 3. ACTIONS BY THE CORPORATION. The Corporation shall have
power to indemnify any person who was or is a party or is threatened to be made
a party to any threatened,
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pending or completed action or suit by or in the right of the Corporation to
procure a judgment in its favor by reason of the fact that he is or was a
director, officer, employee or agent of the Corporation, or is or was serving at
the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against expenses (including attorneys' fees) actually and reasonably incurred by
him in connection with the defense or settlement of such action or suit if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable for negligence or
misconduct in the performance of his duty to the Corporation unless and only to
the extent that the Court of Chancery or the court in which such action or suit
was brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the Court of
Chancery or such other court shall deem proper.
Section 4. SUCCESSFUL DEFENSE BY AGENT. To the extent that a director,
officer, employee or agent of the Corporation has been successful on the merits
or otherwise in defense of any action, suit or proceeding referred to in
Sections 2 and 3, or in defense of any claim, issue or matter therein, he shall
be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith.
Section 5. REQUIRED APPROVAL. Any indemnification under Sections 1 and
2 (unless ordered by a court) shall be made by the Corporation only as
authorized in the specific case upon a determination that indemnification of the
director, officer, employee or agent is proper in the circumstances because he
has met the applicable standard of conduct set forth in Sections 2 and 3. Such
determination shall be made (a) by the Board by a majority vote of quorum
consisting of directors who were not parties to such actions, suit or
proceedings, or (b) if such disinterested directors so direct, by independent
legal counsel in a written opinion, or (c) by the affirmative vote of a majority
of Stockholders.
Section 6. ADVANCE OF EXPENSES. Expenses incurred in defending a civil
or criminal action, suit or proceeding may be paid by the Corporation in advance
of the final disposition of such action, suit or proceeding as authorized by the
Board in the specific case upon receipt of an undertaking by or on behalf of the
director, officer, employee or agent to repay such amount unless it shall
ultimately be determined that he is entitled to be indemnified by the
Corporation as authorized in this Article. Such expenses incurred by other
employees and agents, may be so paid upon such terms and conditions, if any, as
the Board deems appropriate.
Section 7. CONTRACTUAL RIGHTS. The indemnification provided by this
Article shall not be deemed exclusive of any other rights to which those seeking
indemnification may be entitled under any agreement, vote of Stockholders or
disinterested directors or otherwise, both as to
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action in his official capacity and as to action in another capacity while
holding such office, and shall continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
Section 8. LIMITATIONS. No indemnification or advance shall be made
under this Article, except as provided in Section 4, in any circumstances where
it appears:
(a) That it would be inconsistent with a provision of the Certificate of
Incorporation, a resolution of the Stockholders or an agreement in effect at the
time of accrual of the alleged cause of action asserted in the proceeding in
which the expenses were incurred or other amounts were paid, which prohibits or
otherwise limits indemnification;
(b) That it would be inconsistent with any condition expressly imposed by
a court in approving a settlement.
Section 9. INSURANCE. The Corporation shall have the power to purchase
and maintain insurance on behalf of any person who is or was director, officer,
employee or agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against him and incurred by him in any such capacity or arising out of
his status as such, whether or not the Corporation would have the power to
indemnify him against such liability under the provisions of this Article.
Section 10. CONSTITUENT CORPORATIONS. For purposes of this Article,
references to "the Corporation" shall include, in addition to the Corporation,
any constituent corporation (including any constituent of a constituent)
absorbed in a consolidation or merger which, if its separate existence had
continued, would have had power and authority to indemnify its directors,
officers, employees or agents of such constituent corporation, or is or was
serving at the request of such constituent corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, shall stand in the same position under the provisions of this
Article with respect to the resulting or surviving corporation as he would have
with respect to such constituent corporation if its separate existence had
continued.
Section 11. DEFINITIONS. For purposes of this Article, references to
"other enterprises" shall include employee benefit plans; references to "fines"
shall include any excise taxes assessed on a person with respect to an employee
benefit plan; and references to "serving at the request of the Corporation"
shall include any service as a director, officer, employee or agent of the
Corporation which imposes duties on, or involves services by, such director,
officer, employee, or agent with respect to an employee benefit plan, its
participants, or beneficiaries; and an person who acted in good faith and in a
manner he reasonably believed to be in the interests of the
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participants and beneficiaries of an employee benefit plan shall be deemed to
have acted in a manner "not opposed to that best interest of the Corporation" as
referred to in this Article.
ARTICLE VI
MISCELLANEOUS
Section 1. INSPECTION OF BOOKS AND RECORDS BY STOCKHOLDERS Any
Stockholder of record, in person or by attorney or other agent, shall, upon
written demand under oath stating the purpose thereof, have the right during the
usual hours of business to inspect for any proper purpose the Corporation's
stock ledger, a list of Stockholders, and its other books and records, and to
make copies or extracts therefrom. A proper purpose shall mean a purpose
reasonably related to such person's interest as a Stockholder. In every
instance where an attorney or other agent shall be the person who seeks the
right to inspection, the demand under oath shall be accompanied by a power of
attorney or such other writing which authorizes the attorney or other agent to
so act on behalf of the Stockholder. The demand under oath shall be directed to
the Corporation at its registered office in the State of Delaware or at its
principal place of business.
Section 2. INSPECTION OF BOOKS AND RECORDS BY DIRECTORS. Any director
shall have the right to examine the Corporation's stock ledger, a list of its
Stockholders and its other books and records for a purpose reasonably related to
his position as a director. Such right to examine the records and books of the
Corporation shall include the right to make copies and extracts therefrom.
Section 3. CHECKS, DRAFTS, EVIDENCES OF INDEBTEDNESS. All checks,
drafts, or other orders for payment of money, notes, or other evidences of
indebtedness, issued in the name of or payable to the Corporation, shall be
signed or endorsed by such person or persons and in such manner as, from time to
time, shall be determined by resolution of the Board.
Section 4. CORPORATE CONTRACTS AND INSTRUMENTS; HOW EXECUTED. The
Board, except as otherwise provided in these Bylaws, may authorize any officer
or officers, agent or agents, to enter into any contract or execute any
instrument in the name of and on behalf of the Corporation, and this authority
may be general or confined to specific instances; and, unless so authorized or
ratified by the Board or within the agency power of the officer, no officer,
agent, or employee shall have any power or authority to bind the Corporation by
any contract or engagement or to pledge its credit or to render it liable for
any purpose or for any amount.
Section 5. CERTIFICATE FOR SHARES. Every holder of stock in the
Corporation shall be entitled to have a certificate signed by, or in the name of
the Corporation by the Chairman, a Co-Chairman or the Treasurer, or the
Secretary or an Assistant Secretary of the Corporation representing the number
of shares owned by him in the Corporation. Any or all the signatures
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on the certificates may be a facsimile. In case any officer, transfer agent, or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent, or registrar
before such certificate is issued, it may be issued by the Corporation with the
same effect as if he were such officer, transfer agent, or registrar at the date
of issue.
Section 6. TRANSFER OF SHARES. Transfer of shares of the capital stock
of the Corporation shall be made only on the books of the Corporation by the
holder thereof, or by his attorney thereunto authorized by a power of attorney
duly executed and filed with the Secretary of the Corporation or a transfer
agent of the Corporation, if any, and on surrender of the certificate or
certificates for such shares properly endorsed. A person in whose name shares
of stock appear on the books of the Corporation shall be deemed the owner
thereof as regards the Corporation, and upon any transfer of shares of stock the
person or persons into whose name or names such shares shall have been
transferred, with respect to all rights, privileges and obligations of holders
of stock of the Corporation and as against the Corporation or any other person
or persons. The term "person" or "persons" wherever used herein shall be deemed
to include any partnership, corporation, association or other entity. Whenever
any transfer of shares shall be made for collateral security, and not
absolutely, such fact, if known to the Secretary or to such transfer agent,
shall be so expressed in the entry of transfer.
Section 7. LOST, STOLEN OR DESTROYED CERTIFICATES. The Corporation may
issue a new certificate of stock in the place of any certificate theretofore
issued by it, alleged to have been lost, stolen or destroyed, and the
Corporation may require the owner of the lost, stolen or destroyed certificate,
or his legal representative, to give the Corporation a bond sufficient to
indemnify it against any claim that may be made against it on account of the
alleged loss, theft or destruction of any such certificate or the issuance of
such new certificate.
Section 8. REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The
Chairman of the Board, the President, or any Vice-President or any person
designated by any such officers, is authorized, in the absence of authorization
by the Board, to vote on behalf of the Corporation any and all shares of any
other corporation or corporations, foreign or domestic, for which the
Corporation has the right to vote. The authority granted to these officers to
vote or represent on behalf of the Corporation any and all shares held by the
Corporation in any other corporation or corporations may be exercised by any of
these officers in person or by any person authorized to do so by proxy duly
executed by these officers.
Section 9. CONSTRUCTION AND DEFINITIONS. Unless the context requires
otherwise, the general provisions, rules of construction, and definitions in the
General Corporation Law shall govern the construction of these Bylaws. Without
limiting the generality of this provision, the singular number includes the
plural, the plural number includes the singular, and the term "person" includes
both the corporation or other entity and a natural person.
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Section 10. AMENDMENTS. Unless otherwise provided in the Certificate of
Incorporation, the power to adopt, amend or repeal any Bylaws of the Corporation
shall be in the Stockholders of the Corporation holding at least 75% of the
shares entitled to vote considered as one class, and by the Board.
Section 11. SEAL. The Board of Directors shall adopt a corporate seal,
which shall be in the form of a circle and shall have inscribed thereon the name
of the Corporation, the year of its incorporation and the words "Corporate Seal,
Delaware." Said seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
Section 12. FISCAL YEAR. The fiscal year of the Corporation shall begin
on the first day of August of each year.
Section 13. DIVIDENDS; SURPLUS. Subject to the provisions of the
Certificate of Incorporation and any restrictions imposed by statute, the Board
of Directors may declare dividends out of the net assets of the Corporation in
excess of its capital or, in case there shall be no such excess, out of the net
profits of the Corporation for the fiscal year then current and/or the preceding
fiscal year, or out of any funds at the time legally available for the
declaration of dividends (hereinafter referred to as "surplus or net profits")
whenever, and in such amounts as, in its sole discretion, the conditions and
affairs of the Corporation shall render advisable. The Board of Directors in
its sole discretion may, in accordance with law, from time to time set aside
from surplus or net profits such sum as it may think proper as a reserve fund to
meet contingencies, or for equalizing dividends, or for the purpose of
maintaining or increasing the property or business of the Corporation, or for
any other purpose as it may think conducive to the best interests of the
Corporation.
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EXHIBIT 4.2
==============================================================================
PROSPECT MEDICAL HOLDINGS, INC.
AND
AMERICAN STOCK TRANSFER AND TRUST COMPANY
------------
WARRANT AGREEMENT
Dated as of ________________, 1998
==============================================================================
<PAGE>
WARRANT AGREEMENT, dated this ____ day of __________, 1998, by and among
PROSPECT MEDICAL HOLDINGS, INC., a Delaware corporation (the "Company"), and
AMERICAN STOCK TRANSFER AND TRUST COMPANY, as Warrant Agent (the "Warrant
Agent").
W I T N E S S E T H:
--------------------
WHEREAS, in connection with (i) the offering to the public of up to
3,000,000 shares of Common Stock (as defined in Section 1) and 3,000,000
redeemable common stock purchase warrants (the "Warrants"), each Warrant
entitling the holder thereof to purchase one additional share of Common
Stock, (ii) the over-allotment option to purchase up to an additional 450,000
shares of Common Stock and/or 450,000 Warrants (the "Over-allotment Option"),
and (iii) the sale to Security Capital Trading, Inc. (the "Representative")
of warrants (the "Representative's Warrants") to purchase up to 300,000
shares of Common Stock and/or 300,000 Warrants, the Company will issue up to
4,050,000 Warrants (subject to increase as provided in the Representative's
Warrant Agreement); and
WHEREAS, the Company desires to provide for the issuance of certificates
representing the Warrants; and
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing to so act, in connection with the
issuance, registration, transfer, exchange and redemption of the Warrants,
the issuance of certificates representing the Warrants, the exercise of the
Warrants and the rights of the holders thereof.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements hereinafter set forth and for the purpose of defining the terms
and provisions of the Warrants and the certificates representing the Warrants
and the respective rights and obligations thereunder of the Company, the
Representative, the holders of certificates representing the Warrants and the
Warrant Agent, the parties hereto agree as follows:
SECTION 1. DEFINITIONS. As used herein, the following terms shall
have the following meanings, unless the context shall otherwise require:
(a) "Act" shall mean the Securities Act of 1933, as amended.
(b) "Common Stock" shall mean the authorized common stock of the
Company of any class or series, whether now or hereafter authorized, which
has the right to participate in the voting and in the distribution of
earnings and assets of the Company without limit as to amount or percentage.
(c) "Commission" shall mean the Securities and Exchange Commission.
<PAGE>
(d) "Corporate Office" shall mean the office of the Warrant Agent (or
its successor) at which at any particular time its business in New York, New
York, shall be administered, which office is located on the date hereof at 40
Wall Street.
(e) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(f) "Exercise Date" shall mean, subject to the provisions of Section
5(b) hereof, as to any Warrant, the date on which the Warrant Agent shall
have received both the Warrant Certificate representing such Warrant, with
the exercise form thereon duly executed by the Registered Holder thereof or
his attorney duly authorized in writing, and (ii) payment in cash or by
official bank or certified check made payable to the Warrant Agent for the
account of the Company, of the amount in lawful money of the United States of
America equal to the applicable Purchase Price in good funds.
(g) "Initial Warrant Exercise Date" shall mean _____________ __, 1999
[the first anniversary of the effective date of the Registration Statement].
(h) "Initial Warrant Redemption Date" shall mean _______________ __,
1999 [the first anniversary of the effective date of the Registration
Statement].
(i) "NASD" shall mean the National Association of Securities Dealers,
Inc.
(j) "Nasdaq" shall mean the Nasdaq Stock Market.
(k) "Purchase Price" shall mean, subject to modification and adjustment
as provided in Section 8 hereof, $8.40 per share of Common Stock purchased
pursuant to exercise of the Warrants; subject to the Company's right, in its
sole discretion, to decrease the Purchase Price for a period of not less than
30 days on not less than 30 days' prior written notice to the Registered
Holders and the Representative.
(l) "Redemption Date" shall mean the date (which may not occur before
the Initial Warrant Redemption Date) fixed for the redemption of the Warrants
in accordance with the terms hereof.
(m) "Redemption Price" shall mean the price at which the Company may,
at its option, redeem the Warrants, in accordance with the terms hereof,
which price shall be $0.10 per Warrant, subject to adjustment from time to
time pursuant to the provisions of Section 9 hereof.
(n) "Registered Holder" shall mean the person in whose name any
certificate representing the Warrants shall be registered on the books
maintained by the Warrant Agent pursuant to Section 6 hereof.
(o) "Registration Statement" shall mean the Form S-1 Registration
Statement filed by the Company with the Commission relating to the Warrants.
(p) "Representative's Warrant Agreement" shall mean the agreement dated
as of _______________ ___, 1998 [the date of the Prospectus] between the
Company and the
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Representative relating to and governing the terms and provisions of the
Representative's Warrants.
(q) "Transfer Agent" shall mean American Stock Transfer and Trust
Company, or its authorized successor.
(r) "Underwriting Agreement" shall mean the underwriting agreement
dated __________ __, 1998 [the date of the Prospectus] between the Company
and the several underwriters listed on Exhibit A thereto relating to the
purchase for resale to the public of 3,000,000 shares of Common Stock and
3,000,000 Warrants.
(s) "Warrant Certificate" shall mean a certificate representing the
Warrants substantially in the form annexed hereto as Exhibit A.
(t) "Warrant Expiration Date" shall mean, unless the Warrants are
redeemed as provided in Section 9 hereof prior to such date, 5:00 p.m. (New
York time), on ______________ __, 2003 [the day immediately preceding the
fifth anniversary of the effective date of the Registration Statement], or
the Redemption Date as defined herein, whichever date is earlier; provided
that if such date shall in the State of New York be a holiday or a day on
which banks are authorized to close, then 5:00 p.m. (New York time) on the
next following day which, in the State of New York, is not a holiday or a day
on which banks are authorized to close. Upon five business days' prior
written notice to the Registered Holders, the Company shall have the right to
extend the Warrant Expiration Date.
SECTION 2. WARRANTS AND ISSUANCE OF WARRANT CERTIFICATES.
(a) Each Warrant shall initially entitle the Registered Holder of the
Warrant Certificate representing such Warrant to purchase at the Purchase
Price therefor from the Initial Warrant Exercise Date until the Warrant
Expiration Date one share of Common Stock upon the exercise thereof in
accordance with the terms hereof, subject to modification and adjustment as
provided in Section 8 hereof.
(b) Upon execution of this Agreement, Warrant Certificates representing
the number of Warrants sold pursuant to the Underwriting Agreement shall be
executed by the Company and delivered to the Warrant Agent.
(c) Upon execution of the Representative's Warrant Agreement, Warrant
Certificates representing all or a portion of 300,000 Warrants shall be
executed by the Company and issued and delivered to the Representative. Upon
exercise of the Representative's Warrants with respect to up to an additional
300,000 Warrants as provided for in the Representative's Warrant Agreement,
Warrant Certificates representing up to an additional 300,000 Warrants
(subject to modification and adjustment as provided in the Representative's
Warrant Agreement), shall be executed by the Company and issued and delivered
to the Representative.
(d) From time to time, up to the Warrant Expiration Date or the
Redemption Date, whichever date is earlier, the Warrant Agent shall
countersign and deliver Warrant Certificates in required denominations of one
or whole number multiples thereof to the person entitled thereto in
connection with any transfer or exchange permitted under this Agreement.
Except as provided
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herein, no Warrant Certificates shall be issued except (i) Warrant
Certificates initially issued hereunder pursuant to Section 2(b) hereof and
those issued on or after the Initial Warrant Exercise Date, upon the exercise
of fewer than all Warrants held by the exercising Registered Holder, (ii)
Warrant Certificates issued upon any transfer or exchange of Warrants, (iii)
Warrant Certificates issued in replacement of lost, stolen, destroyed or
mutilated Warrant Certificates pursuant to Section 7 hereof, (iv) Warrant
Certificates issued pursuant to Section 2(c) hereof and the Representative's
Warrant Agreement, and (v) at the option of the Company, Warrant Certificates
in such form as may be approved by its Board of Directors, to reflect any
adjustment or change in the Purchase Price, the number of shares of Common
Stock purchasable upon exercise of the Warrants or the Redemption Price
therefor made pursuant to Section 8 hereof.
SECTION 3. FORM AND EXECUTION OF WARRANT CERTIFICATES.
(a) The Warrant Certificates shall be substantially in the form annexed
hereto as Exhibit A (the provisions of which are hereby incorporated herein)
and may have such letters, numbers or other marks of identification or
designation and such legends, summaries or endorsements printed, lithographed
or engraved thereon as the Company may deem appropriate and as are not
inconsistent with the provisions of this Agreement, or as may be required to
comply with any law or with any rule or regulation made pursuant thereto or
with any rule or regulation of any stock exchange on which the Warrants may
be listed, or to conform to usage. The Warrant Certificates shall be dated
the date of issuance thereof (whether upon initial issuance, transfer,
exchange or in lieu of mutilated, lost, stolen or destroyed Warrant
Certificates) and issued in registered form. Warrants shall be numbered
serially with the letter W on the Warrants.
(b) Warrant Certificates shall be executed on behalf of the Company by
its Chairman of the Board, Chief Executive Officer, President or any Vice
President and by its Chief Financial Officer or an Assistant Chief Financial
Officer or its Secretary or an Assistant Secretary, by manual signatures or
by facsimile signatures printed thereon, and shall have imprinted thereon a
facsimile of the Company's seal. Warrant Certificates, other than Warrant
Certificates issued to the Representative pursuant to Section 2(c) hereof and
the Representative's Warrant Agreement, shall be manually countersigned by
the Warrant Agent and shall not be valid for any purpose unless so
countersigned. In case any officer of the Company who shall have signed any
of the Warrant Certificates shall cease to be such officer of the Company
before the date of issuance of the Warrant Certificates or before
countersignature by the Warrant Agent and issue and delivery thereof, such
Warrant Certificates, nevertheless, may be countersigned by the Warrant
Agent, issued and delivered with the same force and effect as though the
person who signed such Warrant Certificates had not ceased to be such officer
of the Company. After countersignature by the Warrant Agent, Warrant
Certificates shall be delivered by the Warrant Agent to the Registered Holder
promptly and without further action by the Company, except as otherwise
provided by Section 4(a) hereof.
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SECTION 4. EXERCISE.
(a) Warrants in denominations of one or whole number multiples thereof
may be exercised by the Registered Holder thereof commencing at any time on
or after the Initial Warrant Exercise Date, but not after the Warrant
Expiration Date, upon the terms and subject to the conditions set forth
herein and in the applicable Warrant Certificate. A Warrant shall be deemed
to have been exercised immediately prior to the close of business on the
Exercise Date and the person entitled to receive the securities deliverable
upon such exercise shall be treated for all purposes as the holder, upon
exercise thereof, as of the close of business on the Exercise Date. If
Warrants in denominations other than whole number multiples thereof shall be
exercised at one time by the same Registered Holder, the number of full
shares of Common Stock which shall be issuable upon exercise thereof shall be
computed on the basis of the aggregate number of full shares of Common Stock
issuable upon such exercise. As soon as practicable on or after the Exercise
Date and in any event within five business days after such date, if one or
more Warrants have been exercised, the Warrant Agent on behalf of the Company
shall cause to be issued to the person or persons entitled to receive the
same a Common Stock certificate or certificates for the shares of Common
Stock deliverable upon such exercise, and the Warrant Agent shall deliver the
same to the person or persons entitled thereto. Upon the exercise of any one
or more Warrants, the Warrant Agent shall promptly notify the Company in
writing of such fact and of the number of securities deliverable upon such
exercise and shall cause the payment of an amount in cash or by check made
payable to the order of the Company, equal to the Purchase Price for such
securities, to be deposited promptly in the Company's designated bank
account.
(b) The Company shall not be required to issue fractional shares on the
exercise of Warrants. Warrants may only be exercised in such multiples as
are required to permit the issuance by the Company of one or more whole
shares. If one or more Warrants shall be presented for exercise in full at
the same time by the same Registered Holder, the number of whole shares which
shall be issuable upon such exercise thereof shall be computed on the basis
of the aggregate number of shares purchasable on exercise of the Warrants so
presented. If any fraction of a share would, except for the provisions
provided herein, be issuable on the exercise of any Warrant (or specified
portion thereof), the Company shall pay an amount in cash equal to such
fraction multiplied by the then current market value of a share of Common
Stock, determined as follows:
(1) If the Common Stock is listed, or admitted to unlisted trading
privileges, on a national securities exchange, or is traded on Nasdaq, the
current market value of a share of Common Stock shall be the closing sale
price of the Common Stock at the end of the regular trading session on the
last business day prior to the date of exercise of the Warrants on whichever
of such exchanges or Nasdaq had the highest average daily trading volume for
the Common Stock on such day; or
(2) If the Common Stock is not listed or admitted to unlisted
trading privileges on any national securities exchange, or listed, quoted or
reported for trading on Nasdaq, but is traded in the over-the-counter market,
the current market value of a share of Common Stock shall be the average of
the last reported bid and asked prices of the Common Stock reported by the
National
5
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Quotation Bureau, Inc. on the OTC Electronic Bulletin Board operated by
Nasdaq on the last business day prior to the date of exercise of the
Warrants; or
(3) If the Common Stock is not listed, admitted to unlisted
trading privileges on any national securities exchange, or listed, quoted or
reported for trading on Nasdaq, and bid and asked prices of the Common Stock
are not reported by the National Quotation Bureau, Inc. on the OTC Electronic
Bulletin Board operated by Nasdaq, the current market value of a share of
Common Stock shall be an amount, not less than the book value thereof as of
the end of the most recently completed fiscal quarter of the Company ending
prior to the date of exercise, determined by the members of the Board of
Directors of the Company exercising good faith and using customary valuation
methods.
SECTION 5. RESERVATION OF SHARES; LISTING; PAYMENT OF TAXES; ETC.
(a) The Company covenants that it will at all times reserve and keep
available out of its authorized Common Stock, solely for the purpose of issue
upon exercise of Warrants, such number of shares of Common Stock as shall
then be issuable upon the exercise of all outstanding Warrants. The Company
covenants that all shares of Common Stock which shall be issuable upon
exercise of the Warrants shall, at the time of issuance and delivery thereof
in accordance with the terms hereof and of the Warrant Certificates, be duly
and validly issued and fully paid and nonassessable and free from all
preemptive or similar rights, taxes, liens and charges with respect to the
issue thereof, and that upon issuance such shares shall be listed on each
securities exchange, if any, on which the other shares of outstanding Common
Stock of the Company are then listed.
(b) The Company covenants that if any securities to be reserved for the
purpose of exercise of Warrants hereunder require registration with, or
approval of, any governmental authority under any federal securities law
before such securities may be validly issued or delivered upon such exercise,
then the Company will file a registration statement under the federal
securities laws or a post-effective amendment to a then effective
registration statement, use its reasonable best efforts to cause such filed
registration statement to become effective and to keep any such effective
registration statement current while any of the Warrants are outstanding, and
deliver a prospectus which complies with Section 10(a)(3) of the Act to the
Registered Holder exercising the Warrant (except, if in the opinion of
counsel to the Company, such registration is not required under the federal
securities law or if the Company receives a letter from the staff of the
Commission stating that it would not take any enforcement action if such
registration is not effected). The Company will use its reasonable best
efforts to obtain appropriate approvals or registrations under state "blue
sky" securities laws with respect to any such securities. However, Warrants
may not be exercised by, or shares of Common Stock issued to, any Registered
Holder in any state in which such exercise would be unlawful.
(c) The Company shall indemnify the Representative and each person, if
any, who controls the Representative within the meaning of Section 15 of the
Act or Section 20(a) of the Exchange Act against all loss, claim, damage,
expense or liability (including all expenses reasonably incurred in
investigating, preparing or defending against any claim whatsoever) to which
any of them may become subject under the Act, the Exchange Act or otherwise,
arising from the registration statement or prospectus referred to in Section
5(b) hereof to the same extent and with the same effect (including
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the provisions regarding contribution) as the provisions pursuant to which
the Company has agreed to indemnify the Representative contained in Section 7
of the Underwriting Agreement.
(d) The Company shall pay all documentary, stamp or similar taxes and
other governmental charges that may be imposed with respect to the issuance
of Warrants, or the issuance or delivery of any shares of Common Stock upon
exercise of the Warrants; provided, however, that if shares of Common Stock
are to be delivered in a name other than the name of the Registered Holder of
the Warrant Certificate representing any Warrant being exercised, then no
such delivery shall be made unless the person requesting the same has paid to
the Warrant Agent the amount of transfer taxes or charges incident thereto,
if any.
(e) The Warrant Agent is hereby irrevocably authorized as the Transfer
Agent to (i) register the transfer of Warrant Certificates and (ii)
requisition from time to time certificates representing shares of Common
Stock or other securities required upon exercise of the Warrants, and the
Company will comply with all such requisitions.
SECTION 6. EXCHANGE AND REGISTRATION OF TRANSFER.
(a) Warrant Certificates may be exchanged for other Warrant
Certificates representing an equal aggregate number of Warrants or may be
transferred in whole or in part. Warrant Certificates to be exchanged shall
be surrendered to the Warrant Agent at the Corporate Office, and, upon
satisfaction of the terms and provisions hereof, the Company shall execute
and the Warrant Agent shall countersign, issue and deliver in exchange
therefor the Warrant Certificate or Certificates which the Registered Holder
making the exchange shall be entitled to receive.
(b) The Warrant Agent shall keep, at the Corporate Office, books in
which, subject to such reasonable regulations as it may prescribe, it shall
register Warrant Certificates and the transfer thereof in accordance with
customary practice. Upon due presentment for registration of transfer of any
Warrant Certificate at such office, the Company shall execute and the Warrant
Agent shall countersign and issue and deliver to the transferee or
transferees a new Warrant Certificate or Certificates representing an equal
aggregate number of Warrants.
(c) With respect to all Warrant Certificates presented for registration
of transfer, or for exchange or exercise, the subscription or exercise form,
as the case may be, on the reverse thereof shall be duly endorsed or be
accompanied by a written instrument or instruments of transfer and
subscription, in form satisfactory to the Company and the Warrant Agent, duly
executed by the Registered Holder thereof or his attorney-in-fact duly
authorized in writing.
(d) A service charge may be imposed by the Warrant Agent and charged to
the Registered Holder for any exchange or registration of transfer of Warrant
Certificates. In addition, the Company may require payment by such Holder of
a sum sufficient to cover any tax or other governmental charge that may be
imposed in connection therewith.
(e) All Warrant Certificates surrendered for exercise or for exchange
in case of mutilated Warrant Certificates shall be promptly canceled by the
Warrant Agent and thereafter retained by the Warrant Agent until termination
of this Agreement.
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(f) Prior to due presentment for registration of transfer thereof, the
Company and the Warrant Agent may deem and treat the Registered Holder of any
Warrant Certificate as the absolute owner thereof and of each Warrant
represented thereby (notwithstanding any notations of ownership or writing
thereon made by anyone other than a duly authorized officer of the Company or
the Warrant Agent) for all purposes and shall not be affected by any notice
to the contrary.
SECTION 7. LOSS OR MUTILATION.
Upon receipt by the Company and the Warrant Agent of evidence
satisfactory to them of the ownership of and the loss, theft, destruction or
mutilation of any Warrant Certificate and (in the case of loss, theft or
destruction) of indemnity satisfactory to them, and (in case of mutilation)
upon surrender and cancellation thereof, the Company shall execute and the
Warrant Agent shall (in the absence of notice to the Company and/or the
Warrant Agent that a new Warrant Certificate has been acquired by a bona fide
purchaser) countersign and deliver to the Registered Holder in lieu thereof a
new Warrant Certificate of like tenor representing an equal aggregate number
of Warrants. Applicants for a substitute Warrant Certificate shall also
comply with such other reasonable regulations and pay such other reasonable
charges as the Warrant Agent may prescribe.
SECTION 8. ADJUSTMENT OF PURCHASE PRICE AND NUMBER OF SHARES OF COMMON
STOCK DELIVERABLE.
(a) Except as hereinafter provided, in the event the Company shall, at
any time or from time to time after the date hereof and prior to the Warrant
Expiration Date, issue or sell any shares of Common Stock for a consideration
per share less than the Purchase Price or issue any shares of Common Stock as
a stock dividend to the holders of Common Stock, or subdivide or combine the
outstanding shares of Common Stock into a greater or lesser number of shares
(any such issuance, subdivision or combination being herein called a "Change
of Shares"), then, and thereafter upon each further Change of Shares, the
Purchase Price for the Warrants (whether or not the same shall be issued and
outstanding) in effect immediately prior to such Change of Shares shall be
changed to a price (including any applicable fraction of a cent to the
nearest cent) determined by dividing (i) the sum of (a) the total number of
shares of Common Stock outstanding immediately prior to such Change of
Shares, multiplied by the Purchase Price in effect immediately prior to such
Change of Shares and (b) the consideration, if any, received by the Company
upon such sale, issuance, subdivision or combination, by (ii) the total
number of shares of Common Stock outstanding immediately after such Change of
Shares; provided, however, that in no event shall the Purchase Price be
adjusted pursuant to this computation to an amount in excess of the Purchase
Price in effect immediately prior to such computation, except in the case of
a combination of outstanding shares of Common Stock.
For the purposes of any adjustment to be made in accordance with this
Section 8(a), the following provisions shall be applicable:
(A) In case of the issuance or sale of shares of Common Stock (or of
other securities deemed hereunder to involve the issuance or sale of shares
of Common Stock) for a consideration part or all of which shall be cash, the
amount of the cash portion of the consideration therefor deemed to have been
received by the Company shall be (i) the subscription price, if shares of
Common Stock
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are offered by the Company for subscription, or (ii) the gross public
offering price (before deducting therefrom any compensation paid or discount
allowed in the sale, underwriting or purchase thereof by underwriters or
dealers or others performing similar services, or any expenses incurred in
connection therewith), if such securities are sold to underwriters or dealers
for public offering without a subscription offering, or (iii) the gross
amount of cash actually received by the Company for such securities, in any
other case.
(B) In case of the issuance or sale (otherwise than as a dividend or
other distribution on any stock of the Company, and otherwise than on the
exercise of options, rights or warrants or the conversion or exchange of
convertible or exchangeable securities) of shares of Common Stock (or of
other securities deemed hereunder to involve the issuance or sale of shares
of Common Stock) for a consideration part or all of which shall be other than
cash, the amount of the consideration therefor other than cash deemed to have
been received by the Company shall be the value of such consideration as
determined in good faith by the Board of Directors of the Company, using
customary valuation methods and on the basis of prevailing market values for
similar property or services.
(C) Shares of Common Stock issuable by way of dividend or other
distribution on any stock of the Company shall be deemed to have been issued
immediately after the opening of business on the day following the record
date for the determination of shareholders entitled to receive such dividend
or other distribution and shall be deemed to have been issued without
consideration.
(D) The reclassification of securities of the Company other than shares
of Common Stock into securities including shares of Common Stock shall be
deemed to involve the issuance of such shares of Common Stock for a
consideration other than cash immediately prior to the close of business on
the date fixed for the determination of security holders entitled to receive
such shares, and the value of the consideration allocable to such shares of
Common Stock shall be determined as provided in subsection (B) of this
Section 8(a).
(E) The number of shares of Common Stock at any one time outstanding
shall be deemed to include the aggregate maximum number of shares issuable
(subject to readjustment upon the actual issuance thereof) upon the exercise
of options, rights or warrants and upon the conversion or exchange of
convertible or exchangeable securities.
(b) Upon each adjustment of the Purchase Price pursuant to this Section
8, the number of shares of Common Stock purchasable upon the exercise of each
Warrant shall be the number derived by multiplying the number of shares of
Common Stock purchasable immediately prior to such adjustment by the Purchase
Price in effect prior to such adjustment and dividing the product so obtained
by the applicable adjusted Purchase Price.
(c) In case the Company shall at any time after the date hereof issue
options, rights or warrants to subscribe for shares of Common Stock, or issue
any securities convertible into or exchangeable for shares of Common Stock,
for a consideration per share (determined as provided in Sections 8(a) and
8(b) and as provided below) less than the Purchase Price in effect
immediately prior to the issuance of such options, rights or warrants, or
such convertible or exchangeable securities, or without consideration
(including the issuance of any such securities by way of dividend or other
distribution), the Purchase Price for the Warrants (whether or not the same
shall be issued and
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<PAGE>
outstanding) in effect immediately prior to the issuance of such options,
rights or warrants, or such convertible or exchangeable securities, as the
case may be, and the number of shares of Common Stock purchasable upon the
exercise of such Warrants, shall be reduced to a price determined by making
the computation in accordance with the provisions of Sections 8(a) and 8(b)
hereof, provided that:
(A) The aggregate maximum number of shares of Common Stock
issuable or that may become issuable under such options, rights or warrants
(assuming exercise in full even if not then currently exercisable or
currently exercisable in full) shall be deemed to be issued and outstanding
at the time such options, rights or warrants were issued, for a consideration
equal to the minimum exercise price per share provided for in such options,
rights or warrants at the time of issuance, plus the consideration, if any,
received by the Company for the grant of such options, rights or warrants;
provided, however, that upon the expiration or other termination of such
options, rights or warrants, if any thereof shall not have been exercised,
the number of shares of Common Stock deemed to be issued and outstanding
pursuant to this subsection (A) (and for the purposes of subsection (E) of
Section 8(a) hereof) shall be reduced by the number of shares as to which
options, warrants and/or rights shall have expired, and such number of shares
shall no longer be deemed to be issued and outstanding, and the Purchase
Price then in effect shall forthwith be readjusted and thereafter be the
price that it would have been had adjustment been made on the basis of the
issuance only of the shares actually issued plus the shares remaining
issuable upon the exercise of those options, rights or warrants as to which
the exercise rights shall not have expired or terminated unexercised.
(B) The aggregate maximum number of shares of Common Stock
issuable or that may become issuable upon conversion or exchange of any
convertible or exchangeable securities (assuming conversion or exchange in
full even if not then currently convertible or exchangeable in full) shall be
deemed to be issued and outstanding at the time of issuance of such
securities, for a consideration equal to the consideration received by the
Company for such securities, plus the minimum consideration, if any,
receivable by the Company upon the conversion or exchange thereof; provided,
however, that upon the termination of the right to convert or exchange such
convertible or exchangeable securities (whether by reason of redemption or
otherwise), the number of shares of Common Stock deemed to be issued and
outstanding pursuant to this subsection (B) (and for the purposes of
subsection (E) of Section 8(a) hereof) shall be reduced by the number of
shares as to which the conversion or exchange rights shall have expired or
terminated unexercised, and such number of shares shall no longer be deemed
to be issued and outstanding, and the Purchase Price then in effect shall
forthwith be readjusted and thereafter be the price that it would have been
had adjustment been made on the basis of the issuance only of the shares
actually issued plus the shares remaining issuable upon conversion or
exchange of those convertible or exchangeable securities as to which the
conversion or exchange rights shall not have expired or terminated
unexercised.
(C) If any change shall occur in the price per share provided for
in any of the options, rights or warrants referred to in subsection (A) of
this Section 8(c), or in the price per share or ratio at which the securities
referred to in subsection (B) of this Section 8(c) are convertible or
exchangeable, such options, rights or warrants or conversion or exchange
rights, as the case may be, to the extent not theretofore exercised, shall be
deemed to have expired or terminated on the date when such price change
became effective in respect of shares not theretofore issued pursuant to the
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exercise or conversion or exchange thereof, and the Company shall be deemed
to have issued upon such date new options, rights or warrants or convertible
or exchangeable securities.
(d) In case of any reclassification or change of outstanding shares of
Common Stock issuable upon exercise of the Warrants (other than a change in
par value, or from par value to no par value, or from no par value to par
value or as a result of a subdivision or combination), or in case of any
consolidation or merger of the Company with or into another corporation
(other than a merger with a subsidiary of the Company in which merger the
Company is the continuing corporation) and which does not result in any
reclassification or change of the then outstanding shares of Common Stock or
other capital stock issuable upon exercise of the Warrants (other than a
change in par value, or from par value to no par value, or from no par value
to par value or as a result of subdivision or combination) or in case of any
sale or conveyance to another corporation of the property of the Company as
an entirety or substantially as an entirety, then, as a condition of such
reclassification, change, consolidation, merger, sale or conveyance, the
Company, or such successor or purchasing corporation, as the case may be,
shall make lawful and adequate provision whereby the Registered Holder of
each Warrant then outstanding shall have the right thereafter to receive on
exercise of such Warrant the kind and amount of securities and property
receivable upon such reclassification, change, consolidation, merger, sale or
conveyance by a holder of the number of securities issuable upon exercise of
such Warrant immediately prior to such reclassification, change,
consolidation, merger, sale or conveyance and shall forthwith file at the
Corporate Office a statement signed by its Chief Executive Officer, President
or a Vice President and by its Chief Financial Officer or an Assistant Chief
Financial Officer or its Secretary or an Assistant Secretary evidencing such
provision. Such provisions shall include provision for adjustments which
shall be as nearly equivalent as may be practicable to the adjustments
provided for in Sections 8(a), (b) and (c). The above provisions of this
Section 8(d) shall similarly apply to successive reclassifications and
changes of shares of Common Stock and to successive consolidations, mergers,
sales or conveyances.
(e) Irrespective of any adjustments or changes in the Purchase Price or
the number of shares of Common Stock purchasable upon exercise of the
Warrants, the Warrant Certificates theretofore and thereafter issued shall,
unless the Company shall exercise its option to issue new Warrant
Certificates pursuant to Section 2(d) hereof, continue to express the
Purchase Price per share and the number of shares purchasable thereunder as
the Purchase Price per share and the number of shares purchasable thereunder
were expressed in the Warrant Certificates when the same were originally
issued.
(f) After each adjustment of the Purchase Price pursuant to this
Section 8, the Company will promptly prepare a certificate signed by the
Chairman, Chief Executive Officer or President, and by the Chief Financial
Officer or an Assistant Chief Financial Officer or the Secretary or an
Assistant Secretary, of the Company setting forth: (i) the Purchase Price as
so adjusted; (ii) the number of shares of Common Stock purchasable upon
exercise of each Warrant, after such adjustment; and (iii) a brief statement
of the facts accounting for such adjustment. The Company will promptly file
such certificate with the Warrant Agent and cause a brief summary thereof to
be sent by ordinary first class mail to each Registered Holder at his last
address as it shall appear on the registry books of the Warrant Agent. No
failure to mail such notice nor any defect therein or in the mailing thereof
shall affect the validity thereof except as to the holder to whom the Company
failed to mail such notice, or except as to the holder whose notice was
defective. The affidavit of an officer of the Warrant
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Agent or the Secretary or an Assistant Secretary of the Company that such
notice has been mailed shall, in the absence of fraud, be prima facie
evidence of the facts stated therein.
(g) No adjustment of the Purchase Price shall be made as a result of or
in connection with the issuance or sale of shares of Common Stock if the
amount of said adjustment shall be less than $.10, provided, however, that in
such case, any adjustment that would otherwise be required then to be made
shall be carried forward and shall be made at the time of and together with
the next subsequent adjustment that shall amount, together with any
adjustment so carried forward, to at least $.10. In addition, Registered
Holders shall not be entitled to cash dividends paid by the Company prior to
the exercise of any Warrant or Warrants held by them.
(h) No adjustment of the Purchase Price or the number of shares of
Common Stock purchasable upon exercise of any Warrant shall be made as a
result of or in connection with: (A) the issuance or sale of shares of
Common Stock pursuant to options, warrants, stock purchase agreements or
convertible or exchangeable securities outstanding or in effect on the date
hereof and on the terms described in the final prospectus relating to the
public offering contemplated by the Underwriting Agreement; (B) the issuance,
grant or sale of options under an incentive stock option plan to purchase
shares of Common Stock in an aggregate amount not to exceed 166,000 shares;
(C) the issuance, grant or sale of options, rights or warrants to subscribe
for shares of Common Stock to a commercial lender in connection with a loan,
credit facility or other form of indebtedness; or (D) the issuance or sale of
shares of Common Stock in transactions involving acquisitions by the Company
or an affiliated physician organization of all or a portion of the assets or
equity ownership of unrelated business entities.
(i) Notwithstanding the foregoing, none of the provisions of this
Section 8 shall apply to any of the Warrants issued to the Representative
pursuant to the Representative's Warrant Agreement. All adjustments to the
exercise price of and the number and kind of securities covered by such
Warrants shall be exclusively as set forth in Section 8 of the
Representative's Warrant Agreement.
SECTION 9. REDEMPTION.
(a) Commencing on the Initial Warrant Redemption Date, the Company may,
on not less than 30 days' prior written notice, redeem all, but not less than
all, the Warrants at ten cents ($.10) per Warrant (subject to the same sorts
of adjustments as are set forth in Section 8 with respect to the Purchase
Price, predicated on a non-variable aggregate Redemption Price of $405,000),
provided, however, that before any such call for redemption of Warrants can
take place, the average closing bid price for the Common Stock as reported on
Nasdaq, if the Common Stock is then traded on Nasdaq, (or the closing sale
price, if the Common Stock is then traded on a national securities exchange)
shall have equaled or exceeded $18.00 per share for any twenty (20) trading
days within a period of thirty (30) consecutive trading days ending on the
fifth trading day prior to the date on which the notice to Registered Holders
contemplated hereby is given (subject to adjustment in the event of any stock
splits or other similar events as provided in Section 8 hereof).
(b) In case the Company shall exercise its right to redeem all of the
Warrants, it shall give or cause to be given notice to the Registered Holders
of the Warrants, by mailing to such Registered
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Holders a notice of redemption, first class, postage prepaid, at their last
address as shall appear on the records of the Warrant Agent. Any notice
mailed in the manner provided herein shall be conclusively presumed to have
been duly given whether or not the Registered Holder receives such notice.
Not less than five (5) business days prior to the mailing to the Registered
Holders of the Warrants of the notice of redemption, the Company shall
deliver or cause to be delivered to the Representative a similar notice
telephonically and confirmed in writing together with a list of the
Registered Holders (including their respective addresses and number of
Warrants beneficially owned) to whom such notice of redemption has been or
will be given.
(c) The notice of redemption shall specify (i) the Redemption Price,
(ii) the Redemption Date, which shall in no event be less than thirty (30)
days after the date of mailing of such notice, (iii) the place where the
Warrant Certificate shall be delivered and the Redemption Price shall be
paid, and (iv) that the right to exercise the Warrant shall terminate at 5:00
p.m. (New York time) on the business day immediately preceding the Redemption
Date. No failure to mail such notice nor any defect therein or in the
mailing thereof shall affect the validity of the proceedings for such
redemption except as to a holder (a) to whom notice was not mailed or (b)
whose notice was defective. An affidavit of the Warrant Agent or the
Secretary or Assistant Secretary of the Company that notice of redemption has
been mailed shall, in the absence of fraud, be prima facie evidence of the
facts stated therein.
(d) Any right to exercise a Warrant shall terminate at 5:00 p.m. (New
York time) on the business day immediately preceding the Redemption Date.
The Redemption Price payable to the Registered Holders shall be mailed to
such persons at their addresses of record.
SECTION 10. CONCERNING THE WARRANT AGENT.
(a) The Warrant Agent acts hereunder as agent and in a ministerial
capacity for the Company and its duties shall be determined solely by the
provisions hereof. The Warrant Agent shall not, by issuing and delivering
Warrant Certificates or by any other act hereunder, be deemed to make any
representations as to the validity or value or authorization of the Warrant
Certificates or the Warrants represented thereby or of any securities or
other property delivered upon exercise of any Warrant or whether any stock
issued upon exercise of any Warrant is fully paid and nonassessable.
(b) The Warrant Agent shall not at any time be under any duty or
responsibility to any holder of Warrant Certificates to make or cause to be
made any adjustment of the Purchase Price or the Redemption Price provided in
this Agreement, or to determine whether any fact exists which may require any
such adjustments, or with respect to the nature or extent of any such
adjustments, when made, or with respect to the method employed in making the
same. It shall not (i) be liable for any recital or statement of fact
contained herein or for any action taken, suffered or omitted by it in
reliance on any Warrant Certificate or other document or instrument believed
by it in good faith to be genuine and to have been signed or presented by the
proper party or parties, (ii) be responsible for any failure on the part of
the Company to comply with any of its covenants and obligations contained in
this Agreement or in any Warrant Certificate, or (iii) be liable for any act
or omission in connection with this Agreement except for its own negligence,
bad faith or willful misconduct.
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(c) The Warrant Agent may at any time consult with counsel satisfactory
to it (who may be counsel for the Company or for the Representative) and
shall incur no liability or responsibility for any action taken, suffered or
omitted by it in good faith in accordance with the opinion or advice of such
counsel.
(d) Any notice, statement, instruction, request, direction, order or
demand of the Company shall be sufficiently evidenced by an instrument signed
by the Chairman of the Board of Directors, Chief Executive Officer, President
or any Vice President (unless other evidence in respect thereof is herein
specifically prescribed). The Warrant Agent shall not be liable for any
action taken, suffered or omitted by it in accordance with such notice,
statement, instruction, request, direction, order or demand reasonably
believed by it to be genuine.
(e) The Company agrees to pay the Warrant Agent reasonable compensation
for its services hereunder and to reimburse it for its reasonable expenses
hereunder; the Company further agrees to indemnify the Warrant Agent and save
it harmless from and against any and all losses, expenses and liabilities,
including judgments, costs and counsel fees, for anything done or omitted by
the Warrant Agent in the execution of its duties and powers hereunder except
losses, expenses and liabilities arising as a result of the Warrant Agent's
negligence, bad faith or willful misconduct.
(f) The Warrant Agent may resign its duties and be discharged from all
further duties and liabilities hereunder (except liabilities arising as a
result of the Warrant Agent's own negligence, bad faith or willful
misconduct), after giving 30 days' prior written notice to the Company. At
least 15 days prior to the date such resignation is to become effective, the
Warrant Agent shall cause a copy of such notice of resignation to be mailed
to the Registered Holder of each Warrant Certificate at the Company's
expense. Upon such resignation, or any inability of the Warrant Agent to act
as such hereunder, the Company shall appoint in writing a new warrant agent.
If the Company shall fail to make such appointment within a period of 15 days
after it has been notified in writing of such resignation by the resigning
Warrant Agent, then the Registered Holder of any Warrant Certificate may
apply to any court of competent jurisdiction for the appointment of a new
warrant agent. Any new warrant agent, whether appointed by the Company or by
such a court, shall be a bank or trust company having a capital and surplus,
as shown by its last published report to its stockholders, of not less than
$100,000,000 or a stock transfer company. After acceptance in writing of
such appointment by the new warrant agent is received by the Company, such
new warrant agent shall be vested with the same powers, rights, duties and
responsibilities as if it had been originally named herein as the Warrant
Agent, without any further assurance, conveyance, act or deed; but if for any
reason it shall be necessary or expedient to execute and deliver any further
assurance, conveyance, act or deed, the same shall be done at the expense of
the Company and shall be legally and validly executed and delivered by the
resigning Warrant Agent. Not later than the effective date of any such
appointment the Company shall file notice thereof with the resigning Warrant
Agent and shall forthwith cause a copy of such notice to be mailed to the
Registered Holder of each Warrant Certificate.
(g) Any corporation into which the Warrant Agent or any new warrant
agent may be converted or merged, any corporation resulting from any
consolidation to which the Warrant Agent or any new warrant agent shall be a
party, or any corporation succeeding to the corporate trust business of the
Warrant Agent or any new warrant agent shall be a successor warrant agent
under this Agreement without any further act, provided that such corporation
is eligible for appointment as
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successor to the Warrant Agent under the provisions of the preceding
paragraph. Any such successor warrant agent shall promptly cause notice of
its succession as warrant agent to be mailed to the Company and to the
Registered Holders of each Warrant Certificate.
(h) The Warrant Agent, its subsidiaries and affiliates, and any of its
or their officers or directors, may buy and hold or sell Warrants or other
securities of the Company and otherwise deal with the Company in the same
manner and to the same extent and with like effect as though it were not
Warrant Agent. Nothing herein shall preclude the Warrant Agent from acting in
any other capacity for the Company or for any other legal entity.
(i) The Warrant Agent shall retain for a period of two years from the
date of exercise any Warrant Certificate received by it upon such exercise.
SECTION 11. MODIFICATION OF AGREEMENT.
The Warrant Agent and the Company may by supplemental agreement make any
changes or corrections in this Agreement (i) that they shall deem appropriate
to cure any ambiguity or to correct any defective or inconsistent provision
or manifest mistake or error herein contained; or (ii) that they may deem
necessary or desirable and which shall not adversely affect the interests of
the holders of Warrant Certificates; provided, however, that this Agreement
shall not otherwise be modified, supplemented or altered in any respect
except with the consent in writing of the Registered Holders representing not
less than 66-2/3% of the Warrants then outstanding; provided, further, that
no change in the number or nature of the securities purchasable upon the
exercise of any Warrant, or to increase the Purchase Price therefor or to
accelerate the Warrant Expiration Date, shall be made without the consent in
writing of the Registered Holder of the Warrant Certificate representing such
Warrant, other than such changes as are presently specifically prescribed by
this Agreement as originally executed. In addition, this Agreement may not
be modified, amended or supplemented without the prior written consent of the
Representative, other than to cure any ambiguity or to correct any provision
which is inconsistent with any other provision of this Agreement or to make
any such change that is necessary or desirable and which shall not adversely
affect the interests of the Representative and except as may be required by
law.
SECTION 12. NOTICES.
All notices, requests, consents and other communications hereunder shall
be in writing and shall be deemed to have been made when delivered or mailed
first-class registered or certified mail, postage prepaid, as follows: if to
the Registered Holder of a Warrant Certificate, at the address of such holder
as shown on the registry books maintained by the Warrant Agent; if to the
Company, at 515 S. Flower Street, Suite 1640, Los Angeles, California 90071,
Attention: Jacob Y. Terner, M.D., Chief Executive Officer, or at such other
address as may have been furnished to the Warrant Agent in writing by the
Company; and if to the Warrant Agent, at the Corporate Office. Copies of any
notice delivered pursuant to this Agreement shall also be delivered to
Security Capital Trading, Inc., ________________________, New York, New York,
_____________________, Attention: General Counsel, or at such other address
as may have been furnished to the Company and the Warrant Agent in writing.
15
<PAGE>
SECTION 13. GOVERNING LAW.
This Agreement shall be governed by and construed in accordance with the
laws of the State of New York without giving effect to conflicts of laws.
SECTION 14. BINDING EFFECT.
This Agreement shall be binding upon and inure to the benefit of the
Company, the Representative, the Warrant Agent and their respective
successors and assigns and the holders from time to time of Warrant
Certificates or any of them. Nothing in this Agreement is intended or shall
be construed to confer upon any other person any right, remedy or claim, at
equity or in law, or to impose upon any other person any duty, liability or
obligation.
SECTION 15. TERMINATION.
This Agreement shall terminate at the close of business on the Warrant
Expiration Date or such earlier date upon which all Warrants have been
exercised or redeemed, except that the Warrant Agent shall account to the
Company for cash held by it and the provisions of Section 10 hereof shall
survive such termination.
SECTION 16. COUNTERPARTS.
This Agreement may be executed in several counterparts, which taken
together shall constitute a single document.
[CONTINUES ON NEXT PAGE]
16
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
[SEAL]
PROSPECT MEDICAL HOLDINGS, INC.
By: ________________________________
Name:
Title:
Attest:
By: ______________________________
Name:
Title:
AMERICAN STOCK TRANSFER AND
TRUST COMPANY, as Warrant Agent
By: ________________________________
Name:
Title:
17
<PAGE>
EXHIBIT A
---------
VOID AFTER _________, 2003
WARRANTS
CERTIFICATE OF
REDEEMABLE WARRANT TO
PURCHASE ONE SHARE OF COMMON STOCK
PROSPECT MEDICAL HOLDINGS, INC.
CUSIP ______
THIS CERTIFIES THAT, FOR VALUE RECEIVED, _____________________________
or registered assigns (the "Registered Holder") is the owner of the number of
Redeemable Warrants (the "Warrants") specified above. Each Warrant initially
entitles the Registered Holder to purchase, subject to the terms and
conditions set forth in this Certificate and the Warrant Agreement (as
hereinafter defined), one fully paid and nonassessable share of Common Stock,
$.01 par value, of Prospect Medical Holdings, Inc., a Delaware corporation
(the "Company"), at any time between _______________, 1999 (the "Initial
Warrant Exercise Date"), and the Expiration Date (as hereinafter defined)
upon the presentation and surrender of this Warrant Certificate with the
Subscription Form on the reverse hereof duly executed, at the corporate
office of American Stock Transfer and Trust Company, as Warrant Agent, or its
successor (the "Warrant Agent"), accompanied by payment of $8.40 (the
"Purchase Price"), subject to adjustment as provided in Section 8 of the
Warrant Agreement, in lawful money of the United States of America in cash or
by check made payable to the Warrant Agent for the account of the Company.
This Warrant Certificate and each Warrant represented hereby are issued
pursuant to and are subject in all respects to the terms and conditions set
forth in the Warrant Agreement (the "Warrant Agreement"), dated
_________________, 1998 [date of the Prospectus], between the Company and the
Warrant Agent.
In the event of certain contingencies provided for in the Warrant
Agreement, the Purchase Price and the number of shares of Common Stock
subject to purchase upon the exercise of each Warrant represented hereby are
subject to modification or adjustment.
Each Warrant represented hereby is exercisable at the option of the
Registered Holder, but no fractional interests will be issued. In the case
of the exercise of less than all the Warrants represented hereby, the Company
shall cancel this Warrant Certificate upon the surrender hereof and shall
execute and deliver a new Warrant Certificate or Warrant Certificates of like
tenor, which the Warrant Agent shall countersign, for the balance of such
Warrants.
<PAGE>
The term "Expiration Date" shall mean 5:00 p.m. (New York time) on the
date which is immediately preceding the fourth anniversary of the Initial
Warrant Exercise Date. If each such date shall in the State of New York be a
holiday or a day on which the banks are authorized to close, then the
Expiration Date shall mean 5:00 p.m. (New York time) on the next following
day which in the State of New York is not a holiday or a day on which banks
are authorized to close.
The Company shall not be obligated to deliver any securities pursuant to
the exercise of this Warrant unless a registration statement under the
Securities Act of 1933, as amended (the "Act"), with respect to such
securities is effective or an exemption thereunder is available. The Company
has covenanted and agreed that, to the extent required by applicable federal
securities laws, it will file a registration statement under the Federal
securities laws or a post-effective amendment to a then effective
registration statement, use its reasonable best efforts to cause such filed
registration statement to become effective and to keep any such effective
registration statement current while any of the Warrants are outstanding, and
deliver a prospectus which complies with Section 10(a)(3) of the Act to the
Registered Holder exercising this Warrant. This Warrant shall not be
exercisable by a Registered Holder in any state where such exercise would be
unlawful.
This Warrant Certificate is exchangeable, upon the surrender hereof by
the Registered Holder at the Corporate Office of the Warrant Agent, for a new
Warrant Certificate or Warrant Certificates of like tenor representing an
equal aggregate number of Warrants, each of such new Warrant Certificates to
represent such number of Warrants as shall be designated by such Registered
Holder at the time of such surrender. Upon due presentment and payment of
any tax or other charge imposed in connection therewith or incident thereto,
for registration of transfer of this Warrant Certificate at such office, a
new Warrant Certificate or Warrant Certificates representing an equal
aggregate number of Warrants will be issued to the transferee in exchange
therefor, subject to the limitations provided in the Warrant Agreement.
Prior to the exercise of any Warrant represented hereby, the Registered
Holder shall not be entitled to any rights of a stockholder of the Company,
including, without limitation, the right to vote or to receive dividends or
other distributions, and shall not be entitled to receive any notice of any
proceedings of the Company, except as provided in the Warrant Agreement.
Subject to the provisions of the Warrant Agreement, this Warrant may be
redeemed at the option of the Company, at a redemption price of $0.10 per
Warrant (subject to adjustment as provided in the Warrant Agreement), at any
time commencing after ______________, 1999
[the first anniversary of the effective date of the Registration Statement],
provided that the average closing bid price for the Common Stock as reported
by Nasdaq (or the closing sale price, if the Common Stock is then traded on a
national securities exchange), shall have equaled or exceeded $18.00 per
share for any twenty (20) trading days within a period of thirty (30)
consecutive trading days ending on the fifth trading day prior to the Notice
of Redemption, as defined below (subject to adjustment in the event of any
stock splits or other similar events). Notice of redemption (the "Notice of
Redemption") shall be given not later than the thirtieth day before the date
fixed for redemption, all as provided in the Warrant Agreement. On and after
the date fixed for redemption, the Registered Holder shall have no rights
with respect to the Warrants except to receive the redemption price upon
surrender of this Warrant Certificate.
2
<PAGE>
Prior to due presentment for registration of transfer hereof, the
Company and the Warrant Agent may deem and treat the Registered Holder as the
absolute owner hereof and of each Warrant represented hereby (notwithstanding
any notations of ownership or writing hereon made by anyone other than a duly
authorized officer of the Company or the Warrant Agent) for all purposes and
shall not be affected by any notice to the contrary, except as provided in
the Warrant Agreement.
This Warrant Certificate shall be governed by and construed in
accordance with the laws of the State of New York without giving effect to
conflicts of laws.
This Warrant Certificate is not valid unless countersigned by the
Warrant Agent.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed, manually or in facsimile by two of its officers thereunto
duly authorized and a facsimile of its corporate seal to be imprinted hereon.
Dated: ________________________
PROSPECT MEDICAL HOLDINGS, INC.
[SEAL]
By: ______________________________
Name:
Title:
By: ______________________________
Secretary
COUNTERSIGNED:
AMERICAN STOCK TRANSFER AND
TRUST COMPANY, as Warrant Agent
By: ______________________________
Authorized Officer
3
<PAGE>
SUBSCRIPTION FORM
-----------------
To Be Executed by the Registered Holder
in Order to Exercise Warrants
The undersigned Registered Holder hereby irrevocably elects to exercise
____________ Warrants represented by this Warrant Certificate, and to
purchase the securities issuable upon the exercise of such Warrants, and
requests that certificates for such securities shall be issued in the name of:
________________________________________
________________________________________
________________________________________
(please insert social security
or other identifying number)
and be delivered to
________________________________________
________________________________________
________________________________________
(please print or type name and address) and if such number of Warrants shall
not be all the Warrants evidenced by this Warrant Certificate, that a new
Warrant Certificate for the balance of such Warrants be registered in the
name of, and delivered to, the Registered Holder at the address stated below.
Dated:_________________
________________________________________
________________________________________
________________________________________
Address
________________________________________
Social Security or Taxpayer
Identification Number
________________________________________
Signature Guaranteed
<PAGE>
ASSIGNMENT
----------
To Be Executed by the Registered Holder
in Order to Assign Warrants
FOR VALUE RECEIVED, _____________________ , hereby sells, assigns and
transfers unto
________________________________________
________________________________________
________________________________________
________________________________________
(please print or type name and address
and insert social security or
other identifying number)
_______________________ of the Warrants represented by this Warrant Certificate,
and hereby irrevocably constitutes and appoints ___________________________
Attorney to transfer this Warrant Certificate on the books of the Company, with
full power of substitution in the premises.
Dated: _______________ ________________________________
Signature Guaranteed
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO
THE NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER AND
MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS,
SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE
17Ad-15.
<PAGE>
EXHIBIT 4.3
PROSPECT MEDICAL HOLDINGS, INC.
AND
SECURITY CAPITAL TRADING, INC.
REPRESENTATIVE'S
WARRANT AGREEMENT
Dated as of _______________, 1998
<PAGE>
REPRESENTATIVE'S WARRANT AGREEMENT dated as of _______________, 1998
between PROSPECT MEDICAL HOLDINGS, INC., a Delaware corporation (the
"Company"), and SECURITY CAPITAL TRADING, INC. (hereinafter referred to
variously as the "Holder" or "Holders" or the "Representative").
W I T N E S S E T H:
WHEREAS, the Company proposes to issue to the Representative warrants
("Warrants") to purchase up to an aggregate of 300,000 shares of Common
Stock, $0.01 par value, of the Company and/or 300,000 redeemable Common Stock
purchase warrants of the Company ("Redeemable Warrants"), each Redeemable
Warrant to purchase one additional share of Common Stock; and
WHEREAS, the Representative has agreed pursuant to the underwriting
agreement (the "Underwriting Agreement") dated as of the date hereof between
the Company and the several Underwriters listed therein to act as the
Representative in connection with the Company's proposed public offering of
up to 3,000,000 shares of Common Stock and 3,000,000 Redeemable Warrants (the
"Public Warrants") at a public offering price of $_____ per share of Common
Stock and $______ per Redeemable Warrant (the "Public Offering"); and
WHEREAS, the Warrants to be issued pursuant to this Agreement will be
issued on the Closing Date (as such term is defined in the Underwriting
Agreement) by the Company to the Representative in consideration for, and as
part of the Representative's compensation in connection with, the
Representative acting as the Representative pursuant to the Underwriting
Agreement;
NOW, THEREFORE, in consideration of the premises, the payment by the
Representative to the Company of an aggregate of thirty dollars ($30.00),
the agreements herein set forth and other good and valuable consideration,
hereby acknowledged, the parties hereto agree as follows:
1. GRANT. The Representative (or its designees) is hereby granted the
right to purchase, at any time from _______________, 1999 [one year after date
of this Agreement], until 5:30 P.M., New York time, on ___________, 2003 [five
years after date of this Agreement], up to an aggregate of 300,000 shares of
Common Stock and/or 300,000 Redeemable Warrants at an initial exercise price
(subject to adjustment as provided in Section 8 hereof) of $_____ per share of
Common Stock [120% of initial public offering price per share of Common Stock],
and $_____ per Redeemable Warrant [120% of initial public offering price per
Redeemable Warrant], subject to the terms and conditions of this Agreement. One
Redeemable Warrant is exercisable to purchase one additional share of Common
Stock at an initial exercise price of $_____ [140% of initial public offering
price per share of the Common Stock] from ______________, 1999 [one year after
date of this Agreement] until 5:30 p.m. New York time on ____________, 2003[5
years after date of this Agreement], at which time the Redeemable Warrants
shall expire. Except as set forth herein, the shares of Common Stock and the
Redeemable Warrants issuable upon exercise of the Warrants are in all respects
identical to the shares of Common Stock and the Public Warrants being purchased
by the Underwriters for resale to the public pursuant to the terms and
provisions of the Underwriting Agreement. The shares of Common Stock and the
Redeemable Warrants issuable upon exercise of the Warrants are sometimes
hereinafter referred to collectively as the "Securities."
<PAGE>
2. WARRANT CERTIFICATES. The warrant certificates (the "Warrant
Certificates") delivered and to be delivered pursuant to this Agreement shall
be in the form set forth in Exhibit A, attached hereto and made a part
hereof, with such appropriate insertions, omissions, substitutions, and other
variations as required or permitted by this Agreement.
3. EXERCISE OF WARRANT.
3.1 METHOD OF EXERCISE. The Warrants initially are exercisable at
an initial exercise price per share of Common Stock and per Redeemable
Warrant set forth in Section 6 hereof payable by certified or official bank
check in New York Clearing House funds, subject to adjustment as provided in
Section 8 hereof. Upon surrender of a Warrant Certificate with the annexed
Form of Election to Purchase Pursuant to Section 3.1 duly executed, together
with payment of the Exercise Price (as hereinafter defined) for the shares of
Common Stock and/or the Redeemable Warrants to be purchased at the Company's
principal executive offices in California (presently located at 515 South
Flower Street, Suite 1640, Los Angeles, California 90071) the registered
holder of a Warrant Certificate ("Holder" or "Holders") shall be entitled to
receive a certificate or certificates for the shares of Common Stock so
purchased and a certificate or certificates for the Redeemable Warrants so
purchased. The purchase rights represented by each Warrant Certificate are
exercisable at the option of the Holder thereof, in whole or in part (but not
as to fractional shares of the Common Stock and Redeemable Warrants
underlying the Warrants). In the event the Company redeems all of the Public
Warrants, then the Warrants may only be exercised if such exercise is
accompanied by the simultaneous exercise of the Redeemable Warrant(s)
underlying the Warrants being so exercised. Warrants may be exercised to
purchase all or part of the shares of Common Stock together with an equal or
unequal number of the Redeemable Warrants represented thereby. In the case of
the purchase of less than all the shares of Common Stock and/or the
Redeemable Warrants purchasable under any Warrant Certificate, the Company
shall cancel said Warrant Certificate upon the surrender thereof and shall
execute and deliver a new Warrant Certificate of like tenor for the balance
of the shares of Common Stock and Redeemable Warrants purchasable thereunder.
3.2 EXERCISE BY SURRENDER OF WARRANT. In addition to the method of
payment set forth in Section 3.1 and in lieu of any cash payment required
thereunder, the Holder(s) of the Warrants shall have the right at any time
and from time to time to exercise the Warrants in full or in part by
surrendering the Warrant Certificate in the manner specified in Section 3.1
hereof. The number of shares of Common Stock to be issued pursuant to this
Section 3.2 shall be equal to the difference between (a) the number of shares
of Common Stock in respect of which the Warrants are exercised and (b) a
fraction, the numerator of which shall be the number of shares of Common
Stock in respect of which the Warrants are exercised multiplied by the
Exercise Price and the denominator of which shall be the Market Price (as
defined in Section 3.3 hereof) of the shares of Common Stock. The number of
Redeemable Warrants to be issued pursuant to this Section 3.2 shall be equal
to the difference between (a) the number of Redeemable Warrants in respect of
which the Warrants are exercised and (b) a fraction, the numerator of which
shall be the number of Redeemable Warrants in respect of which the Warrants
are exercised multiplied by the Exercise Price and the denominator of which
shall be the Market Price (as defined in Section 3.3 hereof) of the
Redeemable Warrants. Solely for the purposes of this paragraph, Market Price
shall be calculated either (i) on the date on which the Form of Election To
Purchase Pursuant to Section 3.2 annexed to the Warrant Certificate is deemed
to have been sent to the Company pursuant to Section 14 hereof ("Notice
Date") or (ii)
2
<PAGE>
as the average of the Market Prices for each of the five trading days
preceding the Notice Date, whichever of (i) or (ii) is greater.
3.3 DEFINITION OF MARKET PRICE. As used herein, the phrase
"Market Price" at any date shall be deemed to be (i) when referring to the
Common Stock, the last reported sale price, or, in case no such reported sale
takes place on such day, the average of the last reported sale prices for the
last three trading days, in either case as officially reported by the
principal securities exchange on which the Common Stock is listed or admitted
to trading or by the Nasdaq SmallCap Market or the Nasdaq National Market (in
either case, "Nasdaq") or, if the Common Stock is not listed or admitted to
trading on any national securities exchange or quoted by Nasdaq, the average
closing bid price as furnished by the National Association of Securities
Dealers, Inc. ("NASD") through Nasdaq or a similar organization if Nasdaq is
no longer reporting such information, or if none of the foregoing conditions
applies, as determined in good faith (using customary valuation methods) by
resolution of the members of the Board of Directors of the Company, based on
the best information available to it, or (ii) when referring to a Redeemable
Warrant, the last reported sales price, or, in the case no such reported sale
takes place on such day, the average of the last reported sale prices for the
last three trading days, in either case as officially reported by the
principal securities exchange on which the Redeemable Warrants are listed or
admitted to trading or by Nasdaq, or, if the Redeemable Warrants are not
listed or admitted to trading on any national securities exchange or quoted
by Nasdaq, the average closing bid price as furnished by the NASD through
Nasdaq or a similar organization if Nasdaq is no longer reporting such
information, or if none of the foregoing conditions applies, the Market Price
of a Redeemable Warrant shall equal the difference between the Market Price
of the Common Stock and the Exercise Price of the Redeemable Warrant.
4. ISSUANCE OF CERTIFICATES. Upon the exercise of the Warrants, the
issuance of certificates for shares of Common Stock and Redeemable Warrants
and/or other securities, properties or rights underlying such Warrants and,
upon the exercise of the Redeemable Warrants, the issuance of certificates
for shares of Common Stock and/or other securities, properties or rights
underlying such Redeemable Warrants, shall be made forthwith (and in any
event within five business days thereafter) without charge to the Holder
thereof including, without limitation, any tax which may be payable in
respect of the issuance thereof, and such certificates shall (subject to the
provisions of Sections 5 and 7 hereof) be issued in the name of, or in such
names as may be directed by, the Holder thereof; provided, however, that the
Company shall not be required to pay any tax which may be payable in respect
of any transfer involved in the issuance and delivery of any such
certificates in a name other than that of the Holder, and the Company shall
not be required to issue or deliver such certificates unless or until the
person or persons requesting the issuance thereof shall have paid to the
Company the amount of such tax or shall have established to the satisfaction
of the Company that such tax has been paid.
The Warrant Certificates and the certificates representing the
shares of Common Stock and the Redeemable Warrants underlying the Warrants
and the shares of Common Stock underlying the Redeemable Warrants (and/or
other securities, property or rights issuable upon the exercise of the
Warrants or the Redeemable Warrants) shall be executed on behalf of the
Company by the manual or facsimile signature of the then Chairman or Vice
Chairman of the Board of Directors or President or Vice President of the
Company. Warrant Certificates shall be dated the date of execution by the
Company upon initial issuance, division, exchange, substitution or transfer.
3
<PAGE>
Certificates representing the shares of Common Stock and Redeemable Warrants,
and the shares of Common Stock underlying each Redeemable Warrant (and/or
other securities, property or rights issuable upon exercise of the Warrants)
shall be dated as of the Notice Date (regardless of when executed or
delivered) and dividend-bearing securities so issued shall accrue dividends
from the Notice Date.
5. RESTRICTION ON TRANSFER OF WARRANTS. The Holder of a Warrant
Certificate, by its acceptance thereof, covenants and agrees that the
Warrants are being acquired as an investment and not with a view to the
distribution thereof; that the Warrants may not be sold, transferred,
assigned, hypothecated or otherwise disposed of, in whole or in part, for a
period of one year from the date hereof, except to officers of the
Representative.
6. EXERCISE PRICE.
6.1 INITIAL AND ADJUSTED EXERCISE PRICE. Except as otherwise
provided in Section 8 hereof, the initial exercise price of each Warrant
shall be $______ per share of Common Stock [120% of the initial public
offering price of the Common Stock] and $_____ per Redeemable Warrant
[120% of the initial public offering price of the Redeemable Warrants]. The
adjusted exercise price shall be the price which shall result from time to
time from any and all adjustments of the initial exercise price in accordance
with the provisions of Section 8 hereof. Any transfer of a Warrant shall
constitute an automatic transfer and assignment of the registration rights
set forth in Section 7 hereof with respect to the Securities or other
securities, properties or rights underlying the Warrants.
6.2 EXERCISE PRICE. The term "Exercise Price" herein shall mean
the initial exercise price or the adjusted exercise price, depending upon the
context or unless otherwise specified.
7. REGISTRATION RIGHTS.
7.1 REGISTRATION UNDER THE SECURITIES ACT OF 1933. The Warrants,
the shares of Common Stock and Redeemable Warrants, or other securities
issuable upon exercise of the Warrants, and the shares of Common Stock or
other securities issuable upon exercise of the Redeemable Warrants
(collectively, the "Warrant Securities") have been registered under the
Securities Act of 1933, as amended (the "Act") pursuant to the Company's
Registration Statement on Form S-1 (Registration No. 333- ) (the
"Registration Statement"). All of the representations and warranties of the
Company contained in the Underwriting Agreement relating to the Registration
Statement, the Preliminary Prospectus and Prospectus (as such terms are
defined in the Underwriting Agreement) and made as of the dates provided
therein, are incorporated by reference herein. The Company agrees and
covenants promptly to file post-effective amendments to such Registration
Statement as may be necessary in order to maintain its effectiveness and
otherwise to take such action as may be necessary to maintain the
effectiveness of the Registration Statement as long as any Warrants are
outstanding. In the event that, for any reason, whatsoever, the Company shall
fail to maintain the effectiveness of the Registration Statement, the
certificates representing the Warrant Securities shall bear the following
legend:
The securities represented by this certificate have not been registered
4
<PAGE>
under the Securities Act of 1933, as amended ("Act"), and may not be
offered or sold except pursuant to (i) an effective registration
statement under the Act, (ii) to the extent applicable, Rule 144 under
the Act (or any similar rule under such Act relating to the disposition
of securities), or (iii) an opinion of counsel, if such opinion
shall be reasonably satisfactory to counsel to the issuer, that an
exemption from registration under such Act is available.
7.2 PIGGYBACK REGISTRATION. If, at any time commencing after the
date hereof and expiring seven years thereafter, the Company proposes to
register any of its securities under the Act (other than pursuant to Form
S-4, Form S-8 or a comparable registration statement), the Company will give
written notice by registered mail, at least 30 days prior to the filing of
each such registration statement, to the Representative and to all other
Holders of the Warrants and/or Warrant Securities of its intention to do so.
If the Representative or other Holders of the Warrants and/or Warrant
Securities notify the Company within 20 business days after receipt of any
such notice of its or their desire to include any such Warrant Securities in
such proposed registration statement, the Company shall afford the
Representative and such Holders of the Warrants and/or Warrant Securities the
opportunity to have any such Warrant Securities registered under such
registration statement, unless and to the extent that the managing
underwriter, if any, of the offering covered by such registration statement
determines that the inclusion of such securities therein would impair the
success of said offering.
Notwithstanding the provisions of this Section 7.2, the Company
shall (i) have the right at any time after it shall have given written notice
pursuant to this Section 7.2 (irrespective of whether a written request for
inclusion of any such securities shall have been made) to elect not to file
any such proposed registration statement, or to withdraw the same after the
filing but prior to the effective date thereof, and (ii) have no obligation
pursuant to this Section 7.2 to the extent that, at the time the registration
statement is proposed to be filed, the holders of such securities may freely
sell such securities pursuant to the Rules and Regulations.
7.3 DEMAND REGISTRATION.
(a) At any time commencing after the date hereof and expiring
five years thereafter, the Holders of the Warrants and/or Warrant Securities
representing a "Majority" (as hereinafter defined) of such securities
(assuming the exercise of all of the Warrants) shall have the right (which
right is in addition to the registration rights under Section 7.2 hereof),
exercisable by written notice to the Company, to have the Company prepare and
file with the Securities and Exchange Commission (the "Commission"), on one
occasion, a registration statement and such other documents, including a
prospectus, as may be necessary in the opinion of both counsel for the
Company and counsel for the Representative and Holders, in order to comply
with the provisions of the Act, so as to permit a public offering and sale of
their respective Warrant Securities for six consecutive months by such
Holders and any other Holders of the Warrants and/or Warrant Securities who
notify the Company within ten days after receiving notice from the Company of
such request.
(b) The Company covenants and agrees to give written notice of
any
5
<PAGE>
registration request under this Section 7.3 by any Holder or Holders to all
other registered Holders of the Warrants and the Warrant Securities within
ten days from the date of the receipt of any such registration request.
(c) Notwithstanding anything to the contrary contained herein,
if the Company shall not have filed a registration statement for the Warrant
Securities within the time period specified in Section 7.4(a) hereof pursuant
to the written notice specified in Section 7.3(a) of a Majority of the
Holders of the Warrants and/or Warrant Securities, the Company may, at its
option, upon the written notice of election of a Majority of the Holders of
the Warrants and/or Warrant Securities requesting such registration,
repurchase (i) any and all Warrant Securities of such Holders at the higher
of the Market Price per share of Common Stock and per Redeemable Warrant,
determined as of (x) the date of the notice sent pursuant to Section 7.3(a)
or (y) the expiration of the period specified in Section 7.4(a) and (ii) any
and all Warrants of such Holders at such Market Price less the Exercise Price
of such Warrant. Such repurchase shall be in immediately available funds and
shall close within two (2) days after the later of (i) the expiration of the
period specified in Section 7.4(a) or (ii) the delivery of the written notice
of election specified in this Section 7.3(c).
7.4 COVENANTS OF THE COMPANY WITH RESPECT TO REGISTRATION. In
connection with any registration under Section 7.2 or 7.3 hereof, the Company
covenants and agrees as follows:
(a) The Company shall use its best efforts to file a
registration statement within 90 days of receipt of a demand therefor
pursuant to Section 7.3 hereof, shall use its reasonable best efforts to have
any registration statements declared effective at the earliest practicable
time, and shall furnish each Holder desiring to sell Warrant Securities such
number of prospectuses as shall reasonably be requested.
(b) The Company shall pay all costs (excluding fees and
expenses of Holder(s)' counsel and any underwriting or selling commissions),
fees and expenses in connection with all registration statements filed
pursuant to Sections 7.2 and 7.3(a) hereof including, without limitation, the
Company's legal and accounting fees, printing expenses and blue sky fees and
expenses.
(c) The Company will take all necessary action which may be
required in qualifying or registering the Warrant Securities included in a
registration statement for offering and sale under the securities or blue sky
laws of such states as reasonably are requested by the Holder(s), provided
that the Company shall not be obligated to execute or file any general
consent to service of process or to qualify as a foreign corporation to do
business under the laws of any such jurisdiction.
(d) The Company shall indemnify the Holder(s) of the Warrant
Securities to be sold pursuant to any registration statement hereunder and
each person, if any, who controls such Holders within the meaning of Section
15 of the Act or Section 20(a) of the Securities Exchange Act of 1934, as
amended ("Exchange Act"), against all loss, claim, damage, expense or
liability (including all expenses reasonably incurred in investigating,
preparing or defending against any claim whatsoever) to which any of them may
become subject under the Act, the Exchange Act or otherwise, arising from
such registration statement but only to the same extent and with the same
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<PAGE>
effect as the provisions pursuant to which the Company has agreed to
indemnify each of the Underwriters contained in Section 7 of the Underwriting
Agreement.
(e) The Holder(s) of the Warrant Securities to be sold
pursuant to a registration statement hereunder, and their successors and
assigns, shall severally, and not jointly, indemnify the Company, its
officers and directors and each person, if any, who controls the Company
within the meaning of Section 15 of the Act or Section 20(a) of the Exchange
Act, against all loss, claim, damage, expense or liability (including all
expenses reasonably incurred in investigating, preparing or defending against
any claim whatsoever) to which they may become subject under the Act, the
Exchange Act or otherwise, arising from information furnished by or on behalf
of such Holders, or their successors or assigns, for specific inclusion in
such registration statement to the same extent and with the same effect as
the provisions contained in Section 7 of the Underwriting Agreement pursuant
to which the Underwriters have agreed to indemnify the Company.
(f) Nothing contained in this Agreement shall be construed as
requiring the Holder(s) to exercise their Warrants prior to the initial
filing of any registration statement or the effectiveness thereof.
(g) The Company shall not permit the inclusion of any
securities other than the Warrant Securities to be included in any
registration statement filed pursuant to Section 7.3 hereof, or permit any
other registration statement to be filed during the effectiveness of a
registration statement filed pursuant to Section 7.3 hereof (other than
registrations on Form S-4 or S-8), without the prior written consent of the
Holders of the Warrants and Warrant Securities representing a Majority of
such securities covered by such registration statement.
(h) The Company shall furnish to each Holder participating in
an offering covered by a registration statement hereunder and to each
underwriter, if any, a signed counterpart, addressed to such Holder or
underwriter, of (i) an opinion of counsel to the Company, dated the effective
date of such registration statement (and, if such registration relates to an
underwritten public offering, an opinion dated the date of the closing under
the underwriting agreement) relating to the due incorporation of the Company,
the validity of the shares being sold and the due execution and delivery by
the Company of the underwriting agreement, if any, and (ii) a "cold comfort"
letter dated the effective date of such registration statement (and, if such
registration relates to an underwritten public offering, a letter dated the
date of the closing under the underwriting agreement) signed by the
independent public accountants who have issued a report on the Company's
financial statements included in such registration statement, covering
substantially the same matters with respect to such registration statement
(and the prospectus included therein) and, with respect to events subsequent
to the date of such financial statements, as are customarily covered in
accountants' "cold comfort" letters delivered to underwriters in underwritten
public offerings of securities.
(i) The Company shall as soon as practicable, and in any event
within 15 months after the effective date of the registration statement, make
"generally available to its security holders" (within the meaning of Rule 158
under the Act) an earnings statement (which need not be audited) complying
with Section 11(a) of the Act and covering a period of at least 12
consecutive months beginning after the effective date of the registration
statement.
7
<PAGE>
(j) The Company shall deliver promptly to each Holder
participating in the offering requesting the correspondence and memoranda
described below and to the managing underwriters, copies of all
correspondence between the Commission and the Company, its counsel or
auditors and all Company-prepared memoranda relating to discussions with the
Commission or its staff with respect to the registration statement and permit
each Holder and underwriter to do such investigation, upon reasonable advance
notice, with respect to information contained in or omitted from the
registration statement as it deems reasonably necessary to comply with
applicable securities laws or rules of the NASD. Such investigation shall
include access to books, records and properties and opportunities to discuss
the business of the Company with its officers and independent auditors, all
to such reasonable extent and at such reasonable times and as often as any
such Holder or underwriter shall reasonably request.
(k) The Company shall enter into an underwriting agreement
with the managing underwriters selected for such underwriting by Holders
holding a Majority of the Warrant Securities requested pursuant to Section
7.3(a) to be included in such underwriting, which may be the Representative.
Such agreement shall be satisfactory in form and substance to the Company,
each Holder and such managing underwriter(s), and shall contain such
representations, warranties and covenants by the Company and such other terms
as are customarily contained in agreements of that type used by the managing
underwriter(s). The Holders shall be parties to any underwriting agreement
relating to an underwritten sale of their Warrant Securities whether pursuant
to Section 7.2 or Section 7.3(a) and may, at their option, require that any
or all of the representations, warranties and covenants of the Company to or
for the benefit of such underwriter(s) shall also be made to and for the
benefit of such Holders. Such Holders shall not be required to make any
representations or warranties to or agreements with the Company or the
underwriter(s) except as they may relate to such Holders and their intended
methods of distribution, or as otherwise provided for herein.
(l) For purposes of this Agreement, the term "Majority" in
reference to the Holders of Warrants or Warrant Securities, shall mean in
excess of 50% of the then outstanding Warrants or Warrant Securities that (i)
are not held by the Company, an affiliate, officer, creditor, employee or
agent thereof or any of their respective affiliates, members of their family,
persons acting as nominees therefor or in conjunction therewith and (ii) have
not been resold to the public pursuant to a registration statement filed with
the Commission under the Act.
8. ADJUSTMENTS TO EXERCISE PRICE AND NUMBER OF SECURITIES.
8.1 SUBDIVISION AND COMBINATION. In case the Company shall at any
time subdivide or combine the outstanding shares of Common Stock, the
Exercise Price shall forthwith be proportionately decreased in the case of
subdivision or increased in the case of combination.
8.2 STOCK DIVIDENDS AND DISTRIBUTIONS. In case the Company shall
pay a dividend in, or make a distribution of, shares of Common Stock or of
the Company's capital stock convertible into Common Stock, the Exercise Price
shall forthwith be proportionately decreased. An adjustment made pursuant to
this Section 8.2 shall be made as of the record date for the subject stock
dividend or distribution.
8.3 ADJUSTMENT IN NUMBER OF SECURITIES. Upon each adjustment of
the Exercise
8
<PAGE>
Price pursuant to the provisions of this Section 8, the number of Warrant
Securities issuable upon the exercise at the adjusted exercise price of each
Warrant shall be adjusted to the nearest full amount by multiplying a number
equal to the Exercise Price in effect immediately prior to such adjustment by
the number of Warrant Securities issuable upon exercise of the Warrants
immediately prior to such adjustment and dividing the product so obtained by
the adjusted Exercise Price.
8.4 DEFINITION OF COMMON STOCK. For the purpose of this Agreement,
the term "Common Stock" shall mean (i) the class of stock designated as
Common Stock in the Certificate of Incorporation of the Company as may be
amended as of the date hereof, or (ii) any other class of stock resulting
from successive changes or reclassifications of such Common Stock consisting
solely of changes in par value, or from par value to no par value, or from no
par value to par value.
8.5 MERGER OR CONSOLIDATION. In case of any consolidation of the
Company with, or merger of the Company with, or merger of the Company into,
another corporation (other than a consolidation or merger which does not
result in any reclassification or change of the outstanding Common Stock),
the corporation formed by such consolidation or merger shall execute and
deliver to the Holder a supplemental warrant agreement providing that the
holder of each Warrant then outstanding or to be outstanding shall have the
right thereafter (until the expiration of such Warrant) to receive, upon
exercise of such Warrant, the kind and amount of shares of stock and other
securities and property receivable upon such consolidation or merger, by a
holder of the number of securities of the Company for which such Warrant
might have been exercised immediately prior to such consolidation or merger.
Such supplemental warrant agreement shall provide for adjustments which shall
be identical to the adjustments provided in Section 8. The above provision of
this subsection shall similarly apply to successive consolidations or
mergers.
8.6 NO ADJUSTMENT OF EXERCISE PRICE IN CERTAIN CASES. No
adjustment of the Exercise Price shall be made if the amount of said
adjustment shall be less than two cents ($.02) per Warrant, provided,
however, that in such case any adjustment that would otherwise be required
then to be made shall be carried forward and shall be made at the time of and
together with the next subsequent adjustment which, together with any
adjustment so carried forward, shall amount to at least two cents ($.02) per
Warrant.
9. EXCHANGE AND REPLACEMENT OF WARRANT CERTIFICATES. Each Warrant
Certificate is exchangeable without expense, upon the surrender thereof by
the registered Holder at the principal executive office of the Company, for a
new Warrant Certificate or Warrant Certificates of like tenor and date
representing in the aggregate the right to purchase the same number of
Warrant Securities in such denominations as shall be designated by the Holder
thereof at the time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to
it of the loss, theft, destruction or mutilation of any Warrant Certificate,
and, in case of loss, theft or destruction, of indemnity or security
reasonably satisfactory to it, and reimbursement to the Company of all
reasonable expenses incidental thereto, and upon surrender and cancellation
of the Warrants, if mutilated, the Company will make and deliver a new
Warrant Certificate of like tenor, in lieu thereof.
10. ELIMINATION OF FRACTIONAL INTERESTS. The Company shall not be
required to issue
9
<PAGE>
certificates representing fractions of shares of Common Stock or Redeemable
Warrants upon the exercise of the Warrants, nor shall it be required to issue
scrip or pay cash in lieu of fractional interests, it being the intent of the
parties that all fractional interests shall be eliminated by rounding any
fraction up or down to the nearest whole number of shares of Common Stock or
Redeemable Warrants or other securities, properties or rights.
11. RESERVATION AND LISTING OF SECURITIES. The Company shall at all
times reserve and keep available out of its authorized shares of Common
Stock, solely for the purpose of issuance upon the exercise of the Warrants
and the Redeemable Warrants, such number of shares of Common Stock or other
securities, properties or rights as shall be issuable upon the exercise
thereof. The Company covenants and agrees that, upon exercise of the
Warrants and payment of the Exercise Price therefor, all shares of Common
Stock, Redeemable Warrants and other securities issuable upon such exercise
shall be duly and validly issued, fully paid, non-assessable and not subject
to the preemptive rights of any stockholder. The Company further covenants
and agrees that upon exercise of the Redeemable Warrants underlying the
Warrants and payment of the respective Redeemable Warrant exercise price
therefor, all shares of Common Stock and other securities issuable upon such
exercise shall be duly and validly issued, fully paid, non-assessable and not
subject to the preemptive rights of any stockholder. As long as the Warrants
shall be outstanding, the Company shall use its reasonable best efforts to
cause all shares of Common Stock issuable upon the exercise of the Warrants
and Redeemable Warrants and all Redeemable Warrants underlying the Warrants
to be listed (subject to official notice of issuance) on all securities
exchanges on which the Common Stock or the Public Warrants issued to the
public in connection herewith may then be listed and/or quoted on Nasdaq.
12. NOTICES TO WARRANT HOLDERS. Nothing contained in this Agreement
shall be construed as conferring upon the Holders the right to vote or to
consent or to receive notice as a stockholder in respect of any meetings of
stockholders for the election of directors or any other matter, or as having
any rights whatsoever as a stockholder of the Company. If, however, at any
time prior to the expiration of the Warrants and their exercise, any of the
following events shall occur:
(a) the Company shall take a record of the holders of its shares of
Common Stock for the purpose of entitling them to receive a dividend or
distribution payable otherwise than in cash, or a cash dividend or
distribution payable otherwise than out of current or retained earnings or
capital surplus (in accordance with applicable law), as indicated by the
accounting treatment of such dividend or distribution on the books of the
Company; or
(b) the Company shall offer to all the holders of its Common Stock
any additional shares of capital stock of the Company or securities
convertible into or exchangeable for shares of capital stock of the Company,
or any option, right or warrant to subscribe therefor; or
(c) a dissolution, liquidation or winding up of the Company (other
than in connection with a consolidation or merger) or a sale of all or
substantially all of its property, assets and business as an entirety shall
be proposed;
then, in any one or more of said events, the Company shall give written
notice of such event at least 30 days prior to the date fixed as a record
date or the date of closing the transfer books for the
10
<PAGE>
determination of the stockholders entitled to such dividend, distribution,
convertible or exchangeable securities or subscription rights, or entitled to
vote on such proposed dissolution, liquidation, winding up or sale. Such
notice shall specify such record date or the date of closing the transfer
books, as the case may be. Failure to give such notice or any defect therein
shall not affect the validity of any action taken in connection with the
declaration or payment of any such dividend, or the issuance of any
convertible or exchangeable securities, or subscription rights, options or
warrants, or any proposed dissolution, liquidation, winding up or sale.
13. REDEEMABLE WARRANTS. The form of the certificate representing
Redeemable Warrants (and the form of election to purchase shares of Common
Stock upon the exercise of Redeemable Warrants and the form of assignment
printed on the reverse thereof) shall be substantially as set forth in
Exhibit "A" to the Warrant Agreement dated as of the date hereof by and
between the Company and American Stock Transfer and Trust Company (the
"Redeemable Warrant Agreement"). Each Redeemable Warrant issuable upon
exercise of the Warrants shall evidence the right to initially purchase a
fully paid and non-assessable share of Common Stock at an initial purchase
price of $_____ per share [140% of the initial public offering price per share
of Common Stock] from ________________, 1999 [one year after date of
Prospectus] until 5:30 p.m. New York time on ________________, 2003 [five years
after date of Prospectus] at which time the Redeemable Warrants, unless the
exercise period has been extended, shall expire. The exercise price of the
Redeemable Warrants and the number of shares of Common Stock issuable upon the
exercise of the Redeemable Warrants are subject to adjustment, whether or not
the Warrants have been exercised and the Redeemable Warrants have been issued,
in the manner and upon the occurrence of the events set forth in Section 8 of
the Redeemable Warrant Agreement, which is hereby incorporated herein by
reference and made a part hereof as if set forth in its entirety herein. Subject
to the provisions of this Agreement and upon issuance of the Redeemable Warrants
underlying the Warrants, each registered holder of such Redeemable Warrant
shall have the right to purchase from the Company (and the Company shall issue
to such registered holders) up to the number of fully paid and non-assessable
shares of Common Stock (subject to adjustment as provided herein and in the
Redeemable Warrant Agreement), free and clear of all preemptive rights of
stockholders, provided that such registered holder complies with the terms
governing exercise of the Redeemable Warrant set forth in the Redeemable
Warrant Agreement, and pays the applicable exercise price, determined in
accordance with the terms of the Redeemable Warrant Agreement. Upon exercise
of the Redeemable Warrants, the Company shall forthwith issue to the
registered holder of any such Redeemable Warrant in his name or in such name
as may be directed by him, certificates for the number of shares of Common
Stock so purchased. Except as otherwise provided in this Agreement, the
Redeemable Warrants underlying the Warrants shall be governed in all respects
by the terms of the Redeemable Warrant Agreement. The Redeemable Warrants
shall be transferable in the manner provided in the Redeemable Warrant
Agreement, and upon any such transfer, a new Redeemable Warrant Certificate
shall be issued promptly to the transferee. The Company covenants to, and
agrees with, the Holder(s) that without the prior written consent of the
Holder(s), which will not be unreasonably withheld, the Redeemable Warrant
Agreement will not be modified, amended, canceled, altered or superseded, and
that the Company will send to each Holder, irrespective of whether or not the
Warrants have been exercised, any and all notices required by the Redeemable
Warrant Agreement to be sent to holders of Redeemable Warrants.
14. NOTICES.
11
<PAGE>
All notices, requests, consents and other communications hereunder
shall be in writing and shall be deemed to have been duly made and sent when
delivered, or mailed by registered or certified mail, return receipt
requested:
(a) If to the registered Holder of the Warrants, to the address of
such Holder as shown on the books of the Company; or
(b) If to the Company, to the address set forth in Section 3.1
hereof or to such other address as the Company may designate by notice to the
Holders.
15. SUPPLEMENTS AND AMENDMENTS. The Company and the Representative may
from time to time supplement or amend this Agreement without the approval of
any Holders of Warrant Certificates (other than the Representative) in order
to cure any ambiguity, to correct or supplement any provision contained
herein which may be defective or inconsistent with any provisions herein, or
to make any other provisions in regard to matters or questions arising
hereunder which the Company and the Representative may deem necessary or
desirable and which the Company and the Representative deem shall not
adversely affect the interests of the Holders of Warrant Certificates.
16. SUCCESSORS. All the covenants and provisions of this Agreement
shall be binding upon and inure to the benefit of the Company, the Holders
and their respective successors and assigns hereunder.
17. TERMINATION. This Agreement shall terminate at the close of
business on ______________, 2005. Notwithstanding the foregoing, the
indemnification provisions of Section 7 shall, as to any cause of action
accruing thereunder, survive such termination until the close of business on
the third anniversary of the date on which said cause of action accrues.
18. GOVERNING LAW; SUBMISSION TO JURISDICTION. This Agreement and each
Warrant Certificate issued hereunder shall be deemed to be a contract made
under the laws of the State of New York and for all purposes shall be
construed in accordance with the laws of said State without giving effect to
the rules of said State governing the conflicts of laws.
The Company, the Representative and the Holders hereby agree that
any action, proceeding or claim against it arising out of, or relating in any
way to, this Agreement shall be brought and enforced in the courts of the
State of New York or of the United States of America for the Southern
District of New York, and irrevocably submits to such jurisdiction, which
jurisdiction shall be exclusive. The Company, the Representative and the
Holders hereby irrevocably waive any objection to such exclusive jurisdiction
or inconvenient forum. Any such process or summons to be served upon any of
the Company, the Representative and the Holders (at the option of the party
bringing such action, proceeding or claim) may be served by transmitting a
copy thereof, by registered or certified mail, return receipt requested,
postage prepaid, addressed to it at the address set forth in Section 14
hereof. Such mailing shall be deemed personal service and shall be legal and
binding upon the party so served in any action, proceeding or claim. The
Company, the Representative and the Holders agree that the prevailing
party(ies) in any such action or proceeding shall be entitled to recover from
the other party(ies) all of its/their reasonable legal costs and expenses
relating to such action or proceeding and/or incurred in connection with the
preparation
12
<PAGE>
therefor.
19. ENTIRE AGREEMENT; MODIFICATION. This Agreement (including the
Underwriting Agreement and the Redeemable Warrant Agreement to the extent
portions thereof are referred to herein) contains the entire understanding
between the parties hereto with respect to the subject matter hereof and may
not be modified or amended except by a writing duly signed by the party
against whom enforcement of the modification or amendment is sought.
20. SEVERABILITY. If any provision of this Agreement shall be held to
be invalid or unenforceable, such invalidity or unenforceability shall not
affect any other provision of this Agreement.
21. CAPTIONS. The caption headings of the Sections of this Agreement
are for convenience of reference only and are not intended, nor should they
be construed as, a part of this Agreement and shall be given no substantive
effect.
22. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company and the
Representative and any other registered Holder(s) of the Warrant Certificates
or Warrant Securities any legal or equitable right, remedy or claim under
this Agreement; and this Agreement shall be for the sole benefit of the
Company and the Representative and any other registered Holders of Warrant
Certificates or Warrant Securities.
13
<PAGE>
23. COUNTERPARTS. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed
to be an original, and such counterparts shall together constitute but one
and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed, as of the day and year first above written.
PROSPECT MEDICAL HOLDINGS, INC.
By:
----------------------------------------
Jacob Y. Terner, Chief Executive Officer
Attest:
- --------------------------------
Secretary
SECURITY CAPITAL TRADING, INC.
By:
----------------------------------------
14
<PAGE>
EXHIBIT A
[FORM OF WARRANT CERTIFICATE]
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES
ISSUABLE UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO
(i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933,
(ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE
UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN
OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO
COUNSEL FOR THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS
AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE
5:30 P.M., NEW YORK TIME, ___________, 2003
No. W- Warrants to Purchase
_________ shares of Common
Stock and/or ________ Redeemable
Warrants
WARRANT CERTIFICATE
This Warrant Certificate certifies that ____________________________, or
registered assigns, is the registered holder of ______________ Warrants to
purchase initially, at any time from _______________, 1999 until 5:30 p.m. New
York time on _______________, 2003 ("Expiration Date"), up to _______________
fully paid and non-assessable shares of common stock, $0.01 par value ("Common
Stock"), of PROSPECT MEDICAL HOLDINGS, INC., a Delaware corporation (the
"Company"), and Redeemable Warrants of the Company (one Redeemable Warrant
entitling the owner to purchase one fully paid and non-assessable share of
Common Stock) at the initial exercise price, subject to adjustment in certain
events (the "Exercise Price"), of $______ per share of Common Stock and $______
per Redeemable Warrant, upon surrender of this Warrant Certificate and payment
of the Exercise Price at an office or agency of the Company, but subject to the
conditions set forth herein and in the Representative's Warrant Agreement dated
as of ________________, 1998 between the Company and SECURITY CAPITAL TRADING,
INC. (the "Warrant Agreement"). Payment of the Exercise Price shall be made by
certified or official bank check in New York Clearing House funds payable to
the order of the Company or by surrender of this Warrant Certificate, as
provided in Section 3 of the Warrant Agreement.
No Warrant may be exercised after 5:30 p.m., New York time, on the
Expiration Date, at which time all Warrants evidenced hereby, unless
exercised prior thereto, shall thereafter be void.
A-1
<PAGE>
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants issued pursuant to the Warrant Agreement, which
Warrant Agreement is hereby incorporated by reference in and made a part of
this instrument and is hereby referred to for a description of the rights,
limitation of rights, obligations, duties and immunities thereunder of the
Company and the holders (the words "holders" or "holder" meaning the
registered holders or registered holder) of the Warrants.
The Warrant Agreement provides that upon the occurrence of certain events
the Exercise Price and the type and/or number of the Company's securities
issuable thereupon may, subject to certain conditions, be adjusted. In such
event, the Company will, at the request of the holder, issue a new Warrant
Certificate evidencing the adjustment in the Exercise Price and the number
and/or type of securities issuable upon the exercise of the Warrants;
provided, however, that the failure of the Company to issue such new Warrant
Certificates shall not in any way change, alter, or otherwise impair, the
rights of the holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this Warrant
Certificate at the principal office of the Company, a new Warrant Certificate
or Warrant Certificates of like tenor and evidencing in the aggregate a like
number of Warrants shall be issued to the transferee(s) in exchange for this
Warrant Certificate, subject to the limitations provided herein and in the
Warrant Agreement, without any charge except for any tax or other
governmental charge imposed in connection with such transfer.
Upon the exercise of less than all of the Warrants evidenced by this
Certificate, the Company shall forthwith issue to the holder hereof a new
Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation
of ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, and of any distribution to the holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.
A-2
<PAGE>
All terms used in this Warrant Certificate which are defined in the
Warrant Agreement shall have the meanings assigned to them in the Warrant
Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed under its corporate seal.
Dated as of _________________, 1998
PROSPECT MEDICAL HOLDINGS, INC.
By:
----------------------------------------
Jacob Y. Terner, Chief Executive Officer
Attest:
- ---------------------------------
Secretary
A-3
<PAGE>
[FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 3.1]
The undersigned hereby irrevocably elects to exercise the right, represented
by this Warrant Certificate, to purchase:
___________ shares of Common Stock;
___________ Redeemable Warrants;
___________ shares of Common Stock together with an equal
number of Redeemable Warrants; or
___________ shares of Common Stock together with ____________
Redeemable Warrants,
and herewith tenders in payment for such securities a certified or official
bank check payable in New York Clearing House Funds to the order of Prospect
Medical Holdings, Inc. in the amount of $______________, all in accordance
with the terms of Section 3.1 of the Representative's Warrant Agreement dated
as of ______________, 1998 between Prospect Medical Holdings, Inc. and Security
Capital Trading, Inc. The undersigned requests that a certificate for such
securities be registered in the name of __________________________________
whose address is ___________________________________________ and that such
Certificate be delivered to _______________________________ whose address is
______________________________.
Dated: ______________, _____ Signature _____________________________
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant Certificate.)
(Insert Social Security or Other
Identifying Number of Holder)
______________________________
A-4
<PAGE>
[FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 3.2]
The undersigned hereby irrevocably elects to exercise the right, represented
by this Warrant Certificate, to purchase:
___________ shares of Common Stock;
___________ Redeemable Warrants;
___________ shares of Common Stock together with an equal
number of Redeemable Warrants; or
___________ shares of Common Stock together with ___________
Redeemable Warrants,
and herewith tenders in payment for such securities _______________ Warrants,
all in accordance with the terms of Section 3.2 of the Representative's Warrant
Agreement dated as of _______________, 1998 between Prospect Medical Holdings,
Inc. and Security Capital Trading, Inc. The undersigned requests that a
certificate for such securities be registered in the name of _________________
whose address is _____________________________________________ and that such
Certificate be delivered to _________________________________ whose address is
_________________________________.
Dated: _______________, _____ Signature ___________________________
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant Certificate.)
(Insert Social Security or Other
Identifying Number of Holder)
________________________________
A-5
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED _____________________________ hereby sells, assigns and
transfers unto _______________________________________________________________
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint _________________ Attorney,
to transfer the within Warrant Certificate on the books of the within-named
Company, with full power of substitution.
Dated: _____________, _____ Signature _____________________________
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant Certificate.)
(Insert Social Security or Other
Identifying Number of Holder)
_______________________________
A-6
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AMENDED AND RESTATED MANAGEMENT SERVICES AGREEMENT
THIS AMENDED AND RESTATED MANAGEMENT SERVICES AGREEMENT ("Agreement") is
made and entered into as of September 15, 1998, and deemed to have been
effective as of June 4, 1996, by and between PROSPECT MEDICAL SYSTEMS, INC., a
Delaware corporation ("Manager"), and PROSPECT MEDICAL GROUP, INC., a California
professional corporation ("GROUP").
RECITALS
A. GROUP is a California professional medical corporation duly organized
under the laws of the State of California and operated as a medical group and
individual practice association, which enters into agreements with organizations
such as health care service plans (HMOs), preferred provider organizations
(PPOs), exclusive provider organizations (EPOs), and other purchasers of medical
services (hereinafter collectively referred to as "Plans") for the arrangement
of the provision of health care services to subscribers or enrollees of said
Plans (the "Practice"); and
B. Manager has special expertise and experience in the operation,
management and marketing aspects of independent practice associations and
medical groups of the type operated or intended to be operated by GROUP.
Manager has made a significant investment in the development of a system of
operations, management and marketing necessary for management of the functions
desired by GROUP to be undertaken by Manager; and
C. GROUP desires to devote all of its time to arranging for the delivery
of health care services to Plan subscribers or enrollees, and in connection
therewith desires to obtain the professional assistance of Manager in managing
the business aspects of the Practice; and
D. Manager has provided GROUP with the necessary support to manage the
business aspects of the Practice, including but not limited to clerical and
billing services, claims pursuit and collection, cash flow management, marketing
and general administrative services (collectively, "Management Services"), to
enable GROUP to concentrate on the development of the professional aspects of
the Practice pursuant to a Management Services Agreement made and entered into
as of June 4, 1996, by and between Manager and GROUP (the "Original Management
Services Agreement"); and
E. Manager and GROUP desire to enter into this Agreement to incorporate
within the terms of one agreement all of the amendments previously made and to
be made as of the date of execution hereof to the Original Management Services
Agreement; and
F. Pursuant to this Agreement Manager will continue to provide Management
Services to GROUP.
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NOW, THEREFORE, in consideration of the mutual covenants and conditions
hereinafter set forth and in exchange for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:
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AGREEMENT
1. PREMISES.
Pursuant to the Master Lease specified below, Manager shall provide
adequate GROUP administrative office space at the addresses described therein
(the "Premises") and facilities for the operation of the Practice with leasehold
improvements, auxiliary services and utilities in order that GROUP may
effectively perform its functions and duties.
In consideration of the sums to be paid to Manager under the terms of
this Agreement, Manager hereby leases to GROUP during the term of this Agreement
the facilities and leasehold improvements at the Premises and the furniture,
fixtures and equipment (the "FF&E") listed on Exhibit "B" attached hereto and
incorporated herein by this reference, under the following terms and conditions:
1.1. Manager is the lessee under certain leases for the Premises
(hereinafter collectively referred to as the "Master Lease") copies of which are
attached hereto as Exhibit "A" and incorporated herein by this reference. GROUP
hereby acknowledges that the Premises described in the Master Lease are suitable
for the administrative office of the Practice. Based and contingent upon
GROUP's promise to timely pay all amounts due under this Agreement, Manager
hereby agrees to sublease the leased Premises to GROUP upon the following terms
and conditions:
1.1.1. This sublease between Manager and GROUP of the
Premises shall be subject to all of the terms and conditions of the Master
Lease. In the event of the termination of Manager's interest as lessee under
the Master Lease for any reason, then the sublease created hereby shall
simultaneously terminate unless GROUP is willing to assume the obligations under
the Master Lease and the Lessor consents thereto.
1.1.2. All of the terms and conditions contained in the
Master Lease are incorporated herein as terms and conditions of the sublease
(with each reference therein to "Lessor" and "Lessee," to be deemed to refer to
Manager and GROUP, respectively) and, along with the provisions of this Section
1.1 and Exhibit "A," shall be the complete terms and conditions of the sublease
created hereby.
1.1.3. Notwithstanding the foregoing, as between Manager and
GROUP, Manager shall remain responsible for meeting the financial obligations of
"Lessee" under the Master Lease, and GROUP shall have no monetary obligation in
that regard. In addition, as between Manager and GROUP, Manager shall retain
all rights to exercise any options to purchase the Premises, or other similar
rights of ownership or possession, which may be granted under the Master Lease,
and GROUP shall have no rights in that regard.
1.1.4. In the event this Agreement is terminated according
to its terms, this sublease shall also terminate automatically.
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1.1.5. If the Master Lease contains an option to renew the
term thereof, Manager shall notify GROUP, at least thirty (30) days prior to the
expiration of the time for exercising such option, of Manager's intention to
renew or not to renew such term. If Manager determines not to renew such term,
Manager shall, at GROUP's option and upon the consent of the Landlord in
accordance with the terms of the Master Lease, assign the Master Lease to GROUP,
including Manager's right to renew the term thereof.
2. PROVISION OF FURNITURE, FURNISHINGS AND EQUIPMENT ("FF&E").
Manager hereby provides to GROUP, and GROUP hereby leases from Manager,
all the FF&E, which FF&E GROUP agrees are suitable and sufficient for GROUP's
use in the operation of GROUP's administrative office at the Premises and are
generally in good repair. The use by GROUP of said FF&E shall be subject to the
following conditions:
2.1. Title to all of the FF&E shall remain in Manager at all times,
and upon the termination of this Management Services Agreement, GROUP shall
immediately surrender the FF&E to Manager in as good condition as of the date
hereof, normal wear and tear excepted. Alternatively, GROUP, in its sole
discretion, shall have the option to purchase any or all of the FF&E upon
termination hereof. GROUP shall exercise such option, if at all, by giving
Manager written notice of same (the "Notice") within twenty (20) days of the
effective date of termination hereof. Upon exercise of such option, Manager
shall convey to GROUP within thirty (30) days of the effective date of
termination hereof, all of the FF&E identified in the Notice, together with (i)
any manufacturer's warranties that Manager has received in connection with such
FF&E and (ii) a bill of sale or such other instrument of conveyance as is
reasonably necessary to accomplish said purchase; and GROUP shall simultaneously
convey to Manager the purchase price for said FF&E. The purchase price shall be
paid all in cash, and shall equal the fair market value of the FF&E.
2.2. Manager shall be responsible for all repairs and maintenance
of the FF&E other than damage caused by negligence or willful misuse by GROUP;
provided, however, GROUP shall employ reasonable efforts to prevent damage to
and excessive wear of the FF&E, and shall promptly notify Manager of any needed
repairs thereto.
2.3. Manager shall be responsible for all property taxes and other
assessments relating to or arising out of ownership or use of the FF&E that
accrue on and after the date hereof.
2.4. Manager shall provide and maintain, at its expense, such
additional or replacement FF&E as the Practice reasonably requires from time to
time, as determined by Manager in its sole discretion, in consultation with
GROUP. Such additional or replacement FF&E shall be subject to all of the terms
of Section 2.1 above.
2.5. GROUP may provide additional equipment at the Practice ("GROUP
Equipment") at its sole cost and expense. GROUP shall be responsible for all
repairs, maintenance and replacement of, as well as all property taxes and other
assessments relating to or arising out of ownership or use of, such additional
equipment, unless GROUP requests that
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Manager provide such repairs, maintenance and replacement upon such terms and
conditions as the parties may agree including, without limitation, an increase
in the Management Fee (as defined in Section 9 below). Title to said GROUP
Equipment shall remain in GROUP's name at all times.
2.6. All revenues of the GROUP derived directly or indirectly from
any and all FF&E or GROUP equipment located at or used in connection with the
Practice, shall be included in "Gross Revenues" as defined in Exhibit "D."
3. MANAGER RESPONSIBILITIES
3.1. During the term of this Agreement, GROUP appoints and engages
Manager to serve as its exclusive manager and administrator of all non-physician
functions and services relating to the operation of the Practice, and Manager
agrees to furnish to GROUP those Management Services set forth below.
Notwithstanding such appointment and engagement, GROUP will have exclusive
authority and control over the professional aspects of the Practice to the
extent the same constitute or directly affect the practice of medicine,
including all diagnosis, treatment and ethical determinations with respect to
patients which are required by applicable law to be decided by a physician.
3.1.1. GENERAL ADMINISTRATIVE SERVICES
Manager shall provide general business management,
administration and supervision for the business operations of GROUP, which shall
include secretarial and other office personnel support services, staff support
for GROUP'S board of directors and committee meetings, administrative record
keeping, and other similar administrative services required in the day-to-day
operation of GROUP.
3.1.2. ACCOUNTING AND FINANCIAL MANAGEMENT SERVICES.
Manager shall provide the following accounting and
financial management services:
3.1.2.1. Manager shall have exclusive
decision-making authority with respect to the establishment and preparation of
annual budgets for the Practice, which budgets shall reflect in reasonable
detail anticipated revenues and expenses.
3.1.2.2. Manager shall, in consultation with
GROUP, establish bank accounts in the name of GROUP ("Accounts") for the deposit
of all sums received by GROUP for services provided to Members. GROUP agrees
that Manager shall have the authority to endorse all checks made payable to
GROUP and deposit checks and funds received by GROUP in Accounts. Manager shall
further have the authority to make transfers of funds to Accounts and further,
Manager shall have the authority to sign checks and stop payment on any checks
drawn on Accounts.
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3.1.2.3. Manager agrees to reconcile checks
written with bank statements on a monthly basis;
3.1.2.4. Manager agrees to make recommendations
regarding check signature approvals and banking procedures of GROUP;
3.1.2.5. Manager agrees to prepare balance sheets
and income statements on a monthly basis during the term of this Agreement.
Such financial statements shall not be audited statements. Manager agrees to
cooperate with any annual audit GROUP obtains at its sole cost and expense by an
independent public accountant selected by GROUP;
3.1.2.6. Manager shall receive and deposit on a
timely basis capitation and other payments received by GROUP;
3.1.2.7. Manager shall calculate primary care
capitation and specialty, ancillary and other payable claims based on the
records provided by the Participating Plans and shall prepare checks to pay such
amounts due and shall mail said payments to the respective providers;
3.1.2.8. Manager shall monitor Plan subscribers or
enrollees exceeding stop loss deductibles and communicate with Plans orally or
in writing to seek reimbursement on behalf of GROUP;
3.1.2.9. Manager shall bill other payors for
coordination of benefits and other third party liability payments according to
the terms of the Plan/GROUP Agreements;
3.1.2.10. Manager shall administer capitation and
other distributions from Plans including auditing and monitoring of risk pools,
negotiation settlement of GROUP's share of such pools and establishment and
maintenance of incurred but not reported ("IBNR") reserves for GROUP;
3.1.2.11. Manager shall monitor any other revenue
receipt programs Plans may have, including but not limited to pre-existing
pregnancy recovery, and seek reimbursement from said Plans;
3.1.2.12. Manager shall assist GROUP in
establishing and administering a physician incentive system and a system to
establish and adjust reserves for medical expenses.
3.1.3. OFFICE SERVICE; BILLING.
Manager shall provide bookkeeping and accounting
services, including, without limitation, maintenance, custody and supervision of
GROUP's business records, papers and documents, ledgers, journals and reports,
and the preparation, distribution and
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recording of all bills and statements for professional services rendered by
GROUP, as well as all reports and forms required by applicable third party
payors. GROUP shall at all times have the ultimate responsibility for setting
all fees for professional services provided on a fee for service basis to
patients of the Practice, as well as negotiating with each managed care contract
Payor. All billings for services rendered to patients by the Practice shall be
made under GROUP's name and provider number(s), and Manager shall act as GROUP's
agent in the preparation, rendering and collection of such billings. GROUP
hereby appoints Manager for the term hereof as its true and lawful agent for the
following purposes:
3.1.3.1. to bill patients in GROUP's name and on
its behalf;
3.1.3.2. to collect accounts receivable generated
by such billings in GROUP's name and on GROUP's behalf;
3.1.3.3. to submit, process and collect all claims
for payment to, and receive on behalf of GROUP payments from, the patients,
Plans, Medicare, Medicaid, and all other third-party payors;
3.1.3.4. to take possession of, endorse and
deposit in the name and on behalf of GROUP to one or more Accounts designated by
GROUP any notes, checks, money orders, insurance payments, and any other
instruments received as payment of accounts receivable; and
3.1.3.5. to collect in GROUP's name and on its
behalf all collections of Gross Revenues (as defined in Exhibit "D" hereto).
3.1.4. CLAIM SETTLEMENT; EXCULPATION. GROUP acknowledges
and agrees that Manager shall have discretion to compromise, settle, write off
or determine not to appeal a denial of any claim for payment for any particular
professional service rendered at the Practice. Further, GROUP agrees to hold
harmless Manager and its officers, directors, agents, contractors,
representatives and employees, from and against any and all liability, loss,
damages, claims, causes of action, and expenses associated therewith (including,
without limitation, attorneys' fees) caused or asserted to have been caused,
directly or indirectly, by or as a result of any acts, errors or omissions
hereunder of Manager or any of its officers, directors, agents, contractors,
representatives and employees, in performing Manager's billing or collection
duties hereunder.
3.1.5. FINANCIAL REPORTS. Manager shall furnish to GROUP
monthly and annual financial reports reflecting the GROUP's financial status,
provided that Manager shall have no obligations with respect to any
shareholder's of GROUP personal finances or any tax returns of the GROUP or any
shareholder of GROUP.
3.1.6. PROVIDER CONTRACT ADMINISTRATION. During the term of
this Agreement, Manager shall provide the following provider contract
administration services to GROUP:
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3.1.6.1. Identify and solicit participation of
health care providers identified by the GROUP as necessary for GROUP operations;
3.1.6.2. Review and make recommendations regarding
the business terms of agreements between GROUP and Participating Providers;
3.1.6.3. Make recommendations regarding
compensation to Participating Providers;
3.1.6.4. Make recommendations for the development,
in conjunction with GROUP, of guidelines for the selection, hiring or firing of
Participating Providers;
3.1.6.5. Make recommendations regarding the
definition of primary, specialty and ancillary services;
3.1.6.6. Establish and exercise exclusive
decision-making authority over the establishment of GROUP policies and
procedures, including without limitation, patient acceptance policies and
procedures, except with respect to the professional aspects of the Practice to
the extent the same constitute or directly affect the practice of medicine which
are required by applicable law to be decided by a physician;
3.1.6.7. Instruct all Participating Providers and
their office staff regarding established GROUP policies and procedures at least
annually during the term of this Agreement
3.1.6.8. Coordinate the preparation, negotiation
and renewal of GROUP Participating Provider Agreements.
3.1.7. ADMINISTER MEMBER ELIGIBILITY PROCESS. Manager shall
provide the following services regarding administration of the member
eligibility process:
3.1.7.1 Maintain and update a current eligibility
list to Plan subscribers and enrollees under all Plan agreements.
3.1.7.2 Verify eligibility on claims and
referrals based on the most current information provided by Plans;
3.1.7.3 Administer system for retroactive
eligibility determination and assist GROUP in identifying outstanding accounts
receivable from ineligible patients.
3.1.8. UTILIZATION MANAGEMENT/QUALITY ASSURANCE. Manager
agrees to provide the following services regarding utilization management and
quality assurance.
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3.1.8.1. Manager shall develop a proposal
outlining the structure and functions of a GROUP utilization and quality
management plan after reviewing the requirements of each Plan. GROUP agrees,
following review of Manager's recommendations, to adopt a GROUP utilization and
quality management plan which includes a list of services for which Manager has
received authority from GROUP to authorize services provided. In authorizing
said services, Manager shall be the agent of GROUP;
3.1.8.2. Manager shall implement systems, programs
and procedures necessary for GROUP and Participating Providers to perform
utilization and quality management.
3.1.8.3 Manager shall recommend procedures for
prior authorization of elective, urgent and emergent out-patient ambulatory
surgery and hospital procedures;
3.1.8.4 Manager shall assist GROUP with
prospective, concurrent and retrospective review of medical procedures in
accordance with GROUP policies and Plan requirements;
3.1.8.5 Manager shall provide data regarding the
use of outpatient and inpatient services by provider to GROUP;
3.1.8.6 Manager shall provide data regarding the
use of noncontracting providers;
3.1.8.7 Manager shall provide secretarial
support, logs, and minutes to the Medical Director and the UR/QA Committee of
GROUP;
3.1.8.8 Manager shall assist Medical Director and
the UR/QA Committee in responding to Plan Member grievances based on the
instructions of the Medical Director;
3.1.8.9 Manager shall provide staff assistance to
GROUP in the credentialing process GROUP is required to conduct to assure that
providers have current licenses and medical staff privileges.
3.1.9. SUPPLIES. Manager shall order and purchase all
supplies required by GROUP in connection with the operation of the
administrative office of the Practice, including furnishing to GROUP all
necessary forms, supplies, postage and duplication services, provided that all
supplies acquired and services provided shall be reasonably necessary in
connection with the day-to-day operations of the Practice.
3.1.10. FILING OF REPORTS. Manager shall prepare and file all
forms, reports, and returns required by law in connection with unemployment
insurance, workers' compensation insurance, disability benefits, social
security, and other similar laws (excluding
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income or franchise tax forms of GROUP or any of GROUP's shareholders, employees
or contractors or providing any other tax-related services on their behalf) now
in effect or hereafter imposed.
3.1.11. MARKETING AND PUBLIC RELATIONS SERVICES. Manager
will assist GROUP in GROUP's marketing, public relations and advertising of the
health care services provided by GROUP. Manager, shall provide and be
principally responsible for marketing and advertising services for GROUP and
prepare signs, brochures, letterhead, advertisements, and other marketing
materials for GROUP. Manager may, at its discretion, contract with third
parties to assist it in the provision of GROUP marketing and public relations
services, should Manager deem such action advisable. Manager shall produce and
distribute such written descriptive materials concerning GROUP's professional
services, subject to the prior approval of GROUP, as may be necessary or
appropriate to the conduct of the Practice. In providing such marketing
services, Manager is acting solely in its capacity as administrator for the
GROUP. At no time shall Manager hold itself out as providing, or actually
provide, medical services on behalf of GROUP. All such marketing services shall
be conducted in accordance with the laws, rules, regulations and guidelines of
all applicable governmental and quasi-governmental agencies, including but not
limited to the Medical Board of California. Manager shall be the owner and
holder of all right, title and interest in and to any such marketing and
advertising materials.
3.1.12. PROFESSIONAL AND OTHER SERVICES. Manager shall be
responsible for arranging and paying for payroll, legal and accounting services
related to GROUP operations in the ordinary course of business, including the
cost of enforcing any managed care plan, physician or subcontractor contracts,
but excluding the cost of malpractice suits.
3.1.13. CERTAIN INCENTIVES. Upon the completion of the
proposed merger by and between Manager and Med-Search Acquisition Corporation, a
wholly owned subsidiary of Med-Search, Inc. ("Med-Search"), Manager agrees to
make available MedSearch stock or exchange-listed stock options or warrants of
Med-Search for use as incentive compensation for physicians employed by or
contracted with GROUP which have been jointly determined by GROUP and Manager to
be appropriate additions to the Practice.
3.2. MANAGED CARE CONTRACTING
3.2.1. Manager shall act as GROUP's exclusive agent in
seeking and negotiating managed care contracts ("Contracts"). Manager is hereby
authorized to negotiate, in its sole discretion, all terms of the Contracts.
GROUP hereby appoints Manager for the term hereof as its true and lawful agent
to perform all actions contemplated by this Section including, without
limitation, the evaluation, negotiation, administration, renewal and execution
of Contracts on GROUP's behalf and binding GROUP to performance thereunder,
provided that the Plan with whom each Contract is entered agrees to pay an
amount for GROUP's professional services thereunder equal to or greater than the
minimum rate that GROUP shall specify to Manager. GROUP shall complete and
execute the Power of Agency attached hereto as Exhibit "C."
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3.2.2. Manager shall also be responsible for general
monitoring of GROUP compliance with the requirements, terms and conditions of
Plan Contracts.
3.2.3. Manager shall notify and provide copies to GROUP of
each Contract (together with all related materials received from the applicable
Payor) that Manager executes as GROUP's agent. GROUP shall comply with all
terms of each Contract including, without limitation, the terms of all documents
or instruments incorporated therein by reference and all documents or
instruments related thereto that Manager executes or agrees to on GROUP's
behalf, as well as all applicable law. GROUP further agrees that an essential
term of this Agreement is GROUP's undertaking to provide cost-effective medical
care consistent with accepted medical practices prevailing in the GROUP's
service area.
3.2.4. Nothing in this Agreement shall prevent Manager from
entering into similar agreements with Plans on behalf of other independent
practice associations, medical groups, physicians, health care professionals or
entities comprised of physician or health care professionals.
3.2.5. GROUP acknowledges and agrees that (i) Manager shall
in no way be responsible for payment of any sums payable to GROUP under any such
Contract (whether by any Payor or otherwise), and (ii) Manager in no way
guarantees or insures the payment to GROUP of any such amounts.
3.3. PERSONNEL.
Manager shall employ or contract with and provide all necessary
non-physician personnel, including quality assurance, utilization review, claims
processing, secretarial and clerical personnel as are reasonably necessary for
the conduct of the Practice (collectively, "Manager Personnel"). Manager shall,
in its sole and absolute discretion, determine the types and numbers of
personnel and the number of hours and schedules of said personnel it determines
are necessary or appropriate to provide the administrative and management
services to be provided pursuant to this Agreement. Manager shall provide such
personnel at its sole cost and expense and such personnel may, at the sole and
absolute discretion of Manager, be employees or independent contractors of
Manager. Manager shall, in its sole and absolute discretion, have the right,
but shall not be required, to engage as Manager Personnel any or all of those
individuals who were employees of GROUP immediately prior to the effective date
hereof ("GROUP's Former Employees"). Manager shall have sole control over
promotion and employee disciplinary and termination matters with respect to
Manager Personnel (including, without limitation, GROUP's Former Employees), and
shall not be responsible for any accrued vacation, paid time off or other
benefits to such individuals that have accrued prior to the date that Manager
engages them as its employees.
3.4. All professional medical and health care services provided to
subscribers or enrollees shall be the ultimate responsibility of the GROUP's
Participating Providers. GROUP shall use its best efforts to cause
Participating Providers to cooperate with Manager in the
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implementation of the protocols, programs, policies, and procedures developed
for GROUP by Manager.
3.5. Manager is hereby expressly authorized by GROUP to perform all
services required of Manager pursuant to the terms of this Agreement in the
manner Manager deems reasonable and appropriate to meet the day-to-day
requirements of GROUP. To the extent required or desirable to enable Manager to
perform such services, GROUP hereby appoints Manager for the term hereof as its
true and lawful agent. GROUP acknowledges and agrees that Manager may
subcontract with other persons or entities, including entities related to
Manager by ownership or control, to perform any part or all of the services
required of Manager hereunder.
3.6. Subject to applicable securities, health care and other laws
or regulations, Manager agrees to use its best efforts to cause the holding
company of Manager to issue, or otherwise make available, stock or
exchange-listed stock options or warrants of such holding company for use as
consideration for the acquisition by GROUP of medical groups, IPAs or other
forms of physician practices or, as consideration for any other appropriate use.
3.7. Upon the request of GROUP, Manager shall provide or arrange
for the provision of additional services, beyond those described herein. Any
additional services provided by Manager are subject to Manager's capacity and
availability to provide the services so requested. Should Manager provide such
additional services, GROUP agrees to pay Manager for such services at its then
current rates as a supplemental payment to the Management Fee described herein.
3.8. Notwithstanding any other provision contained herein, Manager
shall not be liable to GROUP and shall not be deemed to be in default hereunder
for the failure to perform or provide any of the services, personnel or other
obligations to be performed or provided by Manager pursuant to this Agreement if
such failure is a result of collective bargaining, a labor dispute, act(s) of
God, or any other event which is beyond the reasonable control of Manager or
which was not reasonably foreseeable by Manager.
4. RESPONSIBILITIES OF GROUP.
4.1. GROUP covenants and agrees that, at all times during the term
of this Agreement and any extension thereof, it shall conduct all corporate
activities required by its Articles of Incorporation and Bylaws, including but
not limited to election of a Board of Directors, election of Officers,
appointment of committee members including but not limited to the Utilization
Review and Quality Assurance Committees. In addition, GROUP agrees to appoint a
Medical Director. GROUP shall be solely responsible for payment of any and all
compensation, payroll taxes, fringe benefits, disability insurance, workers'
compensation insurance and any other benefits of all such individuals.
4.2. GROUP shall not enter into any agreements with Participating
Providers unless such Participating Providers have: (i) current unrestricted
licenses to practice their respective professions in the State of California and
(ii) current unrestricted Federal Drug
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Enforcement Agency ("DEA") numbers. In addition, where GROUP contracts with
individual physicians, such physicians shall have medical staff membership at
the hospitals required by Participating Plans and where GROUP contracts with
licensed clinics and medical groups, at least one primary care physician
practicing at each clinic or medical group shall have medical staff membership
at the hospitals required by Participating Plans. GROUP further agrees to
establish procedures to ensure that Participating Providers meet these
requirements on an ongoing basis. Manager shall reasonably cooperate with and
assist GROUP to meet its obligations under this Section 4.2; provided however,
that GROUP acknowledges and agrees that it shall retain ultimate responsibility
for meeting such obligations.
4.3. GROUP acknowledges and agrees that it is solely responsible
for making all required reports to the Medical Board of California under Section
805 of the California Business and Professions Code and the National
Practitioner Data Bank.
4.4. GROUP shall, at its sole cost and expense, procure and
maintain at all times during the term of this Agreement comprehensive general
and professional liability insurance covering all activities of GROUP directly
or indirectly relating to GROUP, each policy in a minimum amount of
$1,000,000.00 per occurrence and $3,000,000.00 in the aggregate. The
aforedescribed comprehensive general and professional liability insurance shall
be issued by a company or companies authorized to do business in California with
a financial rating of at least A:12 or better in "Best's Key Rating Guide" or
its equivalent. In the event GROUP procures a "claims made" policy as
distinguished from an "occurrence" policy, GROUP shall procure and maintain at
its sole cost and expense, prior to termination of such insurance, "tail"
coverage to continue and extend coverage complying with this Agreement after the
end of the "claims made" policy. Upon reasonable request from Manager, GROUP
shall cause to be issued to Manager proper certificates of insurance, evidencing
that the foregoing provisions of this Agreement have been complied with, and
said certificates shall provide that prior to any cancellation or change in the
underlying insurance during the policy period, the insurance carrier shall first
give thirty (30) calendar days written notice to Manager.
4.5. Subject to the terms and conditions of Sections 3.1.6.3 and
3.1.6.4 herein, GROUP shall, at its sole cost and expense, including, but not
limited to, the payment of all salaries, benefits, medical malpractice
insurance, employ or contract with such physicians as shall be reasonably
necessary for the conduct of the Practice.
4.6. GROUP shall ensure that Participating Providers procure and
maintain professional liability insurance with minimum coverage amounts of
$1,000,000.00 per occurrence and $3,000,000.00 in the aggregate. GROUP shall
ensure that any Participating Provider who procures insurance required hereunder
on a "claims made" rather than an "occurrences" form will obtain either extended
reporting insurance coverage ("tail coverage") with liability limits equal to
those most recently in effect prior to the day of termination of such
Participating Provider's contract with GROUP, or will enter into such other
arrangements as shall reasonably assure the maintenance of coverage for such
Provider, GROUP, and Manager against the risk of loss in respect of professional
services rendered by such provider while this Agreement was in effect and for a
period of not less than seven (7) years after the date of termination of this
Agreement.
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4.7. GROUP acknowledges and agrees that it shall reasonably assist
and cooperate with Manager to meet all of Manager's obligations under this
Agreement, including approval of agreements and provision of information. GROUP
acknowledges and agrees that Manager shall have no liability for GROUP's failure
to pay any and all of GROUP's debts and expenses.
5. TERM; TERMINATION.
5.1. TERM. The term of this Agreement (the "Term") shall commence
on the date hereof and shall expire on the thirtieth (30th) annual anniversary
hereof unless earlier terminated as provided below. The term of this Agreement
shall be automatically extended for additional terms of ten (10) years each,
unless either party delivers to the other party, not less then twelve (12)
months nor earlier than fifteen (15) months prior to the expiration of the
preceding term, written notice of such party's intention not to extend the term
of this Agreement.
5.2. TERMINATION FOR CAUSE.
5.2.1. Manager may terminate this Agreement for cause at any
time during the Term immediately upon written notice (except as otherwise
provided below). For purposes of this Section 5.2.1 "cause" shall include,
without limitation, the following:
5.2.1.1. If GROUP fails to materially perform any
obligation required hereunder, and such default shall continue for sixty (60)
calendar days after written notice from Manager specifying the nature and extent
of failure to materially perform such obligation, this Agreement shall terminate
automatically and immediately upon the expiration of said sixty (60) calendar
day period; provided, however, that if the obligation which GROUP fails to
perform is other than the failure to make payment of money, and greater than
sixty (60) calendar days are required to perform said obligation, then such
party shall not be in default of this Agreement and the Agreement shall not
terminate as provided hereinabove if such party commences performance within
said sixty day period and diligently pursues said obligation to completion.
5.2.1.2. In the event the performance by either
party hereto of any term, covenant, condition or provision of this Agreement
should be determined by a state or federal court or governmental agency or court
of law to be in violation of any statute, ordinance, or be otherwise deemed
illegal ("Jeopardy Event"), then the parties shall use their best efforts to
meet forthwith and attempt to negotiate an amendment to this Agreement to remove
or negate the effect of the Jeopardy Event. In the event the parties are unable
to negotiate such an amendment within thirty (30) days following written notice
by either party of the Jeopardy Event, then Manager may terminate this Agreement
immediately upon written notice.
5.2.2. GROUP may terminate this Agreement for cause at any
time during the Term immediately upon written notice (except as otherwise
provided below). For purposes of this Section 5.2.2 "cause" shall include,
without limitation, the following:
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5.2.2.1. If Manager fails to materially perform
any obligation required hereunder which failure amounts to gross negligence,
fraud or an illegal act on the part of Manager, and such default shall continue
for sixty (60) calendar days after written notice from GROUP specifying the
nature and extent of failure to materially perform such obligation, this
Agreement shall terminate automatically and immediately upon the expiration of
said sixty (60) calendar day period; provided, however, that if the obligation
which Manager fails to perform is other than the failure to make payment of
money, and greater than sixty (60) calendar days are required to perform said
obligation, then such party shall not be in default of this Agreement and the
Agreement shall not terminate as provided hereinabove if such party commences
performance within said sixty day period and diligently pursues said obligation
to completion.
5.2.3. Either party may terminate this Agreement for cause
at any time during the Term immediately upon written notice. For purposes of
this Section 5.2.3 "cause" shall include, without limitation, the following:
5.2.3.1. If either party shall apply for or consent
to the appointment of receiver, trustee or liquidator in bankruptcy, make a
general assignment for the benefit of creditors, file a petition or answer
seeking reorganization or arrangement with creditors, or take advantage of any
bankruptcy, insolvency, reorganization, moratorium or other law for the benefit
of creditors, or if any order, judgment, or decree shall be entered by any court
of competent jurisdiction on the application of a creditor or otherwise
adjudicating either party bankrupt or approving a petition seeking
reorganization of either party or appointment of a receiver, trustee or
liquidator of either party of all or a substantial part of its assets, and such
order, judgment or decree shall continue stayed and in effect for sixty (60)
calendar days after its entry, termination shall be effective automatically and
immediately upon the occurrence of the foregoing.
5.3. JEOPARDY. In the event the performance by either party hereto
of any term, covenant, condition or provision of this Agreement should be
determined by a state or federal court or governmental agency to be in violation
of any statute, ordinance, or be otherwise deemed illegal ("Jeopardy Event"),
then the parties shall use their best efforts to meet forthwith and attempt to
negotiate an amendment to this Agreement to remove or negate the effect of the
Jeopardy Event. In the event the parties are unable to negotiate such an
amendment within thirty (30) days following written notice by either party of
the Jeopardy Event, then either party may terminate this Agreement immediately
upon written notice.
6. RIGHTS OF MANAGER UPON TERMINATION.
6.1. In the event of the termination of this Agreement for any
reason, including without limitation the breach of this Agreement by either
party, Manager shall be entitled to recover (out of the Accounts (as defined in
Section 3.1.2.2 hereof) or otherwise) from GROUP all fees, and any and all
advances and other charges owed to Manager that had accrued but were unpaid as
of the date of termination.
6.2. In the event of termination of this Agreement for any reason,
Manager shall remain entitled to its Management Fee with respect to all Gross
Revenues (as defined in Exhibit
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"D" hereto) that have accrued on or before the effective date of termination,
which shall be payable, without limitation, out of Net Revenues attributable
thereto whether received before, on or after the effective date of termination.
Further, GROUP shall remain obligated to reimburse Manager for any and all other
unpaid Management Fees that have accrued hereunder as of the date of
termination.
7. REPRESENTATIONS AND WARRANTIES OF GROUP.
The following representations and warranties of GROUP are made to Manager
for the purpose of inducing Manager to enter into this Agreement. GROUP
represents and warrants as follows:
7.1. GROUP is a corporation duly organized, validly existing and in
good standing under the laws of the State of California and has all necessary
corporate powers to own its properties and to operate pursuant to its corporate
purposes.
7.2. GROUP's Board of Directors has all requisite power to execute,
deliver and perform this Agreement. Neither the execution and delivery of this
Agreement, nor the consummation and performance of the transaction contemplated
in this Agreement, shall constitute a default or an event that would constitute
a default under, or violation or breach of, GROUP's Articles of Incorporation,
Bylaws or any license, lease, franchise, mortgage, instrument, or other
agreement to which GROUP may be bound.
7.3. GROUP has furnished Manager full and complete copies of all
contracts and agreements affecting GROUP including, but not limited to, all
contracts to which GROUP is a party.
7.4. GROUP and any and all physicians providing services to
Participating Plans have each complied with, and are not in violation of,
applicable federal, state or local statutes, laws and regulations including, but
not limited to, statutes, laws and regulations regarding the practice of
medicine and surgery in California, participation in the Medicaid and Medicare
programs or the operation of GROUP and all applicable standards of practice
relating to the provision of professional services hereunder.
7.5. GROUP and any and all Participating Providers providing
services for the GROUP have each obtained and currently maintain all necessary
licenses, permits, contracts, and approvals required by federal, state or local
statutes and regulations for the proper conduct of the business of the GROUP as
it is now being conducted and have been approved by the Board of Directors or
its properly designated committee, as documented by written committee minutes.
7.6. There is no action, suit, proceeding, investigation or
litigation outstanding, pending or, to the best of GROUP's knowledge,
threatened, affecting GROUP other than routine patient collection matters and
professional liability cases adequately covered by insurance.
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7.7. GROUP represents and warrants that each GROUP Participating
Provider is as of the date hereof, and shall at all times during the term hereof
be and remain:
7.7.1. duly licensed to practice medicine within the State
of California and in possession of a federal DEA number, all without limitation,
restriction or condition whatsoever;
7.7.2. entitled to receive Medicare and Medicaid
reimbursement without limitation, restriction or condition whatsoever;
7.7.3. in compliance with the insurance requirements set
forth in Section 4.6 hereof.
7.8. GROUP represents and warrants that it and each GROUP
Participating Provider shall (i) comply with all applicable governmental laws,
regulations, ordinances, and directives and (ii) perform his or her work and
functions at all times in strict accordance with currently approved methods and
practices in his or her field.
7.9. GROUP represents and warrants that, as of the date hereof:
7.9.1. All of GROUP's Former Employees and any current
non-professional employees of GROUP related to the Practice ("Practice
Employees") (i) if terminated, have been properly terminated as of the closing
under the Agreement of Purchase and Sale of Stock, by and between GROUP and
Prospect Medical Group, Inc. (the "Closing") without creating any cause of
action or otherwise giving rise to any liability for wrongful discharge, breach
of contract, tort or other cause of action at law or in equity, and there are no
such actions pending or, to GROUP's knowledge, threatened, and GROUP has
satisfied all obligations to such employees for all accrued salaries and
benefits, or (ii) are subject to such other disposition as is satisfactory to
Manager.
7.9.2. There is no liability to any employee or third party,
including any governmental agency, for any employee benefits, compensation,
taxes or withholdings of any kind with respect to any of the Practice Employees
other than those items arising in the normal course of business immediately
prior to the Closing, all of which items shall be set forth in Schedule 7.9.2.
There are no accrued vacations or sick leave for any of the Practice Employees
for which Manager may become liable by reason of any of the transactions
contemplated under this Agreement. GROUP shall be solely responsible to comply
with the requirements, if any, of the federal Worker Adjustment and Retraining
Notification Act.
7.9.3. There are no threats of strikes or work stoppages by
any of the Practice Employees. The GROUP is not a party to any contract or
agreement with a labor union or any local or subdivision thereof, and has not
been charged with any unresolved unfair labor practices, and there are no labor
grievances or any present union organizing activity among any of the Practice
Employees.
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8. REPRESENTATIONS AND WARRANTIES OF MANAGER.
The following representations and warranties of Manager are made to
GROUP for the purpose of inducing GROUP to enter into this Agreement. Manager
represents and warrants as follows:
8.1. Manager is a corporation duly organized, validly existing and
in good standing under the laws of the State of California and has all necessary
corporate powers to own its properties and to operate pursuant to its corporate
purposes.
8.2. Manager has all requisite power to execute, deliver and
perform this Agreement. Neither the execution and delivery of this Agreement,
nor the consummation and performance of the transaction contemplated in this
Agreement, shall constitute a default, or an event that would constitute a
default under, or violation or breach of, Manager's Articles of Incorporation,
Bylaws or any license, lease, franchise, mortgage, instrument, or other
agreement to which Manager may be bound.
8.3. There is no action, suit, proceeding, investigation or
litigation outstanding, pending or, to the best of Manager's knowledge,
threatened, affecting Manager.
9. MANAGER COMPENSATION.
9.1. As compensation for its services hereunder, Manager shall be
reimbursed its Costs (as defined in Exhibit D attached hereto) and paid a
management fee (the "Management Fee") in the amount set forth on Exhibit D
attached hereto and incorporated herein by reference.
9.2. After deduction of amounts which are reimbursed by Manager and
which are retained by Manager as Management Fee compensation, all remaining
Gross Revenues shall be remitted to GROUP. From such sums, Manager shall pay,
on GROUP's behalf, the Cost of Medical Services (as defined in Exhibit D
attached hereto) such other payments or disbursement which Manager may be
authorized or required to make pursuant to this Agreement and such payments or
disbursements which GROUP shall direct Manager to make. Should the funds in
GROUP's accounts not be sufficient at any time during the term of this Agreement
to make such disbursements and to meet the GROUP's financial obligations,
Manager shall have the right (but not the obligation) to loan to GROUP funds in
an amount sufficient to allow GROUP to meet its financial obligations. Such
loan shall bear interest at a rate that is at or above fair market value and
shall have such other terms as the parties may agree from time to time. Manager
shall not lend any funds to GROUP for such purposes without the prior approval
of GROUP's Board of Directors or the officer(s) of GROUP delegated such power of
approval by GROUP's Board of Directors.
10. RECORDS.
10.1. All medical records and documents, including reports, x-rays,
and other similar types of reports for patients of GROUP providers shall be the
property of GROUP's
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providers. GROUP agrees to require GROUP providers to allow Manager and its
duly authorized representatives to inspect, audit and duplicate any data or
records necessary for Manager to perform its duties pursuant to this Agreement.
GROUP and Manager shall comply with all applicable federal, state, and local
laws and regulations pertaining to the confidentiality of said medical records.
10.2. All business records, information, software and systems of the
Manager relating to the provision of its services under this Agreement shall
remain the property of the Manager and may be removed by the Manager upon any
termination of this Agreement.
11. INDEMNIFICATION.
Each party shall indemnify, defend and hold harmless the other, its
officers, directors, agents, contractors, representatives and employees, and
each of its affiliates from and against any and all liability, loss, damages,
claims, causes of action, and expenses associated therewith (including, without
limitation, attorneys' fees) caused or asserted to have been caused, directly or
indirectly, by or as a result of any acts, errors or omissions hereunder of the
other, its contractors, shareholders, employees or agents during the term
hereof. The provisions of this section shall survive the expiration or earlier
termination of this Agreement.
12. PROPRIETARY INFORMATION.
12.1. At all times during the term hereof and following the
expiration or earlier termination of this Agreement, all trade secrets and
proprietary confidential information of Manager, including without limitation,
all forms of contracts and other business documents or information of Manager,
whether currently or in the future developed or maintained by Manager and
including any and all deletions, additions, modifications and amendments thereto
and further including the amount of compensation to be paid to Manager for its
services hereunder (collectively, "Manager's Proprietary Materials"), shall be
the exclusive, sole and absolute property of Manager. Both parties acknowledge
and agree that Manager has developed Manager's Proprietary Materials at
significant expense, and that said Proprietary Materials are not available for
review or use by members of the public. All of Manager's Proprietary Materials
are and shall at all times remain confidential and proprietary and constitute
valuable trade secrets of Manager. Except in the ordinary course of performing
its obligations under this Agreement and except upon Manager's prior written
consent, GROUP shall not disclose to anyone, use, copy, or take any such trade
secrets or confidential and proprietary information for GROUP's benefit or gain
either during the term of this Agreement or at any time after the termination
hereof. Upon any expiration or earlier termination of this Agreement for any
reason, GROUP shall not, without the prior written consent of Manager, take or
use any of Manager's Proprietary Materials, and shall return to Manager all of
Manager's Proprietary Materials in GROUP's possession or control.
12.2. At all times during the term hereof and following the
termination of this Agreement, GROUP shall not, directly or indirectly,
interfere with, disrupt or attempt to disrupt the relationship, contractual or
otherwise, between Manager and any health care provider or supplier (including,
without limitation, any physician or osteopath), or any employee, independent
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contractor, consultant or agent of Manager. GROUP further agrees not to hire,
engage or contract with, either as an independent contractor, employee or in any
other capacity, any personnel of Manager, other than personnel of Manager who
are GROUP's Former Employees, during the first twelve (12) months following the
effective expiration or termination date hereof without Manager's prior written
consent.
12.3. GROUP shall inform all of GROUP's Former Employees specified
by Manager in writing, within ten (10) days following the date hereof, that they
are now employees of Manager. Notwithstanding the provisions of Section 12.2
above, upon termination of this Agreement, Manager may, at its option, require
GROUP upon written notice to hire any or all of GROUP's Former Employees at
salary and benefit levels equal to or greater than the salary and benefits that
Manager was paying those individuals as of their last day of employment with
Manager.
12.4. The provisions of this Section 12 shall survive the
termination of this Agreement.
13. INDEPENDENT CONTRACTORS.
The parties hereto acknowledge and agree that the relationship created
between Manager and GROUP is strictly that of independent contractors. Nothing
contained herein shall be construed as creating a partnership or joint venture
relationship between the parties. Each party hereto shall be responsible for
all compensation, salaries, taxes, withholdings, contributions, benefits, and
workers' compensation insurance with respect to all personnel employed or
contracted by said party and shall indemnify, defend and hold harmless the other
party and its officers, directors, agents, contractors, representatives and
employees (and, in the case of GROUP's indemnification of Manager, Manager's
affiliates and subcontractors) from and against any and all liability, loss,
damages, claims, causes of action, and expenses associated therewith (including,
without limitation, attorneys' fees) caused or asserted to have been caused,
directly or indirectly, by or as a result of same. The provisions of this
Section shall survive the expiration or earlier termination of this Agreement.
14. ASSIGNABLE OPTION AGREEMENT. The parties shall enter into an
Assignable Option Agreement in the form attached hereto as Exhibit E.
15. MISCELLANEOUS
15.1. NO THIRD PARTY BENEFICIARIES. The parties intend that the
benefits of this Agreement shall inure only to Manager and GROUP and not to any
third person, except as expressly so stated herein. Notwithstanding anything
contained herein, or any conduct or course of conduct by any party hereto,
before or after signing this Agreement, this Agreement shall not be construed as
creating any right, claim or cause of action against either Manager or GROUP by
any other person or entity.
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15.2. ENTIRE AGREEMENT. This Agreement, together with all exhibits
and schedules hereto, and all documents referred to herein, constitutes the
entire agreement between the parties with respect to the subject matter hereof,
supersedes all other and prior agreements on the same subject, whether written
or oral, and contains all of the covenants and agreements between the parties
with respect to the subject matter hereof. Each party to this Agreement
acknowledges that no representations, inducements, promises, or agreements,
orally or otherwise, have been made by the other party(ies), or by anyone acting
on behalf of any party, that are not embodied herein, and that no other
agreement, statement, or promise not contained in this Agreement shall be valid
or binding. This Agreement incorporates the Original Management Services
Agreement, together with all amendments previously made and to be made to the
date of execution hereof, and is deemed to have been effective as of the date of
the Original Management Services Agreement.
15.3. SUCCESSORS AND ASSIGNS. All of Manager's rights and duties
under this Agreement may be assigned or delegated by Manager, including but not
limited to, an assignment to Imperial Bank, a California banking corporation.
Notwithstanding any other provision of this Agreement, neither this Agreement
nor the rights and duties of this Agreement may be assigned or delegated by
GROUP. This Agreement binds the successors, heirs, and authorized assignees of
the parties.
15.4. COUNTERPARTS. This Agreement, and any amendments thereto, may
be executed in counterparts, each of which shall constitute an original
document, but which together shall constitute one and the same instrument.
15.5. HEADINGS. The section headings contained in this Agreement
are inserted for convenience only and shall not effect in any way the meaning or
interpretation of this Agreement.
15.6. NOTICES. Any notices required or permitted to be given
hereunder by either party to the other shall be in writing and shall be deemed
delivered upon personal delivery or delivery by electronic facsimile;
twenty-four (24) hours following deposit with a courier for overnight delivery;
or seventy-two (72) hours following deposit in the U.S. Mail, registered or
certified mail, postage prepaid, return-receipt requested, addressed to the
parties at the following addresses or to such other addresses as the parties may
specify in writing:
If to GROUP: Prospect Medical Group, Inc.
18200 Yorba Linda Blvd., Suite 409
Yorba Linda, CA 92886
Attention: President
If to Manager: Prospect Medical Systems, Inc.
18200 Yorba Linda Blvd., Suite 409
Yorba Linda, CA 92886
Attention: President
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15.7. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of California.
15.8. AMENDMENT. This Agreement may be amended at any time by
agreement of the parties, provided that any amendment shall be in writing and
executed by both parties.
15.9. SEVERABILITY. If any provision of this Agreement is held by a
court of competent jurisdiction to be invalid or unenforceable, the remaining
provisions will nevertheless continue in full force and effect, unless such
invalidity or unenforceability would defeat an essential business purpose of
this Agreement.
15.10. EXHIBITS AND SCHEDULES. All exhibits and schedules attached
to this Agreement are incorporated herein by this reference and all references
herein to "Agreement" shall mean this Agreement together with all such exhibits
and schedules.
15.11. TIME OF ESSENCE. Time is expressly made of the essence of
this Agreement and each and every provision hereof of which time of performance
is a factor.
15.12. DISPUTE RESOLUTION.
15.12.1. Subject to the terms of Section 15.12.2, in the event
the parties hereto are unable to resolve any and all disputes in connection with
this Agreement, either party may commence arbitration by sending a written
demand for arbitration to the other party, setting forth the nature of the
matter to be resolved by arbitration. Except as may be expressly provided to
the contrary herein, the arbitration procedure described in this Section shall
be the sole means of resolving any disputes hereunder.
15.12.2. Notwithstanding the foregoing, it is expressly
understood by the parties that the arbitration procedure described in this
Section shall not be applicable to any disputes between the parties as to
matters over which Manager has exclusive decision-making authority pursuant to
the terms hereof, including without limitation, the Manager's exclusive
decision-making authority with respect to the development of guidelines for the
selection, hiring and firing of health care professionals, compensation payable
to health care professionals, scope of services to be provided, patient
acceptance policies and procedures, pricing of services, negotiation and
execution of contracts, and approval of operating and capital budgets.
15.12.3. There shall be one arbitrator. If the parties shall
fail to select a mutually acceptable arbitrator within ten (10) days after the
demand for arbitration is mailed, then the parties stipulate to arbitration
before a retired judge sitting on the Los Angeles Judicial Arbitration Mediation
Services (JAMS) panel.
15.12.4. The parties shall share all costs of arbitration.
The prevailing party shall be entitled to reimbursement by the other party of
such party's attorneys' fees and costs and any arbitration fees and expenses
incurred in connection with the arbitration hereunder.
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15.12.5. The substantive law of the State of California shall
be applied by the arbitrator. The parties shall have the rights of discovery as
provided for in Part 4 of the California Code of Civil Procedure and as provided
for in Section 1283.05 of said Code. The California Code of Evidence shall
apply to testimony and documents submitted to the arbitrator.
15.12.6. Arbitration shall take place in Los Angeles,
California unless the parties otherwise agree. As soon as reasonably
practicable, a hearing with respect to the dispute or matter to be resolved
shall be conducted by the arbitrator. As soon as reasonably practicable
thereafter, the arbitrator shall arrive at a final decision, which shall be
reduced to writing, signed by the arbitrator and mailed to each of the parties
and their legal counsel.
15.12.7. All decisions of the arbitrator shall be final,
binding and conclusive on the parties and shall constitute the only method of
resolving disputes or matters subject to arbitration pursuant to this Agreement.
The arbitrator or a court of appropriate jurisdiction may issue a writ of
execution to enforce the arbitrator's judgment. Judgment may be entered upon
such a decision in accordance with applicable law in any court having
jurisdiction thereof.
15.12.8. Notwithstanding the foregoing, because time is of the
essence of this Agreement, the parties specifically reserve the right to seek a
judicial temporary restraining order, preliminary injunction, or other similar
short term equitable relief, and grant the arbitrator the right to make a final
determination of the parties' rights, including whether to make permanent or
dissolve such court order.
15.12.9. Notwithstanding the foregoing, any and all
arbitration proceedings are conditional upon such proceedings being covered
under the parties' respective risk insurance policies.
15.13. ATTORNEYS' FEES. Should either party institute any action or
procedure to enforce this Agreement or any provision hereof, or for damages by
reason of any alleged breach of this Agreement or of any provision hereof, or
for a declaration of rights hereunder (including, without limitation,
arbitration), the prevailing party in any such action or proceeding shall be
entitled to receive from the other party all costs and expenses, including
without limitation reasonable attorneys' fees, incurred by the prevailing party
in connection with such action or proceeding.
15.14. FURTHER ASSURANCES. The parties shall take such actions and
execute and deliver such further documentation as may reasonably be required in
order to give effect to the transactions contemplated by this Management
Services Agreement and the intentions of the parties hereto.
15.15. RIGHTS CUMULATIVE. The various rights and remedies herein
granted to Manager or GROUP shall be cumulative and in addition to any other
rights Manager or GROUP, respectively, may be entitled to under law. The
exercise of one or more rights or remedies shall
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not impair the right of Manager or GROUP to exercise any other right or remedy,
at law or equity.
15.16. FEDERAL SOCIAL SECURITY REQUIREMENTS. Pursuant to Section
1395x (V)(1)(I) of Title 42 of the United States Code, with respect to any
services furnished under the terms of this Agreement if the value or cost of
which is Ten Thousand Dollars ($10,000) or more over a twelve (12) month period,
until the expiration of four (4) years after the termination of this Agreement,
Manager shall make available upon written request to the Secretary of the United
States Department of Health and Human Services, or upon request by the
Comptroller General of the United States General Accounting Office, or any of
their duly authorized representatives, a copy of this Agreement and such books,
documents and records as are necessary to certify the nature and extent of the
costs of the services provided by Manager under this Agreement.
Manager further agrees that in the event Manager carries out any of its
duties under this Agreement through a subcontract, with a value or cost of Ten
Thousand Dollars ($10,000) or more over a twelve (12) month period, such
subcontract shall contain a clause to the effect that until the expiration of
four (4) years after the furnishing of such services pursuant to such
subcontract, the subcontractor shall make available, upon written request to the
Secretary of the United States Department of Health and Human Services, or upon
request to the Comptroller General of the United States General Accounting
Office, or any of their duly authorized representatives, the subcontract and
such books, documents and records of such organization as are necessary to
verify the nature and extent of such costs.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
MANAGER: GROUP:
PROSPECT MEDICAL SYSTEMS, INC. PROSPECT MEDICAL GROUP, INC.
By: By:
------------------------------------- ------------------------------
Jacob Y. Terner, M.D.
Its: President Its:
------------------------------
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LIST OF EXHIBITS AND SCHEDULES
Exhibits
--------
A - Master Lease
B - Furniture, Fixtures & Equipment
C - Power of Agency
D - Management Fee
Schedule
7.9.2 Practice Employee Liabilities
<PAGE>
EXHIBIT "A"
MASTER LEASE
<PAGE>
EXHIBIT "B"
FURNITURE, FIXTURES & EQUIPMENT
<PAGE>
EXHIBIT "C"
POWER OF AGENCY
<PAGE>
EXHIBIT "C"
POWER OF AGENCY
This Power of Agency is made and entered into in connection with that
certain Management Services Agreement (the "Agreement") dated as of the _______
day of __________________, 1996, between Prospect Medical Systems, Inc., a
Delaware corporation ("Manager"), and Prospect Medical Group, Inc., a
professional corporation ("GROUP"), as amended.
1. DEFINITIONS. Capitalized terms used herein and not otherwise defined
herein shall have the meaning assigned to them in the Agreement.
2. POWER OF MANAGER. GROUP hereby appoints the Manager or its designee
or successor, as GROUP's agent ("Agent") to act for GROUP and in GROUP's name,
place and stead for the purposes of: (a) communicating the terms and conditions
under which GROUP would accept a Contract with each Plan, as set forth in the
Agreement and Exhibit "C" thereto; (b) executing on behalf of GROUP each
Contract that contains said terms and conditions or that contains any other
terms and conditions that are not rejected by GROUP; (c) administering executed
Contracts, as set forth below; (d) performing all actions on behalf of GROUP
contemplated by the Agreement relating to Contracts, including, without
limitation, the evaluation, negotiation and renewal of Contracts; (e)
negotiating and executing all business agreements and leases on GROUP's behalf
in accordance with the Agreement; (f) endorsing all checks made payable to GROUP
for services provided to Members; (g) taking all steps required or desirable to
submit, process and collect all claims for payment to patients, Plans, Medicare,
Medicaid and all other third party payors; and (h) receiving and depositing
capitation and other payments received by GROUP.
3. ADMINISTRATION. Agent shall maintain in his/her files a copy of each
executed Contract and shall provide to GROUP a list of Plans contracting with
GROUP. Notwithstanding anything herein to the contrary, GROUP shall look solely
to Plans and/or enrollees or beneficiaries of Plans, as applicable, for payment
for medical services and supplies and neither Manager nor any officer, employee,
agent or affiliate of Manager shall be liable for such payment.
4. TERM. The term of this Power of Agency shall be coextensive with the
term of the Agreement.
5. FULL AUTHORITY. Agent is hereby granted full authority to act in any
manner proper, necessary or convenient to the exercise of the foregoing powers,
including substitution and revocation. GROUP hereby ratifies every act that
Agent may lawfully perform in exercising those powers.
<PAGE>
IN WITNESS WHEREOF, this Power of Agency is executed effective as of the
day and year first above written.
MANAGER: GROUP:
PROSPECT MEDICAL SYSTEMS, INC. PROSPECT MEDICAL GROUP, INC.
By: By:
----------------------------------- ------------------------------
Gregg DeNicola, M.D.
Its: President Its:
-----------------------------
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EXHIBIT "D"
MANAGEMENT FEE
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EXHIBIT "D"
MANAGEMENT FEE
A. DEFINITIONS
COST OF MEDICAL SERVICES means with respect to the GROUP, the
aggregate compensation of GROUP's employed physicians and physician extenders
(e.g. physician assistants and nurse practitioners), charges incurred by the
GROUP for independent contractor physicians, the cost of services ordered by
GROUP through its physicians for managed care patients, the cost of GROUP's
employee benefits including, but not limited to, vacation pay, employer and
employee contributions to any 401(k) plan or other retirement plan for the
benefit of GROUP employees, sick pay, health care expenses, GROUP's share of
employment and payroll taxes, GROUP's employees' professional dues and all other
expenses and payments required to be made by GROUP to or for physicians pursuant
to physician employment and independent contractor agreements (including expense
reimbursements, discretionary bonuses, incentives based on profitability or
productivity, and payments paid and accrued or deferred).
MANAGER'S COSTS means all operating and non-operating expenses and
other costs directly or indirectly incurred by Manager, including but not
limited to direct labor costs (for all employees of Manager or its affiliates
and for any independent contractors or consultants to Manager), indirect labor
costs, supplies, all amounts paid by Manager or GROUP to satisfy any obligations
of GROUP to non-professional employees and third parties (other than for the
Cost of Medical Services), obligations under any lease or purchase agreement or
arrangement for which Manager has direct or indirect financial liability, and
direct and indirect overhead and other expenses relating to the operation of
GROUP's administrative and non-medical management affairs and relating to
GROUP's direct and indirect corporate overhead (including but not limited to all
interest expense and other expenses which are attributable generally to
Manager's business operations in accordance with Manager's corporate allocation
policies as such are in effect from time to time).
GROSS REVENUES means all sums which are (i) attributed to GROUP
(determined on an accrual basis) as compensation for the provision of medical
services by GROUP employed and independent contractor physicians and physician
extenders, including but not limited to all capitated income, all rights to
receive GROUP's portion of hospital and other shared risk pool payments, all
copayments, coordination of benefits, third party recovery, insured services,
enrollment protection (or other such revenue as is available to replenish
capitated services) and all rights to receive fee-for-service income for
medical, diagnostic and therapeutic services provided to GROUP patients; and
(ii) derived by GROUP or its employees other than from the provision of medical
services, including but not limited to consulting services, insurance and legal
recoveries, royalties and licensing payments, franchise payments, rents and
lease payments, and proceeds from the sale of assets or the merger or other
business combination of GROUP.
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NET-PRE-TAX INCOME means Gross Revenues less the sum of Manager's
Costs and the Cost of Medical Services after provision of related bonuses but
before provision for income taxes.
B. MANAGEMENT FEE
For its services hereunder, which shall include the providing of all
facilities and furniture, fixtures and equipment at the Premises and all
non-physician employees of Manager who perform services at or for the
Practice and all management services provided hereunder, Manager shall (i)
retain that portion of the Gross Revenues which is equal to Manager's Costs
plus (ii) [ ** ] of Gross Revenues plus (iii) a fee for marketing and public
relations services of [ ** ] per month plus (iv) [ ** ] of Net Pre-tax Income
in excess of [ ** ] of Gross Revenues; provided however, that if after the
payment of Manager's Costs as set forth in item (i) herein GROUP's working
capital is insufficient to meet GROUP's liabilities or other obligations, the
amount of Gross Revenues paid to Manager shall be deferred until GROUP is
able to meet such obligations. Additionally, subject to the terms of the
Subordination and Note Cancellation Agreement, dated as of September 25,
1997, by and among Manager, Group, Imperial Bank, a California banking
corporation, Prospect Medical Holdings, Inc., a Delaware corporation,
Karunyan Arulanantham, M.D. and Sinnadurai E. Moorthy, M.D. the Management
Fee shall be deferred to the extent necessary to provide for the payment of
any amounts owed when due under those promissory notes issued by GROUP to
Karunyan Arulanantham, M.D. and Sinnadurai E. Moorthy, M.D. in the aggregate
principal amount of $2,250,000.
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EXHIBIT "E"
ASSIGNABLE OPTION AGREEMENT
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SCHEDULE 7.9.2
PRACTICE EMPLOYEE LIABILITIES
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AMENDED AND RESTATED ASSIGNABLE OPTION AGREEMENT
THIS AMENDED AND RESTATED ASSIGNABLE OPTION AGREEMENT ("Agreement") is made
as of the 2nd day of September, 1998, and deemed to have been effective as of
June 5, 1996, by and among Prospect Medical Systems, Inc. ("Buyer"), a Delaware
corporation, Prospect Medical Group, Inc., a California professional medical
corporation ("Seller"), together with Gregg DeNicola, M.D. ("Shareholder"), with
reference to the following facts:
RECITALS
A. Seller owns and operates a professional corporation that is organized
and operated as a medical group and independent practice association (the
"Practice").
B. Seller and Buyer are entering into that certain Asset Transfer
Agreement dated June 4, 1996, pursuant to which Seller is transferring certain
non-professional assets to Buyer (the "Asset Transfer Agreement").
C. Pursuant to the terms of a proposed Agreement and Plan of
Reorganization, Med-Search Acquisition Corporation, a Delaware corporation
and a wholly owned subsidiary of Med-Search, Inc., a Delaware corporation,
("Med-Search") is intended to merge with and into Buyer (the "Merger").
D. Effective as of the Closing of the Merger, Seller desires to grant to
Buyer, and Buyer desires to acquire from Seller, (i) an assignable option to
purchase all of the remaining assets of Seller, and (ii) the right to designate
the purchaser ("Successor Physician") of all or part of the issued and
outstanding stock in Seller. When used in this Agreement, the term "Assets"
shall mean all of Seller's and Shareholder right, title, interest and estate in
and to all the assets of every kind and description used in or pertaining to the
Practice, including but not limited to the assets set forth on Exhibit A, not
including any assets transferred to Seller pursuant to the terms of the Asset
Transfer Agreement. When used in this Agreement, the term "Stock" shall mean
all of Shareholder's right, title, interest and estate in and to all of the
issued and outstanding stock in Seller, including any rights to any additional
stock, preemptive rights, warrants, and the like, as set forth on Exhibit B.
E. Shareholder, Seller and Buyer desire to enter into this Agreement to
incorporate within the terms of one agreement all of the amendments previously
made and to be made as of the date of execution hereof to an Assignable Option
Agreement made as of June 5, 1996 (the "Original Agreement").
NOW, THEREFORE, in consideration of the foregoing promises and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged by the parties, Seller, Shareholder, and Buyer agree as follows:
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1. GRANT OF OPTION.
1.1 Seller hereby grants to Buyer an assignable option to purchase all or
any part of the Assets (the "Assets Option"), on the terms and subject to the
conditions set forth in this Agreement.
1.2 Seller and Shareholder hereby grant to Buyer the assignable right to
designate a Successor Physician or Successor Physicians, which person or persons
must be duly licensed physicians in the State of California or otherwise
permitted by law to be a shareholder in a professional corporation, to purchase
all or part of the Stock (the "Stock Option"), on the terms and subject to the
conditions set forth herein. In its sole discretion, Buyer may designate the
amount of Stock which is to be purchased. The Assets Option and the Stock
Option are collectively referred to herein as the "Option."
1.3 Seller and Shareholder represent and warrant that as of the day and
year first above written and during the term of this Agreement, Exhibits A and B
are true and complete listings of the Assets and Stock, respectively, as revised
from time to time pursuant to this Agreement.
1.4 Except as set forth in the Amended and Restated Credit Succession
Agreement, dated as of July 14, 1997, by and among Prospect Medical Holdings,
Inc., a Delaware corporation, Seller, Shareholder, Buyer, Santa Ana/Tustin
Physicians Group, Inc., a California professional corporation, and Imperial
Bank, a California banking corporation ("Imperial"), as amended (the "Credit
Succession Agreement"), Seller shall not recognize any share transfer or other
action not in compliance with the terms of this Agreement.
2. TERM OF AGREEMENT. The term of this Agreement commences as of the day and
year first above written and continues for thirty (30) years ("Term"). So long
as the term of the Management Services Agreement, made and entered into as of
June 4, 1996, as amended, by and between Buyer and Seller (the "Management
Services Agreement"), is automatically extended pursuant thereto, the term of
this Agreement shall be automatically extended for additional coextensive terms
of ten (10) years each. In the event the Management Services Agreement is
terminated pursuant to its terms, this Agreement shall terminate upon the
effective date of termination of said Management Services Agreement.
3. OPTION PRICE. The purchase price for the Option (the "Option Price") is
One Hundred Dollars ($100) and Seller and Shareholder acknowledge receipt of
such payment.
4. EXERCISE OF OPTION.
4.1 During the Term of this Agreement, Buyer may elect to exercise the
Option at any time. In the event of an election by Buyer to exercise the
Option, Buyer may exercise either the Assets Option or the Stock Option, or
both, at Buyer's sole discretion.
4.2 Notwithstanding the provisions of Section 4.1, if the Management
Services Agreement is terminated by either party, for any reason, Buyer's right
to exercise the Option is
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automatically and immediately exercised as of the termination date of the
Management Services Agreement such that Buyer may exercise either the Assets
Option or the Stock Option, or both, at such time.
4.3 To the extent that the Assets Option is exercised by Buyer, Buyer will
send Seller a written notice (the "Assets Exercise Notice") specifying the
Assets to be purchased. Buyer may exercise the Assets Option as many times as
Buyer elects in its sole discretion.
4.4 To the extent that the Stock Option is exercised by Buyer, Buyer will
send Seller a written notice (the "Stock Exercise Notice") specifying the Stock
to be purchased. Buyer may designate the Successor Physician(s) who will
exercise the Stock Option as many times as Buyer elects in its sole discretion.
4.5 The Assets Option and the Stock Option are independent of each other,
and can be exercised at different times during the Term.
4.6 Buyer may cancel any Assets Exercise Notice or Stock Exercise Notice
at any time.
4.7 Seller and Shareholder shall cooperate with Buyer in any due
diligence.
5. ASSIGNMENT OF THE OPTION. Buyer may elect to assign either the Assets
Option or the Stock Option or both to any person, by a written assignment,
signed by both Buyer and the assignee, which designates the Assets and/or Stock.
The assignee shall agree as a condition of the assignment to be bound by the
terms of this Agreement. Thereafter, only the assignee named in the assignment
shall have the right to exercise the applicable Assets Option and/or the Stock
Option as to the designated Assets and/or Stock, and that assignee, rather than
Buyer, shall enter into a purchase agreement upon exercise of the Assets Option
and/or the Stock Option, as applicable. Written notice of any such assignment
shall be given by Buyer to Seller and Shareholder within a reasonable time
period following execution of any assignment pursuant to this Agreement. When
the context so requires in this Agreement, the term "Buyer" shall be deemed to
refer to an assignee holding an assignment of an Asset Option or Stock Option,
and the terms "party" and "parties" shall be deemed to include that assignee.
6. PURCHASE PRICE OF THE ASSETS OR STOCK.
6.1 PURCHASE PRICE.
a. ASSETS PURCHASE PRICE. The purchase price for the Assets to be
purchased pursuant to the exercise of the Assets Option shall be $1,000
("Assets Purchase Price"). The purchase price of any partial purchase of the
Assets shall be a pro-rata percentage of the full Assets Purchase Price.
b. STOCK PURCHASE PRICE. The purchase price for the Stock to be
purchased pursuant to the exercise of the Stock Option shall be $1,000
("Stock Purchase Price"). The purchase price
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of less than all of the issued and outstanding Stock is a pro-rata percentage
of the full Stock Purchase Price.
6.2 PAYMENT. For the Assets, Buyer shall pay Seller the Assets Purchase
Price at Closing in the form of immediately available funds transferred by wire
to an account at a financial institution designated by Seller. For the Stock,
Buyer shall cause the Successor Physician to pay the Shareholder the Stock
Purchase Price.
6.3 CLOSING. The transactions contemplated by this Agreement are to close
forty-five (45) days after the date of either the Assets Exercise Notice or the
Stock Exercise Notice, as the case may be ("Closing"), unless extended by Buyer.
7. ADDITIONAL OBLIGATIONS OF SELLER.
7.1 AFFIRMATIVE COVENANTS. To the extent that Seller and Shareholder
participate in the Practice and own, control, or use the Assets, Seller and
Shareholder shall:
a. CONDUCT OF PRACTICE. Conduct Seller's business efficiently and
without voluntary interruption and preserve all rights, privileges, and
franchises held by Seller and Seller's Practice, including the maintenance of
all contracts, copyrights, trademarks, licenses, registrations, etc.;
b. USE. Make use of the Assets with reasonable care to prevent
diminution in value of the Practice and the Assets, and keep the Assets in good
repair;
c. VALUE. Perform all acts necessary to maintain, preserve, and protect
the Assets, and maintain fire and extended coverage insurance on the Assets in
the amounts and under policies acceptable to Buyer, and provide Buyer with the
original policies and certificates at Buyer's request;
d. FINANCING STATEMENTS. Execute and deliver to Buyer all financing
statements and other documents that Buyer requests, in order to put third
parties on notice of this Agreement;
e. ACCESS. Permit Buyer, its representatives, and its agents to inspect
the Assets at any time, and to make copies of records pertaining to the Assets,
at reasonable times at Buyer's request;
f. REPORTS. Furnish Buyer any reports relating to the Assets at Buyer's
request;
g. DEFAULTS. Notify Buyer promptly in writing of any default, potential
default, or any development that might have a material adverse effect on the
Assets, the Stock, or the Practice, or of any litigation that may have a
material adverse effect on the Practice;
h. EXPENSES. Pay all expenses, including attorneys' fees, incurred by
Buyer in the perfection, preservation, realization, enforcement, and exercise of
its rights under this Agreement,
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including but not limited to accounting, correspondence, collection efforts,
filing, recording, and recordkeeping;
i. INDEMNITY. Indemnify Buyer against losses, liabilities, or damages,
costs and expenses of any kind, including reasonable attorneys' fees, caused to
Buyer by reason of its interest in the Assets and/or the Stock;
j. TAXES. Pay promptly when due all taxes and assessments owed in
connection with the Assets and the Stock; and
k. DELIVERY OF CERTIFICATES. Deliver to Buyer all certificates
heretofore issued representing all of the shares of Seller's capital stock held
of record or beneficially owned by Shareholder, and each certificate hereafter
issued representing any share of Seller's capital stock, with each certificate
endorsed in blank for transfer. Notwithstanding the foregoing, this Section
7.1.k shall only apply in the event that the Credit Succession Agreement is no
longer in effect.
7.2 NEGATIVE COVENANTS. Except as required under the Credit Succession
Agreement, without the prior written consent of Buyer, Seller and Shareholder
shall not:
a. TRANSFER. Sell, lease, transfer, or otherwise dispose of the Assets
or Stock;
b. DEBT. Incur, guarantee, assume or otherwise become liable for any
borrowing or increase any existing indebtedness; or discharge or cancel any debt
owed to Seller;
c. NO FURTHER HYPOTHECATION. Pledge, hypothecate, encumber, redeem or
dispose of the Assets, the Stock or any interest therein until all of Seller's
obligations under this Agreement have been fully satisfied or the Assets or the
Stock has been released;
d. LOCATION. Move the Assets from their present locations without the
prior written consent of Buyer;
e. USE. Use the Assets or the Stock for any unlawful purpose or in any
way that would void any effective insurance;
f. NAME AND LOCATION CHANGES. Change the name or place of business or
use a fictitious business name without the prior express consent of Buyer; and
g. ISSUANCE OF STOCK; CHANGE IN OWNERSHIP; MERGERS AND CONSOLIDATION.
Permit any issuance of Stock, other equity, or debt; permit any change in the
composition or respective percentage ownership of Seller; permit Seller to be
merged, consolidated or otherwise reorganized with or into any other
corporation, partnership, trade, business, or the like; amend or otherwise
modify its articles of incorporation and bylaws; dissolve; or enter into any
agreement with any person to do any of the foregoing.
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8. CONFIDENTIALITY. The parties shall use all good faith efforts to keep the
contents of this Agreement and all other aspects of the negotiations preceding
execution of this Agreement confidential. Unless required by law, Seller,
Shareholder, and Buyer shall not disclose the contents of this Agreement or the
negotiations leading to this Agreement to third parties without the prior
written consent of the other party. Buyer shall ensure that all of the
assignees likewise comply with the obligations of confidentiality imposed by
this Section, except that Buyer and the assignees may disclose the contents of
such to their respective agents, representatives, contractors, and employees to
the extent necessary to exercise their respective rights or perform their
respective obligations hereunder.
9. GENERAL.
9.1 COMPLIANCE WITH LAW. Seller and Shareholder shall comply with all
applicable requirements of the Joint Commission on the Accreditation of
Healthcare Organizations, the Medicare and Medicaid programs, applicable state
law and regulations, and other licensing and accreditation authorities.
9.2 RELATIONSHIP OF PARTIES. In the exercise of their respective rights
and the performance of their respective obligations under this Agreement, Seller
and Shareholder on the one hand and Buyer (or any assignee) on the other hand
are acting in the capacity of the grantor and grantee of an option to purchase
all or a portion of the Assets and/or Stock, and nothing in this Agreement is
intended nor shall be construed to create between the parties an
employer/employee relationship, a partnership or joint venture relationship or a
landlord/tenant relationship.
9.3 ASSIGNMENT. All of Buyer's rights and duties under this Agreement may
be assigned or delegated by Buyer or Prospect Medical Holdings, Inc., including
but not limited to an assignment to Imperial; provided, however, that Buyer or
Prospect Medical Holdings, Inc., shall give written notice of any such
assignment to the Seller and Shareholder within a reasonable time period.
Notwithstanding any other provision of this Agreement, neither this Agreement
nor the rights and duties of this Agreement may be assigned or delegated by
Seller or Shareholder. This Agreement binds the successors, heirs, and
authorized assignees of the parties.
9.4 ENTIRE AGREEMENT. Except as expressly provided in this Agreement to
the contrary, this Agreement, including its incorporated exhibits, constitutes
the entire agreement between the parties with respect to the Option, and
supersedes all other and prior agreements on the same subject, whether written
or oral and contains all of the covenants and agreements between the parties
with respect to the subject matter hereof. Except as expressly provided in this
Agreement to the contrary, each party to this Agreement acknowledges that no
representations, inducements, promises, or agreements, orally or otherwise, have
been made by any other party hereto, or by anyone acting on behalf of any party
hereto, that are not embodied herein, and that no agreement, statement, or
promise not contained in this Agreement shall be valid or binding. This
Agreement incorporates the Original Agreement, together with all amendments
previously made and to be made to the date of execution hereof, and is deemed to
have been effective as of the date of the Original Agreement.
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9.5 COUNTERPARTS. This Agreement, and any amendments hereto, may be
executed in counterparts, each of which shall constitute an original document,
but which together shall constitute one and the same instrument.
9.6 HEADINGS. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
9.7 NOTICES. Any notices required or permitted to be given hereunder by
any party to another shall be in writing and shall be deemed delivered upon
personal delivery, twenty-four (24) hours following deposit with a courier for
overnight delivery or seventy two (72) hours following deposit in the U.S. Mail,
registered or certified mail, postage prepaid, return-receipt requested,
addressed to the parties at the following addresses or to such other addresses
as the parties may specify in writing:
If to Seller or Shareholder: Prospect Medical Group, Inc.
18200 Yorba Linda Blvd., Suite 409
Yorba Linda, CA 92886
Attention: President & Shareholder
If to Buyer: Prospect Medical Systems, Inc.
18200 Yorba Linda Blvd., Suite 409
Yorba Linda, CA 92886
Attention: President
9.8 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
9.9 AMENDMENT. This Agreement may be amended at any time by agreement of
the parties, provided that any amendment shall be in writing and executed by all
parties.
9.10 SEVERABILITY. If any provision of this Agreement is held by a court
of competent jurisdiction to be invalid or unenforceable, the remaining
provisions will nevertheless continue in full force and effect, unless such
invalidity or unenforceability would defeat an essential business purpose of
this Agreement.
9.11 FEES AND EXPENSES. Seller, Shareholder, and Buyer each shall bear
their own expenses, including, without limitation, attorneys' and accountants'
fees, incurred in connection with the preparation of this Agreement and the
transactions contemplated hereby.
9.12 EXHIBITS AND SCHEDULES. All exhibits and schedules attached to this
Agreement are incorporated herein by this reference and all references herein to
"Agreement" shall mean this Agreement together with all such exhibits and
schedules.
9.13 TIME OF ESSENCE. Time is expressly made of the essence of this
Agreement and each and every provision hereof of which time of performance is a
factor.
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9.14 DISPUTE RESOLUTION. In the event the parties hereto are unable to
resolve any dispute in connection with this Agreement, the parties may mutually
agree to arbitrate as set forth below.
a. There shall be one arbitrator. If the parties shall fail to select a
mutually acceptable arbitrator within ten (10) days after the demand for
arbitration is mailed, then the parties stipulate to arbitration before a
retired judge sitting on the Los Angeles, California, Judicial Arbitration
Mediation Services (JAMS) panel.
b. The substantive law of the State of California shall be applied by the
arbitrator.
c. Arbitration shall take place in Los Angeles, California, unless Seller
and a majority of the other parties otherwise agree. As soon as reasonably
practicable, a hearing with respect to the dispute or matter to be resolved
shall be conducted by the arbitrator. As soon as reasonably practicable
thereafter, the arbitrator shall arrive at a final decision, which shall be
reduced to writing, signed by the arbitrator and mailed to each of the parties
and their legal counsel.
d. All decisions of the arbitrator shall be final, binding and conclusive
on the parties and shall constitute the only method of resolving disputes or
matters subject to arbitration pursuant to this Agreement. The arbitrator or a
court of appropriate jurisdiction may issue a writ of execution to enforce the
arbitrator's judgment. Judgment may be entered upon such a decision in
accordance with applicable law in any court having jurisdiction thereof.
e. Notwithstanding the foregoing, because time is of the essence of this
Agreement, the parties specifically reserve the right to seek a judicial
temporary restraining order, preliminary injunction, or other similar short term
equitable relief, and grant the arbitrator the right to make a final
determination of the parties' rights, including whether to make permanent or
dissolve such court order.
f. Notwithstanding the foregoing, any and all arbitration proceedings are
conditional upon such proceedings being covered within the parties' respective
risk insurance policies.
9.15 ATTORNEYS' FEES. Should any of the parties hereto institute any
action or procedure to enforce this Agreement or any provision hereof (including
without limitation, arbitration), or for damages by reason of any alleged breach
of this Agreement or of any provision hereof, or for a declaration of rights
hereunder (including, without limitation, by means of arbitration), the
prevailing party in any such action or proceeding shall be entitled to receive
from the other party all costs and expenses, including without limitation
reasonable attorneys' fees, incurred by the prevailing party in connection with
such action or proceeding.
9.16 FURTHER ASSURANCES. The parties shall take such actions and execute
and deliver such further documentation as may reasonably be required in order to
give effect to the transactions contemplated by this Agreement and the
intentions of the parties hereto.
9.17 RIGHTS CUMULATIVE. The various rights and remedies herein granted to
the respective parties hereto shall be cumulative and in addition to any other
rights any such party may
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be entitled to under law. The exercise of one or more rights or remedies by
a party shall not impair the right of such party to exercise any other right
or remedy, at law or equity.
IN WITNESS WHEREOF, Seller, Shareholder, and Buyer execute this Agreement
by their duly authorized representatives as set forth below.
"BUYER" "SELLER"
Prospect Medical Systems, Inc., a Prospect Medical Group, Inc.,
Delaware corporation a California professional
corporation
By: Gregg DeNicola By: Gregg DeNicola
------------------------------- -------------------------------
___________________, President Its:_______________________________
"SHAREHOLDER"
Gregg DeNicola
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SPOUSAL JOINDER AND CONSENT
I am the spouse of Gregg DeNicola, M.D., a shareholder (the "Shareholder") of
Prospect Medical Group, Inc., a California professional medical corporation
("Prospect Medical Group, Inc."). To the extent that I have any interest in any
of the Assets (as that term is defined in the Amended and Restated Assignable
Option Agreement (the "Assignable Option Agreement"), entered into as of this
date, by and among Prospect Medical Systems, Inc., the Shareholder and Prospect
Medical Group, Inc.), I hereby join in the Assignable Option Agreement and agree
to be bound by its terms and conditions to the same extent as my spouse. I have
read the Assignable Option Agreement, understand its terms and conditions, and
to the extent that I have felt it necessary, have retained independent legal
counsel to advise me concerning the legal effect of the Assignable Option
Agreement and this Spousal Joinder and Consent.
I understand and acknowledge that Prospect Medical Systems, Inc., as Buyer, is
significantly relying on the validity and accuracy of this Spousal Joinder and
Consent in entering into the Assignable Option Agreement.
Executed this 2nd day of September, 1998.
Signature: Mary T. DeNicola
-------------------
Printed or Typed Name: Mary T. DeNicola
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EXHIBIT A
ASSETS
1. All contracts and agreements, including all payor contracts, vendor
contracts, loan agreements, leases and subleases.
2. All risk pool or other incentive arrangement payments relating to the
Practice, including hospital incentive funds, and any capitation advances to
physicians.
3. All cash, bank balances, monies in possession of any bank, other cash
items, marketable securities of Seller and prepaid deposits relating to the
Practice.
4. All accounts receivable of Seller ("Accounts Receivable") relating to the
Practice. As used herein, "Accounts Receivable" shall include all rights to
payment for goods or services rendered, whether or not yet earned by
performance, all other obligations and receivables from others no matter how
evidenced relating to the Practice, including purchase orders, notes,
instruments, drafts and acceptances and all guarantees of the foregoing and
security therefor, relating to the Practice.
5. All supplies and inventory relating to the Practice.
6. All patient records, files and X-rays relating to the Practice.
7. All of Seller's goodwill relating to the Practice, which may include
location goodwill, name recognition goodwill, patient allegiance, etc.
8. All business, financial and accounting records and books of account
relating to the Practice, exclusive of Seller's Articles, Bylaws, corporate
minutes, stock shares and general ledger.
9. Seller's right to reimbursement for all professional services provided to
managed care and fee-for-service patients relating to the Practice.
10. All of Seller's furniture, fixtures, leasehold improvements, machinery,
equipment, inventories, supplies and other like tangible personal property used
in the Practice.
11. All trademarks, trade names, fictitious business names, copyrights, logos,
licenses, ownership interests in telephone numbers at the Practice, or related
items of Seller that in any way pertain to the Practice.
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EXHIBIT B
STOCK
Stock has been pledged to Imperial Bank, a California banking corporation
("Bank"), pursuant to the terms of that certain Amended and Restated Credit
Succession Agreement, dated as of July 14, 1997, by and among Bank, Prospect
Medical Holdings, Inc., a Delaware corporation, Prospect Medical Systems, Inc.,
a Delaware corporation, Prospect Medical Group, Inc., a California professional
corporation, Santa Ana/Tustin Physicians Group, Inc., a California professional
corporation, and Gregg DeNicola, M.D.
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EXHIBIT C
INDIVIDUAL NON-COMPETITION AGREEMENT
<PAGE>
INDIVIDUAL NON-COMPETITION AGREEMENT
THIS INDIVIDUAL NON-COMPETITION AGREEMENT ("Agreement") is made as of this
5th day of June, 1996 by and between Prospect Medical Group, Inc., a California
professional corporation ("Prospect Medical Group") and Gregg DeNicola, M.D.,
("Physician"). All capitalized terms used herein and not otherwise expressly
defined shall have the same meanings set forth in the Assignable Option
Agreement (defined below).
RECITALS
A. Prospect Medical Group and Prospect Medical Group's Affiliates are in
the business of developing and operating an integrated healthcare delivery
system in the State of California and other areas. Such system includes primary
care physicians, specialty care physicians, other outpatient and ancillary
services, and management and administrative services.
B. To develop an integrated healthcare delivery system, Prospect Medical
Group previously caused the formation of a management services organization,
Prospect Medical Systems, Inc., a Delaware corporation ("Prospect Medical
Systems"), to provide management and administrative services to Prospect Medical
Group and its other Affiliates.
C. Following formation of Prospect Medical Systems, Prospect Medical
Group and Prospect Medical Systems entered into an Asset Transfer Agreement
providing for the transfer of certain non-professional assets to Prospect
Medical Systems from Prospect Medical Group.
D. In connection therewith Prospect Medical Group, Physician and Prospect
Medical Systems previously entered into an Assignable Option Agreement, dated as
of June 5, 1996 (the "Assignable Option Agreement") pursuant to which Prospect
Medical Group granted to Prospect Medical Systems an assignable option to
purchase all of Prospect Medical Group's remaining assets and the right to
designate the purchaser of all or a part of the issued and outstanding stock in
Prospect Medical Group under certain circumstances.
E. Prospect Medical Group and Prospect Medical Systems previously entered
into a Management Services Agreement pursuant to which Prospect Medical Systems
provides management and administrative services to Prospect Medical Group in
return for a management fee which is calculated based upon the revenues derived
by Prospect Medical Group from its medical practices and other sources.
F. Physician is the sole director, officer and shareholder of Prospect
Medical Group and as such has exclusive control over the operations and
condition of Prospect Medical Group and is a director, officer and shareholder
of Prospect Medical Systems.
G. Pursuant to the Assignable Option Agreement, if Physician or Prospect
Medical Group transfers all or any of the Assets or Stock or under certain other
circumstances, Prospect
<PAGE>
Medical Systems may exercise the Stock Option or the Assets Option. In such
event pursuant to the terms of the Assignable Option Agreement, Physician
shall execute this Agreement.
NOW, THEREFORE, in consideration of the foregoing promises and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows.
1. PHYSICIAN'S COVENANTS. As a material inducement to Prospect Medical Group
to enter into the Assignable Option Agreement and during the term of this
Agreement in the Service Area described in Section 4 below and except as
permitted under the Primary Care Physician Services Agreement, Physician
(directly or indirectly through any business, enterprise, venture, partnership,
corporation or any other entity controlled directly or indirectly by Physician,
whether alone or as a partner, stockholder, creditor or otherwise) shall not:
practice medicine, or engage, participate, aid, assist, or hold any
interest in any business or provision of any healthcare service which is,
or as of Physician's engagement or participation, would become, competitive
with any aspect of Prospect Medical Group's or any of Prospect Medical
Group's Affiliates's (including Prospect Medical Systems') healthcare
services;
solicit or assist any other person to solicit any business relating to a
competing line of healthcare business (other than for Prospect Medical
Group or any of its affiliates) from any present or potential patient or
other healthcare customer (including all third party payors) of Prospect
Medical Systems, Prospect Medical Group, or any of their affiliates;
sell, transfer, assign or otherwise permit another party to benefit from
any of the remaining assets including but not limited to goodwill, of
Prospect Medical Group attributable to Physician based upon the provision
of physician services by or through Physician;
engage or contract (other than with Prospect Medical Group or any of
Prospect Medical Group's Affiliates) for the provision of any management
services to Physician or any physician employed by or under contract to
Physician (as applicable) which are the same as or substantially similar to
any of the services that Prospect Medical Group or any of Prospect Medical
Group's Affiliates furnishes;
commit any other act or assist others to commit any other act which might
injure the healthcare business of Prospect Medical Group or Prospect
Medical Group's Affiliates;
directly or indirectly employ, contract, solicit or encourage any employee
or other person under contract with Prospect Medical Group or any of its
Affiliates to leave the employ of any such entity; or
directly or indirectly solicit, request, advise, or encourage any present
or future supplier, customer or employee of Prospect Medical Group or its
Affiliates (including practices
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<PAGE>
managed by Prospect Medical Group or its Affiliates) to withdraw,
curtail or cancel its business dealings with Prospect Medical Group or
its affiliates, or take any actions that might impair the relations of
Prospect Medical Group or any of its Affiliates and their respective
suppliers, customers, employees or others.
2. CONFIDENTIALITY. From and after the Closing Date, Physician shall keep
secret and retain in strictest confidence, and shall not use for the benefit
of Physician or others, except on behalf of Prospect Medical Group or any of
Prospect Medical Group's Affiliates, all confidential matters and trade
secrets known to Physician relating to the healthcare business and operations
of Physician, Prospect Medical Systems, Prospect Medical Group or any of
their affiliates, including without limitation, customer lists, pricing
policies, operational methods, marketing plans or strategies, product
development techniques or plans, business acquisition plans, new personnel
designs and design projects, invention and research projects and other
business affairs relating to the business and operations of Physician,
Prospect Medical Systems, Prospect Medical Group or any of their affiliates
learned by Physician heretofore or hereafter, and shall not disclose them to
anyone outside of Prospect Medical Group and its Affiliates, provided
however, that this section shall not apply to information in the public
domain or to information that is sought from Physician pursuant to subpoena
or court order (but Physician must provide notice to Prospect Medical Group
or its Affiliates in order for them to have the opportunity to contest such
subpoenas or court orders).
3. PHYSICIAN'S REPRESENTATION. Physician specifically acknowledges,
represents, and warrants that (i) Physician's covenants set forth in this
Agreement are being made in connection with the granting of the Option to
Prospect Medical Systems, (ii) such covenants are reasonable and necessary to
protect the legitimate interests of Prospect Medical Group, and (iii) Prospect
Medical Group would not have entered into the Assignable Option Agreement in the
absence of such restrictions. Physician acknowledges that this Agreement is
subject to all representations, warranties and covenants of Prospect Medical
Group and in the Assignable Option Agreement.
4. SERVICE AREA. The Service Area to which Physician's covenants in Section 1
apply is defined as the area within a fifteen (15) mile radius (or the maximum
radius permitted by law, if less) of each facility of Physician or Prospect
Medical Group now existing or hereafter established. For reference, the current
facilities are listed in Attachment A hereto.
5. TERM. The term of this Agreement commences as of the day and year first
above written and terminates upon the later to occur of:
(i) the date which is three (3) years following the day and year first
above written; or
(ii) the date which is three (3) years following the termination or
expiration of the Primary Care Physician Services Agreement through no
fault of Physician.
-3-
<PAGE>
6. MISCELLANEOUS.
6.1 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
shall inure to the benefit of the parties and their respective heirs (as
applicable), legal representatives, and permitted successors and assigns. No
party may assign this Agreement or the rights, interests or obligations
hereunder; PROVIDED, however, Prospect Medical Group may, (i) assign any or all
of its rights and interests hereunder to one or more of its Affiliates and (ii)
designate one or more of its Affiliates to perform its obligations hereunder (in
any or all of which cases Prospect Medical Group shall remain liable and
responsible for the performance of all of its obligations hereunder). Any
assignment or delegation in contravention of this Section shall be null and
void.
6.2 COUNTERPARTS. This Agreement, and any amendments thereto, may be
executed in counterparts, each of which shall constitute an original document,
but which together shall constitute one and the same instrument.
6.3 HEADINGS. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
6.4 AMENDMENT. This Agreement may not be amended except by a writing
executed by all parties.
6.5 TIME OF ESSENCE. Time is expressly made of the essence of this
Agreement and each and every provision hereof of which time of performance is a
factor.
6.6 NOTICES. Any notices required or permitted to be given hereunder by
any party to the other shall be in writing and shall be deemed delivered upon
personal delivery; twenty-four (24) hours following deposit with a courier for
overnight delivery; or seventy-two (72) hours following deposit in the U.S.
Mail, registered or certified mail, postage prepaid, return-receipt requested,
addressed to the parties at the following addresses or to such other addresses
as the parties may specify in writing:
If to Physician: Gregg DeNicola, M.D.
18200 Yorba Linda Blvd., Suite 409
Yorba Linda, CA 92686
If to Prospect Medical Group: Prospect Medical Group, Inc.
18200 Yorba Linda Blvd., Suite 409
Yorba Linda, CA 92686
Attn: President
6.7 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
6.8 INJUNCTIVE RELIEF. The parties hereto acknowledge and agree that a
breach by Physician of this Agreement will cause irreparable damage to
Prospect Medical Group, the exact
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<PAGE>
amount of which will cause difficult to ascertain, and that remedies at law
for any such breach will be inadequate. Accordingly, Physician agrees that
if Physician breaches this Agreement, then Prospect Medical Group shall be
entitled to injunctive relief, and Physician agrees not to assert in any
proceeding that Prospect Medical Group has an adequate remedy at law.
Physician shall pay the reasonable fees and expenses, including attorneys
fees, incurred by Prospect Medical Group or any successor or assign in
enforcing this Agreement.
6.9 SEVERABILITY. If any provision or portion of this Agreement is held
by a court of competent jurisdiction to be invalid or unenforceable, the
remainder of this Agreement will nevertheless continue in full force and effect
and shall not be invalidated or rendered unenforceable or otherwise adversely
affected, unless such invalidity or unenforceability would defeat an essential
business purpose of this Agreement. Without limiting the generality of the
foregoing, if the provisions of this Agreement shall be deemed to create a
restriction, which is unreasonable as to either duration or geographical area or
both, the parties agree that the provisions of this Agreement shall be enforced
for such duration and in such geographic area as any court of competent
jurisdiction may determine to be reasonable.
6.10 ATTORNEYS' FEES. Should either Prospect Medical Group or Physician
institute any action or procedure to enforce this Agreement or any provision
hereof, or for damages by reason of any alleged breach of this Agreement or of
any provision hereof, or for a declaration of rights hereunder (including
without limitation arbitration), the prevailing party in any such action or
proceeding shall be entitled to receive from the other party all costs and
expenses, including without limitation reasonable attorneys' fees, incurred by
the prevailing party in connection with such action or proceeding.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first written above.
"Prospect Medical Group"
PROSPECT MEDICAL GROUP, INC.,
a California professional medical corporation
By: /s/ Gregg DeNicola
----------------------------------
Gregg DeNicola, M.D., President
"PHYSICIAN"
/s/ Gregg DeNicola
- ---------------------------------------
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<PAGE>
ATTACHMENT A
FACILITY ADDRESSES
18200 Yorba Linda Blvd., Suites 102, 104, 108, 401 and 409
Yorba Linda, CA 92686
23961 Calle De La Magdalena, Suite 517
Laguna Hills, CA
1001 East Chapman Avenue, Suite A
Fullerton, CA 92635
17021 Yorba Linda Boulevard, Suite 70 and Suite 200
Yorba Linda, CA 92686
13372 Newport Avenue, Suites H,I,J
Tustin, CA 92680
-6-
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is executed as of the
31st day of July, 1996, by and between Med-Search, Inc., a Delaware corporation
("Employer"), and Gregg DeNicola, M.D. ("Employee").
P R E A M B L E
A. Employer is a provider of management services to medical practices;
and
B. Employer desires to obtain the services of Employee as President of
Employer, and Employee desires to be employed by Employer, upon the terms and
conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the sufficiency of which is hereby acknowledged, the
parties agree as follows:
1. TERMS AND CONDITIONS OF EMPLOYMENT
1.1 EMPLOYMENT. Employer hereby employs Employee and Employee hereby
accepts employment as President of Employer subject to the terms and conditions
hereinafter set forth.
1.2 FULL-TIME EMPLOYMENT. Employee agrees to devote his full time and
attention to the performance of his duties as President of Employer. Employee's
duties shall include, but not be limited to, the following:
(a) General supervision, direction, and control of the business and
the officers of Employer, subject to the control of the Board of Directors;
(b) In the absence of the Chairman of the Board, preside at all
meetings of the shareholders and at all meetings of the Board of Directors; and
(c) Such other powers and duties as may be prescribed by the Board of
Directors or the Bylaws of Employer.
2. COMPENSATION
2.1 SALARY. Employer shall pay Employee the salary of three hundred
thousand dollars ($300,000) per annum. Employer shall pay Employee in
accordance with Employer's policies for the payment of exempt, salaried
employees in effect from time to time. Salary payments are to be reduced by the
cost of and subject to all state and federal withholding taxes and any other
applicable taxes.
<PAGE>
2.2 PERFORMANCE CRITERIA. Employer may determine from time to time to pay
Employee additional compensation/discretionary bonus(es). Any such
determination shall be made by the Compensation Committee, or similar committee,
if any, of the Board of Directors of Employer or, if there is no such committee,
by the Board of Directors of Employer.
2.3 BENEFITS. During the term of this Agreement, Employer shall provide
Employee and his or her beneficiaries with certain employment benefits,
including but not limited to health insurance benefits. However, Employer's
life insurance company and/or disability insurer may require Employee to
satisfactorily pass a physical examination in order to issue a life insurance
policy to Employee, and Employee shall comply with all such reasonable
requirements. In addition, Employer may elect to obtain key-man life insurance
coverage on Employee, and Employee agrees to submit to any required examination
therefor. Employee shall be entitled to participate in Employer's retirement
and other benefit plans as offered from time to time at a level commensurate
with the retirement benefits offered to Employer's other employees at the
Practice.
3. TERM AND TERMINATION OF AGREEMENT
3.1 CONTRACT TERM. The initial term of this Agreement shall commence on
the closing of the merger of Employer and Med-Search, Inc., a Delaware
corporation (the "Effective Date"), and shall continue for a period of three (3)
years, subject to earlier termination of this Agreement as provided herein.
3.2 TERMINATION WITHOUT CAUSE. No party may terminate this Agreement or
Employee's employment hereunder, without cause.
3.3 TERMINATION BY EMPLOYER. Employer may terminate Employee's employment
hereunder at any time for "cause" by giving written notice of termination to the
defaulting party (the "Termination Notice"). In the event such breach is not
cured within thirty (30) days after the giving of the Termination Notice, this
Agreement shall automatically terminate at the election of the Employer thirty
(30) days after the giving of the Termination Notice. Cause includes the
following:
(a) Upon material violation by Employee of any provision of this
Agreement.
(b) Upon total disability of Employee, as defined in Employer's
policies and procedures; or upon inability of Employee to perform duties
required hereunder for a designated period of time in accordance with Employer's
employment policies and procedures.
(c) Upon Employee's conviction of a felony or crime of moral
turpitude.
(d) Upon the use of alcohol or a controlled substance which
materially impairs the ability of Employee to effectively perform Employee's
duties and obligations under this Agreement.
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<PAGE>
3.4 TERMINATION BY EMPLOYEE. Employee may terminate his or her employment
hereunder at any time for "cause." Cause is limited to Employer's breach of its
obligation to provide Employee with the Compensation and Benefits required
pursuant to this Agreement. In the event Employee terminates this Agreement for
cause, termination shall be effective immediately upon notification to Employer
by Employee.
3.5 EFFECT OF TERMINATION. Upon and after termination of this Agreement,
Employee will be provided full access to copy Employer patient medical records
in the event of a malpractice action or administrative investigation or
proceeding against Employee.
4. CONFIDENTIALITY/TRADE SECRETS. Employee acknowledges that his position
with Employer will be one of the highest trust and confidence both by reason of
his position and by reason of his access to and contact with the trade secrets
and confidential and propriety business information of Employer and all of its
Affiliates (as defined below), during the term of this Agreement and thereafter.
Employee covenants and agrees as follows:
4.1 PROTECTION. That Employee shall use his best efforts and exercise
utmost diligence to protect and safeguard the trade secrets and confidential and
proprietary information of Employer and its "Affiliates" (which term as used in
this Agreement shall include any person, corporation, partnership, general
partner or other entity that directly, or indirectly through one or more
intermediaries, controls or is controlled by or is under common control with
Employer), including, without limitation, their trade secrets, proprietary
information, the identity of their customers and suppliers, their arrangements
with their customers and suppliers, and their technical data, records,
compilations of information, processes, computer software, and specifications
relating to their customers, suppliers, products and services (collectively,
"Confidential Information").
4.2 NON-DISCLOSURE. That Employee shall not disclose any Confidential
Information, except as may be required in the course of his employment or as may
be required by law.
4.3 NON-USAGE. That Employee shall not use, directly or indirectly, for
his own benefit or for the benefit of another, any Confidential Information.
The covenants contained in this Section 4 shall not be applicable to any
information which is in the public domain other than as a result of action by
Employee or which Employee can establish was obtained from sources other than
Employer or any of its Affiliates, who are not under a duty of nondisclosure.
All Confidential Information and all files, records, documents, drawings,
specifications, computer software, memoranda, notes, or other documents relating
thereto or otherwise relating to the business of Employer and its Affiliates,
whether prepared by Employee or otherwise coming into his possession, shall be
the exclusive property of Employer (and/or its Affiliates, as applicable) and
shall be delivered to Employer or its Affiliates as appropriate and not retained
by (nor any copies thereof retained by) Employee upon termination of his
employment for any reason whatsoever.
-3-
<PAGE>
5. NON-COMPETITION. Employee covenants and agrees that:
5.1 NON-COMPETITION. So long as Employee is receiving any compensation
from Employer pursuant to this Agreement, Employee shall not, without the prior
written consent of Employer, directly or indirectly, as an employee, employer,
agent, principal, proprietor, partner, shareholder, consultant, director, or
corporate officer, engage in any business or render any services to any business
that is in direct competition with the business of Employer, any of its
affiliates or any individual, corporation, firm, partnership, association or
other entity to which Employer or any of its affiliates provides services under
an agreement with such individual, corporation, firm, partnership, association
or other entity within a fifteen (15) mile radius area of each facility of
Employer or any of its affiliates now existing or hereafter established. For
reference, the current facilities of Employer and its affiliates are listed in
Attachment A hereto.
5.2 MODIFICATION. If the scope of any restrictions contained in Section 5
hereof are too broad to permit enforcement of such restrictions to their full
extent, then such restrictions shall be enforced to the maximum extent permitted
by law, and Employee hereby consents and agrees that such scope may be modified
accordingly in any proceeding brought to enforce such restrictions.
6. REMEDIES FOR BREACH OF COVENANTS OF EMPLOYEE. The covenants set forth in
Sections 4 and 5 of this Agreement shall continue to be binding upon Employee
notwithstanding the termination of his employment with Employer for any reason
whatsoever. Such covenants shall be deemed and construed as separate agreements
independent of any other provision of this Agreement. The existence of any
claim or cause of action by Employee against Employer or any of its Affiliates,
whether predicated on this Agreement or otherwise, shall not constitute a
defense to the enforcement by Employer or any of its Affiliates of any or all of
such covenants. It is expressly agreed that the remedy at law for the breach of
any such covenant is inadequate and that temporary and permanent injunctive
relief shall be available to prevent the breach or any threatened breach
thereof, without the necessity of proof of actual damages and without the
necessity of posting a bond, cash or otherwise. In this connection, Employee
agrees not to assert any defense that monetary damages would be sufficient.
7. ARBITRATION. The parties firmly desire to resolve all disputes arising
hereunder without resort to litigation in order to protect their respective
business reputations and the confidential nature of certain aspects of their
relationship. Accordingly, any controversy or claim arising out of or relating
to this Agreement, or the breach thereof, shall be settled by arbitration as set
forth below.
(1) All disputes which in any manner arise out of or relate to this
Agreement or the subject matter thereof, shall be resolved exclusively by
arbitration in accordance with the provisions of this Section 7. Either party
may commence arbitration by sending a written demand for arbitration to the
other party, setting forth the nature of the controversy, the dollar amount
involved, if any, and the remedies sought, and attaching a copy of this Section
to the demand.
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<PAGE>
(2) There shall be one arbitrator. If the parties shall fail to select a
mutually acceptable arbitrator within ten (10) days after the demand for
arbitration is mailed, then the parties stipulate to arbitration before a single
arbitrator sitting on the Los Angeles, California Judicial Arbitration Mediation
Services (JAMS) panel, and selected in the sole discretion of the JAMS
administrator.
(3) The parties shall share all costs of arbitration. The prevailing
party shall be entitled to reimbursement by the other party of such party's
attorneys' fees and costs and any arbitration fees and expenses incurred in
connection with the arbitration hereunder.
(4) The substantive law and the Evidence Code of the State of California
shall be applied by the arbitrator, except that the arbitrator's authority in
awarding damages shall be interpreted under New York law. THE PARTIES AGREE
THAT THE ARBITRATOR SHALL HAVE NO AUTHORITY TO AWARD PUNITIVE DAMAGES, AND THE
PARTIES HAVE BEEN ADVISED TO SEEK COUNSEL CONCERNING THE POSSIBLE WAIVER BY THE
PARTIES OF CERTAIN RIGHTS OTHERWISE AVAILABLE AS A CONSEQUENCE OF SUCH
AGREEMENT.
(5) Arbitration shall take place in Los Angeles, California unless the
parties otherwise agree. As soon as reasonably practicable, a hearing with
respect to the dispute or matter to be resolved shall be conducted by the
arbitrator. As soon as reasonably practicable thereafter, the arbitrator shall
arrive at a final decision, which shall be reduced to writing, signed by the
arbitrator and mailed to each of the parties and their legal counsel.
(6) All decisions of the arbitrator shall be final, binding and conclusive
on the parties and shall constitute the only method of resolving disputes or
matters subject to arbitration pursuant to this Agreement. The arbitrator or a
court of appropriate jurisdiction may issue a writ of execution to enforce the
arbitrator's judgment. Judgment may be entered upon such a decision in
accordance with applicable law in any court having jurisdiction thereof.
(7) Notwithstanding the foregoing, because time is of the essence of this
Agreement, the parties specifically reserve the right to seek a judicial
temporary restraining order, preliminary injunction, or other similar short term
equitable relief, and grant the arbitrator the right to make a final
determination of the parties' rights, including whether to make permanent or
dissolve such court order.
(8) The decision and award of the arbitrator shall be kept confidential by
the parties to the greatest extent possible. No disclosure of such decision or
award shall be made by the parties except as required by law or as necessary or
appropriate to effect the enforcement thereof.
-5-
<PAGE>
8. MISCELLANEOUS.
8.1 NOTICES. Any notice, demand, or communication required, permitted or
desired to be given hereunder shall be deemed effectively given when personally
delivered or mailed by prepaid certified mail, return receipt requested,
addressed as follows:
Employee: Gregg DeNicola, M.D.
18200 Yorba Linda Boulevard, Suite 409
Yorba Linda, California 92686
Employer: Med-Search, Inc.
18200 Yorba Linda Boulevard, Suite 409
Yorba Linda, California 92686
Attention: Chief Executive Officer
8.2 GOVERNING LAW. This Agreement has been executed and delivered and
shall be interpreted, construed, and enforced in accordance with the laws of the
State of California.
8.3 ENFORCEMENT. In the event that either party shall be required to
enforce the terms of this Agreement, whether with or without arbitration, the
prevailing party shall be entitled to recover the costs of such action,
including reasonable attorneys' fees.
8.4 ENTIRE AGREEMENT. This Agreement shall constitute the entire
agreement of the parties with respect to the subject matter hereof and may not
be amended except in writing signed by both of the parties hereto. No oral
statements or prior written materials not specifically incorporated herein shall
be of any force or effect.
8.5 SEVERABILITY. In the event any provision of this Agreement is held to
be unenforceable or void for any reason, the remainder of the Agreement shall be
unaffected and shall remain in full force and effect in accordance with its
terms, unless such unenforceability or voidness defeats an essential business
term hereof.
8.6 ASSIGNMENT. Neither this Agreement nor any of the rights of
obligations of the parties hereunder shall be assignable by either party,
whether voluntarily or by operation of law. Any attempted assignment, transfer,
pledge or hypothecation or other disposition of this Agreement or of any such
rights, interests and benefits shall be null and void and without effect.
8.7 BINDING EFFECT. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective heirs, legal representatives,
executors, administrators, successors and permitted assigns.
8.8 HEADINGS. The headings used herein are for convenience only and do
not limit the contents of this Agreement.
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<PAGE>
8.9 COUNTERPARTS. This Agreement may be executed in counterparts, each of
which will be deemed to be an original, but all of which together will
constitute one and the same agreement.
8.10 COMPLIANCE WITH LAW. The parties recognize that this Agreement at all
times is to be subject to applicable state, local and federal law.
8.11 WAIVERS. The waiver of any of the provisions hereof shall not be
effective unless in writing and signed by the party intending to be bound
thereby. The waiver by either party of any act to be performed hereunder will
not constitute a waiver of any other act or identical act required to be
performed at a later time.
IN WITNESS WHEREOF, this Agreement has been executed by the parties as of
the day and year first above written.
MED-SEARCH, INC. GREGG DeNICOLA, M.D.
By: /s/ Gregg DeNicola /s/ Gregg DeNicola
----------------------------- ------------------------------
Its: President
-----------------------------
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<PAGE>
ATTACHMENT A
FACILITY ADDRESSES
18200 Yorba Linda Blvd., Suites 102, 104, 108, 401, 409
Yorba Linda, CA 92686
23961 Calle De La Magdalena, Suite 517
Laguna Hills, CA
1001 East Chapman Avenue, Suite A
Fullerton, CA 92635
17021 Yorba Linda Boulevard, Suite 70 and Suite 200
Yorba Linda, CA 92686
13372 Newport Avenue, Suites H, I, J
Tustin, CA 92680
-8-
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is executed as of the 31st
day of July, 1996, by and between Med-Search, Inc., a Delaware corporation
("Employer"), and Jacob Y. Terner, M.D. ("Employee").
P R E A M B L E
A. Employer is a provider of management services to medical practices;
and
B. Employer desires to obtain the services of Employee as Chief
Executive Officer of Employer, and Employee desires to be employed by Employer,
upon the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the sufficiency of which is hereby acknowledged, the
parties agree as follows:
1. TERMS AND CONDITIONS OF EMPLOYMENT
1.1 EMPLOYMENT. Employer hereby employs Employee and Employee hereby
accepts employment as Chief Executive Officer of Employer subject to the terms
and conditions hereinafter set forth.
1.2 FULL-TIME EMPLOYMENT. Employee agrees to devote his full time and
attention to the performance of his duties as Chief Executive Officer of
Employer. Employee's duties shall include, but not be limited to, the following:
(a) General supervision, direction, and control of the business
and the officers of Employer, subject to the control of the Board of Directors;
(b) Preside at all meetings of the shareholders and at all
meetings of the Board of Directors; and
(c) Such other powers and duties as may be prescribed by the Board
of Directors or the Bylaws of Employer.
2. COMPENSATION
2.1 SALARY. Employer shall reimburse Employee for any and all costs,
fees and expenses incurred by Employee in the course of his duties as Chief
Executive Officer. Employee acknowledges that, due to Employer's current
financial condition, Employer does not have sufficient funds to adequately
compensate Employee for his services. Employer and Employee agree to negotiate a
fair and equitable salary to compensate Employee for his services, in accordance
with the policies and procedures established by the Board of Directors, at such
time as Employer's financial condition improves. At that time, Employer shall
pay Employee in accordance with Employer's policies for the payment of exempt,
salaried employees in effect from
<PAGE>
time to time. Salary payments are to be reduced by the cost of and subject to
all state and federal withholding taxes and any other applicable taxes
2.2 PERFORMANCE CRITERIA. Employer may determine from time to time to
pay Employee additional compensation/discretionary bonus(es). Any such
determination shall be made by the Compensation Committee, or similar
committee, if any, of the Board of Directors of Employer or, if there is no
such committee, by the Board of Directors of Employer.
2.3 BENEFITS. During the term of this Agreement, Employer shall
provide Employee and his or her beneficiaries with certain employment
benefits, including but not limited to health insurance benefits. However,
Employer's life insurance company and/or disability insurer may require
Employee to satisfactorily pass a physical examination in order to issue a
life insurance policy to Employee, and Employee shall comply with all such
reasonable requirements. In addition, Employer may elect to obtain key-man
life insurance coverage on Employee, and Employee agrees to submit to any
required examination therefor. Employee shall be entitled to participate in
Employer's retirement and other benefit plans as offered from time to time at
a level commensurate with the retirement benefits offered to Employer's other
employees at the Practice.
3. TERM AND TERMINATION OF AGREEMENT
3.1 CONTRACT TERM. The initial term of this Agreement shall commence on
the closing of the merger of Employer and Med-Search, Inc., a Delaware
corporation (the "Effective Date"), and shall continue for a period of three (3)
years, subject to earlier termination of this Agreement as provided herein.
3.2 TERMINATION WITHOUT CAUSE. No party may terminate this Agreement or
Employee's employment hereunder, without cause.
3.3 TERMINATION BY EMPLOYER. Employer may terminate Employee's
employment hereunder at any time for "cause" by giving written notice of
termination to the defaulting party (the "Termination Notice"). In the event
such breach is not cured within thirty (30) days after the giving of the
Termination Notice, this Agreement shall automatically terminate at the election
of the Employer thirty (30) days after the giving of the Termination Notice.
Cause includes the following:
(a) Upon material violation by Employee of any provision of this
Agreement.
(b) Upon total disability of Employee.
(c) Upon the use of alcohol or a controlled substance which
materially impairs the ability of Employee to effectively perform Employee's
duties and obligations under this Agreement.
3.4 TERMINATION BY EMPLOYEE Employee may terminate his or her
employment hereunder at any time for "cause." Cause is limited to Employer's
breach of its obligation to
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provide Employee with the Compensation and Benefits required pursuant to this
Agreement. In the event Employee terminates this Agreement for cause,
termination shall be effective immediately upon notification to Employer by
Employee.
3.5 EFFECT OF TERMINATION. Upon and after termination of this Agreement,
Employee will be provided full access to copy Employer patient medical records
in the event of a malpractice action or administrative investigation or
proceeding against Employee.
4. CONFIDENTIALITY/TRADE SECRETS. Employee acknowledges that his position
with Employer will be one of the highest trust and confidence both by reason
of his position and by reason of his access to and contact with the trade
secrets and confidential and propriety business information of Employer and
all of its Affiliates (as defined below), during the term of this Agreement
and thereafter. Employee covenants and agrees as follows:
4.1 PROTECTION. That Employee shall use his best efforts and exercise
utmost diligence to protect and safeguard the trade secrets and confidential
and proprietary information of Employer and its "Affiliates" (which term as
used in this Agreement shall include any person, corporation, partnership,
general partner or other entity that directly, or indirectly through one or
more intermediaries, controls or is controlled by or is under common control
with Employer), including, without limitation, their trade secrets,
proprietary information, the identity of their customers and suppliers, their
arrangements with their customers and suppliers, and their technical data,
records, compilations of information, processes, computer software, and
specifications relating to their customers, suppliers, products and services
(collectively, "Confidential Information").
4.2 NON-DISCLOSURE. That Employee shall not disclose any Confidential
Information, except as may be required in the course of his employment or as may
be required by law.
4.3 NON-USAGE. That Employee shall not use, directly or indirectly, for
his own benefit or for the benefit of another, any Confidential Information.
The covenants contained in this Section 4 shall not be applicable to any
information which is in the public domain other than as a result of action by
Employee or which Employee can establish was obtained from sources other than
Employer or any of its Affiliates, who are not under a duty of nondisclosure.
All Confidential Information and all files, records, documents, drawings,
specifications, computer software, memoranda, notes, or other documents relating
thereto or otherwise relating to the business of Employer and its Affiliates,
whether prepared by Employee or otherwise coming into his possession, shall be
the exclusive property of Employer (and/or its Affiliates, as applicable) and
shall be delivered to Employer or its Affiliates as appropriate and not retained
by (nor any copies thereof retained by) Employee upon termination of his
employment for any reason whatsoever.
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5. NON-COMPETITION. Employee covenants and agrees that:
5.1 NON-COMPETITION. So long as Employee is receiving any compensation
from Employer pursuant to this Agreement, Employee shall not, without the
prior written consent of Employer, directly or indirectly, as an employee,
employer, agent, principal, proprietor, partner, shareholder, consultant,
director, or corporate officer, engage in any business or render any services
to any business that is in direct competition with the business of Employer
or any of its affiliates within a ten (10) mile radius area of 18200 Yorba
Linda Boulevard, Suite 409, Yorba Linda, California.
5.2 MODIFICATION. If the scope of any restrictions contained in Section
5 hereof are too broad to permit enforcement of such restrictions to their full
extent, then such restrictions shall be enforced to the maximum extent permitted
by law, and Employee hereby consents and agrees that such scope may be modified
accordingly in any proceeding brought to enforce such restrictions.
6. REMEDIES FOR BREACH OF COVENANTS OF EMPLOYEE. The covenants set forth in
Sections 4 and 5 of this Agreement shall continue to be binding upon Employee
notwithstanding the termination of his employment with Employer for any reason
whatsoever. Such covenants shall be deemed and construed as separate agreements
independent of any other provision of this Agreement. The existence of any claim
or cause of action by Employee against Employer or any of its Affiliates,
whether predicated on this Agreement or otherwise, shall not constitute a
defense to the enforcement by Employer or any of its Affiliates of any or all of
such covenants. It is expressly agreed that the remedy at law for the breach of
any such covenant is inadequate and that temporary and permanent injunctive
relief shall be available to prevent the breach or any threatened breach
thereof, without the necessity of proof of actual damages and without the
necessity of posting a bond, cash or otherwise. In this connection, Employee
agrees not to assert any defense that monetary damages would be sufficient.
7. ARBITRATION The parties firmly desire to resolve all disputes arising
hereunder without resort to litigation in order to protect their respective
business reputations and the confidential nature of certain aspects of their
relationship. Accordingly, any controversy or claim arising out of or relating
to this Agreement, or the breach thereof, shall be settled by arbitration as
set forth below.
(1) All disputes which in any manner arise out of or relate to this
Agreement or the subject matter thereof, shall be resolved exclusively by
arbitration in accordance with the provisions of this Section 7. Either party
may commence arbitration by sending a written demand for arbitration to the
other party, setting forth the nature of the controversy, the dollar amount
involved, if any, and the remedies sought, and attaching a copy of this Section
to the demand.
(2) There shall be one arbitrator. If the parties shall fail to select a
mutually acceptable arbitrator within ten (10) days after the demand for
arbitration is mailed, then the parties stipulate to arbitration before a single
arbitrator sitting on the Los Angeles, California Judicial Arbitration Mediation
Services (JAMS) panel, and selected in the sole discretion of the JAMS
administrator.
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(3) The parties shall share all costs of arbitration. The prevailing
party shall be entitled to reimbursement by the other party of such party's
attorneys' fees and costs and any arbitration fees and expenses incurred in
connection with the arbitration hereunder.
(4) The substantive law and the Evidence Code of the State of
California shall be applied by the arbitrator, except that the arbitrator's
authority in awarding damages shall be interpreted under New York Law. THE
PARTIES AGREE THAT THE ARBITRATOR SHALL HAVE NO AUTHORITY TO AWARD PUNITIVE
DAMAGES, AND THE PARTIES HAVE BEEN ADVISED TO SEEK COUNSEL CONCERNING THE
POSSIBLE WAIVER BY THE PARTIES OF CERTAIN RIGHTS OTHERWISE AVAILABLE AS A
CONSEQUENCE OF SUCH AGREEMENT.
(5) Arbitration shall take place in Los Angeles, California unless the
parties otherwise agree. As soon as reasonably practicable, a hearing with
respect to the dispute or matter to be resolved shall be conducted by the
arbitrator. As soon as reasonably practicable thereafter, the arbitrator shall
arrive at a final decision, which shall be reduced to writing, signed by the
arbitrator and mailed to each of the parties and their legal counsel.
(6) All decisions of the arbitrator shall be final, binding and
conclusive on the parties and shall constitute the only method of resolving
disputes or matters subject to arbitration pursuant to this Agreement. The
arbitrator or a court of appropriate jurisdiction may issue a writ of execution
to enforce the arbitrator's judgment. Judgment may be entered upon such a
decision in accordance with applicable law in any court having jurisdiction
thereof.
(7) Notwithstanding the foregoing, because time is of the essence of
this Agreement, the parties specifically reserve the right to seek a judicial
temporary restraining order, preliminary injunction, or other similar short term
equitable relief, and grant the arbitrator the right to make a final
determination of the parties' rights, including whether to make permanent or
dissolve such court order.
(8) The decision and award of the arbitrator shall be kept confidential
by the parties to the greatest extent possible. No disclosure of such decision
or award shall be made by the parties except as required by law or as necessary
or appropriate to effect the enforcement thereof.
8. MISCELLANEOUS.
8.1 NOTICES. Any notice, demand, or communication required, permitted
or desired to be given hereunder shall be deemed effectively given when
personally delivered or mailed by prepaid certified mail, return receipt
requested, addressed as follows:
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Employee: Jacob Y. Terner, M. D.
205 Chautauqua Boulevard
Pacific Palisades, California 90272
Employer: Prospect Medical Systems, Inc.
18200 Yorba Linda Boulevard, Suite 409
Yorba Linda, California 92686
Attention: President
8.2 GOVERNING LAW. This Agreement has been executed and delivered and
shall be interpreted, construed, and enforced in accordance with the laws of the
State of California.
8.3 ENFORCEMENT. In the event that either party shall be required to
enforce the terms of this Agreement, whether with or without arbitration, the
prevailing party shall be entitled to recover the costs of such action,
including reasonable attorneys' fees.
8.4 ENTIRE AGREEMENT. This Agreement shall constitute the entire
agreement of the parties with respect to the subject matter hereof and may not
be amended except in writing signed by both of the parties hereto. No oral
statements or prior written materials not specifically incorporated herein shall
be of any force or effect.
8.5 SEVERABILITY. In the event any provision of this Agreement is held
to be unenforceable or void for any reason, the remainder of the Agreement shall
be unaffected and shall remain in full force and effect in accordance with its
terms, unless such unenforceability or voidness defeats an essential business
term hereof.
8.6 ASSIGNMENT. Neither this Agreement nor any of the rights of
obligations of the parties hereunder shall be assignable by either party,
whether voluntarily or by operation of law. Any attempted assignment, transfer,
pledge or hypothecation or other disposition of this Agreement or of any such
rights, interests and benefits shall be null and void and without effect.
8.7 BINDING EFFECT. This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective heirs, legal
representatives, executors, administrators, successors and permitted assigns.
8.8 HEADINGS. The headings used herein are for convenience only and do
not limit the contents of this Agreement.
8.9 COUNTERPARTS. This Agreement may be executed in counterparts, each
of which will be deemed to be an original, but all of which together will
constitute one and the same agreement.
8.10 COMPLIANCE WITH LAW. The parties recognize that this Agreement at
all times is to be subject to applicable state, local and federal law.
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8.11 WAIVERS. The waiver of any of the provisions hereof shall not be
effective unless in writing and signed by the party intending to be bound
thereby. The waiver by either party of any act to be performed hereunder will
not constitute a waiver of any other act or identical act required to be
performed at a later time.
IN WITNESS WHEREOF, this Agreement has been executed by the parties as of
the day and year first above written.
MED-SEARCH, INC. JACOB Y. TERNER, M.D.
By: /s/ Gregg DeNicola /s/ Jacob Y. Terner, M.D.
------------------------- ----------------------------
Its: President
-------------------------
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INVESTMENT AGREEMENT
This INVESTMENT AGREEMENT ("Agreement") is made and entered into as of
July 31, 1996, by and between MED-SEARCH, INC., a Delaware corporation
("Corporation") and JACOB Y. TERNER, M.D. and his assigns and designees
("Terner").
RECITALS
WHEREAS, the Corporation is a provider of medical practice management and
administrative services which is currently operating in a severely distressed
financial condition; and
WHEREAS, the Corporation has previously engaged in discussions with Terner
regarding the merger of the Corporation with another, more financially viable
provider of managed care services and the raising of capital for such ventures;
and
WHEREAS, the Corporation and Terner have entered into a binding memorandum
of intent dated as of October 13, 1995, which provides for the merger of a
wholly owned subsidiary of the Corporation with a management services
organization in a tax-free, stock for stock exchange; and
WHEREAS, pursuant to that certain Agreement and Plan of Reorganization, a
copy of which is attached hereto as Exhibit A (the "Merger Agreement"), the
Corporation proposes to merge Med-Search Acquisition Corporation, with and into
Prospect Medical Systems, Inc., a Delaware corporation (the "Merger"); and
WHEREAS, the Merger will result in part in Terner becoming Chairman of the
Board and Chief Executive Officer of the Corporation; and
WHEREAS, the Corporation requires the infusion of a substantial amount of
new capital in order to address its current severely distressed financial
condition; and
WHEREAS, the infusion of such capital, in the amount of $2,500,000, is also
a condition of the Merger; and
WHEREAS, Terner has been advancing funds to the Corporation to permit it to
continue its operations prior to the Merger and to assist it in obtaining
settlements with its creditors and other claimants; and
<PAGE>
WHEREAS, the Corporation and Terner have agreed to raise an aggregate of
$2,500,000 through the issuance of the common stock ("Stock") of the
Corporation, at the price and upon the other terms and conditions set forth in
the Preliminary Confidential Private Offering Memorandum, attached hereto as
Exhibit B, and any subsequent amendments or supplements thereto (collectively,
the "Offering Memorandum") and in this Agreement (the "Offering"); and
WHEREAS, the Offering Memorandum describes the business of the Corporation
and has been prepared using information provided by the Corporation.
NOW, THEREFORE, in consideration of the recitals set forth above and the
covenants and conditions set forth below, the Corporation and Terner hereby
agree as follows:
1. AGREEMENT. On the basis of the representations and warranties
of the Corporation contained herein, and subject to the terms and conditions
set forth herein, Terner agrees to arrange for a $2,500,000 equity investment
in the Corporation, during the period commencing on the date hereof and
terminating on the Expiration Date, as defined in the Offering Memorandum, at
the price and upon the other terms and conditions set forth in the Offering
Memorandum and in the attachments thereto. Terner shall have no obligation
to continue or to complete his performance under this Agreement if any of the
representations, warranties or covenants of the Corporation contained in this
Agreement or in the Merger Agreement are not accurate and complete as of the
closing of the Merger. Until the closing of the Merger, the Corporation shall
have no claim to any proceeds of, or any rights based upon, commitments
obtained by, or funds delivered to, Terner prior to such closing.
Immediately following such closing, Terner shall be required to deliver to
the Corporation investor commitments, and payment for the shares of stock of
the Corporation represented thereby, in the total amount of $2,500,000,
consisting of cash and/or receipts for Reimbursable Expenses as defined in
Section 2 below.
2. REIMBURSEMENT. The Corporation shall reimburse Terner, his assigns
and/or designees for the reasonable costs and expenses ("Reimbursable Expenses")
he (they) has (have) incurred or advanced, or will incur or advance on behalf of
the Corporation, or otherwise, in connection with his performance of his
obligations pursuant to this Agreement, including, but not limited to, legal,
accounting, appraisal and other fees of professionals, and travel and other
fees, costs and expenses associated with: (i) this Offering and/or the Merger,
including, but not limited to, fees, costs and expenses associated with
obtaining audits of the Corporation, Prospect Medical Systems, Inc., Prospect
Medical Group, Inc., and Suncrest Medical Group, Inc, and fees, costs and
expenses associated with the Fairness Opinion with respect to the Merger being
sought from The Mentor Group, and any amounts payable by Terner to Barbara Noble
and the Noble 1992 Family Trust (the "Trust") pursuant to Section 2.1 of that
certain Agreement, made and entered into as of even date herewith, by and among
Terner, Barbara Noble, both individually and as representative of Joseph W.
Noble, M.D., and the Trust and (ii) any letter of intent relating to the
formation or acquisition of other medical groups or independent practice
associations and the preceding and subsequent negotiations with such entities,
including, but not limited to, the Letter
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of Intent with San Antonio Network of Physicians, P.A., and the Letter of
Intent with Ventu IPA. The Corporation shall reimburse Terner for such
expenses irrespective of whether the Merger closes. To receive reimbursement
of Reimbursable Expenses, Terner shall submit invoices therefor or other
reasonable evidence thereof accompanied by a Certificate in the form of
Exhibit D, attached hereto, certifying that such Reimbursable Expenses have
been incurred or advanced by Terner, his assigns and/or designees.
3. INVESTMENTS AND PAYMENT FOR STOCK.
(a) DELIVERY OF DOCUMENTS. Each person desiring to purchase Stock
through Terner will be required to execute and to deliver to Terner such
documents as Terner shall deem necessary or advisable, in conformance with the
Offering Memorandum, together with a check or other instrument satisfactory to
Terner, in the amount calculated pursuant to the Offering Memorandum and the
attachments thereto.
(b) PAYMENT FOR STOCK. The shares of stock of the Corporation to be
issued pursuant to the Offering shall be sold for the price set forth in the
Offering Memorandum. Payment for such shares of stock may be made in cash or,
at Terner's option, by cancellation of all or any portion of the Reimbursable
Expenses.
4. COVENANTS OF THE CORPORATION. The Corporation covenants and agrees as
follows:
(a) SECURITIES LAW QUALIFICATIONS. The Corporation will cooperate
with Terner and will use its best efforts to qualify the Stock for offering and
sale under the Securities Act of 1933, as amended (the "Act"), and Rule 4(2)
and/or Regulation D thereunder, and under the securities or Blue Sky laws of
California, New York or such jurisdictions as Terner may request, and to make
such applications, file such documents, and furnish such information as may
reasonably be required for such purposes.
(b) AMENDMENTS. If at any time before the Expiration Date, any event
occurs as a result of which the Offering Memorandum, as then amended or
supplemented, would include any untrue statement of a material fact or omit to
state a material fact necessary to make the statements therein not misleading,
or if it is necessary at any time to amend the Offering Memorandum to comply
with the Act, or with any Blue Sky law, the Corporation shall promptly notify
Terner thereof and provide Terner with such information as may be required to
prepare an amendment.
5. REPRESENTATIONS AND WARRANTIES OF THE CORPORATION. The Corporation
hereby represents and warrants that:
(a) COMPLIANCE WITH SECURITIES ACT. Any Preliminary Offering
Memorandum prepared for distribution to prospective investors will comply as to
form in all material respects with the requirements of the Act and the rules and
regulations thereunder, and will not include any
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untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make statements therein, in the
light of the circumstances under which they are made, not misleading; when
the final Offering Memorandum is distributed and at all times subsequent
thereto up to and including the Expiration Date: (i) the Offering Memorandum
and any amendment or supplements thereto will contain all statements which
are required to be stated therein by the Act and the rules and regulations
thereunder and will comply in all material respects with the Act and the
rules and regulations thereunder, and (ii) neither the Offering Memorandum
nor any amendment or supplement thereto will at any such time include any
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.
(b) NO SUBSEQUENT MATERIAL EVENTS. Subsequent to the respective
dates of which information is given in the Offering Memorandum and prior to the
Expiration Date, except as contemplated in the Offering Memorandum, the
Corporation has not incurred and will not have incurred any material liabilities
or obligations, direct or contingent, or entered into any material transactions
not in the ordinary course of business, and there has not been and will not have
been any material adverse change in the financial position or results of
operation of the Corporation.
(c) CORPORATION STATUS. The Corporation is a Delaware corporation
and has full power and authority to conduct its business and to enter into this
Agreement.
(d) AUTHORIZATION OF AGREEMENT. This Agreement has been duly
authorized, executed and delivered by the Corporation and constitutes a valid
and binding agreement of the Corporation enforceable in accordance with its
terms; the performance of this Agreement and the consummation of the
transactions contemplated herein and the fulfillment of the terms hereof will
not result in a breach of any of the terms and provisions of, or constitute a
default under, any statute, indenture, mortgage, deed of trust, note, agreement,
lease or other agreement or instrument to which the Corporation is a party or by
which it or any of its property is bound, or under any rule or regulation or
order of any court or other governmental agency or body applicable to the
Corporation; and no consent, approval, authorization or order of any court or
governmental agency or body has been or is required for the performance of this
Agreement by the Corporation, or for the consummation of the transactions
contemplated hereby and thereby, respectively (except such as have been obtained
under the Act, or as may be required under state securities or Blue Sky laws in
connection with the distribution of the Stock).
(e) MERGER AGREEMENT. All of the representations, covenants and
warranties of the Corporation contained in the Merger Agreement shall be
accurate and complete as of the closing of the Merger; and all of the
obligations of the Corporation required to be fulfilled as of the closing of the
Merger shall have been fulfilled.
(f) OFFICER'S CERTIFICATE. At the closing of the Merger, the
Corporation shall deliver to Terner an officer's certificate, in the form of
Exhibit C attached hereto, signed by the Corporation's president or vice
president, its chief financial officer, and its secretary, certifying
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that as of the date of such closing, all of the representations and
warranties of the Corporation are true on and as of such date of closing and
that all conditions specified in this Agreement to be fulfilled by the
Corporation have been fulfilled.
6. COVENANTS OF TERNER. Terner covenants and agrees with the Corporation
as follows:
(a) QUALIFICATIONS OF INVESTORS. Terner will use best efforts to
independently determine that each person who desires to invest in the
Corporation meets the investor suitability requirements set forth in the
Offering Memorandum, including without limitation that each investor is an
"accredited" investor. Such efforts shall include an independent verification,
by any reasonable means utilized in the ordinary course of business, of the
income and net worth of each person whose investment commitment is obtained by
Terner. In recommending to a prospective investor the purchase of Stock, Terner
will:
(1) have reasonable grounds to believe, on the basis of
information obtained from the prospective investor concerning his investment
objectives, other investments, financial situation and needs, and any other
information known by Terner, that:
(i) the prospective investor is or will be in a financial
position appropriate to enable him to realize to a significant extent any
benefits described in the Offering Memorandum;
(ii) the prospective investor has a fair market net worth
sufficient to sustain the risks inherent to an investment in the Corporation,
including loss of investment and lack of liquidity; and
(iii) investment in the Corporation is otherwise suitable
for the prospective investor; and
(2) maintain documents disclosing the basis upon which the
determination of suitability was reached as to each prospective investor.
7. INDEMNIFICATION. The Corporation shall indemnify and hold harmless
Terner and each of Terner's affiliates within the meaning of the Act against any
losses, claims, damages or liabilities, joint or several, including costs and
reasonable attorneys fees incurred in the investigation and defense of such
claims, to which Terner or such controlling person may become subject under the
Act or otherwise, insofar, as such losses, claims, damages or liabilities (or
actions in respect thereof), arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained in the Offering
Memorandum, or any amendment or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
and will reimburse Terner and each such affiliate for any legal or other
expenses
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<PAGE>
reasonably incurred in connection with investigating or defending any such
loss, claim, damage, liability or action.
8. NOTICE. Any notice, payment, demand or communication required or
permitted to be given by any provision of this Agreement shall be deemed to have
been sufficiently given or served for all purposes if delivered personally in
writing to the party or to an officer of the party to whom the same is directed
or if sent by registered or certified mail, postage and charges prepaid,
addressed as follows:
If to Corporation:
Med-Search, Inc.
15102 Bolsa Chica Road, Suite D
Huntington Beach, California 92649
If to Terner:
Jacob Y. Terner, M.D.
205 Chautauqua Boulevard
Pacific Palisades, CA 90272
Any such notice shall be deemed to be given on the date on which the same
is delivered, if delivered personally, or two days after the date the same is
deposited in a regularly maintained receptacle for the deposit of United States
mail, addressed and sent as aforesaid.
9. CONSTRUCTION. The parties have each been represented by separate
counsel and have participated jointly in the negotiation and drafting of this
Agreement and in the event of any ambiguity or question of intent or
interpretation, no presumption or burden of proof shall arise favoring or
disfavoring any party by virtue of the authorship of any of the provisions of
this Agreement.
10. GOVERNING LAW. This Agreement shall be governed, construed and
enforced in accordance with the internal laws of the State of California.
11. DISPUTE RESOLUTION.
(a) In the event the parties hereto are unable to resolve any dispute
in connection with this Agreement, the parties agree to arbitrate in accordance
with the following.
(b) There shall be one arbitrator. If the parties shall fail to
select a mutually acceptable arbitrator within ten (10) days after the demand
for arbitration is mailed, the parties stipulate to arbitration before a retired
judge sitting on the Los Angeles Judicial Arbitration Mediation Services (JAMS)
panel.
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(c) The parties shall share all costs of arbitration. The prevailing
party shall be entitled to reimbursement by the other party(ies) of such
party's(ies') attorney's fees and costs and any arbitration fees and expenses
incurred in connection with the arbitration hereunder.
(d) The substantive law of the State of California shall be applied
by the arbitrator to the resolution of the dispute. The parties shall have the
rights of discovery as provided for in Part 4 of the California Code of Civil
Procedure and as provided for in Section 1283.05 of said Code. The California
Code of Evidence shall apply to testimony and documents submitted to the
arbitrator.
(e) Arbitration shall take place in Los Angeles, California, unless
the parties otherwise agree. As soon as reasonably practicable, a hearing with
respect to the dispute or matter to be resolved shall be conducted by the
arbitrator. As soon as reasonably practicable thereafter, the arbitrator shall
arrive at a final decision, which shall be reduced to writing, signed by the
arbitrator and mailed to each of the parties and their legal counsel.
(f) All decisions of the arbitrator shall be final, binding and
conclusive on all parties and shall constitute the only method of resolving
disputes or matters subject to arbitration pursuant to this Agreement. The
arbitrator or a court of appropriate jurisdiction may issue a writ of execution
to enforce the arbitrators judgment. Judgment may be entered upon such a
decision in accordance with applicable law in any court having jurisdiction
thereof.
(g) Notwithstanding the foregoing, because time is of the essence of
this Agreement, the parties specifically reserve the right to seek a judicial
temporary restraining order, preliminary injunction, or other similar short term
equitable relief, and grant the arbitrator the right to make a final
determination of the parties' rights, including whether to make permanent or
dissolve such court order.
12. ATTORNEYS' FEES. Should either party institute any action or procedure
to enforce this Agreement or any provision hereof, or for damages by reason of
any alleged breach of this Agreement or of any provision hereof, or for a
declaration of rights hereunder including without limitation arbitration), the
prevailing party in any such action or proceeding shall be entitled to receive
from the other party all costs and expenses, including without limitation
reasonable attorneys' fees, incurred by the prevailing party in connection with
such action or proceeding.
13. SEVERABILITY. Should any one or more of the provisions of this
Agreement be determined to be illegal or unenforceable, all other provisions of
this Agreement shall be given effect separately from the provision or provisions
determined to be illegal or unenforceable and shall not be affected thereby.
14. PARTIES IN INTEREST. Terner's assigns and designees are expressly made
third party beneficiaries of this Agreement. Except as specifically set forth
in this Section, nothing expressed
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or mentioned in this Agreement is intended or shall be construed to give any
other person any legal or equitable right, remedy or claim hereunder.
15. EXECUTION OF COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which, when so executed and delivered, shall be
deemed to be an original and all of which, when taken together, shall constitute
but one and the same instrument.
16. HEADINGS. Section and paragraph headings used in this Agreement have
been inserted for convenience of reference only, do not constitute a part of
this Agreement and shall not affect the construction of this Agreement.
17. ENTIRE AGREEMENT. All prior agreements, representations and
understandings between the parties are incorporated in this Agreement which
constitutes the entire contract between the parties. The terms of this
Agreement are intended by the parties as a final expression of their agreement
with respect to such terms as are included herein and may not be contradicted by
evidence of any prior or contemporaneous written or oral representations,
agreements or understandings, whether express or implied. The parties further
intend that this Agreement constitutes the complete and exclusive statement of
its terms and that no extrinsic evidence whatsoever may be introduced in any
judicial proceeding, if any, involving this Agreement. No amendment or
variation of the terms of this Agreement shall be valid unless made in writing
and signed by each of the parties.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
MED-SEARCH, INC.
By: /s/ T. L. WORTHYLAKE
----------------------------------------
Its: President
---------------------------------------
JACOB Y. TERNER, M.D.
/s/ Jacob Y. Terner, M.D.
-------------------------------------------
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AGREEMENT
This AGREEMENT ("Agreement") is made and entered into as of July 31, 1996,
by and among Jacob Y. Terner, M.D. ("Terner"), Barbara Noble ("Noble"), both
individually and as representative ("Representative") of Joseph W. Noble, M.D.,
deceased ("Dr. Noble"), and the Noble 1992 Family Trust (the "Trust") of which
Noble is the sole Trustee.
RECITALS
This Agreement is made with reference to the following facts and
circumstances:
A. Noble controls disposition of Suncrest Medical Group, Inc., a
California professional corporation ("Suncrest") of which Dr. Noble was the sole
shareholder;
B. Noble is the sole owner of 1.5 million (1,500,000) shares and the
Trust is the sole owner of 3.5 million (3,500,000) shares for a total of five
million (5,000,000) shares ("Pre-Split Shares") of the Common Stock of
Med-Search, Inc., a Delaware corporation ("Company");
C. Pursuant to the terms of that certain Agreement and Plan of
Reorganization, of even date herewith, a wholly owned subsidiary of the Company
is merging with and into Prospect Medical Systems, Inc. (the "Merger"). At the
closing of the Merger, Terner will be appointed Chairman of the Board of
Directors and Chief Executive Officer of the Company;
D. Concurrent with the Merger, Prospect Medical Group, Inc., a California
professional corporation ("Prospect Medical Group"), is purchasing certain of
the assets of Suncrest, pursuant to that certain Agreement for the Purchase and
Sale of Assets of even date herewith ("Asset Purchase Agreement");
E. Prospect Medical Group has previously entered into a Management
Services Agreement, dated June 4, 1996, with Prospect Medical Systems, Inc., a
Delaware corporation ("Prospect Medical Systems") pursuant to which Prospect
Medical Systems has agreed to provide certain management and administrative
services to Prospect Medical Group. As consideration for providing such
services, Prospect Medical Group pays a management fee to Prospect Medical
Systems in an amount which is calculated based upon the revenues generated by
Prospect Medical Group. Following the closing of the Merger, as a result of the
purchase of certain assets of Suncrest by Prospect Medical Group pursuant to the
terms of the Asset Purchase Agreement, Prospect Medical Systems expects that the
revenues generated by Prospect Medical Group will increase with a corresponding
increase in the management fees payable to Prospect Medical Systems. Since
Prospect Medical Systems will be a wholly-owned subsidiary of the Company
following the Merger, the increased management fees payable to Prospect Medical
Systems after the Merger will further increase the Company's revenues.
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F. Subsequent to the Merger, the Company intends to engage in a reverse
stock split ("Reverse Stock Split") pursuant to which the Company will issue one
(1) new share ("Post-Split Share") of its Common Stock in exchange for each
forty-four (44) Pre-Split Shares.
NOW THEREFORE, in consideration of the covenants and conditions contained
herein and for other valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereby agree as follows:
1. ASSET PURCHASE AGREEMENT
Noble, as Representative of Dr. Noble, will take such action as she deems
necessary or advisable to cause Suncrest to consummate the transactions
contemplated by the Asset Purchase Agreement.
2. STOCK PRICE GUARANTY AND ISSUANCE OF ADDITIONAL SHARES
2.1 STOCK PRICE GUARANTY. In the event the Value, as defined herein,
of the Post-Split Shares is less than one dollar and seventy five cents ($1.75)
per share as of a date ("Calculation Date") thirty (30) months following the
date of the closing of the Merger, Terner will pay to Noble and the Trust,
respectively, the difference between one dollar and seventy five cents ($1.75)
per share and the Value of the Post-Split Shares then held by Noble and the
Trust, respectively, and resulting from the Pre-Split Shares; provided, however,
that if, at any time during such thirty (30) month period the closing bid price
of the Company's stock equals or exceeds one dollar and seventy five cents
($1.75) per share for twenty (20) consecutive trading days, Terner's obligation
to pay such difference will terminate. As used in this Section 2. 1, the
term "Value" shall mean the average closing bid price of the Post-Split Shares
for the twenty (20) consecutive trading days preceding the Calculation Date.
2.2 ISSUANCE OF ADDITIONAL SHARES. Within sixty (60) days following
the later of the Reverse Stock Split or the Merger, Terner will use his best
efforts to cause the Company to issue to Noble an additional fifty thousand
(50,000) Post-Split Shares. These additional 50,000 Post-Split Shares constitute
additional inducement to Noble to consummate the transactions contemplated by
the Asset Purchase Agreement which transactions are expected to increase the
Company's revenues as recited above. The Stock Price Guaranty set forth in
Section 2.1 shall not apply to the Post-Split Shares issued to Noble pursuant to
this Section 2.2.
3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF NOBLE
Noble, individually, as Representative of Dr. Noble and on behalf of the
Trust, represents and warrants to Terner that the statements in this Section 3
are correct and complete as of the Closing Date, as defined in the Asset
Purchase Agreement (as though made then and as though the Closing Date were
substituted for the date of this Agreement throughout this Section 3).
3.1 OWNERSHIP OF SHARES. Noble is the sole owner of 1,500,000
Pre-Split Shares. The Trust is the sole owner of 3,500,000 Pre-Split Shares.
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3.2 SOLE TRUSTEE. Noble is the sole Trustee of the Trust.
3.3 SOLE REPRESENTATIVE. Noble is the sole Representative of Dr.
Noble for purposes of Section 13407 of the California Corporations Code.
3.4 AUTHORIZATION. Noble, individually, as Representative of Dr.
Noble and as Trustee of the Trust, has the power and authority to enter into
this Agreement and to consummate the transactions contemplated hereby. All
action on the part of Noble, both individually and as Representative of Dr.
Noble, and the Trust necessary for the authorization, execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated hereby has been or will be taken prior to the Closing Date, and
this Agreement constitutes the legal, valid and binding obligation of Noble,
both individually and as Representative of Dr. Noble, and the Trust, enforceable
in accordance with its terms, except as enforceability may be restricted,
limited or delayed by applicable bankruptcy or other laws affecting creditor's
rights generally and except as enforceability is subject to general principles
of equity.
3.5 NO CONSENT REQUIRED. Neither the execution of this Agreement by
Noble, either individually, as Representative of Dr. Noble or as Trustee of the
Trust, nor the performance by Noble, either individually, as Representative of
Dr. Noble or as Trustee of the Trust, of her obligations under this Agreement,
requires the consent of any third party, which has not been obtained and
delivered to Terner prior to the Closing Date.
3.6 NO VIOLATION OF OTHER AGREEMENTS. Neither this Agreement nor any
of the transactions contemplated hereunder violates or shall violate any lease,
contract, document, understanding, agreement or instrument to which Noble,
either individually or as Representative of Dr. Noble, or the Trust is a party
or by which either may be bound.
3.7 NO DEFAULT. Neither Noble, either individually or as
Representative of Dr. Noble, nor the Trust is in default under the terms of any
lease, contract, document, understanding, agreement or instrument pertaining to
or affecting the transactions contemplated hereunder, nor has any event occurred
that shall constitute a default by Noble, either individually or as
Representative of Dr. Noble, or the Trust under any of the same following the
passage of time or consummation of any of the transactions contemplated
hereunder, nor has Noble, either individually or as Representative of Dr. Noble,
or the Trust received any notice of any default under any of the same. No
acceleration or other right to accelerate, terminate, modify, cancel, create a
security interest or otherwise change any existing arrangement will be created
as a result of the consummation of any of the transactions contemplated
hereunder.
3.8 NO LITIGATION. Except as set forth in Schedule 3.8, there is no
pending litigation or, to the best knowledge of Noble, individually, as
Representative of Dr. Noble and as Trustee of the Trust, threatened litigation,
unasserted claim, or governmental investigation, relating to the Pre-Split
Shares.
3.9 NO VIOLATION OF LAWS. To the best knowledge of Noble,
individually, as Representative of Dr. Noble and as Trustee of the Trust,
neither Noble, either individually or as
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Representative of Dr. Noble, nor the Trust is in violation of any law, rule,
regulation or administrative or judicial order pertaining to the Pre-Split
Shares, and, to the best knowledge of Noble, individually, as a
Representative of Dr. Noble and as Trustee of the Trust, there is no law,
rule, regulation or administrative or judicial order that any of the
transactions contemplated by this Agreement would violate.
3.10 NO BANKRUPTCY PROCEEDINGS. Except as set forth in Schedule 3.10,
neither Noble, either individually or as Representative of Dr. Noble, nor the
Trust has (i) made a general assignment for the benefit of creditors, (ii) filed
any voluntary petition in bankruptcy or suffered the filing of an involuntary
petition by her or its creditors, (iii) suffered the appointment of a receiver
to take possession of all or substantially all of her or its assets, (iv)
suffered the attachment or other judicial seizure of all or substantially all,
of her or its assets, (v) admitted in writing her or its inability to pay her or
its debts as they come due, or (vi) made an offer of settlement, extension or
compromise to her or its creditors generally.
3.11 NO UNTRUE STATEMENTS. To the best knowledge of Noble,
individually, as Representative of Dr. Noble and as Trustee of the Trust, (i)
neither Noble, either individually or Representative of Dr. Noble, nor the Trust
has made any untrue statement or representation in connection with this
Agreement, (ii) there are no undisclosed liabilities of any nature whatsoever in
connection with the Pre-Split Shares, (iii) neither Noble, either individually
or as Representative of Dr. Noble, nor the Trust has failed to state or disclose
any material fact in connection with the transactions contemplated by this
Agreement, and (iv) Noble, neither individually, as Representative of Dr. Noble
nor as Trustee of the Trust, knows of any facts and has not misrepresented any
facts concerning her, either individually or as Representative of Dr. Noble, or
the Trust's ability, financial or otherwise, to consummate the transactions
contemplated by this Agreement or that would otherwise materially adversely
affect Terner's decision to consummate the transactions contemplated by this
Agreement.
4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF TERNER
Terner hereby represents and warrants to Noble that:
4.1 NO VIOLATION OF OTHER AGREEMENTS. Neither this Agreement nor any
of the transactions contemplated hereunder violates or shall violate any lease,
contract, document, understanding, agreement or instrument to which Terner is a
party or by which it may be bound.
5. CONDITIONS TO TERNER'S OBLIGATION
Terner's obligation to consummate the transactions contemplated by this
Agreement is conditioned upon satisfaction, or waiver by Terner in writing, of
all of the following on or before the Closing Date:
5.1 The Closing, as defined in the Asset Purchase Agreement, has
occurred.
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5.2 Terner has not exercised any of the cancellation or repurchase
options set forth in the Asset purchase Agreement.
5.3 The Merger has closed.
6. CONFIDENTIAL INFORMATION; PUBLICITY
6.1 PUBLICITY No party shall, at any time on or after the date
hereof through the Closing Date, issue any publicity or written or oral
statement, or otherwise disclose the existence of this Agreement or any of the.
terms or conditions hereof, or disclose the contemplation, implementation or
consummation of any of the transactions intended hereby (other than to its
employees, attorneys, financial advisors and other agents and representatives,
as necessary in order to negotiate, evaluate, approve and consummate the
transactions hereunder), without the prior written consent of Terner (in the
case of Noble, either individually or as Representative of Dr. Noble, or the
Trust) or Noble (in the case of Terner), except (i) as required by law,
including as required of Terner by any applicable federal or state securities
law (or agency's) disclosure requirements; (ii) as may be reasonably necessary
in connection with any litigation or dispute arising out of this Agreement or
any of the transactions contemplated hereunder; (iii) information contained in
any such materials that was already in the disclosing party's possession prior
to the date hereof; and (iv) information contained in any such materials that is
or becomes generally available to the public other than as a result of a
disclosure by a party hereto or its agents or employees in violation of this
Section 6.1 ( collectively, the "Exceptions"). In the case of any written
publicity or statement, the applicable party with the above right of consent
shall have the right to approve in advance the specific language of any such
writing, provided that such approval may not be unreasonably withheld in the
event of occurrence of any of the Exceptions.
7. MISCELLANEOUS
7.1 NO THIRD PARTY BENEFICIARIES. The parties intend that the
benefits of this Agreement shall inure only to Terner, Noble, both individually
and as Representative of Dr. Noble, and the Trust except as expressly so stated
herein. Notwithstanding anything contained herein, or any conduct or course of
conduct by any party hereto, before or after signing this Agreement, this
Agreement shall not be construed as creating any right, claim or cause of action
against Terner, Noble, either individually or as representative of Dr. Noble, or
the Trust by any other person or entity.
7.2 ENTIRE AGREEMENT. This Agreement, together with all exhibits and
schedules hereto, and all documents referred to herein, constitutes the entire
agreement between the parties with respect to the subject matter hereof,
supersedes all other and prior agreements on the same subject, whether written
or oral, and contains all of the covenants and agreements between the parties
with respect to the subject matter hereof. Each party to this Agreement
acknowledges that no representations, inducements, promises, or agreements,
orally or otherwise, have been made by the other party(ies), or by anyone acting
on behalf of any party, that are not identified herein,
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and that no other agreement, statement, or promise not contained in this
Agreement shall be valid or binding.
7.3 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon
and shall inure to the benefit of the parties and their respective heirs (as
applicable), legal representatives, permitted successors and assigns. No
party may assign this Agreement or the rights, interests and or obligations
hereunder. Any assignment or delegation in contravention of this Section
shall be null and void.
7.4 NO WAIVER. No waiver of any term, provision or condition of this
Agreement, whether by conduct or otherwise, in any one or more instances, shall
be deemed to be or be construed as a further or continuing waiver of any such
term, provision or condition or as a waiver of any other term, provision or
condition of this Agreement.
7.5 COUNTERPARTS. This Agreement, and any amendments thereto, may be
executed in counterparts, each of which shall constitute an original document,
but which together shall constitute one and the same instrument.
7.6 HEADINGS. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
7.7 NOTICES. Any notices required or permitted to be given hereunder
by any party to the other shall be in writing and shall be deemed delivered upon
personal delivery; twenty-four (24) hours following deposit with a courier for
overnight delivery; or seventy-two (72) hours following deposit in the U.S.
Mail, registered or certified mail, postage prepaid, return-receipt requested,
addressed to the parties at the following addresses or to such other addresses
as the parties may specify in writing:
If to Terner
Jacob Y. Terner, M.D.
205 Chautauqua Boulevard
Pacific Palisades, CA 90272
If to Noble or the Trust:
Barbara Noble
5400 The Toledo, Penthouse, Suite 701
Long Beach, CA 90803
7.8 GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of California.
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7.9 AMENDMENT. This Agreement may be amended at any time by
agreement of the parties, provided that any amendment shall be in writing and
executed by all parties.
7.10 SEVERABILITY. If any provision of this Agreement in held by a
court of competent jurisdiction to be invalid or unenforceable, the remaining
provisions will nevertheless continue in full force and effect, unless such
invalidity or unenforceability would defeat an essential business purpose of
this Agreement.
7.11 FEES AND EXPENSES. Except as otherwise explicitly set forth in a
writing signed by the parties, each party shall bear its own expenses including,
without limitation, attorneys' and accountants' fees in connection with the
preparation of this Agreement and the transactions contemplated hereby.
7.12 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Except as expressly
stated to the contrary herein, the representations and warranties of Noble, both
individually and as Representative of Dr. Noble, the Trust and Terner contained
in this Agreement or in any certificate or document delivered pursuant to the
provisions hereof shall survive the Closing Date; provided, however, that such
survival shall be limited to a period of six (6) months from the date hereof.
7.13 TIME OF ESSENCE. Time is expressly made of the essence of this
Agreement and each and every provision hereof of which time of performance is a
factor.
7.14 CONSTRUCTION OF AGREEMENT. Ambiguities, in any, in this Agreement
shall be reasonably construed in accordance with all relevant circumstances,
including, without limitation prevailing practices in the industry of the
parties in the place where the contract is to be performed and shall not be
construed against either party, irrespective of which party may be deemed to
have authored the ambiguous provision.
7.15 DISPUTE RESOLUTION.
(a) In the event the parties hereto are unable to resolve any
dispute in connection with this Agreement, the parties may mutually agree to
arbitrate in accordance with the following.
(b) There shall be one arbitrator. If the parties shall fail to
select a mutually acceptable arbitrator within ten (10) days after the demand
for arbitration is mailed, the parties stipulate to arbitration before a retired
judge sitting on the Los Angeles Judicial Arbitration Mediation Services (JAMS)
panel.
(c) The parties shall share all costs of arbitration. The
prevailing party shall be entitled to reimbursement by the other party(ies) of
such party's(ies') attorney's fees and costs and any arbitration fees and
expenses incurred in connection with the arbitration hereunder.
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(d) The substantive law of the State of California shall be
applied by the arbitrator to the resolution of the dispute. The parties shall
have the rights of discovery as provided for in Part 4 of the California Code of
Civil Procedure and as provided for in Section 1283.05 of said Code. The
California Code of Evidence shall apply to testimony and documents submitted to
the arbitrator.
(e) Arbitration shall take place in Los Angeles, California,
unless the parties otherwise agree. As soon as reasonably practicable, a
hearing with respect to the dispute or matter to be resolved shall be conducted
by the arbitrator. As soon as reasonably practicable thereafter, the arbitrator
shall arrive at a final decision, which shall be reduced to writing, signed
by the arbitrator and mailed to each of the parties and their legal counsel.
(f) All decisions of the arbitrator shall be final, binding and
conclusive on all parties and shall constitute the only method of resolving
disputes or matters subject to arbitration pursuant to this Agreement. The
arbitrator or a court of appropriate jurisdiction may issue a writ of execution
to enforce the arbitrators judgment. Judgment may be entered upon such a
decision in accordance with applicable law in any court having jurisdiction
thereof.
(g) Notwithstanding the foregoing, because time is of the
essence of this Agreement, the parties specifically reserve the right to seek a
judicial temporary restraining order, preliminary injunction, or other similar
short term equitable relief, and grant the arbitrator the right to make a final
determination of the parties' rights, including whether to make permanent or
dissolve such court order.
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7.16 FURTHER ASSURANCES. The parties shall take such actions and
execute and deliver such further documentation as may reasonably be required in
order to give effect to the transactions contemplated by this Agreement and the
intentions of the parties hereto.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date written above
JACOB Y. TERNER, M.D.
/s/ Jacob Terner, M.D.
---------------------------------------
BARBARA NOBLE, Individually
/s/ Barbara Noble
---------------------------------------
NOBLE 1992 FAMILY TRUST
By: /s/ Barbara Noble
------------------------------------
Barbara Noble, Trustee
BARBARA NOBLE AS REPRESENTATIVE
OF JOSEPH W. NOBLE, M.D.
/s/ Barbara Noble
---------------------------------------
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EXECUTION COPY
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REVOLVING CREDIT AGREEMENT
DATED AS OF
JULY 3, 1997
BETWEEN
PROSPECT MEDICAL HOLDINGS, INC.
("BORROWER")
AND
IMPERIAL BANK
("BANK")
$10,000,000
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TABLE OF CONTENTS
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ARTICLE I
DEFINITIONS AND INTERPRETATIONS . . . . . . . . 1
1.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ADA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Applicable Margin . . . . . . . . . . . . . . . . . . . . . . . . . 1
Applicable Multiplier . . . . . . . . . . . . . . . . . . . . . . . 2
Applicable Period . . . . . . . . . . . . . . . . . . . . . . . . . 2
Asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Asset Sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Bank. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Bank Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Bankruptcy Code . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Borrower. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Borrowing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Business Day. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Capital Expenditures. . . . . . . . . . . . . . . . . . . . . . . . 3
Capital Lease . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Capital Lease Obligations . . . . . . . . . . . . . . . . . . . . . 3
Champus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Change of Control . . . . . . . . . . . . . . . . . . . . . . . . . 3
Closing Date. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Collateral Assignment of Transaction Documents. . . . . . . . . . . 4
Commitment Fee. . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Compliance Certificate. . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated EBITDA . . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated EBITDAR. . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Interest Expense . . . . . . . . . . . . . . . . . . . 4
Consolidated Lease Expense. . . . . . . . . . . . . . . . . . . . . 4
Consolidated Net Income . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Net Worth. . . . . . . . . . . . . . . . . . . . . . . 4
Coverage Ratio. . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Credit Succession Agreement . . . . . . . . . . . . . . . . . . . . 5
Current Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Current Liabilities . . . . . . . . . . . . . . . . . . . . . . . . 5
Current Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
i
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Dollars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
ERISA Event . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
ERISA Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Event of Default. . . . . . . . . . . . . . . . . . . . . . . . . . 6
Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Financial Statement(s). . . . . . . . . . . . . . . . . . . . . . . 6
GAAP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Governing Documents . . . . . . . . . . . . . . . . . . . . . . . . 7
Governmental Authority. . . . . . . . . . . . . . . . . . . . . . . 7
Guaranties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Guarantor(s). . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Hazardous Materials . . . . . . . . . . . . . . . . . . . . . . . . 7
Health Service Plan License . . . . . . . . . . . . . . . . . . . . 7
Insolvency Proceeding . . . . . . . . . . . . . . . . . . . . . . . 7
Indemnified Person(s) . . . . . . . . . . . . . . . . . . . . . . . 7
Inter-Company Note (Guarantor). . . . . . . . . . . . . . . . . . . 8
Inter-Company Note (Physician Group Shareholder). . . . . . . . . . 8
Inter-Company Security Agreement. . . . . . . . . . . . . . . . . . 8
Internal Revenue Code . . . . . . . . . . . . . . . . . . . . . . . 8
Late Payment Fee. . . . . . . . . . . . . . . . . . . . . . . . . . 8
Lending Rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Letter(s) of Credit . . . . . . . . . . . . . . . . . . . . . . . . 8
Letter of Credit Application. . . . . . . . . . . . . . . . . . . . 8
Letter of Credit Fee. . . . . . . . . . . . . . . . . . . . . . . . 8
Letter of Credit Usage. . . . . . . . . . . . . . . . . . . . . . . 8
Leverage Ratio. . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Lien. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Loan Document(s). . . . . . . . . . . . . . . . . . . . . . . . . . 9
Management Services Agreement . . . . . . . . . . . . . . . . . . . 9
Manager . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Material Adverse Effect . . . . . . . . . . . . . . . . . . . . . . 9
Medicaid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Medicare. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Multiemployer Plan. . . . . . . . . . . . . . . . . . . . . . . . . 10
Note. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Notice of Borrowing . . . . . . . . . . . . . . . . . . . . . . . . 10
Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Old Lenders . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Operating Lease . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Option Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . 11
Optional Commitment Reduction . . . . . . . . . . . . . . . . . . . 11
ii
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Participant . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Pay-Off Letters . . . . . . . . . . . . . . . . . . . . . . . . . . 11
PBGC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Permitted Acquisition . . . . . . . . . . . . . . . . . . . . . . . 11
Permitted Debt. . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Permitted Investments . . . . . . . . . . . . . . . . . . . . . . . 11
Permitted Liens . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Person. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Physician Group . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Physician Group Shareholder . . . . . . . . . . . . . . . . . . . . 12
Plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Prime Rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Private Insurance Company . . . . . . . . . . . . . . . . . . . . . 13
Purchase Money Lien . . . . . . . . . . . . . . . . . . . . . . . . 13
Real Estate Leases. . . . . . . . . . . . . . . . . . . . . . . . . 13
Reportable Event. . . . . . . . . . . . . . . . . . . . . . . . . . 13
Responsible Officer . . . . . . . . . . . . . . . . . . . . . . . . 13
Retiree Health Plan . . . . . . . . . . . . . . . . . . . . . . . . 13
Revolving Credit Commitment . . . . . . . . . . . . . . . . . . . . 13
Revolving Loans . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Revolving Loans Daily Balances. . . . . . . . . . . . . . . . . . . 13
Revolving Loans Maturity Date . . . . . . . . . . . . . . . . . . . 13
Security Agreement (Borrower)" . . . . . . . . . . . . . . . . . . 13
Security Agreement (Guarantor). . . . . . . . . . . . . . . . . . . 14
Security Agreement (Physician Group). . . . . . . . . . . . . . . . 14
Solvent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Stock Pledge Agreement" . . . . . . . . . . . . . . . . . . . . . . 14
Subsidiary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Transaction Documents . . . . . . . . . . . . . . . . . . . . . . . 15
Transferee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Unfunded Liabilities. . . . . . . . . . . . . . . . . . . . . . . . 15
Unmatured Event of Default. . . . . . . . . . . . . . . . . . . . . 15
Unused Commitment Fee . . . . . . . . . . . . . . . . . . . . . . . 15
Warrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Working Capital Sublimit. . . . . . . . . . . . . . . . . . . . . . 15
1.2 Accounting Terms and Determinations . . . . . . . . . . . . . . . . 16
1.3 Computation of Time Periods . . . . . . . . . . . . . . . . . . . . 16
1.4 Construction. . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
1.5 Exhibits and Schedules. . . . . . . . . . . . . . . . . . . . . . . 16
1.6 No Presumption Against Any Party. . . . . . . . . . . . . . . . . . 16
1.7 Independence of Provisions. . . . . . . . . . . . . . . . . . . . . 16
iii
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ARTICLE II
TERMS OF THE CREDIT . . . . . . . . . . . 17
2.1 [Intentionally Omitted] . . . . . . . . . . . . . . . . . . . . . . 17
2.2 Revolving Loans . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2.3 Letters of Credit . . . . . . . . . . . . . . . . . . . . . . . . . 17
2.4 Notice of Borrowing Requirements. . . . . . . . . . . . . . . . . . 19
2.5 Interest Rates; Payments of Interest. . . . . . . . . . . . . . . . 19
2.6 Note; Statements of Obligations . . . . . . . . . . . . . . . . . . 20
2.7 Holidays. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
2.8 Time and Place of Payments. . . . . . . . . . . . . . . . . . . . . 21
2.9 Commitment Fee and Unused Commitment Fee. . . . . . . . . . . . . . 21
2.10 Optional Commitment Reductions. . . . . . . . . . . . . . . . . . . 22
ARTICLE III
CONDITIONS PRECEDENT. . . . . . . . . . . 22
3.1 Conditions to Initial Loan or Letter of Credit. . . . . . . . . . . 22
3.2 Conditions to all Loans and Letters of Credit . . . . . . . . . . . 25
3.3 Additional Conditions to Loans for Permitted Acquisitions . . . . . 25
ARTICLE IV
REPRESENTATIONS AND WARRANTIES . . . . . . . . 25
4.1 Legal Status. . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
4.2 No Violation; Compliance. . . . . . . . . . . . . . . . . . . . . . 26
4.3 Authorization; Enforceability . . . . . . . . . . . . . . . . . . . 26
4.4 Approvals; Consents . . . . . . . . . . . . . . . . . . . . . . . . 27
4.5 Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
4.6 Debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
4.7 Litigation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
4.8 No Default. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
4.9 Subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
4.10 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
4.11 Correctness of Financial Statements . . . . . . . . . . . . . . . . 28
4.12 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
4.13 Other Obligations . . . . . . . . . . . . . . . . . . . . . . . . . 28
4.14 Public Utility Holding Company Act. . . . . . . . . . . . . . . . . 28
4.15 Investment Company Act. . . . . . . . . . . . . . . . . . . . . . . 28
4.16 Patents, Trademarks, Copyrights, and Intellectual Property, etc.. . 29
4.17 Environmental Condition . . . . . . . . . . . . . . . . . . . . . . 29
4.18 Real Estate Leases. . . . . . . . . . . . . . . . . . . . . . . . . 29
4.19 Compliance With ADA . . . . . . . . . . . . . . . . . . . . . . . . 29
iv
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4.20 Physician Groups; Transaction Documents . . . . . . . . . . . . . . 30
4.21 Billing Practices . . . . . . . . . . . . . . . . . . . . . . . . . 31
4.22 Character of Business . . . . . . . . . . . . . . . . . . . . . . . 31
ARTICLE V
AFFIRMATIVE COVENANTS. . . . . . . . . . . 31
5.1 Punctual Payments . . . . . . . . . . . . . . . . . . . . . . . . . 31
5.2 Books and Records . . . . . . . . . . . . . . . . . . . . . . . . . 31
5.3 Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . 31
5.4 Existence; Preservation of Licenses; Compliance with Law. . . . . . 33
5.5 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
5.6 Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
5.7 Taxes and Other Liabilities . . . . . . . . . . . . . . . . . . . . 34
5.8 Notice to Bank. . . . . . . . . . . . . . . . . . . . . . . . . . . 34
5.9 Employee Benefits . . . . . . . . . . . . . . . . . . . . . . . . . 35
5.10 Further Assurances. . . . . . . . . . . . . . . . . . . . . . . . . 36
5.11 Bank Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
5.12 Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
5.13 Real Estate Leases. . . . . . . . . . . . . . . . . . . . . . . . . 37
5.14 ADA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
5.15 Billing Practices . . . . . . . . . . . . . . . . . . . . . . . . . 37
ARTICLE VI
NEGATIVE COVENANTS . . . . . . . . . . . 37
6.1 Use of Funds; Margin Regulation . . . . . . . . . . . . . . . . . . 37
6.2 Debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
6.3 Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
6.4 Merger, Consolidation, Transfer of Assets . . . . . . . . . . . . . 38
6.5 Leases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
6.6 Sales and Leasebacks. . . . . . . . . . . . . . . . . . . . . . . . 38
6.7 Asset Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
6.8 Investments; Permitted Acquisitions . . . . . . . . . . . . . . . . 38
6.9 Character of Business . . . . . . . . . . . . . . . . . . . . . . . 42
6.10 Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
6.11 Guaranty. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
6.12 Capital Expenditures. . . . . . . . . . . . . . . . . . . . . . . . 43
6.13 Transactions with Affiliates. . . . . . . . . . . . . . . . . . . . 43
6.14 Change of Control . . . . . . . . . . . . . . . . . . . . . . . . . 43
6.15 Stock Issuance. . . . . . . . . . . . . . . . . . . . . . . . . . . 43
6.16 Financial Condition . . . . . . . . . . . . . . . . . . . . . . . . 43
6.17 Transactions Under ERISA. . . . . . . . . . . . . . . . . . . . . . 44
v
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6.18 Transaction Documents . . . . . . . . . . . . . . . . . . . . . . . 45
ARTICLE VII
EVENTS OF DEFAULT AND REMEDIES . . . . . . . . 45
7.1 Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . 45
7.2 Remedies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
7.3 Remedies Cumulative . . . . . . . . . . . . . . . . . . . . . . . . 47
ARTICLE VIII
TAXES. . . . . . . . . . . . . . . 47
8.1 Taxes on Payments . . . . . . . . . . . . . . . . . . . . . . . . . 47
8.2 Indemnification For Taxes . . . . . . . . . . . . . . . . . . . . . 48
8.3 Evidence of Payment . . . . . . . . . . . . . . . . . . . . . . . . 48
ARTICLE IX
MISCELLANEOUS. . . . . . . . . . . . . 48
9.1 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
9.2 No Waivers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
9.3 Bank Expenses; Documentary Taxes; Indemnification.. . . . . . . . . 48
9.4 Amendments and Waivers. . . . . . . . . . . . . . . . . . . . . . . 49
9.5 Successors and Assigns; Participations; Disclosure. . . . . . . . . 50
9.6 Counterparts; Effectiveness; Integration. . . . . . . . . . . . . . 50
9.7 Severability. . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
9.8 Governing Law.. . . . . . . . . . . . . . . . . . . . . . . . . . . 51
9.9 Judicial Reference. . . . . . . . . . . . . . . . . . . . . . . . . 51
</TABLE>
EXHIBITS AND SCHEDULES
Exhibit 1.1C - Form of Collateral Assignment of Transaction Documents
Exhibit 1.1G - Form of Guaranty
Exhibit 1.1I-1 - Form of Inter-Company Note (Guarantor)
Exhibit 1.1I-2 - Form of Inter-Company Note (Physician Group
Shareholders)
Exhibit 1.1I-3 - Form of Inter-Company Security Agreement
vi
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Exhibit 1.1S-1 - Form of Security Agreement (Guarantor)
Exhibit 1.1S-2 - Form of Security Agreement (Physician Group)
Exhibit 1.1S-3 - Form of Stock Pledge Agreement (Borrower)
Exhibit 1.1S-4 - Form of Stock Pledge Agreement (Guarantor)
Exhibit 2.4(b) - Form of Notice of Borrowing
Exhibit 3.1(b) - Form of Opinions of Borrower's and Guarantors' Counsel
Exhibit 5.3(d) - Form of Compliance Certificate
Schedule 1.1P - Permitted Debt
Schedule 4.7 - Litigation
Schedule 4.9 - Subsidiaries
Schedule 4.12 - Employee Benefit Plans
Schedule 4.18 - Real Estate Leases
Schedule 4.20 - Physician Groups; Transaction Documents.
vii
<PAGE>
REVOLVING CREDIT AGREEMENT
This REVOLVING CREDIT AGREEMENT, dated as of July 3, 1997, is entered
into among Borrower and Bank.
The parties hereto agree as follows:
ARTICLE I
DEFINITIONS AND INTERPRETATIONS
1.1 DEFINITIONS. The following terms, as used herein, shall have the
following meanings:
"ADA" means the Americans with Disabilities Act, 42 U.S.C. Section
12101, ET. SEQ., and all applicable rules and regulations promulgated
thereunder.
"AFFILIATE" means any Person (i) that, directly or indirectly,
controls, is controlled by or is under common control with Borrower or any
Subsidiary; (ii) which directly or indirectly beneficially owns or controls five
percent (5%) or more of any class of voting stock of Borrower or any Subsidiary;
or (iii) five percent (5%) or more of the voting stock of which is directly or
indirectly beneficially owned or held by Borrower or any Subsidiary. For
purposes of the foregoing, "control" (including "controlled by" and "under
common control with") shall mean 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 Revolving Credit Agreement, together with any
concurrent or subsequent rider, amendment, schedule or exhibit to this Revolving
Credit Agreement.
"APPLICABLE MARGIN" means the margin set forth in the table below
opposite the applicable Leverage Ratio, as disclosed in the latest Compliance
Certificate delivered pursuant to Section 5.3(c):
<TABLE>
<CAPTION>
Leverage Ratio Margin
-------------- ------
<S> <C>
3.5:1.0 or greater 150 basis points
greater than 3.0:1.0 but less than 3.5:1.0 100 basis points
less than 3.0:1.0 50 basis points
</TABLE>
"APPLICABLE MULTIPLIER" means for purposes of calculating the Coverage
Ratio and the Leverage Ratio, (i) for the test dates September 30, 1997,
December 31, 1997, March 31, 1998 and June 30, 1998, four (4), and (ii) for each
test date thereafter, two (2).
1
<PAGE>
"APPLICABLE PERIOD" means for purposes of calculating the Coverage
Ratio and the Leverage Ratio, (i) for the test dates September 30, 1997,
December 31, 1997, March 31, 1998 and June 30, 1998, Borrower's fiscal quarter
ending on each such test date, and (ii) on each test date thereafter, Borrower's
two fiscal quarter period ending on such test date.
"ASSET" means any interest of a Person in any kind of property or
asset, whether real, personal, or mixed real and personal, and whether tangible
or intangible.
"ASSET SALE" means any sale, transfer or other disposition of
Borrower's or any Subsidiary's businesses or Asset(s) now owned or hereafter
acquired, including shares of stock and indebtedness of any Subsidiary,
receivables and leasehold interests.
"BANK" means Imperial Bank, a California banking corporation.
"BANK EXPENSES" means (i) all expenses of Bank paid or incurred in
connection with Bank's due diligence and investigation of Borrower, including
appraisal, filing, recording, documentation, publication and search fees and
other such expenses, and all attorneys' fees and expenses (including attorneys'
fees incurred pursuant to proceedings arising under the Bankruptcy Code)
incurred in connection with the structuring, negotiation, drafting, preparation,
execution and delivery of this Agreement, the Loan Documents, and any and all
other documents, instruments and agreements entered into in connection herewith;
(ii) all expenses of Bank, including attorneys' fees and expenses (including
attorneys' fees incurred pursuant to proceedings arising under the Bankruptcy
Code) paid or incurred in connection with the negotiation, preparation,
execution and delivery of any waiver, forbearance, consent, amendment or
addition to this Agreement or any Loan Document, or the termination hereof and
thereof; (iii) all costs or expenses paid or advanced by Bank which are required
to be paid by Borrower under this Agreement or the Loan Documents, including
taxes and insurance premiums of every nature and kind of Borrowers; and (iv) if
an Event of Default occurs, all expenses paid or incurred by Bank, including
attorneys' fees and expenses (including attorneys' fees incurred pursuant to
proceedings arising under the Bankruptcy Code), costs of collection, suit,
arbitration, judicial reference and other enforcement proceedings, and any other
out-of-pocket expenses incurred in connection therewith or resulting therefrom,
whether or not suit is brought, or in connection with any refinancing or
restructuring of the Obligations and the liabilities of Borrower under this
Agreement, any of the Loan Documents, or any other document, instrument or
agreement entered into in connection herewith in the nature of a "workout."
"BANKRUPTCY CODE" means The Bankruptcy Reform Act of 1978 (Pub. L.
No. 95-598; 11 U.S.C.), as amended or supplemented from time to time, or any
successor statute, and any and all rules and regulations issued or promulgated
in connection therewith.
"BORROWER" means Prospect Medical Holdings, Inc., a Delaware
corporation.
2
<PAGE>
"BORROWING" means a borrowing of a Revolving Loan pursuant to the
terms and conditions hereof.
"BUSINESS DAY" means any day other than a Saturday, a Sunday, or a day
on which commercial banks in the City of Los Angeles, California are authorized
or required by law or executive order or decree to close.
"CAPITAL EXPENDITURES" means expenditures made in cash, or financed
with long term debt, by any Person for the acquisition of any fixed Assets or
improvements, replacements, substitutions, or additions thereto that have a
useful life of more than one (1) year, including the direct or indirect
acquisition of such Assets by way of increased product or service charges,
offset items, or otherwise, and the principal portion of payments with respect
to Capital Lease Obligations, calculated in accordance with GAAP.
"CAPITAL LEASE" means any lease of an Asset by a Person as lessee
which would, in conformity with GAAP, be required to be accounted for as an
Asset and corresponding liability on the balance sheet of that Person.
"CAPITAL LEASE OBLIGATIONS" of a Person means the amount of the
obligations of such Person under all Capital Leases which would be shown as a
liability on a balance sheet of such Person prepared in accordance with GAAP.
"CHAMPUS" means the Civilian Health and Medical Program of the
Uniformed Service, a program of medical benefits covering retirees and
dependents of a member or a former member of a uniformed service, provided,
financed and supervised by the United States Department of Defense established
by 10 U.S.C. Sections 1071, ET SEQ.
"CHANGE OF CONTROL" shall be deemed to have occurred at such time as
any "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of
the Securities Exchange Act of 1934) becomes the "beneficial owner" (as defined
in Rule 13d-3 under the Securities Exchange Act of 1934), directly or
indirectly, of more than twenty percent (20%) of the total voting power of all
classes of stock then outstanding of Borrower normally entitled to vote in the
election of directors.
"CLOSING DATE" means the date when all of the conditions set forth in
Section 3.1 have been fulfilled to the satisfaction of Bank and its counsel.
"COLLATERAL ASSIGNMENT OF TRANSACTION DOCUMENTS" means each Collateral
Assignment of Transaction Documents now or hereafter executed by a Guarantor in
favor of Bank, substantially in the form of EXHIBIT 1.1C.
"COMMITMENT FEE" has the meaning set forth in Section 2.9(a).
"COMPLIANCE CERTIFICATE" means a certificate of compliance to be
delivered quarterly in accordance with Section 5.3(d), substantially in the form
of EXHIBIT 5.3(d).
3
<PAGE>
"CONSOLIDATED EBITDA" means, with respect to any period, the sum of
(without duplication) (i) Consolidated Net Income for such period (excluding
extraordinary gains and losses); (ii) Consolidated Interest Expense during such
period; (iii) accrued federal and state income taxes payable by Borrower and the
Subsidiaries during such period which are included in the determination of
Consolidated Net Income; and (iv) Borrower's and the Subsidiaries' consolidated
depreciation and amortization during such period; calculated in accordance with
GAAP.
"CONSOLIDATED EBITDAR" means, with respect to any period, the sum of
Consolidated EBITDA for such period, PLUS Consolidated Lease Expense for such
period.
"CONSOLIDATED INTEREST EXPENSE" means, with respect to any period, the
current interest accrued during such period in accordance with GAAP on the
aggregate amount of Borrower's and the Subsidiaries consolidated Debt, including
the interest portion of Borrower's and the Subsidiaries' consolidated Capital
Lease Obligations.
"CONSOLIDATED LEASE EXPENSE" means, with respect to any period, the
aggregate amount of rent paid or payable, on a consolidated basis, in connection
with any and all Operating Leases of Borrower and the Subsidiaries that is
charged against Consolidated Net Income during such period.
"CONSOLIDATED NET INCOME" means, with respect to any period, the
consolidated net income of Borrower and the Subsidiaries reflected on Borrower's
Financial Statement for such period, calculated in accordance with GAAP.
"CONSOLIDATED NET WORTH" means, as of the date of determination,
Borrower's and the Subsidiaries' consolidated net worth, calculated in
accordance with GAAP.
"COVERAGE RATIO" means as of the date of determination for the
Applicable Period, the ratio of: (i) EBITDAR for such period TIMES the
Applicable Multiplier; to (ii) the sum of (x) [THE PRODUCT OF the sum of
(1) Consolidated Interest Expense for such period, (2) Consolidated Lease
Expense for such period, and (3) cash federal and state income taxes actually
paid by Borrower and the Subsidiaries during such period, TIMES the Applicable
Multiplier], (y) current maturities of Borrower's and the Subsidiaries'
consolidated long term Debt during such period (other than the Obligations) and
(z) twenty-five percent (25%) of the sum of the principal amount of the Loans
plus the Letter of Credit Usage outstanding on such date.
"CREDIT SUCCESSION AGREEMENT" means that certain Credit Succession
Agreement, dated as of even date herewith, among Borrower, Bank, each Guarantor,
each Physician Group and each Physician Group Shareholder.
"CURRENT ASSETS" means, as of the date of determination, the sum of
Borrower's cash, accounts receivable, inventory and other Assets that are likely
to be
4
<PAGE>
converted into cash, sold, exchanged, or expensed in the ordinary course of
Borrower's business, as now conducted, within one year, calculated in accordance
with GAAP.
"CURRENT LIABILITIES" means, as of the date of determination, the sum
of Borrower's Debt coming due within one year, calculated in accordance with
GAAP.
"CURRENT RATIO" means, as of the date of determination, the ratio of:
(i) Current Assets as of such date; to (ii) Current Liabilities less seventy-
five percent (75%) of the principal amount of the Loans and the Letter of Credit
Usage reported as current under Borrower's latest Financial Statement as of such
date.
"DEBT" means, as of the date of determination, the sum, but without
duplication, of any and all of a Person's: (i) indebtedness heretofore or
hereafter created, issued, incurred or assumed by such Person (directly or
indirectly) for or in respect of money borrowed; (ii) Capital Lease Obligations;
(iii) obligations evidenced by bonds, debentures, notes, or other similar
instruments; (iv) obligations for the deferred purchase price of property or
services; (v) current liabilities in respect of unfunded vested benefits under
any Plan; (vi) obligations under letters of credit; (vii) obligations under
acceptance facilities; (viii) obligations under all guaranties, endorsements
(other than for collection or deposit in the ordinary course of business), and
other contingent obligations to purchase, to provide funds for payment, or
supply funds to invest in any other Person, or otherwise to assure a creditor
against loss; (ix) obligations secured by any Lien, whether or not such
obligations have been assumed; and (x) Swaps.
"DISTRIBUTIONS" means, with respect to any Person, dividends or
distributions of earnings made by such Person to its owners.
"DOLLARS" or "$" means lawful currency of the United States of
America.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, or any successor statute, and any and all regulations
thereunder.
"ERISA EVENT" means (a) a Reportable Event with respect to a Plan or
Multiemployer Plan, (b) the withdrawal of a member of the ERISA Group from a
Plan during a plan year in which it was a "substantial employer" (as defined in
Section 4001(a)(2) of ERISA), (c) the providing of notice of intent to terminate
a Plan in a distress termination (as described in Section 4041(c) of ERISA),
(d) the institution by the PBGC of proceedings to terminate a Plan or
Multiemployer Plan, (e) any event or condition (i) that provides a basis under
Section 4042(a)(1), (2), or (3) of ERISA for the termination of or the
appointment of a trustee to administer, any Plan or Multiemployer Plan, of
(ii) that may result in termination of a Multiemployer Plan pursuant to
Section 4041A of ERISA, (f) the partial or complete withdrawal within the
meaning of Sections 4203 and 4205 of ERISA of a member of the ERISA Group from a
Multiemployer Plan, or (g) providing any security to any Plan under
Section 401(a)(29) of the IRC by a member of the ERISA Group.
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"ERISA GROUP" means Borrower and all members of a controlled group of
corporations and all trades or business (whether or not incorporated) under
common control which, together with Borrower are treated as a single employer
under Section 414 of the Internal Revenue Code.
"EVENT OF DEFAULT" has the meaning set forth in Section 7.1.
"FEES" means the Commitment Fee, the Unused Commitment Fee, the Letter
of Credit Fees and the Late Payment Fee.
"FINANCIAL STATEMENT(S)" means, with respect to any accounting period
of any Person, statements of income and statements of cash flows of such Person
for such period, and balance sheets of such Person as of the end of such period,
setting forth in each case in comparative form figures for the corresponding
period in the preceding fiscal year or, if such period is a full fiscal year,
corresponding figures from the preceding annual audit, all prepared in
reasonable detail and in accordance with GAAP, subject to year-end adjustments
in the case of monthly Financial Statements. Financial Statement(s) shall
include the schedules thereto and annual Financial Statements shall also include
the footnotes thereto.
"GAAP" means generally accepted accounting principles in the United
States of America, consistently applied, which are in effect as of the date of
this Agreement. If any changes in accounting principles from those in effect on
the date hereof are hereafter occasioned by promulgation of rules, regulations,
pronouncements or opinions by or are otherwise required by the Financial
Accounting Standards Board or the American Institute of Certified Public
Accountants (or successors thereto or agencies with similar functions), and any
of such changes results in a change in the method of calculation of, or affects
the results of such calculation of, any of the financial covenants, standards or
terms found herein, then the parties hereto agree to enter into and diligently
pursue negotiations in order to amend such financial covenants, standards or
terms so as to equitably reflect such changes, with the desired result that the
criteria for evaluating financial condition and results of operations of
Borrower and the Subsidiaries shall be the same after such changes as if such
changes had not been made.
"GOVERNING DOCUMENTS" means the certificate or articles of
incorporation, by-laws, or other organizational or governing documents of any
Person.
"GOVERNMENTAL AUTHORITY" means any federal, state, local or other
governmental department, commission, board, bureau, agency, central bank, court,
tribunal or other instrumentality or authority or subdivision thereof, domestic
or foreign, exercising executive, legislative, judicial, regulatory or
administrative functions of or pertaining to government.
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"GUARANTIES" and "GUARANTY" means, individually or collectively as the
context requires, each certain Continuing Guaranty executed by a Guarantor in
favor of Bank, substantially in the form of EXHIBIT 1.1G.
"GUARANTOR(S)" means, individually or collectively as the context
requires, each Subsidiary and every other Person who now or hereafter executes a
Guaranty in favor of Bank with respect to the Obligations.
"HAZARDOUS MATERIALS" means all or any of the following:
(a) substances that are defined or listed in, or otherwise classified pursuant
to, any applicable laws or regulations as "hazardous substances," "hazardous
materials," "hazardous wastes," "toxic substances," or any other formulation
intended to define, list, or classify substances by reason of deleterious
properties such as ignitability, corrosivity, reactivity, carcinogenicity,
reproductive toxicity, or "EP toxicity" or are otherwise regulated for the
protection of persons, property or the environment; (b) oil, petroleum, or
petroleum derived substances, natural gas, natural gas liquids, synthetic gas,
drilling fluids, produced waters, and other wastes associated with the
exploration, development, or production of crude oil, natural gas, or geothermal
resources; (c) any flammable substances or explosives or any radioactive
materials; and (d) asbestos in any form or electrical equipment which contains
any oil or dielectric fluid containing levels of polychlorinated biphenyls in
excess of fifty (50) parts per million.
"HEALTH SERVICE PLAN LICENSE" means a license issued by the California
Department of Corporations or the corresponding agency of another state, and/or
any other applicable or successor state agency or body, certifying that Borrower
and/or Guarantors are qualified to operate as a health service plan under
applicable laws.
"INSOLVENCY PROCEEDING" means any proceeding commenced by or against
any Person, under any provision of the Bankruptcy Code, or under any other
bankruptcy or insolvency law, including, but not limited to, assignments for the
benefit of creditors, formal or informal moratoriums, compositions, or
extensions with some or all creditors.
"INDEMNIFIED PERSON(S)" has the meaning given to such term in
Section 9.3(c).
"INTER-COMPANY NOTE (GUARANTOR)" means, with respect to any Permitted
Acquisition, the promissory note executed by the applicable Guarantor to
Borrower to evidence the loan made by Borrower to such Guarantor with respect
thereto, substantially in the form of EXHIBIT 1.1I-1.
"INTER-COMPANY NOTE (PHYSICIAN GROUP SHAREHOLDER)" means, with respect
to any Permitted Acquisition, the promissory note executed by the applicable
Physician Group Shareholder to the order of the applicable Guarantor to evidence
the loan made by such Guarantor to such Physician Group Shareholder with respect
thereto, substantially in the form of EXHIBIT 1.1I-2.
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"INTER-COMPANY SECURITY AGREEMENT" means each certain Security
Agreement now or hereafter executed between a Guarantor and Borrower to secure
the Inter-Company Note (Guarantor) executed by such Guarantor, substantially in
the form of EXHIBIT 1.1I-3.
"INTERNAL REVENUE CODE" means the Internal Revenue Code of 1986, as
amended from time to time, or any successor statute, and any and all regulations
thereunder.
"LATE PAYMENT FEE" has the meaning given to such term in
Section 2.9(d).
"LENDING RATE" means the per annum rate equal to the Prime Rate PLUS
the Applicable Margin.
"LETTER(S) OF CREDIT" means any standby letter(s) of credit issued by
Bank, pursuant to Section 2.3.
"LETTER OF CREDIT APPLICATION" means Bank's standard Application for
Standby Letter of Credit and Security Agreement, as the same may be from time to
time amended or modified.
"LETTER OF CREDIT FEE" means, with respect to each Letter of Credit,
one and one-half percent (1.5%) PLUS the Applicable Margin TIMES the face amount
of such Letter of Credit.
"LETTER OF CREDIT USAGE" means, on any date of determination, the
aggregate maximum amounts available to be drawn under all outstanding Letters of
Credit, without regard to whether any conditions to drawing could then be met.
"LEVERAGE RATIO" means, as of the date of determination, the ratio of:
(i) Borrower's and the Subsidiaries consolidated Debt as of such date; to
(ii) Consolidated EBITDA for the Applicable Period TIMES the Applicable
Multiplier.
"LIEN" means any mortgage, deed of trust, pledge, security interest,
hypothecation, assignment, deposit arrangement or other preferential
arrangement, charge or encumbrance (including, any conditional sale or other
title retention agreement, or finance lease) of any kind.
"LOANS" means the Revolving Loans.
"LOAN DOCUMENT(S)" means each of the following documents, instruments,
and agreements individually or collectively, as the context requires:
(i) the Note;
(ii) the Security Agreement (Borrower);
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(iii) the Guaranties;
(iv) the Security Agreements (Guarantor);
(v) the Stock Pledge Agreements (Borrower);
(vi) the Collateral Assignments of Transaction Documents;
(vii) the Credit Succession Agreement;
(viii) the Letter of Credit Applications;
(ix) the Warrant; and
(x) such other documents, instruments, and agreements (including
financing statements and fixture filings) as Bank may reasonably request in
connection with the transactions contemplated hereunder or to perfect or
protect the liens and security interests granted to Bank in connection
herewith.
"MANAGEMENT SERVICES AGREEMENT" means each certain Management Services
Agreement now or hereafter entered into between a Guarantor, on the one hand,
and a Physician Group, on the other hand, wherein such Guarantor agrees to
provide management services to such Physician Group.
"MANAGER" means, with respect to any Physician Group, the Guarantor
which is the party identified as "Manager" under the Management Services
Agreement to which such Physician Group is a party.
"MATERIAL ADVERSE EFFECT" means a material adverse effect on (i) the
business, Assets, condition (financial or otherwise), results of operations, or
prospects of Borrower, any Subsidiary, or any Physician Group; (ii) the ability
of Borrower to perform its obligations under this Agreement (including, without
limitation, repayment of the Obligations as they come due), or the ability of
any Guarantor to perform its obligations under the Guaranty to which it is a
party or (iii) the validity or enforceability of this Agreement, the Loan
Documents, or the rights or remedies of Bank hereunder and thereunder.
"MEDICAID" means the medical assistance program established by the
Social Security Act and any statutes succeeding thereto.
"MEDICARE" means the health insurance program for the aged and
disabled established by the Social Security Act and any statutes succeeding
thereto.
"MULTIEMPLOYER PLAN" means a "multiemployer plan" as defined in
Section 4001(a)(3) of ERISA or Section 3(37) of ERISA to which any member of
the ERISA Group has
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<PAGE>
contributed, or was obligated to contribute, within the preceding six plan years
(while a member of such ERISA Group) including for these purposes any Person
which ceased to be a member of the ERISA Group during such six year period.
"NOTE" means that certain Secured Revolving Note in the principal
amount of Ten Million Dollars ($10,000,000), dated as of even date herewith,
executed by Borrower to the order of Bank.
"NOTICE OF BORROWING" means an irrevocable notice from Borrower to
Bank of Borrower's request for a Borrowing pursuant to the terms of
Section 2.4(b), substantially in the form of EXHIBIT 2.4(B).
"OBLIGATIONS" means any and all indebtedness, liabilities, and
obligations of Borrower owing to Bank and to its successors and assigns,
previously, now, or hereafter incurred, and howsoever evidenced, whether direct
or indirect, absolute or contingent, joint or several, liquidated or
unliquidated, voluntary or involuntary, due or not due, legal or equitable,
whether incurred before, during, or after any Insolvency Proceeding, and whether
recovery thereof is or becomes barred by a statute of limitations or is or
becomes otherwise unenforceable or unallowable as claims in any Insolvency
Proceeding, together with all interest thereupon (including interest under
Section 2.5(b) and all interest accruing during the pendency of an Insolvency
Proceeding). The Obligations shall include, without limiting the generality of
the foregoing, all principal and interest owing under the Loans, all Bank
Expenses, the Fees, any other fees and expenses due hereunder, and all other
indebtedness evidenced by this Agreement and/or the Notes.
"OLD LENDERS" means, with respect to any Permitted Acquisition, the
existing lender(s) to the applicable Physician Group.
"OPERATING LEASE" means any lease of an Asset by a Person which, in
conformity with GAAP, is not a Capital Lease.
"OPTION AGREEMENT" means, with respect to any Permitted Acquisition,
the Assignable Option Agreement entered into by and among the Physician Group,
Physician Group Shareholders and Manager which are the subject of such Permitted
Acquisition.
"OPTIONAL COMMITMENT REDUCTION" has the meaning given to such term in
Section 2.10.
"PARTICIPANT" has the meaning set forth in Section 9.5(d).
"PAY-OFF LETTERS" means those certain letters, in form and substance
reasonably satisfactory to Bank, from Old Lenders respecting the amount
necessary to repay in full all of the obligations of Borrower owing to Old
Lenders and obtain a termination or release of all of the Liens existing in
favor of Old Lenders in and to the Assets of Borrower.
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<PAGE>
"PBGC" means the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.
"PERMITTED ACQUISITION" has the meaning given to such term in
Section 6.8(b).
"PERMITTED DEBT" means (i) Debt owing to Bank in accordance with the
terms of this Agreement and the Loan Documents; (ii) Debt which has been
approved in writing by Bank and is listed on SCHEDULE 1.1P, but no voluntary
prepayments, renewals, extensions, or refinancing thereof; and (iii) Debt
secured by a Purchase Money Lien and Capital Lease Obligations up to a maximum
aggregate principal amount outstanding for all such Debt of Borrower and the
Subsidiaries under this clause (iii) of One Million Dollars ($1,000,000).
"PERMITTED INVESTMENTS" means any of the following investments
denominated and payable in Dollars, maturing within one year from the date of
acquisition, selected by Borrower: (i) marketable direct obligations issued or
unconditionally guaranteed by the United States government or issued by any
agency thereof and backed by the full faith and credit of the United States;
(ii) marketable direct obligations issued by any state of the United States or
any political subdivision of any such state or any public instrumentality
thereof and, at the time of acquisition, having the highest credit rating
obtainable from either Standard & Poor's Corporation ("S&P") or Moody's
Investors Service, Inc. ("Moody's"); (iii) commercial paper or corporate
promissory notes bearing at the time of acquisition the highest credit rating
either of S&P or Moody's issued by United States, Canadian, European or Japanese
bank holding companies or industrial or financial companies; (iv) certificates
of deposit issued by and bankers acceptances of and interest bearing deposits
with Bank; and (v) money market funds organized under the laws of the United
States or any state thereof that invest predominantly in any of the foregoing
investments permitted under clauses (i), (ii), (iii) and (iv).
"PERMITTED LIENS" means (i) Liens for current taxes, assessments or
other governmental charges which are not delinquent or remain payable without
any penalty, (ii) Liens in favor of Bank in accordance with the Loan Documents,
(iii) statutory Liens, such as inchoate mechanics', inchoate materialmen's,
landlord's, warehousemen's, and carriers' liens, and other similar liens, other
than those described in clause (i) above, arising in the ordinary course of
business with respect to obligations which are not delinquent or are being
contested in good faith by appropriate proceedings, PROVIDED that, if
delinquent, adequate reserves have been set aside with respect thereto as
required by GAAP and, by reason of nonpayment, no property is subject to a
material risk of loss or forfeiture; (iv) Liens securing Debt described in
clauses (iii) of the definition of Permitted Debt in this Agreement,
(v) judgment Liens that do not constitute an Event of Default under
Section 7.1(i), (vi) Liens, if they constitute such, of any Operating Lease UCC
filings permitted hereunder, and (vii) Liens securing any Debt listed on
SCHEDULE 1.1P.
"PERSON" means and includes natural persons, corporations, limited
partnerships, general partnerships, limited liability companies, limited
liability partnerships,
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joint stock companies, joint ventures, associations, companies, trusts, banks,
trust companies, land trusts, business trusts, or other organizations,
irrespective of whether they are legal entities, and governments and agencies
and political subdivisions thereof.
"PHYSICIAN GROUP" means, with respect to any Transaction Documents
executed or to be executed in connection with any Permitted Acquisition, the
professional medical corporation which is to be acquired thereunder.
"PHYSICIAN GROUP SHAREHOLDER" means, with respect to any Physician
Group, a shareholder of such Physician Group.
"PLAN" means an "employee benefit plan" as defined in Section 3(3) of
ERISA in which any personnel of any member of the ERISA Group participate or
from which any such personnel may derive a benefit or with respect to which any
member of the ERISA Group may incur liability, excluding any Multiemployer Plan,
but including any plan either established or maintained by any member of the
ERISA Group or to which such Person contributes under the laws of any foreign
country.
"PRIME RATE" means the rate of interest announced by Bank at its
corporate headquarters as its prime rate and which serves as the basis upon
which effective rates of interest are calculated for those loans making
reference thereto. The Prime Rate is determined by Bank from time to time as a
means of pricing credit extensions to some customers and is neither directly
tied to some external rate of interest or index nor necessarily the lowest rate
of interest charged by Bank at any given time for any particular class of
customers or credit extensions.
"PRIVATE INSURANCE COMPANY" means any insurance company and/or managed
care organization which provides reimbursement for medical care or supplies
provided by a Physician Group to its patients.
"PURCHASE MONEY LIEN" means a Lien on any Asset acquired by Borrower
or any of its Subsidiaries; PROVIDED that (i) such Lien attaches only to the
Asset being acquired; (ii) a description of the Asset being acquired is
furnished to Bank; and (iii) the Debt incurred in connection with such
acquisition does not exceed one hundred percent (100%) of the purchase price of
such Asset.
"REAL ESTATE LEASES" means all leases, licenses, and any and all other
agreements regarding a right of entry to and/or a possessory interest in real
property now or hereinafter entered into by either Borrower as a tenant or
licensee, or which have been, or are in the future, being purchased, assigned or
sublet to either Borrower as a tenant or licensee.
"REPORTABLE EVENT" means any of the events described in
Section 4043(c) of ERISA other than a Reportable Event as to which the provision
of 30 days notice to the PBGC is waived under applicable regulations.
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"RESPONSIBLE OFFICER" means either the Chief Executive Officer, Chief
Financial Officer or Controller of a Person, or such other officer, employee, or
agent of such Person designated by a Responsible Officer in a writing delivered
to Bank.
"RETIREE HEALTH PLAN" means an "employee welfare benefit plan" within
the meaning of Section 3(1) of ERISA that provides benefits to individuals after
termination of their employment, other than as required by Section 601 of ERISA.
"REVOLVING CREDIT COMMITMENT" means Ten Million Dollars ($10,000,000).
"REVOLVING LOANS" has the meaning given to such term in Section 2.2.
"REVOLVING LOANS DAILY BALANCES" means the amount determined by taking
the amount of the obligations owed under the Revolving Loans at the beginning of
a given day, adding any new Revolving Loans advanced or incurred on such date,
and subtracting any payments or collections on the Revolving Loans which are
deemed to be paid on that date under the provisions of this Agreement.
"REVOLVING LOANS MATURITY DATE" means July 3, 1999.
"SECURITY AGREEMENT (BORROWER)" means that certain Security Agreement,
dated as of even date herewith, between Borrower and Bank.
"SECURITY AGREEMENT (GUARANTOR)" means each certain Security Agreement
now or hereafter entered into between a Guarantor, on the one hand, and Bank, on
the other hand, substantially in the form of EXHIBIT 1.1S-1, to secure the
Guaranty to which such Guarantor is a party.
"SECURITY AGREEMENT (PHYSICIAN GROUP)" means each certain Security
Agreement now or hereafter entered into between a Physician Group, on the one
hand, and a its Manager, on the other hand, substantially in the form of
EXHIBIT 1.1S-2, to secure the Management Services Agreement to which they are
parties.
"SOLVENT" means, with respect to any Person on the date any
determination thereof is to be made, that on such date: (a) the present fair
valuation of the Assets of such Person is greater than such Person's probable
liability in respect of existing debts; (b) such Person does not intend to, and
does not believe that it will, incur debts beyond such Person's ability to pay
as such debts mature; and (c) such Person is not engaged in business or a
transaction, and is not about to engage in business or a transaction, which
would leave such Person with Assets remaining which would constitute
unreasonably small capital after giving effect to the nature of the particular
business or transaction. For purposes of this definition (i) the "fair
valuation" of any property or assets means the amount realizable within a
reasonable time, either through collection or sale of such Assets at their
regular market value, which is the amount obtainable by a capable and diligent
Person from an interested buyer willing to purchase such property or assets
within a reasonable time under
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ordinary circumstances; and (ii) the term "debts" includes any payment
obligation, whether or not reduced to judgment, equitable or legal, matured or
unmatured, liquidated or unliquidated, disputed or undisputed, secured or
unsecured, absolute, fixed or contingent.
"STOCK PLEDGE AGREEMENT" means each certain Security Agreement-Stock
Pledge, now or hereafter entered into between a Borrower or a Guarantor, on the
one hand, and Bank, on the other hand, substantially in the form of EXHIBIT
1.1S-3 or EXHIBIT 1.1S-4, as applicable.
"SUBSIDIARY" means any corporation, limited liability company,
partnership, trust or other entity (whether now existing or hereafter organized
or acquired) of which Borrower or one or more Subsidiaries of Borrower at the
time owns or controls directly or indirectly more than 50% of the shares of
stock or partnership or other ownership interest having general voting power
under ordinary circumstances to elect a majority of the board of directors,
managers or trustees or otherwise exercising control of such corporation,
limited liability company, partnership, trust or other entity (irrespective of
whether at the time stock or any other form of ownership of any other class or
classes shall have or might have voting power by reason of the happening of any
contingency).
"SWAPS" means payment obligations with respect to interest rate swaps,
currency swaps and similar obligations obligating a Person to make payments,
whether periodically or upon the happening of a contingency. For the purposes
of this Agreement, the amount of the obligation under any Swap shall be the
amount determined, in respect thereof as of the end of the then most recently
ended fiscal quarter of Borrower, based on the assumption that such Swap had
terminated at the end of such fiscal quarter, and in making such determination,
if any agreement relating to such Swap provides for the netting of amounts
payable by and to each party thereto or if any such agreement provides for the
simultaneous payment of amounts by and to each party, then in each such case,
the amount of such obligation shall be the net amount so determined.
"TAXES" has the meaning set forth in Section 8.1.
"TRANSACTION DOCUMENTS" means the agreements, instruments and
documents heretofore or hereafter entered into by and among Borrower, a Manager,
a Physician Group, the Physician Group Shareholders, and certain other parties,
relating to the Permitted Acquisition with respect to such Physician Group
and/or the management of such Physician Group by its Manager, and all of the
other transactions relating thereto. Without limiting the generality of the
foregoing, the Transaction Documents with respect to each Physician Group
include the acquisition agreements, instruments and documents among such
Physician Group, its Physician Group Shareholders, its Manager and a seller, a
Management Services Agreement, an Inter-Company Note (Physician Group
Shareholder), an Inter-Company Note (Guarantor), an Inter-Company Security
Agreement, a Security Agreement (Physician Group), and an Option Agreement.
"TRANSFEREE" has the meaning set forth in Section 9.5(e).
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"UNFUNDED LIABILITIES" means, with respect to any Plan at any time,
the amount (if any) by which (i) the present value of all benefits under such
Plan exceeds (ii) the fair market value of all Plan assets allocable to such
benefits (excluding any accrued but unpaid contributions), all determined as of
the then most recent valuation date for such Plan, but only to the extent that
such excess represents a potential liability of a member of the ERISA Group to
the PBGC or an appointed trustee under Title IV of ERISA.
"UNMATURED EVENT OF DEFAULT" means any condition or event which with
the giving of notice or lapse of time or both would, unless cured or waived,
become an Event of Default.
"UNUSED COMMITMENT FEE" has the meaning given to such term in
Section 2.9(b).
"WARRANT" means that certain Warrant, dated as of even date herewith,
executed by Borrower in favor of Bank.
"WORKING CAPITAL SUBLIMIT" means One Million Five Hundred Thousand
Dollars ($1,500,000).
1.2 ACCOUNTING TERMS AND DETERMINATIONS. Unless otherwise
specified herein, all accounting terms used herein shall be interpreted, all
accounting determinations hereunder shall be made, and all financial statements
required to be delivered hereunder shall be prepared in accordance with GAAP.
1.3 COMPUTATION OF TIME PERIODS. In this Agreement, with respect
to the computation of periods of time from a specified date to a later specified
date, the word "from" means "from and including" and the words "to" and "until"
each mean "to but excluding." Periods of days referred to in this Agreement
shall be counted in calendar days unless otherwise stated.
1.4 CONSTRUCTION. Unless the context of this Agreement clearly
requires otherwise, references to the plural include the singular and to the
singular include the plural, references to any gender include any other gender,
the part includes the whole, the term "including" is not limiting, and the term
"or" has, except where otherwise indicated, the inclusive meaning represented by
the phrase "and/or." References in this Agreement to "determination" by Bank
include good faith estimates by Bank (in the case of quantitative
determinations), and good faith beliefs by Bank (in the case of qualitative
determinations). The words "hereof," "herein," "hereby," "hereunder," and
similar terms in this Agreement refer to this Agreement as a whole and not to
any particular provision of this Agreement. Article, section, subsection,
clause, exhibit and schedule references are to this Agreement, unless otherwise
specified. Any reference in this Agreement or any of the Loan Documents to this
Agreement or any of the Loan Documents includes any and all permitted
alterations, amendments, changes, extensions, modifications, renewals, or
supplements thereto or thereof, as applicable.
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1.5 EXHIBITS AND SCHEDULES. All of the exhibits and schedules
attached hereto shall be deemed incorporated herein by reference.
1.6 NO PRESUMPTION AGAINST ANY PARTY. Neither this Agreement, any
of the Loan Documents, any other document, agreement, or instrument entered into
in connection herewith, nor any uncertainty or ambiguity herein or therein shall
be construed or resolved using any presumption against any party hereto, whether
under any rule of construction or otherwise. On the contrary, this Agreement,
the Loan Documents, and the other documents, instruments, and agreements entered
into in connection herewith have been reviewed by each of the parties and their
counsel and shall be construed and interpreted according to the ordinary
meanings of the words used so as to accomplish fairly the purposes and
intentions of all parties hereto.
1.7 INDEPENDENCE OF PROVISIONS. All agreements and covenants
hereunder, under the Loan Documents, and the other documents, instruments, and
agreements entered into in connection herewith shall be given independent effect
such that if a particular action or condition is prohibited by the terms of any
such agreement or covenant, the fact that such action or condition would be
permitted within the limitations of another agreement or covenant shall not be
construed as allowing such action to be taken or condition to exist.
ARTICLE II
TERMS OF THE CREDIT
2.1 [INTENTIONALLY OMITTED].
2.2 REVOLVING LOANS. Provided that no Event of Default or
Unmatured Event of Default has occurred, and subject to the other terms and
conditions hereof, Bank agrees to make revolving loans ("REVOLVING LOANS") to
Borrower, upon notice in accordance with Section 2.4(b), from the Closing Date
up to but not including the Maturity Date, the proceeds of which shall be used
only for the purposes allowed in Section 6.1, subject to the following
conditions and limitations:
(a) the aggregate principal amount of Revolving Loans
outstanding after giving effect to any proposed Borrowing plus the Letter of
Credit Usage on such date shall not exceed the amount of the Revolving Credit
Commitment then in effect;
(b) Borrower shall not be permitted to borrow, and Bank
shall not be obligated to make, any Revolving Loans to Borrower, unless and
until all of the conditions for a Borrowing set forth in Section 3.2, and
Section 3.3 in the case of a Borrowing for a Permitted Acquisition, have been
met to the satisfaction of Bank in its sole and absolute discretion;
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(c) Borrowings shall be in minimum amounts each of Five
Hundred Thousand Dollars ($500,000), plus increments of One Hundred Thousand
Dollars ($100,000) in excess of such minimum amount; and
(d) the aggregate amount of Revolving Loans for working
capital outstanding after giving effect to any proposed Borrowing PLUS the
Letter of Credit Usage on such date shall not exceed the Working Capital
Sublimit;
All repayments of Revolving Loans shall be without penalty or premium. On the
Maturity Date, Borrower shall pay to Bank the entire unpaid principal balance of
the Revolving Loans together with all accrued but unpaid interest thereon.
2.3 LETTERS OF CREDIT. Subject to the terms and conditions
hereof, Borrower may request Bank to issue Letters of Credit for the account of
Borrower, subject, in each case, to the following limitations:
(a) Each Letter of Credit shall be issued only upon
satisfaction of each of the following conditions:
(i) The face amount of the Letter of Credit
requested if and when issued must not cause the sum of the aggregate
principal amount outstanding of all Revolving Loans PLUS the Letter of
Credit Usage to exceed the Revolving Credit Commitment then in effect;
(ii) The face amount of the Letter of Credit
requested if and when issued must not cause the Letter of Credit Usage PLUS
the aggregate amount of Borrowings outstanding on such date for working
capital to exceed the Working Capital Sublimit;
(iii) The Letter of Credit may not have an expiry
date or draw period which extends beyond the date which is thirty (30) days
prior to the Maturity Date;
(iv) The conditions specified in Section 3.2(b) and
(c) have been satisfied on the date of issuance of such Letter of Credit;
(v) Borrower shall have submitted a Letter of
Credit Application, and executed such other documents, instruments and
agreements as may be required by Bank, all in form and substance
satisfactory to Bank; PROVIDED, HOWEVER, that the execution, delivery and
performance of such Letter of Credit Application and other documents,
instruments and agreements must not constitute an Unmatured Event of
Default or an Event of Default and, in the event of any conflict between
the provisions hereof and such Letter of Credit Application and other
documents, instruments and agreements, the provisions hereof shall control;
and
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(vi) Borrower shall pay any and all charges of Bank,
arising in connection with the issuance or amendment of any Letter of
Credit.
(b) Borrower shall pay to Bank the Letter of Credit Fee
upon issuance of each Letter of Credit PLUS all of Bank's standard and customary
fees with respect to each Letter of Credit.
(c) In determining whether to pay under any Letter of
Credit, only Bank shall be responsible for determining that the documents and
certificates required to be delivered under the Letter of Credit have been
delivered and that they comply on their face with the requirements of such
Letter of Credit.
(d) With respect to all Letters of Credit outstanding upon
the occurrence of an Unmatured Event of Default or Event of Default, Borrower
shall either replace such Letters of Credit, whereupon such Letters of Credit
shall be canceled, with letters of credit issued by another issuer acceptable to
the beneficiary of such Letter of Credit, or provide Bank, as security for such
Letters of Credit, with a cash deposit in an amount equal to the Letter of
Credit Usage for so long as such Letters of Credit remain outstanding during the
continuance of such Unmatured Event of Default or Event of Default.
(e) Any and all amounts paid by Bank under any Letter of
Credit shall constitute a Borrowing.
2.4 NOTICE OF BORROWING REQUIREMENTS.
(a) Each Borrowing shall be made on a Business Day.
(b) Each Borrowing shall be made upon telephonic notice
given by a Responsible Officer of Borrower, followed by a Notice of Borrowing,
given by facsimile or personal service, delivered to Bank at the address set
forth in the Notice of Borrowing. Bank shall be given such notice no later than
11:00 a.m., California time, on the day on which such Borrowing is to be made,
and such notice shall state the amount thereof (subject to the limitations set
forth in Section 2.2). Any Notice of Borrowing (or telephonic notice in respect
thereof) shall be irrevocable and Borrower shall be bound to borrow in
accordance therewith.
(c) Bank shall not incur any liability to Borrower in
acting upon any telephonic notice which Bank believes in good faith to have been
given by a Responsible Officer of Borrower, or for otherwise acting in good
faith under this Section 2.3, and in making any Revolving Loans pursuant to
telephonic notice.
(d) So long as all of the conditions for a Borrowing set
forth herein have been satisfied, Bank shall make the proceeds of such Borrowing
available to Borrower on the applicable Borrowing date by transferring same day
funds, equal to the amount of such Borrowing, in accordance with written
disbursement instructions given by Borrower
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to Bank, in form and substance satisfactory to Bank and otherwise consistent
with Section 6.1.
2.5 INTEREST RATES; PAYMENTS OF INTEREST.
(a) INTEREST RATE. The unpaid principal balance of all
Loans shall bear interest at the Lending Rate.
(b) DEFAULT RATE. If any payment of principal or interest
on the Loans shall not be paid when due (whether at the stated maturity, by
acceleration or otherwise), in addition to and not in substitution of any of
Bank's other rights and remedies with respect to such nonpayment, the entire
unpaid principal balance of the Loans shall bear interest at the Lending Rate
PLUS five hundred (500) basis points until such overdue payment is paid in full.
In addition, interest, Bank Expenses, the Fees, and other amounts due hereunder
not paid when due shall bear interest at the Lending Rate PLUS five hundred
(500) basis points until such overdue payment is paid in full.
(c) COMPUTATION OF INTEREST. All computations of interest
shall be calculated on the basis of a year of three hundred sixty (360) days for
the actual days elapsed. In the event that the Prime Rate announced is, from
time to time, changed, adjustment in the rate of interest payable hereunder on
the Loans shall be made as of 12:01 a.m. (California time) on the effective date
of the change in the Prime Rate. Interest shall accrue from the Closing Date to
the date of repayment of the Loans in accordance with the provisions of this
Agreement.
(d) MAXIMUM INTEREST RATE. In no event shall the interest
rate and other charges hereunder exceed the highest rate permissible under any
law which a court of competent jurisdiction shall, in a final determination,
deem applicable hereto. In the event that such a court determines that Bank has
received interest and other charges hereunder in excess of the highest rate
applicable hereto, such excess shall be deemed received on account of, and shall
automatically be applied to reduce, the Obligations, other than interest, in the
inverse order of maturity, and the provisions hereof shall be deemed amended to
provide for the highest permissible rate. If there are no Obligations
outstanding, Bank shall refund to Borrower such excess.
(e) PAYMENTS OF INTEREST. All accrued but unpaid interest
on the Loans, calculated in accordance with this Section 2.5, shall be due and
payable, in arrears, on the first Business Day of each and every month.
(f) CHANGE IN APPLICABLE MARGIN. Changes in the Applicable
Margin, resulting from a change in the Leverage Ratio, shall become effective on
the 45th day following the last day of each fiscal quarter of Borrower, and
shall be based on the Leverage Ratio disclosed in the Compliance Certificate
with respect to such fiscal quarter; PROVIDED, HOWEVER, for purposes of
determining the aforementioned margins, (i) until Borrower accurately completes
and delivers to Bank the first Compliance Certificate due
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hereunder, the Leverage Ratio shall be conclusively presumed to be greater than
3.5:1.0 and (ii) if Borrower fails to deliver to Bank an accurately completed
Compliance Certificate within forty-five (45) days following the end of each
fiscal quarter of Borrower, the Leverage Ratio shall be conclusively presumed to
be greater than 3.5:1.0 until the applicable Compliance Certificate has been so
completed and delivered to Bank.
2.6 NOTE; STATEMENTS OF OBLIGATIONS. The Revolving Loans and
Borrower's obligation to repay the same shall be evidenced by the Note, this
Agreement and the books and records of Bank. Bank shall render monthly
statements of the Loans to Borrower, including statements of all principal and
interest owing on the Loans, and all Fees and Bank Expenses owing, and such
statements shall be presumed to be correct and accurate and constitute an
account stated between Borrower and Bank unless, within thirty (30) days after
receipt thereof by Borrower, Borrower delivers to Bank, at the address specified
in Section 9.1, written objection thereof specifying the error or errors, if
any, contained in any such statement.
2.7 HOLIDAYS. Any principal or interest in respect of the Loans
which would otherwise become due on a day other than a Business Day, shall
instead become due on the next succeeding Business Day and such adjustment shall
be reflected in the computation of interest; PROVIDED, HOWEVER, that in the
event that such due date shall, subsequent to the specification thereof by Bank,
for any reason no longer constitute a Business Day, Bank may change such
specified due date in accordance with this Section 2.7.
2.8 TIME AND PLACE OF PAYMENTS.
(a) All payments due hereunder shall be made available to
Bank in immediately available Dollars, not later than 12:00 p.m., Los Angeles
time, on the day of payment, to the following address or such other address as
Bank may from time to time specify by notice to Borrower:
IMPERIAL BANK
9920 South La Cienega Blvd., Ste. 628
Inglewood, California 90301
Attention: Lending Services Department
(b) Borrower hereby authorizes Bank to charge any account
which Borrower maintains with Bank for the amount of any payment due or past due
hereunder.
(c) In addition, Borrower hereby authorizes Bank at its
option, without prior notice to Borrower, to advance a Revolving Loan for any
payment due or past due hereunder, including principal and interest owing on the
Loans, the Fees and all Bank Expenses, and to pay the proceeds of such Revolving
Loan to Bank for application toward such due or past due payment.
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2.9 COMMITMENT FEE AND UNUSED COMMITMENT FEE.
(a) On the Closing Date, Borrower shall pay to Bank a fully
earned, non-refundable Commitment Fee (the "COMMITMENT FEE") in the amount of
One Hundred Thousand Dollars ($100,000) in consideration of Bank's agreement to
enter into this Agreement upon the terms and conditions set forth herein, of
which Twenty-Five Thousand Dollars ($25,000) has previously been paid.
(b) Borrower shall pay to Bank an unused commitment fee
(the "UNUSED COMMITMENT FEE") in an aggregate amount equal to one-half of one
percent (0.5%) per annum of the average daily amount of the Revolving Credit
Commitment MINUS the Revolving Loans Daily Balances. The Unused Commitment Fee
shall begin to accrue on the Closing Date and shall be due and payable on the
first Business Day of each month and the Maturity Date.
(c) LATE PAYMENT FEE. If any payment due hereunder,
whether for principal, interest, or otherwise, is not paid on or before the
tenth day after the date such payment is due, in addition to and not in
substitution of any of Bank's other rights and remedies with respect to such
nonpayment, Borrower shall pay to Bank, a late payment fee ("LATE PAYMENT FEE")
equal to five percent (5%) of the amount of such overdue payment. The Late
Payment Fee shall be due and payable on the eleventh day after the due date of
the overdue payment with respect thereto.
2.10 OPTIONAL COMMITMENT REDUCTIONS. Borrower may terminate or
permanently reduce the Revolving Credit Commitment at any time, upon three (3)
Business Days' notice to Bank (an "OPTIONAL COMMITMENT REDUCTION"), and Borrower
shall concurrently therewith pay Bank in immediately available funds, an amount
equal to the amount by which the aggregate outstanding principal balance of the
Revolving Loans exceeds the amount of the Revolving Credit Commitment as so
reduced, PLUS all accrued interest on such amount. Optional Commitment
Reductions shall be in minimum increments of Five Hundred Thousand Dollars
($500,000).
ARTICLE III
CONDITIONS PRECEDENT
3.1 CONDITIONS TO INITIAL LOAN OR LETTER OF CREDIT. Bank's
obligation to make the initial Loan or issue the initial Letter of Credit is
subject to and contingent upon the fulfillment of each of the following
conditions to the satisfaction of Bank and its counsel:
(a) receipt by Bank of this Agreement and each of the Loan
Documents, all duly executed by Borrower and/or the other Persons party thereto,
acknowledged where required, and in form and substance satisfactory to Bank in
its sole and absolute discretion;
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(b) receipt by Bank of a duly executed opinion of
Borrower's and Guarantors' counsel, dated as of the Closing Date, covering the
matters set forth in EXHIBIT 3.1(b) and otherwise in form and substance
satisfactory to Bank in its sole and absolute discretion;
(c) receipt by Bank of a Certificate of the Secretary of
Borrower, dated as of the Closing Date, certifying (i) the incumbency and
signatures of the Responsible Officers of Borrower who are executing this
Agreement and the Loan Documents on behalf of Borrower; (ii) the bylaws of
Borrower and all amendments thereto as being true and correct and in full force
and effect; and (iii) the resolutions of the Board of Directors of Borrower as
being true and correct and in full force and effect, authorizing the execution
and delivery of this Agreement and the Loan Documents, and authorizing the
transactions contemplated hereunder and thereunder, and authorizing the
Responsible Officers of Borrower to execute the same on behalf of Borrower;
(d) receipt by Bank of a certificate of status and good
standing for each Borrower, dated as of a recent date prior to the Closing Date,
showing that Borrower is in good standing under the laws of the State of
Delaware;
(e) receipt by Bank of Borrower's Certificate of
Incorporation and all amendments thereto, certified by the Delaware Secretary of
State and dated as of a recent date prior to the Closing Date;
(f) receipt by Bank of certificates of foreign
qualification and good standing with respect for Borrower, dated as of a recent
date prior to the Closing Date, showing that Borrower is in good standing under
the laws of California;
(g) receipt by Bank of a certificate signed by the
President and Chief Financial Officer of Borrower, dated as of the Closing Date,
certifying to Bank that (i) both immediately before and immediately after giving
effect to the transactions contemplated by this Agreement and the Loan
Documents, Borrower is and will be Solvent; (ii) the representations and
warranties of Borrower contained in this Agreement and the Loan Documents are
true and correct and (iii) both immediately before and immediately after giving
effect to the transactions contemplated by this Agreement and the Loan
Documents, no Event of Default or Unmatured Event of Default is continuing or
shall occur;
(h) receipt by Bank of a Certificate of the Secretary of
each Guarantor, dated as of the Closing Date, certifying (i) the incumbency and
signatures of the Responsible Officers of such Guarantor who are executing the
Loan Documents on behalf of such Guarantor, (ii) the bylaws of such Guarantor
and all amendments thereto as being true and correct and in full force and
effect, and (iii) the resolutions of the Board of Directors of such Guarantor as
being true and correct and in full force and effect, authorizing the execution
and delivery of the Loan Documents, and authorizing the
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transactions contemplated thereunder, and authorizing the Responsible Officers
of such Guarantor to execute the same on behalf of such Guarantor;
(i) receipt by Bank of a certificate of status and good
standing for each Guarantor, dated as of a recent date prior to the Closing
Date, showing that such Guarantor is in good standing under the laws of the
state of its organization;
(j) receipt by Bank of each Guarantor's Articles of
Incorporation and all amendments thereto, certified by the Secretary of State of
the state of its organization and dated as of a recent date prior to the Closing
Date;
(k) receipt by Bank of certificates of foreign
qualification and good standing with respect to each Guarantor, dated as of a
recent date prior to the Closing Date, showing that such Guarantor is in good
standing under the laws of California;
(l) receipt by Bank of a certificate signed by the
President and Chief Financial Officer of each Guarantor, dated as of the Closing
Date, certifying to Bank that (i) both immediately before and immediately after
giving effect to the transactions contemplated by this Agreement and the Loan
Documents, such Guarantor is and will be Solvent; (ii) to the best of their
knowledge after due and diligent inquiry, the representations and warranties of
such Guarantor contained in the Loan Documents are true and correct and (iii) to
the best of their knowledge after due and diligent inquiry, both immediately
before and immediately after giving effect to the transactions contemplated by
the Loan Documents, no Event of Default or Unmatured Event of Default is
continuing or shall occur;
(m) receipt by Bank of Uniform Commercial Code and other
public record searches with respect to Borrower and Guarantors, in each case
satisfactory to Bank in its sole and absolute discretion;
(n) receipt by Bank of (i) the balance of the Commitment
Fee and (ii) all Bank Expenses owing on the Closing Date;
(o) receipt by Bank of (i) Borrower's internally prepared
Financial Statements for Borrower fiscal year ended September 30, 1996, and
(ii) Borrower's operating budgets and projections for their fiscal year ending
September 30, 1997, all of which satisfactory to Bank to Bank in its sole and
absolute discretion;
(p) no Material Adverse Effect shall have occurred;
(q) receipt by Bank of copies of insurance binders or
insurance certificates evidencing Borrower's having caused to be obtained
insurance in accordance with Section 5.5, including the lender's loss payee
endorsements required by such Section;
(r) Borrower, each Guarantor and Physician Group shall have
established the bank accounts at Bank as described in Section 5.11;
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(s) receipt by Bank of (i) a written detailed description
of all proposed Permitted Acquisitions for which Borrower has committed as of
the Closing Date, in form and substance satisfactory to Bank, including
historical and projected financial information, accounts receivable information
and reconciliations, and such other supporting information with respect to the
applicable Physician Groups and proposed Permitted Acquisitions as Bank shall
require, including historical financial statements; and (ii) draft copies of all
Transaction Documents with respect to such proposed Permitted Acquisitions, in
form and substance satisfactory to Bank;
(t) Bank's approval of Borrower's equity and capital
structure; and
(u) the Closing Date shall have occurred on or before
July 3, 1997.
3.2 CONDITIONS TO ALL LOANS AND LETTERS OF CREDIT. Bank's
obligation hereunder to make any Loans to Borrower (including the initial Loan),
or issue any Letters of Credit (including the initial Letter of Credit), is
further subject to and contingent upon the fulfillment of each of the following
conditions to the satisfaction of Bank:
(a) in the case of a Borrowing, receipt by Bank of a Notice
of Borrowing as required by Section 2.4(b) and written disbursement instructions
to Bank consistent with Section 6.1;
(b) in the case of a Borrowing or Letter of Credit
Application, the fact that, immediately before and after such Borrowing or
issuance of Letter of Credit, as the case may be, no Event of Default or
Unmatured Event of Default shall have occurred; and
(c) in the case of a Borrowing or Letter of Credit
Application, the fact that the representations and warranties of Borrower
contained in this Agreement shall be true on and as of the date of such
Borrowing, or issuance of Letter of Credit, as the case may be.
3.3 ADDITIONAL CONDITIONS TO LOANS FOR PERMITTED ACQUISITIONS.
Bank's obligation hereunder to make any Loans to Borrower for a Permitted
Acquisition with respect to any Physician Group, is further subject to and
contingent upon the fulfillment of each of the following conditions to the
satisfaction of Bank:
(a) satisfaction of all of the conditions set forth in
Section 6.8(b); and
(b) receipt by Bank of Pay-Off Letters from the Old
Lenders, if any, and such UCC-2 Termination Statements and other Lien releases
as Bank shall require, duly executed by such Old Lenders, all of the foregoing
in form and substance satisfactory to Bank; and
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(c) receipt by Bank of such other agreements, instruments
and documents as Bank may reasonably require in connection with such Borrowing,
in form and substance satisfactory to Bank in its sole and absolute discretion.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
In order to induce Bank to enter into this Agreement and to make Loans
and/or issue any Letters of Credit, Borrower represents and warrants to Bank
that on the Closing Date and on the date of each Borrowing or issuance of a
Letter of Credit:
4.1 LEGAL STATUS. Borrower is a corporation duly organized and
existing under the laws of the state of Delaware. Borrower and each Subsidiary
has the power and authority to own its own Assets and to transact the business
in which it is engaged, and is properly licensed, qualified to do business and
in good standing in every jurisdiction in which it is doing business where
failure to so qualify could have a Material Adverse Effect.
4.2 NO VIOLATION; COMPLIANCE.
(a) The execution, delivery and performance of this
Agreement and the Loan Documents and the Transaction Documents to which Borrower
is a party are within Borrower's powers, are not in conflict with the terms of
the Governing Documents of Borrower, and do not result in a breach of or
constitute a default under any contract, obligation, indenture or other
instrument to which Borrower is a party or by which Borrower is bound or
affected. There is no law, rule or regulation (including Regulations G, T, U
and X of the Federal Reserve Board and laws relating to the practice of
medicine), nor is there any judgment, decree or order of any court or
Governmental Authority binding on Borrower which would be contravened by the
execution, delivery, performance or enforcement of this Agreement and the Loan
Documents and the Transaction Documents to which Borrower is a party.
(b) The execution, delivery and performance of the Loan
Documents and the Transaction Documents to which each Guarantor is a party are
within such Guarantor's powers, are not in conflict with the terms of the
Governing Documents of such Guarantor, and do not result in a breach of or
constitute a default under any contract, obligation, indenture or other
instrument to which such Guarantor is a party or by which such Guarantor is
bound or affected. There is no law, rule or regulation (including Regulations
G, T, U and X of the Federal Reserve Board and laws relating to the practice of
medicine), nor is there any judgment, decree or order of any court or
Governmental Authority binding on any Guarantor which would be contravened by
the execution, delivery, performance or enforcement of the Loan Documents and
the Transaction Documents to which any Guarantor is a party.
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4.3 AUTHORIZATION; ENFORCEABILITY.
(a) Borrower has taken all corporate action necessary to
authorize the execution and delivery of this Agreement and the Loan Documents
and the Transaction Documents to which Borrower is a party, and the consummation
of the transactions contemplated hereby and thereby. Upon their execution and
delivery in accordance with the terms hereof, this Agreement and the Loan
Documents and the Transaction Documents to which Borrower is a party will
constitute legal, valid and binding agreements and obligations of Borrower
enforceable against Borrower in accordance with their respective terms, except
as enforceability may be limited by bankruptcy, insolvency, and similar laws and
equitable principles affecting the enforcement of creditors' rights generally.
(b) Each Guarantor has taken all corporate action necessary
to authorize the execution and delivery of the Loan Documents and the
Transaction Documents to which such Guarantor is a party, and the consummation
of the transactions contemplated thereby. Upon their execution and delivery in
accordance with the terms hereof, the Loan Documents and the Transaction
Documents to which each Guarantor is a party will constitute legal, valid and
binding agreements and obligations of such Guarantor enforceable against such
Guarantor in accordance with their respective terms, except as enforceability
may be limited by bankruptcy, insolvency, fraudulent conveyance, and similar
laws and equitable principles affecting the enforcement of creditors' rights
generally.
4.4 APPROVALS; CONSENTS. No approval, consent, exemption or other
action by, or notice to or filing with, any Governmental Authority is necessary
in connection with the execution, delivery, performance or enforcement of this
Agreement, the Loan Documents or the Transaction Documents.
4.5 LIENS. Borrower and each of its Subsidiaries has good and
marketable title to, or valid leasehold interests in, all of its Assets, free
and clear of all Liens or rights of others, except for Permitted Liens.
4.6 DEBT. Borrower and each of its Subsidiaries has no Debt other
than Permitted Debt.
4.7 LITIGATION. Except as set forth in SCHEDULE 4.7, there are no
suits, proceedings, claims or disputes pending or, to the knowledge of Borrower
after due inquiry, threatened, against or affecting Borrower or any of
Borrower's Assets, or any Subsidiary of Borrower or any of such Subsidiary's
Assets, which are not fully covered by applicable insurance and as to which no
reservation of rights has been taken by the insurer thereunder.
4.8 NO DEFAULT. No Event of Default or Unmatured Event of
Default is continuing or would result from the incurring of obligations by
Borrower or any Subsidiary under this Agreement or the Loan Documents.
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4.9 SUBSIDIARIES. Set forth in SCHEDULE 4.9 is a complete and
accurate list of the Subsidiaries, showing the jurisdiction of incorporation of
each and showing the percentage of each Borrower's ownership of the outstanding
stock of each Subsidiary. All of the outstanding capital stock of each
Subsidiary has been validly issued, is fully paid and nonassessable, and is
owned by Borrower free and clear of all Liens except Permitted Liens.
4.10 TAXES. All tax returns required to be filed by Borrower and
each of its Subsidiaries in any jurisdiction have in fact been filed, and all
taxes, assessments, fees and other governmental charges upon Borrower and each
of its Subsidiaries or upon any of their Assets, income or franchises, which are
due and payable have been paid. The provisions for taxes on the books of
Borrower and each of its Subsidiaries are adequate for all open years, and for
Borrower's and each of its Subsidiaries current fiscal period.
4.11 CORRECTNESS OF FINANCIAL STATEMENTS. Borrower's consolidated
audited Financial Statement as of the fiscal year ended September 30, 1996, and
all information and data furnished by Borrower to Bank in connection therewith,
are complete and correct and accurately and fairly present the financial
condition and results of operations of Borrower and the Subsidiaries as of their
respective dates. Any forecasts of future financial performance delivered by
Borrower to Bank have been made in good faith and are based on reasonable
assumptions and investigations by Borrower. Said audited Financial Statement
has been prepared in accordance with GAAP. Since the date of such audited
Financial Statement, there has been no change in Borrower's or the Subsidiaries'
financial condition or results of operations sufficient to have a Material
Adverse Effect. Borrower and the Subsidiaries have no contingent obligations,
liabilities for taxes or other outstanding financial obligations which are
material in the aggregate, except as disclosed in such statements, information
and data.
4.12 ERISA. Neither Borrower nor any member of the ERISA Group
maintains or contributes to any Plan or Multiemployer Plan, other than those
listed on SCHEDULE 4.12. Borrower and each member of the ERISA Group have
satisfied the minimum funding standards of ERISA and the Internal Revenue Code
with respect to each Plan and Multiemployer Plan to which it is obligated to
contribute. No ERISA Event has occurred nor has any other event occurred that
may result in an ERISA Event that reasonably could be expected to result in a
Material Adverse Effect. None of Borrower, any member of the ERISA Group, or
any fiduciary of any Plan is subject to any direct or indirect liability with
respect to any Plan (other than to make regularly scheduled required
contributions and to pay Plan benefits in the normal course) under any
applicable law, treaty, rule, regulation, or agreement. Neither Borrower nor
any member of the ERISA Group is required to provide security to any Plan under
Section 401(a)(29) of the Internal Revenue Code. Each Plan will be able to
fulfill its benefit obligations as they come due in accordance with the Plan
documents and Under GAAP.
4.13 OTHER OBLIGATIONS. Borrower and each of its Subsidiaries is
not in default on any Debt, and Borrower and each of its Subsidiaries is not in
default on any other
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lease, commitment, contract, instrument or obligation which is material to the
operation of its business.
4.14 PUBLIC UTILITY HOLDING COMPANY ACT. Borrower is not a
"holding company," or an "affiliate" of a "holding company" or a "subsidiary
company" of a "holding company," within the meaning of the Public Utility
Holding Company Act of 1935, as amended.
4.15 INVESTMENT COMPANY ACT. Borrower is not an "investment
company," or a company "controlled" by an "investment company," within the
meaning of the Investment Company Act of 1940, as amended.
4.16 PATENTS, TRADEMARKS, COPYRIGHTS, AND INTELLECTUAL PROPERTY,
ETC. Borrower and each Subsidiary has all necessary, patents, patent rights,
licenses, trademarks, trademark rights, trade names, trade name rights,
copyrights, permits, and franchises in order for it to conduct its business and
to operate its Assets, without known conflict with the rights of third Persons,
and all of same are valid and subsisting. The consummation of the transactions
contemplated by this Agreement will not alter or impair any of such rights of
Borrower or any Subsidiary. Borrower and each Subsidiary has not been charged
or, to the best of Borrower's knowledge after due inquiry, threatened to be
charged with any infringement or, after due inquiry, infringed on any, unexpired
trademark, trademark registration, trade name, patent, copyright, copyright
registration, or other proprietary right of any Person.
4.17 ENVIRONMENTAL CONDITION. (i) None of Borrower's, any
Subsidiary's or any Physician Group's Assets has ever been used by such
Borrower, such Subsidiary or any Physician Group or by previous owners or
operators in the disposal of, or to produce, store, handle, treat, release, or
transport, any Hazardous Materials, other than medical supplies used in the
ordinary course of a Physician Group's practice as presently conducted in
accordance with all applicable laws, rules and regulations; (ii) none of
Borrower's, any Subsidiary's or any Physician Group's Assets has ever been
designated or identified in any manner pursuant to any environmental protection
statute as a Hazardous Materials disposal site, or a candidate for closure
pursuant to any environmental protection statute; (iii) no Lien arising under
any environmental protection statute has attached to any revenues or to any real
or personal property owned or operated by Borrower, any Subsidiary nor any
Physician Group; and (iv) neither Borrower, any Subsidiary or any Physician
Group has received a summons, citation, notice, or directive from the
Environmental Protection Agency or any other federal or state governmental
agency concerning any action or omission by Borrower, any Subsidiary or any
Physician Group resulting in the releasing or disposing of Hazardous Materials
into the environment.
4.18 REAL ESTATE LEASES. All of the Real Estate Leases are listed
on SCHEDULE 4.18. All of the Real Estate Leases are currently in full force and
effect, and true and correct copies of all Real Estate Leases, together with all
amendments, exhibits and schedules thereto, have been delivered to Bank.
Neither the landlord nor the tenant therein,
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as the case may be, is in default on any of its obligations thereunder, and no
event has occurred which, with the passage of time or the giving of notice, or
both, would constitute such a default.
4.19 COMPLIANCE WITH ADA.
(a) Borrower's, the Subsidiaries' and the Physician Group's
premises are presently used as an administrative, office, and for other
commercial purposes, and no portions of Borrower's, any Subsidiaries' or any
Physician Group's premises are used as or for a "public accommodation," as
described and defined in the ADA.
(b) Borrower, each Subsidiary and each Physician Group has
made all modifications and/or provided all accommodations which may be required
to be made or provided by Borrower, such Subsidiary and each Physician Group to
their premises pursuant to the ADA in order to accommodate the needs and
requirements of any disabled employees of Borrower, such Subsidiary and each
Physician Group.
(c) Borrower, the Subsidiaries and the Physician Group's
have received no notice or complaint regarding any noncompliance with the ADA of
their premises or of Borrower's, any Subsidiary's and the Physician Group's
employment practices and, to the best of Borrower's knowledge, there has been no
threatened litigation alleging any such noncompliance by Borrower, the
Subsidiaries, the Physician Groups or their premises.
4.20 PHYSICIAN GROUPS; TRANSACTION DOCUMENTS.
(a) Each of the Physician Groups is listed on SCHEDULE 4.20
including with respect to each Physician Group, its full legal name and all
trade names and fictitious business names, state of organization, and all
locations where such Physician Group conducts its business. Each of the
Transaction Documents executed in connection with the formation of such
Physician Group and currently in effect, and transactions by and among such
Physician Group, its Physician Group Shareholders, Borrower and any Subsidiary,
are listed by title, date and parties in SCHEDULE 4.20.
(b) Each Physician Group is a professional medical
corporation, duly organized and existing under the laws of the state of its
organization. Each Physician Group has the power and authority to own its own
Assets and to transact the business in which it is engaged, and is properly
licensed to practice medicine in accordance with applicable laws.
(c) The execution, delivery and performance of the
Transaction Documents to which each Physician Group is a party are within such
Physician Group's powers, are not in conflict with the terms of any charter,
bylaw, the articles or certificate of incorporation or other organization papers
of such Physician Group, and do not result in a breach of or constitute a
default under any material contract, obligation, indenture or other
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instrument to which such Physician Group or its Physician Group Shareholders is
a party or by which such Physician Group its Physician Group Shareholders is
bound or affected. To the knowledge of Borrower, there is no law, rule or
regulation, whether relating to the practice of medicine or otherwise, nor is
there any judgment, decree or order of any court or Governmental Authority
binding on any Physician Group or any Physician Group Shareholder which would be
contravened by the execution, delivery, performance or enforcement of the
Transaction Documents to which such Physician Group and such Physician Group
Shareholder is a party.
(d) Each Physician Group has taken all corporate action
necessary to authorize the execution and delivery of the Transaction Documents
to which such Physician Group is a party, and the consummation of the
transactions contemplated thereby.
4.21 BILLING PRACTICES. To the knowledge of Borrower, all billing
practices of each Guarantor with third party payors of each Physician Group,
including Medicare, Medicaid, Champus and Private Insurance Companies, are true
and correct and in compliance with all applicable laws, regulations, policies
and agreements, except where the failure to so comply is not reasonably likely
to have a Material Adverse Effect.
4.22 CHARACTER OF BUSINESS. Borrower is a holding company engaged
in no business activities or operations other than the acquisition of Permitted
Acquisitions and the acquisition, ownership and management of the Subsidiaries,
and the Subsidiaries are not engaged in any business activities or operations
other than the management of the Physician Groups and other activities
incidental thereto.
ARTICLE V
AFFIRMATIVE COVENANTS
Borrower covenants and agrees that from the Closing Date and
thereafter until the indefeasible payment, performance and satisfaction in full
of the Obligations and all of Bank's obligations hereunder have been terminated,
Borrower shall:
5.1 PUNCTUAL PAYMENTS. Punctually pay the interest and principal
on the Loans, the Fees and all Bank Expenses and any other fees and liabilities
due under this Agreement and the Loan Documents at the times and place and in
the manner specified in this Agreement or the Loan Documents.
5.2 BOOKS AND RECORDS. Maintain, and cause each of its
Subsidiaries to maintain, adequate books and records in accordance with GAAP,
and permit any officer, employee or agent of Bank, at any time and from time to
time, to inspect, audit and examine such books and records, and to make copies
of the same.
5.3 FINANCIAL STATEMENTS. Deliver to Bank the following, all in
form and detail satisfactory to Bank and in such number of copies as Bank may
request:
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(a) as soon as available but not later than forty-five (45)
days after and as of the close of each monthly accounting period, a consolidated
internally prepared Financial Statement for Borrower and its Subsidiaries which
shall include Borrower's and its Subsidiaries' consolidated balance sheet as of
the close of such period, and Borrower's and its Subsidiaries' consolidated
statement of income and retained earnings and statement of cash flow for such
period and year to date, certified by the Chief Financial Officer of Borrower,
to the best of his or her knowledge after due and diligent inquiry, as being
complete and correct and fairly presenting in all material respects Borrower's
and its Subsidiaries' financial condition and results of operations for such
period;
(b) as soon as available but not later than forty-five (45)
days after and as of the close of each quarterly accounting period, a
consolidated and consolidating internally prepared Financial Statement for
Borrower and its Subsidiaries which shall include Borrower's and its
Subsidiaries' consolidated and consolidating balance sheet as of the close of
such period, and Borrower's and its Subsidiaries' consolidated statement of
income and retained earnings and statement of cash flow for such period and year
to date, certified by the Chief Financial Officer of Borrower, to the best of
his or her knowledge after due and diligent inquiry, as being complete and
correct and fairly presenting Borrower's and its Subsidiaries' financial
condition and results of operations;
(c) as soon as available but not later than forty-five (45)
days after and as of the close of each quarterly accounting period, a report,
certified by a Responsible Officer of Borrower, to the best of his or her
knowledge after due and diligent inquiry, as being complete and correct, setting
forth all of the following information with respect to such quarterly accounting
period with respect to Borrower, the Subsidiaries and the Physician Groups, both
in the aggregate and by Physician Group: (i) an accounts receivable aging by
payor class, (ii) number of member lives and number of doctors employed, (iii)
monthly capitation rate for commercial lives, Medicare risk lives and
Medical/Medicaid lives, (iv) medical loss ratio; and (v) an analysis of incurred
but not reported medical expenses.
(d) as soon as available but not later than forty-five (45)
days after and as of the end of each quarterly accounting period, a Compliance
Certificate from the Chief Financial Officer of Borrower, stating, among other
things, that he or she has reviewed the provisions of this Agreement and the
Loan Documents and that, to the best of his or her knowledge after due and
diligent inquiry there exists no Event of Default or Unmatured Event of Default,
and containing the calculations and other details necessary to demonstrate
compliance with Sections 6.12 and 6.16;
(e) as soon as available but not later than ninety (90)
after and as of the end of each fiscal year, a complete copy of Borrower's and
the Subsidiaries' consolidated audited Financial Statement and all work papers
and supporting documents thereunder which Bank may request, which shall include
at least Borrower's and the Subsidiaries' balance sheet as of the close of such
fiscal year, and Borrower's and the Subsidiaries' statement of income and
retained earnings and statement of cash flow for such
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fiscal year, certified by a certified public accountant selected by Borrower and
satisfactory to Bank, which certificate shall not be qualified in any manner
whatsoever, and shall include or be accompanied by a statement from such
accountant that during the examination, solely with respect to accounting and
auditing matters herein, there was observed no Event of Default or Unmatured
Event of Default, or a statement of such Event of Default or Unmatured Event of
Default if any is found and the actions taken or to be taken with respect
thereto;
(f) as soon as available but not later than thirty (30)
days prior to the last day of each fiscal year, a Capital Expenditure budget for
the following fiscal year of Borrower and the Subsidiaries, approved by the
Board of Directors of Borrower, in form and content satisfactory to Bank;
(g) as soon as available, but no later than ten (10) days
after submission thereof to the Department of Corporations and/or any other
applicable or successor state agency or body, all reports and/or financial
statements required under Borrower's or any Guarantor's Health Service Plan
License;
(h) promptly upon receipt by Borrower, copies of any and
all reports and management letters submitted to Borrower or any Subsidiary by
any certified public accountant in connection with any examination of Borrower's
or any Subsidiary's financial records made by such accountant; and
(i) from time to time annual budgets, operating statistics,
operating plans and any other information as Bank may reasonably request,
promptly upon such request.
5.4 EXISTENCE; PRESERVATION OF LICENSES; COMPLIANCE WITH LAW.
Preserve and maintain, and cause each Subsidiary to preserve and maintain, its
corporate existence and good standing in the state of its organization, qualify
and remain qualified, and cause each Subsidiary to qualify and remain qualified,
as a foreign corporation in every jurisdiction where the failure to be so
qualified could have a Material Adverse Effect; and preserve, and cause each of
the Subsidiaries to preserve, all of its licenses, permits, governmental
approvals, rights, privileges and franchises required for its operations; and
comply, and cause each of the Subsidiaries to comply, with the provisions of its
Governing Documents; and comply, and cause each of the Subsidiaries to comply,
with the requirements of all applicable laws, rules, regulations, orders of any
Governmental Authority having authority or jurisdiction over it, except for such
laws, rules and regulations where the failure to so comply could not have a
Material Adverse Effect, and comply, and cause each of the Subsidiaries to
comply, with all requirements for the maintenance of its business, insurance,
licenses, permits, governmental approvals, rights, privileges and franchises;
and timely file, and cause each of its Subsidiaries to timely file, to the
Department of Corporations, all required reports and financial statements
required under its Health Service Plan License.
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5.5 INSURANCE.
(a) Maintain and keep in force, and cause each Subsidiary
and each Physician Group to maintain and keep in force, insurance of the types
and in amounts customarily carried by companies engaged in the same or similar
business, or similarly situated, including fire, extended coverage, public
liability, business interruption, property damage, medical liability and
workers' compensation insurance, and deliver to Bank from time to time at Bank's
request schedules setting forth all insurance then in effect. All insurance
required herein shall be written by companies which are authorized to do
insurance business in the State of California. All hazard insurance and such
other insurance as Bank shall specify, shall contain a California
Form 438BFU (NS) endorsement, or an equivalent endorsement satisfactory to Bank,
showing Bank as sole loss payee thereof, and shall contain a waiver of
warranties. Every policy of insurance referred to in this Section 5.5 shall
contain an agreement by the insurer that it will not cancel such policy except
after 30 days prior written notice to Bank and that any loss payable thereunder
shall be payable notwithstanding any act or negligence of Borrower or Bank which
might, absent such agreement, result in a forfeiture of all or a part of such
insurance payment.
(b) Original policies or certificates thereof satisfactory
to Bank evidencing such insurance shall be delivered to Bank at least 30 days
prior to the expiration of the existing or preceding policies. Borrower shall
give Bank prompt notice of any loss covered by such insurance, and Bank shall
have the right to adjust any loss. Bank shall have the exclusive right to
adjust all losses payable under any such insurance policies without any
liability to Borrower whatsoever in respect of such adjustments. Any monies
received as payment for any loss under any insurance policy including the
insurance policies mentioned above, shall be paid over to Bank to be applied at
the option of Bank either to the prepayment of the Obligations without premium,
in such order or manner as Bank may elect, or shall be disbursed to Borrower
under stage payment terms satisfactory to Bank for application to the cost of
repairs, replacements, or restorations. All repairs, replacements, or
restorations shall be effected with reasonable promptness and shall be of a
value at least equal to the value of the items or property destroyed prior to
such damage or destruction. Upon the occurrence of an Event of Default, Bank
shall have the right to apply all prepaid premiums to the payment of the
Obligations in such order or form as Bank shall determine.Borrower shall,
concurrently with the financial information required to be delivered by Borrower
pursuant to Section 5.3(b), deliver to Bank, as Bank may request, copies of
certificates describing all insurance of Borrower then in effect.
5.6 ASSETS. Maintain, keep and preserve, and cause each
Subsidiary to maintain, keep and preserve, all of its Assets (tangible or
intangible) which are necessary to its business in good repair and condition,
and from time to time make necessary repairs, renewals and replacements thereto
so that such Assets shall be fully and efficiently preserved and maintained.
5.7 TAXES AND OTHER LIABILITIES. Pay and discharge when due, and
cause each Subsidiary to pay and discharge when due, any and all assessments and
taxes, both real
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or personal and including federal and state income taxes, and any and all other
Permitted Debt.
5.8 NOTICE TO BANK. Promptly, upon Borrower acquiring knowledge
thereof, give written notice to Bank of:
(a) all litigation affecting Borrower or any Subsidiary
where the amount in controversy is in excess of applicable insurance coverage;
(b) any dispute which may exist between Borrower, any
Subsidiary or any Physician Group, on the one hand, and any Governmental
Authority, on the other;
(c) any labor controversy resulting in or threatening to
result in a strike against Borrower or any Subsidiary;
(d) any proposal by any public authority to acquire the
Assets or business of Borrower or any Subsidiary, or to compete with Borrower or
any Subsidiary;
(e) all notices or claims which may be received by Borrower
or any Subsidiary and involving claims made by any Person as to any alleged
noncompliance of Borrower's or such Subsidiary's premises with the requirements
of the ADA;
(f) any material notice from any Governmental Authority
pertaining to any Physician Group, the Transaction Documents or any of them, or
the transactions contemplated thereunder;
(g) any notice of termination of any Management Service
Agreement or any other material notice from any Physician Group, or any
Physician Group Shareholder;
(h) any Event of Default or Unmatured Event of Default; and
(i) any other matter which has resulted or could result in
a Material Adverse Effect.
5.9 EMPLOYEE BENEFITS. (a)(i) Promptly, and in any event within 10
Business Days after Borrower or any of the Subsidiaries knows or has reason to
know that an ERISA Event has occurred that reasonably could be expected to
result in a Material Adverse Effect, deliver or cause to be delivered a written
statement of the Chief Financial Officer of Borrower describing such ERISA Event
and any action that is being taken with respect thereto by Borrower, any such
Subsidiary, or member of the ERISA Group, and any action taken or threatened by
the IRS, Department of Labor, or PBGC. Borrower or such Subsidiary, as
applicable, shall be deemed to know all facts known by the administrator of any
Plan of which it is the plan sponsor; (ii) promptly and in any event within 3
Business Days after the filing thereof with the IRS, a copy of each funding
waiver request filed with
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respect to any Plan and all communications received by Borrower, any member of
the ERISA Group with respect to such request; and (iii) promptly and in any
event within 3 Business Days after receipt by Borrower, any of its Subsidiaries
or, to the knowledge of Borrower, any member of the ERISA Group, of the PBGC's
intention to terminate a Plan or to have a trustee appointed to administer a
Plan, copies of each such notice.
(b) Cause to be delivered to Bank, upon Bank's request,
each of the following: (i) a copy of each Plan (or, where any such plan is not
in writing, complete description thereof) (and if applicable, related trust
agreements of other funding instruments) and all amendments thereto, all written
interpretations thereof and written descriptions thereof that have been
distributed to employees or former employees of Borrower or its Subsidiaries;
(ii) the most recent determination letter issued by the IRS with respect to each
Plan; (iii) for the three most recent plan years, annual reports on Form 5500
Series required to be filed with any governmental agency for each Plan; (iv) all
actuarial reports prepared for the last three plan years for each Plan; (v) a
listing of all Multiemployer Plans, with the aggregate amount of the most recent
annual contributions required to be made by Borrower or any member of the ERISA
Group to each such plan and copies of the collective bargaining agreements
requiring such contributions; (vi) any information that has been provided to
Borrower or any member of the ERISA Group regarding withdrawal liability under
any Multiemployer Plan; and (vii) the aggregate amount of the most recent annual
payments made to former employees of Borrower or its Subsidiaries under any
Retiree Health Plan.
5.10 FURTHER ASSURANCES. Execute and deliver, or cause to be
executed and delivered, upon the request of Bank and at Borrower's expense, such
additional documents, instruments and agreements as Bank may reasonably
determine to be necessary or advisable to carry out the provisions of this
Agreement and the Loan Documents, and the transactions and actions contemplated
hereunder and thereunder.
5.11 BANK ACCOUNTS. Maintain, and cause each Subsidiary and each
Physician Group to maintain, its cash on hand and cash equivalent investments in
deposit accounts at Bank, which deposits accounts (other than the deposit
accounts of the Physician Groups) shall be subject to the security interests
granted to Bank under the Security Agreement and the Security Agreements
(Guarantor), and all funds in the deposit accounts of the Physician Groups shall
be swept daily into the deposit account of its Manager established at Bank.
5.12 ENVIRONMENT. Be and remain, and cause each Subsidiary and
each operator of any of Borrower's or any Subsidiary's Assets to be and remain,
in compliance with the provisions of all federal, state and local environmental,
health and safety laws, codes and ordinances, and all rules and regulations
issued thereunder; notify Bank immediately of any notice of a hazardous
discharge or environmental complaint received from any Governmental Authority or
any other Person; notify Bank immediately of any hazardous discharge from or
affecting its premises; immediately contain and remove the same, in compliance
with all applicable laws; promptly pay any fine or penalty assessed in
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connection therewith; permit Bank to inspect the premises, to conduct tests
thereon, and to inspect all books, correspondence, and records pertaining
thereto; and at Bank's request, and at Borrower's expense, provide a report of a
qualified environmental engineer, satisfactory in scope, form and content to
Bank, and such other and further assurances reasonably satisfactory to Bank that
the condition has been corrected.
5.13 REAL ESTATE LEASES. Perform all of its obligations under all
of the Real Estate Leases and promptly deliver to Bank a copy of all notices of
default or breach under any Real Estate Lease.
5.14 ADA. Observe and comply, and cause each Subsidiary to observe
and comply, in all material respects with all obligations and requirements of
the ADA as it applies to their premises, which shall include, without
limitation, installing or constructing all improvements or alterations which may
be necessary to cause such premises to be accessible to all persons if the use
of such premises or any part thereof becomes a "public accommodation," as
defined in the ADA, or in the event additional building improvements are added
or incorporated into the existing improvements, and making any reasonable
accommodations which may be necessary to accommodate the needs or requirements
of any existing or future employee of Borrower and the Subsidiaries, as
applicable.
5.15 BILLING PRACTICES. Cause all billing practices of each
Guarantor with third party payors of each Physician Group, including Medicare,
Medicaid, Champus and Private Insurance Companies, to be true and correct in all
material respects and in material compliance with all applicable laws,
regulations, policies and agreements.
ARTICLE VI
NEGATIVE COVENANTS
Borrower further covenants and agrees that from the Closing Date and
thereafter until the indefeasible payment, performance and satisfaction in full
of the Obligations and all of Bank's obligations hereunder have been terminated,
Borrower shall not:
6.1 USE OF FUNDS; MARGIN REGULATION.
(a) Use any proceeds of the Revolving Loans for any purpose
other than for (i) Permitted Acquisitions to the extent permitted by
Sections 3.3 and 6.8 and (ii) working capital; or
(b) Use any portion of the proceeds of the Loans in any
manner which might cause the Loans, the application of the proceeds thereof, or
the transactions contemplated by this Agreement to violate Regulation G, T, U,
or X of the Board of Governors of the Federal Reserve System, or any other
regulation of such board, or to violate the Securities and Exchange Act of 1934,
as amended or supplemented.
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6.2 DEBT. Create, incur, assume or suffer to exist, or permit any
Subsidiary or any Physician Group to create, incur, assume or suffer to exist,
any Debt except Permitted Debt.
6.3 LIENS. Create, incur, assume or suffer to exist, or permit
any Subsidiary or any Physician Group to create, incur, assume or suffer to
exist, any Lien (including the lien of an attachment, judgment or execution) on
any of its Assets, whether now owned or hereafter acquired, except Permitted
Liens; or sign or file, or permit any Subsidiary or any Physician Group to sign
or file, under the Uniform Commercial Code as adopted in any jurisdiction, a
financing statement which names Borrower or any Subsidiary or any Physician
Group as a debtor, except with respect to Permitted Liens, or sign, or permit
any Subsidiary or any Physician Group to sign, any security agreement
authorizing any secured party thereunder to file such a financing statement,
except with respect to Permitted Liens.
6.4 MERGER, CONSOLIDATION, TRANSFER OF ASSETS. Wind up, liquidate
or dissolve, reorganize, merge or consolidate with or into any other Person, or
acquire all or substantially all of the Assets or the business of any other
Person, or permit any Subsidiary to do so, except for Permitted Acquisitions;
PROVIDED, HOWEVER, upon prior written notice to Bank, any Subsidiary may merge
into or consolidate with or transfer Assets to any other Subsidiary.
6.5 LEASES. Create, incur, assume or suffer to exist, or permit
any Subsidiary to create, incur, assume or suffer to exist, any obligation as a
lessee for the rental or hire of any real or personal property, other than (i)
leases that have been or should be capitalized in accordance with GAAP and (ii)
leases (other than Capital Leases) that do not in the aggregate require Borrower
and its Subsidiaries on a consolidated basis to make payments (including taxes,
insurance, maintenance, and similar expenses which Borrower or any Subsidiary is
required to pay under the terms of any lease) in excess of One Hundred Thousand
Dollars ($100,000) in any fiscal year of Borrower.
6.6 SALES AND LEASEBACKS. Sell, transfer, or otherwise dispose
of, or permit any Subsidiary to sell, transfer, or otherwise dispose of, any
real or personal property to any Person, and thereafter directly or indirectly
leaseback the same or similar property.
6.7 ASSET SALES. Conduct any Asset Sale, or permit any Subsidiary
to do so, other than the sale or other disposition of Assets which are worn,
obsolete, or no longer used or useful in the conduct of its business.
6.8 INVESTMENTS; PERMITTED ACQUISITIONS.
(a) Make, or permit any Subsidiary to make, any loans or
advances to, or any investment in, any Person, except Permitted Investments and
loans evidenced by an Inter-Company Note (Guarantor) or an Inter-Company Note
(Physician Group) in
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accordance with a Permitted Acquisition; or acquire, or permit any Subsidiary to
acquire, any capital stock, Assets, obligations, or other securities of, make
any contribution to, or otherwise acquire any interest in, any Person except in
accordance with Section 6.8(b); or acquire or form or permit any Subsidiary to
acquire or form, any new Subsidiary except in accordance with Section 6.8(b);
or participate, or permit any Subsidiary to participate, as a partner or joint
venturer with any other Person.
(b) Notwithstanding Section 6.8(a), Borrower shall be
permitted to acquire or form a new Subsidiary in connection with the funding by
it or such Subsidiary of the acquisition of a Physician Group in accordance with
the Transaction Documents with respect to such Physician Group (a "PERMITTED
ACQUISITION") so long as the following conditions have been fulfilled to the
satisfaction of Bank in its sole and absolute discretion:
(i) Such Subsidiary shall be a corporation, wholly
owned by Borrower;
(ii) Bank shall have received not later than thirty
(30) days prior to the date of the proposed Permitted Acquisition, (x) a
written detailed description of the proposed Permitted Acquisition, in form
and substance satisfactory to Bank, including historical and projected
financial information, accounts receivable information and reconciliations,
and such other supporting information with respect to the applicable
Physician Group and proposed Permitted Acquisition as Bank shall require,
including historical financial statements and a listing of adjustments to
physician compensation and other ongoing expenses reflected in the
projected EBITDA for the transaction; and (y) draft copies of all
Transaction Documents with respect to the proposed Permitted Acquisition,
in form and substance satisfactory to Bank;
(iii) Bank shall have given its prior written consent
to such Permitted Acquisition if either (x) the total consideration to be
paid to the seller of the applicable Physician Group is Three Million
Dollars ($3,000,000) or more, or (y) the total consideration to be paid to
the seller of the applicable Physician Group is One Million Dollars
($1,000,000) or more but less than Three Million Dollars ($3,000,000) AND
both (1) the total consideration to be paid to the seller of the applicable
Physician Group is in excess of five times such Physician Group's projected
EBITDA and (2) the cash consideration to be paid to the seller of the
applicable Physician Group is in excess of three times such Physician
Group's projected EBITDA;
(iv) Bank shall have received, not later than one
(1) day prior to the date of the closing of such Permitted Acquisition,
final copies of all Transaction Documents with respect thereto, marked to
show changes from the drafts of same previously provided to Bank, and Bank
shall be satisfied with same;
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(v) Bank shall have received all of the following
Loan Documents with respect to such proposed Permitted Acquisition, in form
and substance satisfactory to Bank in its sole and absolute discretion:
(1) a Guaranty duly executed by the
applicable Subsidiary;
(2) a Security Agreement (Guarantor), duly
executed by the applicable Subsidiary;
(3) a Stock Pledge Agreement with respect to
the capital stock of the applicable Subsidiary, duly executed by Borrower
and acknowledged by such Subsidiary;
(4) a Collateral Assignment of Transaction
Documents (Guarantor), duly executed by the applicable Subsidiary and
acknowledged by each of the other Persons party to such Transaction
Documents;
(5) a Security Agreement (Physician Group)
and related financing statement (Form UCC-1) and financing statement
assignment (Form UCC-2 or UCC-3, as applicable), duly executed by the
applicable Physician Group and Subsidiary;
(6) a joinder agreement to the Credit
Succession Agreement, duly executed by such Subsidiary, Physician Group and
the Physician Group Shareholders of such Physician Group;
(7) such UCC-1 financing statements and/or
fixture filings as Bank shall reasonably require in connection with the
foregoing Loan Documents, duly executed by Borrower or such Subsidiary, as
applicable;
(vi) Bank shall have received the original duly
executed Inter-Company Note (Guarantor), endorsed by allonge by Borrower to
Bank, and the original duly executed Inter-Company Note (Physician Group
Shareholder), endorsed by allonge by the applicable Guarantor to Bank,
evidencing the downstreaming of the funds from Borrower to the applicable
Guarantor to the applicable Physician Group Shareholder, together with the
original duly executed Inter-Company Security Agreement and UCC-1 Financing
Statements as Bank shall require with respect thereto, duly assigned to
Bank, all in form and substance satisfactory to Bank in its sole and
absolute discretion;
(vii) Bank shall have received the certificates
evidencing all of the capital stock of the applicable Physician Group
together with undated stock powers with respect thereto, duly executed by
the applicable Physician Group Shareholder;
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(viii) Bank shall have received a favorable duly
executed opinion of Borrower's and Guarantors' counsel, dated as of the
date of the closing of the proposed Permitted Acquisition, with respect to
the proposed Permitted Acquisition, satisfactory to Bank in its sole and
absolute discretion;
(ix) Bank shall have received replacement Schedules
to this Agreement and the Loan Documents, as appropriate, in form and
substance satisfactory to Bank in its sole and absolute discretion;
(x) Bank shall have received a Certificate of the
Secretary of the applicable Guarantor, dated as of the date of the closing
of the proposed Permitted Acquisition, certifying (i) the incumbency and
signatures of the Responsible Officers of such Guarantor who are executing
the Loan Documents on behalf of such Guarantor, (ii) the bylaws of such
Guarantor and all amendments thereto as being true and correct and in full
force and effect, and (iii) the resolutions of the Board of Directors of
such Guarantor as being true and correct and in full force and effect,
authorizing the execution and delivery of the Loan Documents, and
authorizing the transactions contemplated thereunder, and authorizing the
Responsible Officers of such Guarantor to execute the same on behalf of
such Guarantor;
(xi) Bank shall have received a certificate of
status and good standing for the applicable Guarantor, dated as of a recent
date prior to the date of the closing of the proposed Permitted
Acquisition, showing that such Guarantor is in good standing under the laws
of the state of its organization;
(xii) Bank shall have received the Articles or
Certificate of Incorporation and all amendments thereto of the applicable
Guarantor, certified by the Secretary of State of the state of its
organization;
(xiii) receipt by Bank of certificates of foreign
qualification and good standing with respect to the applicable Guarantor,
dated as of a recent date prior to the date of the closing of the proposed
Permitted Acquisition, showing that such Guarantor is qualified to do
business and is in good standing under the laws of each state where the
failure to be so qualified would have a Material Adverse Effect;
(xiv) receipt by Bank of a certificate signed by the
President and Chief Financial Officer of the applicable Guarantor, dated as
of the date of the closing of the proposed Permitted Acquisition,
certifying to Bank that (i) both immediately before and immediately after
giving effect to the transactions contemplated by the Loan Documents, such
Guarantor is and will be Solvent, (ii) to the best of their knowledge after
due and diligent inquiry, the representations and warranties of such
Guarantor contained in the Loan Documents are true and correct, (iii) to
the best of their knowledge after due and diligent inquiry, both
immediately before and immediately after giving effect to the transactions
contemplated by the
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Loan Documents, no Event of Default or Unmatured Event of Default is
continuing or shall occur, and (iv) the business of such Guarantor and
the practice of the Physician Group which is the subject of such
Permitted Acquisition are substantially the same as all other Guarantors
and Physician Groups;
(xv) Bank shall have received payment in full of all
Bank Expenses pursuant to Section 9.3(a)(i) incurred in connection with the
proposed Permitted Acquisition;
(xvi) Bank shall have received copies of insurance
binders or insurance certificates evidencing Borrower's having caused to be
obtained insurance in accordance with Section 5.5, including the lender's
loss payee endorsements required by such Section;
(xvii) Bank shall have received Uniform Commercial
Code and other public record searches with respect to the applicable
Guarantor and Physician Group, in each case satisfactory to Bank in its
sole and absolute discretion; and
(xviii) Bank shall have received such other agreements,
instruments and documents as Bank may reasonably require in connection with
such Permitted Acquisition, in form and substance satisfactory to Bank in
its sole and absolute discretion.
6.9 CHARACTER OF BUSINESS. Engage in any business activities or
operations other than to make Permitted Acquisitions and the acquisition,
ownership and management of the Subsidiaries, or permit the Subsidiaries to
engage in any business activities or operations other than the management of the
Physician Groups in accordance with the Management Service Agreements and other
activities incidental thereto.
6.10 DISTRIBUTIONS. Declare or pay any Distributions; or purchase,
redeem, retire, or otherwise acquire for value any of its ownership interests
now or hereafter outstanding; or make any distribution of Assets to its partners
or problems as such, whether in cash, Assets, or in obligations of Borrower; or
allocate or otherwise set apart any sum for the payment of any Distribution on,
or for the purchase, redemption or retirement of, any of its capital stock; or
make any other distribution by reduction of capital or otherwise in respect of
any of its ownership interests; or permit any Subsidiary to purchase or
otherwise acquire for value any ownership interests of Borrower or any other
Subsidiary.
6.11 GUARANTY. Assume, guaranty, endorse (other than checks and
drafts received by Borrower in the ordinary course of business so long as an
Event of Default has not occurred), or otherwise be or become directly or
contingently responsible or liable, or permit any Subsidiary to assume,
guaranty, endorse, or otherwise be or become directly or contingently
responsible or liable (including, any agreement to purchase any obligation,
stock, Assets, goods, or services or to supply or advance any funds, Assets,
goods, or
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services, or any agreement to maintain or cause such Person to maintain, a
minimum working capital or net worth, or otherwise to assure the creditors of
any Person against loss) for the obligations of any other Person; or pledge
or hypothecate, or permit any Subsidiary to pledge or hypothecate, any of its
Assets as security for any liabilities or obligations of any other Person.
6.12 CAPITAL EXPENDITURES. Make any Capital Expenditures, or any
commitments therefor, in excess of Seven Hundred Fifty Thousand Dollars
($750,000) in the aggregate in any fiscal year.
6.13 TRANSACTIONS WITH AFFILIATES. Enter into any transaction,
including the purchase, sale, or exchange of property or the rendering of any
service, with any Affiliate, or permit any Subsidiary to enter into any
transaction, including the purchase, sale, or exchange of property or the
rendering of any service, with any Affiliate, other than (i) in the ordinary
course of and pursuant to the reasonable requirements of Borrower's or such
Subsidiary's business and upon fair and reasonable terms no less favorable to
Borrower or such Subsidiary than would obtain in a comparable arm's length
transaction with a Person not an Affiliate; (ii) the Transaction Documents; and
(iii) that certain Tax Sharing Agreement among Borrower and Guarantors, in form
and content substantially similar to the draft circulated on or about the date
hereof.
6.14 CHANGE OF CONTROL. Cause, permit or suffer, directly or
indirectly any Change of Control.
6.15 STOCK ISSUANCE. Permit any Subsidiary to issue any additional
capital stock or other ownership interests.
6.16 FINANCIAL CONDITION. Permit or suffer:
(a) the Current Ratio at any time to be less than 1.0:1.0.
(b) Consolidated Net Worth at the end of each fiscal
quarter to be less than the sum of (i) $1,734,606, PLUS (ii) on a cumulative
basis from May 1, 1997, one hundred percent (100%) of all extraordinary gains,
proceeds from the sale of capital stock, and equity issued in connection with
any mergers and acquisitions permitted hereunder, and PLUS (iii) on a cumulative
basis from May 1, 1997, seventy percent (70%) of positive Consolidated Net
Income.
(c) the Leverage Ratio at any time to exceed the ratio set
forth in the table below during the periods indicated:
<TABLE>
<CAPTION>
Period Maximum Leverage Ratio
------ ----------------------
<S> <C>
Closing Date through 9/30/98 4.00:1.0
10/1/98 and thereafter 3.50:1.0
</TABLE>
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(d) the Coverage Ratio at any time to be less than
1.25:1.0.
6.17 TRANSACTIONS UNDER ERISA. Directly or indirectly:
(a) engage, or permit any Subsidiary of Borrower to engage,
in any prohibited transaction which is reasonably likely to result in a civil
penalty or excise tax described in Sections 406 of ERISA or 4975 of the Internal
Revenue Code for which a statutory or class exemption is not available or a
private exemption has not been previously obtained from the Department of Labor;
(b) permit to exist with respect to any Plan any
accumulated funding deficiency (as defined in Sections 302 of ERISA and 412 of
the Internal Revenue Code), whether or not waived;
(c) fail, or permit any Subsidiary of Borrower to fail, to
pay timely required contributions or installments due with respect to any waived
funding deficiency to any Plan;
(d) terminate, or permit any Subsidiary of Borrower to
terminate, any Plan where such event would result in any liability of Borrower,
any of its Subsidiaries or any member of ERISA Group under Title IV of ERISA;
(e) fail, or permit any Subsidiary of Borrower to fail, to
make any required contribution or payment to any Multiemployer Plan;
(f) fail, or permit any Subsidiary of Borrower to fail, to
pay to a Plan or Multiemployer Plan any required installment or any other
payment required under Section 412 of the Internal Revenue Code on or before the
due date for such installment or other payment;
(g) amend, or permit any Subsidiary of Borrower to amend, a
Plan resulting in an increase in current liability for the plan year such that
either of Borrower, any Subsidiary of Borrower or any the member of the ERISA
Group is required to provide security to such Plan under Section 401(a)(29) of
the Internal Revenue Code; or
(h) withdraw, or permit any Subsidiary of Borrower to
withdraw, from any Multiemployer Plan where such withdrawal is reasonably likely
to result in any liability of any such entity under Title IV of ERISA;
which, individually or in the aggregate, results in or reasonably would be
expected to result in a claim against or liability of Borrower, any of its
Subsidiaries or any member of the ERISA Group in excess of Two Hundred Fifty
Thousand Dollars ($250,000).
6.18 TRANSACTION DOCUMENTS. (i) Terminate any of the Transaction
Documents, or permit any Subsidiary to do so, or (ii) amend any of the
Transaction
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Documents, or waive any of the provisions thereof, or permit any Subsidiary to
do so, in any respect which (x) adversely affects Bank's rights or remedies with
respect thereto, or (y) could reasonably be expected to have a Material Adverse
Effect.
ARTICLE VII
EVENTS OF DEFAULT AND REMEDIES
7.1 EVENTS OF DEFAULT. The occurrence of any one or more of the
following events, acts or occurrences shall constitute an event of default (an
"Event of Default") hereunder:
(a) Borrower fails to pay any payment of principal or
interest due on the Loans, the Fees, any Bank Expenses, or any other amount
payable hereunder or under any Loan Document;
(b) Borrower fails to observe or perform any of the
covenants and agreements set forth in Article VI;
(c) Borrower fails to observe or perform any covenant or
agreement set forth in this Agreement and the Loan Documents (other than those
covenants and agreements described in Sections 7.1(a) and 7.1(b)), and such
failure continues for fifteen (15) days after the earlier to occur of
(i) Borrower obtaining knowledge of such failure or (ii) Bank's dispatch of
notice to Borrower of such failure;
(d) Any representation, warranty or certification made by
Borrower or any Guarantor or any officer or employee of Borrower or any
Guarantor in this Agreement or any Loan Document, in any certificate, financial
statement or other document delivered pursuant to this Agreement or any Loan
Document proves to have been untrue in any material respect when made;
(e) Borrower or any Guarantor fails to pay when due any
payment in respect of Debt or other extensions of credit or financial
arrangements (other than under this Agreement);
(f) Any event or condition occurs that: (i) results in the
acceleration of the maturity of Debt or other financial arrangements of Borrower
or any Guarantor; or (ii) permits (or, with the giving of notice or lapse of
time or both, would permit) the holder or holders of such Debt or extensions of
credit or financial accommodations or any Person acting on behalf of such holder
or holders to accelerate the maturity thereof;
(g) Borrower or any Guarantor commences a voluntary
Insolvency Proceeding seeking liquidation, reorganization or other relief with
respect to itself or its Debt or seeking the appointment of a trustee, receiver,
liquidator, custodian or other similar
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official over it or any substantial part of its property, or consents to any
such relief or to the appointment of or taking possession by any such official
in an involuntary Insolvency Proceeding or fails generally to pay its Debt as it
becomes due, or takes any action to authorize any of the foregoing;
(h) An involuntary Insolvency Proceeding is commenced
against Borrower or any Guarantor seeking liquidation, reorganization or other
relief with respect to it or its Debt or seeking the appointment of a trustee,
receiver, liquidator, custodian or other similar official of it or any
substantial part of its property and any of the following events occur: (i) the
petition commencing the Insolvency Proceeding is not timely controverted;
(ii) the petition commencing the Insolvency Proceeding is not dismissed within
thirty (30) calendar days of the date of the filing thereof; (iii) an interim
trustee is appointed to take possession of all or a substantial portion of the
Assets of, or to operate all or any substantial portion of the business of, such
Borrower or such Guarantor; or (iv) an order for relief shall have been issued
or entered therein;
(i) Borrower or any Guarantor suffers (i) any money
judgment in excess of applicable insurance coverage or (ii) any writ, warrant of
attachment, or similar process;
(j) A judgment creditor obtains possession of any of the
Assets of Borrower or any Guarantor by any means, including levy, distraint,
replevin, or self-help, or any order, judgment or decree is entered decreeing
the dissolution of either Borrower or any Guarantor;
(k) Any Management Services Agreement or any of the other
Transaction Documents is terminated or fails to be in full force and effect for
any reason, or a breach, a default or an event of default occurs under any
Transaction Document;
(l) Any of the Loan Documents fails to be in full force and
effect for any reason, or Bank fails to have a perfected, first priority Lien in
and upon all of the collateral assigned or pledged to Bank thereunder, or a
breach, default or an event of default occurs under any Loan Document; or
(m) Any other Material Adverse Effect occurs.
7.2 REMEDIES.
(a) ACCELERATION. Upon the occurrence of any Event of
Default described in Section 7.1(g) or 7.1(h), the Obligations shall become
immediately due and payable without any election or action on the part of Bank
without presentment, demand, protest or notice of any kind, all of which
Borrower hereby expressly waives. Upon the occurrence and continuance of any
other Event of Default, Bank may, at its election, without notice of its
election and without demand, immediately declare the Obligations to be due and
payable, whereupon the Obligations shall become immediately due and payable,
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without presentment, demand, protest or notice of any kind, all of which
Borrower hereby expressly waives.
(b) TERMINATION OF REVOLVING CREDIT COMMITMENT. Upon the
occurrence of any Unmatured Event of Default or Event of Default, Bank may, at
its option, terminate the Revolving Credit Commitment and cease making Revolving
Loans to Borrower.
7.3 REMEDIES CUMULATIVE. The rights and remedies of Bank herein
and in the Loan Documents are cumulative, and are not exclusive of any other
rights, powers, privileges, or remedies, now or hereafter existing, at law, in
equity or otherwise.
ARTICLE VIII
TAXES
8.1 TAXES ON PAYMENTS. All payments in respect of the Obligations
shall be made free and clear of and without any deduction or withholding for or
on account of any present and future taxes, levies, imposts, deductions,
charges, withholdings, assessments or governmental charges, and all liabilities
with respect thereto, imposed by the United States of America, any foreign
government, or any political subdivision or taxing authority thereof or therein,
excluding any taxes, imposed on Bank under the Internal Revenue Code or similar
state and local laws and determined by Bank's net income, and any franchise
taxes imposed on Bank by the State of California (or any political subdivision
thereof) (all such non-excluded taxes, levies, imposts, deductions, charges,
withholdings, assessments, charges and liabilities being hereinafter referred to
as "TAXES"). If any Taxes are imposed and required by law to be deducted or
withheld from any amount payable to Bank, then Borrower shall (i) increase the
amount of such payment so that Bank will receive a net amount (after deduction
of all Taxes) equal to the amount due hereunder, and (ii) pay such Taxes to the
appropriate taxing authority for the account of Bank prior to the date on which
penalties attach thereto or interest accrues thereon; PROVIDED, HOWEVER, if any
such penalties or interest shall become due, Borrower shall make prompt payment
thereof to the appropriate taxing authority.
8.2 INDEMNIFICATION FOR TAXES. Borrower shall indemnify Bank for
the full amount of Taxes (including penalties, interest, expenses and Taxes
arising from or with respect to any indemnification payment) arising therefrom
or with respect thereto, whether or not the Taxes were correctly or legally
asserted. This indemnification shall be made on demand.
8.3 EVIDENCE OF PAYMENT. Within thirty (30) days after the date
of payment of any Taxes, Borrower shall furnish to Bank the original or a
certified copy of a receipt evidencing payment thereof. If no Taxes are payable
in respect of any payment due hereunder or under the Notes, Borrower shall
furnish to Bank a certificate from each
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appropriate taxing authority, or an opinion of counsel acceptable to Bank, in
either case stating that such payment is exempt from or not subject to Taxes.
ARTICLE IX
MISCELLANEOUS
9.1 NOTICES. All notices, requests and other communications to
any party hereunder shall be in writing (including facsimile transmission or
similar writing) and shall be given to such party at its address or facsimile
number set forth on the signature pages hereof or such other address or
facsimile number as such party may hereafter specify by notice to the other
party in accordance with this Section 9.1. Each such notice, request or other
communication shall be deemed given on the second business day after mailing;
PROVIDED that actual notice, however and from whomever given or received, shall
always be effective on receipt; PROVIDED further that notices to Bank pursuant
to Article II shall not be effective until received by a Responsible Officer of
Bank; PROVIDED FURTHER that notices sent by Bank in connection with
Sections 9504 or 9505 of the California Uniform Commercial Code shall be deemed
given when deposited in the mail or personally delivered, or, where permitted by
law, transmitted by facsimile.
9.2 NO WAIVERS. No failure or delay by Bank in exercising any
right, power or privilege hereunder or under any Loan Document shall operate as
a waiver thereof nor shall any single or partial exercise thereof preclude any
other or further exercise thereof or the exercise of any other right, power or
privilege.
9.3 BANK EXPENSES; DOCUMENTARY TAXES; INDEMNIFICATION.
(a) Borrower shall pay all Bank Expenses on demand.
(b) Borrower shall pay all and indemnify Bank against any
and all transfer taxes, documentary taxes, assessments, or charges made by any
Governmental Authority and imposed by reason of the execution and delivery of
this Agreement, any of the Loan Documents, or any other document, instrument or
agreement entered into in connection herewith.
(c) Borrower shall and hereby agrees to indemnify, protect,
defend and hold harmless Bank and its directors, officers, agents, employees and
attorneys (collectively, the "INDEMNIFIED PERSONS" and individually, an
"INDEMNIFIED PERSON") from and against (i) any and all losses, claims, damages,
liabilities, deficiencies, judgments, costs and expenses (including attorneys'
fees and attorneys' fees incurred pursuant to proceedings arising under the
Bankruptcy Code) incurred by any Indemnified Person (except to the extent that
it is finally judicially determined to have resulted from the gross negligence
or willful misconduct of any Indemnified Person) arising out of or by reason of
any litigations, investigations, claims or proceedings (whether administrative,
judicial or otherwise), including discovery, whether or not Bank is designated a
party thereto, which arise out of
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or are in any way related to (1) this Agreement, the Loan Documents or the
transactions contemplated hereby or thereby, (2) any actual or proposed use by
Borrower of the proceeds of the Loans, or (3) Bank's entering into this
Agreement, the Loan Documents or any other agreements and documents relating
hereto; (ii) any such losses, claims, damages, liabilities, deficiencies,
judgments, costs and expenses arising out of or by reason of the use,
generation, manufacture, production, storage, release, threatened release,
discharge, disposal or presence on, under or about Borrower's operations or
property or property leased by Borrower of any material, substance or waste
which is or becomes designated as Hazardous Materials; (iii) any such losses,
claims, damages, liabilities, deficiencies, judgments, costs and expenses,
penalties, fines and other sanctions arising from any claim that Borrower's or
any Subsidiaries' premises is not in compliance with the requirements of the
ADA; and (iv) any such losses, claims, damages, liabilities, deficiencies,
judgments, costs and expenses incurred in connection with any remedial or other
action taken by Borrower or Bank in connection with compliance by Borrower with
any federal, state or local environmental laws, acts, rules, regulations,
orders, directions, ordinances, criteria or guidelines (except to the extent
that it is finally judicially determined to have resulted from the gross
negligence or willful misconduct of any Indemnified Person). If and to the
extent that the obligations of Borrower hereunder are unenforceable for any
reason, Borrower hereby agrees to make the maximum contribution to the payment
and satisfaction of such obligations of Bank which is permissible under
applicable law.
(d) Borrower's obligations under this Section 9.3 and under
Section 8.2 shall survive any termination of this Agreement and the Loan
Documents and the payment in full of the Obligations, and are in addition to,
and not in substitution of, any other of its obligations set forth in this
Agreement.
9.4 AMENDMENTS AND WAIVERS. Any provision of this Agreement or
any of the Loan Documents to which Borrower is a party may be amended or waived
if, but only if, such amendment or waiver is in writing and is signed by the
party asserted to be bound thereby, and then such amendment or waiver shall be
effective only in the specific instance and specific purpose for which given.
9.5 SUCCESSORS AND ASSIGNS; PARTICIPATIONS; DISCLOSURE.
(a) This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns,
except that Borrower may not assign or transfer any of its rights or obligations
under this Agreement without the prior written consent of Bank and any such
prohibited assignment or transfer by Borrower shall be void.
(b) Bank may make, carry or transfer the Loans at, to or
for the account of, any of its branch offices or the office of an Affiliate of
Bank or to any Federal Reserve Bank, all without Borrower's consent.
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<PAGE>
(c) Bank may, at its own expense, assign to one or more
banks or other financial institutions all or a portion of its rights (including
voting rights) and obligations under this Agreement and the Loan Documents. In
the event of any such assignment by Bank pursuant to this Section 9.5(c), Bank's
obligations under this Agreement arising after the effective date of such
assignment shall be released and concurrently therewith, transferred to and
assumed by Bank's assignee to the extent provided for in the document evidencing
such assignment, and Bank shall give prompt notice of such assignment to
Borrower.
(d) Bank may at any time sell to one or more banks or other
financial institutions (each a "PARTICIPANT") participating interests in the
Loans, and in any other interest of Bank hereunder. In the event of any such
sale by Bank of a participating interest to a Participant, Bank's obligations
under this Agreement shall remain unchanged, Bank shall remain solely
responsible for the performance thereof, and Borrower shall continue to deal
solely and directly with Bank in connection with Bank's rights and obligations
under this Agreement. Borrower agrees that each Participant shall, to the
extent provided in its participation agreement, be entitled to the benefits of
Article VIII with respect to its participating interest.
(e) Borrower authorizes Bank to disclose to any assignee
under Section 9.5(c) or any Participant (either, a "TRANSFEREE") and any
prospective Transferee any and all financial information in Bank's possession
concerning Borrower which has been delivered to Bank by Borrower pursuant to
this Agreement or which has been delivered to Bank by Borrower in connection
with Bank's credit evaluation prior to entering into this Agreement.
(f) Borrower agrees that Bank may use Borrower's names in
advertising and promotional materials, and in conjunction therewith, Bank may
disclose the amount of the Loans and the purpose thereof.
9.6 COUNTERPARTS; EFFECTIVENESS; INTEGRATION. This Agreement may
be signed in any number of counterparts, each of which shall be an original,
with the same effect as if the signatures thereto and hereto were upon the same
instrument. This Agreement shall be effective when executed by each of the
parties hereto. This Agreement constitutes the entire agreement and
understanding among the parties hereto and supersedes any and all prior
agreements and understandings, oral or written, relating to the subject matter
hereof.
9.7 SEVERABILITY. The provisions of this Agreement are severable.
The invalidity, in whole or in part, of any provision of this Agreement shall
not affect the validity or enforceability of any other of its provisions. If
one or more provisions hereof shall be declared invalid or unenforceable, the
remaining provisions shall remain in full force and effect and shall be
construed in the broadest possible manner to effectuate the purposes hereof.
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9.8 GOVERNING LAW. This Agreement shall be deemed to have been
made in the State of California and the validity, construction, interpretation,
and enforcement hereof, and the rights of the parties hereto, shall be
determined under, governed by, and construed in accordance with the internal
laws of the State of California, without regard to principles of conflicts of
law.
9.9 JUDICIAL REFERENCE.
(a) Other than (i) nonjudicial foreclosure and all matters
in connection therewith regarding security interests in real or personal
property; or (ii) the appointment of a receiver, or the exercise of other
provisional remedies (any and all of which may be initiated pursuant to
applicable law), each controversy, dispute or claim between the parties arising
out of or relating to this Agreement, which controversy, dispute or claim is not
settled in writing within thirty (30) days after the "CLAIM DATE" (defined as
the date on which a party subject to this Agreement gives written notice to all
other parties that a controversy, dispute or claim exists), will be settled by a
reference proceeding in California in accordance with the provisions of Section
638 ET SEQ. of the California Code of Civil Procedure, or their successor
section ("CCP"), which shall constitute the exclusive remedy for the settlement
of any controversy, dispute or claim concerning this Agreement, including
whether such controversy, dispute or claim is subject to the reference
proceeding and except as set forth above, the parties waive their rights to
initiate any legal proceedings against each other in any court or jurisdiction
other than the Superior Court in the County where any real property collateral
is located, or Los Angeles County, if none (the "COURT"). The referee shall be
a retired Judge of the Court selected by mutual agreement of the parties, and if
they cannot so agree within forty-five (45) days after the Claim Date, the
referee shall be promptly selected by the Presiding Judge of the Court (or his
or her representative). The referee shall be appointed to sit as a temporary
judge, with all of the powers for a temporary judge, as authorized by law, and
upon selection should take and subscribe to the oath of office as provided for
in Rule 244 of the California Rules of Court (or any subsequently enacted Rule).
Each party shall have one peremptory challenge pursuant to CCP Section 170.6.
The referee shall (i) be requested to set the matter for hearing within sixty
(60) days after the Claim Date and (ii) try any and all issues of law or fact
and report a statement of decision upon them, if possible, within ninety (90)
days of the Claim Date. Any decision rendered by the referee will be final,
binding and conclusive and judgment shall be entered pursuant to CCP Section 644
in any court in the State of California having jurisdiction. Any party may
apply for a reference proceeding at any time after thirty (30) days following
notice to any other party of the nature of the controversy, dispute or claim, by
filing a petition for a hearing and/or trial. All discovery permitted by this
Agreement shall be completed no later than fifteen (15) days before the first
hearing date established by the referee. The referee may extend such period in
the event of a party's refusal to provide requested discovery for any reason
whatsoever, including, without limitation, legal objections raised to such
discovery or unavailability of a witness due to absence or illness. No party
shall be entitled to "priority" in conducting discovery. Depositions may be
taken by either party upon seven (7) days written notice, and request for
production or inspection of documents shall be responded to within ten (10) days
after
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service. All disputes relating to discovery which cannot be resolved by the
parties shall be submitted to the referee whose decision shall be final and
binding upon the parties. Pending appointment of the referee as provided
herein, the Superior Court is empowered to issue temporary and/or provisional
remedies, as appropriate.
(b) Except as expressly set forth in this Agreement, the
referee shall determine the manner in which the reference proceeding is
conducted including the time and place of all hearings, the order of
presentation of evidence, and all other questions that arise with respect to the
course of the reference proceeding. All proceedings and hearings conducted
before the referee, except for trial, shall be conducted without a court
reporter except that when any party so requests, a court reporter will be used
at any hearing conducted before the referee. The party making such a request
shall have the obligation to arrange for and pay for the court reporter. The
costs of the court reporter at the trial shall be borne equally by the parties.
(c) The referee shall be required to determine all issues
in accordance with existing case law and the statutory laws of the State of
California. The rules of evidence applicable to proceedings at law in the State
of California will be applicable to the reference proceeding. The referee shall
be empowered to enter equitable as well as legal relief, to provide all
temporary and/or provisional remedies and to enter equitable orders that will be
binding upon the parties. The referee shall issue a single judgment at the
close of the reference proceeding which shall dispose of all of the claims of
the parties that are the subject of the reference. The parties hereto expressly
reserve the right to contest or appeal from the final judgment or any appealable
order or appealable judgment entered by the referee. The parties hereto
expressly reserve the right to findings of fact, conclusions of laws, a written
statement of decision, and the right to move for a new trial or a different
judgment, which new trial, if granted, is also to be a reference proceeding
under this provision.
(d) In the event that the enabling legislation which
provides for appointment of a referee is repealed (and no successor statute is
enacted), any dispute between the parties that would otherwise be determined by
the reference procedure herein described will be resolved and determined by
arbitration. The arbitration will be conducted by a retired judge of the Court,
in accordance with the California Arbitration Act, Section 1280 through Section
1294.2 of the CCP as amended from time to time. The limitations with respect to
discovery as set forth hereinabove shall apply to any such arbitration
proceeding.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed by their respective authorized officers as of the day and year
first above written.
BORROWER: PROSPECT MEDICAL HOLDINGS, INC.,
a Delaware corporation
By /s/ Jacob Y. Terner, M.D.
--------------------------------------------
Title CEO
-----------------------------------------
Address for Notices:
18200 Yorba Linda Boulevard
Yorba Linda, CA
Attn: Jack Terner, M.D.
Telephone: (310) 202-4774
Facsimile: (310) 204-6334
BANK: IMPERIAL BANK
By /s/ Mark W. Campbell
--------------------------------------------
Title SVP
-----------------------------------------
Address for Notices:
IMPERIAL BANK
201 N. Figueroa Street
Los Angeles, CA 90012
Attn: Mark W. Campbell
Telephone: (213) 484-3738
Facsimile: (213) 484-3721
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SECURITY AGREEMENT
This SECURITY AGREEMENT, dated as of July 3, 1997, is entered into
between PROSPECT MEDICAL HOLDINGS, INC., a Delaware corporation ("Borrower") and
IMPERIAL BANK, ("Bank"), with reference to the following facts:
R E C I T A L S
A. Borrower and Bank are contemporaneously herewith entering into
the Loan Agreement; and
B. In order to induce Bank to enter into the Loan Agreement,
Borrower has agreed to enter into this Security Agreement in order to grant to
Bank a first priority security interest in the Collateral to secure prompt
payment and performance of the Secured Obligations.
A G R E E M E N T
NOW, THEREFORE, in consideration of the mutual promises, covenants,
conditions, representations, and warranties hereinafter set forth, and for other
good and valuable consideration, the parties hereto agree as follows:
1. DEFINITIONS. All initially capitalized terms used but not
defined herein shall have the meanings ascribed thereto in the Loan Agreement.
In addition, as used herein, the following terms shall have the following
meanings:
"ACCOUNT DEBTOR" means any Person who is or who may become
obligated with respect to, or on account of, an Account.
"ACCOUNTS" means any and all of Borrower's presently existing and
hereafter arising accounts and rights to payment, except those evidenced by
Negotiable Collateral, arising out of the sale or lease of goods or the
rendition of services by Borrower, irrespective of whether earned by
performance.
"BANK" means Imperial Bank, a California banking corporation.
"BANK EXPENSES" shall have the meaning assigned to such term in
the Loan Agreement and shall also mean: any and all costs or expenses required
to be paid by Borrower under this Security Agreement which are paid or advanced
by Bank; all costs and expenses of Bank, including its attorneys' fees and
expenses (including attorneys' fees incurred pursuant to proceedings arising
under the Bankruptcy Code), incurred or expended to correct any default or
enforce any provision of this Security Agreement, or in gaining possession of,
maintaining, handling, preserving, storing, shipping, selling, preparing for
sale, or advertising to sell the Collateral, irrespective of whether a sale is
consummated; and
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all costs and expenses of suit incurred or expended by Bank, including its
attorneys' fees and expenses (including attorneys' fees incurred pursuant to
proceedings arising under the Bankruptcy Code) in enforcing or defending this
Security Agreement, irrespective of whether suit is brought.
"BORROWER" means Prospect Medical Holdings, Inc., a Delaware
corporation.
"BORROWER'S BOOKS" means any and all presently existing and
hereafter acquired or created books and records of Borrower, including all
records (including maintenance and warranty records), ledgers, computer
programs, disc or tape files, printouts, runs, and other computer prepared
information indicating, summarizing, or evidencing the Accounts, Deposit
Accounts, Equipment, Inventory, Investment Property, General Intangibles and
Negotiable Collateral.
"CHATTEL PAPER" means all writings of whatever sort which
evidence a monetary obligation and a security interest in or lease of specific
goods, whether now existing or hereafter arising.
"CODE" means the California Uniform Commercial Code except, to
the extent applicable, the Uniform Commercial Code as adopted by the
jurisdiction in which any of the Collateral is located. Any and all terms used
in this Security Agreement which are defined in the Code shall be construed and
defined in accordance with the meaning and definition ascribed to such terms
under the Code, unless otherwise defined herein.
"COLLATERAL" means the following, collectively: any and all of
the Accounts, Deposit Accounts, Equipment, Inventory, Investment Property,
General Intangibles, Negotiable Collateral, and Borrower's Books, in each case
whether now existing or hereafter acquired or created, and any Proceeds or
products of any of the foregoing, or any portion thereof, and any and all
Accounts, Deposit Accounts, Equipment, Inventory, Investment Property, General
Intangibles, Negotiable Collateral, money, or other tangible or intangible
property, resulting from the sale or other disposition of the Accounts, Deposit
Accounts, Equipment, Inventory, Investment Property, General Intangibles, or
Negotiable Collateral, or any portion thereof or interest therein, and the
substitutions, replacements, additions, accessions, products and Proceeds
thereof.
"COLLATERAL ACCESS AGREEMENT" means a landlord waiver, mortgagee
waiver, bailee letter, or acknowledgement agreement of any warehouseman,
processor, lessor, consignee, or other Person in possession of, having a Lien
upon, or having rights or interests in the Equipment or Inventory, in each case,
in form and substance satisfactory to Bank.
"DEPOSIT ACCOUNT" means any demand, time, savings, passbook or
like account now or hereafter maintained by or for the benefit of Borrower with
a bank, savings
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and loan association, credit union or like organization, and all funds and
amounts therein, whether or not restricted or designated for a particular
purpose.
"DOCUMENTS" means any and all documents of title, bills of
lading, dock warrants, dock receipts, warehouse receipts and other documents of
Borrower, whether or not negotiable, and includes all other documents which
purport to be issued by a bailee or agent and purport to cover goods in any
bailee's or agent's possession which are either identified or are fungible
portions of an identified mass, including such documents of title made available
to Borrower for the purpose of ultimate sale or exchange of goods or for the
purpose of loading, unloading, storing, shipping, transshipping, manufacturing,
processing or otherwise dealing with goods in a manner preliminary to their sale
or exchange, in each case whether now existing or hereafter acquired.
"EQUIPMENT" means any and all of Borrower's presently existing
and hereafter acquired machinery, equipment, furniture, furnishings, fixtures,
computer and other electronic data processing equipment and other office
equipment and supplies, computer programs and related data processing software,
spare parts, tools, motors, automobiles, trucks, tractors and other motor
vehicles, rolling stock, jigs, and other goods (other than Inventory, farm
products, and consumer goods), of every kind and description, wherever located,
together with any and all parts, improvements, additions, attachments,
replacements, accessories, and substitutions thereto or therefor, and all other
rights of Borrower relating thereto, whether in the possession and control of
Borrower, or in the possession and control of a third party for the account of
Borrower.
"FEIN" means Federal Employer Identification Number.
"GENERAL INTANGIBLES" means any and all of Borrower's presently
existing and hereafter acquired or arising general intangibles and other
intangible personal property of every kind and description, including:
(a) contracts and contract rights, noncompetition covenants,
licensing and distribution agreements, indemnity agreements, guaranties,
insurance policies, franchise agreements and lease agreements;
(b) deposit accounts, uncertificated certificates of deposit,
uncertificated securities, and interests in any joint ventures, partnerships or
limited liability companies;
(c) choses in action and causes of action (whether legal or
equitable, whether in contract or tort or otherwise, and however arising);
(d) licenses, approvals, permits or any other authorizations
issued by any Government Authority;
(e) Intellectual Property Collateral;
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(f) computer software, magnetic media, electronic data
processing files, systems and programs;
(g) rights of stoppage in transit, replevin and reclamation,
rebates or credits of every kind and nature to which Borrower may be entitled;
(h) purchase orders, customer lists, subscriber lists and
goodwill;
(i) monies due or recoverable from pension funds, refunds and
claims for tax or other refunds against any Governmental Authority; and
(j) other contractual, equitable and legal rights of whatever
kind and nature.
"INSTRUMENTS" means any and all negotiable instruments,
certificated securities and every other writing which evidences a right to the
payment of money, in each case whether now existing or hereafter acquired.
"INTELLECTUAL PROPERTY COLLATERAL" means the following Assets
owned or held by Borrower or in which Borrower otherwise has any interest, now
existing or hereafter acquired or arising:
(a) all patents and patent applications, domestic or foreign,
all licenses relating to any of the foregoing and all income and royalties with
respect to any licenses, all rights to sue for past, present or future
infringement thereof, all rights arising therefrom and pertaining thereto and
all reissues, divisions, continuations, renewals, extensions and continuations
in-part thereof;
(b) all copyrights and applications for copyright, domestic or
foreign, together with the underlying works of authorship (including titles),
whether or not the underlying works of authorship have been published and
whether said copyrights are statutory or arise under the common law, and all
other rights and works of authorship, all rights, claims and demands in any way
relating to any such copyrights or works, including royalties and rights to sue
for past, present or future infringement, and all rights of renewal and
extension of copyright;
(c) all state (including common law), federal and foreign
trademarks, service marks and trade names, and applications for registration of
such trademarks, service marks and trade names, all licenses relating to any of
the foregoing and all income and royalties with respect to any licenses, whether
registered or unregistered and wherever registered, all rights to sue for past,
present or future infringement or unconsented use thereof, all rights arising
therefrom and pertaining thereto and all reissues, extensions and renewals
thereof;
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(d) all trade secrets, confidential information, customer lists,
license rights, advertising materials, operating manuals, methods, processes,
know-how, sales literature, sales and operating plans, drawings, specifications,
blue prints, descriptions, inventions, name plates and catalogs; and
(e) the entire goodwill of or associated with the businesses now
or hereafter conducted by Borrower connected with and symbolized by any of the
aforementioned properties and assets.
"INVENTORY" means any and all of Borrower's presently existing
and hereafter acquired goods of every kind and description (including goods in
transit) which are held for sale or lease, or to be furnished under a contract
of service or which have been so leased or furnished, or other disposition,
wherever located, including those held for display or demonstration or out on
lease or consignment or are raw materials, work in process, finished materials,
or materials used or consumed, or to be used or consumed, in Borrower's
business, and the resulting product or mass, and all repossessed, returned,
rejected, reclaimed and replevied goods, together with all materials, parts,
supplies, packing and shipping materials used or usable in connection with the
manufacture, packing, shipping, advertising, selling or furnishing of such
goods; and all other items hereafter acquired by Borrower by way of
substitution, replacement, return, repossession or otherwise, and all additions
and accessions thereto, and any Document representing or relating to any of the
foregoing at any time.
"INVESTMENT PROPERTY" has the meaning given to such term in the
Code.
"LOAN AGREEMENT" means that certain Revolving Credit Agreement,
dated as of even date herewith, between Borrower and Bank, as may be at any time
hereafter supplemented, modified, amended or restated.
"NEGOTIABLE COLLATERAL" means any and all of Borrower's presently
existing and hereafter acquired or arising letters of credit, advises of credit,
certificates of deposit, notes, drafts, Instruments, Documents and Chattel
Paper.
"PROCEEDS" means whatever is receivable or received from or upon
the sale, lease, license, collection, use, exchange or other disposition,
whether voluntary or involuntary, of any Collateral or other assets of Borrower,
including "proceeds" as defined in Section 9306 of the Code, any and all
proceeds of any insurance, indemnity, warranty or guaranty payable to or for the
account of Borrower from time to time with respect to any of the Collateral, any
and all payments (in any form whatsoever) made or due and payable to Borrower
from time to time in connection with any requisition, confiscation,
condemnation, seizure or forfeiture of all or any part of the Collateral by any
Governmental Authority (or any Person acting under color of Governmental
Authority), any and all other amounts from time to time paid or payable under or
in connection with any of the Collateral or for or on account of any damage or
injury to or conversion of any Collateral by any
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Person, any and all other tangible or intangible property received upon the sale
or disposition of Collateral, and all proceeds of proceeds.
"RIGHTS TO PAYMENT" means all Accounts and any and all rights and
claims to the payment or receipt of money or other forms of consideration of any
kind in, to and under all General Intangibles, Negotiable Collateral and
Proceeds thereof.
"SECURED OBLIGATIONS" shall have the meaning of "Obligations"
under the Loan Agreement and shall also mean any and all debts, liabilities,
obligations, or undertakings owing by Borrower to Bank arising under, advanced
pursuant to, or evidenced by this Security Agreement, whether direct or
indirect, absolute or contingent, matured or unmatured, due or to become due,
voluntary or involuntary, whether now existing or hereafter arising, and
including all interest not paid when due and all Bank Expenses which Borrower is
required to pay or reimburse pursuant to this Security Agreement, the Loan
Agreement, the other Loan Documents or by law.
"SECURITY AGREEMENT" shall mean this Security Agreement, any
concurrent or subsequent riders, exhibits or schedules to this Security
Agreement, and any extensions, supplements, amendments, or modifications to or
in connection with this Security Agreement, or to any such riders, exhibits or
schedules.
2. CONSTRUCTION. Unless the context of this Security Agreement
clearly requires otherwise, references to the plural include the singular,
references to the singular include the plural, the part includes the whole,
"including" is not limiting, and "or" has the inclusive meaning represented by
the phrase "and/or." References in this Security Agreement to "determination"
by Bank include reasonable estimates (absent manifest error) by Bank, as
applicable (in the case of quantitative determinations) and reasonable beliefs
(absent manifest error) by Bank, as applicable (in the case of qualitative
determinations). The words "hereof," "herein," "hereby," "hereunder," and
similar terms in this Security Agreement refer to this Security Agreement as a
whole and not to any particular provision of this Security Agreement. Article,
section, subsection, exhibit, and schedule references are to this Security
Agreement unless otherwise specified.
3. CREATION OF SECURITY INTEREST. Borrower hereby grants to Bank a
continuing security interest in all presently existing and hereafter acquired or
arising Collateral in order to secure the prompt payment and performance of all
of the Secured Obligations. Borrower acknowledges and affirms that such
security interest in the Collateral has attached to all Collateral without
further act on the part of Bank or Borrower.
4. FURTHER ASSURANCES.
4.1 Borrower shall execute and deliver to Bank concurrently with
Borrower's execution of this Security Agreement, and from time to time at the
request of Bank, all financing statements, continuation financing statements,
fixture filings, security agreements, chattel mortgages, assignments, and all
other documents that Bank may request,
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in form satisfactory to Bank, to perfect and maintain perfected Bank's security
interests in the Collateral and in order to consummate fully all of the
transactions contemplated by this Security Agreement and the Loan Agreement.
Borrower hereby irrevocably makes, constitutes, and appoints Bank (and Bank's
officers, employees, or agents) as Borrower's true and lawful attorney with
power to sign the name of Borrower on any of the above-described documents or on
any other similar documents which need to be executed, recorded, or filed, and
to do any and all things necessary in the name and on behalf of Borrower in
order to perfect, or continue the perfection of, Bank's security interests in
the Collateral. Borrower agrees that neither Bank, nor any of its designees or
attorneys-in-fact, will be liable for any act of commission or omission, or for
any error of judgment or mistake of fact or law with respect to the exercise of
the power of attorney granted under this Section 4.1, other than as a result of
its or their gross negligence or wilful misconduct. THE POWER OF ATTORNEY
GRANTED UNDER THIS SECTION 4.1 IS COUPLED WITH AN INTEREST AND SHALL BE
IRREVOCABLE UNTIL ALL OF THE SECURED OBLIGATIONS HAVE BEEN INDEFEASIBLY PAID IN
FULL, THE LOAN AGREEMENT TERMINATED, AND ALL BORROWER'S DUTIES HEREUNDER AND
THEREUNDER HAVE BEEN DISCHARGED IN FULL.
4.2 Without limiting the generality of the foregoing Section 4.1
or any of the provisions of the Loan Agreement, Borrower will: (i) at the
request of Bank, mark conspicuously all of its records pertaining to the
Collateral with a legend, in form and substance satisfactory to Bank, indicating
that the Collateral is subject to the security interest granted hereby; (ii) at
the request of Bank, appear in and defend any action or proceeding which may
affect Borrower's title to, or the security interest of Bank in, any of the
Collateral; and (iii) upon demand of Bank, allow inspection of Collateral by
Bank or Persons designated by Bank at any time during normal business hours.
4.3 With respect to the Negotiable Collateral (other than drafts
received in the ordinary course of business so long as no Event of Default is
continuing), Borrower shall, immediately upon request by Bank, endorse (where
appropriate) and assign the Negotiable Collateral over to Bank, and deliver to
Bank actual physical possession of the Negotiable Collateral to Bank together
with any instruments of transfer or assignment, all in form and substance
satisfactory to Bank, in order to fully perfect the security interest therein of
Bank.
4.4 Borrower shall cooperate with Bank in obtaining a control
agreement in form and substance satisfactory to Bank with respect to all Deposit
Accounts and Investment Property.
5. REPRESENTATIONS AND WARRANTIES. In order to induce Bank to enter
into the Loan Agreement and to make Loans to Borrower, in addition to the
representations and warranties of Borrower set forth in the Loan Agreement which
are incorporated herein by this reference, Borrower represents and warrants to
Bank that on the Closing Date and thereafter on the date of each and every
Borrowing:
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5.1 LOCATION OF CHIEF EXECUTIVE OFFICE AND COLLATERAL; FEIN.
Borrower's chief executive office is located at the address set forth in
SCHEDULE 1, and all other locations where Borrower conducts business or
Collateral is kept are set forth in SCHEDULE 1. Borrower's Fein is 33-0564370.
5.2 LOCATIONS OF BORROWER'S BOOKS. All locations where
Borrower's Books are kept, including all equipment necessary for accessing
Borrower's Books and the names and addresses of all service bureaus, computer or
data processing companies and other Persons keeping Borrower's Books or
collecting Rights to Payment for Borrower, are set forth in SCHEDULE 1.
5.3 TRADE NAMES AND TRADE STYLES. All trade names and trade
styles under which Borrower presently conducts its business operations are set
forth in SCHEDULE 1, and, except as set forth in SCHEDULE 1, Borrower has not,
at any time during the preceding five years: (i) been known as or used any other
corporate, trade or fictitious name; (ii) changed its name; (iii) been the
surviving or resulting corporation in a merger or consolidation; or (iv)
acquired through asset purchase or otherwise any business of any Person.
5.4 OWNERSHIP OF COLLATERAL. Borrower is and shall continue to
be the sole and complete owner of the Collateral, free from any Lien other than
Permitted Liens.
5.5 ENFORCEABILITY; PRIORITY OF SECURITY INTEREST. (i) This
Agreement creates a security interest which is enforceable against the
Collateral in which Borrower now has rights and will create a security interest
which is enforceable against the Collateral in which Borrower hereafter acquires
rights at the time Borrower acquires any such rights, and (ii) Bank has a
perfected security interest (to the fullest extent perfection can be obtained by
filing, notification to third parties, possession or control) and a first
priority security interest in the Collateral in which Borrower now has rights
(subject only to Permitted Liens), and will have a perfected and first priority
security interest in the Collateral in which Borrower hereafter acquires rights
at the time Borrower acquires any such rights (subject only to Permitted Liens),
in each case securing the payment and performance of the Secured Obligations.
5.6 OTHER FINANCING STATEMENTS. Other than financing statements
in favor of Bank and financing statements filed in connection with Permitted
Liens, no effective financing statement naming Borrower as debtor, assignor,
grantor, mortgagor, pledgor or the like and covering all or any part of the
Collateral is on file in any filing or recording office in any jurisdiction.
5.7 RIGHTS TO PAYMENT.
(a) the Rights to Payment represent valid, binding and
enforceable obligations of the Account Debtors or other Persons obligated
thereon,
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representing undisputed, bona fide transactions completed in accordance with the
terms and provisions contained in any documents related thereto, and are and
will be genuine, free from Liens, adverse claims, counterclaims, setoffs,
defaults, disputes, defenses, retainages, holdbacks and conditions precedent of
any kind of character, except to the extent reflected by Borrower's reserves for
uncollectible Rights to Payment;
(b) all Account Debtors and other obligors on the Rights to
Payment are Solvent and generally paying their debts as they come due;
(c) all Rights to Payment comply with all applicable laws
concerning form, content and manner of preparation and execution, including
where applicable any federal and state consumer credit laws;
(d) Borrower has not assigned any of its rights under the
Rights to Payment other than to Bank pursuant to this Agreement;
(e) all statements made, all unpaid balances and all other
information in Borrower's Books and other documentation relating to the Rights
to Payment are true and correct and in all respects what they purport to be; and
(f) Borrower has no knowledge of any fact or circumstance
which would impair the validity or collectibility of any of the Rights to
Payment.
5.8 INVENTORY. No Inventory is stored with any bailee,
warehouseman or similar Person or on any premises leased to Borrower, nor has
any Inventory been consigned to Borrower or consigned by Borrower to any Person
or is held by Borrower for any Person under any "bill and hold" or other
arrangement.
5.9 INTELLECTUAL PROPERTY.
(a) except as set forth in SCHEDULE 1, Borrower (directly
or through any Subsidiary) does not own, possess or use under any licensing
arrangement any patents, copyrights, trademarks, service marks or trade names,
nor is there currently pending before any Governmental Authority any application
for registration of any patent, copyright, trademark, service mark or trade
name;
(b) all patents, copyrights, trademarks, service marks and
trade names are subsisting and have not been adjudged invalid or unenforceable
in whole or in part;
(c) all maintenance fees required to be paid on account of
any patents have been timely paid for maintaining such patents in force, and, to
the best of Borrower's knowledge, each of the patents is valid and enforceable
and Borrower has notified Bank in writing of all prior art (including public
uses and sales) of which it is aware;
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(d) to the best of Borrower's knowledge after due inquiry,
no infringement or unauthorized use presently is being made of any Intellectual
Property Collateral by any Person;
(e) Borrower is the sole and exclusive owner of the
Intellectual Property Collateral and the past, present and contemplated future
use of such Intellectual Property Collateral by Borrower has not, does not and
will not infringe or violate any right, privilege or license agreement of or
with any other Person; and
(f) Borrower owns, has material rights under, is a party
to, or an assignee of a party to all material licenses, patents, patent
applications, copyrights, service marks, trademarks, trademark applications,
trade names and all other intellectual property Collateral necessary to continue
to conduct its business as heretofore conducted.
5.10 EQUIPMENT.
(a) none of the Equipment or other Collateral is affixed to
real property, except Collateral with respect to which Borrower has supplied
Bank with all information and documentation necessary to make all fixture
filings required to perfect and protect the priority of Bank's security interest
in all such Collateral which may be fixtures as against all Persons having an
interest in the premises to which such property may be affixed; and
(b) none of the Equipment is leased from or to any Person,
except as set forth in SCHEDULE 1.
5.11 DEPOSIT ACCOUNTS. The names and addresses of all financial
institutions at which Borrower maintains its Deposit Accounts, and the account
numbers and account names of such Deposit Accounts, are set forth in SCHEDULE 1.
5.12 INVESTMENT PROPERTY. All Investment Property is set forth
and described in SCHEDULE 1, and all financial institutions or financial
intermediaries holding or in possession of such Investment Property are set
forth in SCHEDULE 1.
6. COVENANTS. In addition to the covenants of Borrower set forth in
the Loan Agreement which are incorporated herein by this reference, Borrower
agrees that from the Closing Date and thereafter until the indefeasible payment,
performance and satisfaction in full of the Secured Obligations, and all of
Bank's obligations under the Loan Agreement to Borrower have been terminated:
6.1 DEFENSE OF COLLATERAL. Borrower shall appear in and defend
any action, suit or proceeding which may affect its title to or right or
interest in, or Bank's right or interest in, the Collateral.
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6.2 PRESERVATION OF COLLATERAL. Borrower shall do and perform
all acts that may be necessary and appropriate to maintain, preserve and protect
the Collateral.
6.3 COMPLIANCE WITH LAWS, ETC. Borrower shall comply with all
laws, regulations and ordinances, and all policies of insurance, relating to the
possession, operation, maintenance and control of the Collateral.
6.4 LOCATION OF BORROWER'S BOOKS AND CHIEF EXECUTIVE OFFICE.
Borrower shall: (i) keep all Borrower's Books at the locations set forth in
SCHEDULE 1; and (ii) maintain the location of Borrower's chief executive office
or principal place of business at the location set forth in SCHEDULE 1;
PROVIDED, HOWEVER, that Borrower may amend SCHEDULE 1 so long as (i) such
amendment occurs by written notice to Bank not less than 30 days prior to the
date on which the location of Borrower's Books or Borrower's chief executive
office or principal place of business is changed, and (ii) at the time of such
written notification, Borrower executes and delivers any financing statement
amendments or fixture filing amendments necessary to perfect or continue
perfected Bank's security interests in the Collateral and also obtains for Bank
such duly executed Collateral Access Agreement as Bank shall require with
respect to such new location.
6.5 LOCATION OF COLLATERAL. Borrower shall keep the Inventory
and Equipment only at the locations identified on SCHEDULE 1; PROVIDED, HOWEVER,
that Borrower may amend SCHEDULE 1 so long as (i) such amendment occurs by
written notice to Bank not less than 30 days prior to the date on which the
Inventory or Equipment is moved to such new location, (ii) such new location is
within the continental United States, and (iii) at the time of such written
notification, Borrower executes and delivers any financing statements or fixture
filings necessary to perfect and continue perfected Bank's security interests in
such Assets and also obtains for Bank such duly executed Collateral Access
Agreement as Bank shall require with respect to such new location.
6.6 CHANGE IN NAME, TRADE NAME, TRADE STYLE OR FEIN. Borrower
shall not change its name, trade names, trade styles or FEIN, or add any new
trade names or trade styles from those listed on SCHEDULE 1; PROVIDED, HOWEVER,
that Borrower may amend SCHEDULE 1 so long as (i) such amendment occurs by
written notice to Bank not less than 30 days prior to the date on which such new
name, trade name, trade style or FEIN becomes effective, and (ii) at the time of
such written notification, Borrower executes and delivers any financing
statement amendments or fixture filing amendments necessary to continue
perfected Bank's security interests in the Collateral.
6.7 MAINTENANCE OF RECORDS. Borrower shall keep separate,
accurate and complete Borrower's Books, disclosing Bank's security interest
hereunder.
6.8 DISPOSITION OF COLLATERAL. Borrower shall not surrender or
lose possession of (other than to Bank), sell, lease, rent, or otherwise dispose
of or transfer any of the Collateral or any right or interest therein, except to
the extent permitted by the Loan Agreement.
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6.9 LIENS. Borrower shall keep the Collateral free of all Liens
except Permitted Liens.
6.10 LEASED PREMISES. At Bank's request, Borrower shall obtain
from each Person from whom Borrower leases any premises at which any Collateral
is at any time present, such Collateral Access Agreements as Bank may require.
6.11 RIGHTS TO PAYMENT. Borrower shall:
(a) perform and observe all terms and provisions of the
Rights to Payment and all obligations to be performed or observed by it in
connection therewith and maintain the Rights to Payment in full force and
effect;
(b) enforce all Rights to Payment strictly in accordance
with their terms, and take all such action to such end as may be from time to
time reasonably requested by Bank;
(c) if, to the knowledge of Borrower, any dispute, setoff,
claim, counterclaim or defense shall exist or shall be asserted or threatened
with respect to a Right to Payment (whether with or against Borrower or
otherwise), disclose such fact fully to Bank in Borrower's Books relating to
such Account or other Right to Payment and in connection with any report
furnished by Borrower to Bank relating to such Right to Payment;
(d) furnish to Bank such information and reports regarding
the Rights to Payment as Bank may request, and upon request of Bank make such
demands and requests for information and reports as Borrower is entitled to make
in respect of the Rights to Payment; and
(e) upon the occurrence of any Event of Default, establish
such lockbox or similar arrangements for the payment of the Rights to Payment as
Bank shall require.
6.12 INVENTORY. Borrower shall:
(a) at such times as Bank shall request, prepare and
deliver to Bank periodic reports pertaining to the Inventory, in form and
substance satisfactory to Bank;
(b) upon the request of Bank, take a physical listing of
the Inventory and promptly deliver a copy of such physical listing to Bank;
(c) not store any Inventory with a bailee, warehouseman or
similar Person or on premises leased to Borrower without obtaining for Bank such
Collateral Access Agreements as Bank shall require; and
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(d) not dispose of any Inventory on a bill-and-hold,
guaranteed sale, sale and return, sale on approval, consignment or similar
basis, nor acquire any Inventory from any Person on any such basis, without in
each case giving Bank prior written notice thereof.
6.13 EQUIPMENT. Borrower shall, upon Bank's request, deliver to
Bank a report of each item of Equipment, in form and substance satisfactory to
Bank.
6.14 INTELLECTUAL PROPERTY COLLATERAL. Borrower shall:
(a) not enter into any agreement (including any license or
royalty agreement) pertaining to any Intellectual Property Collateral without in
each case giving Bank prior notice thereof;
(b) not allow or suffer any Intellectual Property
Collateral to become abandoned, nor any registration thereof to be terminated,
forfeited, expired or dedicated to the public;
(c) promptly give Bank notice of any rights Borrower may
obtain to any new patentable inventions, trademarks, servicemarks, copyrightable
works or other new Intellectual Property Collateral, prior to the filing of any
application for registration thereof; and
(d) diligently prosecute all applications for patents,
copyrights and trademarks, and file and prosecute any and all continuations,
continuations-in-part, applications for reissue, applications for certificate of
correction and like matters as shall be reasonable and appropriate in accordance
with prudent business practice, and promptly and timely pay any and all
maintenance, license, registration and other fees, taxes and expenses incurred
in connection with any Intellectual Property Collateral.
7. COLLECTION OF RIGHTS TO PAYMENT. Borrower or its agents shall
endeavor in the first instance to collect all amounts due or to become due on or
with respect to the Rights to Payment. At the request of Bank after the
occurrence of an Event of Default, all remittances received by Borrower shall be
held in trust for Bank, and, in accordance with Bank's instructions, remitted to
Bank or deposited to an account with Bank in the form received (with any
necessary endorsements or instruments of assignment or transfer).
8. EVENTS OF DEFAULT. The occurrence of any Event of Default under
the Loan Agreement shall constitute an event of default ("Event of Default")
under this Security Agreement.
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9. RIGHTS AND REMEDIES.
9.1 During the continuance of an Event of Default, Bank, without
notice or demand, may do any one or more of the following, all of which are
authorized by Borrower:
(a) Settle or adjust disputes and claims directly with
Account Debtors for amounts and upon terms which Bank considers advisable, and
in such cases, Bank will credit the Secured Obligations with only the net
amounts received by Bank in payment of such disputed Accounts after deducting
all Bank Expenses incurred or expended in connection therewith;
(b) Cause Borrower to hold all returned Inventory in trust
for Bank, segregate all returned Inventory from all other property of Borrower
or in Borrower's possession and conspicuously label said returned Inventory as
the property of Bank;
(c) Without notice to or demand upon Borrower or any
guarantor, make such payments and do such acts as Bank considers necessary or
reasonable to protect its security interests in the Collateral. Borrower agrees
to assemble the Collateral if Bank so requires, and to make the Collateral
available to Bank as Bank may designate. Borrower authorizes Bank to enter the
premises where the Collateral is located, to take and maintain possession of the
Collateral, or any part of it, and to pay, purchase, contest, or compromise any
encumbrance, charge, or Lien that in Bank's determination appears to conflict
with its security interests and to pay all expenses incurred in connection
therewith. With respect to any of Borrower's owned or leased premises, Borrower
hereby grants Bank a license to enter into possession of such premises and to
occupy the same, without charge, for up to 120 days in order to exercise any of
Bank's rights or remedies provided herein, at law, in equity, or otherwise;
(d) Without notice to Borrower (such notice being expressly
waived), and without constituting a retention of any collateral in satisfaction
of an obligation (within the meaning of Section 9505 of the Code), set off and
apply to the Secured Obligations any and all (i) balances and Deposit Accounts
of Borrower held by Bank, or (ii) indebtedness at any time owing to or for the
credit or the account of Borrower held by Bank;
(e) Hold, as cash collateral, any and all balances and
Deposit Accounts of Borrower held by Bank, to secure the full and final
repayment of all of the Secured Obligations;
(f) Ship, reclaim, recover, store, finish, maintain,
repair, prepare for sale, advertise for sale, and sell (in the manner provided
for herein) the Collateral. Bank is hereby granted a license or other right to
use, without charge, Borrower's labels, patents, copyrights, rights of use of
any name, trade secrets, trade
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names, trademarks, service marks, and advertising matter, or any property of a
similar nature, as it pertains to the Collateral, in completing production of,
advertising for sale, and selling any Collateral and Borrower's rights under all
licenses and all franchise agreements shall inure to Bank's benefit;
(g) Sell the Collateral at either a public or private sale,
or both, by way of one or more contracts or transactions, for cash or on terms,
in such manner and at such places (including Borrower's premises) as Bank
determines is commercially reasonable. It is not necessary that the Collateral
be present at any such sale;
(h) Bank shall give notice of the disposition of the
Collateral as follows:
(i) Bank shall give Borrower and each holder of a
security interest in the Collateral who has filed with Bank a written request
for notice, a notice in writing of the time and place of public sale, or, if the
sale is a private sale or some other disposition other than a public sale is to
be made of the Collateral, then the time on or after which the private sale or
other disposition is to be made;
(ii) The notice shall be personally delivered or
mailed, postage prepaid, to Borrower as provided in SECTION 9.1 of the Loan
Agreement, at least 5 days before the date fixed for the sale, or at least 5
days before the date on or after which the private sale or other disposition is
to be made; no notice needs to be given prior to the disposition of any portion
of the Collateral that is perishable or threatens to decline speedily in value
or that is of a type customarily sold on a recognized market. Notice to Persons
other than Borrower claiming an interest in the Collateral shall be sent to such
addresses as they have furnished to Bank;
(iii) If the sale is to be a public sale, Bank also
shall give notice of the time and place by publishing a notice one time at least
5 days before the date of the sale in a newspaper of general circulation in the
county in which the sale is to be held;
(i) Bank may credit bid and purchase at any public sale;
and
(j) Any deficiency that exists after disposition of the
Collateral as provided above will be paid immediately by Borrower. Any excess
will be returned, without interest and subject to the rights of third Persons,
by Bank to Borrower.
9.2 Upon the exercise by Bank of any power, right, privilege, or
remedy pursuant to this Security Agreement which requires any consent, approval,
registration, qualification, or authorization of any Governmental Authority,
Borrower agrees to execute and deliver, or will cause the execution and delivery
of, all applications, certificates, instruments, assignments, and other
documents and papers that Bank or any
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purchaser of the Collateral may be required to obtain for such governmental
consent, approval, registration, qualification, or authorization.
9.3 The rights and remedies of Bank under this Security
Agreement, the Loan Agreement, the other Loan Documents, and all other
agreements contemplated hereby and thereby shall be cumulative. Bank shall have
all other rights and remedies not inconsistent herewith as provided under the
Code, by law, or in equity. No exercise by Bank of any one right or remedy
shall be deemed an election of remedies, and no waiver by Bank of any default on
Borrower's part shall be deemed a continuing waiver of any further defaults. No
delay by Bank shall constitute a waiver, election or acquiescence with respect
to any right or remedy.
10. BANK NOT LIABLE. So long as Bank complies with the obligations,
if any, imposed by Section 9207 of the Code, Bank shall not otherwise be liable
or responsible in any way or manner for: (a) the safekeeping of the Collateral;
(b) any loss or damage thereto occurring or arising in any manner or fashion or
from any cause; (c) any diminution in the value thereof; or (d) any act or
default of any carrier, warehouseman, bailee, forwarding agency, or other person
whomsoever.
11. INDEFEASIBLE PAYMENT. The Secured Obligations shall not be
considered indefeasibly paid for purposes of this Security Agreement unless and
until all payments to Bank are no longer subject to any right on the part of any
Person, including Borrower, Borrower as a debtor in possession, or any trustee
(whether appointed under the Bankruptcy Code or otherwise) of Borrower or
Borrower's Assets to invalidate or set aside such payments or to seek to recoup
the amount of such payments or any portion thereof, or to declare same to be
fraudulent or preferential. In the event that, for any reason, any portion of
such payments to Bank is set aside or restored, whether voluntarily or
involuntarily, after the making thereof, then the obligation intended to be
satisfied thereby shall be revived and continued in full force and effect as if
said payment or payments had not been made.
12. NOTICES. All notices or demands by any party hereto to the other
party and relating to this Security Agreement shall be made in the manner and to
the addresses set forth in Section 9.1 of the Loan Agreement.
13. GENERAL PROVISIONS.
13.1 SUCCESSORS AND ASSIGNS. This Security Agreement shall bind
and inure to the benefit of the respective successors and assigns of Borrower
and Bank; PROVIDED, HOWEVER, that Borrower may not assign this Security
Agreement nor delegate any of its duties hereunder without Bank's prior written
consent and any prohibited assignment or delegation shall be absolutely void.
No consent by Bank to an assignment by Borrower shall release Borrower from the
Secured Obligations. Bank reserves its right to sell, assign, transfer,
negotiate, or grant participations in all or any part of, or any interest in,
the rights and benefits hereunder pursuant to and in accordance with the
provisions of the Loan
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Agreement. In connection therewith, Bank may disclose all documents and
information which Bank now or hereafter may have relating to Borrower,
Borrower's business, or the Collateral to any such prospective or actual
Transferee, subject to the terms of Section 9.5(e) of the Loan Agreement.
13.2 EXHIBITS AND SCHEDULES. All of the exhibits and schedules
attached hereto shall be deemed incorporated by reference.
13.3 NO PRESUMPTION AGAINST ANY PARTY. Neither this Security
Agreement nor any uncertainty or ambiguity herein shall be construed or resolved
against Bank or Borrower, whether under any rule of construction or otherwise.
On the contrary, this Security Agreement has been reviewed by each of the
parties and their counsel and shall be construed and interpreted according to
the ordinary meaning of the words used so as to accomplish fairly the purposes
and intentions of all parties hereto.
13.4 AMENDMENTS AND WAIVERS. Any provision of this Agreement or
any of the Loan Documents to which Borrower is a party may be amended or waived
if, but only if, such amendment or waiver is in writing and is signed by the
party asserted to be bound thereby, and then such amendment or waiver shall be
effective only in the specific instance and specific purpose for which given.
13.5 COUNTERPARTS; INTEGRATION; EFFECTIVENESS. This Security
Agreement may be signed in any number of counterparts, each of which shall be an
original, with the same effect as if the signatures thereto and hereto were upon
the same instrument. This Security Agreement constitutes the entire agreement
and understanding among the parties hereto and supersedes any and all prior
agreements and understandings, oral or written, relating to the subject matter
hereof. This Security Agreement shall become effective when executed by each of
the parties hereto and delivered to Bank.
13.6 SEVERABILITY. The provisions of this Agreement are
severable. The invalidity, in whole or in part, of any provision of this
Agreement shall not affect the validity or enforceability of any other of its
provisions. If one or more provisions hereof shall be declared invalid or
unenforceable, the remaining provisions shall remain in full force and effect
and shall be construed in the broadest possible manner to effectuate the
purposes hereof.
14. GOVERNING LAW. This Security Agreement shall be deemed to have
been made in the State of California and the validity, construction,
interpretation, and enforcement hereof, and the rights of the parties hereto,
shall be determined under, governed by, and construed in accordance with the
internal laws of the State of California, without regard to principles of
conflicts of law.
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15. JUDICIAL REFERENCE.
15.1 Other than (i) nonjudicial foreclosure and all matters in
connection therewith regarding security interests in real or personal property;
or (ii) the appointment of a receiver, or the exercise of other provisional
remedies (any and all of which may be initiated pursuant to applicable law),
each controversy, dispute or claim between the parties arising out of or
relating to this Security Agreement, which controversy, dispute or claim is not
settled in writing within thirty (30) days after the "Claim Date" (defined as
the date on which Borrower or Bank gives written notice to the other that a
controversy, dispute or claim exists), will be settled by a reference proceeding
in California in accordance with the provisions of Section 638 ET SEQ. of the
California Code of Civil Procedure, or their successor section ("CCP"), which
shall constitute the exclusive remedy for the settlement of any controversy,
dispute or claim concerning this Security Agreement, including whether such
controversy, dispute or claim is subject to the reference proceeding and except
as set forth above, the parties waive their rights to initiate any legal
proceedings against each other in any court or jurisdiction other than the
Superior Court in the County where any real property Collateral is located or
Los Angeles County if none (the "Court"). The referee shall be a retired Judge
of the Court selected by mutual agreement of the parties, and if they cannot so
agree within forty-five (45) days after the Claim Date, the referee shall be
promptly selected by the Presiding Judge of the Court (or his representative).
The referee shall be appointed to sit as a temporary judge, with all of the
powers for a temporary judge, as authorized by law, and upon selection should
take and subscribe to the oath of office as provided for in Rule 244 of the
California Rules of Court (or any subsequently enacted Rule). Each party shall
have one peremptory challenge pursuant to CCP Section 170.6. The referee shall
(a) be requested to set the matter for hearing within sixty (60) days after the
Claim Date and (b) try any and all issues of law or fact and report a statement
of decision upon them, if possible, within ninety (90) days of the Claim Date.
Any decision rendered by the referee will be final, binding and conclusive and
judgment shall be entered pursuant to CCP Section 644 in any court in the State
of California having jurisdiction. Any party may apply for a reference
proceeding at any time after thirty (30) days following notice to any other
party of the nature of the controversy, dispute or claim, by filing a petition
for a hearing and/or trial. All discovery permitted by this Security Agreement
shall be completed no later than fifteen (15) days before the first hearing date
established by the referee. The referee may extend such period in the event of
a party's refusal to provide requested discovery for any reason whatsoever,
including, without limitation, legal objections raised to such discovery or
unavailability of a witness due to absence or illness. No party shall be
entitled to "priority" in conducting discovery. Depositions may be taken by
either party upon seven (7) days written notice, and request for production or
inspection of documents shall be responded to within ten (10) days after
service. All disputes relating to discovery which cannot be resolved by the
parties shall be submitted to the referee whose decision shall be final and
binding upon the parties. Pending appointment of the referee as provided
herein, the Superior Court is empowered to issue temporary and/or provisional
remedies, as appropriate.
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15.2 Except as expressly set forth in this Security Agreement,
the referee shall determine the manner in which the reference proceeding is
conducted including the time and place of all hearings, the order of
presentation of evidence, and all other questions that arise with respect to the
course of the reference proceeding. All proceedings and hearings conducted
before the referee, except for trial, shall be conducted without a court
reporter except that when any party so requests, a court reporter will be used
at any hearing conducted before the referee. The party making such a request
shall have the obligation to arrange for and pay for the court reporter. The
costs of the court reporter at the trial shall be borne equally by the parties.
15.3 The referee shall be required to determine all issues in
accordance with existing case law and the statutory laws of the State of
California. The rules of evidence applicable to proceedings at law in the State
of California will be applicable to the reference proceeding. The referee shall
be empowered to enter equitable as well as legal relief, to provide all
temporary and/or provisional remedies and to enter equitable orders that will be
binding upon the parties. The referee shall issue a single judgment at the
close of the reference proceeding which shall dispose of all of the claims of
the parties that are the subject of the reference. The parties hereto expressly
reserve the right to contest or appeal from the final judgment or any appealable
order or appealable judgment entered by the referee. The parties hereto
expressly reserve the right to findings of fact, conclusions of laws, a written
statement of decision, and the right to move for a new trial or a different
judgment, which new trial, if granted, is also to be a reference proceeding
under this provision.
15.4 In the event that the enabling legislation which provides
for appointment of a referee is repealed (and no successor statute is enacted),
any dispute between the parties that would otherwise be determined by the
reference procedure herein described will be resolved and determined by
arbitration. The arbitration will be conducted by a retired judge of the Court,
in accordance with the California Arbitration Act, Section 1280 through Section
1294.2 of the CCP as amended from time to time. The limitations with respect to
discovery as set forth hereinabove shall apply to any such arbitration
proceeding.
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IN WITNESS WHEREOF, the parties have executed this Security Agreement
as of the date first set forth above.
PROSPECT MEDICAL HOLDINGS, INC.,
a Delaware corporation
By /s/ Jacob Y. Terner, M.D.
-------------------------------------------
Title: CEO
---------------------------------------
IMPERIAL BANK,
a California banking corporation
By /s/ Mark W. Campbell
-------------------------------------------
Title: SVP
---------------------------------------
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CONTINUING GUARANTY
This CONTINUING GUARANTY (this "GUARANTY"), dated as of July 3, 1997,
is executed and delivered by PROSPECT MEDICAL SYSTEMS, INC., a Delaware
corporation ("GUARANTOR"), with reference to the following facts:
R E C I T A L S
A. Prospect Medical Holdings, Inc., a Delaware corporation
("BORROWER"), and Imperial Bank, a California banking corporation ("BANK"), have
entered into that certain Loan Agreement, dated as of July 3, 1997 (as the same
may be amended, restated, supplemented or otherwise modified from time to time,
the "LOAN AGREEMENT").
B. Guarantor is materially interested in the financial success of
Borrower, agrees that the Loan Agreement is in Borrower's best interests, and
acknowledges that the execution and delivery of this Guaranty formed a material
part of the consideration to Bank to induce Bank to enter into the Loan
Agreement.
A G R E E M E N T
NOW, THEREFORE, in consideration of the foregoing, Guarantor hereby
agrees, in favor of Bank, as follows:
1. DEFINITIONS AND CONSTRUCTION.
(a) DEFINITIONS. All initially capitalized terms used but not
defined herein shall have the meanings assigned to such terms in the Loan
Agreement. In addition, the following terms, as used in this Guaranty, shall
have the following meanings:
"GUARANTEED OBLIGATIONS" means any and all obligations,
indebtedness, or liabilities of any kind or character owed by Borrower to Bank
(including without limitation, all principal and interest owing under the Loans,
all Bank Expenses, the Fees, any other fees and expenses due under the Loan
Agreement, and all other indebtedness evidenced by the Loan Agreement and the
other Loan Documents), including all such obligations, indebtedness, or
liabilities, whether for principal, interest (including any interest which, but
for the application of the provisions of the Bankruptcy Code, would have accrued
on such amounts), premium, reimbursement obligations, fees, costs, expenses
(including, attorneys' fees and attorneys' fees incurred pursuant to proceedings
arising under the Bankruptcy Code), or indemnity obligations, whether
heretofore, now, or hereafter made, incurred, or created, whether voluntarily or
involuntarily made, incurred, or created, whether secured or unsecured (and if
secured, regardless of the nature or extent of the security), whether absolute
or contingent, liquidated or unliquidated, determined or indeterminate, whether
Borrower is liable individually or jointly with others, and whether
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recovery is or hereafter becomes barred by any statute of limitations or
otherwise becomes unenforceable for any reason whatsoever, including any act or
failure to act by Bank.
"LOAN DOCUMENTS" shall mean the Loan Agreement, this
Guaranty, and the other Loan Documents (as defined in the Loan Agreement).
(b) CONSTRUCTION. Unless the context of this Guaranty clearly
requires otherwise, references to the plural include the singular, references to
the singular include the plural, and the term "including" is not limiting. The
words "hereof," "herein," "hereby," "hereunder," and other similar terms refer
to this Guaranty as a whole and not to any particular provision of this
Guaranty. Any reference herein to any of the Loan Documents includes any and
all alterations, amendments, extensions, modifications, renewals, or supplements
thereto or thereof, as applicable. Neither this Guaranty nor any uncertainty or
ambiguity herein shall be construed or resolved against Bank or Guarantor,
whether under any rule of construction or otherwise. On the contrary, this
Guaranty has been reviewed by Guarantor, Bank, and their respective counsel, and
shall be construed and interpreted according to the ordinary meaning of the
words used so as to fairly accomplish the purposes and intentions of Bank and
Guarantor.
2. GUARANTEED OBLIGATIONS. Guarantor hereby irrevocably and
unconditionally guarantees to Bank, as and for Guarantor's own debt, until final
and indefeasible payment thereof has been made, (a) payment of the Guaranteed
Obligations, in each case when and as the same shall become due and payable,
whether at maturity, pursuant to a mandatory prepayment requirement, by
acceleration, or otherwise; it being the intent of Guarantor that the guaranty
set forth herein shall be a guaranty of payment and not a guaranty of
collection, and (b) the punctual and faithful performance, keeping, observance,
and fulfillment by Borrower of all of the agreements, conditions, covenants, and
obligations of Borrower contained in the Loan Documents.
3. CONTINUING GUARANTY. This Guaranty includes Guaranteed
Obligations arising under successive transactions continuing, compromising,
extending, increasing, modifying, releasing, or renewing the Guaranteed
Obligations, changing the interest rate, payment terms, or other terms and
conditions thereof, or creating new or additional Guaranteed Obligations after
prior Guaranteed Obligations have been satisfied in whole or in part. To the
maximum extent permitted by law, Guarantor hereby waives and agrees not to
assert any right Guarantor has under Section 2815 of the California Civil Code,
or otherwise, to revoke this Guaranty as to future indebtedness.
4. PERFORMANCE UNDER THIS GUARANTY. In the event that Borrower
fails to make any payment of any Guaranteed Obligations on or before the due
date thereof, or if Borrower shall fail to perform, keep, observe, or fulfill
any other obligation referred to in clause (b) of Section 2 hereof in the manner
provided in the Loan Documents, Guarantor immediately shall cause such payment
to be made or each of such obligations to be performed, kept, observed, or
fulfilled.
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5. PRIMARY OBLIGATIONS. This Guaranty is a primary and original
obligation of Guarantor, is not merely the creation of a surety relationship,
and is an absolute, unconditional, and continuing guaranty of payment and
performance which shall remain in full force and effect without respect to
future changes in conditions, including any change of law or any invalidity or
irregularity with respect to the Loan Documents. Guarantor agrees that
Guarantor is severally and not jointly and severally liable, with any other
guarantor of the Guaranteed Obligations, to Bank, to the extent set forth in
Section 2 hereof, that the obligations of Guarantor hereunder are independent of
the obligations of Borrower or any other guarantor, and that a separate action
may be brought against Guarantor whether such action is brought against Borrower
or any other guarantor or whether Borrower or any such other guarantor is joined
in such action. Guarantor agrees that Guarantor's liability hereunder shall be
immediate and shall not be contingent upon the exercise or enforcement by Bank
of whatever remedies it may have against Borrower or any other guarantor, or the
enforcement of any lien or realization upon any security Bank may at any time
possess. Guarantor agrees that any release which may be given by Bank to
Borrower or any other guarantor shall not release Guarantor. Guarantor consents
and agrees that Bank shall be under no obligation to marshal any assets of
Borrower or any other guarantor in favor of Guarantor, or against or in payment
of any or all of the Guaranteed Obligations.
6. WAIVERS.
(a) Guarantor absolutely, unconditionally, knowingly, and
expressly waives:
(i) (1) notice of acceptance hereof; (2) notice of any
loans or other financial accommodations made or extended under the Loan
Documents or the creation or existence of any Guaranteed Obligations; (3) notice
of the amount of the Guaranteed Obligations, subject, however, to Guarantor's
right to make inquiry of Bank to ascertain the amount of the Guaranteed
Obligations at any reasonable time; (4) notice of any adverse change in the
financial condition of Borrower or of any other fact that might increase
Guarantor's risk hereunder; (5) notice of presentment for payment, demand,
protest, and notice thereof as to any instruments among the Loan Documents;
(6) notice of any Unmatured Event of Default or Event of Default; and (7) all
other notices (except if such notice is specifically required to be given to
Guarantor hereunder or under the Loan Documents) and demands to which Guarantor
might otherwise be entitled.
(ii) its right, under Sections 2845 or 2850 of the
California Civil Code, or otherwise, to require Bank to institute suit against,
or to exhaust any rights and remedies which Bank has or may have against,
Borrower or any third party, or against any collateral for the Guaranteed
Obligations provided by Borrower or any third party. In this regard, Guarantor
agrees that Guarantor is bound to the payment of all Guaranteed Obligations,
whether now existing or hereafter accruing, as fully as if such Guaranteed
Obligations were directly owing to Bank by Guarantor. Guarantor further waives
any defense arising by reason of any disability or other defense (other than the
defense that the
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Guaranteed Obligations shall have been fully and finally performed and
indefeasibly paid) of Borrower or by reason of the cessation from any cause
whatsoever of the liability of Borrower in respect thereof.
(iii) (1) any rights to assert against Bank any defense
(legal or equitable), set-off, counterclaim, or claim which Guarantor may now or
at any time hereafter have against Borrower or any other party liable to Bank;
(2) any defense, set-off, counterclaim, or claim, of any kind or nature, arising
directly or indirectly from the present or future lack of perfection,
sufficiency, validity, or enforceability of the Guaranteed Obligations or any
security therefor; (3) any defense Guarantor has to performance hereunder, and
any right Guarantor has to be exonerated, provided by Sections 2819, 2822, or
2825 of the California Civil Code, or otherwise, arising by reason of: the
impairment or suspension of Bank's rights or remedies against Borrower; the
alteration by Bank of the Guaranteed Obligations; any discharge of Borrower's
obligations to Bank by operation of law as a result of Bank's intervention or
omission; or the acceptance by Bank of anything in partial satisfaction of the
Guaranteed Obligations; (4) the benefit of any statute of limitations affecting
Guarantor's liability hereunder or the enforcement thereof, and any act which
shall defer or delay the operation of any statute of limitations applicable to
the Guaranteed Obligations shall similarly operate to defer or delay the
operation of such statute of limitations applicable to Guarantor's liability
hereunder.
(b) Guarantor absolutely, unconditionally, knowingly, and
expressly waives any defense arising by reason of or deriving from (i) any claim
or defense based upon an election of remedies by Bank including any defense
based upon an election of remedies by Bank under the provisions of
Sections 580a, 580b, 580d, and 726 of the California Code of Civil Procedure or
any similar law of California or any other jurisdiction; or (ii) any election by
Bank under Bankruptcy Code Section 1111(b) to limit the amount of, or any
collateral securing, its claim against Borrower. Pursuant to Section 2856 of
the California Civil Code:
Guarantor waives all rights and defenses arising out of an
election of remedies by the creditor, even though that election of remedies,
such as a nonjudicial foreclosure with respect to security for a guaranteed
obligation, has destroyed Guarantor's rights of subrogation and reimbursement
against Borrower by the operation of Section 580(d) of the California Code of
Civil Procedure or otherwise.
Guarantor waives all rights and defenses that Guarantor may have
because Borrower's Obligations are secured by real property. This means, among
other things:
(1) Bank may collect from Guarantor without first foreclosing on
any real or personal property collateral pledged by Borrower.
(2) If Bank forecloses on any real property collateral pledged
by Borrower:
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(A) The amount of the Guaranteed Obligations may be
reduced only by the price for which that collateral is sold at the foreclosure
sale, even if the collateral is worth more than the sale price.
(B) Bank may collect from Guarantor even if Bank, by
foreclosing on the real property collateral, has destroyed any right Guarantor
may have to collect from Borrower.
This is an unconditional and irrevocable waiver of any rights and
defenses Guarantor may have because Borrower's Obligations are secured by real
property. These rights and defenses include, but are not limited to, any rights
or defenses based upon Section 580a, 580b, 580d, or 726 of the California Code
of Civil Procedure.
If any of the Guaranteed Obligations at any time are secured by a mortgage or
deed of trust upon real property, Bank may elect, in its sole discretion, upon a
default with respect to the Guaranteed Obligations, to foreclose such mortgage
or deed of trust judicially or nonjudicially in any manner permitted by law,
before or after enforcing the Loan Documents, without diminishing or affecting
the liability of Guarantor hereunder except to the extent the Guaranteed
Obligations are repaid with the proceeds of such foreclosure. Guarantor
understands that (a) by virtue of the operation of California's antideficiency
law applicable to nonjudicial foreclosures, an election by Bank nonjudicially to
foreclose such a mortgage or deed of trust probably would have the effect of
impairing or destroying rights of subrogation, reimbursement, contribution, or
indemnity of Guarantor against Borrower or other guarantors or sureties, and
(b) absent the waiver given by Guarantor, such an election would prevent Bank
from enforcing the Loan Documents against Guarantor. Understanding the
foregoing, and understanding that Guarantor is hereby relinquishing a defense to
the enforceability of the Loan Documents, Guarantor hereby waives any right to
assert against Bank any defense to the enforcement of the Loan Documents,
whether denominated "estoppel" or otherwise, based on or arising from an
election by Bank nonjudicially to foreclose any such mortgage or deed of trust.
Guarantor understands that the effect of the foregoing waiver may be that
Guarantor may have liability hereunder for amounts with respect to which
Guarantor may be left without rights of subrogation, reimbursement,
contribution, or indemnity against Borrower or other guarantors or sureties.
Guarantor also agrees that the "fair market value" provisions of Section 580a of
the California Code of Civil Procedure shall have no applicability with respect
to the determination of Guarantor's liability under the Loan Documents.
(c) Guarantor hereby absolutely, unconditionally, knowingly, and
expressly waives: (i) any right of subrogation Guarantor has or may have as
against Borrower with respect to the Guaranteed Obligations; (ii) any right to
proceed against Borrower or any other person or entity, now or hereafter, for
contribution, indemnity, reimbursement, or any other suretyship rights and
claims, whether direct or indirect, liquidated or contingent, whether arising
under express or implied contract or by operation of law, which Guarantor may
now have or hereafter have as against Borrower with respect
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to the Guaranteed Obligations; and (iii) any right to proceed or seek recourse
against or with respect to any property or asset of Borrower.
(d) WITHOUT LIMITING THE GENERALITY OF ANY OTHER WAIVER OR OTHER
PROVISION SET FORTH IN THIS GUARANTY, GUARANTOR HEREBY ABSOLUTELY, KNOWINGLY,
UNCONDITIONALLY, AND EXPRESSLY WAIVES AND AGREES NOT TO ASSERT ANY AND ALL
BENEFITS OR DEFENSES ARISING DIRECTLY OR INDIRECTLY UNDER ANY ONE OR MORE OF
CALIFORNIA CIVIL CODE SECTIONS 2799, 2808, 2809, 2810, 2815, 2819, 2820, 2821,
2822, 2825, 2839, 2845, 2848, 2849, AND 2850, CALIFORNIA CODE OF CIVIL PROCEDURE
SECTIONS 580A, 580B, 580C, 580D, AND 726, AND CHAPTER 2 OF TITLE 14 OF PART 4 OF
DIVISION 3 OF THE CALIFORNIA CIVIL CODE.
7. RELEASES. Guarantor consents and agrees that, without notice to
or by Guarantor, and without affecting or impairing the obligations of Guarantor
hereunder, Bank may, by action or inaction:
(a) compromise, settle, extend the duration or the time for the
payment of, or discharge the performance of, or may refuse
to or otherwise not enforce this Guaranty, the other Loan
Documents, or any part thereof, with respect to Borrower or
any other Person;
(b) release Borrower or any other Person or grant other
indulgences to Borrower or any other Person in respect
thereof;
(c) amend or modify in any manner and at any time (or from time
to time) any of the Loan Documents; or
(d) release or substitute any other guarantor, if any, of the
Guaranteed Obligations, or enforce, exchange, release, or
waive any security for the Guaranteed Obligations or any
other guaranty of the Guaranteed Obligations, or any portion
thereof.
8. NO ELECTION. Bank shall have all of the rights to seek recourse
against Guarantor to the fullest extent provided for herein, and no election by
Bank to proceed in one form of action or proceeding, or against any party, or on
any obligation, shall constitute a waiver of Bank's right to proceed in any
other form of action or proceeding or against other parties unless Bank has
expressly waived such right in writing. Specifically, but without limiting the
generality of the foregoing, no action or proceeding by Bank under any document
or instrument evidencing the Guaranteed Obligations shall serve to diminish the
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liability of Guarantor under this Guaranty except to the extent that Bank
finally and unconditionally shall have realized indefeasible payment by such
action or proceeding.
9. INDEFEASIBLE PAYMENT. The Guaranteed Obligations shall not be
considered indefeasibly paid for purposes of this Guaranty unless and until all
payments to Bank are no longer subject to any right on the part of any Person,
including Borrower, Borrower as a debtor in possession, or any trustee (whether
appointed under the Bankruptcy Code or otherwise) of any of Borrower's assets,
to invalidate or set aside such payments or to seek to recoup the amount of such
payments or any portion thereof, or to declare same to be fraudulent or
preferential. Upon such full and final performance and indefeasible payment of
the Guaranteed Obligations, whether by Borrower pursuant to the Loan Agreement
or by any other Person, Bank shall have no obligation whatsoever to transfer or
assign its interests in the Loan Documents to Guarantor. In the event that, for
any reason, any portion of such payments to Bank is set aside or restored,
whether voluntarily or involuntarily, after the making thereof, then the
obligation intended to be satisfied thereby shall be revived and continued in
full force and effect as if said payment or payments had not been made, and
Guarantor shall be liable for the full amount Bank is required to repay plus any
and all costs and expenses (including attorneys' fees and expenses and
attorneys' fees and expenses incurred pursuant to proceedings arising under the
Bankruptcy Code) paid by Bank in connection therewith.
10. FINANCIAL CONDITION OF BORROWER. Guarantor represents and
warrants to Bank that Guarantor is currently informed of the financial condition
of Borrower and of all other circumstances which a diligent inquiry would reveal
and which bear upon the risk of nonpayment of the Guaranteed Obligations.
Guarantor further represents and warrants to Bank that Guarantor has read and
understands the terms and conditions of the Loan Documents. Guarantor hereby
covenants that Guarantor will continue to keep informed of Borrower's financial
condition, the financial condition of other guarantors, if any, and of all other
circumstances which bear upon the risk of nonpayment or nonperformance of the
Guaranteed Obligations.
11. SUBORDINATION. Guarantor hereby agrees that any and all present
and future indebtedness of Borrower owing to Guarantor is postponed in favor of
and subordinated to payment, in full, in cash, of the Guaranteed Obligations.
In this regard, no payment of any kind whatsoever shall be made with respect to
such indebtedness until the Guaranteed Obligations have been indefeasibly paid
in full.
12. PAYMENTS; APPLICATION. All payments to be made hereunder by
Guarantor shall be made in lawful money of the United States of America at the
time of payment, shall be made in immediately available funds, and shall be made
without deduction (whether for taxes or otherwise) or offset. All payments made
by Guarantor hereunder shall be applied as follows: first, to all costs and
expenses (including attorneys' fees and expenses and attorneys' fees and
expenses incurred pursuant to proceedings arising under the Bankruptcy Code)
incurred by Bank in enforcing this Guaranty or in collecting the Guaranteed
Obligations; second, to all accrued and unpaid interest, premium, if any, and
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fees owing to Bank constituting Guaranteed Obligations; and third, to the
balance of the Guaranteed Obligations.
13. REPRESENTATIONS AND WARRANTIES. Guarantor hereby represents and
warrants to Bank that:
(a) Guarantor is a corporation duly organized and existing under
the laws of Delaware and has the power and authority to own its own properties
and assets, and to transact the business in which it is engaged, and is properly
licensed, qualified to do business and in good standing in every jurisdiction
where the conduct of its business requires it to be so qualified.
(b) The execution, delivery and performance of this Guaranty are
within Guarantor's powers, are not in conflict with the terms of any charter,
bylaw, [certificate/articles] of incorporation or other organization papers of
Guarantor, and do not result in a breach of or constitute a default under any
contract, obligation, indenture or other instrument to which Guarantor is a
party or by which Guarantor is bound or affected. There is no law, rule or
regulation, nor is there any judgment, decree or order of any court or
governmental authority binding on Guarantor which would be contravened by the
execution, delivery, performance or enforcement of this Guaranty and the other
Loan Documents to which Guarantor is a party.
(c) Guarantor has taken all corporate action necessary to
authorize the execution and delivery of this Guaranty and the other Loan
Documents to which Guarantor is a party, and the consummation of the
transactions contemplated hereby and thereby. Upon their execution and delivery
in accordance with their respective terms, this Guaranty and the other Loan
Documents to which Guarantor is a party will constitute legal, valid and binding
agreements and obligations of Guarantor enforceable against Guarantor in
accordance with their respective terms, except as enforceability may be limited
by bankruptcy, insolvency, fraudulent conveyance, and similar laws and equitable
principles affecting the enforcement of creditors' rights generally.
(d) No approval, consent, exemption or other action by, or
notice to or filing with, any governmental authority is necessary in connection
with the execution, delivery, performance or enforcement of this Guaranty and
the other Loan Documents to which Guarantor is a party except as may have been
obtained by Guarantor and certified copies of which have been delivered to Bank.
(e) Guarantor has no Debt other than Debt owing to Bank
hereunder, and Guarantor covenants and agrees that until the indefeasible
payment, performance and satisfaction in full of the Guaranteed Obligations,
Guarantor will not create, incur, assume or suffer to exist any Debt without the
prior written consent of Bank.
14. ATTORNEYS' FEES AND COSTS. Guarantor agrees to pay, on demand,
all attorneys' fees (including attorneys' fees incurred pursuant to proceedings
arising under the
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Bankruptcy Code) and all other costs and expenses which may be incurred by Bank
in the enforcement of this Guaranty or in any way arising out of, or
consequential to the protection, assertion, or enforcement of the Guaranteed
Obligations (or any security therefor), whether or not suit is brought.
15. NOTICES. All notices, requests and other communications to any
party hereunder shall be sent in accordance with Section 9.1 of the Loan
Agreement to the following addresses:
If to Guarantor: PROSPECT MEDICAL SYSTEMS, INC.
18200 Yorba Linda Blvd., Ste. 409
Yorba Linda, CA 92686
Attn: Chief Executive Officer
Facsimile No: (714) 572-5900
Telephone No: (714) 572-3269
If to Bank: (as set forth in Section 9.1 of the Loan
Agreement)
16. CUMULATIVE REMEDIES. No remedy under this Guaranty or under any
Loan Document is intended to be exclusive of any other remedy, but each and
every remedy shall be cumulative and in addition to any and every other remedy
given hereunder or under any Loan Document, and those provided by law or in
equity. No delay or omission by Bank to exercise any right under this Guaranty
shall impair any such right nor be construed to be a waiver thereof. No failure
on the part of Bank to exercise, and no delay in exercising, any right hereunder
shall operate as a waiver thereof; nor shall any single or partial exercise of
any right hereunder preclude any other or further exercise thereof or the
exercise of any other right.
17. BOOKS AND RECORDS. Guarantor agrees Bank's books and records
showing the account between Bank and Borrower shall be admissible in any action
or proceeding and shall be binding upon Guarantor for the purpose of
establishing the items therein set forth and shall constitute prima facie proof
thereof.
18. SEVERABILITY OF PROVISIONS. If any provision of this Guaranty is
for any reason held to be invalid, illegal or unenforceable in any respect, that
provision shall not affect the validity, legality or enforceability of any other
provision of this Guaranty.
19. ENTIRE AGREEMENT; AMENDMENTS AND WAIVERS. This Guaranty
constitutes the entire agreement between Guarantor and Bank pertaining to the
subject matter contained herein. Any provision of this Guaranty may be amended
or waived if, but only if, such amendment or waiver is in writing and is signed
by the party asserted to be bound thereby, and then such amendment or waiver
shall be effective only in the specific instance and specific purpose for which
given.
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20. SECURITY. This Guaranty is secured by that certain Security
Agreement and Collateral Assignment of Transaction Documents, each dated as of
even date herewith, between Guarantor and Bank, as the same may be amended from
time to time.
21. SUCCESSORS AND ASSIGNS. This Guaranty shall bind the successors
and assigns of Guarantor, and shall inure to the benefit of the respective
successors and assigns of Bank; PROVIDED, HOWEVER, Guarantor may not assign this
Guaranty or delegate any of his duties hereunder without Bank's prior written
consent and any such prohibited assignment shall be absolutely null and void.
Bank reserves its right to sell, assign, transfer, negotiate, or grant
participations in all or any part of, or any interest in, the rights and
benefits hereunder pursuant to and in accordance with the provisions of the Loan
Documents. In connection therewith, Bank may disclose all documents and
information which Bank now or hereafter may have relating to Guarantor,
Guarantor's business, or this Guaranty to any such prospective or actual
transferee.
22. GOVERNING LAW. This Guaranty shall be deemed to have been made
in the State of California and the validity, construction, interpretation, and
enforcement hereof, and the rights of the parties hereto, shall be determined
under, governed by, and construed in accordance with the internal laws of the
State of California, without regard to principles of conflicts of law.
23. JUDICIAL REFERENCE.
(a) Other than (i) nonjudicial foreclosure and all matters in
connection therewith regarding security interests in real or personal property;
or (ii) the appointment of a receiver, or the exercise of other provisional
remedies (any and all of which may be initiated pursuant to applicable law),
each controversy, dispute or claim between the parties arising out of or
relating to this Guaranty, which controversy, dispute or claim is not settled in
writing within thirty (30) days after the "CLAIM DATE" (defined as the date on
either Guarantor or Bank gives written notice to the other that a controversy,
dispute or claim exists), will be settled by a reference proceeding in
California in accordance with the provisions of Section 638 ET SEQ. of the
California Code of Civil Procedure, or their successor section ("CCP"), which
shall constitute the exclusive remedy for the settlement of any controversy,
dispute or claim concerning this Guaranty, including whether such controversy,
dispute or claim is subject to the reference proceeding and except as set forth
above, the parties waive their rights to initiate any legal proceedings against
each other in any court or jurisdiction other than the Superior Court in the
County where any real property collateral for this Guaranty is located or Los
Angeles County if none (the "COURT"). The referee shall be a retired Judge of
the Court selected by mutual agreement of the parties, and if they cannot so
agree within forty-five (45) days after the Claim Date, the referee shall be
promptly selected by the Presiding Judge of the Court (or his representative).
The referee shall be appointed to sit as a temporary judge, with all of the
powers for a temporary judge, as authorized by law, and upon selection should
take and subscribe to the oath of office as provided for in Rule 244 of the
California Rules of Court (or any subsequently enacted Rule). Each party shall
have one peremptory challenge
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pursuant to CCP Section 170.6. The referee shall (a) be requested to set the
matter for hearing within sixty (60) days after the date of selection of the
referee and (b) try any and all issues of law or fact and report a statement of
decision upon them, if possible, within ninety (90) days of the Claim Date. Any
decision rendered by the referee will be final, binding and conclusive and
judgment shall be entered pursuant to CCP Section 644 in any court in the State
of California having jurisdiction. Any party may apply for a reference
proceeding at any time after thirty (30) days following notice to any other
party of the nature of the controversy, dispute or claim, by filing a petition
for a hearing and/or trial. All discovery permitted by this Guaranty shall be
completed no later than fifteen (15) days before the first hearing date
established by the referee. The referee may extend such period in the event of
a party's refusal to provide requested discovery for any reason whatsoever,
including, without limitation, legal objections raised to such discovery or
unavailability of a witness due to absence or illness. No party shall be
entitled to "priority" in conducting discovery. Depositions may be taken by
either party upon seven (7) days written notice, and request for production or
inspection of documents shall be responded to within ten (10) days after
service. All disputes relating to discovery which cannot be resolved by the
parties shall be submitted to the referee whose decision shall be final and
binding upon the parties. Pending appointment of the referee as provided
herein, the Superior Court is empowered to issue temporary and/or provisional
remedies, as appropriate.
(b) Except as expressly set forth in this Guaranty, the referee
shall determine the manner in which the reference proceeding is conducted
including the time and place of all hearings, the order of presentation of
evidence, and all other questions that arise with respect to the course of the
reference proceeding. All proceedings and hearings conducted before the
referee, except for trial, shall be conducted without a court reporter except
that when any party so requests, a court reporter will be used at any hearing
conducted before the referee. The party making such a request shall have the
obligation to arrange for and pay for the court reporter. The costs of the
court reporter at the trial shall be borne equally by the parties.
(c) The referee shall be required to determine all issues in
accordance with existing case law and the statutory laws of the State of
California. The rules of evidence applicable to proceedings at law in the State
of California will be applicable to the reference proceeding. The referee shall
be empowered to enter equitable as well as legal relief, to provide all
temporary and/or provisional remedies and to enter equitable orders that will be
binding upon the parties. The referee shall issue a single judgment at the
close of the reference proceeding which shall dispose of all of the claims of
the parties that are the subject of the reference. The parties hereto expressly
reserve the right to contest or appeal from the final judgment or any appealable
order or appealable judgment entered by the referee. The parties hereto
expressly reserve the right to findings of fact, conclusions of laws, a written
statement of decision, and the right to move for a new trial or a different
judgment, which new trial, if granted, is also to be a reference proceeding
under this provision.
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(d) In the event that the enabling legislation which provides
for appointment of a referee is repealed (and no successor statute is enacted),
any dispute between the parties that would otherwise be determined by the
reference procedure herein described will be resolved and determined by
arbitration. The arbitration will be conducted by a retired judge of the Court,
in accordance with the California Arbitration Act, Section 1280 through Section
1294.2 of the CCP as amended from time to time. The limitations with respect
to discovery as set forth hereinabove shall apply to any such arbitration
proceeding.
[Remainder of this page intentionally left blank.]
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IN WITNESS WHEREOF, Guarantor has executed and delivered this Guaranty
as of the date set forth in the first paragraph hereof.
PROSPECT MEDICAL SYSTEMS, INC.,
a Delaware corporation
By /s/ Jacob Y. Terner, M.D.
-------------------------------------------
Title: CEO
---------------------------------------
ACCEPTED AND AGREED:
IMPERIAL BANK,
a California banking corporation
By /s/ Mark W. Campbell
-------------------------------------
Title SVP
----------------------------------
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SECURITY AGREEMENT
(GUARANTOR)
This SECURITY AGREEMENT, dated as of July 3, 1997, is entered into
between PROSPECT MEDICAL SYSTEMS, INC., a Delaware corporation ("GUARANTOR") and
Imperial Bank, a California banking corporation ("Bank"), with reference to the
following facts:
R E C I T A L S
A. Prospect Medical Holdings, Inc., a Delaware corporation
("BORROWER"), and Bank have entered into the Loan Agreement; and
B. In order to induce Bank to continue to make Loans under the Loan
Agreement and as a condition thereof, Guarantor has executed that certain
Continuing Guaranty, of even date herewith (as the same may be amended,
restated, supplemented or otherwise modified from time to time, the "GUARANTY"),
pursuant to which Guarantor guarantees the full payment and performance of all
obligations owing to Bank by the Borrower under the Loan Agreement; and
C. In order to induce Bank to continue to make Loans under the Loan
Agreement and as a condition thereof, Guarantor has agreed to enter into this
Security Agreement in order to grant to Bank a first priority security interest
in the Collateral to secure prompt payment and performance of the Secured
Obligations.
A G R E E M E N T
NOW, THEREFORE, in consideration of the mutual promises, covenants,
conditions, representations, and warranties hereinafter set forth, and for other
good and valuable consideration, the parties hereto agree as follows:
1. DEFINITIONS. All initially capitalized terms used but not
defined herein shall have the meanings ascribed thereto in the Loan Agreement.
In addition, as used herein, the following terms shall have the following
meanings:
"ACCOUNT DEBTOR" means any Person who is or who may become
obligated with respect to, or on account of, an Account.
"ACCOUNTS" means any and all of Guarantor's presently existing
and hereafter arising accounts and rights to payment, except those evidenced by
Negotiable Collateral, arising out of the sale or lease of goods or the
rendition of services by Guarantor, irrespective of whether earned by
performance.
"BANK" means Imperial Bank, a California banking corporation.
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"BANK EXPENSES" shall mean: any and all costs or expenses
required to be paid by Guarantor under this Security Agreement which are paid or
advanced by Bank; all costs and expenses of Bank, including its attorneys' fees
and expenses (including attorneys' fees incurred pursuant to proceedings arising
under the Bankruptcy Code), incurred or expended to correct any default or
enforce any provision of this Security Agreement, or in gaining possession of,
maintaining, handling, preserving, storing, shipping, selling, preparing for
sale, or advertising to sell the Collateral, irrespective of whether a sale is
consummated; and all costs and expenses of suit incurred or expended by Bank,
including its attorneys' fees and expenses (including attorneys' fees incurred
pursuant to proceedings arising under the Bankruptcy Code) in enforcing or
defending this Security Agreement, irrespective of whether suit is brought.
"GUARANTOR'S BOOKS" means any and all presently existing and
hereafter acquired or created books and records of Guarantor, including all
records (including maintenance and warranty records), ledgers, computer
programs, disc or tape files, printouts, runs, and other computer prepared
information indicating, summarizing, or evidencing the Accounts, Deposit
Accounts, Equipment, Inventory, Investment Property, General Intangibles and
Negotiable Collateral.
"CHATTEL PAPER" means all writings of whatever sort which
evidence a monetary obligation and a security interest in or lease of specific
goods, whether now existing or hereafter arising.
"CODE" means the California Uniform Commercial Code except, to
the extent applicable, the Uniform Commercial Code as adopted by the
jurisdiction in which any of the Collateral is located. Any and all terms used
in this Security Agreement which are defined in the Code shall be construed and
defined in accordance with the meaning and definition ascribed to such terms
under the Code, unless otherwise defined herein.
"COLLATERAL" means the following, collectively: any and all of
the Accounts, Deposit Accounts, Equipment, Inventory, Investment Property,
General Intangibles, Negotiable Collateral, and Guarantor's Books, in each case
whether now existing or hereafter acquired or created, and any Proceeds or
products of any of the foregoing, or any portion thereof, and any and all
Accounts, Deposit Accounts, Equipment, Inventory, Investment Property, General
Intangibles, Negotiable Collateral, money, or other tangible or intangible
property, resulting from the sale or other disposition of the Accounts, Deposit
Accounts, Equipment, Inventory, Investment Property, General Intangibles, or
Negotiable Collateral, or any portion thereof or interest therein, and the
substitutions, replacements, additions, accessions, products and Proceeds
thereof.
"COLLATERAL ACCESS AGREEMENT" means a landlord waiver, mortgagee
waiver, bailee letter, or acknowledgement agreement of any warehouseman,
processor, lessor, consignee, or other Person in possession of, having a Lien
upon, or having rights or interests in the Equipment or Inventory, in each case,
in form and substance satisfactory to Bank.
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"DEPOSIT ACCOUNT" means any demand, time, savings, passbook or
like account now or hereafter maintained by or for the benefit of Guarantor with
a bank, savings and loan association, credit union or like organization, and all
funds and amounts therein, whether or not restricted or designated for a
particular purpose.
"DOCUMENTS" means any and all documents of title, bills of
lading, dock warrants, dock receipts, warehouse receipts and other documents of
Guarantor, whether or not negotiable, and includes all other documents which
purport to be issued by a bailee or agent and purport to cover goods in any
bailee's or agent's possession which are either identified or are fungible
portions of an identified mass, including such documents of title made available
to Guarantor for the purpose of ultimate sale or exchange of goods or for the
purpose of loading, unloading, storing, shipping, transshipping, manufacturing,
processing or otherwise dealing with goods in a manner preliminary to their sale
or exchange, in each case whether now existing or hereafter acquired.
"EQUIPMENT" means any and all of Guarantor's presently existing
and hereafter acquired machinery, equipment, furniture, furnishings, fixtures,
computer and other electronic data processing equipment and other office
equipment and supplies, computer programs and related data processing software,
spare parts, tools, motors, automobiles, trucks, tractors and other motor
vehicles, rolling stock, jigs, and other goods (other than Inventory, farm
products, and consumer goods), of every kind and description, wherever located,
together with any and all parts, improvements, additions, attachments,
replacements, accessories, and substitutions thereto or therefor, and all other
rights of Guarantor relating thereto, whether in the possession and control of
Guarantor, or in the possession and control of a third party for the account of
Guarantor.
"FEIN" means Federal Employer Identification Number.
"GENERAL INTANGIBLES" means any and all of Guarantor's presently
existing and hereafter acquired or arising general intangibles and other
intangible personal property of every kind and description, including:
(a) contracts and contract rights, noncompetition covenants,
licensing and distribution agreements, indemnity agreements, guaranties,
insurance policies, franchise agreements and lease agreements;
(b) deposit accounts, uncertificated certificates of deposit,
uncertificated securities, and interests in any joint ventures, partnerships or
limited liability companies;
(c) choses in action and causes of action (whether legal or
equitable, whether in contract or tort or otherwise, and however arising);
(d) licenses, approvals, permits or any other authorizations
issued by any Government Authority;
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(e) Intellectual Property Collateral;
(f) computer software, magnetic media, electronic data
processing files, systems and programs;
(g) rights of stoppage in transit, replevin and reclamation,
rebates or credits of every kind and nature to which Guarantor may be entitled;
(h) purchase orders, customer lists, subscriber lists and
goodwill;
(i) monies due or recoverable from pension funds, refunds and
claims for tax or other refunds against any Governmental Authority; and
(j) other contractual, equitable and legal rights of whatever
kind and nature.
"GUARANTY" has the meaning set forth in Recital B hereto.
"INSTRUMENTS" means any and all negotiable instruments,
certificated securities and every other writing which evidences a right to the
payment of money, in each case whether now existing or hereafter acquired.
"INTELLECTUAL PROPERTY COLLATERAL" means the following Assets
owned or held by Guarantor or in which Guarantor otherwise has any interest, now
existing or hereafter acquired or arising:
(a) all patents and patent applications, domestic or foreign,
all licenses relating to any of the foregoing and all income and royalties with
respect to any licenses, all rights to sue for past, present or future
infringement thereof, all rights arising therefrom and pertaining thereto and
all reissues, divisions, continuations, renewals, extensions and continuations
in-part thereof;
(b) all copyrights and applications for copyright, domestic or
foreign, together with the underlying works of authorship (including titles),
whether or not the underlying works of authorship have been published and
whether said copyrights are statutory or arise under the common law, and all
other rights and works of authorship, all rights, claims and demands in any way
relating to any such copyrights or works, including royalties and rights to sue
for past, present or future infringement, and all rights of renewal and
extension of copyright;
(c) all state (including common law), federal and foreign
trademarks, service marks and trade names, and applications for registration of
such trademarks, service marks and trade names, all licenses relating to any of
the foregoing and all income and royalties with respect to any licenses, whether
registered or unregistered and wherever registered, all rights to sue for past,
present or future infringement or unconsented
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use thereof, all rights arising therefrom and pertaining thereto and all
reissues, extensions and renewals thereof;
(d) all trade secrets, confidential information, customer lists,
license rights, advertising materials, operating manuals, methods, processes,
know-how, sales literature, sales and operating plans, drawings, specifications,
blue prints, descriptions, inventions, name plates and catalogs; and
(e) the entire goodwill of or associated with the businesses now
or hereafter conducted by Guarantor connected with and symbolized by any of the
aforementioned properties and assets.
"INVENTORY" means any and all of Guarantor's presently existing
and hereafter acquired goods of every kind and description (including goods in
transit) which are held for sale or lease, or to be furnished under a contract
of service or which have been so leased or furnished, or other disposition,
wherever located, including those held for display or demonstration or out on
lease or consignment or are raw materials, work in process, finished materials,
or materials used or consumed, or to be used or consumed, in Guarantor's
business, and the resulting product or mass, and all repossessed, returned,
rejected, reclaimed and replevied goods, together with all materials, parts,
supplies, packing and shipping materials used or usable in connection with the
manufacture, packing, shipping, advertising, selling or furnishing of such
goods; and all other items hereafter acquired by Guarantor by way of
substitution, replacement, return, repossession or otherwise, and all additions
and accessions thereto, and any Document representing or relating to any of the
foregoing at any time.
"INVESTMENT PROPERTY" has the meaning given to such term in the
Code.
"LOAN AGREEMENT" means that certain Revolving Credit Agreement,
dated as of even date herewith, between Borrower and Bank, as may be at any time
hereafter supplemented, modified, amended or restated.
"NEGOTIABLE COLLATERAL" means any and all of Guarantor's
presently existing and hereafter acquired or arising letters of credit, advises
of credit, certificates of deposit, notes, drafts, Instruments, Documents and
Chattel Paper.
"PROCEEDS" means whatever is receivable or received from or upon
the sale, lease, license, collection, use, exchange or other disposition,
whether voluntary or involuntary, of any Collateral or other assets of
Guarantor, including "proceeds" as defined in Section 9306 of the Code, any and
all proceeds of any insurance, indemnity, warranty or guaranty payable to or for
the account of Guarantor from time to time with respect to any of the
Collateral, any and all payments (in any form whatsoever) made or due and
payable to Guarantor from time to time in connection with any requisition,
confiscation, condemnation, seizure or forfeiture of all or any part of the
Collateral by any Governmental Authority (or any Person acting under color of
Governmental Authority), any and all other
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amounts from time to time paid or payable under or in connection with any of the
Collateral or for or on account of any damage or injury to or conversion of any
Collateral by any Person, any and all other tangible or intangible property
received upon the sale or disposition of Collateral, and all proceeds of
proceeds.
"RIGHTS TO PAYMENT" means all Accounts and any and all rights and
claims to the payment or receipt of money or other forms of consideration of any
kind in, to and under all General Intangibles, Negotiable Collateral and
Proceeds thereof.
"SECURED OBLIGATIONS" shall have the meaning of "Guaranteed
Obligations" under the Guaranty and shall also mean any and all debts,
liabilities, obligations, or undertakings owing by Guarantor to Bank arising
under, advanced pursuant to, or evidenced by this Security Agreement, whether
direct or indirect, absolute or contingent, matured or unmatured, due or to
become due, voluntary or involuntary, whether now existing or hereafter arising,
and including all interest not paid when due and all Bank Expenses which
Guarantor is required to pay or reimburse pursuant to this Security Agreement,
the Loan Agreement, the other Loan Documents or by law.
"SECURITY AGREEMENT" shall mean this Security Agreement, any
concurrent or subsequent riders, exhibits or schedules to this Security
Agreement, and any extensions, supplements, amendments, or modifications to or
in connection with this Security Agreement, or to any such riders, exhibits or
schedules.
2. CONSTRUCTION. Unless the context of this Security Agreement
clearly requires otherwise, references to the plural include the singular,
references to the singular include the plural, the part includes the whole,
"including" is not limiting, and "or" has the inclusive meaning represented by
the phrase "and/or." References in this Security Agreement to "determination"
by Bank include reasonable estimates (absent manifest error) by Bank, as
applicable (in the case of quantitative determinations) and reasonable beliefs
(absent manifest error) by Bank, as applicable (in the case of qualitative
determinations). The words "hereof," "herein," "hereby," "hereunder," and
similar terms in this Security Agreement refer to this Security Agreement as a
whole and not to any particular provision of this Security Agreement. Article,
section, subsection, exhibit, and schedule references are to this Security
Agreement unless otherwise specified.
3. CREATION OF SECURITY INTEREST. Guarantor hereby grants to Bank a
continuing security interest in all presently existing and hereafter acquired or
arising Collateral in order to secure the prompt payment and performance of all
of the Secured Obligations. Guarantor acknowledges and affirms that such
security interest in the Collateral has attached to all Collateral without
further act on the part of Bank or Guarantor.
4. FURTHER ASSURANCES.
4.1 Guarantor shall execute and deliver to Bank concurrently
with Guarantor's execution of this Security Agreement, and from time to time at
the request of Bank, all financing statements, continuation financing
statements, fixture filings, security
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agreements, chattel mortgages, assignments, and all other documents that Bank
may request, in form satisfactory to Bank, to perfect and maintain perfected
Bank's security interests in the Collateral and in order to consummate fully all
of the transactions contemplated by this Security Agreement and the Loan
Agreement. Guarantor hereby irrevocably makes, constitutes, and appoints Bank
(and Bank's officers, employees, or agents) as Guarantor's true and lawful
attorney with power to sign the name of Guarantor on any of the above-described
documents or on any other similar documents which need to be executed, recorded,
or filed, and to do any and all things necessary in the name and on behalf of
Guarantor in order to perfect, or continue the perfection of, Bank's security
interests in the Collateral. Guarantor agrees that neither Bank, nor any of its
designees or attorneys-in-fact, will be liable for any act of commission or
omission, or for any error of judgment or mistake of fact or law with respect to
the exercise of the power of attorney granted under this Section 4.1, other than
as a result of its or their gross negligence or wilful misconduct. THE POWER OF
ATTORNEY GRANTED UNDER THIS SECTION 4.1 IS COUPLED WITH AN INTEREST AND SHALL BE
IRREVOCABLE UNTIL ALL OF THE SECURED OBLIGATIONS HAVE BEEN INDEFEASIBLY PAID IN
FULL, THE LOAN AGREEMENT TERMINATED, AND ALL GUARANTOR'S DUTIES HEREUNDER AND
THEREUNDER HAVE BEEN DISCHARGED IN FULL.
4.2 Without limiting the generality of the foregoing Section 4.1
or any of the provisions of the Loan Agreement, Guarantor will: (i) at the
request of Bank, mark conspicuously all of its records pertaining to the
Collateral with a legend, in form and substance satisfactory to Bank, indicating
that the Collateral is subject to the security interest granted hereby; (ii) at
the request of Bank, appear in and defend any action or proceeding which may
affect Guarantor's title to, or the security interest of Bank in, any of the
Collateral; and (iii) upon demand of Bank, allow inspection of Collateral by
Bank or Persons designated by Bank at any time during normal business hours.
4.3 With respect to the Negotiable Collateral (other than drafts
received in the ordinary course of business so long as no Event of Default is
continuing), Guarantor shall, immediately upon request by Bank, endorse (where
appropriate) and assign the Negotiable Collateral over to Bank, and deliver to
Bank actual physical possession of the Negotiable Collateral to Bank together
with any instruments of transfer or assignment, all in form and substance
satisfactory to Bank, in order to fully perfect the security interest therein of
Bank.
4.4 Guarantor shall cooperate with Bank in obtaining a control
agreement in form and substance satisfactory to Bank with respect to all Deposit
Accounts and Investment Property.
5. REPRESENTATIONS AND WARRANTIES. In order to induce Bank to enter
into the Loan Agreement and to make Loans to Borrower, in addition to the
representations and warranties of Guarantor set forth in the Guaranty which are
incorporated herein by this reference, Guarantor represents and warrants to Bank
that on the Closing Date and thereafter on the date of each and every Borrowing:
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5.1 LOCATION OF CHIEF EXECUTIVE OFFICE AND COLLATERAL; FEIN.
Guarantor's chief executive office is located at the address set forth in
SCHEDULE 1, and all other locations where Guarantor conducts business or
Collateral is kept are set forth in SCHEDULE 1. Guarantor's Fein is 33-0718606.
5.2 LOCATIONS OF GUARANTOR'S BOOKS. All locations where
Guarantor's Books are kept, including all equipment necessary for accessing
Guarantor's Books and the names and addresses of all service bureaus, computer
or data processing companies and other Persons keeping Guarantor's Books or
collecting Rights to Payment for Guarantor, are set forth in SCHEDULE 1.
5.3 TRADE NAMES AND TRADE STYLES. All trade names and trade
styles under which Guarantor presently conducts its business operations are set
forth in SCHEDULE 1, and, except as set forth in SCHEDULE 1, Guarantor has not,
at any time during the preceding five years: (i) been known as or used any other
corporate, trade or fictitious name; (ii) changed its name; (iii) been the
surviving or resulting corporation in a merger or consolidation; or (iv)
acquired through asset purchase or otherwise any business of any Person.
5.4 OWNERSHIP OF COLLATERAL. Guarantor is and shall continue to
be the sole and complete owner of the Collateral, free from any Lien other than
Permitted Liens.
5.5 ENFORCEABILITY; PRIORITY OF SECURITY INTEREST. (i) This
Agreement creates a security interest which is enforceable against the
Collateral in which Guarantor now has rights and will create a security interest
which is enforceable against the Collateral in which Guarantor hereafter
acquires rights at the time Guarantor acquires any such rights, and (ii) Bank
has a perfected security interest (to the fullest extent perfection can be
obtained by filing, notification to third parties, possession or control) and a
first priority security interest in the Collateral in which Guarantor now has
rights (subject only to Permitted Liens), and will have a perfected and first
priority security interest in the Collateral in which Guarantor hereafter
acquires rights at the time Guarantor acquires any such rights (subject only to
Permitted Liens), in each case securing the payment and performance of the
Secured Obligations.
5.6 OTHER FINANCING STATEMENTS. Other than financing statements
in favor of Bank and financing statements filed in connection with Permitted
Liens, no effective financing statement naming Guarantor as debtor, assignor,
grantor, mortgagor, pledgor or the like and covering all or any part of the
Collateral is on file in any filing or recording office in any jurisdiction.
5.7 RIGHTS TO PAYMENT.
(a) the Rights to Payment represent valid, binding and
enforceable obligations of the Account Debtors or other Persons obligated
thereon, representing undisputed, bona fide transactions completed in accordance
with the terms and
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provisions contained in any documents related thereto, and are and will be
genuine, free from Liens, adverse claims, counterclaims, setoffs, defaults,
disputes, defenses, retainages, holdbacks and conditions precedent of any kind
of character, except to the extent reflected by Guarantor's reserves for
uncollectible Rights to Payment;
(b) all Account Debtors and other obligors on the Rights to
Payment are Solvent and generally paying their debts as they come due;
(c) all Rights to Payment comply with all applicable laws
concerning form, content and manner of preparation and execution, including
where applicable any federal and state consumer credit laws;
(d) Guarantor has not assigned any of its rights under the
Rights to Payment other than to Bank pursuant to this Agreement;
(e) all statements made, all unpaid balances and all other
information in Guarantor's Books and other documentation relating to the Rights
to Payment are true and correct and in all respects what they purport to be; and
(f) Guarantor has no knowledge of any fact or circumstance
which would impair the validity or collectibility of any of the Rights to
Payment.
5.8 INVENTORY. No Inventory is stored with any bailee,
warehouseman or similar Person or on any premises leased to Guarantor, nor has
any Inventory been consigned to Guarantor or consigned by Guarantor to any
Person or is held by Guarantor for any Person under any "bill and hold" or other
arrangement.
5.9 INTELLECTUAL PROPERTY.
(a) except as set forth in SCHEDULE 1, Guarantor (directly
or through any Subsidiary) does not own, possess or use under any licensing
arrangement any patents, copyrights, trademarks, service marks or trade names,
nor is there currently pending before any Governmental Authority any application
for registration of any patent, copyright, trademark, service mark or trade
name;
(b) all patents, copyrights, trademarks, service marks and
trade names are subsisting and have not been adjudged invalid or unenforceable
in whole or in part;
(c) all maintenance fees required to be paid on account of
any patents have been timely paid for maintaining such patents in force, and, to
the best of Guarantor's knowledge, each of the patents is valid and enforceable
and Guarantor has notified Bank in writing of all prior art (including public
uses and sales) of which it is aware;
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(d) to the best of Guarantor's knowledge, no infringement
or unauthorized use presently is being made of any Intellectual Property
Collateral by any Person;
(e) Guarantor is the sole and exclusive owner of the
Intellectual Property Collateral and the past, present and contemplated future
use of such Intellectual Property Collateral by Guarantor has not, does not and
will not infringe or violate any right, privilege or license agreement of or
with any other Person; and
(f) Guarantor owns, has material rights under, is a party
to, or an assignee of a party to all material licenses, patents, patent
applications, copyrights, service marks, trademarks, trademark applications,
trade names and all other intellectual property Collateral necessary to continue
to conduct its business as heretofore conducted.
5.10 EQUIPMENT.
(a) none of the Equipment or other Collateral is affixed to
real property, except Collateral with respect to which Guarantor has supplied
Bank with all information and documentation necessary to make all fixture
filings required to perfect and protect the priority of Bank's security interest
in all such Collateral which may be fixtures as against all Persons having an
interest in the premises to which such property may be affixed; and
(b) none of the Equipment is leased from or to any Person,
except as set forth in SCHEDULE 1.
5.11 DEPOSIT ACCOUNTS. The names and addresses of all financial
institutions at which Guarantor maintains its Deposit Accounts, and the account
numbers and account names of such Deposit Accounts, are set forth in SCHEDULE 1.
5.12 INVESTMENT PROPERTY. All Investment Property is set forth
and described in SCHEDULE 1, and all financial institutions or financial
intermediaries holding or in possession of such Investment Property are set
forth in SCHEDULE 1.
6. COVENANTS. In addition to the covenants of Guarantor set forth
in the Loan Agreement which are incorporated herein by this reference, Guarantor
agrees that from the Closing Date and thereafter until the indefeasible payment,
performance and satisfaction in full of the Secured Obligations, and all of
Bank's obligations under the Loan Agreement to Guarantor have been terminated:
6.1 DEFENSE OF COLLATERAL. Guarantor shall appear in and defend
any action, suit or proceeding which may affect its title to or right or
interest in, or Bank's right or interest in, the Collateral.
6.2 PRESERVATION OF COLLATERAL. Guarantor shall do and perform
all acts that may be necessary and appropriate to maintain, preserve and protect
the Collateral.
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6.3 COMPLIANCE WITH LAWS, ETC. Guarantor shall comply with all
laws, regulations and ordinances, and all policies of insurance, relating to the
possession, operation, maintenance and control of the Collateral.
6.4 LOCATION OF GUARANTOR'S BOOKS AND CHIEF EXECUTIVE OFFICE.
Guarantor shall: (i) keep all Guarantor's Books at the locations set forth in
SCHEDULE 1; and (ii) maintain the location of Guarantor's chief executive office
or principal place of business at the location set forth in SCHEDULE 1;
PROVIDED, HOWEVER, that Guarantor may amend SCHEDULE 1 so long as (i) such
amendment occurs by written notice to Bank not less than 30 days prior to the
date on which the location of Guarantor's Books or Guarantor's chief executive
office or principal place of business is changed, and (ii) at the time of such
written notification, Guarantor executes and delivers any financing statement
amendments or fixture filing amendments necessary to perfect or continue
perfected Bank's security interests in the Collateral and also obtains for Bank
such duly executed Collateral Access Agreement as Bank shall require with
respect to such new location.
6.5 LOCATION OF COLLATERAL. Guarantor shall keep the Inventory
and Equipment only at the locations identified on SCHEDULE 1; PROVIDED, HOWEVER,
that Guarantor may amend SCHEDULE 1 so long as (i) such amendment occurs by
written notice to Bank not less than 30 days prior to the date on which the
Inventory or Equipment is moved to such new location, (ii) such new location is
within the continental United States, and (iii) at the time of such written
notification, Guarantor executes and delivers any financing statements or
fixture filings necessary to perfect and continue perfected Bank's security
interests in such Assets and also obtains for Bank such duly executed Collateral
Access Agreement as Bank shall require with respect to such new location.
6.6 CHANGE IN NAME, TRADE NAME, TRADE STYLE OR FEIN. Guarantor
shall not change its name, trade names, trade styles or FEIN, or add any new
trade names or trade styles from those listed on SCHEDULE 1; PROVIDED, HOWEVER,
that Guarantor may amend SCHEDULE 1 so long as (i) such amendment occurs by
written notice to Bank not less than 30 days prior to the date on which such new
name, trade name, trade style or FEIN becomes effective, and (ii) at the time of
such written notification, Guarantor executes and delivers any financing
statement amendments or fixture filing amendments necessary to continue
perfected Bank's security interests in the Collateral.
6.7 MAINTENANCE OF RECORDS. Guarantor shall keep separate,
accurate and complete Guarantor's Books, disclosing Bank's security interest
hereunder.
6.8 DISPOSITION OF COLLATERAL. Guarantor shall not surrender or
lose possession of (other than to Bank), sell, lease, rent, or otherwise dispose
of or transfer any of the Collateral or any right or interest therein, except to
the extent permitted by the Loan Agreement.
6.9 LIENS. Guarantor shall keep the Collateral free of all
Liens except Permitted Liens.
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6.10 LEASED PREMISES. At Bank's request, Guarantor shall obtain
from each Person from whom Guarantor leases any premises at which any Collateral
is at any time present, such Collateral Access Agreements as Bank may require.
6.11 RIGHTS TO PAYMENT. Guarantor shall:
(a) perform and observe all terms and provisions of the
Rights to Payment and all obligations to be performed or observed by it in
connection therewith and maintain the Rights to Payment in full force and
effect;
(b) enforce all Rights to Payment strictly in accordance
with their terms, and take all such action to such end as may be from time to
time reasonably requested by Bank;
(c) if, to the knowledge of Guarantor, any dispute, setoff,
claim, counterclaim or defense shall exist or shall be asserted or threatened
with respect to a Right to Payment (whether with or against Guarantor or
otherwise), disclose such fact fully to Bank in Guarantor's Books relating to
such Account or other Right to Payment and in connection with any report
furnished by Guarantor to Bank relating to such Right to Payment;
(d) furnish to Bank such information and reports regarding
the Rights to Payment as Bank may request, and upon request of Bank make such
demands and requests for information and reports as Guarantor is entitled to
make in respect of the Rights to Payment; and
(e) upon the occurrence of any Event of Default, establish
such lockbox or similar arrangements for the payment of the Rights to Payment as
Bank shall require.
6.12 INVENTORY. Guarantor shall:
(a) at such times as Bank shall request, prepare and
deliver to Bank periodic reports pertaining to the Inventory, in form and
substance satisfactory to Bank;
(b) upon the request of Bank, take a physical listing of
the Inventory and promptly deliver a copy of such physical listing to Bank;
(c) not store any Inventory with a bailee, warehouseman or
similar Person or on premises leased to Guarantor without obtaining for Bank
such Collateral Access Agreements as Bank shall require; and
(d) not dispose of any Inventory on a bill-and-hold,
guaranteed sale, sale and return, sale on approval, consignment or similar
basis, nor acquire
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any Inventory from any Person on any such basis, without in each case giving
Bank prior written notice thereof.
6.13 EQUIPMENT. Guarantor shall, upon Bank's request, deliver to
Bank a report of each item of Equipment, in form and substance satisfactory to
Bank.
6.14 INTELLECTUAL PROPERTY COLLATERAL. Guarantor shall:
(a) not enter into any agreement (including any license or
royalty agreement) pertaining to any Intellectual Property Collateral without in
each case giving Bank prior notice thereof;
(b) not allow or suffer any Intellectual Property
Collateral to become abandoned, nor any registration thereof to be terminated,
forfeited, expired or dedicated to the public;
(c) promptly give Bank notice of any rights Guarantor may
obtain to any new patentable inventions, trademarks, servicemarks, copyrightable
works or other new Intellectual Property Collateral, prior to the filing of any
application for registration thereof; and
(d) diligently prosecute all applications for patents,
copyrights and trademarks, and file and prosecute any and all continuations,
continuations-in-part, applications for reissue, applications for certificate of
correction and like matters as shall be reasonable and appropriate in accordance
with prudent business practice, and promptly and timely pay any and all
maintenance, license, registration and other fees, taxes and expenses incurred
in connection with any Intellectual Property Collateral.
7. COLLECTION OF RIGHTS TO PAYMENT. Guarantor or its agents shall
endeavor in the first instance to collect all amounts due or to become due on or
with respect to the Rights to Payment. At the request of Bank after the
occurrence of an Event of Default, all remittances received by Guarantor shall
be held in trust for Bank, and, in accordance with Bank's instructions, remitted
to Bank or deposited to an account with Bank in the form received (with any
necessary endorsements or instruments of assignment or transfer).
8. EVENTS OF DEFAULT. The occurrence of any Event of Default under
the Loan Agreement shall constitute an event of default ("Event of Default")
under this Security Agreement.
9. RIGHTS AND REMEDIES.
9.1 During the continuance of an Event of Default, Bank, without
notice or demand, may do any one or more of the following, all of which are
authorized by Guarantor:
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(a) Settle or adjust disputes and claims directly with
Account Debtors for amounts and upon terms which Bank considers advisable, and
in such cases, Bank will credit the Secured Obligations with only the net
amounts received by Bank in payment of such disputed Accounts after deducting
all Bank Expenses incurred or expended in connection therewith;
(b) Cause Guarantor to hold all returned Inventory in trust
for Bank, segregate all returned Inventory from all other property of Guarantor
or in Guarantor's possession and conspicuously label said returned Inventory as
the property of Bank;
(c) Without notice to or demand upon Guarantor or any
guarantor, make such payments and do such acts as Bank considers necessary or
reasonable to protect its security interests in the Collateral. Guarantor
agrees to assemble the Collateral if Bank so requires, and to make the
Collateral available to Bank as Bank may designate. Guarantor authorizes Bank
to enter the premises where the Collateral is located, to take and maintain
possession of the Collateral, or any part of it, and to pay, purchase, contest,
or compromise any encumbrance, charge, or Lien that in Bank's determination
appears to conflict with its security interests and to pay all expenses incurred
in connection therewith. With respect to any of Guarantor's owned or leased
premises, Guarantor hereby grants Bank a license to enter into possession of
such premises and to occupy the same, without charge, for up to 120 days in
order to exercise any of Bank's rights or remedies provided herein, at law, in
equity, or otherwise;
(d) Without notice to Guarantor (such notice being
expressly waived), and without constituting a retention of any collateral in
satisfaction of an obligation (within the meaning of Section 9505 of the Code),
set off and apply to the Secured Obligations any and all (i) balances and
Deposit Accounts of Guarantor held by Bank, or (ii) indebtedness at any time
owing to or for the credit or the account of Guarantor held by Bank;
(e) Hold, as cash collateral, any and all balances and
Deposit Accounts of Guarantor held by Bank, to secure the full and final
repayment of all of the Secured Obligations;
(f) Ship, reclaim, recover, store, finish, maintain,
repair, prepare for sale, advertise for sale, and sell (in the manner provided
for herein) the Collateral. Bank is hereby granted a license or other right to
use, without charge, Guarantor's labels, patents, copyrights, rights of use of
any name, trade secrets, trade names, trademarks, service marks, and advertising
matter, or any property of a similar nature, as it pertains to the Collateral,
in completing production of, advertising for sale, and selling any Collateral
and Guarantor's rights under all licenses and all franchise agreements shall
inure to Bank's benefit;
(g) Sell the Collateral at either a public or private sale,
or both, by way of one or more contracts or transactions, for cash or on terms,
in such manner
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and at such places (including Guarantor's premises) as Bank determines is
commercially reasonable. It is not necessary that the Collateral be present at
any such sale;
(h) Bank shall give notice of the disposition of the
Collateral as follows:
(i) Bank shall give Guarantor and each holder of a
security interest in the Collateral who has filed with Bank a written request
for notice, a notice in writing of the time and place of public sale, or, if the
sale is a private sale or some other disposition other than a public sale is to
be made of the Collateral, then the time on or after which the private sale or
other disposition is to be made;
(ii) The notice shall be personally delivered or
mailed, postage prepaid, to Guarantor as provided in SECTION 15 of the Guaranty,
at least 5 days before the date fixed for the sale, or at least 5 days before
the date on or after which the private sale or other disposition is to be made;
no notice needs to be given prior to the disposition of any portion of the
Collateral that is perishable or threatens to decline speedily in value or that
is of a type customarily sold on a recognized market. Notice to Persons other
than Guarantor claiming an interest in the Collateral shall be sent to such
addresses as they have furnished to Bank;
(iii) If the sale is to be a public sale, Bank also
shall give notice of the time and place by publishing a notice one time at least
5 days before the date of the sale in a newspaper of general circulation in the
county in which the sale is to be held;
(i) Bank may credit bid and purchase at any public sale;
and
(j) Any deficiency that exists after disposition of the
Collateral as provided above will be paid immediately by Guarantor. Any excess
will be returned, without interest and subject to the rights of third Persons,
by Bank to Guarantor.
9.2 Upon the exercise by Bank of any power, right, privilege, or
remedy pursuant to this Security Agreement which requires any consent, approval,
registration, qualification, or authorization of any Governmental Authority,
Guarantor agrees to execute and deliver, or will cause the execution and
delivery of, all applications, certificates, instruments, assignments, and other
documents and papers that Bank or any purchaser of the Collateral may be
required to obtain for such governmental consent, approval, registration,
qualification, or authorization.
9.3 The rights and remedies of Bank under this Security
Agreement, the Guaranty, the other Loan Documents, and all other agreements
contemplated hereby and thereby shall be cumulative. Bank shall have all other
rights and remedies not inconsistent herewith as provided under the Code, by
law, or in equity. No exercise by Bank of any one right or remedy shall be
deemed an election of remedies, and
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no waiver by Bank of any default on Guarantor's part shall be deemed a
continuing waiver of any further defaults. No delay by Bank shall constitute a
waiver, election or acquiescence with respect to any right or remedy.
10. BANK NOT LIABLE. So long as Bank complies with the obligations,
if any, imposed by Section 9207 of the Code, Bank shall not otherwise be liable
or responsible in any way or manner for: (a) the safekeeping of the Collateral;
(b) any loss or damage thereto occurring or arising in any manner or fashion or
from any cause; (c) any diminution in the value thereof; or (d) any act or
default of any carrier, warehouseman, bailee, forwarding agency, or other person
whomsoever.
11. INDEFEASIBLE PAYMENT. The Secured Obligations shall not be
considered indefeasibly paid for purposes of this Security Agreement unless and
until all payments to Bank are no longer subject to any right on the part of any
Person, including Guarantor, Guarantor as a debtor in possession, or any trustee
(whether appointed under the Bankruptcy Code or otherwise) of Guarantor or
Guarantor's Assets to invalidate or set aside such payments or to seek to recoup
the amount of such payments or any portion thereof, or to declare same to be
fraudulent or preferential. In the event that, for any reason, any portion of
such payments to Bank is set aside or restored, whether voluntarily or
involuntarily, after the making thereof, then the obligation intended to be
satisfied thereby shall be revived and continued in full force and effect as if
said payment or payments had not been made.
12. NOTICES. All notices or demands by any party hereto to the other
party and relating to this Security Agreement shall be made in the manner and to
the addresses set forth in Section 15 of the Guaranty.
13. GENERAL PROVISIONS.
13.1 SUCCESSORS AND ASSIGNS. This Security Agreement shall bind
and inure to the benefit of the respective successors and assigns of Guarantor
and Bank; PROVIDED, HOWEVER, that Guarantor may not assign this Security
Agreement nor delegate any of its duties hereunder without Bank's prior written
consent and any prohibited assignment or delegation shall be absolutely void.
No consent by Bank to an assignment by Guarantor shall release Guarantor from
the Secured Obligations. Bank reserves its right to sell, assign, transfer,
negotiate, or grant participations in all or any part of, or any interest in,
the rights and benefits hereunder pursuant to and in accordance with the
provisions of the Loan Agreement. In connection therewith, Bank may disclose
all documents and information which Bank now or hereafter may have relating to
Guarantor, Guarantor's business, or the Collateral to any such prospective or
actual Transferee, subject to the terms of Section 9.5(e) of the Loan Agreement.
13.2 EXHIBITS AND SCHEDULES. All of the exhibits and schedules
attached hereto shall be deemed incorporated by reference.
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13.3 NO PRESUMPTION AGAINST ANY PARTY. Neither this Security
Agreement nor any uncertainty or ambiguity herein shall be construed or resolved
against Bank or Guarantor, whether under any rule of construction or otherwise.
On the contrary, this Security Agreement has been reviewed by each of the
parties and their counsel and shall be construed and interpreted according to
the ordinary meaning of the words used so as to accomplish fairly the purposes
and intentions of all parties hereto.
13.4 AMENDMENTS AND WAIVERS. Any provision of this Agreement or
any of the Loan Documents to which Guarantor is a party may be amended or waived
if, but only if, such amendment or waiver is in writing and is signed by the
party asserted to be bound thereby, and then such amendment or waiver shall be
effective only in the specific instance and specific purpose for which given.
13.5 COUNTERPARTS; INTEGRATION; EFFECTIVENESS. This Security
Agreement may be signed in any number of counterparts, each of which shall be an
original, with the same effect as if the signatures thereto and hereto were upon
the same instrument. This Security Agreement constitutes the entire agreement
and understanding among the parties hereto and supersedes any and all prior
agreements and understandings, oral or written, relating to the subject matter
hereof. This Security Agreement shall become effective when executed by each of
the parties hereto and delivered to Bank.
13.6 SEVERABILITY. The provisions of this Agreement are
severable. The invalidity, in whole or in part, of any provision of this
Agreement shall not affect the validity or enforceability of any other of its
provisions. If one or more provisions hereof shall be declared invalid or
unenforceable, the remaining provisions shall remain in full force and effect
and shall be construed in the broadest possible manner to effectuate the
purposes hereof.
14. GOVERNING LAW. This Security Agreement shall be deemed to have
been made in the State of California and the validity, construction,
interpretation, and enforcement hereof, and the rights of the parties hereto,
shall be determined under, governed by, and construed in accordance with the
internal laws of the State of California, without regard to principles of
conflicts of law.
15. JUDICIAL REFERENCE.
15.1 Other than (i) nonjudicial foreclosure and all matters in
connection therewith regarding security interests in real or personal property;
or (ii) the appointment of a receiver, or the exercise of other provisional
remedies (any and all of which may be initiated pursuant to applicable law),
each controversy, dispute or claim between the parties arising out of or
relating to this Security Agreement, which controversy, dispute or claim is not
settled in writing within thirty (30) days after the "Claim Date" (defined as
the date on which Guarantor or Bank gives written notice to the other that a
controversy, dispute or claim exists), will be settled by a reference proceeding
in California in accordance with the provisions of Section 638 ET SEQ. of the
California Code of Civil Procedure, or their successor section ("CCP"), which
shall constitute the exclusive remedy
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for the settlement of any controversy, dispute or claim concerning this Security
Agreement, including whether such controversy, dispute or claim is subject to
the reference proceeding and except as set forth above, the parties waive their
rights to initiate any legal proceedings against each other in any court or
jurisdiction other than the Superior Court in the County where any real property
Collateral is located or Los Angeles County if none (the "Court"). The referee
shall be a retired Judge of the Court selected by mutual agreement of the
parties, and if they cannot so agree within forty-five (45) days after the Claim
Date, the referee shall be promptly selected by the Presiding Judge of the Court
(or his representative). The referee shall be appointed to sit as a temporary
judge, with all of the powers for a temporary judge, as authorized by law, and
upon selection should take and subscribe to the oath of office as provided for
in Rule 244 of the California Rules of Court (or any subsequently enacted Rule).
Each party shall have one peremptory challenge pursuant to CCP Section 170.6.
The referee shall (a) be requested to set the matter for hearing within sixty
(60) days after the Claim Date and (b) try any and all issues of law or fact and
report a statement of decision upon them, if possible, within ninety (90) days
of the Claim Date. Any decision rendered by the referee will be final, binding
and conclusive and judgment shall be entered pursuant to CCP Section 644 in any
court in the State of California having jurisdiction. Any party may apply for a
reference proceeding at any time after thirty (30) days following notice to any
other party of the nature of the controversy, dispute or claim, by filing a
petition for a hearing and/or trial. All discovery permitted by this Security
Agreement shall be completed no later than fifteen (15) days before the first
hearing date established by the referee. The referee may extend such period in
the event of a party's refusal to provide requested discovery for any reason
whatsoever, including, without limitation, legal objections raised to such
discovery or unavailability of a witness due to absence or illness. No party
shall be entitled to "priority" in conducting discovery. Depositions may be
taken by either party upon seven (7) days written notice, and request for
production or inspection of documents shall be responded to within ten (10) days
after service. All disputes relating to discovery which cannot be resolved by
the parties shall be submitted to the referee whose decision shall be final and
binding upon the parties. Pending appointment of the referee as provided
herein, the Superior Court is empowered to issue temporary and/or provisional
remedies, as appropriate.
15.2 Except as expressly set forth in this Security Agreement,
the referee shall determine the manner in which the reference proceeding is
conducted including the time and place of all hearings, the order of
presentation of evidence, and all other questions that arise with respect to the
course of the reference proceeding. All proceedings and hearings conducted
before the referee, except for trial, shall be conducted without a court
reporter except that when any party so requests, a court reporter will be used
at any hearing conducted before the referee. The party making such a request
shall have the obligation to arrange for and pay for the court reporter. The
costs of the court reporter at the trial shall be borne equally by the parties.
15.3 The referee shall be required to determine all issues in
accordance with existing case law and the statutory laws of the State of
California. The rules of evidence applicable to proceedings at law in the State
of California will be applicable to the reference proceeding. The referee shall
be empowered to enter equitable
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as well as legal relief, to provide all temporary and/or provisional remedies
and to enter equitable orders that will be binding upon the parties. The
referee shall issue a single judgment at the close of the reference proceeding
which shall dispose of all of the claims of the parties that are the subject of
the reference. The parties hereto expressly reserve the right to contest or
appeal from the final judgment or any appealable order or appealable judgment
entered by the referee. The parties hereto expressly reserve the right to
findings of fact, conclusions of laws, a written statement of decision, and the
right to move for a new trial or a different judgment, which new trial, if
granted, is also to be a reference proceeding under this provision.
15.4 In the event that the enabling legislation which provides
for appointment of a referee is repealed (and no successor statute is enacted),
any dispute between the parties that would otherwise be determined by the
reference procedure herein described will be resolved and determined by
arbitration. The arbitration will be conducted by a retired judge of the Court,
in accordance with the California Arbitration Act, Section 1280 through Section
1294.2 of the CCP as amended from time to time. The limitations with respect to
discovery as set forth hereinabove shall apply to any such arbitration
proceeding.
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IN WITNESS WHEREOF, the parties have executed this Security Agreement
as of the date first set forth above.
PROSPECT MEDICAL SYSTEMS, INC.,
a Delaware corporation
By /s/ Jacob Y. Terner, M.D.
-------------------------------------------
Title: CEO
---------------------------------------
IMPERIAL BANK,
a California banking corporation
By /s/ Mark W. Campbell
-------------------------------------------
Title: SVP
---------------------------------------
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SECURITY AGREEMENT - STOCK PLEDGE (BORROWER)
This SECURITY AGREEMENT - STOCK PLEDGE (this "AGREEMENT"), dated as of
July 3, 1997, is entered into by and between PROSPECT MEDICAL HOLDINGS, INC., a
Delaware corporation ("PLEDGOR"), and IMPERIAL BANK, a California banking
corporation ("PLEDGEE"), with reference to the following facts:
R E C I T A L S
A. Pledgor and Pledgee have entered into that certain Revolving
Credit Agreement, dated as of July 3, 1997 (as the same may be amended,
restated, modified or supplemented from time to time in accordance with its
terms, the "LOAN AGREEMENT").
B. Pledgor has agreed to provide additional security for its
obligations under the Loan Agreement by pledging to Pledgee all of Pledgor's
right, title and interest in and to the Collateral (as hereinafter defined), to
secure the Secured Obligations (as hereinafter defined).
A G R E E M E N T
NOW THEREFORE, in consideration of the mutual promises, covenants,
conditions, representations, and warranties hereinafter set forth and for other
good and valuable consideration, the parties hereto mutually agree as follows:
1. DEFINITIONS AND CONSTRUCTION.
(a) DEFINITIONS. All initially capitalized terms used but not
defined in this Agreement shall have the meanings ascribed to such terms in the
Loan Agreement. In addition, the following terms, as used in this Agreement,
have the following meanings:
"CERTIFICATED SECURITY, "ENDORSEMENT", "REGISTERED FORM",
"SECURITY", "SECURITY CERTIFICATE", and "UNCERTIFICATED SECURITY" have the
meanings ascribed to such terms in Division 8 of the Code.
"CODE" means the California Uniform Commercial Code, as
amended and supplemented from time to time, and any successor statute.
"COLLATERAL" means all of the following:
(i) One Thousand Six Hundred (1,600) shares of the
outstanding Common Stock of Company, which shares constitute one hundred percent
(100%) of the capital stock of Company, and all of the hereafter-acquired shares
of Common Stock of Company in which Pledgor has an interest at any time while
this Agreement is in effect (collectively, the "SHARES");
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(ii) All of Pledgor's presently existing and hereafter
arising stock subscription warrants, stock options, or other rights to purchase
Company's capital stock and all rights represented thereby (the "OPTIONS"); and
(iii) The proceeds of each of the foregoing, including any
and all dividends, cash, stock, instruments, and other property from time to
time received, receivable, or otherwise distributed in respect of or in exchange
for any of the Shares or Options (the "PROCEEDS").
"COMPANY" means Prospect Medical Systems, Inc., a Delaware
corporation.
"EVENT OF DEFAULT" has the meaning given to such term in
Section 11.
"SECURED OBLIGATIONS" means Obligations (as defined in the
Loan Agreement) and the obligations of Pledgor hereunder.
"'33 ACT" means the Securities Act of 1933, as amended and
supplemented from time to time, and any successor statute, and any and all rules
promulgated in connection therewith.
(b) CONSTRUCTION. Unless the context of this Agreement clearly
requires otherwise, references to the plural include the singular, references to
the singular include the plural, the part includes the whole, "including" is not
limiting, and "or" has the inclusive meaning represented by the phrase "and/or."
References in this Agreement to "determination" by Pledgee include reasonable
estimates (absent manifest error) by Pledgee, as applicable (in the case of
quantitative determinations) and reasonable beliefs (absent manifest error) by
Pledgee, as applicable (in the case of qualitative determinations). The words
"hereof," "herein," "hereby," "hereunder," and similar terms in this Agreement
refer to this Agreement as a whole and not to any particular provision of this
Agreement. Article, section, subsection, exhibit, and schedule references are
to this Agreement unless otherwise specified.
2. PLEDGE. As security for the prompt and complete payment and
performance of the Secured Obligations, Pledgor hereby delivers, pledges, and
grants to Pledgee a continuing security interest in all of Pledgor's now-owned
or hereafter-acquired right, title, and interest in and to the Collateral.
3. CONTROL OF COLLATERAL. Pledgor shall promptly deliver to Pledgee
any and all Certificated Securities comprising all or any portion of the
Collateral for Pledgee to hold pursuant to the terms hereof, and if such
Certificated Securities are in Registered Form, (i) such Certificated Securities
shall be endorsed in blank by an effective undated Endorsement, in form and
substance satisfactory to Pledgee in its sole and absolute discretion, or (ii)
Pledgor shall cause the Company or the Company's transfer agent to transfer such
Securities into the name of Pledgee and issue a replacement Security
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Certificate evidencing the same in the name of Pledgee. In the event that all
or any portion of the Collateral consists of Uncertificated Securities, Pledgor
shall cause the Company to enter into a control agreement with respect to such
Uncertificated Securities, in form and substance satisfactory to Pledgee in its
sole and absolute discretion.
4. FURTHER ASSURANCES. Pledgor agrees that it shall cooperate with
Pledgee and shall execute and deliver, or cause to be executed and delivered, to
Pledgee all stock powers, proxies, assignments, financing statements,
instruments, control agreements and other documents, and shall take all further
action, at the expense of Pledgor, from time to time requested by Pledgee, in
order to maintain a continuing, first-priority, perfected security interest in
the Collateral in favor of Pledgee, and to enable Pledgee to exercise and
enforce its rights and remedies hereunder with respect to the Collateral, and
Pledgor agrees that it shall execute and deliver to Pledgee at Pledgee's request
any further applications, agreements, documents and instruments, and shall
perform any and all acts deemed necessary by Pledgee to carry into effect the
terms, conditions, and provisions of this Agreement and the transactions
connected herewith. Should Pledgor fail to execute or deliver any such
applications, agreements, documents, financing statements and instruments, or to
perform any such acts, Pledgor acknowledges that Pledgee may execute and deliver
the same and perform such acts in the name of Pledgor and on its behalf as its
attorney-in-fact in accordance with Section 13.
5. PLEDGEE'S DUTIES. Pledgee shall not have any duties with respect
to the Collateral other than the duty to use reasonable care if the Collateral
is in its possession. In accordance with Section 9207 of the Code, Pledgee
shall be deemed to have used reasonable care if it observes substantially the
same standard of care with respect to the custody or preservation of the
Collateral as it observes with respect to similar assets owned by Pledgee.
Without limiting the generality of the foregoing, Pledgee shall be under no
obligation to take any steps necessary to preserve rights in the Collateral
against any other parties, to sell the same if it threatens to decline in value,
or to exercise any rights represented thereby (including rights with respect to
calls, conversions, exchanges, maturities, or tenders); PROVIDED, HOWEVER, that
Pledgee may, at its option, do so, and any and all expenses incurred in
connection therewith shall be for the account of Pledgor.
6. VOTING RIGHTS; DIVIDENDS; ETC.
6.1 During the term of this Agreement, and as long as no Event
of Default is continuing:
(a) Pledgor shall be entitled to exercise any and all
voting and other consensual rights pertaining to the Shares or any part thereof;
PROVIDED, HOWEVER, no vote shall be cast or any consent, waiver or ratification
given or any action taken which would violate or be inconsistent with the terms
of this Agreement, the Loan Agreement or any other instrument or agreement
referred to therein or herein, or which could have the effect of impairing the
value of the Collateral or any part thereof or the position or interest of
Pledgee therein.
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(b) Pledgor shall be entitled to receive and retain any and
all dividends and distributions paid in respect of the Shares not otherwise
prohibited by the Loan Agreement; PROVIDED, HOWEVER, that any and all:
(i) dividends and distributions paid or payable
other than in cash in respect of, and any and all additional Shares or
instruments or other property received, receivable, or otherwise distributed in
respect of, or in exchange for, any Shares;
(ii) dividends and distributions paid or payable in
cash in respect of any Shares in connection with a partial or total liquidation
or dissolution, merger, consolidation of the Company, or any exchange of stock,
conveyance of assets, or similar corporate reorganization; and
(iii) cash paid with respect to, payable, or
otherwise distributed on redemption of, or in exchange for, any Shares,shall be
forthwith delivered to Pledgee to hold as Collateral and shall, if received by
Pledgor, be received in trust for the benefit of Pledgee, be segregated from the
other property or funds of Pledgor, and be forthwith delivered to Pledgee as
Collateral in the same form as so received (with any necessary endorsement),
and, if deemed appropriate by Pledgee, Pledgor shall take such actions,
including the actions described in Section 2, as Pledgee may require.
6.2 Upon the occurrence of an Event of Default or if any amounts
shall be due and payable (whether by acceleration, maturity, or otherwise) under
any of the Secured Obligations, all rights of Pledgor to exercise the voting and
other consensual rights that it would otherwise be entitled to exercise pursuant
to Section 6.1(a) and to receive the dividends and distributions that it would
otherwise be authorized to receive and retain pursuant to Section 5.1(b) shall,
at Pledgee's option, cease, and all such rights shall, at Pledgee's option,
thereupon become vested in Pledgee, and Pledgee shall, at its option, thereupon
have the sole right to exercise such voting and other consensual rights and to
receive and hold as Collateral such dividends and interest payments. Any
payments received by Pledgor contrary to the provisions of this Section 6.2
shall be held in trust by Pledgor for the benefit of Pledgee, shall be
segregated from other funds of Pledgor, and shall be promptly paid over to
Pledgee, with any necessary endorsement.
7. REPRESENTATIONS, WARRANTIES, AND COVENANTS. In order to induce
Pledgee to enter into the Loan Agreement and make and continue to make Loans to
Pledgor, Pledgor hereby warrants, represents, and covenants that:
7.1 There are no restrictions upon the transfer of any of the
Collateral to or by Pledgee and Pledgor is the sole beneficial owner of the
Collateral and has the right to pledge and grant a security interest in or
otherwise transfer such Collateral free of any encumbrances or rights of third
Persons.
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7.2 All of the Collateral is and shall remain free from all
Liens except as created hereby. Pledgor shall not, without Pledgee's prior
written consent, sell or otherwise dispose of any of the Collateral.
7.3 The execution and delivery of this Agreement, and the
completion of the actions described in Section 3, creates a valid, perfected and
first-priority security interest in the Collateral in favor of Pledgee, and all
actions necessary or desirable to such perfection have been duly taken.
7.4 No authorization or other action by, and no notice to or
filing with, any Governmental Authority is required either: (a) for the grant
by Pledgor of the security interest granted hereby or for the execution,
delivery, or performance of this Agreement by Pledgor; (b) for the perfection of
or exercise by Pledgee of its rights and remedies hereunder except as may be
required in connection with a disposition of the Collateral by laws affecting
the offering and sale of securities generally; or (c) for the exercise by
Pledgee of the voting or other rights provided for in this Agreement or the
remedies in respect of the Collateral pursuant to this Agreement except as may
be required in connection with a disposition of the Collateral by laws affecting
the offering and sale of securities generally.
7.5 The pledge of the Collateral pursuant to this Agreement, and
the making of the loans in accordance with the terms of the Loan Agreement, does
not violate Regulation G, T, U, or X of the Board of Governors of the Federal
Reserve System.
7.6 The Company presently has issued and outstanding One
Thousand Six Hundred (1,600) shares of Common Stock of which one hundred percent
(100%) is owned by Pledgor and they constitute, respectively, all of the capital
stock of Company and the Shares referenced herein.
7.7 There are no presently existing Options.
7.8 All of the outstanding Shares have been duly and validly
issued by the Company, and they are fully paid and nonassessable.
7.9 Pledgor has made its own arrangements for keeping informed
of changes or potential changes affecting the Collateral (including, but not
limited to, rights to convert, rights to subscribe, payment of dividends,
reorganization or other exchanges, tender offers, and voting rights), and
Pledgor agrees that Pledgee shall not have any responsibility or liability for
informing Pledgor of any such changes or potential changes or for taking any
action or omitting to take any action with respect thereto.
7.10 Pledgor shall at all times keep its books and records
concerning the Collateral at its chief executive office. Pledgor shall not
change the location of its chief executive office without giving Pledgee at
least thirty (30) days' prior written notice thereof.
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7.11 Pledgor shall prevent the Company from issuing any
additional Shares or Options.
8. SHARE ADJUSTMENTS. In the event that during the term of this
Agreement any reclassification, readjustment, or other change is declared or
made in the capital structure of any Company, Pledgor shall give Pledgee prompt
written notice thereof and all new substituted and additional shares or other
Securities, issued or issuable to Pledgor by reason of any such change or
exercise shall be subject to the security interest created hereby and Pledgor
shall as soon as practicable but in no event more than 10 days thereafter, take
all of the actions required under Section 3 with respect thereto.
9. OPTIONS. In the event that during the term of this Agreement
Options shall be issued or exercised in connection with the Collateral, Pledgor
shall give Pledgee prompt written notice thereof and such Options acquired by
Pledgor shall be immediately assigned by Pledgor to Pledgee pursuant to an
assignment agreement in form and substance satisfactory to Pledgee in its sole
and absolute discretion, and all new shares or other Securities so acquired by
Pledgor shall also be subject to the security interest created hereby and
Pledgor shall as soon as practicable but in no event more than 10 days
thereafter, take all of the actions required under Section 3 with respect
thereto.
10. CONSENT. Pledgor hereby consents that, from time to time, before
or after the occurrence or existence of any Event of Default with or without
notice to or assent from Pledgor, any other security at any time held by or
available to Pledgee for any of the Secured Obligations or any other security at
any time held by or available to Pledgee of any other person, firm, or
corporation secondarily or otherwise liable for any of the Secured Obligations,
may be exchanged, surrendered, or released and any of the Secured Obligations
may be changed, altered, renewed, extended, continued, surrendered, compromised,
waived, or released, in whole or in part, as Pledgee may see fit. Pledgor shall
remain bound under this Agreement notwithstanding any such exchange, surrender,
release, alteration, renewal, extension, continuance, compromise, waiver, or
inaction, or extension of further credit.
11. EVENTS OF DEFAULT. The occurrence of an Event of Default under
the Loan Agreement shall constitute an event of default ("EVENT OF DEFAULT")
under this Agreement.
12. REMEDIES UPON DEFAULT.
12.1 Upon the occurrence of an Event of Default, Pledgee shall
have, in addition to any other rights given by law or in this Agreement, in the
Loan Agreement, or in any other agreement between Pledgee and Pledgor, all of
the rights and remedies with respect to the Collateral of a secured party under
the Code, and also shall have, without limitation, the following rights, which
Pledgor hereby agrees to be commercially reasonable:
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(a) to receive all amounts payable in respect of the
Collateral to Pledgor under Section 6.1(b) hereof;
(b) to register all or any part of the Collateral on the
books of the Company in Pledgee's name or the name of its nominee or nominees;
(c) to vote all or any part of the Shares (whether or not
transferred into the name of the Pledgee) in accordance with Section 6.2 hereof,
and give all consents, waivers and ratifications in respect of the Collateral
and otherwise act with respect thereto as though it were the outright owner
thereof; PLEDGOR HEREBY IRREVOCABLY CONSTITUTES AND APPOINTS PLEDGEE THE PROXY
AND ATTORNEY-IN-FACT OF PLEDGOR, COUPLED WITH AN INTEREST, WITH FULL POWER OF
SUBSTITUTION FOR ANY AND ALL OF SUCH PURPOSES; WHICH PROXY AND POWER OF
ATTORNEY SHALL CONTINUE IN FULL FORCE AND EFFECT AND TERMINATE UPON THE EARLIER
TO OCCUR OF (a) UPON THE INDEFEASIBLE PAYMENT IN FULL OF THE SECURED
OBLIGATIONS, AND (b) TEN (10) YEARS FROM THE DATE HEREOF.
(d) at any time or from time to time, to sell, assign and
deliver, or grant options to purchase, all or any part of the Collateral, or any
interest therein, at any public or private sale, without demand of performance,
advertisement or notice of intention to sell or of the time or place of sale or
adjournment thereof or to redeem or otherwise (all of which are hereby waived by
Pledgor), for cash, on credit or for other property, for immediate or future
delivery without any assumption of credit risk, and for such price or prices and
on such terms as the Pledgee in its absolute discretion may determine; PROVIDED,
that at least five (5) days notice of the time and place of any such sale shall
be given to Pledgor. Pledgee shall not be obligated to make any such sale of
Collateral regardless of whether any such notice of sale has therefore been
given. Pledgor hereby waives any other requirement of notice, demand, or
advertisement for sale, to the extent permitted by law. Pledgor hereby waives
and releases to the fullest extent permitted by law any right or equity of
redemption with respect to the Collateral, whether before or after sale
hereunder, and all rights, if any, of marshalling the Collateral and any other
security for the Secured Obligations or otherwise. At any such sale, unless
prohibited by applicable law, Pledgee may bid for and purchase all or any part
of the Collateral so sold free from any such right or equity of redemption.
Pledgee shall not be liable for failure to collect or realize upon any or all of
the Collateral or for any delay in so doing nor shall Pledgee be under any
obligation to take any action whatsoever with regard thereto;
(e) to buy the Collateral, in its own name, or in the name
of a designee or nominee. Pledgee shall have the right to execute any document
or form, in its name or in the name of the Pledgor, that may be necessary or
desirable in connection with such sale of the Collateral.
(f) to sell all or any part of the Collateral by a private
placement, restricting bidders and prospective purchasers to those who will
represent and agree that they are purchasing for investment only and not for
distribution. In so doing,
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Pledgee may solicit offers to buy the Collateral, or any part of it for cash,
from a limited number of investors deemed by Pledgee, in its reasonable
judgment, to be responsible parties who might be interested in purchasing the
Collateral. If Pledgee shall solicit such offers from not less than four (4)
such investors, then the acceptance by Pledgee of the highest offer obtained
therefore shall be deemed to be a commercial reasonable method of disposition of
such Collateral, even though the sales price established and/or obtained may be
substantially less than the price that would be obtained pursuant to a public
offering. Notwithstanding the foregoing, should Pledgee determine that, prior
to any public offering of any securities contained in the Collateral, such
securities should be registered under the '33 Act and/or registered or qualified
under any other federal or state law, and that such registration and/or
qualification is not practical, Pledgor agrees that it will be commercially
reasonable if a private sale is arranged so as to avoid a public offering even
if offers are solicited from fewer than four (4) investors, and even though the
sales price established and/or obtained may be substantially less than the price
that would be obtained pursuant to a public offering.
13. PLEDGEE AS PLEDGOR'S ATTORNEY-IN FACT. Pledgor hereby
irrevocably appoints Pledgee as its attorney-in-fact, coupled with an interest,
(i) to arrange for the register, at any time after the occurrence of an Event of
Default, of the Collateral on the books of the Company to the name of Pledgee or
to the name of Pledgee's nominee and (ii) to receive, endorse and collect all
instruments made payable to Pledgor of any dividend, distribution or other
payment on account of the Collateral, or any part thereof, and to give full
discharge for the same and to execute and file governmental notifications and
reporting forms. Pledgor hereby further authorizes Pledgee to perform any and
all acts which Pledgee deems necessary for the protection and preservation of
the Collateral or of the value of Pledgee's security interest therein, including
but not limited to receiving income thereon as additional security hereunder,
and all expenses paid or incurred by Pledgee in connection therewith shall
constitute Bank Expenses. Pledgor hereby further grants to Pledgee a power of
attorney coupled with an interest to execute all agreements, forms,
applications, documents and instruments and to take all actions and do all
things as could be executed, taken, or done by Pledgor in connection with the
protection and preservation of the Collateral or this Agreement. This power of
attorney is irrevocable and authorizes Pledgee to act for Pledgor in connection
with the matters described herein without notice to or demand upon Pledgor.
14. GENERAL PROVISIONS.
14.1 CUMULATIVE REMEDIES; NO PRIOR RECOURSE TO COLLATERAL. The
enumeration herein of Pledgee's rights and remedies is not intended to be
exclusive, and such rights and remedies are in addition to and not by way of
limitation of any other rights or remedies that the Pledgee may have under the
Loan Agreement, the Loan Documents, the Code, or other applicable law. Pledgee
shall have the right, in its sole discretion, to determine which rights and
remedies are to be exercised and in which order. The exercise of one right or
remedy shall not preclude the exercise of any others, all of which shall be
cumulative.
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14.2 NO IMPLIED WAIVERS. No act, failure, or delay by Pledgee
shall constitute a waiver of any of its rights and remedies. No single or
partial waiver by Pledgee of any provision of this Agreement or any other Loan
Document, or of a breach or default hereunder or thereunder, or of any right or
remedy which the Pledgee may have, shall operate as a waiver of any other
provision, breach, default, right, or remedy or of the same provision, breach,
default, right, or remedy on a future occasion. No waiver by Pledgee shall
affect its rights to require strict performance of this Agreement.
14.3 NOTICES. All notices or demands by any party hereto to the
other party and relating to this Agreement shall be sent in accordance with the
terms of Section 9.1 of the Loan Agreement.
14.4 SUCCESSORS AND ASSIGNS. This Agreement shall bind the
successors and assigns of Pledgor, and shall inure to the benefit of the
successors and assigns of Pledgee; PROVIDED, HOWEVER, that Pledgor may not
assign this Agreement nor delegate any of its duties hereunder without Pledgee's
prior written consent and any prohibited assignment shall be absolutely void.
Pledgee may assign this Agreement and its rights and duties hereunder and no
consent or approval by Pledgor is required in connection with any such
assignment. Pledgee reserves the right to sell, assign, transfer, negotiate, or
grant participations in all or any part of, or any interest in Pledgee's rights
and benefits hereunder. In connection with any such assignment or
participation, Pledgee may disclose all documents and information which Pledgee
now or hereafter may have relating to Pledgor or Pledgor's business to any
prospective or actual Transferee, subject to the terms of Section 9.5(e) of the
Loan Agreement.
14.5 EXHIBITS AND SCHEDULES. All of the exhibits and schedules
attached hereto shall be deemed incorporated by reference.
14.6 NO PRESUMPTION AGAINST ANY PARTY. Neither this Agreement
nor any uncertainty or ambiguity herein shall be construed or resolved against
Pledgor or Pledgee, whether under any rule of construction or otherwise. On the
contrary, this Agreement has been reviewed by each of the parties and their
counsel and shall be construed and interpreted according to the ordinary meaning
of the words used so as to accomplish fairly the purposes and intentions of all
parties hereto.
14.7 SECTION HEADINGS. Headings and numbers have been set forth
herein for convenience only. Unless the contrary is compelled by the context,
everything contained in each section applies equally to this entire Agreement.
14.8 SEVERABILITY OF PROVISIONS. If any provision of this
Agreement is for any reason held to be invalid, illegal or unenforceable in any
respect, that provision shall not affect the validity, legality or
enforceability of any other provision of this Agreement.
14.9 ENTIRE AGREEMENT; AMENDMENTS AND WAIVERS. This Agreement
constitutes the entire agreement between Pledgor and Pledgee pertaining to the
subject
9
<PAGE>
matter contained herein. Any provision of this Agreement may be amended or
waived if, but only if, such amendment or waiver is in writing and is signed by
the party asserted to be bound thereby, and then such amendment or waiver shall
be effective only in the specific instance and specific purpose for which given.
14.10 COUNTERPARTS; TELEFACSIMILE EXECUTION. This Agreement
may be executed in any number of counterparts and by different parties on
separate counterparts, each of which, when executed and delivered, shall be
deemed to be an original, and all of which, when taken together, shall
constitute but one and the same Agreement. Delivery of an executed counterpart
of this Agreement by telefacsimile shall be equally as effective as delivery of
a manually executed counterpart of this Agreement. Any party delivering an
executed counterpart of this Agreement by telefacsimile also shall deliver a
manually executed counterpart of this Agreement but the failure to deliver a
manually executed counterpart shall not affect the validity, enforceability, and
binding effect of this Agreement.
14.11 TERMINATION BY PLEDGEE. After termination of the Loan
Agreement and when Pledgee has received payment and performance, in full, of the
Secured Obligations, Pledgee shall execute and deliver to Pledgor a termination
of all of the security interests granted by Pledgor hereunder and, to the extent
they have been delivered to Pledgee and not disposed of in accordance with this
Agreement, certificates evidencing the Shares.
15. GOVERNING LAW; JUDICIAL REFERENCE.
15.1 GOVERNING LAW. This Agreement shall be deemed to have been
made in the State of California and the validity, construction, interpretation,
and enforcement hereof, and the rights of the parties hereto, shall be
determined under, governed by, and construed in accordance with the internal
laws of the State of California, without regard to principles of conflicts of
law.
15.2 JUDICIAL REFERENCE.
(a) Other than (i) nonjudicial foreclosure and all matters
in connection therewith regarding security interests in real or personal
property; or (ii) the appointment of a receiver, or the exercise of other
provisional remedies (any and all of which may be initiated pursuant to
applicable law), each controversy, dispute or claim between the parties arising
out of or relating to this Agreement, which controversy, dispute or claim is not
settled in writing within thirty (30) days after the "CLAIM DATE" (defined as
the date on which a party subject to this Agreement gives written notice to all
other parties that a controversy, dispute or claim exists), will be settled by a
reference proceeding in California in accordance with the provisions of Section
638 ET SEQ. of the California Code of Civil Procedure, or their successor
section ("CCP"), which shall constitute the exclusive remedy for the settlement
of any controversy, dispute or claim concerning this Agreement, including
whether such controversy, dispute or claim is subject to the reference
proceeding and except as set forth above, the parties waive their rights to
initiate any legal proceedings against each other in any court or jurisdiction
other than the Superior Court in the County
10
<PAGE>
where the Real Property, if any, is located or Los Angeles County if none (the
"COURT"). The referee shall be a retired Judge of the Court selected by mutual
agreement of the parties, and if they cannot so agree within forty-five (45)
days after the Claim Date, the referee shall be promptly selected by the
Presiding Judge of the Court (or his representative). The referee shall be
appointed to sit as a temporary judge, with all of the powers for a temporary
judge, as authorized by law, and upon selection should take and subscribe to the
oath of office as provided for in Rule 244 of the California Rules of Court (or
any subsequently enacted Rule). Each party shall have one peremptory challenge
pursuant to CCP Section 170.6. The referee shall (a) be requested to set the
matter for hearing within sixty (60) days after the date of selection of the
referee and (b) try any and all issues of law or fact and report a statement of
decision upon them, if possible, within ninety (90) days of the Claim Date. Any
decision rendered by the referee will be final, binding and conclusive and
judgment shall be entered pursuant to CCP Section 644 in any court in the State
of California having jurisdiction. Any party may apply for a reference
proceeding at any time after thirty (30) days following notice to any other
party of the nature of the controversy, dispute or claim, by filing a petition
for a hearing and/or trial. All discovery permitted by this Agreement shall be
completed no later than fifteen (15) days before the first hearing date
established by the referee. The referee may extend such period in the event of
a party's refusal to provide requested discovery for any reason whatsoever,
including, without limitation, legal objections raised to such discovery or
unavailability of a witness due to absence or illness. No party shall be
entitled to "priority" in conducting discovery. Depositions may be taken by
either party upon seven (7) days written notice, and request for production or
inspection of documents shall be responded to within ten (10) days after
service. All disputes relating to discovery which cannot be resolved by the
parties shall be submitted to the referee whose decision shall be final and
binding upon the parties. Pending appointment of the referee as provided
herein, the Superior Court is empowered to issue temporary and/or provisional
remedies, as appropriate.
(b) Except as expressly set forth in this Agreement, the
referee shall determine the manner in which the reference proceeding is
conducted including the time and place of all hearings, the order of
presentation of evidence, and all other questions that arise with respect to the
course of the reference proceeding. All proceedings and hearings conducted
before the referee, except for trial, shall be conducted without a court
reporter except that when any party so requests, a court reporter will be used
at any hearing conducted before the referee. The party making such a request
shall have the obligation to arrange for and pay for the court reporter. The
costs of the court reporter at the trial shall be borne equally by the parties.
(c) The referee shall be required to determine all issues
in accordance with existing case law and the statutory laws of the State of
California. The rules of evidence applicable to proceedings at law in the State
of California will be applicable to the reference proceeding. The referee shall
be empowered to enter equitable as well as legal relief, to provide all
temporary and/or provisional remedies and to enter equitable orders that will be
binding upon the parties. The referee shall issue a single judgment at the
close of the reference proceeding which shall dispose of all of the claims of
the parties that are the subject of the reference. The parties hereto expressly
reserve the
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<PAGE>
right to contest or appeal from the final judgment or any appealable order or
appealable judgment entered by the referee. The parties hereto expressly
reserve the right to findings of fact, conclusions of laws, a written
statement of decision, and the right to move for a new trial or a different
judgment, which new trial, if granted, is also to be a reference proceeding
under this provision.
(d) In the event that the enabling legislation which
provides for appointment of a referee is repealed (and no successor statute is
enacted), any dispute between the parties that would otherwise be determined by
the reference procedure herein described will be resolved and determined by
arbitration. The arbitration will be conducted by a retired judge of the Court,
in accordance with the California Arbitration Act, Section 1280 through Section
1294.2 of the CCP as amended from time to time. The limitations with respect to
discovery as set forth hereinabove shall apply to any such arbitration
proceeding.
IN WITNESS WHEREOF, the parties have executed this Agreement on the
date first written above.
"PLEDGOR"
PROSPECT MEDICAL HOLDINGS, INC.,
a Delaware corporation
By: /s/ Jacob Y. Terner, M.D.
-----------------------------
Title: CEO
---------------------
"Pledgee"
IMPERIAL BANK,
a California banking corporation
By: /s/ Mark W. Campbell
-----------------------------
Title: SVP
---------------------
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<PAGE>
CONTROL AGREEMENT
Prospect Medical Systems, Inc., a Delaware corporation ("COMPANY")
hereby acknowledges the terms of the foregoing Security Agreement - Stock Pledge
(the "AGREEMENT"), dated as of July 3, 1997, by and between Prospect Medical
Holdings, Inc., a Delaware corporation ("PLEDGOR"), and Imperial Bank, a
California banking corporation ("PLEDGEE"). Company agrees that it will comply
with all instructions from Pledgee with respect to transfers of all or any part
of the Collateral (as defined in the Agreement), whether by sale or otherwise,
without further consent from Pledgor. Company further acknowledges and agrees
that it has received a copy of the Agreement and has registered the pledge of
the Collateral (as defined in the Agreement) in the name of Pledgee. Company
acknowledges that, in entering into the Loan Agreement (as defined in the
Agreement), Pledgee is relying on the Agreement and on Company's agreement
herein; and Company agrees that any offset or claim Company may now or hereafter
have against Pledgor (or against Pledgor's interests, claims or rights) shall be
subordinate to the claims, rights and interests of Pledgee under the Agreement.
The signatories below hereby represent and warrant to Pledgee that they are duly
authorized to execute and deliver this Control Agreement to Pledgee and thereby
bind the Company as set forth herein.
Dated: July 3, 1997 PROSPECT MEDICAL SYSTEMS, INC.,
a Delaware corporation
By: /s/ Jacob Y. Terner, M.D.
----------------------------
Title: CEO
--------------------
13
<PAGE>
COLLATERAL ASSIGNMENT OF TRANSACTION DOCUMENTS
THIS COLLATERAL ASSIGNMENT OF TRANSACTION DOCUMENTS (this
"ASSIGNMENT") has been executed and delivered as of July 3, 1997, by and between
PROSPECT MEDICAL SYSTEMS, INC., a Delaware corporation ("ASSIGNOR"), and
IMPERIAL BANK, a California banking corporation ("BANK"), with reference to the
following facts:
R E C I T A L S
A. Assignor is a party to certain transaction documents pursuant to
which, among other things, Assignor acquired or will acquire the non-medical
assets of Prospect Medical Group, a California professional medical corporation
("PHYSICIAN GROUP"), and provides management services to Physician Group.
B. Assignor is contemporaneously herewith executing that certain
Continuing Guaranty, dated as of July 3, 1997, in favor of Bank (as the same may
be amended, restated, supplemented or otherwise modified from time to time, the
"GUARANTY") pursuant to which Assignor guarantees the Guaranteed Obligations (as
defined in the Guaranty), including, without limitation, all obligations,
indebtedness and liabilities owed by Prospect Medical Holdings, Inc., a Delaware
corporation ("BORROWER") to Bank under that certain Revolving Credit Agreement,
dated as of July 3, 1997 (as the same may be amended, restated, supplemented or
otherwise modified from time to time, the "LOAN AGREEMENT").
C. Assignor has executed and delivered that certain Security
Agreement, dated as of even date with the Guaranty ("SECURITY AGREEMENT"), in
order to secure the Guaranteed Obligations.
D. Assignor has agreed to execute and deliver this Assignment to
Bank in order to supplement the terms of the Security Agreement with respect to
the Transaction Documents (as hereinafter defined).
E. Assignor is a wholly-owned subsidiary of Borrower which will
directly and materially benefit from the Loans made by Bank to Borrower under
the Loan Agreement, and Assignor acknowledges that Bank would not enter into the
Loan Agreement absent Assignor's agreements under the Guaranty, the Security
Agreement and hereunder.
A G R E E M E N T
In consideration of the premises and the mutual agreements herein set
forth, Assignor and Bank hereby agree as follows:
1
<PAGE>
1. DEFINED TERMS. All initially capitalized terms used but not
defined herein shall have the meanings assigned to such terms in the Guaranty.
2. ASSIGNMENT. As additional security for the Guaranteed
Obligations, Assignor hereby collaterally assigns and transfers to Bank, and
acknowledges that pursuant to the Security Agreement Assignor has granted to
Bank a security interest in:
2.1 TRANSACTION DOCUMENTS. All of Assignor's right, title and
interest in and to the following documents (collectively, the "TRANSACTION
DOCUMENTS"):
(a) Management Services Agreement, dated as of June 4,
1996, as amended on or about the date hereof, executed by and between Assignor
and Physician Group;
(b) Assignable Option Agreement, dated as of June 5, 1996,
by and among Assignor, Physician Group and Gregg DeNicola, M.D.; and
(d) Security Agreement, dated as of July 3, 1997, executed
by and between Assignor and Physician Group, together with UCC-1 Financing
Statements with respect thereto ("PHYSICIAN GROUP SECURITY AGREEMENT").
2.2 RIGHTS AND REMEDIES. All of the rights, benefits, remedies,
privileges and claims of Assignor with respect to the Transaction Documents
(collectively, the "RIGHTS AND REMEDIES"), including, without limitation, (i)
all rights to monies or payments owing to Assignor under the Transaction
Documents, and any and all security therefor and for all other obligations owing
to Assignor thereunder, (ii) any right that Assignor may have to indemnification
under the Transaction Documents, (iii) all Rights and Remedies of Assignor with
respect to any breach of the representations, warranties and covenants set forth
in the Purchase Agreement, and (iv) the proceeds thereof (the Transaction
Documents and the Rights and Remedies are collectively referred to herein as,
the "COLLATERAL").
3. RIGHT AND REMEDIES GENERALLY. Prior to the occurrence of a
breach or default of any of the agreements, covenants and obligations of
Assignor under the Guaranty (a "DEFAULT"), Assignor will enforce all of its
Rights and Remedies diligently and in good faith. Effective from and after the
occurrence of a Default, Assignor hereby irrevocably authorizes and empowers
Bank, in Bank's own discretion, to assert as Bank may deem proper, either
directly or on behalf of Assignor, any of the Rights and Remedies which Assignor
may from time to time have under the Transaction Documents, and to receive and
collect all damages, awards and other monies resulting therefrom and to apply
the same on account of any of the Guaranteed Obligations.
4. FURTHER ASSURANCES. Assignor shall execute and deliver to Bank
concurrently with Assignor's execution of this Assignment, and from time to time
at the request of Bank, all financing statements, continuation financing
statements, fixture filings,
2
<PAGE>
security agreements, chattel mortgages, assignments, and all other documents
that Bank may request, in form satisfactory to Bank, to perfect and maintain
perfected Bank's security interests in the Collateral and in order to consummate
fully all of the transactions contemplated by this Assignment.
5. TRANSACTION DOCUMENTS. Concurrent herewith, Assignor is
delivering to Bank possession of the original Transaction Documents, together
with any and all amendments thereto, as in effect on the date hereof, including
the Note and Physician Group Security Agreement, duly endorsed to Bank pursuant
to an allonge in form and substance satisfactory to Bank, to hold in accordance
with the terms of the Security Agreement until the Security Agreement is
terminated in accordance with its terms.
6. ATTORNEY-IN-FACT. Assignor hereby irrevocably makes,
constitutes, and appoints Bank (and Bank's officers, employees, or agents) as
Assignor's true and lawful agent and attorney-in-fact for the purposes of
enabling Bank or its agent(s) after the occurrence of a Default to (a) assert
such Rights and Remedies and to collect such damages, awards and other monies
and to apply them in the manner set forth hereinabove, and (b) to sign the name
of Assignor on any documents which need to be executed, recorded, or filed, and
to do any and all things necessary in the name and on behalf of Assignor in
order to protect Bank's interests in the Transaction Documents. Assignor agrees
that neither Bank, nor any of its designers or attorneys-in-fact, will be liable
for any act of commission or omission, or for any error of judgment or mistake
of fact or law with respect to the exercise of the power of attorney granted
under this Section 6, other than as a result of its or their gross negligence or
wilful misconduct. The power of attorney granted under this Section 6 is
coupled with an interest and shall be irrevocable until all of the Guaranteed
Obligations have been paid in full, the Guaranty terminated, and Assignor's
duties under this Assignment have been discharged in full.
7. MODIFICATION OF RIGHTS AND REMEDIES. Assignor shall keep Bank
informed of all circumstances bearing upon the Rights and Remedies and shall
immediately provide Bank with copies of any notices delivered to Assignor in
connection with the Transaction Documents. Assignor shall also provide Bank
with a copy of any notice sent by Assignor in connection with the Transaction
Documents, concurrently with the sending of any such notice. Assignor shall not
waive, amend, alter or modify any of the Rights and Remedies in any material
respect without the prior written consent of Bank. Assignor shall not, without
Bank's prior written consent, amend, alter, modify or terminate any of the
Transaction Documents, or waive any of the provisions thereof, or do or permit
any act in contravention thereof.
8. ASSIGNOR TO REMAIN LIABLE. Notwithstanding the foregoing,
Assignor expressly acknowledges and agrees that it shall remain liable under the
Transaction Documents to observe and perform all of the conditions and
obligations in the Transaction Documents which Assignor is bound to observe and
perform, and that neither this Assignment, nor any action taken pursuant hereto,
shall cause Bank to be under any obligation or liability in any respect
whatsoever to observe or perform any of the
3
<PAGE>
representations, warranties, conditions, covenants, agreements or terms of the
Transaction Documents.
9. COUNTERPARTS; EFFECTIVENESS. This Assignment may be executed in
any number of counterparts, each of which, when executed and delivered, shall be
deemed to be an original. All of such counterparts, taken together, shall
constitute but one and the same agreement. This Assignment shall become
effective upon the execution of a counterpart of this Assignment by each of the
parties hereto.
10. NOTICES. All notices, requests and other communications to any
party hereunder shall be sent in accordance with Section 15 of the Guaranty.
11. MODIFICATIONS AND AMENDMENTS. This Assignment shall not be
changed orally but shall be changed only by agreement in writing signed by
Assignor and Bank. No course of dealing between the parties, no usage of trade
and no parole or extrinsic evidence of any nature shall be used to supplement or
modify any of the terms or provisions of this Assignment.
12. SEVERABILITY. If any provision of this Assignment is held to be
illegal, invalid or unenforceable under present or future laws, the legality,
validity and enforceability of the remaining provisions of this Assignment shall
not be affected thereby, and this Assignment shall be liberally construed so as
to carry out the intent of the parties to it.
13. GOVERNING LAW; SUCCESSORS AND ASSIGNS; ENTIRE AGREEMENT. This
Assignment (a) shall be governed and construed according to the laws of the
State of California, without regard to principles of conflicts of law; (b) shall
be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns; and (c) embodies the entire agreement and
understanding between the parties with respect to the subject matter hereof and
supersedes all prior agreements, consents and understandings relating to such
subject matter.
14. JUDICIAL REFERENCE.
14.1 REFERENCE PROCEEDING. Other than (i) nonjudicial
foreclosure and all matters in connection therewith regarding security interests
in real or personal property; or (ii) the appointment of a receiver, or the
exercise of other provisional remedies (any and all of which may be initiated
pursuant to applicable law), each controversy, dispute or claim between the
parties arising out of or relating to this Assignment, which controversy,
dispute or claim is not settled in writing within thirty (30) days after the
"CLAIM DATE" (defined as the date on which either Assignor or Bank gives written
notice to the other that a controversy, dispute or claim exists), will be
settled by a reference proceeding in California in accordance with the
provisions of Section 638 ET SEQ. of the California Code of Civil Procedure, or
their successor section ("CCP"), which shall constitute the exclusive remedy for
the settlement of any controversy, dispute or claim
4
<PAGE>
concerning this Assignment, including whether such controversy, dispute or claim
is subject to the reference proceeding and except as set forth above, the
parties waive their rights to initiate any legal proceedings against each other
in any court or jurisdiction other than the Superior Court in Los Angeles County
(the "COURT"). The referee shall be a retired Judge of the Court selected by
mutual agreement of the parties, and if they cannot so agree within forty-five
(45) days after the Claim Date, the referee shall be promptly selected by the
Presiding Judge of the Court (or his representative). The referee shall be
appointed to sit as a temporary judge, with all of the powers for a temporary
judge, as authorized by law, and upon selection should take and subscribe to the
oath of office as provided for in Rule 244 of the California Rules of Court (or
any subsequently enacted Rule). Each party shall have one peremptory challenge
pursuant to CCP Section 170.6. The referee shall (a) be requested to set the
matter for hearing within sixty (60) days after the date of selection of the
referee and (b) try any and all issues of law or fact and report a statement of
decision upon them, if possible, within ninety (90) days of the Claim Date. Any
decision rendered by the referee will be final, binding and conclusive and
judgment shall be entered pursuant to CCP Section 644 in any court in the State
of California having jurisdiction. Any party may apply for a reference
proceeding at any time after thirty (30) days following notice to any other
party of the nature of the controversy, dispute or claim, by filing a petition
for a hearing and/or trial. All discovery permitted by this Assignment shall be
completed no later than fifteen (15) days before the first hearing date
established by the referee. The referee may extend such period in the event of
a party's refusal to provide requested discovery for any reason whatsoever,
including, without limitation, legal objections raised to such discovery or
unavailability of a witness due to absence or illness. No party shall be
entitled to "priority" in conducting discovery. Depositions may be taken by
either party upon seven (7) days written notice, and request for production or
inspection of documents shall be responded to within ten (10) days after
service. All disputes relating to discovery which cannot be resolved by the
parties shall be submitted to the referee whose decision shall be final and
binding upon the parties. Pending appointment of the referee as provided
herein, the Court is empowered to issue temporary and/or provisional remedies,
as appropriate.
14.2 MANNER OF REFERENCE PROCEEDING. Except as expressly set
forth in this Assignment, the referee shall determine the manner in which the
reference proceeding is conducted including the time and place of all hearings,
the order of presentation of evidence, and all other questions that arise with
respect to the course of the reference proceeding. All proceedings and hearings
conducted before the referee, except for trial, shall be conducted without a
court reporter except that when any party so requests, a court reporter will be
used at any hearing conducted before the referee. The party making such a
request shall have the obligation to arrange for and pay for the court reporter.
The costs of the court reporter at the trial shall be borne equally by the
parties.
14.3 DUTIES OF REFEREE. The referee shall be required to
determine all issues in accordance with existing case law and the statutory laws
of the State of California. The rules of evidence applicable to proceedings at
law in the State of California will be applicable to the reference proceeding.
The referee shall be empowered to enter equitable as well as legal relief, to
provide all temporary and/or provisional remedies and
5
<PAGE>
to enter equitable orders that will be binding upon the parties. The referee
shall issue a single judgment at the close of the reference proceeding which
shall dispose of all of the claims of the parties that are the subject of the
reference. The parties hereto expressly reserve the right to contest or appeal
from the final judgment or any appealable order or appealable judgment entered
by the referee. The parties hereto expressly reserve the right to findings of
fact, conclusions of laws, a written statement of decision, and the right to
move for a new trial or a different judgment, which new trial, if granted, is
also to be a reference proceeding under this provision.
14.4 ARBITRATION ALTERNATIVE. In the event that the enabling
legislation which provides for appointment of a referee is repealed (and no
successor statute is enacted), any dispute between the parties that would
otherwise be determined by the reference procedure herein described will be
resolved and determined by arbitration. The arbitration will be conducted by a
retired judge of the Court, in accordance with the California Arbitration Act,
Section 1280 through Section 1294.2 of the CCP as amended from time to time.
The limitations with respect to discovery as set forth hereinabove shall apply
to any such arbitration proceeding.
EXECUTED as of the date first above written.
"Assignor"
PROSPECT MEDICAL SYSTEMS, INC.,
a Delaware corporation
By: /s/ Jacob Y. Terner, M.D.
-----------------------------------------
Title: CEO
--------------------------------------
"Bank"
IMPERIAL BANK,
a California banking corporation
By: /s/ Mark W. Campbell
-----------------------------------------
Title: SVP
--------------------------------------
6
<PAGE>
CONSENT TO ASSIGNMENT
Each of the undersigned acknowledges the terms of the above
Assignment, consents to the assignment by Assignor to Bank of the transaction
documents identified in Section 2 of the Assignment (the "TRANSACTION
DOCUMENTS") which it is a party, and agrees to recognize Bank as Assignor's
assignee under the Transaction Documents. Each of the undersigned hereby
represents and warrants to Bank that (i) it has no knowledge of any fact or
circumstance which would or could have a material adverse effect on the rights
granted to Bank in the Transaction Documents, (ii) each of the Transaction
Documents complies with all applicable laws and regulations, (iii) each of the
Transaction Documents is in full force and effect, and all signatures, names,
addresses, amounts and other statements and facts contained therein are true and
correct, and (iv) there are no defenses, offsets or counterclaims to enforcement
of the Transaction Documents.
ACKNOWLEDGED AND CONSENTED TO
THIS 3RD DAY OF JULY, 1997:
PROSPECT MEDICAL GROUP, INC.,
a California professional corporation
By: /s/ Jacob Y. Terner, M.D.
------------------------------------
Title: VP
---------------------------------
/s/ Gregg DeNicola
- ---------------------------------------
GREGG DENICOLA, M.D.
7
<PAGE>
SECURITY AGREEMENT
(PHYSICIAN GROUP)
This SECURITY AGREEMENT, dated as of July 3, 1997, is entered into
between PROSPECT MEDICAL GROUP, INC., a California professional medical
corporation ("PHYSICIAN GROUP") and PROSPECT MEDICAL SYSTEMS, INC., a Delaware
corporation ("MANAGER"), with reference to the following facts:
R E C I T A L S
A. Manager and Physician Group have entered into that certain
Management Services Agreement, effective June 4, 1996 (the "MANAGEMENT
AGREEMENT"), pursuant to which Manager is providing certain management services
to Physician Group;
B. Physician Group has agreed to enter into this Security Agreement
in order to grant Manager a first priority security interest in the Collateral
(as hereinafter defined) to secure prompt payment and performance of its
obligations under the Management Agreement.
A G R E E M E N T
NOW, THEREFORE, in consideration of the mutual promises, covenants,
conditions, representations, and warranties hereinafter set forth, and for other
good and valuable consideration, the parties hereto agree as follows:
1. DEFINITIONS. All initially capitalized terms used but not
defined herein shall have the meanings ascribed thereto in the Management
Agreement. In addition, as used herein, the following terms shall have the
following meanings:
"ACCOUNT DEBTOR" means any person or entity who is or who may
become obligated with respect to, or on account of, an Account.
"ACCOUNTS" means any and all of Physician Group's presently
existing and hereafter arising accounts and rights to payment arising out of the
sale or lease of goods or the rendition of services by Physician Group,
irrespective of whether earned by performance, and all Instruments evidencing
the same or arising in connection therewith.
"APPLICABLE LAW" means all applicable provisions of
constitutions, statutes, rules, regulations and orders of all government bodies
and all orders and decrees of all courts, tribunals and arbitrators.
"BANKRUPTCY CODE" means The Bankruptcy Reform Act of 1978 (Pub.
L. No. 95-598; 11 U.S.C.), as amended or supplemented from time to time, or any
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<PAGE>
successor statute, and any and all rules and regulations issued or promulgated
in connection therewith.
"CODE" means the California Uniform Commercial Code. Any and all
terms used in this Security Agreement which are defined in the Code shall be
construed and defined in accordance with the meaning and definition ascribed to
such terms under the Code, unless otherwise defined herein.
"COLLATERAL" means any and all of the Accounts and Physician
Group's Books, in each case whether now existing or hereafter acquired or
created, and any Proceeds or products of any of the foregoing, or any portion
thereof, and any and all Accounts, money, or other tangible or intangible
property, resulting from the sale or other disposition of the Accounts, or any
portion thereof or interest therein, and the substitutions, replacements,
additions, accessions, products and Proceeds thereof.
"EXPENSES" means any and all costs or expenses required to be
paid by Physician Group under this Security Agreement which are paid or advanced
by Manager; all costs and expenses of Manager, including its attorneys' fees and
expenses (including attorneys' fees incurred pursuant to proceedings arising
under the Bankruptcy Code), incurred or expended to correct any default or
enforce any provision of this Security Agreement, or in gaining possession of,
maintaining, handling, preserving, storing, shipping, selling, preparing for
sale, or advertising to sell the Collateral, irrespective of whether a sale is
consummated; and all costs and expenses of suit incurred or expended by Manager,
including its attorneys' fees and expenses (including attorneys' fees incurred
pursuant to proceedings arising under the Bankruptcy Code) in enforcing or
defending this Security Agreement, irrespective of whether suit is brought.
"GOVERNMENTAL AUTHORITY" means any federal, state, local or other
governmental department, commission, board, bureau, agency, central bank, court,
tribunal or other instrumentality or authority or subdivision thereof, domestic
or foreign, exercising executive, legislative, judicial, regulatory or
administrative functions of or pertaining to government.
"HEALTH CARE LAW" means any Applicable Law regulating the
acquisition, construction, operation, maintenance or management of a healthcare
practice, facility, provider or payor.
"INSTRUMENTS" means any and all negotiable instruments,
certificated securities and every other writing which evidences a right to the
payment of money, in each case whether now existing or hereafter acquired.
"LIEN" means any mortgage, deed of trust, pledge, security
interest, hypothecation, assignment, deposit arrangement or other preferential
arrangement, charge or encumbrance (including, any conditional sale or other
title retention agreement, or finance lease) of any kind.
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"PHYSICIAN GROUP'S BOOKS" means any and all presently existing
and hereafter acquired or created books and records of Physician Group,
including all records (including maintenance and warranty records), ledgers,
computer programs, disc or tape files, printouts, runs, and other computer
prepared information indicating, summarizing, or evidencing the Accounts.
"PROCEEDS" means whatever is receivable or received from or upon
the sale, lease, license, collection, use, exchange or other disposition,
whether voluntary or involuntary, of any Collateral or other assets of Physician
Group, including "proceeds" as defined in Section 9306 of the Code, any and all
proceeds of any insurance, indemnity, warranty or guaranty payable to or for the
account of Physician Group from time to time with respect to any of the
Collateral, any and all payments (in any form whatsoever) made or due and
payable to Physician Group from time to time in connection with any requisition,
confiscation, condemnation, seizure or forfeiture of all or any part of the
Collateral by any Governmental Authority (or any person or entity acting under
color of Governmental Authority), any and all other amounts from time to time
paid or payable under or in connection with any of the Collateral or for or on
account of any damage or injury to or conversion of any Collateral by any person
or entity, any and all other tangible or intangible property received upon the
sale or disposition of Collateral, and all proceeds of proceeds.
"SECURED OBLIGATIONS" shall mean any and all debts, liabilities,
obligations, or undertakings owing by Physician Group to Manager arising under,
advanced pursuant to, or evidenced by the Management Agreement and this Security
Agreement, whether direct or indirect, absolute or contingent, matured or
unmatured, due or to become due, voluntary or involuntary, whether now existing
or hereafter arising.
"SECURITY AGREEMENT" shall mean this Security Agreement, any
concurrent or subsequent riders, exhibits or schedules to this Security
Agreement, and any extensions, supplements, amendments, or modifications to or
in connection with this Security Agreement, or to any such riders, exhibits or
schedules.
2. CONSTRUCTION. Unless the context of this Security Agreement
clearly requires otherwise, references to the plural include the singular,
references to the singular include the plural, the part includes the whole,
"including" is not limiting, and "or" has the inclusive meaning represented by
the phrase "and/or." References in this Security Agreement to "determination"
by Manager include reasonable estimates (absent manifest error) by Manager, as
applicable (in the case of quantitative determinations) and reasonable beliefs
(absent manifest error) by Manager, as applicable (in the case of qualitative
determinations). The words "hereof," "herein," "hereby," "hereunder," and
similar terms in this Security Agreement refer to this Security Agreement as a
whole and not to any particular provision of this Security Agreement. Article,
section, subsection, exhibit, and schedule references are to this Security
Agreement unless otherwise specified.
3. CREATION OF SECURITY INTEREST. Physician Group hereby grants to
Manager a continuing security interest in all presently existing and hereafter
acquired or
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arising Collateral in order to secure the prompt payment and performance of all
of the Secured Obligations. Physician Group acknowledges and affirms that such
security interest in the Collateral has attached to all Collateral without
further act on the part of Manager or Physician Group.
4. FURTHER ASSURANCES.
4.1 FURTHER ASSURANCES. Physician Group shall execute and
deliver to Manager concurrently with Physician Group's execution of this
Security Agreement, and from time to time at the request of Manager, all
financing statements, continuation financing statements, fixture filings,
security agreements, chattel mortgages, assignments, and all other documents
that Manager may request, in form satisfactory to Manager, to perfect and
maintain perfected Manager's security interests in the Collateral and in order
to consummate fully all of the transactions contemplated by this Security
Agreement and the Management Agreement.
5. REPRESENTATIONS AND WARRANTIES. Physician Group represents and
warrants to Manager that:
5.1 TRADE NAMES AND TRADE STYLES Physician Group presently does
not conduct its business operations under any trade names or trade styles.
5.2 OWNERSHIP OF COLLATERAL. Physician Group is and shall
continue to be the sole and complete owner of the Collateral, free from any
Lien, other than the Lien granted to Manager hereunder and the Liens granted
under the agreements listed in SCHEDULE 5.2.
5.3 ENFORCEABILITY; PRIORITY OF SECURITY INTEREST. This
Agreement (i) creates a security interest which is enforceable against the
Collateral in which Physician Group now has rights and will create a security
interest which is enforceable against the Collateral in which Physician Group
hereafter acquires rights at the time Physician Group acquires any such rights,
and (ii) Manager has a perfected security interest (to the fullest extent
perfection can be obtained by filing, notification to third parties or
possession) and a first priority security interest in the Collateral in which
Physician Group now has rights, and will have a perfected and first priority
security interest in the Collateral in which Physician Group hereafter acquires
rights at the time Physician Group acquires any such rights, subject only to the
Liens listed on SCHEDULE 5.3, in each case securing the payment and performance
of the Secured Obligations.
5.4 OTHER FINANCING STATEMENTS. Other than financing statements
in favor of Manager and financing statements filed in connection with the
agreements listed in SCHEDULE 5.2, no effective financing statement naming
Physician Group as debtor, assignor, grantor, mortgagor, pledgor or the like and
covering all or any part of the Collateral is on file in any filing or recording
office in any jurisdiction.
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6. COVENANTS. In addition to the covenants of Physician Group set
forth in the Management Agreement which are incorporated herein by this
reference, Physician Group agrees that from the date of this Security Agreement
and thereafter until the indefeasible payment, performance and satisfaction in
full of the Secured Obligations, and all of Physician Group's obligations under
the Management Agreement to Manager have been terminated:
6.1 DEFENSE OF COLLATERAL. Physician Group shall appear in and
defend any action, suit or proceeding which may affect its title to or right or
interest in, or Manager's right or interest in, the Collateral.
6.2 PRESERVATION OF COLLATERAL. Physician Group shall do and
perform all acts that may be necessary and appropriate to maintain, preserve and
protect the Collateral.
6.3 CHANGE IN NAME; ADOPTION OF TRADE NAME OR TRADE STYLE.
Physician Group shall give Manager at least 30 days' prior written notice of any
changes in its name, or of the adoption of any trade name or trade style.
6.4 MAINTENANCE OF RECORDS. Physician Group shall keep
separate, accurate and complete Physician Group's Books, disclosing Manager's
security interest hereunder.
6.5 DISPOSITION OF COLLATERAL. Physician Group shall not
surrender or lose possession of (other than to Manager), sell, lease, rent, or
otherwise dispose of or transfer any of the Collateral or any right or interest
therein.
6.6 LIENS. Physician Group shall keep the Collateral free of
all Liens, other than the Lien granted to Manager hereunder.
7. EVENTS OF DEFAULT. The occurrence of any of the following shall
constitute an event of default ("Event of Default") under this Security
Agreement:
7.1 BREACH OF MANAGEMENT AGREEMENT. Physician Group shall
breach, or be in default of, any of its agreements, covenants and obligations
under the Management Agreement;
7.2 BREACH OF SECURITY AGREEMENT. Physician Group shall breach,
or be in default of, any of its agreements, covenants and obligations under this
Security Agreement; or
7.3 BREACH OF REPRESENTATIONS OR WARRANTIES. Any representation
or warranty made by Physician Group in this Security Agreement shall have been
untrue in any material respect when made.
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8. RIGHTS AND REMEDIES, ETC.
8.1 RIGHTS AND REMEDIES. During the continuance of an Event of
Default, Manager, without notice or demand, may do any one or more of the
following, all of which are authorized by Physician Group:
(a) Make such payments and do such acts as it considers
necessary or reasonable to protect Manager's security interest in the
Collateral. Physician Group agrees to assemble and make available any or all of
the Collateral if Manager so requires. Physician Group authorizes Manager to
enter the premises where the Collateral is located, take and maintain possession
of the Collateral, or any part of it, and to pay, purchase, contest, or
compromise any encumbrance, charge, or lien which, in the opinion of the
Manager, appears to be prior or superior to Manager's security interest, and to
pay all costs and expenses incurred in connection therewith;
(b) Sell the Collateral, at either a public or private
sale, or both, by way of one or more contracts or transactions, for cash or on
terms, in such manner and at such places (including Physician Group's premises)
as is commercially reasonable, and apply any proceeds of any sale or other
disposition of the Collateral in the order provided in Section 9504 of the Code,
including the payment of Expenses. It is not necessary that the Collateral be
present at any such sale;
(c) Without constituting a retention of collateral in
satisfaction of indebtedness as provided for in Section 9505 of the Code, notify
account debtors and other obligors of Physician Group of Manager's security
interests in the Collateral, and proceed to collect the same and apply the net
cash proceeds therefrom to the Secured Obligations;
(d) Manager shall give notice of any disposition of the
Collateral as follows:
(i) Manager shall give Physician Group and each
holder of a security interest in the Collateral who has filed with Manager a
written request for notice, a written notice stating the time and place of a
public sale, or, if the disposition is to be either a private sale or some other
disposition that is not a public sale, the time on or after which the private
sale or other disposition is to be made;
(ii) The notice described in the immediately
preceding paragraph shall be delivered to Physician Group as provided in Section
8.3 of the Management Agreement at least five (5) calendar days before the date
fixed for a sale. Notice to persons other than Physician Group claiming an
interest in the Collateral shall be sent to such addresses as such persons have
furnished to Manager prior to the date of such notice;
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(iii) If the disposition is to be a public sale,
Manager shall also give notice of the time and place of said sale by publishing
a notice at least five (5) calendar days before the date of the sale in a
newspaper of general circulation, if one exists, in the county in which the sale
is to be held;
(e) Manager may, in its own name, or in the name of a
designee or nominee, credit bid and purchase at any public sale;
(f) Physician Group shall pay all Expenses; and
(g) Any portion of the Secured Obligations which remains
unpaid after disposition of the Collateral as provided above shall be paid
immediately by Physician Group. Any excess which exists after disposition of
the Collateral and payment in full of the Secured Obligations shall be returned
promptly, without interest and subject to the rights of third persons, to
Physician Group by Manager.
8.2 FURTHER DOCUMENTATION. Upon the exercise by Manager of any
power, right, privilege, or remedy pursuant to this Security Agreement which
requires any consent, approval, registration, qualification, or authorization of
any Governmental Authority, Physician Group agrees to execute and deliver, or
will cause the execution and delivery of, all applications, certificates,
instruments, assignments, and other documents and papers that Manager or any
purchaser of the Collateral may be required to obtain for such governmental
consent, approval, registration, qualification, or authorization.
8.3 CUMULATIVE REMEDIES; WAIVERS. The rights and remedies of
Manager under this Security Agreement, the Management Agreement, and all other
agreements contemplated hereby and thereby shall be cumulative. Manager shall
have all other rights and remedies not inconsistent herewith as provided under
the Code, by law, or in equity. No exercise by Manager of any one right or
remedy shall be deemed an election of remedies, and no waiver by Manager of any
default on Physician Group's part shall be deemed a continuing waiver of any
further defaults. No delay by Manager shall constitute a waiver, election or
acquiescence with respect to any right or remedy.
9. NOTICES. All notices or demands by any party hereto to the other
party and relating to this Security Agreement shall be made in the manner set
forth in Section 14.6 of the Management Agreement.
10. GENERAL PROVISIONS.
10.1 SUCCESSORS AND ASSIGNS. This Security Agreement shall bind
and inure to the benefit of the respective successors and assigns of Physician
Group and Manager; PROVIDED, HOWEVER, that Physician Group may not assign this
Security Agreement nor delegate any of its duties hereunder without Manager's
prior written consent and any prohibited assignment or delegation shall be
absolutely void. No consent by Manager to an assignment by Physician Group
shall release Physician Group from the Secured Obligations.
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Manager may assign this Security Agreement and delegate its duties hereunder, if
any, from time to time to its lender or lenders or to its Parent's lender or
lenders, without prior notice to, or the consent of, Physician Group, and
Physician Group agrees to recognize such lender or lenders as Manager's assignee
under this Security Agreement.
10.2 NO PRESUMPTION AGAINST ANY PARTY. Neither this Security
Agreement nor any uncertainty or ambiguity herein shall be construed or resolved
against Manager or Physician Group, whether under any rule of construction or
otherwise. On the contrary, this Security Agreement has been reviewed by each
of the parties and their counsel and shall be construed and interpreted
according to the ordinary meaning of the words used so as to accomplish fairly
the purposes and intentions of all parties hereto.
10.3 AMENDMENTS AND WAIVERS. Any provision of this Security
Agreement or any of the Loan Documents to which Physician Group is a party may
be amended or waived if, but only if, such amendment or waiver is in writing and
is signed by the party asserted to be bound thereby, and then such amendment or
waiver shall be effective only in the specific instance and specific purpose for
which given.
10.4 COUNTERPARTS; INTEGRATION; EFFECTIVENESS. This Security
Agreement may be signed in any number of counterparts, each of which shall be an
original, with the same effect as if the signatures thereto and hereto were upon
the same instrument. This Security Agreement constitutes the entire agreement
and understanding among the parties hereto and supersedes any and all prior
agreements and understandings, oral or written, relating to the subject matter
hereof. This Security Agreement shall become effective when executed by each of
the parties hereto and delivered to Manager.
11. GOVERNING LAW. This Security Agreement shall be deemed to have
been made in the State of California and the validity, construction,
interpretation, and enforcement hereof, and the rights of the parties hereto,
shall be determined under, governed by, and construed in accordance with the
internal laws of the State of California.
12. NO VIOLATION OF APPLICABLE LAW. To the extent that any lien or
security interest on any Asset(s) granted by Physician Group herein violates any
applicable Health Care Law, the grant of such lien or security interest on such
Asset(s) shall be automatically null and void; provided however, that to the
extent such lien or security interest at any time hereafter no longer violates
any applicable Health Care Law, then such lien or security interest shall
automatically and without any further action attach and become fully effective
at that time (giving effect to any retroactive effect to any change in
applicable law or regulation); and, provided further, that the liens or security
interests on other Asset(s) granted by Physician Group herein that do not
violate any applicable Health Care Law shall remain at all times in full force
and effect.
[Remainder of this page intentionally left blank.]
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IN WITNESS WHEREOF, the parties have executed this Security Agreement
as of the date first set forth above.
PROSPECT MEDICAL GROUP, INC.,
a California professional corporation
By: /s/ Jacob Y. Terner, M.D.
-------------------------------------
Title: VP
----------------------------------
PROSPECT MEDICAL SYSTEMS, INC.,
a Delaware corporation
By: /s/ Jacob Y. Terner, M.D.
-------------------------------------
Title: CEO
----------------------------------
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CREDIT SUCCESSION AGREEMENT
THIS CREDIT SUCCESSION AGREEMENT (this "AGREEMENT") dated as of July 3,
1997 by and among Gregg DeNicola, M.D. ("DENICOLA"), and Prospect Medical
Holdings, Inc., a Delaware corporation ("HOLDINGS"), Prospect Medical Systems,
Inc., a Delaware corporation ("SYSTEMS"), Prospect Medical Group, a California
professional corporation ("GROUP"), such other entities as may become parties
hereto by executing a joinder agreement, in form and substance satisfactory to
Imperial Bank, a California banking corporation ("BANK"), making them a party to
this Agreement, and Bank.
A. Group and each other California professional medical corporation which
hereafter becomes a party to this Agreement (collectively, with Group, the
"PROFESSIONAL CORPORATIONS") is a professional service corporation within the
meaning of the Moscone-Knox Professional Corporation Act of the State of
California ("PROFESSIONAL CORPORATION ACT").
B. Systems and each other subsidiary of Holdings which hereafter becomes
a party to this Agreement (collectively, with System, the "MANAGEMENT
COMPANIES") and the Professional Corporations have entered into those certain
Management Services Agreements, all as more fully set forth on SCHEDULE A
attached hereto and incorporated herein by this reference (each such agreement a
"MANAGEMENT AGREEMENT").
C. DeNicola is the legal and beneficial owner of all of the issued and
outstanding shares of the Professional Corporations (all such shares
collectively held by DeNicola are referred to herein as the "SHARES").
D. Holdings has entered into that certain Revolving Credit Agreement (the
"CREDIT AGREEMENT") dated as of the date herewith with Bank pursuant to which
Bank shall extend credit to Holdings. All initially capitalized terms used but
not defined herein shall have the meanings given to them in the Credit
Agreement.
E. Each of the Management Companies has entered into a Continuing
Guaranty (each, a "GUARANTY" and collectively, the "GUARANTIES") in favor of
Bank pursuant to which such Management Company has guaranteed the obligations of
the Holdings under the Credit Agreement.
F. DeNicola, the Management Companies and the Professional Corporations
are parties to those certain Assignable Option Agreements, all as more fully set
forth on SCHEDULE B, attached hereto and incorporated herein by this reference
(each such agreement an "OPTION AGREEMENT"). As used herein the term "Successor
Physician" shall have the same meaning as in the Option Agreements or, if such
term is undefined in any Option Agreement, shall mean the shareholder(s)
designated to succeed to the ownership interest of the Shares upon the
occurrence of certain succession events.
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G. Each Professional Corporation is a member of an affiliated group of
companies that includes Holdings and the Management Companies and the proceeds
of the Loans to be advanced under the Credit Agreement will be used, in part, to
enable Holdings and the Management Companies to make transfers amongst
themselves and their Subsidiaries and the Professional Corporations in
connection with the operation of their respective businesses.
H. DeNicola and the Professional Corporations will derive direct and
substantial benefit from the execution of and performance under the Credit
Agreement by Holdings and from the Loans to be advanced thereunder.
I. The parties hereto desire to promote their mutual interest by imposing
certain restrictions on the sale, transfer or other disposition of the Shares
and by providing for certain disposition of the Shares upon the occurrence of an
Event of Default under the Credit Agreement.
J. Bank is willing to enter into the Credit Agreement and to make the
Loans available to Holdings as set forth therein, but only upon the condition,
among others, that DeNicola and the Professional Corporations shall have
executed and delivered this Agreement to Bank.
NOW, THEREFORE, in consideration of the foregoing recitals and for other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto each represents, warrants, covenants and agrees
as follows:
1. GENERAL PURPOSE; CONSTRUCTION. The purpose of this Agreement is to
grant Bank certain rights to secure the performance and payment of sums due
under the Credit Agreement, the Guaranties and the other Loan Documents upon the
occurrence of a Succession Event, as defined below, and to provide for the
orderly management of the Professional Corporations in the event of a Succession
Event. It is a further purpose of this Agreement to provide for the transfer of
ownership of the Shares in accordance with the terms of this Agreement and the
laws of the relevant jurisdictions and to provide for the orderly transition in
the composition of the Boards of Directors upon the occurrence of a Succession
Event. In connection therewith, it is the intent of the parties hereto, and
each of DeNicola and the Professional Corporations hereby covenants and agrees
that, notwithstanding the occurrence of a Succession Event:
(a) EXISTENCE. Each Professional Corporation shall maintain its
existence as a professional service corporation (a "MEDICAL CORPORATION") under
the laws of its state of formation.
(b) MANAGEMENT AGREEMENTS. Each Professional Corporation shall
continue to honor the Management Agreement to which it is a party; and
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(c) BOARD OF DIRECTORS. The Board of Directors of each Professional
Corporation shall consist of employees of such Corporation or such other persons
who are qualified hereunder and under the laws of the relevant jurisdictions to
serve thereon.
2. SUCCESSION EVENTS. As used herein, the term "SUCCESSION EVENT" shall
mean the occurrence of any one or more of the following events:
(a) DEFAULT. The occurrence of an Event of Default under or as
defined in the Credit Agreement; or
(b) REPRESENTATIONS AND WARRANTIES. Any representation or warranty
of DeNicola or any Professional Corporation made under this Agreement or any
statement or certificate at any time given pursuant hereto or in connection
herewith shall be false, misleading or incomplete in any material respect when
made; or
(c) COVENANTS. DeNicola to perform, keep or observe any covenant or
provision of this Agreement and the same has not been cured to the Bank's
satisfaction within ten (10) Business Days after such Person shall become aware
thereof, whether by written notice from Bank or otherwise; or
(d) DEATH OR DISQUALIFICATION. DeNicola dies or is disqualified
under the Professional Corporation Act or is no longer a Qualified Medical
Professional (as hereinafter defined).
3. GENERAL OBLIGATIONS OF SHAREHOLDER. DeNicola and each Professional
Corporation covenant and agree that, so long as any of the Revolving Credit
Commitment shall be available and until the full and infeasible payment and
performance of the Obligations and of all obligations arising under the
Guaranties (the "GUARANTY OBLIGATIONS"), DeNicola and each Professional
Corporations, shall:
(a) QUALIFIED DIRECTORS. Maintain for each of the Professional
Corporations a Board of Directors of five (5) members who shall be persons
(i) duly licensed to practice in the medical industry in the applicable
jurisdiction and that each such person shall be designated as a licensed
professional in accordance with the Professional Corporation Act of such
jurisdiction, (ii) who are otherwise qualified hereunder and (iii) who are not
legally disqualified (temporarily or permanently) under the Professional
Corporation Act (a licensed person who is not legally disqualified is
hereinafter referred to as a "QUALIFIED MEDICAL PROFESSIONAL");
(b) BOARD MEMBERS. Vote the Shares only to elect Qualified Medical
Professionals as members of the Boards of Directors;
(c) NO TRANSFER. Notwithstanding the terms of any Option Agreement,
not sell, transfer, pledge or otherwise hypothecate the Shares except as set
forth herein;
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(d) COMPLIANCE WITH LAW. Cause all directors of each of the
Professional Corporations to take all steps necessary to ensure that each
Professional Corporation complies with all provisions of the Professional
Corporation Act and remains in good standing as a medical corporation in the
state of California.
4. REMEDIES. Upon the occurrence of a Succession Event, pursuant to
Sections 2(a) through 2(c) of this Agreement and the exercise by Bank under the
Credit Agreement, the Guaranties or any of the other Loan Documents, of any of
the remedies provided for therein, or upon the occurrence of a Succession Event
pursuant to Section 2(d) of this Agreement, the following shall occur:
(a) SHAREHOLDER ISSUES. As soon as reasonably practicable following
written notice from Bank of the occurrence of a Succession Event and upon
receipt of Bank's written demand therefor, DeNicola, or his estate, as the case
may be, shall sell the Shares to such person(s) as Bank shall, in its sole
discretion, direct (the "NEW SHAREHOLDER(S)"). The total purchase price for the
Shares shall be $1,000.
(b) DIRECTOR ISSUES. As soon as reasonably practicable following the
notice specified in Section 4(a) and the sale and purchase of the Shares as set
forth in Section 4(a), the New Shareholder(s) shall remove any existing members
of the Boards of Directors, in accordance with the provisions of the by-laws of
the Professional Corporations and any relevant laws, and fill the vacancies on
the Boards of Directors by electing the New Shareholder(s) as the only
director(s) of each of the Professional Corporations to the extent permitted by
applicable law.
5. TERM; AMENDMENT TO CHARTER OR BYLAWS. This Agreement shall be in full
force and effect for so long as the Credit Agreement has not been terminated and
until the full and indefeasible payment and performance of the Obligations and
the Guaranty Obligations. DeNicola agrees that he will not authorize the
issuance of any additional Shares or amend the charter or bylaws of the
Professional Corporations in any manner adverse to the purposes set forth herein
so long as this Agreement is in effect.
6. COMMUNITY PROPERTY INTEREST. DeNicola shall cause his spouse to
execute an Acknowledgement and Consent, substantially in the form of EXHIBIT A
attached hereto, signifying such spouse's consent to this Agreement and such
spouse's agreement that any rights that such spouse may have, as a result of a
community property or other interest in the Shares, shall be subject to the
provisions of this Agreement. It is intended by this Agreement that DeNicola
shall subject his entire interest in the Shares to the terms of this Agreement,
irrespective of any community property or other interest of his spouse.
7. GRANT OF SECURITY INTEREST. In order to secure the timely performance
of the obligations of DeNicola and the Professional Corporations owing to Bank
hereunder, DeNicola hereby grants a security interest in the Shares to Bank.
Such security interest
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shall attach to all now existing and hereafter acquired Shares without further
action required on the part of Bank or DeNicola.
8. DELIVERY OF SHARES; STOCK ASSIGNMENTS. Upon the purchase of any
Shares of any of the Professional Corporations hereunder or under any Option
Agreement, DeNicola, any New Shareholder, any Successor Shareholder or any
Professional Corporation, as the case may be, shall deliver to Bank, as
collateral for the Obligations and the Guaranty Obligations, all stock
certificate(s) evidencing the Shares of the relevant Professional Corporation(s)
purchased, together with all necessary or appropriate stock assignments separate
from such certificate(s) in accordance with the terms of this Agreement.
9. REPRESENTATIONS AND WARRANTIES. DeNicola, and the Professional
Corporations, hereby represent and warrant to Bank as follows:
(a) SHAREHOLDERS OF RECORDS. DeNicola is the sole holder of record
and the sole beneficial owner of the Shares of each of the Professional
Corporations, free and clear of any Lien thereon or affecting title thereto,
except for (i) the Lien created by this Agreement, and (ii) Permitted Liens.
(b) CONSENTS AND APPROVALS. The Shares, the pledge of the Shares
hereunder and the agreements, covenants and restrictions hereby entered into are
not subject to and do not require the consent, approval or authorization under
any agreement to which any of the Professional Corporations are subject,
including, without limitation, under formation documents of any of the
Professional Corporations, any management or professional services agreements,
any loan agreements or similar documents, or of any third party, including,
without limitation, any lender to any of any Professional Corporation.
(c) RESTRICTIVE COVENANTS. The Shares are not subject to any
restrictive covenants, negative pledges or any similar types of covenants or
agreements that would restrict transferability.
(d) DELIVERY OF CERTIFICATES. All certificates or other instruments
representing or evidencing the Shares, accompanied by appropriate duly executed
instruments of transfer or assignment in blank, have been delivered to Bank
pursuant to the terms of this Agreement and all certificates, cash, instruments
and other property or proceeds from time to time received, receivable or
otherwise distributed in respect of, or in exchange for, any such Shares shall,
immediately upon receipt, be delivered to Bank in accordance with the terms of
this Agreement, together with any necessary endorsements.
10. INDEMNIFICATION.
(a) BANK INDEMNIFICATION. DeNicola, Holdings, the Management
Companies and the Professional Corporations, jointly and severally, shall
indemnify and defend Bank against any and all claims, expenses, liabilities and
losses, including reasonable
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attorneys' fees, incurred or suffered by Bank by reason of the exercise or
failure to exercise any rights of Bank under this Agreement, excluding only such
claims, expenses, liabilities and losses arising solely from the gross
negligence or willful misconduct of Bank.
(b) SURVIVAL. The obligations of the parties under this Section 9
will survive the termination of this Agreement.
11. FURTHER AGREEMENTS.
(a) PARTY TO AGREEMENT. DeNicola, or his estate, as the case may be,
Holdings, the Management Companies and each of the Professional Corporations
hereby agree that they shall cause any New Shareholder and any Successor
Shareholder to become a party to this Agreement upon and as a condition to
becoming a New Shareholder or a Successor Shareholder and agree that each such
New Shareholder or Successor Shareholder shall be, and DeNicola and each of the
Professional Corporations shall cause them to be, bound by the terms hereof with
the same obligations and liabilities as DeNicola. The parties hereto agree that
any shares of any of the Professional Corporations acquired by any party hereto,
any New Shareholder, any Successor Shareholder shall be or become Shares
hereunder and DeNicola, the Management Companies, Holdings and the Professional
Corporations shall cause such Shares to be delivered to Bank in accordance with
the terms hereof.
(b) TRANSFER OF SHARES. During the term of this Agreement no New
Shareholder or Successor Shareholder shall sell, transfer, pledge or otherwise
hypothecate the shares of any Professional Corporation which such New
Shareholder or Successor Shareholder owns except to Bank. Such shares of stock
shall be marked with a restrictive legend with respect thereto.
(c) COMPLIANCE. Each New Shareholder and Successor Shareholder
agrees to, and shall cause all directors of the Professional Corporations to
take all steps necessary to, ensure that each Professional Corporation comply
with all provisions of the Professional Corporation Act and remain in good
standing as a professional medical corporation in the State of California.
12. COPY OF AGREEMENT. Each of the Professional Corporations shall keep a
copy of this Agreement on file in the principal business office of such
Professional Corporation.
13. PRIMACY OF AGREEMENT. Upon the occurrence of a Succession Event, this
Agreement and the provisions hereof shall supersede any Option Agreement with
respect to the subject matter hereof. Upon the occurrence of a Succession
Event, in the case of any conflict or inconsistency between this Agreement and
any Option Agreement, this Agreement shall control.
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14. SPECIFIC PERFORMANCE. DeNicola and the Professional Corporations
agree that a breach of any covenants contained in this Agreement will cause
irreparable injury to Bank, that Bank has no adequate remedy at law in respect
of such breach and, as a consequence, each agrees that each and every covenant
contained in this Agreement shall be specifically enforceable against each of
them, and each hereby waives and agrees not to assert any defenses against an
action for specific performance of such covenants.
15. NOTICES. All notices, requests, demands and other communications
under this Agreement shall be in writing and shall be deemed duly given on the
date of service if personally served on the party to whom notice is to be given,
which in the case of the Professional Corporations shall be the Professional
Corporation specified in this Section 15, or on the third day after mailing if
deposited in the United States mail to the party to whom notice is to be given,
certified, postage prepaid, return receipt requested, and properly addressed as
follows:
DeNicola:
Gregg A. DeNicola, M.D.
Prospect Medical Holdings, Inc.
18200 Yorba Linda Blvd., Suite 409
Yorba Linda, CA 92686
Professional Corporations:
c/o Prospect Medical Group
18200 Yorba Linda Blvd., Suite 409
Yorba Linda, CA 92686
Attn: Gregg A. DeNicola, M.D.
Bank:
Imperial Bank
at its address for notice under the Credit Agreement
Any party hereto may change its address for the purpose of receiving notices,
requests, demands and other communications as herein provided by a written
notice given in the manner set forth above to the other parties hereto; PROVIDED
HOWEVER, that only one Professional Corporation shall at any time be designated
to receive notice for and on behalf of all the Professional Corporations.
16. ATTORNEYS' FEES. Should any parties hereto institute any action or
proceeding at law, in equity or in arbitration to enforce any provision of this
Agreement, including an action for declaratory relief or for damages by reason
of an alleged breach of any provision of this Agreement or otherwise in
connection with this Agreement or any provision hereof,
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the prevailing party shall be entitled to recover from the losing party such
prevailing party's reasonable attorneys' fees and costs in such action or
proceeding.
17. MISCELLANEOUS.
(a) ENTIRE AGREEMENT. This Agreement and the other Loan Documents
constitute the entire understanding and agreement of the parties with respect to
the subject matter hereof and any and all prior agreements, understandings or
representations with respect to such subject matter are hereby terminated and
canceled in their entirety and are of no further force or effect.
(b) SEVERABILITY. Nothing contained herein shall be construed so as
to require the commission of any act contrary to law, and whenever there is any
conflict between any provision contained herein and any present or future
constitution, statute, law, ordinance, rule or regulation, the latter shall
prevail; PROVIDED, HOWEVER, that the provision of this Agreement which is
affected shall be curtailed and limited only to the extent necessary to bring it
within the requirements of the law. In any event, all other provisions of this
Agreement shall be deemed valid and enforceable to the fullest extent possible.
(c) FURTHER ASSURANCES. Each of the parties hereto shall execute and
deliver any and all additional papers, documents, and other assurances, and
shall do any and all acts and things reasonably necessary in connection with the
performance of its obligations hereunder to carry out the intent of the parties
hereto.
(d) MODIFICATIONS OR AMENDMENTS. No amendment, change or
modification of this Agreement shall be valid, unless in writing and signed by
all of the parties hereto.
(e) NO WAIVER; AMENDMENTS. No failure on the part of Bank to
exercise, no delay in exercising and no course of dealing with respect to, any
right hereunder shall operate as a waiver thereof; nor shall any single or
partial exercise of any right hereunder or under any of the other Loan Documents
preclude any other or further exercise thereof or the exercise of any other
right. The remedies herein provided are cumulative and not exclusive of any
remedies provided by law.
(f) JOINT AND SEVERAL LIABILITY. DeNicola, Holdings, the Management
Companies and the Professional Corporations each agree that the liability
hereunder shall be the immediate, direct, and primary obligation of such Person
and shall not be contingent upon Bank's exercise or enforcement of any remedy it
may have against any of them or against any other Person, or against the
Collateral or any other security for the Obligations or the Guaranty
Obligations. Without limiting the generality of the foregoing, this Agreement
shall remain in full force and effect without regard to and shall not be
impaired or affected by, nor shall DeNicola, Holdings, the Management Companies,
or the Professional Corporations be exonerated or discharged by, any of the
following events:
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(i) Insolvency, bankruptcy, reorganization, arrangement,
adjustment, composition, assignment for the benefit of creditors, death,
liquidation, winding up or dissolution of any of them or any other guarantor of
the Obligations or the Guaranty Obligations;
(ii) Any limitation, discharge, or cessation of the
liability of any of them or any other guarantor for the Obligations or the
Guaranty Obligations due to any statute, regulation or rule of law, or any
invalidity or unenforceability in whole or in part of the documents evidencing
the Obligations or the Guaranty Obligations or any other guaranty thereof or any
other security agreement or pledge agreement related thereto;
(iii) Any merger, acquisition, consolidation or change in
structure of any of them or any other guarantor of the Obligations or the
Guaranty Obligations or any sale, lease, transfer or other disposition of any or
all of the assets or shares of any of them or any other guarantor of the
Obligations or the Guaranty Obligations;
(iv) Any assignment or other transfer, in whole or in part,
of Bank's interests in and rights under this Agreement, the Credit Agreement or
any of the other Loan Documents, including, without limitation, Bank's right to
receive payment of the Obligations or the Guaranty Obligations or any assignment
or other transfer, in whole or in part, of Bank's interests in and to the
Collateral or any other collateral securing the Obligations or the Guaranty
Obligations;
(v) Any claim, defense, counterclaim or setoff, other than
that of prior performance, that DeNicola, the Professional Corporations,
Holdings, any of the Management Companies or any guarantor of the Obligations or
the Guaranty Obligations may have or assert, including, but not limited to, any
defense of incapacity or lack of corporate or other authority to execute any
documents relating to the Obligations or the Guaranty Obligations, the
Collateral, or any other collateral securing the Obligations or the Guaranty
Obligations;
(vi) Bank's amendment, modification, renewal, extension,
cancellation or surrender, of any agreement, document or instrument relating to
the Credit Agreement, this Agreement, the Obligations, the Guaranty Obligations,
the Collateral or any other collateral securing the Obligations or the Guaranty
Obligations, or Bank's exchange, release, or waiver of any Collateral or of any
other collateral securing the Obligations or the Guaranty Obligations;
(vii) Bank's exercise or nonexercise of any power, right or
remedy with respect to the Obligations, the Guaranty Obligations, the Collateral
or any other collateral securing the Obligations or the Guaranty Obligations,
including, but not limited to, Bank's compromise, release, settlement or waiver
with DeNicola, any of the Management Companies, the Professional Corporations,
or of Holdings, any guarantor or any other Person;
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<PAGE>
(viii) Bank's vote, claim, distribution, election, acceptance,
action or inaction in any bankruptcy case related to the Obligations, the
Guaranty Obligations, the Collateral or any other collateral securing the
Obligations or the Guaranty Obligations; and
(ix) Any impairment or invalidity of the Collateral or any
other collateral securing the Obligations or the Guaranty Obligations or any
failure to perfect any of Bank's Liens thereon or therein.
(g) COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, and all of which taken
together shall constitute one and the same instrument.
(h) NUMBER AND GENDER. In this Agreement, the masculine, feminine or
neuter gender, and the singular or plural number, shall each be deemed to
include the other, whenever the context so requires.
(i) CAPTIONS. The section and other headings contained in this
Agreement are for reference only and shall not in any way limit or amplify the
terms and provisions hereof, nor affect the meaning or interpretation of this
Agreement.
(j) CONTINUED TENURE. The parties hereto acknowledge that nothing
contained in this Agreement shall be deemed a guarantee of any New Shareholder's
or any Successor Shareholder's continued tenure on the Board of Directors of any
of the Professional Corporations.
(k) ASSIGNMENT. This Agreement may not be assigned by DeNicola, any
of the Professional Corporations, any New Shareholder, any Successor
Shareholder, any of the Management Companies or Holdings without the prior
written consent of Bank. Subject to the foregoing, this Agreement will inure to
the benefit of the parties and will be binding upon their respective successors,
executors, administrators, heirs and assigns.
(l) GOVERNING LAW. This Agreement has been delivered to Bank and
accepted by Bank in the State of California. THIS AGREEMENT SHALL BE GOVERNED
BY, CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE
OF CALIFORNIA WITHOUT GIVING EFFECT TO ANY PRINCIPLES OF CONFLICT OF LAWS.
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<PAGE>
(m) JUDICIAL REFERENCE. Other than (i) nonjudicial foreclosure and
all matters in connection therewith regarding security interests in real or
personal property; or (ii) the appointment of a receiver, or the exercise of
other provisional remedies (any and all of which may be initiated pursuant to
applicable law), each controversy, dispute or claim between the parties arising
out of or relating to this Agreement, which controversy, dispute or claim is not
settled in writing within thirty (30) days after the "CLAIM DATE" (defined as
the date on which a party subject to the Agreement gives written notice to all
other parties that a controversy, dispute or claim exists), will be settled by a
reference proceeding in California in accordance with the provisions of Section
638 ET SEQ. of the California Code of Civil Procedure, or their successor
section ("CCP"), which shall constitute the exclusive remedy for the settlement
of any controversy, dispute or claim concerning this Agreement, including
whether such controversy, dispute or claim is subject to the reference
proceeding and except as set forth above, the parties waive their rights to
initiate any legal proceedings against each other in any court or jurisdiction
other than the Superior Court in the County where the Real Property, if any, is
located or Los Angeles County if none (the "Court"). The referee shall be a
retired Judge of the Court selected by mutual agreement of the parties, and if
they cannot so agree within forty-five (45) days after the Claim Date, the
referee shall be promptly selected by the Presiding Judge of the Court (or his
representative). The referee shall be appointed to sit as a temporary judge,
with all of the powers for a temporary judge, as authorized by law, and upon
selection should take and subscribe to the oath of office as provided for in
Rule 244 of the California Rules of Court (or any subsequently enacted Rule).
Each party shall have one peremptory challenge pursuant to CCP Section 170.6.
The referee shall (a) be requested to set the matter for hearing within sixty
(60) days after the Claim Date and (b) try any and all issues of law or fact and
report a statement of decision upon them, if possible, within ninety (90) days
of the Claim Date. Any decision rendered by the referee will be final, binding
and conclusive and judgment shall be entered pursuant to CCP Section 644 in any
court in the State of California having jurisdiction. Any party may apply for a
reference proceeding at any time after thirty (30) days following notice to any
other party of the nature of the controversy, dispute or claim, by filing a
petition for a hearing and/or trial. All discovery permitted by this Agreement
shall be completed no later than fifteen (15) days before the first hearing date
established by the referee. The referee may extend such period in the event of
a party's refusal to provide requested discovery for any reason whatsoever,
including, without limitation, legal objections raised to such discovery or
unavailability of a witness due to absence or illness. No party shall be
entitled to "priority" in conducting discovery. Depositions may be taken by
either party upon seven (7) days written notice, and request for production or
inspection of documents shall be responded to within ten (10) days after
service. All disputes relating to discovery which cannot be resolved by the
parties shall be submitted to the referee whose decision shall be final and
binding upon the parties. Pending appointment of the referee as provided
herein, the Superior Court is empowered to issue temporary and/or provisional
remedies, as appropriate.
Except as expressly set forth in this Agreement, the referee shall
determine the manner in which the reference proceeding is conducted including
the time and place of all hearings, the order of presentation of evidence, and
all other questions that arise with
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<PAGE>
respect to the course of the reference proceeding. All proceedings and
hearings conducted before the referee, except for trial, shall be conducted
without a court reporter except that when any party so requests, a court
reporter will be used at any hearing conducted before the referee. The party
making such a request shall have the obligation to arrange for and pay for the
court reporter. The costs of the court reporter at the trial shall be borne
equally by the parties.
The referee shall be required to determine all issues in accordance
with existing case law and the statutory laws of the State of California. The
rules of evidence applicable to proceedings at law in the State of California
will be applicable to the reference proceeding. The referee shall be empowered
to enter equitable as well as legal relief, to provide all temporary and/or
provisional remedies and to enter equitable orders that will be binding upon the
parties. The referee shall issue a single judgment at the close of the
reference proceeding which shall dispose of all of the claims of the parties
that are the subject of the reference. The parties hereto expressly reserve the
right to contest or appeal from the final judgment or any appealable order or
appealable judgment entered by the referee. The parties hereto expressly
reserve the right to findings of fact, conclusions of laws, a written statement
of decision, and the right to move for a new trial or a different judgment,
which new trial, if granted, is also to be a reference proceeding under this
provision.
In the event that the enabling legislation which provides for
appointment of a referee is repealed (and no successor statute is enacted), any
dispute between the parties that would otherwise be determined by the reference
procedure herein described will be resolved and determined by arbitration. The
arbitration will be conducted by a retired judge of the Court, in accordance
with the California Arbitration Act, Section 1280 through Section 1294.2 of the
CCP as amended from time to time. The limitations with respect to discovery as
set forth hereinabove shall apply to any such arbitration proceeding.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date and year first above written.
/s/ Gregg DeNicola
-------------------------------------------------------
Gregg DeNicola
PROSPECT MEDICAL HOLDINGS, INC.
By: /s/ Jacob Y. Terner, M.D.
----------------------------------------------------
Title: CEO
-------------------------------------------------
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PROSPECT MEDICAL SYSTEMS, INC.
By: /s/ Jacob Y. Terner, M.D.
----------------------------------------------------
Title: CEO
-------------------------------------------------
PROSPECT MEDICAL GROUP, INC.
By: /s/ Jacob Y. Terner, M.D.
----------------------------------------------------
Title: VP
-------------------------------------------------
IMPERIAL BANK
By: /s/ Mark W. Campbell
----------------------------------------------------
Title: SVP
-------------------------------------------------
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EXHIBIT A
SPOUSAL JOINDER AND CONSENT
I am the spouse of Gregg DeNicola, M.D., a shareholder (the
"SHAREHOLDER") of Prospect Medical Group, Inc., a California professional
medical corporation ("PROFESSIONAL CORPORATION"). To the extent that I have
any interest in any of the Shares (as that term is defined in the Credit
Succession Agreement (the "CREDIT SUCCESSION AGREEMENT"), entered into as of
July __, 1997, by and among Imperial Bank, Prospect Medical Holdings, Inc.,
Prospect Medical Systems, Inc., the Shareholder and Prospect Medical Group,
Inc.), I hereby join in the Credit Succession Agreement and agree to be bound
by its terms and conditions to the same extent as my spouse. I have read the
Credit Succession Agreement, understand its terms and conditions, and to the
extent that I have felt it necessary, have retained independent legal counsel
to advise me concerning the legal effect of the Credit Succession Agreement
and this Spousal Joinder and Consent.
I understand and acknowledge that Imperial Bank is significantly
relaying on the validity and accuracy of this Spousal Joinder and Consent in
entering into the Credit Succession Agreement.
Executed this 3rd day of July, 1997.
Signature: Mary DeNicola
---------------------------------------------------
Printed or Typed Name: Mary DeNicola
---------------------------------------
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THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE HEREUNDER HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
ANY APPLICABLE STATE SECURITIES LAWS AND MUST BE HELD INDEFINITELY
UNLESS SUBSEQUENTLY REGISTERED UNDER SAID ACT AND ANY APPLICABLE STATE
SECURITIES LAWS OR DISPOSED OF PURSUANT TO AN EXEMPTION FROM SUCH
REGISTRATION REQUIREMENTS.
AMENDED AND RESTATED WARRANT
Company: Prospect Medical Holdings, Inc.,
a Delaware corporation
Number of Shares: One Hundred Thirty-Two Thousand Three Hundred
Seventy-Five (132,375)
Class of Stock: Common Stock
Initial Exercise Price: $5.00 per share
Issued as of: July 3, 1997
Expiration Date: Seven (7) years after the date of this Warrant.
FOR VALUE RECEIVED, the adequacy and receipt of which is hereby
acknowledged, Prospect Medical Holdings, Inc., a Delaware corporation, hereby
certifies that IMPERIAL BANK, a California banking corporation, and its
successors and assigns, are entitled to purchase from the Company at any time
and from time to time on and after the date hereof until 12:00 midnight
California local time on the Expiration Date at an initial exercise price of
FIVE DOLLARS AND NO CENTS ($5.00) per share of Common Stock One Hundred
Thirty-Two Thousand Three Hundred Seventy-Five (132,375) fully paid and
nonassessable shares of Common Stock of the Company; on the terms and conditions
hereinafter set forth.
The number of such shares of Common Stock and the Exercise Price are
subject to adjustment as provided in this Warrant. Anything contained in this
Warrant to the contrary notwithstanding, the number of shares of Common Stock
which may be issued upon exercise of this Warrant by any Regulated Warrantholder
shall never exceed such amount (the "Maximum Amount") as may be permitted under
the Bank Holding Company Act, or any
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successor statute, or under any other federal or state banking laws or
regulations to which such Regulated Warrantholder may be subject at the time of
such exercise. If the number of shares of Common Stock which may be issued upon
exercise of this Warrant exceeds the Maximum Amount, the number of shares of
Common Stock into which this Warrant may be exercised will be reduced to the
Maximum Amount and the Company will pay to Imperial by check or in cash such
amount that equals (a) the difference obtained by subtracting the Exercise Price
from the Current Market Price, multiplied by (b) the number of shares of Common
Stock by which the Warrant is reduced pursuant to this Paragraph.
1. Certain Definitions. As used in this Warrant, the following terms
have the following definitions:
"ADDITIONAL SHARES OF COMMON STOCK" means all shares of Common Stock issued
or issuable by the Company after the date of this Warrant.
"BANK" means IMPERIAL BANK, a California banking corporation, and its
successors and assigns.
"COMMON STOCK" means the Company's Common Stock, par value $.01 per share,
and includes any common stock of the Company of any class or classes resulting
from any reclassification or reclassifications thereof which is not limited to a
fixed sum or percentage of par value in respect of the rights of the holders
thereof to participate in dividends and in the distribution of assets upon the
voluntary or involuntary liquidation, dissolution or winding up of the Company.
"COMPANY" means Prospect Medical Holdings, Inc., a Delaware corporation.
"CONVERTIBLE SECURITIES" means evidence of indebtedness, shares of stock or
other securities which are at any time directly or indirectly convertible into
or exchangeable for Additional Shares of Common Stock.
"CURRENT MARKET PRICE" of a share of Common Stock or of any other
security as of a relevant date means: (i) the Fair Value thereof as
determined in accordance with clause (ii) of the definition of Fair Value
with respect to Common Stock or any other security that is not listed on a
national securities exchange or traded on the over-the-counter market or
quoted on NASDAQ, and (ii) the average of the daily closing prices for the
ten (10) trading days before such date (excluding any trades which are not
bona fide arm's length transactions) with respect to Common Stock or any
other security that is listed on a national securities exchange or traded on
the over-the-counter market or quoted on NASDAQ. The closing price for each
day shall be (i) the last sale price of shares of Common Stock or such other
security, regular way, on such date or, if no such sale takes place on such
date, the average of the closing bid and asked prices thereof on such date,
in each case as officially reported on the principal national securities
exchange on which the same are then listed or admitted to trading, or (ii) if
no shares of Common Stock or if no securities of the same class as such other
security are then listed or admitted to trading on any national securities
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exchange, the average of the reported closing bid and asked prices thereof on
such date in the over-the-counter market as shown by the National Association of
Securities Dealers automated quotation system or, if no shares of Common Stock
or if no securities of the same class as such other security are then quoted in
such system, as published by the National Quotation Bureau, Incorporated or any
similar successor organization, and in either case as reported by any member
firm of the New York Stock Exchange selected by the Warrantholders.
"EXCHANGE ACT" means the Securities Exchange Act of 1934.
"EXERCISE PERIOD" means the period commencing on the date hereof and ending
at 12:00 midnight California local time on the Expiration Date.
"EXERCISE PRICE" means initially Five Dollars and No Cents ($5.00) per
share, subject to adjustment as provided in this Warrant.
"EXPIRATION DATE" means the date that is Seven (7) years after the date of
this Warrant.
"FAIR VALUE" means: (i) with respect to a share of Common Stock or any
other security, the Current Market Price thereof, and (ii) with respect to any
other property, assets, business or entity, an amount determined in accordance
with the following procedure: The Company and the holders of the Warrants and
Warrant Shares, as applicable, shall use their best efforts to mutually agree to
a determination of Fair Value within ten (10) days of the date of the event
requiring that such a determination be made. If the Company and such holders
are unable to reach agreement within said ten (10) day period, the Company and
such holders shall within ten (10) days of the expiration of the ten (10) day
period referred to above each retain a separate independent investment banking
firm (which firm shall not be the investment banking firm regularly retained by
the Company). If either the Company or such holders fails to retain such an
investment banking firm during such period, then the independent investment
banking firm retained by such holders or the Company, as the case may be, acting
alone, shall take the actions outlined below. Such firms shall determine
(within thirty (30) days of their being retained) the Fair Value of the
security, property, assets, business or entity, as the case may be, in question
and deliver their opinion in writing to the Company and to such holders. If
such firms cannot jointly make the determination, then, unless otherwise
directed by agreement of the Company and such holders, such firms, in their sole
discretion, shall choose another investment banking firm independent of the
Company and such holders, which firm shall make the determination and render an
opinion as promptly as practicable. In either case, the determination so made
shall be conclusive and binding on the Company and such holders. The fees and
expenses of any such determination made by any and all such independent
investment banking firms shall be paid by the Company. If there is more than
one holder of Warrants, and/or Warrant Shares entitled to a determination of
Fair Value in any particular instance, each action to be taken by the holders of
such Warrants and/or Warrant Shares under this Section shall be taken by a
majority in interest of such holders
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and the action taken by such majority (including as to any mutual agreement with
the Company with respect to Fair Value and as to any selection of investment
banking firms) shall be binding upon all such holders. In the case of a
determination of the Fair Value per share of Common Stock, the Company and such
holders shall not take into consideration, and shall instruct all such
investment banking firms not to take into consideration, any premium for shares
representing control of the Company, any discount for any minority interest
therein or any restrictions on transfer under applicable federal and state
securities laws or otherwise.
"INDEMNIFIED PARTY" and "INDEMNIFYING PARTY" have the meanings set forth in
Section 11(e)(iii).
"LOAN AGREEMENT" means that certain Loan Agreement of even date herewith
between the Company and the Bank.
"PROTECTED PERIOD" means the period beginning on the date which is ten (10)
days prior to the anticipated effective date of a registration statement filed
pursuant to Sections 11(a) or 11(b) hereof in connection with an underwritten
offering, as set forth in a written notice given to the Company by the managing
underwriter in such offering, and ending on the earlier of (a) the ninetieth
(90th) day following the effective date of such registration statement, or
(b) twenty (20) days following said anticipated effective date, if such
registration statement has not become effective by that time, and (c) the date
on which all of the securities to be sold pursuant thereto have been sold.
"REGISTRABLE STOCK" means: (i) all Warrant Shares which are issuable to the
Warrantholders pursuant to the Warrants, whether or not the Warrants have in
fact been exercised and whether or not such Warrant Shares have in fact been
issued, (ii) all Warrant Shares acquired by the Warrantholders pursuant to the
Warrants, (iii) any shares of Common Stock, whether or not such shares of Common
Stock have in fact been issued, and stock or other securities of the Company
issued upon conversion of, in a stock split or reclassification of, or a stock
dividend or other distribution on, or in substitution or exchange for, or
otherwise in connection with, such Warrant Shares. For purposes of Section 11,
a Warrantholder of record shall be treated as the record holder of the related
Warrant Shares and other securities issuable pursuant to the Warrants.
"REGULATED WARRANTHOLDER" means any Warrantholder which is, or the parent
of which is, subject to the Bank Holding Company Act, or any successor statute,
or any other federal or state banking laws and regulations.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"WARRANT(S)" means this Warrant and any warrants issued in exchange or
replacement of this Warrant or upon transfer hereof.
"WARRANTHOLDER(S)" means the Bank and its successors and assigns.
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<PAGE>
"WARRANT SHARES" means shares of Common Stock issuable to Warrantholders
pursuant to the Warrants.
2. EXERCISE OF WARRANT. This Warrant may be exercised, in whole or in
part, at any time and from time to time during the Exercise Period by written
notice to the Company and upon payment to the Company of the Exercise Price
(subject to adjustment as provided herein) for the shares of Common Stock in
respect of which the Warrant is exercised.
3. FORM OF PAYMENT OF EXERCISE PRICE. Anything contained herein to the
contrary notwithstanding, at the option of the Warrantholders, the Exercise
Price may be paid in any one or a combination of the following forms: (a) by
wire transfer to the Company, (b) by the Warrantholder's check to the Company,
(c) by the cancellation of any indebtedness owed by the Company and/or any
subsidiaries of the Company to the Warrantholder, and/or (d) by the surrender to
the Company of Warrants, Warrant Shares, Common Stock and/or other securities of
the Company and/or any subsidiaries of the Company having a Fair Value equal to
the Exercise Price.
4. CASHLESS EXERCISE/CONVERSION. In lieu of exercising this Warrant as
specified in Sections 2 and 3 above, the Warrantholders may from time to time at
the Warrantholders' option convert this Warrant, in whole or in part, into a
number of shares of Common Stock of the Company determined by dividing (A) the
aggregate Fair Value of such shares or other securities otherwise issuable upon
exercise of this Warrant minus the aggregate Exercise Price of such shares by
(B) the Fair Value of one such share.
5. CERTIFICATES FOR WARRANT SHARES; NEW WARRANT. The Company agrees that
the Warrant Shares shall be deemed to have been issued to the Warrantholders as
the record owner of such Warrant Shares as of the close of business on the date
on which payment for such Warrant Shares has been made (or deemed to be made by
conversion) in accordance with the terms of this Warrant. Certificates for the
Warrant Shares shall be delivered to the Warrantholders within a reasonable
time, not exceeding five (5) days, after this Warrant has been exercised or
converted. A new Warrant representing the number of shares, if any, with
respect to which this Warrant remains exercisable also shall be issued to the
Warrantholders within such time so long as this Warrant has been surrendered to
the Company at the time of exercise.
6. ADJUSTMENT OF EXERCISE PRICE, NUMBER OF SHARES AND NATURE OF
SECURITIES ISSUABLE UPON EXERCISE OF WARRANTS.
(a) EXERCISE PRICE: ADJUSTMENT OF NUMBER OF SHARES. The Exercise
Price shall be subject to adjustment from time to time as hereinafter provided.
Upon each adjustment of the Exercise Price, the Warrantholders shall thereafter
be entitled to purchase, at the Exercise Price resulting from such adjustment, a
number of shares determined by multiplying the Exercise Price in effect
immediately prior to such adjustment by the number
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of shares purchasable pursuant hereto immediately prior to such adjustment and
dividing the product thereof by the Exercise Price resulting from such
adjustment.
(b) ADJUSTMENT OF EXERCISE PRICE UPON ISSUANCE OF COMMON STOCK. If
and whenever after the date hereof the Company shall issue or sell Additional
Shares of Common Stock without consideration or for a consideration per share
less than the Current Market Price or the Exercise Price then in effect
immediately prior to the issuance or sale of such shares, then the Exercise
Price in effect immediately prior to such issuance or sale of such shares shall
be reduced to a number which shall be calculated by dividing (A) an amount equal
to the sum of (1) the number of shares of Common Stock outstanding immediately
prior to such issue or sale MULTIPLIED BY the then existing Exercise Price PLUS
(2) the aggregate consideration, if any, received by the Company upon such issue
or sale, by (B) the total number of shares of Common Stock outstanding
immediately after such issue or sale.
No adjustment of the Exercise Price, however, shall be made in an
amount less than $.01 per share, but any such lesser adjustment shall be carried
forward and shall be made at the time and together with the next subsequent
adjustment which, together with any adjustments so carried forward, shall amount
to $.01 per share or more.
The provisions of this Section 6(b) shall not apply to any
Additional Shares of Common Stock which are distributed to holders of Common
Stock pursuant to a stock split for which an adjustment is provided for under
Section 6(f).
(c) FURTHER PROVISIONS FOR ADJUSTMENT OF EXERCISE PRICE UPON ISSUANCE
OF ADDITIONAL SHARES OF COMMON STOCK AND CONVERTIBLE SECURITIES. For purposes
of Section 6(b), the following provisions shall also be applicable:
(i) In case at any time on or after the date hereof, the
Company shall declare any dividend, or authorize any other distribution, upon
any stock of the Company of any class, payable in Additional Shares of Common
Stock or by the issuance of Convertible Securities, such declaration or
distribution shall be deemed to have been issued or sold (as of the record date)
without consideration and shall thereby cause an adjustment in the Exercise
Price as required by Section 6(b).
(ii) (A) In case at any time on or after the date hereof,
the Company shall in any manner issue or sell any Convertible Securities,
whether or not the rights to exchange or convert thereunder are immediately
exercisable, there shall be determined the price per share for which Additional
Shares of Common Stock are issuable upon the conversion or exchange thereof,
such determination to be made by dividing (a) the total amount received or
receivable by the Company as consideration for the issue or sale of such
Convertible Securities, plus the minimum aggregate amount of additional
consideration, if any, payable to the Company upon the conversion or exchange
thereof by (b) the maximum aggregate number of Additional Shares of Common Stock
issuable upon conversion or exchange of all such Convertible Securities for such
minimum aggregate
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amount of additional consideration; and such issue or sale shall be deemed to be
an issue or sale for cash (as of the date of issue or sale of such Convertible
Securities) of such maximum number of Additional Shares of Common Stock at the
price per share so determined, and shall thereby cause an adjustment in the
Exercise Price, if such an adjustment is required by Section 6(b) hereof.
(B) If such Convertible Securities shall by their
terms provide for an increase or increases, with the passage of time, in the
amount of additional consideration, if any, payable to the Company, or in the
rate of exchange upon the conversion or exchange thereof, the adjusted Exercise
Price shall, upon any such increase becoming effective, be increased to such
Exercise Price as would have been in effect had the adjustments made upon the
issuance of such Convertible Securities been made upon the basis of (and the
total consideration received therefor) (a) the issuance of the number of shares
of Common Stock theretofore actually delivered upon the exercise of such
Convertible Securities, (b) the issuance of all Common Stock, all Convertible
Securities and all rights and options to purchase Common Stock issued after the
issuance of such Convertible Securities, and (c) the original issuance at the
time of such change of any such Convertible Securities then still outstanding;
PROVIDED, HOWEVER, that any such increase or increases shall not exceed, in the
aggregate, the amount of the original reduction of the Exercise Price
attributable to the Convertible Securities.
(C) If any rights of conversion or exchange evidenced
by such Convertible Securities shall expire without having been exercised, the
adjusted Exercise Price shall forthwith be readjusted to such Exercise Price as
would have been in effect had an adjustment with respect to such Convertible
Securities been made on the basis that the only Additional Shares of Common
Stock issued or sold were those issued upon the conversion or exchange of such
Convertible Securities, and that they were issued or sold for the consideration
actually received by the Company upon such exercise, plus the consideration, if
any, actually received by the Company for the granting of such Convertible
Securities.
(iii) (A) In case at any time on or after the date hereof,
the Company shall in any manner grant or issue any rights or options to
subscribe for, purchase or otherwise acquire Additional Shares of Common Stock,
whether or not such rights or options are immediately exercisable, except for
the granting of employee stock options to purchase one hundred thirty thousand
(130,000) shares of the Company's Common Stock per year, at an exercise price
equal to the Current Market Price, and except for: (x) four hundred
seventy-seven thousand one hundred nineteen (477,119) shares of Common Stock
issuable upon exercise of those outstanding employee stock options which are in
existence as of the date hereof, and (y) one hundred nineteen thousand four
hundred one (119,401) shares of Common Stock issuable upon the exercise of
warrants in existence as of the date hereof, other than this Warrant, and
issuable under certain other agreements of the Company which agreements are in
existence as of the date hereof, as such shares of Common Stock are more fully
set forth in Section 12(a) below, there shall be determined the price per share
for which Additional Shares of Common Stock are issuable upon the
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exercise of such rights or options, such determination to be made by dividing
(a) the total amount, if any, received or receivable by the Company as
consideration for the granting of such rights or options, plus the minimum
aggregate amount of additional consideration, if any, payable to the Company
upon the exercise of such rights or options if the maximum number of
Additional Shares were issued pursuant to such rights or options for such
minimum aggregate amount of additional consideration, by (b) the maximum
number of Additional Shares of Common Stock of the Company issuable upon the
exercise of all such rights or options for such minimum aggregate amount of
additional consideration; and the granting of such rights or options shall be
deemed to be an issue or sale for cash (as of the date of the granting of
such rights or options) of such maximum number of Additional Shares of Common
Stock at the price per share so determined, and shall thereby cause an
adjustment in the Exercise Price, if such an adjustment is required by
Section 6(b) hereof.
(B) If such rights or options shall by their terms
provide for an increase or increases, with passage of time, in the amount of
additional consideration payable to the Company upon the exercise thereof, the
adjusted Exercise Price shall, upon any such increases becoming effective, be
increased to such Exercise Price as would have been in effect had the
adjustments made upon the issuance of such rights or options been made upon the
basis of (and the total consideration received therefor) (a) the issuance of the
number of shares of Common Stock theretofore actually delivered upon the
exercise of such rights or options, (b) the issuance of all Common Stock, all
rights and options and all Convertible Securities issued after the issuance of
such rights and options, and (c) the original issuance at the time of such
change of any such rights or options then still outstanding; PROVIDED, HOWEVER,
that any such increase or increases in the Exercise Price shall not exceed, in
the aggregate, the amount of the original reduction of the Exercise Price
attributable to the grant of such rights or options.
(C) If any such rights or options shall expire without
having been exercised, the adjusted Exercise Price shall forthwith be readjusted
to such Exercise Price as would have been in effect had an adjustment with
respect to such rights or options been made on the basis that the only
Additional Shares of Common Stock so issued or sold were those issued or sold
upon the exercise of such rights or options and that they were issued or sold
for the consideration actually received by the Company upon such exercise, plus
the consideration, if any, actually received by the Company for the granting of
such rights or options.
(iv) (A) In case at any time on or after the date hereof,
the Company shall grant any rights or options to subscribe for, purchase or
otherwise acquire Convertible Securities, there shall be determined the price
per share for which Additional Shares of Common Stock are issuable upon the
exchange or conversion of such Convertible Securities if such rights or options
were exercised, such determination to be made by dividing (a) the total amount,
if any, received or receivable by the Company as consideration for the issuance
of such rights or options, plus the minimum aggregate amount of additional
consideration, if any, payable to the Company upon the exercise of such rights
or options if the maximum number of Convertible Securities were issued pursuant
to such
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rights or options for such minimum aggregate amount of additional consideration,
plus the minimum aggregate amount of additional consideration, if any, payable
to the Company upon the exchange or conversion of such Convertible Securities if
the maximum number of Additional Shares were issued pursuant to such Convertible
Securities for such minimum aggregate amount of additional consideration, by
(b) the maximum aggregate number of Additional Shares of Common Stock issuable
upon the exchange or conversion of the Convertible Securities for such minimum
aggregate amount of additional consideration; and the issue or sale of such
rights or options shall be deemed to be an issue or sale for cash (as of the
date of the granting of such rights or options) of such maximum number of
Additional Shares of Common Stock at the price per share so determined, and
thereby shall cause an adjustment in the Exercise Price, if such an adjustment
is required by Section 6(b).
(B) If such rights or options to subscribe for or
otherwise acquire Convertible Securities shall by their terms provide for an
increase or increases, with the passage of time, in the amount of additional
consideration payable to the Company upon the exercise, exchange or conversion
thereof, the adjusted Exercise Price shall, forthwith upon any such increase
becoming effective, be increased to such Exercise Price as would have been in
effect had the adjustments made upon the issuances of such rights or options
been made upon the basis of (and the total consideration received therefor)
(a) the issuance of the number of shares of Common Stock theretofore actually
delivered upon the exchange or conversion of such Convertible Securities,
(b) the issuances of all Common Stock and all rights, options and Convertible
Securities issued after the issuance of such rights and options, and (c) the
original issuances at the time of such change of any such rights, options and
Convertible Securities issued upon exercise of such rights or options which are
then still outstanding; provided, however, that any such increase or increases
shall not exceed, in the aggregate, the amount of the original reduction of the
Exercise Price attributable to the grant of such rights or options.
(C) If any such rights, options or rights of
conversion or exchange of such Convertible Securities shall expire without
having been exercised, exchanged or converted, the adjusted Exercise Price shall
forthwith be readjusted to such Exercise Price as would have been in effect had
an adjustment been made with respect to such rights, options or rights of
conversion or exchange of such Convertible Securities on the basis that the only
Additional Shares of Common Stock so issued or sold were those issued or sold
upon the exercise of such rights or options and exchange or conversion of such
Convertible Securities and that they were issued or sold for the consideration
actually received by the Company upon exercise of such rights and options and
exchange or conversion of such Convertible Securities, plus the consideration,
if any, actually received by the Company for the granting of such rights,
options or Convertible Securities.
(v) In any case where an adjustment has been made in the
Exercise Price upon the issuance of Convertible Securities or any rights or
options to purchase Convertible Securities or Additional Shares of Common Stock
pursuant to this Section 6(c), no further adjustment shall be made at the time
of the conversion of any such Convertible Securities or at the time of the
exercise of any such rights or options.
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(vi) In case at any time on or after the issuance of this
Warrant any shares of Common Stock or Convertible Securities shall be issued or
sold for a consideration other than cash, the amount of the consideration other
than cash payable to the Company shall be deemed to be the Fair Value of such
consideration. Whether or not the consideration so received is cash, the amount
thereof shall be determined after deducting therefrom any expenses incurred or
any underwriting commissions or concessions or discounts paid or allowed by the
Company in connection therewith.
(vii) In case at any time the Company shall fix a record date
of the holders of its Common Stock for the purpose of entitling them (a) to
receive a dividend or other distribution payable in Common Stock, Convertible
Securities or rights or options to purchase either thereof, or (b) to subscribe
for or purchase Common Stock, Convertible Securities or rights or options to
purchase either thereof, then such record date shall be deemed to be the date of
the issue or sale of the shares of Common Stock deemed, pursuant to this
Section 6(c), to have been issued or sold upon the declaration of such dividend
or the making of such other distribution or the date of the granting of such
right of subscription or purchase, as the case may be.
(viii) The number of shares of Common Stock outstanding at any
given time shall not include shares owned or held by or for the account of the
Company, and the disposition of any such shares shall be considered an issue or
sale of Common Stock for the purposes of this Section 6(c).
(d) REORGANIZATION, RECLASSIFICATION, CONSOLIDATION, MERGER OR SALE.
If any capital reorganization or reclassification of the capital stock of the
Company, or any consolidation or merger of the Company with another corporation,
or the sale of all or substantially all of its assets to another corporation
shall be effected in such a way that holders of Common Stock shall be entitled
to receive cash, stock, securities or assets with respect to or in exchange for
Common Stock, then, as a condition of such reorganization, reclassification,
consolidation, merger or sale, lawful and adequate provisions shall be made
whereby the Warrantholders shall thereafter have the right to purchase and
receive upon the basis and upon the terms and conditions specified in this
Warrant upon exercise of this Warrant and in lieu of the shares of the Common
Stock of the Company immediately theretofore purchasable and receivable upon the
exercise of the rights represented hereby, such cash, shares of stock,
securities or assets as may be issued or payable with respect to or in exchange
for a number of outstanding shares of Common Stock equal to the number of shares
of such Common Stock immediately theretofore purchasable and receivable upon the
exercise of the rights represented hereby, and in any such case appropriate
provision shall be made with respect to the rights and interest of the
Warrantholders to the end that the provisions hereof (including, without
limitation, provisions for adjustments of the Exercise Price and of the number
of shares purchasable and receivable upon the exercise of this Warrant) shall
thereafter be applicable, as nearly as may be, in relation to any shares of
stock, securities or assets thereafter deliverable upon the exercise hereof.
The Company shall not effect any consolidation, merger or sale of all or
substantially all of the assets of the Company unless prior to or simultaneous
with the consummation thereof the successor
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corporation (if other than the Company) resulting from such consolidation,
merger or purchase of such assets shall assume, by written instrument executed
and mailed or delivered to the Warrantholders, the obligation to deliver to such
Warrantholders such cash (or cash equivalent), shares of stock, securities or
assets as, in accordance with the foregoing provisions, the Warrantholders may
be entitled to receive and containing the express assumption of such successor
corporation of the due and punctual performance and observance of each provision
of this Warrant to be performed and observed by the Company and of all
liabilities and obligations of the Company hereunder; PROVIDED, HOWEVER, in the
case of any consolidation or merger of the Company with another corporation or
the sale of all or substantially all of its assets to another corporation
effected in such a manner that the holders of Common Stock shall be entitled to
receive stock, securities or assets with respect to or in exchange for Common
Stock, then, at the election of each Warrantholder, in lieu of receiving such
stock, securities or assets, such Warrantholder shall receive cash equal to the
Fair Value of the Common Stock issuable upon exercise of the Warrant, less the
Exercise Price payable upon exercise thereof.
In case any Additional Shares of Common Stock or Convertible
Securities or any rights or options to purchase any Additional Shares of Common
Stock or Convertible Securities shall be issued in connection with any merger of
another corporation into the Company, except for any acquisitions made by the
Company with the proceeds of the loan from the Bank, as set forth in the Loan
Agreement, of management service organizations which manage medical practices,
the amount of consideration therefor shall be deemed to be the Fair Value of
such portion of the assets of such merged corporation as the Board of Directors
of the Company shall in good faith determine to be attributable to such
Additional Shares of Common Stock, Convertible Securities or rights or options,
as the case may be, and the Exercise Price shall be adjusted in accordance with
this Section 6(d).
(e) COMPANY TO PREVENT DILUTION. In case at any time or from time to
time conditions arise by reason of action taken by the Company which are not
adequately covered by the provisions of this Section 6, and which might
materially and adversely affect the exercise rights of the Warrantholders under
any provision of this Warrant, unless the adjustment necessary shall be agreed
upon by the Company and the Warrantholders, the Board of Directors of the
Company shall appoint a firm of independent certified public accountants of
recognized national standing (who have not been employed by the Company within
the last five years), acceptable to the Warrantholders, who at the Company's
expense shall give their opinion upon the adjustment, if any, on a basis
consistent with the standards established in the other provisions of this
Section 6, necessary with respect to the Exercise Price and the number of shares
purchasable upon exercise of the Warrants, so as to preserve, without dilution,
the exercise rights of the Warrantholders. Upon receipt of such opinion, such
Board of Directors shall forthwith make the adjustments described therein.
(f) STOCK SPLITS AND REVERSE SPLITS. In case at any time the Company
shall subdivide its outstanding shares of Common Stock into a greater number of
shares, the Exercise Price in effect immediately prior to such subdivision shall
be proportionately
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reduced and the number of shares of Common Stock purchasable pursuant to this
Warrant immediately prior to such subdivision shall be proportionately
increased, and conversely, in case at any time the Company shall combine its
outstanding shares of Common Stock into a smaller number of shares, the Exercise
Price in effect immediately prior to such combination shall be proportionately
increased and the number of shares of Common Stock purchasable upon the exercise
of this Warrant immediately prior to such combination shall be proportionately
reduced.
(g) DISSOLUTION, LIQUIDATION AND WINDING-UP. In case the Company
shall, at any time prior to the expiration of this Warrant, dissolve, liquidate
or wind up its affairs, the Warrantholders shall be entitled, upon the exercise
of this Warrant, to receive, in lieu of the shares of Common Stock of the
Company which such Warrantholders would have been entitled to receive, the same
kind and amount of assets as would have been issued, distributed or paid to such
Warrantholders upon any such dissolution, liquidation or winding up with respect
to such shares of Common Stock of the Company, had such Warrantholders been the
holders of record of the Warrant Shares receivable upon the exercise of this
Warrant on the record date for the determination of those persons entitled to
receive any such liquidating distribution. After any such dissolution,
liquidation or winding up which shall result in any cash distribution in excess
of the Exercise Price provided for by this Warrant, the Warrantholders may, at
each such Warrantholder's option, exercise the same without making payment of
the Exercise Price, and in such case the Company shall, upon the distribution to
said Warrantholders, consider that said Exercise Price has been paid in full to
it and in making settlement to said Warrantholders, shall deduct from the amount
payable to such Warrantholders an amount equal to such Exercise Price.
(h) NONCASH CONSIDERATION. In case any Additional Shares of Common
Stock or Convertible Securities or any rights or options to purchase any
Additional Shares of Common Stock or Convertible Securities shall be issued for
a consideration in a form other than cash, the amount of such consideration
shall be deemed to be the Fair Value thereof.
(i) ACCOUNTANTS' CERTIFICATE. In each case of an adjustment in the
number of shares of Common Stock or other stock, securities or property
receivable on the exercise of the Warrants, the Company at its expense shall
cause independent public accountants of recognized standing selected by the
Company and acceptable to the Warrantholders to compute such adjustment in
accordance with the terms of this Warrant and prepare a certificate setting
forth such adjustment and showing in detail the facts upon which such adjustment
is based, including a statement of (a) the consideration received or to be
received by the Company for any Additional Shares of Common Stock, rights,
options or Convertible Securities issued or sold or deemed to have been issued
or sold, (b) the number of shares of Common Stock of each class outstanding or
deemed to be outstanding, (c) the adjusted Exercise Price and (d) the number of
shares issuable upon exercise of this Warrant. The Company will forthwith mail
a copy of each such certificate to each Warrantholder.
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7. SPECIAL AGREEMENTS OF THE COMPANY.
(a) RESERVATION OF SHARES. The Company covenants and agrees that all
Warrant Shares will, upon issuance, be validly issued, fully paid and
nonassessable and free from all preemptive rights of any stockholder, and from
all taxes, liens and charges with respect to the issue thereof. The Company
further covenants and agrees that during the period within which the rights
represented by this Warrant may be exercised, the Company will at all times have
authorized, and reserved, a sufficient number of shares of Common Stock to
provide for the exercise of the rights represented by this Warrant. The Company
hereby covenants and agrees to take all such action as may be necessary to
assure that the par value per share of the Common Stock is at all times equal to
or less than the Exercise Price.
(b) AVOIDANCE OF CERTAIN ACTIONS. The Company will not, by amendment
of its Articles or Certificate of Incorporation or through any reorganization,
transfer of assets, consolidation, merger, issue or sale of securities or
otherwise, avoid or take any action which would have the effect of avoiding the
observance or performance of any of the terms to be observed or performed
hereunder by the Company, but will at all times in good faith assist in carrying
out all of the provisions of this Warrant and in taking all of such action as
may be necessary or appropriate in order to protect the rights of the
Warrantholders against dilution or other impairment of their rights hereunder.
(c) SECURING GOVERNMENTAL APPROVALS. If any shares of Common Stock
required to be reserved for the purposes of exercise of this Warrant require
registration with or approval of any governmental authority under any federal
law (other than the Securities Act) or under any state law before such shares
may be issued upon exercise of this Warrant, the Company will, at its expense,
as expeditiously as possible, cause such shares to be duly registered or
approved, as the case may be.
(d) LISTING ON SECURITIES EXCHANGES; REGISTRATION. If, and so long
as, any class of the Company's Common Stock shall be listed on any national
securities exchange (as defined in the Exchange Act), the Company will, at its
expense, obtain and maintain the approval for listing upon official notice of
issuance of all Warrant Shares and maintain the listing of Warrant Shares after
their issuance; and the Company will so list on such national securities
exchange, will register under the Exchange Act (or any similar statute then in
effect), and will maintain such listing of, any other securities that at any
time are issuable upon exercise of this Warrant if and at the time any
securities of the same class shall be listed on such national securities
exchange by the Company.
(e) INFORMATION RIGHTS. So long as the Warrantholders hold this
Warrant and/or any of the Warrant Shares, the Company shall deliver to the
Warrantholders (i) promptly after mailing, copies of all communications to the
shareholders of the Company, (ii) within ninety (90) days after the end of each
fiscal year of the Company, the annual audited financial statements of the
Company certified by the independent public accountants of recognized standing,
and (iii) within forty-five (45) days after the end of each
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of the first three quarters of each fiscal year, the Company's quarterly,
unaudited financial statements.
(f) RESTRICTIONS ON PUBLIC SALE BY THE COMPANY. The Company will not
effect any public or private sale or distribution of its convertible debt or
equity securities, including a sale pursuant to Regulation D under the
Securities Act, during the Protected Period of each underwritten offering by the
Company made pursuant to a registration statement filed pursuant to
Sections 11(a) or 11(b). In addition, the Company shall cause each holder of
its privately placed convertible debt or equity securities issued by it at any
time on or after the date of this Warrant to agree not to effect any public sale
or distribution of any such securities during such Period, including a sale
pursuant to Rule 144 or Rule 144A under the Securities Act; provided, however,
that no such agreement shall be required with respect to any such debt or equity
securities which are to be issued by the Company in a transaction which is
intended to be treated as a pooling of interests if the existence of such
agreement would cause the transaction to fail to qualify for such treatment.
(g) PREEMPTIVE RIGHTS. In the event the Company offers to the
Company's shareholders the right to purchase any securities of the Company, then
all shares of Common Stock issuable pursuant to the Warrants shall be deemed to
be issued and outstanding and held by the Warrantholders and the Warrantholders
shall be entitled to participate in such rights offering.
(h) COMPLIANCE WITH LAW. The Company shall comply with all
applicable laws, rules and regulations of the United States and of all states,
municipalities and agencies and of any other jurisdiction applicable to the
Company and shall do all things necessary to preserve, renew and keep in full
force and effect and in good standing its corporate existence and authority
necessary to continue its business.
8. FRACTIONAL SHARES. No fractional shares or scrip representing
fractional shares shall be issued upon the exercise of this Warrant. With
respect to any fraction of a share called for upon exercise hereof, the Company
shall pay to the Warrantholder an amount in cash equal to such fraction
multiplied by the Current Market Value of one share of Common Stock.
9. NOTICES OF STOCK DIVIDENDS, SUBSCRIPTIONS, RECLASSIFICATIONS,
CONSOLIDATIONS, MERGERS, ETC. If at any time: (i) the Company shall declare a
cash dividend (or an increase in the then existing dividend rate), or declare a
dividend on Common Stock payable otherwise than in cash out of its net earnings
after taxes for the prior fiscal year; or (ii) the Company shall authorize the
granting to the holders of Common Stock of rights to subscribe for or purchase
any shares of capital stock of any class or of any other rights; or (iii) there
shall be any capital reorganization, or reclassification, or redemption of the
capital stock of the Company, or consolidation or merger of the Company with, or
sale of all or substantially all of its assets to, another corporation or firm;
or (iv) there shall be a voluntary or involuntary dissolution, liquidation or
winding up of the Company, then the Company shall give to the Warrantholders at
the addresses of such Warrantholders as shown
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on the books of the Company, at least twenty (20) days prior to the applicable
record date hereinafter specified, a written notice summarizing such action or
event and stating the record date for any such dividend or rights (or, if a
record date is not to be selected, the date as of which the holders of Common
Stock of record entitled to such dividend or rights are to be determined), the
date on which any such reorganization, reclassification, consolidation, merger,
sale of assets, dissolution, liquidation or winding up is expected to become
effective, and the date as of which it is expected the holders of Common Stock
of record shall be entitled to effect any exchange of their shares of Common
Stock for cash (or cash equivalent), securities or other property deliverable
upon any such reorganization, reclassification, consolidation, merger, sale of
assets, dissolution, liquidation or winding up.
10. REGISTERED HOLDER; TRANSFER OF WARRANTS OR WARRANT SHARES.
(a) MAINTENANCE OF REGISTRATION BOOKS; OWNERSHIP OF THIS WARRANT.
The Company shall keep at its principal office a register in which the Company
shall provide for the registration, transfer and exchange of this Warrant. The
Company shall not at any time, except upon the dissolution, liquidation or
winding-up of the Company, close such register so as to result in preventing or
delaying the exercise or transfer of this Warrant.
(b) EXCHANGE AND REPLACEMENT. This Warrant is exchangeable upon
surrender hereof by the registered holder to the Company at its principal office
for new Warrants of like tenor and date representing in the aggregate the right
to purchase the number of shares purchasable hereunder, each of such new
Warrants to represent the right to purchase such number of shares as shall be
designated by said registered holder at the time of surrender. Subject to
compliance with all restrictions and provisions of this Warrant, this Warrant
and all rights hereunder are transferable in whole or in part upon the books of
the Company by the registered holder hereof in person or by duly authorized
attorney, and new Warrants shall be made and delivered by the Company, of the
same tenor and date as this Warrant but registered in the name of the
transferee(s), upon surrender of this Warrant, duly endorsed, to said office of
the Company. Upon receipt by the Company of evidence reasonably satisfactory to
it of the loss, theft, destruction or mutilation of this Warrant, and upon
surrender and cancellation of this Warrant, if mutilated, the Company will make
and deliver a new Warrant of like tenor, in lieu of this Warrant, without
requiring the posting of any bond or the giving of any other security. This
Warrant shall be promptly cancelled by the Company upon the surrender hereof in
connection with any exchange, transfer or replacement. The Company shall pay
all expenses, taxes and other charges payable in connection with the
preparation, execution and delivery of Warrants pursuant to this Section 10.
(c) WARRANTS AND WARRANT SHARES NOT REGISTERED. The holder of this
Warrant, by accepting this Warrant, represents and acknowledges that this
Warrant and the Warrant Shares are not being registered under the Securities Act
on the grounds that the issuance of this Warrant and the offering and sale of
such Warrant Shares are exempt from registration under Section 4(2) of the
Securities Act as not involving any public offering.
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11. REGISTRATION.
(a) REQUIRED REGISTRATION. After three (3) years from the date of
this Warrant, whenever the Company shall receive a written request therefor from
any holder or holders of at least 10% of the Registrable Stock, the Company
shall promptly prepare and file a registration statement under the Securities
Act covering the Registrable Stock which is the subject of such request and
shall use its best efforts to cause such registration statement to become
effective as expeditiously as possible. Upon the receipt of such request, the
Company shall promptly give written notice to all holders of Registrable Stock
that such registration is to be effected. The Company shall include in such
registration statement such Registrable Stock for which it has received written
requests to register such shares by the holders thereof within thirty (30) days
after the effectiveness of the Company's written notice to such other holders.
The Registrable Stock owned by the Bank under this Warrant shall receive
priority over all other shares of stock included in a registration statement
under this Section 11(a). Notwithstanding the above, the Company is obligated
to effect only one (1) registration pursuant to this Section 11(a).
(b) INCIDENTAL REGISTRATION. Each time the Company shall determine
to file a registration statement under the Securities Act (other than on
Form S-8 or Form S-4) in connection with the proposed offer and sale for money
of any of its securities by it or by any of its security holders, the Company
will give written notice of its determination to all holders of Registrable
Stock. Upon the written request of a holder of any Registrable Stock, the
Company will cause all such Registrable Stock, the holders of which have so
requested registration thereof, to be included in such registration statement,
all to the extent requisite to permit the sale or other disposition by the
prospective seller or sellers of the Registrable Stock to be so registered in
accordance with the terms of the proposed offering. If the registration
statement is to cover an underwritten distribution, the Company shall use its
best efforts to cause the Registrable Stock requested for inclusion pursuant to
this Section 11(b) to be included in the underwriting on the same terms and
conditions as the securities otherwise being sold through the underwriters. If,
in the good faith judgment of the managing underwriter of such public offering,
the inclusion of all of the Registrable Stock requested to be registered would
materially and adversely affect the successful marketing of the other shares
proposed to be offered, then the amount of the Registrable Stock to be included
in the offering shall be reduced and the Registrable Stock and the other shares
to be offered shall participate in such offering as follows: the shares to be
sold by the Company, the Registrable Stock to be included in such offering and
the other shares of Common Stock to be included in such offering shall each be
reduced pro rata in proportion to the number of shares of Common Stock proposed
to be included in such offering by each holder of such shares and by the
Company.
(c) REGISTRATION PROCEDURES. If and whenever the Company is required
by the provisions of Section 11(a) or 11(b) to effect the registration of
Registrable Stock under the Securities Act, the Company will, at its expense, as
expeditiously as possible:
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(i) In accordance with the Securities Act and the rules and
regulations of the Commission, prepare and file with the Commission a
registration statement on the form of registration statement appropriate with
respect to such securities and use its best efforts to cause such registration
statement to become and remain effective until the earlier of (x) the date on
which the securities covered by such registration statement have been sold, or
(y) one hundred eighty (180) days after the effective date thereof, and prepare
and file with the Commission such amendments to such registration statement and
supplements to the prospectus contained therein as may be necessary to keep such
registration statement effective and such registration statement and prospectus
accurate and complete until the securities covered by such registration
statement have been sold;
(ii) If the offering is to be underwritten, in whole or in
part, enter into a written underwriting agreement with the holders of the
Registrable Stock participating in such offering and the underwriter in form and
substance reasonably satisfactory to the managing underwriter of the public
offering and the holders of the Registrable Stock participating in such
offering;
(iii) Furnish to the holders of securities participating in
such registration and to the underwriters of the securities being registered
such reasonable number of copies of the registration statement, preliminary
prospectus, final prospectus and such other documents as such underwriters and
holders may reasonably request in order to facilitate the public offering of
such securities;
(iv) Use its best efforts to register or qualify the
securities covered by such registration statement under such state securities or
blue sky laws of such jurisdictions as such participating holders and
underwriters may reasonably request;
(v) Notify the holders participating in such registration,
promptly after it shall receive notice thereof, of the date and time when such
registration statement and each post-effective amendment thereto has become
effective or a supplement to any prospectus forming a part of such registration
statement has been filed;
(vi) Notify such holders promptly of any request by the
Commission for the amending or supplementing of such registration statement or
prospectus or for additional information;
(vii) Prepare and file with the Commission, promptly upon the
request of any such holders, any amendments or supplements to such registration
statement or prospectus which, in the opinion of counsel for such holders, is
required under the Securities Act or the rules and regulations thereunder in
connection with the distribution of the Registrable Stock by such holders;
(viii) Prepare and promptly file with the Commission, and
promptly notify such holders of the filing of, such amendments or supplements to
such registration statement or prospectus as may be necessary to correct any
statements or omissions if, at
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the time when a prospectus relating to such securities is required to be
delivered under the Securities Act, any event has occurred as the result of
which any such prospectus or any other prospectus as then in effect may include
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;
(ix) In case any of such holders or any underwriter for any
such holders is required to deliver a prospectus at a time when the prospectus
then in circulation is not in compliance with the Securities Act or the rules
and regulations of the Commission, prepare promptly upon request such amendments
or supplements to such registration statement and such prospectus as may be
necessary in order for such prospectus to comply with the requirements of the
Securities Act and such rules and regulations;
(x) Advise such holders, promptly after it shall receive
notice or obtain knowledge thereof, of the issuance of any stop order by the
Commission suspending the effectiveness of such registration statement or the
initiation or threatening of any proceeding for that purpose and promptly use
its best efforts to prevent the issuance of any stop order or to obtain its
withdrawal if such stop order should be issued;
(xi) If requested by the managing underwriter or underwriters
or a holder of Registrable Stock being sold in connection with an underwritten
offering, immediately incorporate in a prospectus supplement or post-effective
amendment such information as the managing underwriters and the holders of a
majority of the Registrable Stock being sold agree should be included therein
relating to the plan of distribution with respect to such Registrable Stock,
including information with respect to the Registrable Stock being sold to such
underwriters, the purchase price being paid therefor by such underwriters and
with respect to any other terms of the underwritten (or best efforts
underwritten) offering of the Registrable Stock to be sold in such offering; and
make all required filings of such prospectus supplement or post-effective
amendment as soon as notified of the matters to be incorporated in such
prospectus supplement or post-effective amendment;
(xii) Cooperate with the selling holders of Registrable Stock
and the managing underwriters, if any, to facilitate the timely preparation and
delivery of certificates representing Registrable Stock to be sold and not
bearing any restrictive legends; and enable such Registrable Stock to be in such
denominations and registered in such names as the managing underwriters may
request at least two business days prior to any sale of Registrable Stock to the
underwriters;
(xiii) Prepare a prospectus supplement or post-effective
amendment to the registration statement or the related prospectus or any
document incorporated therein by reference or file any other required documents
so that, as thereafter delivered to the purchasers of the Registrable Stock, the
prospectus will not contain an untrue statement of material fact or omit to
state any material fact necessary to make the statements therein not misleading;
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(xiv) Enter into such agreements (including an underwriting
agreement) and take all such other actions in connection therewith in order to
expedite or facilitate the disposition of such Registrable Stock and in such
connection, whether or not an underwriting agreement is entered into and whether
or not the registration is an underwritten registration:
(A) make such representations and warranties to the
holders of such Registrable Stock and the underwriters, if any, in form,
substance and scope as are customarily made by issuers to underwriters in
primary underwritten offerings;
(B) If an underwriting agreement is entered into, the
same shall set forth in full the indemnification provisions and procedures of
Section 11(e) hereof with respect to all parties to be indemnified pursuant to
said Section; and
(C) The Company shall deliver such documents and
certificates as may be requested by the holders of the majority of the
Registrable Stock being sold and the managing underwriters, if any, to evidence
compliance with the terms of this Section 11(c) and with any customary
conditions contained in the underwriting agreement or other agreement entered
into by the Company.
The above shall be done at each closing under such
underwriting or similar agreement or as and to the extent required thereunder;
(xv) Make available for inspection by a representative of the
holders of a majority of the Registrable Stock, any underwriter participating in
any disposition pursuant to a registration statement, and any attorney or
accountant retained by the sellers or underwriter, all financial and other
records, pertinent corporate documents and properties of the Company, and cause
the Company's officers, directors and employees to supply all information
reasonably requested by any such representative, underwriter, attorney or
accountant in connection with the preparation of the registration statement;
provided, that any records, information or documents that are designated by the
Company in writing as confidential shall be kept confidential by such persons
unless disclosure of such records, information or documents is required by court
or administrative order;
(xvi) Otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make generally available
to the Company's security holders, earning statements satisfying the provisions
of Section 11(a) of the Securities Act, no later than forty-five (45) days after
the end of any twelve (12) month period (or ninety (90) days, if such a period
is a fiscal year) (i) commencing at the end of any fiscal quarter in which
Registrable Stock is sold to underwriters in an underwritten offering, or, if
not sold to underwriters in such an offering, (ii) beginning with the first
month of the Company's first fiscal quarter commencing after the effective date
of a registration statement;
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(xvii) Not file any amendment or supplement to such registration
statement or prospectus to which a majority in interest of such holders has
objected on the grounds that such amendment or supplement does not comply in all
material respects with the requirements of the Securities Act or the rules and
regulations thereunder, after having been furnished with a copy thereof at least
five (5) business days prior to the filing thereof; provided, however, that the
failure of such holders or their counsel to review or object to any amendment or
supplement to such registration statement or prospectus shall not affect the
rights of such holders or any controlling person or persons thereof or any
underwriter or underwriters therefor under Section 11(e) hereof; and
(xviii) At the request of any such holder (i) furnish to such
holder on the effective date of the registration statement or, if such
registration includes an underwritten public offering, at the closing provided
for in the underwriting agreement, an opinion, dated such date, of the counsel
representing the Company for the purposes of such registration, addressed to the
underwriters, if any, and to the holder or holders making such request, covering
such matters with respect to the registration statement, the prospectus and each
amendment or supplement thereto, proceedings under state and federal securities
laws, other matters relating to the Company, the securities being registered and
the offer and sale of such securities as are customarily the subject of opinions
of issuer's counsel provided to underwriters in underwritten public offerings,
and such opinion of counsel shall additionally cover such legal and factual
matters with respect to the registration as such requesting holder or holders
may reasonably request, and (ii) use its best efforts to furnish to such holder
letters dated each such effective date and such closing date, from the
independent certified public accountants of the Company, addressed to the
underwriters, if any, and to the holder or holders making such request, stating
that they are independent certified public accountants within the meaning of the
Securities Act and dealing with such matters as the underwriters may request,
or, if the offering is not underwritten, that in the opinion of such accountants
the financial statements and other financial data of the Company included in the
registration statement or the prospectus or any amendment or supplement thereto
comply in all material respects with the applicable accounting requirements of
the Securities Act, and additionally covering such other financial matters,
including information as to the period ending immediately prior to the date of
such letter with respect to the registration statement and prospectus, as such
requesting holder or holders may reasonably request.
(d) EXPENSES OF REGISTRATION. All expenses incident to the Company's
performance of or compliance with this Warrant, including, without limitation,
the following shall be borne by the Company, regardless of whether the
registration statement becomes effective:
(i) All registration and filing fees (including those with
respect to filings required to be made with the National Association of
Securities Dealers, Inc.);
(ii) Fees and expenses of compliance with all securities or
blue sky laws (including fees and disbursements of counsel for the underwriters
or selling holders in connection with blue sky qualifications of the Registrable
Stock and in determination of their
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eligibility for investment under the laws of such jurisdictions as the managing
underwriters or holders of a majority of the Registrable Stock being sold may
designate);
(iii) Printing, messenger, telephone and delivery expenses;
(iv) Fees and disbursements of counsel for the Company, the
underwriters and for the sellers of the Registrable Stock as hereinafter
provided;
(v) Fees and disbursements of all independent certified
public accountants of the Company (including the expenses of any special audit
and "comfort" letters required by or incident to such performance);
(vi) Fees and disbursements of underwriters (excluding
discounts, commissions or fees of underwriters, selling brokers, dealer managers
or similar securities industry professionals relating to the distribution of the
Registrable Stock or legal expenses of any person other than the Company and the
selling holders); and
(vii) Fees and expenses of other persons retained by the
Company.
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 similar
securities issued by the Company are then listed, rating agency fees and the
fees and expenses of any person, including special experts, retained by the
Company.
In connection with the registration statement required
hereunder, the Company will reimburse the holders of Registrable Stock being
registered pursuant to the registration statement for the reasonable fees and
disbursements of not more than one counsel (or more than one counsel if conflict
exists among such selling holders in the exercise of the reasonable judgment of
counsel for the selling holders and counsel for the Company) chosen by the
holders of a majority of such Registrable Stock.
(e) INDEMNIFICATION.
(i) The Company hereby agrees to indemnify each of the
holders of Registrable Stock against all claims, losses, damages and liabilities
(or actions in respect thereof) arising out of or based on any untrue statement
(or alleged untrue statement) of a material fact contained in any registration
statement, preliminary or final prospectus, or other document incident to any
such registration, qualification or compliance (or in any related registration
statement, notification or the like) or 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, or any violation by the Company of any
rule or regulation promulgated under the Securities Act applicable to the
Company and relating to action or
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inaction required of the Company in connection with any such registration,
qualification or compliance, and to reimburse the holders of Registrable Stock
(including officers and directors of the same and controlling persons) for any
legal and any other expenses reasonably incurred in connection with
investigating or defending any such claim, loss, damage, liability or action,
PROVIDED, HOWEVER, that the Company will not be liable in any such case to the
extent that any such claim, loss, damage or liability arises out of or is based
on any untrue statement or omission based upon written information furnished to
the Company by Warrantholders in an instrument duly executed by Warrantholders
and stated to be specifically for use therein.
(ii) The Warrantholders severally and not jointly agree to
indemnify the Company and its officers and directors and each person, if any,
who controls any thereof within the meaning of Section 15 of the Securities Act
and their respective successors against all claims, losses, damages and
liabilities (or actions in respect thereof) arising out of or based on any
untrue statement of a material fact contained in any prospectus, offering
circular or other document incident to any registration, qualification or
compliance relating to securities purchased pursuant to the Warrants (or in any
related registration statement, notification or the like) or 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 and will reimburse
the Company and each other person indemnified pursuant to this subsection (ii)
for any legal and any other expenses reasonably incurred in connection with
investigating or defending any such claim, loss, damage, liability or action;
PROVIDED, HOWEVER, that this subsection (ii) shall apply only if (and only to
the extent that) such statement or omission was made in reliance upon
information (including, without limitation, written negative responses to
inquiries) furnished to the Company by an instrument duly executed by
Warrantholders and stated to be specifically for use in such prospectus, or
other document (or related registration statement, notification or the like) or
any amendment or supplement thereto.
(iii) Each party entitled to indemnification hereunder (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party (at such Indemnifying Party's expense) to assume
the defense of any claim or any litigation resulting therefrom, provided that
counsel for the Indemnifying Party, who shall conduct the defense of such claim
or litigation, shall be satisfactory to the Indemnified Party, and the
Indemnified Party may participate in such defense at such party's expense, and
provided, further, that the omission by any Indemnified Party to give notice as
provided herein shall not relieve the Indemnifying Party of its obligations
under this Section 11(e) except to the extent that the omission results in a
failure of actual notice to the Indemnifying Party and such Indemnifying Party
is materially damaged solely as a result of the failure to give notice. No
Indemnifying Party, in the defense of any such claim or litigation, shall,
except with the consent of each Indemnified Party, consent to entry of any
judgment or enter into any settlement which does not include as an unconditional
term thereof the giving by the
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claimant or plaintiff to such Indemnified Party of a release from all liability
in respect to such claim or litigation.
(iv) If the indemnification provided for in this Section 11(e)
is unavailable or insufficient to hold harmless an Indemnified Party in respect
of any losses, claims, damages, liabilities, expenses or actions in respect
thereof referred to herein, then the Indemnifying Party shall contribute to the
amount paid or payable by such Indemnified Party as a result of such losses,
claims, damages, liabilities, expenses or actions in such proportion as is
appropriate to reflect the relative fault of the Indemnifying Party on the one
hand, and the Indemnified Party on the other, in connection with the statements
or omissions which resulted in such losses, claims, damages, liabilities,
expenses or actions as well as any other relevant equitable considerations,
including the failure to give the notice required hereunder. The relative fault
of the Indemnifying Party and the Indemnified Party shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact relates to information supplied by the Indemnifying Party or
the Indemnified Party and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company and the Warrantholders agree that it would not be just and
equitable if contributions pursuant to this Section 11(e) were determined by pro
rata allocation or by any other method of allocation which did not take account
of the equitable considerations referred to above. The amount paid or payable
to an Indemnified Party as a result of the losses, claims, damages, liabilities
or actions in respect thereof, referred to above, shall be deemed to include any
legal or other expenses reasonably incurred by such Indemnified Party in
connection with investigating or defending any such action or claim.
Notwithstanding the contribution provisions of this Section 11(e), in no event
shall the amount contributed by any seller of Registrable Stock exceed the
aggregate net offering proceeds received by such seller from the sale of
Registrable Stock to which such contribution or indemnification claim relates.
No person guilty of fraudulent misrepresentations (within the meaning of
Section 11(f) of the Securities Act) shall be entitled to contribution from any
person who is not guilty of such fraudulent misrepresentation.
(v) The indemnification required by this Section 11(e) shall
be made by periodic payments during the course of the investigation or defense,
as and when bills are received or expenses incurred. Anything contained herein
to the contrary notwithstanding, the maximum aggregate liability of any holder
of Registrable Stock under this Section 11(e) shall not exceed the amount of the
net proceeds actually received by such holder from the sale of its Registrable
Stock pursuant to the registration, qualification, notification or compliance in
respect of which such liability arose.
(f) REPORTING REQUIREMENTS UNDER EXCHANGE ACT. From and after the
effective date of the first registration statement filed by the Company under
the Securities Act, the Company shall (whether or not it shall then be required
to do so) timely file such information, documents and reports as the Commission
may require or prescribe under Section 13 or 15(d) (whichever is applicable) of
the Exchange Act. Immediately upon becoming subject to the reporting
requirements of either Section 13 or 15(d) of the
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Exchange Act, the Company shall forthwith upon request furnish any holder of
Registrable Stock (i) a written statement by the Company that it has complied
with such reporting requirements, (ii) a copy of the most recent annual or
quarterly report of the Company, and (iii) such other reports and documents
filed by the Company with the Commission as such holder may reasonably request
in availing itself of an exemption for the sale of Registrable Stock without
registration under the Securities Act. The Company acknowledges and agrees that
the purpose of the requirements contained in this Section 11(f) is to enable any
such holder to comply with the current public information requirement contained
in Rule 144 under the Securities Act should such holder ever wish to dispose of
any of the securities of the Company acquired by it without registration under
the Securities Act in reliance upon Rule 144 (or any other similar exemptive
provision). In addition, the Company shall take such other measures and file
such other information, documents and reports as shall hereafter be required by
the Commission as a condition to the availability of Rule 144 and Rule 144A
under the Securities Act (or any similar exemptive provision hereafter in
effect).
(g) STOCKHOLDER INFORMATION. The Company may require each holder of
Registrable Stock as to which any registration is to be effected pursuant to
this Section 11 to furnish the Company such information with respect to such
holder and the distribution of such Registrable Stock as shall be required by
law or by the Commission in connection therewith.
12. REPRESENTATION AND WARRANTIES. The Company hereby represents and
warrants to and covenants with Imperial, the Bank, each Warrantholder, and each
holder of Warrant Shares that:
(a) ORGANIZATION AND CAPITALIZATION OF THE COMPANY. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware. As of the date hereof, the authorized capital of the
Company consists of forty million (40,000,000) shares of Common Stock and one
million (1,000,000) shares of Preferred Stock, of which four million six hundred
ninety-eight thousand four hundred seventy-one (4,698,471) shares of Common
Stock and no shares of Preferred Stock are issued and outstanding. The Company
has, and at all times during the Exercise Period will have, reserved for
issuance pursuant to the Warrants that number of shares of Common Stock that are
issuable pursuant to the Warrants. No unissued shares of Common Stock are
reserved for any purpose other than: (i) for issuance upon the exercise of the
Warrants, (ii) four hundred seventy-seven thousand one hundred nineteen
(477,119) shares of Common Stock reserved for issuance upon the exercise of
employee stock options, and (iii) one hundred nineteen thousand four hundred one
(119,401) shares of Common Stock reserved for issuance upon the exercise of
warrants other than this Warrant and under certain other agreements of the
Company as in existence on the date hereof. There are no preemptive rights in
effect with respect to the issuance of any shares of Common Stock. All the
outstanding shares of Common Stock and Preferred Stock have been validly issued
without violation of any preemptive or similar rights, are fully paid and
nonassessable and have been issued in compliance with all federal and applicable
state securities laws.
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(b) AUTHORITY. The Company has full corporate power and authority to
execute and deliver this Warrant, to issue the shares of Common Stock issuable
upon exercise of this Warrant, and to perform all of its obligations hereunder,
and the execution, delivery and performance hereof has been duly authorized by
all necessary corporate action on its part. This Warrant has been duly executed
on behalf of the Company and constitutes the legal, valid and binding obligation
of the Company enforceable in accordance with its terms.
(c) NO LEGAL BAR. Neither the execution, delivery or performance of
this Warrant nor the issuance of the shares of Common Stock issuable upon
exercise of this Warrant will (a) conflict with or result in a violation of the
Certificate of Incorporation or By-Laws of the Company, (b) conflict with or
result in a violation of any law, statute, regulation, order or decree
applicable to the Company or any affiliate, (c) require any consent or
authorization or filing with, or other act by or in respect of any governmental
authority, or (d) result in a breach of, constitute a default under or
constitute an event creating rights of acceleration, termination or cancellation
under any mortgage, lease, contract, franchise, instrument or other agreement to
which the Company is a party or by which it is bound.
(d) VALIDITY OF SHARES. When issued upon the exercise of this
Warrant as contemplated herein, the shares of Common Stock so issued will have
been validly issued and will be fully paid and nonassessable. On the date
hereof, the par value of the Common Stock is less than the Exercise Price per
share of Common Stock.
13. CONTINUING VALIDITY. The Bank and each holder of Warrant Shares shall
continue to be entitled to all rights to which a Warrantholder is entitled
pursuant to the provisions of this Warrant except such rights as by their terms
apply solely to a Warrantholder, notwithstanding the fact that this Warrant has
been exercised or the period of exercisability has expired. The Company will,
at any time upon the request of the Bank or a holder of the Warrant Shares,
acknowledge in writing, in form reasonably satisfactory to the Bank or such
holder, the Company's continuing obligation to afford to the Bank or such holder
all rights to which the Bank or such holder shall continue to be entitled in
accordance with the provisions of this Warrant; PROVIDED, HOWEVER, that if the
Bank or such holder shall fail to make any such request, such failure shall not
affect the continuing obligation of the Company to afford to Imperial, the Bank
and such holder all such rights.
14. MISCELLANEOUS PROVISIONS.
(a) NOTICE OF EXPIRATION. The Company shall give written notice to
the Warrantholders specifically advising them of the Expiration Date and of
their right to exercise the Warrants not more than one hundred eighty (180) days
and not less than ninety (90) days before the Expiration Date. If such written
notice is not so given, the Expiration Date shall automatically be extended
until ninety (90) days after the date that the Company gives the Warrantholders
such written notice.
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(b) JUDICIAL REFERENCE.
(i) Other than the appointment of a receiver, or the exercise
of other provisional remedies (any and all of which may be initiated pursuant to
applicable law), each controversy, dispute or claim arising out of or relating
to this Warrant, which controversy, dispute or claim is not settled in writing
within thirty (30) days after the "CLAIM DATE" (defined as the date on which the
Company or a Warrantholder gives written notice to the other that a controversy,
dispute or claim exists), will be settled by a reference proceeding in
California in accordance with the provisions of Section 638 et seq. of the
California Code of Civil Procedure, or their successor section ("CCP"), which
shall constitute the exclusive remedy for the settlement of any controversy,
dispute or claim concerning this Warrant, including whether such controversy,
dispute or claim is subject to the reference proceeding and except as set forth
above, the parties waive their rights to initiate any legal proceedings against
each other in any court or jurisdiction other than the Superior Court in
counties of Los Angeles or Orange, California (the "COURT"). The referee shall
be a retired Judge of the Court selected by mutual agreement of the parties, and
if they cannot so agree within forty-five (45) days after the Claim Date, the
referee shall be promptly selected by the Presiding Judge of the Court (or his
or her representative). The referee shall be appointed to sit as a temporary
judge, with all of the powers for a temporary judge, as authorized by law, and
upon selection should take and subscribe to the oath of office as provided for
in Rule 244 of the California Rules of Court (or any subsequently enacted Rule).
Each party shall have one peremptory challenge pursuant to CCP Section 170.6.
The referee shall (i) be requested to set the matter for hearing within sixty
(60) days after the Claim Date and (ii) try any and all issues of law or fact
and report a statement of decision upon them, if possible, within ninety (90)
days of the Claim Date. Any decision rendered by the referee will be final,
binding and conclusive and judgment shall be entered pursuant to CCP Section 644
in any court in the State of California having jurisdiction. Any party may
apply for a reference proceeding at any time after thirty (30) days following
notice to any other party of the nature of the controversy, dispute or claim, by
filing a petition for a hearing and/or trial. All discovery permitted by this
Warrant shall be completed no later than fifteen (15) days before the first
hearing date established by the referee. The referee may extend such period in
the event of a party's refusal to provide requested discovery for any reason
whatsoever, including, without limitation, legal objections raised to such
discovery or unavailability of a witness due to absence or illness. No party
shall be entitled to "priority" in conducting discovery. Depositions may be
taken by either party upon seven (7) days written notice, and request for
production or inspection of documents shall be responded to within ten (10) days
after service. All disputes relating to discovery which cannot be resolved by
the parties shall be submitted to the referee whose decision shall be final and
binding upon the parties. Pending appointment of the referee as provided
herein, the Court is empowered to issue temporary and/or provisional remedies,
as appropriate.
(ii) Except as expressly set forth in this Warrant, the
referee shall determine the manner in which the reference proceeding is
conducted including the time and place of all hearings, the order of
presentation of evidence, and all other questions that arise
26
<PAGE>
with respect to the course of the reference proceeding. All proceedings and
hearings conducted before the referee, except for trial, shall be conducted
without a court reporter except that when any party so requests, a court
reporter will be used at any hearing conducted before the referee. The party
making such a request shall have the obligation to arrange for and pay for the
court reporter. The costs of the court reporter at the trial shall be borne
equally by the parties.
(iii) The referee shall be required to determine all issues in
accordance with existing case law and the statutory laws of the State of
California. The rules of evidence applicable to proceedings at law in the State
of California will be applicable to the reference proceeding. The referee shall
be empowered to enter equitable as well as legal relief, to provide all
temporary and/or provisional remedies and to enter equitable orders that will be
binding upon the parties. The referee shall issue a single judgment at the
close of the reference proceeding which shall dispose of all of the claims of
the parties that are the subject of the reference. The parties hereto expressly
reserve the right to contest or appeal from the final judgment or any appealable
order or appealable judgment entered by the referee. The parties hereto
expressly reserve the right to findings of fact, conclusions of laws, a written
statement of decision, and the right to move for a new trial or a different
judgment, which new trial, if granted, is also to be a reference proceeding
under this provision.
(iv) In the event that the enabling legislation which provides
for appointment of a referee is repealed (and no successor statute is enacted),
any dispute between the parties that would otherwise be determined by the
reference procedure herein described will be resolved and determined by
arbitration. The arbitration will be conducted by a retired judge of the Court,
in accordance with the California Arbitration Act, Section 1280 through Section
1294.2 of the CCP as amended from time to time. The limitations with respect to
discovery as set forth hereinabove shall apply to any such arbitration
proceeding.
(c) NOTICES. All notices hereunder shall be in writing and shall be
deemed to have been given five (5) days after being mailed by certified mail,
addressed to the address below stated of the party to which notice is given, or
to such changed address as such party may have fixed by notice:
To the Company: Prospect Medical Holdings, Inc.
18200 Yorba Linda Blvd.
Yorba Linda, CA 92686
Attention: Jacob Y. Terner, M.D., Chief Executive
Officer
With a copy (which
shall not constitute
notice) to: Dale S. Miller, Esq.
Miller & Holguin
1801 Century Park East, 7th Floor
Los Angeles, CA 90067
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<PAGE>
To the
Warrantholders
or holder of
Warrant Shares: Imperial Bank
201 North Figueroa Street
Los Angeles, California 90012
Attention: Roc A. Caldarone, Senior Vice President
With a copy (which
shall not constitute
notice) to: Richard M. Baker, Esq.
Senior Vice President and General Counsel
IMPERIAL BANK
9920 South La Cienega Boulevard
Inglewood, CA 90301
provided, however, that any notice of change of address shall be effective only
upon receipt.
(d) SUCCESSORS AND ASSIGNS. This Warrant shall be binding upon and
inure to the benefit of the Company, the Bank, the Warrantholders and the
holders of Warrant Shares and the successors, assigns and transferees of the
Company, the Bank, the Warrantholders and the holders of Warrant Shares.
(e) ATTORNEYS' FEES. The Company agrees to pay, on demand, all
attorneys' fees (including attorneys' fees incurred pursuant to proceedings
arising under the Bankruptcy Code) and all other costs and expenses which may be
incurred by Imperial, the Bank, the Warrantholders and the holders of Warrant
Shares in connection with any amendment to this Warrant and/or in connection
with the enforcement of this Warrant or in any way arising out of, or
consequential to the protection, assertion, or enforcement of the Obligations
under the Loan Agreement (or any security therefor), whether or not suit is
brought.
(f) ENTIRE AGREEMENT; AMENDMENTS AND WAIVERS. This Warrant sets
forth the entire understanding of the parties with respect to the transactions
contemplated hereby. The failure of any party to seek redress for the violation
or to insist upon the strict performance of any term of this Warrant shall not
constitute a waiver of such term and such party shall be entitled to enforce
such term without regard to such forbearance. This Warrant may be amended, the
Company may take any action herein prohibited or omit to take action herein
required to be performed by it, and any breach of or compliance with any
covenant, agreement, warranty or representation may be waived, only if the
Company has obtained the written consent or written waiver of the majority in
interest of the Warrantholders, and then such consent or waiver shall be
effective only in the specific instance and for the specific purpose for which
given.
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(g) SEVERABILITY. If any term of this Warrant as applied to any
person or to any circumstance is prohibited, void, invalid or unenforceable in
any jurisdiction, such term shall, as to such jurisdiction, be ineffective to
the extent of such prohibition or invalidity without in any way affecting any
other term of this Warrant or affecting the validity or enforceability of this
Warrant or of such provision in any other jurisdiction.
(h) HEADINGS. The headings in this Warrant are inserted only for
convenience of reference and shall not be used in the construction of any of its
terms.
(i) AMENDMENT AND RESTATEMENT. This Warrant amends and restates in
its entirety the original warrant issued to Imperial Bancorp as of July 3, 1997,
which is being assigned to the Bank concurrently herewith, surrendered herewith,
exchanged for this Warrant and cancelled, and such exchange is being effected
solely in consideration for the exchange of this Warrant for the other warrant.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its
duly authorized officers effective as of the date first set forth above.
Prospect Medical Holdings, Inc.,
a Delaware corporation
By /s/ Thomas A. Maloof
--------------------------------------
Name:
---------------------------------
Title: CFO
--------------------------------
29
<PAGE>
AMENDED AND RESTATED ASSIGNABLE OPTION AGREEMENT
THIS AMENDED AND RESTATED ASSIGNABLE OPTION AGREEMENT ("Agreement") is made
as of the 2nd day of September, 1998, and deemed to have been effective as of
July 14, 1997, by and among Prospect Medical Systems, Inc. ("Prospect Medical
Systems"), a Delaware corporation, Santa Ana/Tustin Physicians Group, Inc., a
California professional medical corporation ("Group"), together with Prospect
Medical Group, Inc., a California professional corporation ("Prospect Medical
Group"), with reference to the following facts:
RECITALS
A. Group is a professional corporation that is organized and operated as
an independent practice association (the "Practice").
B. Group, Prospect Medical Group and Melvin L. Reich, D.O. ("Reich")
entered into that certain Agreement of Purchase and Sale of Stock, dated as of
June 23, 1997 (the "Stock Purchase Agreement"), pursuant to which Reich sold all
of the outstanding shares of Group to Prospect Medical Group, Inc. (the
"Acquisition").
C. Subject to the conditions set forth herein, effective as of the
Closing of the Acquisition, Prospect Medical Group desires to grant to Prospect
Medical Systems, and Prospect Medical Systems desires to acquire from Prospect
Medical Group, (i) an assignable option to purchase all of the assets of Group,
and (ii) the right to designate the purchaser ("Successor Physician") of all or
part of the issued and outstanding stock in Group. When used in this Agreement,
the term "Assets" shall mean all of Group's and Prospect Medical Group's right,
title, interest and estate in and to all the assets of every kind and
description used in or pertaining to the Practice, including but not limited to
the assets set forth on Exhibit A. When used in this Agreement, the term
"Stock" shall mean all of Prospect Medical Group's right, title, interest and
estate in and to all of the issued and outstanding stock in Group, including any
rights to any additional stock, preemptive rights, warrants, and the like, as
set forth on Exhibit B.
D. Prospect Medical Group, Group and Prospect Medical Systems desire to
enter into this Agreement to incorporate within the terms of one agreement all
of the amendments previously made and to be made as of the date of execution
hereof to an Assignable Option Agreement made as of July 14, 1997 (the "Original
Agreement").
NOW, THEREFORE, in consideration of the foregoing promises and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged by the parties, Group, Prospect Medical Group, and Prospect Medical
Systems agree as follows:
1. GRANT OF OPTION.
1.1 Prospect Medical Group hereby grants to Prospect Medical Systems an
assignable option to purchase all or any part of the Assets (the "Assets
Option"), on the terms and subject to the conditions set forth in this
Agreement.
<PAGE>
1.2 Group and Prospect Medical Group hereby grant to Prospect Medical
Systems the assignable right to designate a Successor Physician or Successor
Physicians, which person or persons must be duly licensed physicians in the
State of California or otherwise permitted by law to be a shareholder in a
professional corporation, to purchase all or part of the Stock (the "Stock
Option"), on the terms and subject to the conditions set forth herein. In its
sole discretion, Prospect Medical Systems may designate the amount of Stock
which is to be purchased. The Assets Option and the Stock Option are
collectively referred to herein as the "Option."
1.3 Group and Prospect Medical Group represent and warrant that as of the
day and year first above written and during the term of this Agreement, Exhibits
A and B are true and complete listings of the Assets and Stock, respectively, as
revised from time to time pursuant to this Agreement.
1.4 Other than in connection with that certain Amended and Restated Credit
Succession Agreement, dated as of July 14, 1997, by and among Prospect Medical
Holdings, Inc., a Delaware corporation, Prospect Medical Group, Gregg DeNicola,
M.D., Group, Prospect Medical Systems, Inc., a Delaware corporation, and
Imperial Bank, a California banking corporation ("Imperial"), as amended (the
"Amended and Restated Credit Succession Agreement"), Group shall not recognize
any share transfer or other action not in compliance with the terms of this
Agreement.
2. TERM OF AGREEMENT. The term of this Agreement commences as of the day and
year first above written and continues for thirty (30) years ("Term"). So long
as the term of the Management Services Agreement, made and entered into as of
even date herewith, by and between Prospect Medical Systems and Group (the
"Management Services Agreement"), is automatically extended pursuant thereto,
the term of this Agreement shall be automatically extended for additional
coextensive terms of ten (10) years each. In the event the Management Services
Agreement is terminated pursuant to its terms, this Agreement shall terminate
upon the effective date of termination of said Management Services Agreement.
3. OPTION PRICE. The purchase price for the Option (the "Option Price") is
One Hundred Dollars ($100) and Group and Prospect Medical Group acknowledge
receipt of such payment.
4. EXERCISE OF OPTION.
4.1 During the Term of this Agreement, Prospect Medical Systems may elect
to exercise the Option at any time. In the event of an election by Prospect
Medical Systems to exercise the Option, Prospect Medical Systems may exercise
either the Assets Option or the Stock Option, or both, at Prospect Medical
Systems' sole discretion.
4.2 Notwithstanding the provisions of Section 4.1, if the Management
Services Agreement is terminated by either party, for any reason, Prospect
Medical Systems' right to exercise the Option is automatically and immediately
exercised as of the termination date of the Management Services Agreement such
that Prospect Medical Systems may exercise either the Assets Option or the Stock
Option, or both, at such time.
2
<PAGE>
4.3 To the extent that the Assets Option is exercised by Prospect Medical
Systems, Prospect Medical Systems will send Group a written notice (the "Assets
Exercise Notice") specifying the Assets to be purchased. Prospect Medical
Systems may exercise the Assets Option as many times as Prospect Medical Systems
elects in its sole discretion.
4.4 To the extent that the Stock Option is exercised by Prospect Medical
Systems, Prospect Medical Systems will send Group a written notice (the "Stock
Exercise Notice") specifying the Stock to be purchased. Prospect Medical
Systems may designate the Successor Physician(s) who will exercise the Stock
Option as many times as Prospect Medical Systems elects in its sole discretion.
4.5 The Assets Option and the Stock Option are independent of each other,
and can be exercised at different times during the Term.
4.6 Prospect Medical Systems may cancel any Assets Exercise Notice or
Stock Exercise Notice at any time.
4.7 Group and Prospect Medical Group shall cooperate with Prospect Medical
Systems in any due diligence.
5. ASSIGNMENT OF THE OPTION. Prospect Medical Systems may elect to assign
either the Assets Option or the Stock Option or both to any person, by a written
assignment, signed by both Prospect Medical Systems and the assignee, which
designates the Assets or Stock. The assignee shall agree as a condition of the
assignment to be bound by the terms of this Agreement. Thereafter, only the
assignee named in the assignment shall have the right to exercise the applicable
Assets Option and/or the Stock Option as to the designated Assets and/or Stock,
and that assignee, rather than Prospect Medical Systems, shall enter into a
purchase agreement upon exercise of the Assets Option and/or the Stock Option,
as applicable. Written notice of any such assignment shall be given by Prospect
Medical Systems to Group and Prospect Medical Group within a reasonable time
period following execution of any assignment pursuant to this Agreement. When
the context so requires in this Agreement, the term "Prospect Medical Systems"
shall be deemed to refer to an assignee holding an assignment of an Asset Option
or Stock Option, and the terms "party" and "parties" shall be deemed to include
that assignee.
6. PURCHASE PRICE OF THE ASSETS OR STOCK.
6.1 PURCHASE PRICE.
a. ASSETS PURCHASE PRICE. The purchase price for the Assets to be
purchased pursuant to the exercise of the Assets Option shall be $1,000 ("Assets
Purchase Price"). The purchase price of any partial purchase of the Assets
shall be a pro-rata percentage of the full Assets Purchase Price.
3
<PAGE>
b. STOCK PURCHASE PRICE. The purchase price for the Stock to be
purchased pursuant to the exercise of the Stock Option shall be $1,000 ("Stock
Purchase Price"). The purchase price of less than all of the issued and
outstanding Stock is a pro-rata percentage of the full Stock Purchase Price.
6.2 PAYMENT. For the Assets, Prospect Medical Systems shall pay Group the
Assets Purchase Price at Closing in the form of immediately available funds
transferred by wire to an account at a financial institution designated by
Group. For the Stock, Prospect Medical Systems shall cause the Successor
Physician to pay Prospect Medical Group the Stock Purchase Price.
6.3 CLOSING. The transactions contemplated by this Agreement are to close
forty-five (45) days after the date of either the Assets Exercise Notice or the
Stock Exercise Notice, as the case may be ("Closing"), unless extended by
Prospect Medical Systems.
7. ADDITIONAL OBLIGATIONS OF GROUP.
7.1 AFFIRMATIVE COVENANTS. To the extent that Group and Prospect Medical
Group participate in the Practice and own, control, or use the Assets, Group and
Prospect Medical Group shall:
a. CONDUCT OF PRACTICE. Conduct Group's business efficiently and
without voluntary interruption and preserve all rights, privileges, and
franchises held by Group and Group's Practice, including the maintenance of all
contracts, copyrights, trademarks, licenses, registrations, etc.;
b. USE. Make use of the Assets with reasonable care to prevent
diminution in value of the Practice and the Assets, and keep the Assets in good
repair;
c. VALUE. Perform all acts necessary to maintain, preserve, and
protect the Assets, and maintain fire and extended coverage insurance on the
Assets in the amounts and under policies acceptable to Prospect Medical Systems,
and provide Prospect Medical Systems with the original policies and certificates
at Prospect Medical Systems' request;
d. FINANCING STATEMENTS. Execute and deliver to Prospect Medical
Systems all financing statements and other documents that Prospect Medical
Systems requests, in order to put third parties on notice of this Agreement;
e. ACCESS. Permit Prospect Medical Systems, its representatives,
and its agents to inspect the Assets at any time, and to make copies of records
pertaining to the Assets, at reasonable times at Prospect Medical Systems'
request;
f. REPORTS. Furnish Prospect Medical Systems any reports relating
to the Assets at Prospect Medical Systems' request;
4
<PAGE>
g. DEFAULTS. Notify Prospect Medical Systems promptly in writing of
any default, potential default, or any development that might have a material
adverse effect on the Assets, the Stock, or the Practice, or of any litigation
that may have a material adverse effect on the Practice;
h. EXPENSES. Pay all expenses, including attorneys' fees,
incurred by Prospect Medical Systems in the perfection, preservation,
realization, enforcement, and exercise of its rights under this Agreement,
including but not limited to accounting, correspondence, collection efforts,
filing, recording, and recordkeeping;
i. INDEMNITY. Indemnify Prospect Medical Systems against losses,
liabilities, or damages, costs and expenses of any kind, including reasonable
attorneys' fees, caused to Prospect Medical Systems by reason of its interest in
the Assets and/or the Stock;
j. TAXES. Pay promptly when due all taxes and assessments owed in
connection with the Assets and the Stock; and
k. DELIVERY OF CERTIFICATES. Deliver to Prospect Medical Systems
all certificates heretofore issued representing all of the shares of Group's
capital stock held of record or beneficially owned by Prospect Medical Group,
and each certificate hereafter issued representing any share of Group's capital
stock, with each certificate endorsed in blank for transfer. Notwithstanding the
foregoing, this Section 7.1.k shall only apply in the event that the Amended and
Restated Credit Succession Agreement is no longer in effect.
7.2 NEGATIVE COVENANTS. Except as required under the Amended and Restated
Credit Succession Agreement, without the prior written consent of Prospect
Medical Systems, Group and Prospect Medical Group shall not:
a. TRANSFER. Sell, lease, transfer, or otherwise dispose of the
Assets or Stock;
b. DEBT. Incur, guarantee, assume or otherwise become liable for
any borrowing or increase any existing indebtedness; or discharge or cancel any
debt owed to Group;
c. NO FURTHER HYPOTHECATION. Pledge, hypothecate, encumber, redeem
or dispose of the Assets, the Stock or any interest therein until all of Group's
obligations under this Agreement have been fully satisfied or the Assets or the
Stock has been released;
d. LOCATION. Move the Assets from their present locations without
the prior written consent of Prospect Medical Systems;
e. USE. Use the Assets or the Stock for any unlawful purpose or in
any way that would void any effective insurance;
f. NAME AND LOCATION CHANGES. Change the name or place of business
or use a fictitious business name without the prior express consent of Prospect
Medical Systems; and
5
<PAGE>
g. ISSUANCE OF STOCK; CHANGE IN OWNERSHIP; MERGERS AND
CONSOLIDATION. Permit any issuance of Stock, other equity, or debt; permit any
change in the composition or respective percentage ownership of Group; permit
Group to be merged, consolidated or otherwise reorganized with or into any other
corporation, partnership, trade, business, or the like; amend or otherwise
modify its articles of incorporation and bylaws; dissolve; or enter into any
agreement with any person to do any of the foregoing.
8. CONFIDENTIALITY. The parties shall use all good faith efforts to keep the
contents of this Agreement and all other aspects of the negotiations preceding
execution of this Agreement confidential. Unless required by law, Group,
Prospect Medical Group, and Prospect Medical Systems shall not disclose the
contents of this Agreement or the negotiations leading to this Agreement to
third parties without the prior written consent of the other party. Prospect
Medical Systems shall ensure that all of the assignees likewise comply with the
obligations of confidentiality imposed by this Section, except that Prospect
Medical Systems and the assignees may disclose the contents of such to their
respective agents, representatives, contractors, and employees to the extent
necessary to exercise their respective rights or perform their respective
obligations hereunder.
9. GENERAL.
9.1 COMPLIANCE WITH LAW. Group and Prospect Medical Group shall comply
with all applicable requirements of the Joint Commission on the Accreditation of
Healthcare Organizations, the Medicare and Medicaid programs, applicable state
law and regulations, and other licensing and accreditation authorities.
9.2 RELATIONSHIP OF PARTIES. In the exercise of their respective rights
and the performance of their respective obligations under this Agreement, Group
and Prospect Medical Group on the one hand and Prospect Medical Systems (or any
assignee) on the other hand are acting in the capacity of the grantor and
grantee of an option to purchase all or a portion of the Assets and/or Stock,
and nothing in this Agreement is intended nor shall be construed to create
between the parties an employer/employee relationship, a partnership or joint
venture relationship or a landlord/tenant relationship.
9.3 ASSIGNMENT. All of Prospect Medical Systems' rights and duties under
this Agreement may be assigned or delegated by Prospect Medical Systems or
Prospect Medical Holdings including but not limited to an assignment to
Imperial; provided, however, that Prospect Medical Systems or Prospect Medical
Holdings, Inc., shall give written notice of any such assignment to the Group
and Prospect Medical Group within a reasonable time period. Notwithstanding any
other provision of this Agreement, neither this Agreement nor the rights and
duties of this Agreement may be assigned or delegated by Group or Prospect
Medical Group. This Agreement binds the successors, heirs, and authorized
assignees of the parties.
9.4 ENTIRE AGREEMENT. Except as expressly provided in this Agreement to
the contrary, this Agreement, including its incorporated exhibits, constitutes
the entire agreement between the parties with respect to the Option, and
supersedes all other and prior agreements on the same
6
<PAGE>
subject, whether written or oral, and contains all of the covenants and
agreements between the parties with respect to the subject matter hereof.
Except as expressly provided in this Agreement to the contrary, each party to
this Agreement acknowledges that no representations, inducements, promises,
or agreements, orally or otherwise, have been made by any other party hereto,
or by anyone acting on behalf of any party hereto, that are not embodied
herein, and that no agreement, statement, or promise not contained in this
Agreement shall be valid or binding. This Agreement incorporates the
Original Agreement, together with all amendments previously made and to be
made to the date of execution hereof, and is deemed to have been effective as
of the date of the Original Agreement.
9.5 COUNTERPARTS. This Agreement, and any amendments hereto, may be
executed in counterparts, each of which shall constitute an original document,
but which together shall constitute one and the same instrument.
9.6 HEADINGS. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
9.7 NOTICES. Any notices required or permitted to be given hereunder by
any party to another shall be in writing and shall be deemed delivered upon
personal delivery, twenty-four (24) hours following deposit with a courier for
overnight delivery or seventy two (72) hours following deposit in the U.S. Mail,
registered or certified mail, postage prepaid, return-receipt requested,
addressed to the parties at the following addresses or to such other addresses
as the parties may specify in writing:
If to Group or Santa Ana/Tustin Physicians Group, Inc.
Prospect Medical Group: c/o Prospect Medical Group, Inc.
18200 Yorba Linda Blvd., Suite 409
Yorba Linda, CA 92886
Attention: President
If to Prospect Medical Systems: Prospect Medical Systems, Inc.
18200 Yorba Linda Blvd., Suite 409
Yorba Linda, CA 92886
Attention: President
9.8 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
9.9 AMENDMENT. This Agreement may be amended at any time by agreement of
the parties, provided that any amendment shall be in writing and executed by all
parties.
9.10 SEVERABILITY. If any provision of this Agreement is held by a court
of competent jurisdiction to be invalid or unenforceable, the remaining
provisions will nevertheless continue in full force and effect, unless such
invalidity or unenforceability would defeat an essential business purpose of
this Agreement.
7
<PAGE>
9.11 FEES AND EXPENSES. Group, Prospect Medical Group, and Prospect
Medical Systems each shall bear their own expenses, including, without
limitation, attorneys' and accountants' fees, incurred in connection with the
preparation of this Agreement and the transactions contemplated hereby.
9.12 EXHIBITS AND SCHEDULES. All exhibits and schedules attached to this
Agreement are incorporated herein by this reference and all references herein to
"Agreement" shall mean this Agreement together with all such exhibits and
schedules.
9.13 TIME OF ESSENCE. Time is expressly made of the essence of this
Agreement and each and every provision hereof of which time of performance is a
factor.
9.14 DISPUTE RESOLUTION. In the event the parties hereto are unable to
resolve any dispute in connection with this Agreement, the parties may mutually
agree to arbitrate as set forth below.
a. There shall be one arbitrator. If the parties shall fail to
select a mutually acceptable arbitrator within ten (10) days after the demand
for arbitration is mailed, then the parties stipulate to arbitration before a
retired judge sitting on the Los Angeles, California, Judicial Arbitration
Mediation Services (JAMS) panel.
b. The substantive law of the State of California shall be applied
by the arbitrator.
c. Arbitration shall take place in Los Angeles, California,
unless Group and a majority of the other parties otherwise agree. As soon as
reasonably practicable, a hearing with respect to the dispute or matter to be
resolved shall be conducted by the arbitrator. As soon as reasonably
practicable thereafter, the arbitrator shall arrive at a final decision,
which shall be reduced to writing, signed by the arbitrator and mailed to
each of the parties and their legal counsel.
d. All decisions of the arbitrator shall be final, binding and
conclusive on the parties and shall constitute the only method of resolving
disputes or matters subject to arbitration pursuant to this Agreement. The
arbitrator or a court of appropriate jurisdiction may issue a writ of
execution to enforce the arbitrator's judgment. Judgment may be entered upon
such a decision in accordance with applicable law in any court having
jurisdiction thereof.
e. Notwithstanding the foregoing, because time is of the essence of
this Agreement, the parties specifically reserve the right to seek a judicial
temporary restraining order, preliminary injunction, or other similar short term
equitable relief, and grant the arbitrator the right to make a final
determination of the parties' rights, including whether to make permanent or
dissolve such court order.
8
<PAGE>
f. Notwithstanding the foregoing, any and all arbitration
proceedings are conditional upon such proceedings being covered within the
parties' respective risk insurance policies.
9.15 ATTORNEYS' FEES. Should any of the parties hereto institute any
action or procedure to enforce this Agreement or any provision hereof
(including without limitation, arbitration), or for damages by reason of any
alleged breach of this Agreement or of any provision hereof, or for a
declaration of rights hereunder (including, without limitation, by means of
arbitration), the prevailing party in any such action or proceeding shall be
entitled to receive from the other party all costs and expenses, including
without limitation reasonable attorneys' fees, incurred by the prevailing
party in connection with such action or proceeding.
9.16 FURTHER ASSURANCES. The parties shall take such actions and execute
and deliver such further documentation as may reasonably be required in order to
give effect to the transactions contemplated by this Agreement and the
intentions of the parties hereto.
9.17 RIGHTS CUMULATIVE. The various rights and remedies herein granted to
the respective parties hereto shall be cumulative and in addition to any other
rights any such party may be entitled to under law. The exercise of one or more
rights or remedies by a party shall not impair the right of such party to
exercise any other right or remedy, at law or equity.
9.18 CONFLICTS. In the event that any provision contained herein shall
conflict with the Credit Succession Agreement, the provision of the Credit
Succession Agreement shall control and such conflicting provision herein shall
be of no further force or effect.
IN WITNESS WHEREOF, Group, Prospect Medical Group, and Prospect Medical
Systems execute this Agreement by their duly authorized representatives as set
forth below.
"PROSPECT MEDICAL SYSTEMS" "GROUP"
Prospect Medical Systems, Inc., Santa Ana/Tustin Physicians Group, Inc.,
a Delaware corporation a California professional corporation
By: Gregg DeNicola By: Jacob Y. Terner, M.D.
---------------------------------- ----------------------------
Gregg DeNicola, M.D., President Its: CEO
---------------------------
"PROSPECT MEDICAL GROUP"
Prospect Medical Group, Inc.,
a California professional corporation
By: Jacob Y. Terner, M.D.
----------------------------
Its: VP
---------------------------
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<PAGE>
EXHIBIT "A"
ASSETS
1. All contracts and agreements, including all payor contracts, vendor
contracts, loan agreements, leases and subleases.
2. All risk pool or other incentive arrangement payments relating to the
Practice, including hospital incentive funds, and any capitation advances to
physicians.
3. All cash, bank balances, monies in possession of any bank, other cash
items, marketable securities of Group and prepaid deposits relating to the
Practice.
4. All accounts receivable of Group ("Accounts Receivable") relating to the
Practice. As used herein, "Accounts Receivable" shall include all rights to
payment for goods or services rendered, whether or not yet earned by
performance, all other obligations and receivables from others no matter how
evidenced relating to the Practice, including purchase orders, notes,
instruments, drafts and acceptances and all guarantees of the foregoing and
security therefor, relating to the Practice.
5. All supplies and inventory relating to the Practice.
6. All patient records, files and X-rays relating to the Practice.
7. All of Group's goodwill relating to the Practice, which may include
location goodwill, name recognition goodwill, patient allegiance, etc.
8. All business, financial and accounting records and books of account
relating to the Practice, exclusive of Group's Articles, Bylaws, corporate
minutes, stock shares and general ledger.
9. Group's right to reimbursement for all professional services provided to
managed care and fee-for-service patients relating to the Practice.
10. All of Group's furniture, fixtures, leasehold improvements, machinery,
equipment, inventories, supplies and other like tangible personal property used
in the Practice.
11. All trademarks, trade names, fictitious business names, copyrights, logos,
licenses, ownership interests in telephone numbers at the Practice, or related
items of Group that in any way pertain to the Practice.
<PAGE>
EXHIBIT "B"
STOCK
Stock has been pledged to Imperial Bank, a California banking corporation
("Bank"), pursuant to the terms of that certain Amended and Restated Credit
Succession Agreement, dated as of July 14, 1997, by and among Bank, Prospect
Medical Holdings, Inc., a Delaware corporation, Prospect Medical Systems, Inc.,
a Delaware corporation, Prospect Medical Group, Inc., a California professional
corporation, Santa Ana/Tustin Physicians Group, Inc., a California professional
corporation, and Gregg DeNicola, M.D.
<PAGE>
NON-COMPETITION AGREEMENT
THIS NON-COMPETITION AGREEMENT ("Agreement") is made effective as of the
14th day of July, 1997, by and between Prospect Medical Group, Inc., a
California professional corporation ("Purchaser"), and Melvin L. Reich, D.O.
("Physician"). All capitalized terms used herein and not otherwise expressly
defined shall have the same meanings set forth in the Stock Purchase Agreement.
R E C I T A L S
A. Purchaser is developing an integrated delivery system, a key
component of which is a strong network of physicians who can provide the
necessary professional medical services to payors in a designated geographic
area.
B. To build the physician component of its integrated delivery
systems, Purchaser provides a range of alternative services to and relationships
with physicians including the recruitment of physicians to a designated
geographic area, the management of physician practices, the acquisition of
assets and/or physician practices, the consolidation of physician practices, the
formation of medical groups, the establishment of outpatient clinics, etc.
C. Physician owns all of the issued and outstanding capital stock
of the Santa Ana/Tustin Physicians Group, Inc. ("Company").
D. Physician is selling to Purchaser and Purchaser is purchasing
from Physician all of Physician's stock in Company ("Stock") pursuant to that
certain Agreement for the Purchase and Sale of Stock ("Stock Purchase
Agreement") of even date herewith, by and among Purchaser, Company and
Physician.
E. Purchaser desires to purchase the Stock pursuant to
Purchaser's goal of developing an integrated delivery system.
F. Physician will benefit from the sale of the Stock to
Purchaser.
G. As conditions to the Closing of the Stock Purchase Agreement,
Physician shall have entered into an agreement in the form of this Agreement to
be delivered to Purchaser, and shall have entered into an Employment Agreement
with Purchaser.
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NOW, THEREFORE, in consideration of the foregoing premises and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows.
1. PHYSICIAN'S COVENANTS.
1.1 As a material inducement to Purchaser to enter into the Stock
Purchase Agreement and except as set forth herein, or as permitted under the
Employment Agreement between Physician and Purchaser, Physician shall not
(directly or indirectly through any business, enterprise, venture, partnership,
corporation or any other entity controlled directly or indirectly by Physician
whether alone or as a partner, stockholder, creditor or otherwise) in the
Service Area described in Section 4 below:
A. During the term of Physician's employment with Company,
(i) practice medicine, or engage, participate, aid, assist,
or hold any interest in any business or provision of any service which is, or as
of Physician's engagement or participation, would become, competitive with any
aspect of Purchaser's or any of Purchaser's Affiliates' outpatient or other
healthcare services;
(ii) sell, transfer, assign or otherwise permit another
party to benefit from, any remaining goodwill attributable to Physician based
upon the provision of physician services by or through Physician;
(iii) engage or contract (other than with Purchaser or any of
Purchaser's Affiliates) for the provision of any management services to
Physician or any physician employed or under contract to Physician (as
applicable) which are the same as or substantially similar to any of the
services that Purchaser furnishes;
(iv) commit any other act or assist others to commit any
other act which might injure the business of Purchaser or Purchaser's
Affiliates;
B. During the term of Physician's employment with Company and for
a period of two (2) years thereafter,
(i) solicit or assist any other person to solicit any
business relating to a competing line of business (other than for Purchaser or
any of its affiliates) from any present or potential customer (including all
third party payors) of Physician, Seller, Purchaser, or any of their affiliates;
(ii) directly or indirectly employ, contract, solicit or
encourage any employee or other person under contract with Purchaser or any of
its Affiliates to leave the employ of any such entity, except pursuant to the
terms of the Stock Purchase Agreement; and
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(iii) directly or indirectly solicit, request, advise, or
encourage any present or future supplier, customer, patient or employee of
Purchaser or its Affiliates (including practices managed by Purchaser) to
withdraw, curtail, disenroll, or become enrolled with another provider of health
care, or cancel its business dealings with Purchaser or its affiliates, or take
any actions that might impair the relations of Purchaser or any of its
affiliates and their respective suppliers, customers, employees or others.
1.2 If any term or provision of this Section is determined to be illegal,
unenforceable or invalid in whole or in part for any reason, such illegal,
unenforceable or invalid provision or part thereof shall be stricken from this
Agreement, and such provision shall not affect the legality, enforceability or
validity of the remainder of this Agreement. If any provision or part thereof
of this Agreement is stricken from this Agreement, in accordance with the
provisions of this Section, then the stricken provision shall automatically be
replaced to the extent possible, with a legal, enforceable and valid provision
which is as similar in tenor to the stricken provision as is legally possible.
2. CONFIDENTIALITY. From and after the Closing Date, Physician shall keep
secret and retain in strictest confidence, and shall not use for the benefit of
any other party, except for Purchaser or any of Purchaser's Affiliates, trade
secrets known to Physician relating to the business and operations of Physician,
Seller, Purchaser or any of their affiliates, including without limitation,
customer lists, utilization data, patient records, business acquisition plans,
relating to the business and operations of Physician, Seller, Purchaser or any
of their affiliates learned by Physician before or after the date of this
Agreement, and shall not disclose them to anyone outside of Purchaser and its
Affiliates, provided however, that this section shall not apply to information
in the public domain or to information that is sought from Physician pursuant to
subpoena or court order (but Physician must provide notice to Purchaser or its
Affiliates in order for them to contest such subpoenas or court orders).
3. PHYSICIAN'S REPRESENTATION. Physician specifically acknowledges,
represents, and warrants that (i) Physician's covenants set forth in this
Agreement are being purchased in connection with the sale of the Stock to
Purchaser, (ii) such covenants are reasonable and necessary to protect the
legitimate interests of Purchaser, and (iii) Purchaser would not have entered
into the Stock Purchase Agreement in the absence of such restrictions.
Physician acknowledges that this Agreement is subject to all representations,
warranties and covenants in the Stock Purchase Agreement.
4. SERVICE AREA. The Service Area to which Physician's covenants in Section 1
applies is set forth in Exhibit A attached hereto.
5. TERM. Except for the provisions contained in Section 1.1.B, the term of
this Agreement commences as of the day and year first above written and
terminates upon the earlier to occur of:
(i) the termination of Physician's employment under the Employment
Agreement; or
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(ii) the date on which the Stock Purchase between Purchaser and
Physician is terminated due to a "Jeopardy Event" as defined in Section 10.1 of
the Stock Purchase Agreement; or
(iii) the date upon which Employer is in material default of any of
Employer's obligations under its Employment Agreement with Physician or the
Stock Purchase Agreement, and Physician terminates the Employment Agreement as a
result of such material breach. In the event of termination of Physician's
Employment Agreement by Physician for cause, as set forth therein, Employer
shall be required to pay to Physician the remaining compensation and benefits
owed under the Employment Agreement at such times as if the Employment Agreement
were still in full force and effect.
6. MISCELLANEOUS.
A. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
shall inure to the benefit of the parties and their respective heirs (as
applicable), legal representatives, and permitted successors and assigns. No
party may assign this Agreement or the rights, interests or obligations
hereunder. Any assignment or delegation in contravention of this Section shall
be null and void.
B. MEDICAL STAFF PRIVILEGES. Nothing in this Agreement is intended to
prohibit Physician from maintaining professional staff membership or clinical
privileges at any acute care hospital or other health facility licensed to
provide patient care for stays in excess of twenty-four (24) hours, so long as
maintaining such privileges does not in any manner result in Physician competing
with Employer in the Service Area.
C. COUNTERPARTS. This Agreement, and any amendments thereto, may be
executed in counterparts, each of which shall constitute an original document,
but which together shall constitute one and the same instrument.
D. HEADINGS. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Stock Purchase Agreement.
E. STOCKHOLDER IN PUBLIC COMPANY. Notwithstanding any provision to the
contrary, nothing contained herein shall prevent Physician from purchasing or
otherwise acquiring equity securities of a company that has a class of
securities traded on a national securities exchange whose business competes with
that of the Company, so long as Physician's ownership of such securities does
not exceed one percent (1%) of the total outstanding shares of such competitive
company.
F. AMENDMENT. This Agreement may not be amended except in writing and
as executed by all parties.
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G. TIME OF ESSENCE. Time is expressly made of the essence of this
Agreement and each and every provision hereof of which time of performance is a
factor.
H. NOTICES. Any notices required or permitted to be given hereunder by
any party to the other shall be in writing and shall be deemed delivered upon
personal delivery; twenty-four (24) hours following deposit with a courier for
overnight delivery; or seventy-two (72) hours following deposit in the U.S.
Mail, registered or certified mail, postage prepaid, return-receipt requested,
addressed to the parties at the following addresses or to such other addresses
as the parties may specify in writing:
If to Physician: Melvin L. Reich, D.O.
4603 Seashore Drive
Newport Beach, California 92663
With copy to: George Wall, Esq.
Palmieri, Tyler, Wiener, Wilhelm and Waldron
2603 Main Street, Suite 1300
Irvine, California 92714
If to Purchaser: Gregg DeNicola, M.D.
Prospect Medical Group, Inc.
18200 Yorba Linda Blvd., Suite 409
Yorba Linda, California 92686
With copy to: Dale S. Miller, Esq.
Miller & Holguin
1801 Century Park East, Suite 700
Los Angeles, CA 90067
I. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
J. SEVERABILITY. If any provision or portion of this Agreement is held
by a court of competent jurisdiction to be invalid or unenforceable, the
remainder of this Agreement will nevertheless continue in full force and effect
and shall not be invalidated or rendered unenforceable or otherwise adversely
affected, unless such invalidity or unenforceability would defeat an essential
business purpose of this Stock Purchase Agreement. Without limiting the
generality of the foregoing, if the provisions of this Agreement shall be deemed
to create a restriction which is unreasonable as to either duration or
geographical area, or both, the parties agree that the provisions of this
Agreement shall be enforced for such duration and in such geographical area as
any court of competent jurisdiction may determine to be reasonable.
K. ARBITRATION. The parties firmly desire to resolve all disputes
arising hereunder without resort to litigation in order to protect their
respective business reputations and the
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confidential nature of certain aspects of their relationship. Accordingly, any
controversy or claim arising out of or relating to this Agreement, or the breach
thereof, shall be settled by arbitration as set forth below.
(i) All disputes which in any manner arise out of or relate to
this Agreement or the subject matter thereof, shall be resolved exclusively by
arbitration in accordance with the provisions of this Section K. Either party
may commence arbitration by sending a written demand for arbitration to the
other party, setting forth the nature of the controversy, the dollar amount
involved, if any, and the remedies sought, and attaching a copy of this Section
to the demand.
(ii) The parties stipulate to arbitration before a single, mutually
agreed upon arbitrator sitting on the Los Angeles, California Judicial
Arbitration Mediation Services (JAMS) panel. In the event that the parties are
unable to agree upon the person chosen as arbitrator within 30 days of the
demand for arbitration, the arbitrator shall be selected in the sole discretion
of the JAMS administrator. The arbitrator shall be a member of the California
bar.
(iii) The parties shall share all costs of arbitration. The
prevailing party shall be entitled to reimbursement by the other party of such
party's attorneys' fees and costs and any arbitration fees and expenses incurred
in connection with the arbitration hereunder.
(iv) The substantive law of the State of California shall be
applied by the arbitrator. All proceedings in arbitration shall be in
accordance with the California Code of Civil Procedure, as amended, and the
parties shall have the right to legal discovery in any matter submitted to
arbitration in satisfaction of California Code of Civil Procedure Section
1283.05, as permitted by California Code of Civil Procedure Section 1283.1(b).
(v) Arbitration shall take place in Los Angeles, California unless
the parties otherwise agree. As soon as reasonably practicable, a hearing with
respect to the dispute or matter to be resolved shall be conducted by the
arbitrator. As soon as reasonably practicable thereafter, the arbitrator shall
arrive at a final decision, which shall be reduced to writing, signed by the
arbitrator and mailed to each of the parties and their legal counsel.
(vi) All decisions of the arbitrator shall be final, binding and
conclusive on the parties and shall constitute the only method of resolving
disputes or matters subject to arbitration pursuant to this Agreement. The
arbitrator or a court of appropriate jurisdiction may issue a writ of execution
to enforce the arbitrator's judgment. Judgment may be entered upon such a
decision in accordance with applicable law in any court having jurisdiction
thereof.
(vii) Notwithstanding the foregoing, because time is of the essence
of this Agreement, the parties specifically reserve the right to seek a judicial
temporary restraining order, preliminary injunction, or other similar equitable
relief.
(viii) The decision and award of the arbitrator shall be kept
confidential by the
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parties to the greatest extent possible. No disclosure of such decision or
award shall be made by the parties except as required by law or as necessary or
appropriate to effect the enforcement thereof.
(ix) Should either Employer or Physician institute any action or
procedure to enforce this Agreement or any provision hereof, or for damages by
reason of any alleged breach of this Agreement or of any provision hereof, or
for a declaration of rights hereunder (including without limitation
arbitration), the prevailing party in any such action or proceeding shall be
entitled to receive from the other party all costs and expenses, including
without limitation reasonable attorneys' fees, incurred by the prevailing party
in connection with such action or proceeding.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
of the day and year first written above.
"Purchaser"
PROSPECT MEDICAL GROUP, INC.
By: /s/ Gregg DeNicola
--------------------------------
Gregg DeNicola, M.D., President
"Physician"
By: /s/ Melvin L. Reich
--------------------------------
Melvin L. Reich, D.O.
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PERSONAL GUARANTY OF PAYMENT AND PERFORMANCE
THIS PERSONAL GUARANTY OF PAYMENT AND PERFORMANCE ("Guaranty"), is made as
of July 14, 1997, by Melvin L. Reich, D.O. ("Guarantor"), whose address is 4603
Seashore Drive, Newport Beach, California 92663, in favor of Prospect Medical
Group, Inc., a California professional corporation ("Purchaser"), whose address
is 18200 Yorba Linda Blvd., Suite 409, Yorba Linda, California 92686.
WITNESSETH:
WHEREAS, Guarantor is the sole shareholder of Santa Ana/Tustin Physicians
Group, Inc., a California professional corporation ("Company"); and
WHEREAS, Purchaser is acquiring all of the shares of Company pursuant to
the terms of that certain Agreement for the Purchase and Sale of Stock, dated
June 23, 1997, by and among Purchaser, Company and Guarantor ("Stock Purchase
Agreement"); and
WHEREAS, Company, Guarantor, and Purchaser are also willing to enter into
certain ancillary agreements in the form attached as exhibits to the Stock
Purchase Agreement (the term "Stock Purchase Agreement" includes the exhibits,
schedules and ancillary agreements to be delivered at Closing; all capitalized
terms are as defined in the Stock Purchase Agreement unless otherwise defined
herein); and
WHEREAS, Guarantor makes certain representations, warranties, indemnities,
and covenants in the Stock Purchase Agreement, relating to the payment and
performance of certain liabilities and claims of Company which occurred or arose
prior to the Closing Date from the Reserve Account (collectively, the
"Obligations"); and
WHEREAS, to the extent that the Reserve Account is insufficient to provide
for the payment of such Obligations, Guarantor is willing to guarantee the
Obligations to induce Purchaser to enter into the Stock Purchase Agreement;
NOW, THEREFORE, to induce Purchaser to enter into the Stock Purchase
Agreement and in consideration of the foregoing promises and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Guarantor hereby covenants and agrees for the benefit of
Purchaser, as follows:
1. GUARANTY.
1.1 Notwithstanding anything to the contrary contained in this Guaranty,
pursuant to the terms of the Stock Purchase Agreement, in the event Purchaser is
required to provide for the payment of any Obligation, Purchaser is required to
exhaust all sums in the Reserve Account prior to making a demand upon Guarantor
for payment. In the event that the funds in the Reserve Account are
insufficient to pay any or all claims or liabilities of Company which were
incurred
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prior to the Closing Date for which payment has not already been made, Guarantor
does hereby unconditionally and irrevocably guarantee to Purchaser the full and
prompt performance of the Obligations when such performance is due on a
dollar-for-dollar, after-tax basis (with such tax effects to be determined
within 20 days of the completion of an audit of Company's financial statements
for the first fiscal period following the Closing Date), including but not
limited to payment for breach of any of the Obligations. Purchaser and
Guarantor agree that Guarantor's liability for the Obligations shall be limited
to $1,000,000, exclusive of any amounts in the Reserve Account; provided
however, that the following shall not count toward such $1,000,000 limitation:
(i) any Obligation known by Guarantor to exist at the time of the execution of
the Stock Purchase Agreement which was not disclosed to Purchaser, or (ii)
Obligations resulting from fraud, tax liabilities, or a violation of state or
federal statutes or regulations governing the practice of medicine.
1.2 Subject to the limitations of Section 4 of this Guaranty, Guarantor
hereby agrees that if any performance of the Obligations is not rendered in
accordance with their terms for any reason whatsoever, Guarantor shall
immediately make such payments and performance. Guarantor further agrees to pay
Purchaser all expenses (including, without limitation, reasonable attorneys'
fees) paid or incurred by Purchaser in endeavoring to obtain performance of the
Obligations, to enforce any other obligations guaranteed hereby, or to enforce
this Guaranty.
2. REINSTATEMENT OF OBLIGATIONS. If at any time all or any part of any
payment or performance made by Guarantor or received by Purchaser from Guarantor
under or with respect to this Guaranty is or must be rescinded or returned for
any reason whatsoever (including, but not limited to, the insolvency, bankruptcy
or reorganization of Guarantor or Company), then the obligations of Guarantor
hereunder shall, to the extent of the payment or performance rescinded or
returned, be deemed to have continued in existence, notwithstanding such
previous payment or performance made by Guarantor, or receipt of payment or
performance by Purchaser, and the obligations of Guarantor hereunder shall
continue to be effective or be reinstated, as the case may be, as to such
payment or performance, all as though such previous payment or performance by
Guarantor had never been made.
3. WAIVERS BY GUARANTOR. To the extent permitted by law, Guarantor hereby
waives and agrees not to assert or take advantage of (as a defense or otherwise)
any one or more of the following:
3.1 Except as provided in Section 1.1 herein, any right to require
Purchaser to proceed against Company or any other person or to proceed against
or exhaust any security held by Purchaser at any time or to pursue any other
remedy in Purchaser's power or under any other agreement before proceeding
against Guarantor hereunder; and any right or claim or right to cause a
marshaling of the assets of Guarantor;
3.2 Any defense arising from the failure of Purchaser (i) to file or
enforce a claim against the estate (in administration, bankruptcy or any other
proceeding) of any other person or
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persons; (ii) to ascertain the extent or nature of the Collateral or other
rights with respect thereto, or the liability of any liable party or the
obligations evidenced or secured thereby; and
3.3 An assertion or claim that the automatic stay provided by 11 U.S.C.
Section 362 (arising upon the voluntary or involuntary bankruptcy proceeding of
Company) or any other stay provided under any other debtor relief law (whether
statutory, common law, case law or otherwise) of any jurisdiction whatsoever,
now or hereafter in effect, which may be or become applicable, shall operate or
be interpreted to stay, interdict, condition, reduce or inhibit the ability of
Purchaser to enforce any of its rights, whether now or hereafter required, which
Purchaser may have against Guarantor.
4. TERM. The term of this Guaranty shall be three (3) years from the date
hereof, except for (i) any Obligation known by Guarantor to exist at the time of
the execution of the Stock Purchase Agreement which was not disclosed to
Purchaser, or (ii) Obligations resulting from fraud, tax liabilities, or a
violation of state or federal statutes or regulations governing the practice of
medicine, in which case the Guaranty shall continue.
5. GENERAL PROVISIONS.
5.1 FULL RECOURSE. Except as provided in Section 1.1 herein concerning
the requirement that Purchaser first exhaust all sums in the Reserve Account
prior to making demand on Guarantor, or in Section 4 covering the term of this
Guaranty, all of the terms and provisions of this Guaranty are recourse
obligations as to Guarantor and not restricted by any limitation on personal
liability.
5.2 KNOWLEDGE OF COMPANY AND COMPANY'S SHAREHOLDER. As the sole
shareholder, director, and officer of Company prior to the Closing, Guarantor
warrants and represents that Guarantor is fully aware of the financial and
other conditions and status of Company and is executing and delivering this
Guaranty based solely upon Guarantor's own knowledge and independent
investigation of all matters pertinent hereto, and that Guarantor is not relying
in any manner upon any representation or statement of Purchaser, except as set
forth in the Stock Purchase Agreement. Guarantor warrants, represents and
agrees that Guarantor is in a position to obtain, and Guarantor hereby assumes
full responsibility for obtaining, any additional information concerning the
financial and other conditions and status of Company and any other matter
pertinent hereto, and that Guarantor is not relying upon Purchaser to furnish,
and shall have no right to require Purchaser to obtain or disclose, any
information with respect to the Obligations guaranteed hereby, the financial
condition or character of Company or the ability of Company to pay or perform
the Obligations guaranteed hereby, the existence of any security for any or all
of such indebtedness or obligations, the existence or nonexistence of any other
guaranties of all or any part of such indebtedness or obligations, any actions
or non-action on the part of Purchaser, Company or any other person or entity,
or any other matter, fact or occurrence whatsoever. By executing this Guaranty,
Guarantor acknowledges and knowingly accepts the full range of risks encompassed
within a contract of guaranty.
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5.3 SURVIVAL/BREACH BY PURCHASER. Except for a material breach by
Purchaser of a provision of the Stock Purchase Agreement and Employment
Agreement, and subject to the term set forth herein, this Guaranty shall be and
shall remain in full force and effect and shall survive the exercise of any
remedy by Purchaser under law, in equity, and under the Stock Purchase
Agreement, including, without limitation, any foreclosure or deed in lieu
thereof. In the event of a material breach by Purchaser of a provision of the
Stock Purchase Agreement or the Employment Agreement, the obligations, waivers
and subrogation of Guarantor hereunder shall be suspended until such breach is
cured.
5.4 RESERVATION OF RIGHTS. Nothing contained in this Guaranty shall
prevent or in any way diminish or interfere with any rights or remedies,
including, without limitation, the right to contribution, which Purchaser may
have against Company, Guarantor or any other party under any applicable federal,
state or local laws, all such rights being hereby expressly reserved.
5.5 RIGHTS CUMULATIVE. Purchaser's rights under this Guaranty shall be
in addition to all rights of Purchaser under law, in equity, and any other
agreement.
5.6 MITIGATION. Purchaser must act in good faith to mitigate any
damages or costs suffered as a result of Guarantor's failure to perform the
Obligations.
5.7 ENTIRE AGREEMENT; AMENDMENT; SEVERABILITY. Except as set forth in
the Stock Purchase Agreement, this Guaranty contains the entire agreement
between the parties respecting the matters herein set forth and supersedes all
prior agreements, whether written or oral, between the parties respecting such
matters; and Guarantor and Purchaser acknowledge that there are no
contemporaneous oral agreements with respect to the subject matter hereof. This
Guaranty may not be changed, modified or amended, except by a writing executed
by the parties hereto; and no obligation of Guarantor can be released or waived
by Purchaser or any agent of Purchaser, except by a writing duly executed by
Purchaser. A determination that any provision of this Guaranty is unenforceable
or invalid shall not affect the enforceability or validity of any other
provision, and any determination that the application of any provision of this
Guaranty to any person or circumstance is illegal or unenforceable shall not
affect the enforceability or validity of such provision as it may apply to any
other persons or circumstances.
5.8 GOVERNING LAW; BINDING EFFECT; ASSIGNMENT; WAIVER OF ACCEPTANCE.
This Guaranty shall be governed by and construed in accordance with the laws of
the State of California, except to the extent that the applicability of any of
such laws may now or hereafter be preempted by Federal law, in which case such
Federal law shall so govern and be controlling. The provisions of this Guaranty
shall be binding upon Guarantor and its respective heirs, executors, legal
representatives, successors and assigns and shall inure to the benefit of
Purchaser, the heirs, executors, legal representatives, successors and assigns
of Purchaser. This Guaranty shall in no event be impaired by any change which
may arise by reason of the death of Guarantor or by reason of the dissolution of
Company. Except for an assignment to St. Joseph's Hospital Systems, St Joseph's
Foundation, St. Joseph's Medical Corporation, or any of their affiliates, this
Guaranty is assignable by Purchaser with Seller's consent, which consent shall
not
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be unreasonably withheld, and any full or partial assignment hereof by Purchaser
shall operate to vest in the assignee all rights and powers herein conferred
upon and granted to Purchaser and so assigned by Purchaser. Guarantor expressly
waives notice of transfer or assignment of this Guaranty and acknowledges that
the failure by Purchaser to give any such notice shall not affect the
liabilities of Guarantor hereunder. Notwithstanding the foregoing, Guarantor
shall not assign any of its rights or obligations under this Guaranty.
Guarantor hereby waives any acceptance of this Guaranty by Purchaser, and this
Guaranty shall immediately be binding upon Guarantor.
5.9 NOTICES. All notices, demands, requests or other communications to
be sent by one party to the other hereunder or required by law shall be in
writing and shall be deemed to have been validly given or served by delivery of
the same in person to the intended addressee, or by depositing the same with
Federal Express or another reputable private courier service for next business
day delivery to the intended addressee at its address set forth on the first
page of this Guaranty or at such other address as may be designated by such
party as herein provided, or by depositing the same in the United States mail,
postage prepaid, registered or certified mail, return receipt requested,
addressed to the intended addressee at its address set forth on the first page
of this Guaranty or at such other address as may be designated by such party as
herein provided. All notices, demands and requests shall be effective upon such
personal delivery, or one (1) business day after being deposited with the
private courier service, or two (2) business days after being deposited in the
United States mail as required above. Rejection or other refusal to accept or
the inability to deliver because of changed address of which no notice was given
as herein required shall be deemed to be receipt of the notice, demand or
request sent. By giving to the other party hereto at least fifteen (15) days'
prior written notice thereof in accordance with the provisions hereof, the
parties hereto shall have the right from time to time to change their respective
addresses and each shall have the right to specify as its address any other
address within the United States of America.
5.10 NO WAIVER; TIME OF ESSENCE; BUSINESS DAY. The failure of any party
hereto to enforce any right or remedy hereunder, or to promptly enforce any such
right or remedy, shall not constitute a waiver thereof nor give rise to any
estoppel against such party nor excuse any of the parties hereto from their
respective obligations hereunder. Any waiver of such right or remedy must be in
writing and signed by the party to be bound. This Guaranty is subject to
enforcement at law or in equity, including actions for damages or specific
performance. All damages sought shall be on a dollar-for-dollar, after-tax
basis, with such tax effects to be determined within 20 days of the completion
of an audit of Company's financial statements for the first fiscal period
following the Closing Date.. Time is of the essence hereof. The term "business
day" as used herein shall mean a weekday, Monday through Friday, except a legal
holiday.
5.11 SUCCESSIVE ACTIONS. A separate right of action hereunder shall
arise each time Purchaser acquires knowledge of any failure of payment or
performance of any matter guaranteed by Guarantor under this Guaranty. Separate
and successive actions may be brought hereunder to enforce any of the provisions
hereof at any time and from time to time. No action hereunder shall preclude
any subsequent action, and Guarantor hereby waives and covenants not to assert
any defense in the nature of splitting of causes of action or merger of
judgments.
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6. ARBITRATION. The parties firmly desire to resolve all disputes arising
hereunder without resort to litigation in order to protect their respective
business reputations and the confidential nature of certain aspects of their
relationship. Accordingly, any controversy or claim arising out of or relating
to this Agreement, or the breach thereof, shall be settled by arbitration as set
forth below.
6.1 All disputes which in any manner arise out of or relate to this
Agreement or the subject matter thereof, shall be resolved exclusively by
arbitration in accordance with the provisions of this Section 6. Either party
may commence arbitration by sending a written demand for arbitration to the
other party, setting forth the nature of the controversy, the dollar amount
involved, if any, and the remedies sought, and attaching a copy of this Section
to the demand.
6.2 The parties stipulate to arbitration before a single, mutually
agreed upon arbitrator sitting on the Los Angeles, California Judicial
Arbitration Mediation Services (JAMS) panel. In the event that the parties are
unable to agree upon the person chosen as arbitrator within 30 days of the
demand for arbitration, the arbitrator shall be selected in the sole discretion
of the JAMS administrator. The arbitrator shall be a member of the California
bar.
6.3 The parties shall share all costs of arbitration. The prevailing
party shall be entitled to reimbursement by the other party of such party's
attorneys' fees and costs and any arbitration fees and expenses incurred in
connection with the arbitration hereunder.
6.4 The substantive law of the State of California shall be applied by
the arbitrator. All proceedings in arbitration shall be in accordance with the
California Code of Civil Procedure, as amended, and the parties shall have the
right to legal discovery in any matter submitted to arbitration in satisfaction
of California Code of Civil Procedure Section 1283.05, as permitted by
California Code of Civil Procedure Section 1283.1(b).
6.5 Arbitration shall take place in Los Angeles, California unless the
parties otherwise agree. As soon as reasonably practicable, a hearing with
respect to the dispute or matter to be resolved shall be conducted by the
arbitrator. As soon as reasonably practicable thereafter, the arbitrator shall
arrive at a final decision, which shall be reduced to writing, signed by the
arbitrator and mailed to each of the parties and their legal counsel.
6.6 All decisions of the arbitrator shall be final, binding and
conclusive on the parties and shall constitute the only method of resolving
disputes or matters subject to arbitration pursuant to this Agreement. The
arbitrator or a court of appropriate jurisdiction may issue a writ of execution
to enforce the arbitrator's judgment. Judgment may be entered upon such a
decision in accordance with applicable law in any court having jurisdiction
thereof.
6.7 Notwithstanding the foregoing, because time is of the essence of
this Agreement, the parties specifically reserve the right to seek a judicial
temporary restraining order, preliminary injunction, or other similar equitable
relief.
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6.8 The decision and award of the arbitrator shall be kept confidential
by the parties to the greatest extent possible. No disclosure of such decision
or award shall be made by the parties except as required by law or as necessary
or appropriate to effect the enforcement thereof.
6.9 Should either Employer or Physician institute any action or
procedure to enforce this Agreement or any provision hereof, or for damages by
reason of any alleged breach of this Agreement or of any provision hereof, or
for a declaration of rights hereunder (including without limitation
arbitration), the prevailing party in any such action or proceeding shall be
entitled to receive from the other party all costs and expenses, including
without limitation reasonable attorneys' fees, incurred by the prevailing party
in connection with such action or proceeding.
IN WITNESS WHEREOF, the undersigned Guarantor has executed this Guaranty as
of the day and year first above written.
By: /s/ Melvin L. Reich
-------------------------------------
Melvin L. Reich, D.O.
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DR. JACOB TERNER
PERSONAL GUARANTY
OF
PAYMENT AND PERFORMANCE
THIS GUARANTY OF REPAYMENT AND PERFORMANCE (the "Guaranty") is made and
entered into and effective this 23rd day of June, 1997 by and between Jacob Y.
Terner, M.D. and Santa Ana/Tustin Physicians Group, Inc., a California
Professional Corporation ("Company") and Melvin L. Reich, D.O. ("Reich").
Capitalized terms not used herein and not otherwise defined herein shall have
the meanings assigned to them in that certain Agreement For the Purchase and
Sale of Stock of Santa Ana/Tustin Physicians Group, Inc. ("Stock Purchase
Agreement") of even date herewith by and among Purchaser, Company, and Reich.
RECITALS
A. WHEREAS, pursuant to the terms of the Stock Purchase Agreement,
Purchaser is purchasing from Reich, all the issued and outstanding shares of the
Company for the aggregate consideration of Five Million Dollars ($5,000,000).
B. WHEREAS, Section 8.5(j) of the Stock Purchase Agreement provides that
in the event Purchaser does not timely make any payment when due, Terner shall
personally fund up to One Million Dollars ($1,000,000) of the Purchase Price.
C. WHEREAS, as additional security for the payment of the Purchase Price
and as a condition to the sale of the outstanding shares of the Company,
Purchaser is required by the Stock Purchase Agreement to have Terner execute and
deliver to Reich this Guaranty.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing, and of the mutual
covenants, conditions, agreements, representations and warranties hereinafter
contained and such other good and valuable consideration, the legal sufficiency
of which is acknowledged by Terner, the parties hereto agree as follows:
1. GUARANTY OF REPAYMENT AND PERFORMANCE. Terner hereby acknowledges
receipt of good, adequate, legal and valuable consideration including but not
limited to the fact that (i) Terner owns directly a cash equity interest in
Prospect Medical Holdings which will receive revenue from the Company based upon
a management agreement between the Company and Prospect Medical Holdings and
(ii) Terner not having to be the buyer for this acquisition. In the event
Purchaser does not timely pay any portion of the Purchase Price when due, as set
forth in the Stock Purchase Agreement, upon five (5) days prior written notice
from Reich, Terner hereby
<PAGE>
agrees to personally pay up to $1,000,000 of such amount (the "Guarantee
Amount") to Reich, on behalf of Purchaser. Reich agrees and acknowledges that
Terner's obligation to pay up to the Guarantee Amount shall not arise until such
time as Prospect does not timely make any payment required under the Stock
Purchase Agreement. Notwithstanding the foregoing, Terner's obligations
hereunder shall only arise if Purchaser has already deposited $1,900,000 into
the Escrow Account at the time the Escrow Account is opened and shall not arise
until forty two (42) days from the date of execution of the Stock Purchase
Agreement unless Purchaser elects to close earlier than forty two (42) days from
the execution date of this Stock Purchase Agreement in which event Terner's
obligations under this Guaranty shall commence the Closing Date. Terner's
liability hereunder shall be in an amount up to the Guarantee Amount plus
interest, costs, and fees including reasonable attorney fees incurred in the
enforcement of the Guarantee including those that would have accrued under the
Stock Purchase Agreement but for the commencement of a case under Title 11 of
the United States Bankruptcy Code (the "Bankruptcy Code") or any other law
governing insolvency, bankruptcy, reorganization, liquidation or like
proceeding. Terner's liability under this Guaranty is a guaranty of performance
and payment of the Guarantee Amount and not of collectability. In the event of
any breach of any of the terms and conditions of the Stock Purchase Agreement by
Reich, Terner's performance under this Guaranty shall be suspended until such
breach is cured.
2. CHANGES DO NOT AFFECT LIABILITY. Reich may without notice to Terner
and in his absolute discretion and without prejudice to him or in any way
limiting Terner's liability under this Guaranty, (a) grant extensions of time,
renewals or other indulgences and modifications to Terner or Prospect or any
other party under the Stock Purchase Agreement and all documents related thereto
or evidencing the transactions set forth in the Stock Purchase Agreement
(collectively, the "Stock Purchase Documents"), (b) change, amend or modify the
Stock Purchase Documents, (c) discharge or release any party or parties liable
under the Stock Purchase Documents, (d) accept or make compositions or other
arrangements or file or refrain from filing a claim in any bankruptcy proceeding
of Purchaser or any other guarantor or pledgor, (e) credit payments in such a
manner and order of priority to principal, interest or other obligations as
Reich may determine in his discretion, and (g) otherwise deal with Purchaser or
any party related to the transactions set forth in the Stock Purchase Documents.
Without limiting the generality of the foregoing, Terner hereby waives the
rights and benefits under CC Section 2819 and agrees that by doing so Terner's
liability shall continue even if Reich alters any obligations under the Stock
Purchase Documents in any respect or Reich's remedies or rights against
Purchaser are in any way impaired or suspended without Terner's consent.
3. WAIVERS OF CERTAIN RIGHTS AND DEFENSES. Except as provided in the
next paragraph, Terner hereby waives any and all benefits and defenses under CC
Section 2845, 2849 and 2850, including, without limitation, the right to require
Reich to (a) proceed against Purchaser or any other guarantor or pledgor and
without proceeding against or exhausting any security or collateral Reich holds.
Terner agrees that Reich may unqualifiedly exercise in its sole
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discretion any or all rights and remedies in enforcing this Guaranty, under
which Terner's liabilities shall remain independent and unconditional. Terner
agrees that Reich's exercise of certain of such rights or remedies may affect or
eliminate Terner's right of subrogation or recovery against Purchaser and that
Terner may incur a partially or totally nonreimbursable liability under this
Guaranty.
4. ADDITIONAL WAIVERS. Terner hereby waives diligence and all demands,
protests, presentments and notices of every kind or nature, including notices of
protest, dishonor, nonpayment, acceptance of this Guaranty and the creation,
renewal, extension, modification or accrual of any of the obligations Terner has
hereby guarantied. No failure or delay on Reich's part in exercising any power,
right or privilege hereunder shall impair any such power, right or privilege or
be construed as a waiver of or an acquiescence therein. Terner hereby waives
any defense to the enforcement of this Guaranty based upon the lack of
consideration in whole or in part.
5. GUARANTY MADE WITH FULL KNOWLEDGE. Terner has had the opportunity to
review matters discussed and contemplated by the Stock Purchase Documents,
including the remedies Reich may pursue against Purchaser in the event of a
default under the Stock Purchase Documents and Purchaser's financial condition
and ability to perform under the Stock Purchase Documents. Terner further
agrees to keep himself fully informed on all aspects of Purchaser's financial
condition and the performance of Purchaser's obligations to Reich and that Reich
has no duty to disclose to Terner any information pertaining to Purchaser or any
security of collateral.
6. GUARANTY CONTINUES IF PAYMENTS ARE AVOIDED OR RECOVERED FROM
PURCHASER. If all or any portion of the obligations guarantied hereunder are
paid or performed, Terner's obligations hereunder shall continue and remain in
full force and effect in the event that all or any part of such payment or
performance is avoided or recovered directly or indirectly from Reich as a
preference, fraudulent transfer or otherwise, irrespective of (a) any notice of
revocation given by Terner prior to such avoidance or recovery, and (b) payment
in full of the Purchase Price.
7. CHANGES, WAIVER, REVOCATIONS AND AMENDMENTS IN WRITING. No terms or
provisions of this Guaranty may be changed, waived, revoked, or amended without
Reich's prior written consent. Should any provision of this Guaranty to be
determined by a court of competent jurisdiction to be enforceable, all of the
other provisions shall remain effective.
This Guaranty embodies the entire agreement among the parties hereto with
respect to the matters set forth herein, and supersedes all prior agreements
among the parties with respect to the matters set forth herein. No course of
prior dealing among the parties, no usage of trade, and no parole or extrinsic
evidence of any nature shall be used to supplement, modify or vary any of the
terms hereof. There are no conditions to the full effectiveness of this
Guaranty other than set forth herein.
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8. LIMITATION OF LIABILITY. Company and Reich agree and acknowledge
that, except as specifically set forth herein, Terner shall have no personal or
individual liability under the Stock Purchase Documents or the transactions
contemplated under the Stock Purchase Documents or the transactions contemplated
thereto. Company and Reich further agree that Terner's liability herein is
limited solely the Guarantee Amount plus interest costs and fees including
reasonable attorney fees, and that Reich's damages in the event of a breach by
Terner of this Agreement shall be limited to $1,000,000 plus interest, cost, and
fees, including reasonable attorney fees as more specifically set forth in
Section 1 of this Guaranty.
9. ARBITRATION. The parties firmly desire to resolve all disputes
arising hereunder without resort to litigation in order to protect their
respective business reputations and the confidential nature of certain aspects
of their relationship. Accordingly, any controversy or claim arising out of or
relating to this agreement or the breach thereof, shall be settled by
arbitration as set forth below.
9.1 All disputes in any manner arise out of or relate to this
Agreement or the subject matter thereof, shall be resolved exclusively by
arbitration in accordance with the provisions of this Section 10. Either party
may commence arbitration by sending a written demand for arbitration to the
other party, setting forth the nature of the controversy, the dollar amount
involved, if any, and the remedies sought, and attaching a copy of this Section
to the demand.
9.2 The parties stipulate to arbitration before a single, mutually
agreed upon arbitrator sitting on the Los Angeles, California Judicial
Arbitration Mediation Services (JAMS) panel. In the event that the parties are
unable to agree upon the person chosen as arbitrator within 30 days of the
demand for arbitration, the arbitrator shall be selected in the sole discretion
of the JAMS administrator. The arbitrator shall be a member of the California
bar.
9.3 The parties shall share all costs of arbitration. The prevailing
party shall be entitled to reimbursement by the other party of such party's
attorneys' fees, and costs and any arbitration fees and expenses incurred in
connection with the arbitration hereunder.
9.4 The substantive law of the State of California shall be applied
by the arbitrator. All proceedings in arbitration shall be in accordance with
the California Code of Civil Procedure, as amended, and the parties shall have
the right to legal discovery in any matter submitted to arbitration in
satisfaction of California Code of Civil Procedure Section 1283.05, as permitted
by California Code of Civil Procedure Section 1283.1(b).
9.5 Arbitration shall take place in Los Angeles, California unless
the parties otherwise agree. As soon as reasonably practicable, a hearing with
respect to the dispute or matter to be resolved shall be conducted by the
arbitrator. As soon as reasonably practicable
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thereafter, the arbitrator shall arrive at a final decision, which shall be
reduced to writing, signed by the arbitrator and mailed to each of the parties
and their legal counsel.
9.6 All decisions of the arbitrator shall be final, binding and
conclusive on the parties and shall constitute the only method of resolving
disputes or matters subject to arbitration pursuant to this Agreement. The
arbitrator or a court of appropriate jurisdiction may issue a writ of execution
to enforce the arbitrator's judgement. Judgement may be entered upon such a
decision in accordance with applicable law in any court having jurisdiction
thereof.
9.7 Notwithstanding the foregoing, because time is of the essence of
this Agreement, the parties specifically reserve the right to seek a judicial
temporary restraining order, preliminary injunction, or other similar short term
equitable relief, and grant the arbitrator the right to make a final
determination of the parties' rights, including whether to make permanent or
dissolve such court order.
9.8 The decision and award of the arbitrator shall be kept
confidential by the parties to the greatest extent possible. No disclosure of
such decision or award shall be made by the parties except as required by law or
as necessary or appropriate to effect the enforcement thereof.
9.9 In the event of any dispute concerning this guaranty, the
prevailing party in any such action or proceeding shall be entitled to receive
from the other party all costs and expenses, including without limitation
reasonable attorneys' fees, incurred by the prevailing party in connection with
such action or proceeding.
10. MISCELLANEOUS.
10.1 NOTICES. Any notice, demand, or communication required,
permitted or desired to be given hereunder shall be deemed effectively given
when personally delivered or mailed by prepaid certified mail, return receipt
requested, addressed as follows:
If to Company or Reich: Melvin L. Reich, D.O.
4603 Seashore Drive
Newport Beach, CA 92663
With a copy to: George Wall, Esq.
Palmieri, Tyler, Wiener,
Wilhelm & Waldron, LLP
2603 Main Street, #1300
Irvine, CA 92714
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If to Purchaser: Prospect Medical Group, Inc.
18200 Yorba Linda Blvd.
Suite #409
Yorba Linda, CA 92686
Attn: Gregg DeNicola, M.D.
If to Terner: Jacob Y. Terner, M.D.
205 Chautauqua Blvd.
Pacific Palisades, CA 90272
10.2 GOVERNING LAW. This Agreement has been executed and delivered
and shall be interpreted, construed, and enforced in accordance with the laws of
the State of California.
10.3 ENFORCEMENT. In the event that any party shall be required to
enforce the terms of this Agreement, whether with or without arbitration, the
prevailing party shall be entitled to recover the costs of such action,
including reasonable attorneys' fees.
10.4 ENTIRE AGREEMENT. This Agreement shall constitute the entire
agreement of the parties with respect to the subject matter hereof and may not
be amended except in writing signed by both of the parties hereto. No oral
statements or prior written materials not specifically incorporated herein shall
be of any force or effect.
10.5 SEVERABILITY. In the event any provision of this Agreement is
held to be unenforceable or void for any reason, the remainder of the Agreement
shall be unaffected and shall remain in full force and effect in accordance with
its terms, unless such unenforceability or voidness defeats an essential
business term hereof.
10.6 ASSIGNMENT. This Agreement and any of the rights of obligations
of the parties hereunder shall be assignable only by Reich. Any other attempted
assignment, transfer, pledge or hypothecation or other disposition of this
Agreement or of any such rights, interests and benefits shall be null and void
and without effect.
10.7 BINDING EFFECT. This Agreement shall be binding upon and inure
to the benefit of the parties hereto and their respective heirs, legal
representatives, executors, administrators, successors and permitted assigns.
10.8 HEADINGS. The headings used herein are for convenience only and
do not limit the contents of this Agreement.
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10.9 COMPLIANCE WITH LAW. The parties recognize that this Agreement
at all times is to be subject to applicable state, local and federal law.
10.10 WAIVERS. The waiver of any of the provisions hereof shall
not be effective unless in writing and signed by the party intending to be bound
thereby. The waiver by any party or any act to be performed hereunder will not
constitute a waiver of any other act or identical act required to be performed
at a later time.
IN WITNESS WHEREOF, this Guaranty has been executed by the parties as of
the day and year first above written.
GUARANTOR
/s/ Jacob Y. Terner, M. D.
-----------------------------------------
Jacob Y. Terner, M. D.
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<PAGE>
AMENDED AND RESTATED MANAGEMENT SERVICES AGREEMENT
THIS AMENDED AND RESTATED MANAGEMENT SERVICES AGREEMENT ("Agreement") is
made and entered into as of September 15, 1998, and deemed to have been
effective as of July 14, 1997, by and between PROSPECT MEDICAL SYSTEMS, INC., a
Delaware corporation ("Manager"), and SANTA ANA/TUSTIN PHYSICIANS GROUP INC., a
California professional corporation ("GROUP").
RECITALS
A. GROUP is a California professional medical corporation duly organized
under the laws of the State of California and operated as a medical group and
individual practice association, which enters into agreements with organizations
such as health care service plans (HMOs), preferred provider organizations
(PPOs), exclusive provider organizations (EPOs), and other purchasers of medical
services (hereinafter collectively referred to as "Plans") for the arrangement
of the provision of health care services to subscribers or enrollees of said
Plans (the "Practice"); and
B. Manager has special expertise and experience in the operation,
management and marketing aspects of independent practice associations and
medical groups of the type operated or intended to be operated by GROUP.
Manager has made a significant investment in the development of a system of
operations, management and marketing necessary for management of the functions
desired by GROUP to be undertaken by Manager; and
C. GROUP desires to devote all of its time to arranging for the delivery
of health care services to Plan subscribers or enrollees, and in connection
therewith desires to obtain the professional assistance of Manager in managing
the business aspects of the Practice; and
D. Manager has provided GROUP with the necessary support to manage the
business aspects of the Practice, including but not limited to clerical and
billing services, claims pursuit and collection, cash flow management, marketing
and general administrative services (collectively, "Management Services"), to
enable GROUP to concentrate on the development of the professional aspects of
the Practice pursuant to a Management Services Agreement made and entered into
as of July 14, 1997, by and between Manager and GROUP (the "Original Management
Services Agreement"); and
E. Manager and GROUP desire to enter into this Agreement to incorporate
within the terms of one agreement all of the amendments previously made and to
be made as of the date of execution hereof to the Original Management Services
Agreement; and
F. Pursuant to this Agreement Manager will continue to provide Management
Services to GROUP.
<PAGE>
NOW, THEREFORE, in consideration of the mutual covenants and conditions
hereinafter set forth and in exchange for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:
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<PAGE>
AGREEMENT
1. PREMISES. Pursuant to the Master Lease specified below, Manager shall
provide adequate GROUP administrative office space at the addresses described
therein (the "Premises") and facilities for the operation of the Practice with
leasehold improvements, auxiliary services and utilities in order that GROUP may
effectively perform its functions and duties.
In consideration of the sums to be paid to Manager under the terms of
this Agreement, Manager hereby leases to GROUP during the term of this Agreement
the facilities and leasehold improvements at the Premises and the furniture,
fixtures and equipment (the "FF&E") listed on Exhibit "B" attached hereto and
incorporated herein by this reference, under the following terms and conditions:
1.1. Manager is the lessee, or will become lessee, under certain
leases for the Premises (hereinafter collectively referred to as the "Master
Lease") copies of which are attached hereto as Exhibit "A" and incorporated
herein by this reference. GROUP hereby acknowledges that the Premises described
in the Master Lease are suitable for the administrative office of the Practice.
Based and contingent upon GROUP's promise to timely pay all amounts due under
this Agreement, Manager hereby agrees to sublease the leased Premises to GROUP
upon the following terms and conditions:
1.1.1. This sublease between Manager and GROUP of the
Premises shall be subject to all of the terms and conditions of the Master
Lease. In the event of the termination of Manager's interest as lessee under
the Master Lease for any reason, then the sublease created hereby shall
simultaneously terminate unless GROUP is willing to assume the obligations under
the Master Lease and the Lessor consents thereto.
1.1.2. All of the terms and conditions contained in the
Master Lease are incorporated herein as terms and conditions of the sublease
(with each reference therein to "Lessor" and "Lessee," to be deemed to refer to
Manager and GROUP, respectively) and, along with the provisions of this Section
1.1 and Exhibit "A," shall be the complete terms and conditions of the sublease
created hereby.
1.1.3. Notwithstanding the foregoing, as between Manager
and GROUP, Manager shall remain responsible for meeting the financial
obligations of "Lessee" under the Master Lease, and GROUP shall have no monetary
obligation in that regard. In addition, as between Manager and GROUP, Manager
shall retain all rights to exercise any options to purchase the Premises, or
other similar rights of ownership or possession, which may be granted under the
Master Lease, and GROUP shall have no rights in that regard.
1.1.4. In the event this Agreement is terminated according
to its terms, this sublease shall also terminate automatically.
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1.1.5. If the Master Lease contains an option to renew the
term thereof, Manager shall notify GROUP, at least thirty (30) days prior to the
expiration of the time for exercising such option, of Manager's intention to
renew or not to renew such term. If Manager determines not to renew such term,
Manager shall, at GROUP's option and upon the consent of the Landlord in
accordance with the terms of the Master Lease, assign the Master Lease to GROUP,
including Manager's right to renew the term thereof.
2. PROVISION OF FURNITURE, FURNISHINGS AND EQUIPMENT ("FF&E"). Manager
hereby provides to GROUP, and GROUP hereby leases from Manager, all the FF&E,
which FF&E GROUP agrees are suitable and sufficient for GROUP's use in the
operation of GROUP's administrative office at the Premises and are generally in
good repair. The use by GROUP of said FF&E shall be subject to the following
conditions:
2.1. Title to all of the FF&E shall remain in Manager at all times,
and upon the termination of this Management Services Agreement, GROUP shall
immediately surrender the FF&E to Manager in as good condition as of the date
hereof, normal wear and tear excepted. Alternatively, GROUP, in its sole
discretion, shall have the option to purchase any or all of the FF&E upon
termination hereof. GROUP shall exercise such option, if at all, by giving
Manager written notice of same (the "Notice") within twenty (20) days of the
effective date of termination hereof. Upon exercise of such option, Manager
shall convey to GROUP within thirty (30) days of the effective date of
termination hereof, all of the FF&E identified in the Notice, together with (i)
any manufacturer's warranties that Manager has received in connection with such
FF&E and (ii) a bill of sale or such other instrument of conveyance as is
reasonably necessary to accomplish said purchase; and GROUP shall simultaneously
convey to Manager the purchase price for said FF&E. The purchase price shall be
paid all in cash, and shall equal the fair market value of the FF&E.
2.2. Manager shall be responsible for all repairs and maintenance
of the FF&E other than damage caused by negligence or willful misuse by GROUP;
provided, however, GROUP shall employ reasonable efforts to prevent damage to
and excessive wear of the FF&E, and shall promptly notify Manager of any needed
repairs thereto.
2.3. Manager shall be responsible for all property taxes and other
assessments relating to or arising out of ownership or use of the FF&E that
accrue on and after the date hereof.
2.4. Manager shall provide and maintain, at its expense, such
additional or replacement FF&E as the Practice reasonably requires from time to
time, as determined by Manager in its sole discretion, in consultation with
GROUP. Such additional or replacement FF&E shall be subject to all of the terms
of Section 2.1 above.
2.5. GROUP may provide additional equipment at the Practice ("GROUP
Equipment") at its sole cost and expense. GROUP shall be responsible for all
repairs, maintenance and replacement of, as well as all property taxes and other
assessments relating to or arising out of ownership or use of, such additional
equipment, unless GROUP requests that Manager provide such repairs, maintenance
and replacement upon such terms and conditions as
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the parties may agree including, without limitation, an increase in the
Management Fee (as defined in Section 9 below). Title to said GROUP Equipment
shall remain in GROUP's name at all times.
2.6. All revenues of the GROUP derived directly or indirectly from
any and all FF&E or GROUP equipment located at or used in connection with the
Practice, shall be included in "Gross Revenues" as defined in Exhibit "D."
3. MANAGER RESPONSIBILITIES.
3.1. During the term of this Agreement, GROUP appoints and engages
Manager to serve as its exclusive manager and administrator of all non-physician
functions and services relating to the operation of the Practice, and Manager
agrees to furnish to GROUP those Management Services set forth below.
Notwithstanding such appointment and engagement, GROUP will have exclusive
authority and control over the professional aspects of the Practice to the
extent the same constitute or directly affect the practice of medicine,
including all diagnosis, treatment and ethical determinations with respect to
patients which are required by applicable law to be decided by a physician.
3.1.1. GENERAL ADMINISTRATIVE SERVICES. Manager shall
provide general business management, administration and supervision for the
business operations of GROUP, which shall include secretarial and other office
personnel support services, staff support for GROUP'S board of directors and
committee meetings, administrative record keeping, and other similar
administrative services required in the day-to-day operation of GROUP.
3.1.2. ACCOUNTING AND FINANCIAL MANAGEMENT SERVICES.
Manager shall provide the following accounting and financial management
services:
3.1.2.1. Manager shall have exclusive
decision-making authority with respect to the establishment and preparation of
annual budgets for the Practice, which budgets shall reflect in reasonable
detail anticipated revenues and expenses.
3.1.2.2. Manager shall, in consultation with
GROUP, establish bank accounts in the name of GROUP ("Accounts") for the deposit
of all sums received by GROUP for services provided to Members. GROUP agrees
that Manager shall have the authority to endorse all checks made payable to
GROUP and deposit checks and funds received by GROUP in Accounts. Manager shall
further have the authority to make transfers of funds to Accounts and further,
Manager shall have the authority to sign checks and stop payment on any checks
drawn on Accounts.
3.1.2.3. Manager agrees to reconcile checks
written with bank statements on a monthly basis;
3.1.2.4. Manager agrees to make recommendations
regarding check signature approvals and banking procedures of GROUP;
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3.1.2.5. Manager agrees to prepare balance sheets
and income statements on a monthly basis during the term of this Agreement.
Such financial statements shall not be audited statements. Manager agrees to
cooperate with any annual audit GROUP obtains at its sole cost and expense by an
independent public accountant selected by GROUP;
3.1.2.6. Manager shall receive and deposit on a
timely basis capitation and other payments received by GROUP;
3.1.2.7. Manager shall calculate primary care
capitation and specialty, ancillary and other payable claims based on the
records provided by the Participating Plans and shall prepare checks to pay such
amounts due and shall mail said payments to the respective providers;
3.1.2.8. Manager shall monitor Plan subscribers
or enrollees exceeding stop loss deductibles and communicate with Plans orally
or in writing to seek reimbursement on behalf of GROUP;
3.1.2.9. Manager shall bill other payors for
coordination of benefits and other third party liability payments according to
the terms of the Plan/GROUP Agreements;
3.1.2.10. Manager shall administer capitation and
other distributions from Plans including auditing and monitoring of risk pools,
negotiation settlement of GROUP's share of such pools and establishment and
maintenance of incurred but not reported ("IBNR") reserves for GROUP;
3.1.2.11. Manager shall monitor any other revenue
receipt programs Plans may have, including but not limited to pre-existing
pregnancy recovery, and seek reimbursement from said Plans;
3.1.2.12. Manager shall assist GROUP in
establishing and administering a physician incentive system and a system to
establish and adjust reserves for medical expenses.
3.1.3. OFFICE SERVICE; BILLING. Manager shall provide
bookkeeping and accounting services, including, without limitation, maintenance,
custody and supervision of GROUP's business records, papers and documents,
ledgers, journals and reports, and the preparation, distribution and recording
of all bills and statements for professional services rendered by GROUP, as well
as all reports and forms required by applicable third party payors. GROUP shall
at all times have the ultimate responsibility for setting all fees for
professional services provided on a fee for service basis to patients of the
Practice, as well as negotiating with each managed care contract Payor. All
billings for services rendered to patients by the Practice shall be made under
GROUP's name and provider number(s), and Manager shall act as GROUP's agent in
the preparation, rendering and collection of such billings. GROUP hereby
appoints Manager for the term hereof as its true and lawful agent for the
following purposes:
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3.1.3.1. to bill patients in GROUP's name and on
its behalf;
3.1.3.2. to collect accounts receivable generated
by such billings in GROUP's name and on GROUP's behalf;
3.1.3.3. to submit, process and collect all
claims for payment to, and receive on behalf of GROUP payments from, the
patients, Plans, Medicare, Medicaid, and all other third-party payors;
3.1.3.4. to take possession of, endorse and
deposit in the name and on behalf of GROUP to one or more Accounts designated by
GROUP any notes, checks, money orders, insurance payments, and any other
instruments received as payment of accounts receivable; and
3.1.3.5. to collect in GROUP's name and on its
behalf all collections of Gross Revenues (as defined in Exhibit "D" hereto).
3.1.4. CLAIM SETTLEMENT; EXCULPATION. GROUP acknowledges
and agrees that Manager shall have discretion to compromise, settle, write off
or determine not to appeal a denial of any claim for payment for any particular
professional service rendered at the Practice. Further, GROUP agrees to hold
harmless Manager and its officers, directors, agents, contractors,
representatives and employees, from and against any and all liability, loss,
damages, claims, causes of action, and expenses associated therewith (including,
without limitation, attorneys' fees) caused or asserted to have been caused,
directly or indirectly, by or as a result of any acts, errors or omissions
hereunder of Manager or any of its officers, directors, agents, contractors,
representatives and employees, in performing Manager's billing or collection
duties hereunder.
3.1.5. FINANCIAL REPORTS. Manager shall furnish to GROUP
monthly and annual financial reports reflecting the GROUP's financial status,
provided that Manager shall have no obligations with respect to any
shareholder's of GROUP personal finances or any tax returns of the GROUP or any
shareholder of GROUP.
3.1.6. PROVIDER CONTRACT ADMINISTRATION. During the term
of this Agreement, Manager shall provide the following provider contract
administration services to GROUP:
3.1.6.1. Identify and solicit participation of
health care providers identified by the GROUP as necessary for GROUP operations;
3.1.6.2. Review and make recommendations
regarding the business terms of agreements between GROUP and Participating
Providers;
3.1.6.3. Make recommendations regarding
compensation to Participating Providers;
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3.1.6.4. Make recommendations for the
development, in conjunction with GROUP, of guidelines for the selection, hiring
or firing of Participating Providers;
3.1.6.5. Make recommendations regarding the
definition of primary, specialty and ancillary services;
3.1.6.6. Establish and exercise decision-making
authority over the establishment of GROUP policies and procedures, including
without limitation, patient acceptance policies and procedures, except with
respect to the professional aspects of the Practice to the extent the same
constitute or directly affect the practice of medicine which are required by
applicable law to be decided by a physician.
3.1.6.7. Instruct all Participating Providers and
their office staff regarding established GROUP policies and procedures at least
annually during the term of this Agreement.
3.1.6.8. Coordinate the preparation, negotiation
and renewal of GROUP Participating Provider Agreements.
3.1.7. ADMINISTER MEMBER ELIGIBILITY PROCESS. Manager
shall provide the following services regarding administration of the member
eligibility process:
3.1.7.1 Maintain and update a current
eligibility list to Plan subscribers and enrollees under all Plan agreements.
3.1.7.2 Verify eligibility on claims and
referrals based on the most current information provided by Plans;
3.1.7.3 Administer system for retroactive
eligibility determination and assist GROUP in identifying outstanding accounts
receivable from ineligible patients.
3.1.8. UTILIZATION MANAGEMENT/QUALITY ASSURANCE. Manager
agrees to provide the following services regarding utilization management and
quality assurance.
3.1.8.1. Manager shall develop a proposal
outlining the structure and functions of a GROUP utilization and quality
management plan after reviewing the requirements of each Plan. GROUP agrees,
following review of Manager's recommendations, to adopt a GROUP utilization and
quality management plan which includes a list of services for which Manager has
received authority from GROUP to authorize services provided. In authorizing
said services, Manager shall be the agent of GROUP;
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3.1.8.2. Manager shall implement systems,
programs and procedures necessary for GROUP and Participating Providers to
perform utilization and quality management.
3.1.8.3 Manager shall recommend procedures for
prior authorization of elective, urgent and emergent out-patient ambulatory
surgery and hospital procedures;
3.1.8.4 Manager shall assist GROUP with
prospective, concurrent and retrospective review of medical procedures in
accordance with GROUP policies and Plan requirements;
3.1.8.5 Manager shall provide data regarding the
use of outpatient and inpatient services by provider to GROUP;
3.1.8.6 Manager shall provide data regarding the
use of noncontracting providers;
3.1.8.7 Manager shall provide secretarial
support, logs, and minutes to the Medical Director and the UR/QA Committee of
GROUP;
3.1.8.8 Manager shall assist Medical Director
and the UR/QA Committee in responding to Plan Member grievances based on the
instructions of the Medical Director;
3.1.8.9 Manager shall provide staff assistance
to GROUP in the credentialing process GROUP is required to conduct to assure
that providers have current licenses and medical staff privileges.
3.1.9. SUPPLIES. Manager shall order and purchase all
supplies required by GROUP in connection with the operation of the
administrative office of the Practice, including furnishing to GROUP all
necessary forms, supplies, postage and duplication services, provided that all
supplies acquired and services provided shall be reasonably necessary in
connection with the day-to-day operations of the Practice.
3.1.10. FILING OF REPORTS. Manager shall prepare and file
all forms, reports, and returns required by law in connection with unemployment
insurance, workers' compensation insurance, disability benefits, social
security, and other similar laws (excluding income or franchise tax forms of
GROUP or any of GROUP's shareholders, employees or contractors or providing any
other tax-related services on their behalf) now in effect or hereafter imposed.
3.1.11. MARKETING AND PUBLIC RELATIONS SERVICES. Manager
will assist GROUP in GROUP's marketing, public relations and advertising of the
health care services provided by GROUP. Manager, shall provide and be
principally responsible for marketing and
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advertising services for GROUP and prepare signs, brochures, letterhead,
advertisements, and other marketing materials for GROUP. Manager may, at its
discretion, contract with third parties to assist it in the provision of GROUP
marketing and public relations services, should Manager deem such action
advisable. Manager shall produce and distribute such written descriptive
materials concerning GROUP's professional services, subject to the prior
approval of GROUP, as may be necessary or appropriate to the conduct of the
Practice. In providing such marketing services, Manager is acting solely in its
capacity as administrator for the GROUP. At no time shall Manager hold itself
out as providing, or actually provide, medical services on behalf of GROUP. All
such marketing services shall be conducted in accordance with the laws, rules,
regulations and guidelines of all applicable governmental and quasi-governmental
agencies, including but not limited to the Medical Board of California. Manager
shall be the owner and holder of all right, title and interest in and to any
such marketing and advertising materials.
3.1.12. PROFESSIONAL AND OTHER SERVICES. Manager shall be
responsible for arranging and paying for payroll, legal and accounting services
related to GROUP operations in the ordinary course of business, including the
cost of enforcing any managed care plan, physician or subcontractor contracts,
but excluding the cost of malpractice suits.
3.2. MANAGED CARE CONTRACTING.
3.2.1. Manager shall act as GROUP's exclusive agent in
seeking and negotiating managed care contracts ("Contracts"). Manager is hereby
authorized to negotiate, in its sole discretion, all terms of the Contracts.
GROUP hereby appoints Manager for the term hereof as its true and lawful agent
to perform all actions contemplated by this Section including, without
limitation, the evaluation, negotiation, administration, renewal and execution
of Contracts on GROUP's behalf and binding GROUP to performance thereunder,
provided that the Plan with whom each Contract is entered agrees to pay an
amount for GROUP's professional services thereunder equal to or greater than the
minimum rate that GROUP shall specify to Manager. GROUP shall complete and
execute the Power of Agency attached hereto as Exhibit "C."
3.2.2. Manager shall also be responsible for general
monitoring of GROUP compliance with the requirements, terms and conditions of
Plan Contracts.
3.2.3. Manager shall notify and provide copies to GROUP of
each Contract (together with all related materials received from the applicable
Payor) that Manager executes as GROUP's agent. GROUP shall comply with all
terms of each Contract including, without limitation, the terms of all documents
or instruments incorporated therein by reference and all documents or
instruments related thereto that Manager executes or agrees to on GROUP's
behalf, as well as all applicable law. GROUP further agrees that an essential
term of this Agreement is GROUP's undertaking to provide cost-effective medical
care consistent with accepted medical practices prevailing in the GROUP's
service area.
3.2.4. Nothing in this Agreement shall prevent Manager from
entering into similar agreements with Plans on behalf of other independent
practice associations, medical
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groups, physicians, health care professionals or entities comprised of physician
or health care professionals.
3.2.5. GROUP acknowledges and agrees that (i) Manager shall
in no way be responsible for payment of any sums payable to GROUP under any such
Contract (whether by any Payor or otherwise), and (ii) Manager in no way
guarantees or insures the payment to GROUP of any such amounts.
3.3. PERSONNEL. Manager shall employ or contract with and provide
all necessary non-physician personnel, including quality assurance, utilization
review, claims processing, secretarial and clerical personnel as are reasonably
necessary for the conduct of the Practice (collectively, "Manager Personnel").
Manager shall, in its sole and absolute discretion, determine the types and
numbers of personnel and the number of hours and schedules of said personnel it
determines are necessary or appropriate to provide the administrative and
management services to be provided pursuant to this Agreement. Manager shall
provide such personnel at its sole cost and expense and such personnel may, at
the sole and absolute discretion of Manager, be employees or independent
contractors of Manager. Manager shall, in its sole and absolute discretion,
have the right, but shall not be required, to engage as Manager Personnel any or
all of those individuals who were employees of GROUP immediately prior to the
effective date hereof ("GROUP's Former Employees"). Manager shall have sole
control over promotion and employee disciplinary and termination matters with
respect to Manager Personnel (including, without limitation, GROUP's Former
Employees), and shall not be responsible for any accrued vacation, paid time off
or other benefits to such individuals that have accrued prior to the date that
Manager engages them as its employees.
3.4. All professional medical and health care services provided to
subscribers or enrollees shall be the ultimate responsibility of the GROUP's
Participating Providers. GROUP shall use its best efforts to cause
Participating Providers to cooperate with Manager in the implementation of the
protocols, programs, policies, and procedures developed for GROUP by Manager.
3.5. Manager is hereby expressly authorized by GROUP to perform all
services required of Manager pursuant to the terms of this Agreement in the
manner Manager deems reasonable and appropriate to meet the day-to-day
requirements of GROUP. To the extent required or desirable to enable Manager to
perform such services, GROUP hereby appoints Manager for the term hereof as its
true and lawful agent. GROUP acknowledges and agrees that Manager may
subcontract with other persons or entities, including entities related to
Manager by ownership or control, to perform any part or all of the services
required of Manager hereunder.
3.6. Subject to applicable securities, health care and other laws
or regulations, Manager agrees to use its best efforts to cause the holding
company of Manager to issue, or otherwise make available, stock or
exchange-listed stock options or warrants of such holding company for use as
consideration for the acquisition by GROUP of medical groups, IPAs or other
forms of physician practices or, as consideration for any other appropriate use.
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3.7. Upon the request of GROUP, Manager shall provide or arrange
for the provision of additional services, beyond those described herein. Any
additional services provided by Manager are subject to Manager's capacity and
availability to provide the services so requested. Should Manager provide such
additional services, GROUP agrees to pay Manager for such services at its then
current rates as a supplemental payment to the Management Fee described herein.
3.8. Notwithstanding any other provision contained herein, Manager
shall not be liable to GROUP and shall not be deemed to be in default hereunder
for the failure to perform or provide any of the services, personnel or other
obligations to be performed or provided by Manager pursuant to this Agreement if
such failure is a result of collective bargaining, a labor dispute, act(s) of
God, or any other event which is beyond the reasonable control of Manager or
which was not reasonably foreseeable by Manager.
4. RESPONSIBILITIES OF GROUP.
4.1. GROUP covenants and agrees that, at all times during the term
of this Agreement and any extension thereof, it shall conduct all corporate
activities required by its Articles of Incorporation and Bylaws, including but
not limited to election of a Board of Directors, election of Officers,
appointment of committee members including but not limited to the Utilization
Review and Quality Assurance Committees. In addition, GROUP agrees to appoint a
Medical Director. GROUP shall be solely responsible for payment of any and all
compensation, payroll taxes, fringe benefits, disability insurance, workers'
compensation insurance and any other benefits of all such individuals.
4.2. GROUP shall not enter into any agreements with Participating
Providers unless such Participating Providers have: (i) current unrestricted
licenses to practice their respective professions in the State of California and
(ii) current unrestricted Federal Drug Enforcement Agency ("DEA") numbers. In
addition, where GROUP contracts with individual physicians, such physicians
shall have medical staff membership at the hospitals required by Participating
Plans and where GROUP contracts with licensed clinics and medical groups, at
least one primary care physician practicing at each clinic or medical group
shall have medical staff membership at the hospitals required by Participating
Plans. GROUP further agrees to establish procedures to ensure that
Participating Providers meet these requirements on an ongoing basis. Manager
shall reasonably cooperate with and assist GROUP to meet its obligations under
this Section 4.2; provided however, that GROUP acknowledges and agrees that it
shall retain ultimate responsibility for meeting such obligations.
4.3. GROUP acknowledges and agrees that it is solely responsible
for making all required reports to the Medical Board of California under Section
805 of the California Business and Professions Code and the National
Practitioner Data Bank.
4.4. GROUP shall, at its sole cost and expense, procure and
maintain at all times during the term of this Agreement comprehensive general
and professional liability insurance covering all activities of GROUP directly
or indirectly relating to GROUP, each policy in a
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minimum amount of $1,000,000.00 per occurrence and $3,000,000.00 in the
aggregate. The aforedescribed comprehensive general and professional liability
insurance shall be issued by a company or companies authorized to do business in
California with a financial rating of at least A:12 or better in "Best's Key
Rating Guide" or its equivalent. In the event GROUP procures a "claims made"
policy as distinguished from an "occurrence" policy, GROUP shall procure and
maintain at its sole cost and expense, prior to termination of such insurance,
"tail" coverage to continue and extend coverage complying with this Agreement
after the end of the "claims made" policy. Upon reasonable request from
Manager, GROUP shall cause to be issued to Manager proper certificates of
insurance, evidencing that the foregoing provisions of this Agreement have been
complied with, and said certificates shall provide that prior to any
cancellation or change in the underlying insurance during the policy period, the
insurance carrier shall first give thirty (30) calendar days written notice to
Manager.
4.5. Subject to the terms and conditions of Sections 3.1.6.3 and
3.1.6.4 herein, GROUP shall, at its sole cost and expense, including, but not
limited to, the payment of all salaries, benefits, medical malpractice
insurance, employ or contract with such physicians as shall be reasonably
necessary for the conduct of the Practice.
4.6. GROUP shall ensure that Participating Providers procure and
maintain professional liability insurance with minimum coverage amounts of
$1,000,000.00 per occurrence and $3,000,000.00 in the aggregate. GROUP shall
ensure that any Participating Provider who procures insurance required hereunder
on a "claims made" rather than an "occurrences" form will obtain either extended
reporting insurance coverage ("tail coverage") with liability limits equal to
those most recently in effect prior to the day of termination of such
Participating Provider's contract with GROUP, or will enter into such other
arrangements as shall reasonably assure the maintenance of coverage for such
Provider, GROUP, and Manager against the risk of loss in respect of professional
services rendered by such provider while this Agreement was in effect and for a
period of not less than seven (7) years after the date of termination of this
Agreement.
4.7. GROUP acknowledges and agrees that it shall reasonably assist
and cooperate with Manager to meet all of Manager's obligations under this
Agreement, including approval of agreements and provision of information. GROUP
acknowledges and agrees that Manager shall have no liability for GROUP's failure
to pay any and all of GROUP's debts and expenses.
5. TERM; TERMINATION.
5.1. TERM. The term of this Agreement (the "Term") shall commence
on the date hereof and shall expire on the thirtieth (30th) annual anniversary
hereof unless earlier terminated as provided below. The term of this Agreement
shall be automatically extended for additional terms of ten (10) years each,
unless either party delivers to the other party, not less then twelve (12)
months nor earlier than fifteen (15) months prior to the expiration of the
preceding term, written notice of such party's intention not to extend the term
of this Agreement.
5.2. TERMINATION FOR CAUSE.
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5.2.1. Manager may terminate this Agreement for cause at
any time during the Term immediately upon written notice (except as otherwise
provided below). For purposes of this Section 5.2.1 "cause" shall include,
without limitation, the following:
5.2.1.1. If GROUP fails to materially perform any
obligation required hereunder, and such default shall continue for sixty (60)
calendar days after written notice from Manager specifying the nature and extent
of failure to materially perform such obligation, this Agreement shall terminate
automatically and immediately upon the expiration of said sixty (60) calendar
day period; provided, however, that if the obligation which GROUP fails to
perform is other than the failure to make payment of money, and greater than
sixty (60) calendar days are required to perform said obligation, then such
party shall not be in default of this Agreement and the Agreement shall not
terminate as provided hereinabove if such party commences performance within
said sixty day period and diligently pursues said obligation to completion.
5.2.1.2. In the event the performance by either
party hereto of any term, covenant, condition or provision of this Agreement
should be determined by a state or federal court or governmental agency or court
of law to be in violation of any statute, ordinance, or be otherwise deemed
illegal ("Jeopardy Event"), then the parties shall use their best efforts to
meet forthwith and attempt to negotiate an amendment to this Agreement to remove
or negate the effect of the Jeopardy Event. In the event the parties are unable
to negotiate such an amendment within thirty (30) days following written notice
by either party of the Jeopardy Event, then Manager may terminate this Agreement
immediately upon written notice.
5.2.2. GROUP may terminate this Agreement for cause at any
time during the Term immediately upon written notice (except as otherwise
provided below). For purposes of this Section 5.2.2 "cause" shall include,
without limitation, the following:
5.2.2.1. If Manager fails to materially perform
any obligation required hereunder which failure amounts to gross negligence,
fraud or an illegal act on the part of Manager, and such default shall continue
for sixty (60) calendar days after written notice from GROUP specifying the
nature and extent of failure to materially perform such obligation, this
Agreement shall terminate automatically and immediately upon the expiration of
said sixty (60) calendar day period; provided, however, that if the obligation
which Manager fails to perform is other than the failure to make payment of
money, and greater than sixty (60) calendar days are required to perform said
obligation, then such party shall not be in default of this Agreement and the
Agreement shall not terminate as provided hereinabove if such party commences
performance within said sixty day period and diligently pursues said obligation
to completion.
5.2.3. Either party may terminate this Agreement for cause
at any time during the Term immediately upon written notice. For purposes of
this Section 5.2.3 "cause" shall include, without limitation, the following:
5.2.3.1. If either party shall apply for or
consent to the appointment of a receiver, trustee or liquidator in bankruptcy,
make a general assignment for the benefit of creditors, file a petition or
answer seeking reorganization or arrangement with creditors,
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or take advantage of any bankruptcy, insolvency, reorganization, moratorium or
other law for the benefit of creditors, or if any order, judgment, or decree
shall be entered by any court of competent jurisdiction on the application of a
creditor or otherwise adjudicating either party bankrupt or approving a petition
seeking reorganization of either party or appointment of a receiver, trustee or
liquidator of either party of all or a substantial part of its assets, and such
order, judgment or decree shall continue stayed and in effect for sixty (60)
calendar days after its entry, termination shall be effective automatically and
immediately upon the occurrence of the foregoing.
5.3. JEOPARDY. In the event the performance by either party hereto
of any term, covenant, condition or provision of this Agreement should be
determined by a state or federal court or governmental agency to be in violation
of any statute, ordinance, or be otherwise deemed illegal ("Jeopardy Event"),
then the parties shall use their best efforts to meet forthwith and attempt to
negotiate an amendment to this Agreement to remove or negate the effect of the
Jeopardy Event. In the event the parties are unable to negotiate such an
amendment within thirty (30) days following written notice by either party of
the Jeopardy Event, then either party may terminate this Agreement immediately
upon written notice.
6. RIGHTS OF MANAGER UPON TERMINATION.
6.1. In the event of the termination of this Agreement for any
reason, including without limitation the breach of this Agreement by either
party, Manager shall be entitled to recover (out of the Accounts (as defined in
Section 3.1.2.2 hereof) or otherwise) from GROUP all fees, and any and all
advances and other charges owed to Manager that had accrued but were unpaid as
of the date of termination.
6.2. In the event of termination of this Agreement for any reason,
Manager shall remain entitled to its Management Fee with respect to all Gross
Revenues (as defined in Exhibit "D" hereto) that have accrued on or before the
effective date of termination, which shall be payable, without limitation, out
of Net Revenues attributable thereto whether received before, on or after the
effective date of termination. Further, GROUP shall remain obligated to
reimburse Manager for any and all other unpaid Management Fees that have accrued
hereunder as of the date of termination.
7. REPRESENTATIONS AND WARRANTIES OF GROUP. The following
representations and warranties of GROUP are made to Manager for the purpose of
inducing Manager to enter into this Agreement. GROUP represents and warrants as
follows:
7.1. GROUP is a corporation duly organized, validly existing and in
good standing under the laws of the State of California and has all necessary
corporate powers to own its properties and to operate pursuant to its corporate
purposes.
7.2. GROUP's Board of Directors has all requisite power to execute,
deliver and perform this Agreement. Neither the execution and delivery of this
Agreement, nor the consummation and performance of the transaction contemplated
in this Agreement, shall constitute
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a default or an event that would constitute a default under, or violation or
breach of, GROUP's Articles of Incorporation, Bylaws or any license, lease,
franchise, mortgage, instrument, or other agreement to which GROUP may be bound.
7.3. GROUP has furnished Manager full and complete copies of all
contracts and agreements affecting GROUP including, but not limited to, all
contracts to which GROUP is a party.
7.4. GROUP and any and all physicians providing services to
Participating Plans have each complied with, and are not in violation of,
applicable federal, state or local statutes, laws and regulations including, but
not limited to, statutes, laws and regulations regarding the practice of
medicine and surgery in California, participation in the Medicaid and Medicare
programs or the operation of GROUP and all applicable standards of practice
relating to the provision of professional services hereunder.
7.5. GROUP and any and all Participating Providers providing
services for the GROUP have each obtained and currently maintain all necessary
licenses, permits, contracts, and approvals required by federal, state or local
statutes and regulations for the proper conduct of the business of the GROUP as
it is now being conducted and have been approved by the Board of Directors or
its properly designated committee, as documented by written committee minutes.
7.6. There is no action, suit, proceeding, investigation or
litigation outstanding, pending or, to the best of GROUP's knowledge,
threatened, affecting GROUP other than routine patient collection matters and
professional liability cases adequately covered by insurance.
7.7. GROUP represents and warrants that each GROUP Participating
Provider is as of the date hereof, and shall at all times during the term hereof
be and remain:
7.7.1. duly licensed to practice medicine within the State
of California and in possession of a federal DEA number, all without limitation,
restriction or condition whatsoever;
7.7.2. entitled to receive Medicare and Medicaid
reimbursement without limitation, restriction or condition whatsoever;
7.7.3. in compliance with the insurance requirements set
forth in Section 4.6 hereof.
7.8. GROUP represents and warrants that it and each GROUP
Participating Provider shall (i) comply with all applicable governmental laws,
regulations, ordinances, and directives and (ii) perform his or her work and
functions at all times in strict accordance with currently approved methods and
practices in his or her field.
7.9. GROUP represents and warrants that, as of the date hereof:
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7.9.1. All of GROUP's Former Employees and any current
non-professional employees of GROUP related to the Practice ("Practice
Employees") (i) have either been properly terminated as of the closing under the
Stock Purchase Agreement (the "Closing") without creating any cause of action or
otherwise giving rise to any liability for wrongful discharge, breach of
contract, tort or other cause of action at law or in equity, and there are no
such actions pending or, to GROUP's knowledge, threatened, and GROUP has
satisfied all obligations to such employees for all accrued salaries and
benefits, or (ii) are subject to such other disposition as is satisfactory to
Manager.
7.9.2. There is no liability to any employee or third
party, including any governmental agency, for any employee benefits,
compensation, taxes or withholdings of any kind with respect to any of the
Practice Employees other than those items arising in the normal course of
business immediately prior to the Closing, all of which items shall be set forth
in Schedule 7.9.2. There are no accrued vacations or sick leave for any of the
Practice Employees for which Manager may become liable by reason of any of the
transactions contemplated under this Agreement. GROUP shall be solely
responsible to comply with the requirements, if any, of the federal Worker
Adjustment and Retraining Notification Act.
7.9.3. There are no threats of strikes or work stoppages by
any of the Practice Employees. The GROUP is not a party to any contract or
agreement with a labor union or any local or subdivision thereof, and has not
been charged with any unresolved unfair labor practices, and there are no labor
grievances or any present union organizing activity among any of the Practice
Employees.
8. REPRESENTATIONS AND WARRANTIES OF MANAGER. The following
representations and warranties of Manager are made to GROUP for the purpose of
inducing GROUP to enter into this Agreement. Manager represents and warrants as
follows:
8.1. Manager is a corporation duly organized, validly existing and
in good standing under the laws of the State of California and has all necessary
corporate powers to own its properties and to operate pursuant to its corporate
purposes.
8.2. Manager has all requisite power to execute, deliver and
perform this Agreement. Neither the execution and delivery of this Agreement,
nor the consummation and performance of the transaction contemplated in this
Agreement, shall constitute a default, or an event that would constitute a
default under, or violation or breach of, Manager's Articles of Incorporation,
Bylaws or any license, lease, franchise, mortgage, instrument, or other
agreement to which Manager may be bound.
8.3. There is no action, suit, proceeding, investigation or
litigation outstanding, pending or, to the best of Manager's knowledge,
threatened, affecting Manager.
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9. MANAGER COMPENSATION.
9.1. As compensation for its services hereunder, Manager shall be
reimbursed its Costs (as defined in Exhibit D attached hereto) and paid a
management fee (the "Management Fee") in the amount set forth on Exhibit D
attached hereto and incorporated herein by reference.
9.2. After deduction of amounts which are reimbursed by Manager and
which are retained by Manager as Management Fee compensation, all remaining
Gross Revenues shall be remitted to GROUP. From such sums, Manager shall pay,
on GROUP's behalf, the Cost of Medical Services (as defined in Exhibit D
attached hereto) such other payments or disbursement which Manager may be
authorized or required to make pursuant to this Agreement and such payments or
disbursements which GROUP shall direct Manager to make. Should the funds in
GROUP's accounts not be sufficient at any time during the term of this Agreement
to make such disbursements and to meet the GROUP's financial obligations,
Manager shall have the right (but not the obligation) to loan to GROUP funds in
an amount sufficient to allow GROUP to meet its financial obligations. Such
loan shall bear interest at a rate that is at or above fair market value and
shall have such other terms as the parties may agree from time to time. Manager
shall not lend any funds to GROUP for such purposes without the prior approval
of GROUP's Board of Directors or the officer(s) of GROUP delegated such power of
approval by GROUP's Board of Directors.
10. RECORDS.
10.1. All medical records and documents, including reports, x-rays,
and other similar types of reports for patients of GROUP providers shall be the
property of GROUP's providers. GROUP agrees to require GROUP providers to allow
Manager and its duly authorized representatives to inspect, audit and duplicate
any data or records necessary for Manager to perform its duties pursuant to this
Agreement. GROUP and Manager shall comply with all applicable federal, state,
and local laws and regulations pertaining to the confidentiality of said medical
records.
10.2. All business records, information, software and systems of the
Manager relating to the provision of its services under this Agreement shall
remain the property of the Manager and may be removed by the Manager upon any
termination of this Agreement.
11. INDEMNIFICATION. Each party shall indemnify, defend and hold harmless
the other, its officers, directors, agents, contractors, representatives and
employees, and each of its affiliates from and against any and all liability,
loss, damages, claims, causes of action, and expenses associated therewith
(including, without limitation, attorneys' fees) caused or asserted to have been
caused, directly or indirectly, by or as a result of any acts, errors or
omissions hereunder of the other, its contractors, shareholders, employees or
agents during the term hereof. The provisions of this section shall survive the
expiration or earlier termination of this Agreement.
18
<PAGE>
12. PROPRIETARY INFORMATION.
12.1. At all times during the term hereof and following the
expiration or earlier termination of this Agreement, all trade secrets and
proprietary confidential information of Manager, including without limitation,
all forms of contracts and other business documents or information of Manager,
whether currently or in the future developed or maintained by Manager and
including any and all deletions, additions, modifications and amendments thereto
and further including the amount of compensation to be paid to Manager for its
services hereunder (collectively, "Manager's Proprietary Materials"), shall be
the exclusive, sole and absolute property of Manager. Both parties acknowledge
and agree that Manager has developed Manager's Proprietary Materials at
significant expense, and that said Proprietary Materials are not available for
review or use by members of the public. All of Manager's Proprietary Materials
are and shall at all times remain confidential and proprietary and constitute
valuable trade secrets of Manager. Except in the ordinary course of performing
its obligations under this Agreement and except upon Manager's prior written
consent, GROUP shall not disclose to anyone, use, copy, or take any such trade
secrets or confidential and proprietary information for GROUP's benefit or gain
either during the term of this Agreement or at any time after the termination
hereof. Upon any expiration or earlier termination of this Agreement for any
reason, GROUP shall not, without the prior written consent of Manager, take or
use any of Manager's Proprietary Materials, and shall return to Manager all of
Manager's Proprietary Materials in GROUP's possession or control.
12.2. At all times during the term hereof and following the
termination of this Agreement, GROUP shall not, directly or indirectly,
interfere with, disrupt or attempt to disrupt the relationship, contractual or
otherwise, between Manager and any health care provider or supplier (including,
without limitation, any physician or osteopath), or any employee, independent
contractor, consultant or agent of Manager. GROUP further agrees not to hire,
engage or contract with, either as an independent contractor, employee or in any
other capacity, any personnel of Manager, other than personnel of Manager who
are GROUP's Former Employees, during the first twelve (12) months following the
effective expiration or termination date hereof without Manager's prior written
consent.
12.3. GROUP shall inform all of GROUP's Former Employees specified
by Manager in writing, within ten (10) days following the date hereof, that they
are now employees of Manager. Notwithstanding the provisions of Section 12.2
above, upon termination of this Agreement, Manager may, at its option, require
GROUP upon written notice to hire any or all of GROUP's Former Employees at
salary and benefit levels equal to or greater than the salary and benefits that
Manager was paying those individuals as of their last day of employment with
Manager.
12.4. The provisions of this Section 12 shall survive the
termination of this Agreement.
13. INDEPENDENT CONTRACTORS. The parties hereto acknowledge and agree
that the relationship created between Manager and GROUP is strictly that of
independent contractors. Nothing contained herein shall be construed as
creating a partnership or joint venture
19
<PAGE>
relationship between the parties. Each party hereto shall be responsible for
all compensation, salaries, taxes, withholdings, contributions, benefits, and
workers' compensation insurance with respect to all personnel employed or
contracted by said party and shall indemnify, defend and hold harmless the other
party and its officers, directors, agents, contractors, representatives and
employees (and, in the case of GROUP's indemnification of Manager, Manager's
affiliates and subcontractors) from and against any and all liability, loss,
damages, claims, causes of action, and expenses associated therewith (including,
without limitation, attorneys' fees) caused or asserted to have been caused,
directly or indirectly, by or as a result of same. The provisions of this
Section shall survive the expiration or earlier termination of this Agreement.
14. ASSIGNABLE OPTION AGREEMENT. The parties shall enter into an
Assignable Option Agreement in the form attached hereto as Exhibit E.
15. MISCELLANEOUS.
15.1. NO THIRD PARTY BENEFICIARIES. The parties intend that the
benefits of this Agreement shall inure only to Manager and GROUP and not to any
third person, except as expressly so stated herein. Notwithstanding anything
contained herein, or any conduct or course of conduct by any party hereto,
before or after signing this Agreement, this Agreement shall not be construed as
creating any right, claim or cause of action against either Manager or GROUP by
any other person or entity.
15.2. ENTIRE AGREEMENT. This Agreement, together with all exhibits
and schedules hereto, and all documents referred to herein, constitutes the
entire agreement between the parties with respect to the subject matter hereof,
supersedes all other and prior agreements on the same subject, whether written
or oral, and contains all of the covenants and agreements between the parties
with respect to the subject matter hereof. Each party to this Agreement
acknowledges that no representations, inducements, promises, or agreements,
orally or otherwise, have been made by the other party(ies), or by anyone acting
on behalf of any party, that are not embodied herein, and that no other
agreement, statement, or promise not contained in this Agreement shall be valid
or binding. This Agreement incorporates the Original Management Services
Agreement, together with all amendments previously made and to be made to the
date of execution hereof, and is deemed to have been effective as of the date of
the Original Management Services Agreement.
15.3. SUCCESSORS AND ASSIGNS. All of Manager's rights and duties
under this Agreement may be assigned or delegated by Manager, including but not
limited to, an assignment to Imperial Bank, a California banking corporation.
Notwithstanding any other provision of this Agreement, neither this Agreement
nor the rights and duties of this Agreement may be assigned or delegated by
GROUP. This Agreement binds the successors, heirs, and authorized assignees of
the parties.
15.4. COUNTERPARTS. This Agreement, and any amendments thereto, may
be executed in counterparts, each of which shall constitute an original
document, but which together shall constitute one and the same instrument.
20
<PAGE>
15.5. HEADINGS. The section headings contained in this Agreement
are inserted for convenience only and shall not effect in any way the meaning or
interpretation of this Agreement.
15.6. NOTICES. Any notices required or permitted to be given
hereunder by either party to the other shall be in writing and shall be deemed
delivered upon personal delivery or delivery by electronic facsimile;
twenty-four (24) hours following deposit with a courier for overnight delivery;
or seventy-two (72) hours following deposit in the U.S. Mail, registered or
certified mail, postage prepaid, return-receipt requested, addressed to the
parties at the following addresses or to such other addresses as the parties may
specify in writing:
If to GROUP: Santa Ana/Tustin Physicians Group Inc.
999 North Tustin Avenue, Suite 120
Santa Ana, California
Attention: President
If to Manager: Prospect Medical Systems, Inc.
18200 Yorba Linda Blvd., Suite 409
Yorba Linda, CA 92886
Attention: President
15.7. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of California.
15.8. AMENDMENT. This Agreement may be amended at any time by
agreement of the parties, provided that any amendment shall be in writing and
executed by both parties.
15.9. SEVERABILITY. If any provision of this Agreement is held by a
court of competent jurisdiction to be invalid or unenforceable, the remaining
provisions will nevertheless continue in full force and effect, unless such
invalidity or unenforceability would defeat an essential business purpose of
this Agreement.
15.10. EXHIBITS AND SCHEDULES. All exhibits and schedules attached
to this Agreement are incorporated herein by this reference and all references
herein to "Agreement" shall mean this Agreement together with all such exhibits
and schedules.
15.11. TIME OF ESSENCE. Time is expressly made of the essence of
this Agreement and each and every provision hereof of which time of performance
is a factor.
15.12. DISPUTE RESOLUTION.
15.12.1. Subject to the terms of Section 15.12.2, in the event
the parties hereto are unable to resolve any and all disputes in connection with
this Agreement, either party may commence arbitration by sending a written
demand for arbitration to the other party, setting
21
<PAGE>
forth the nature of the matter to be resolved by arbitration. Except as may be
expressly provided to the contrary herein, the arbitration procedure described
in this Section shall be the sole means of resolving any disputes hereunder.
15.12.2. Notwithstanding the foregoing, it is expressly
understood by the parties that the arbitration procedure described in this
Section shall not be applicable to any disputes between the parties as to
matters over which Manager has exclusive decision-making authority pursuant to
the terms hereof, including without limitation, the Manager's exclusive
decision-making authority with respect to the development of guidelines for the
selection, hiring and firing of health care professionals, compensation payable
to health care professionals, scope of services to be provided, patient
acceptance policies and procedures, pricing of services, negotiation and
execution of contracts, and approval of operating and capital budgets.
15.12.3. There shall be one arbitrator. If the parties shall
fail to select a mutually acceptable arbitrator within ten (10) days after the
demand for arbitration is mailed, then the parties stipulate to arbitration
before a retired judge sitting on the Los Angeles Judicial Arbitration Mediation
Services (JAMS) panel.
15.12.4. The parties shall share all costs of arbitration.
The prevailing party shall be entitled to reimbursement by the other party of
such party's attorneys' fees and costs and any arbitration fees and expenses
incurred in connection with the arbitration hereunder.
15.12.5. The substantive law of the State of California shall
be applied by the arbitrator. The parties shall have the rights of discovery as
provided for in Part 4 of the California Code of Civil Procedure and as provided
for in Section 1283.05 of said Code. The California Code of Evidence shall
apply to testimony and documents submitted to the arbitrator.
15.12.6. Arbitration shall take place in Los Angeles,
California unless the parties otherwise agree. As soon as reasonably
practicable, a hearing with respect to the dispute or matter to be resolved
shall be conducted by the arbitrator. As soon as reasonably practicable
thereafter, the arbitrator shall arrive at a final decision, which shall be
reduced to writing, signed by the arbitrator and mailed to each of the parties
and their legal counsel.
15.12.7. All decisions of the arbitrator shall be final,
binding and conclusive on the parties and shall constitute the only method of
resolving disputes or matters subject to arbitration pursuant to this Agreement.
The arbitrator or a court of appropriate jurisdiction may issue a writ of
execution to enforce the arbitrator's judgment. Judgment may be entered upon
such a decision in accordance with applicable law in any court having
jurisdiction thereof.
15.12.8. Notwithstanding the foregoing, because time is of the
essence of this Agreement, the parties specifically reserve the right to seek a
judicial temporary restraining order, preliminary injunction, or other similar
short term equitable relief, and grant the arbitrator the right to make a final
determination of the parties' rights, including whether to make permanent or
dissolve such court order.
22
<PAGE>
15.12.9. Notwithstanding the foregoing, any and all
arbitration proceedings are conditional upon such proceedings being covered
under the parties' respective risk insurance policies.
15.13. ATTORNEYS' FEES. Should either party institute any action or
procedure to enforce this Agreement or any provision hereof, or for damages by
reason of any alleged breach of this Agreement or of any provision hereof, or
for a declaration of rights hereunder (including, without limitation,
arbitration), the prevailing party in any such action or proceeding shall be
entitled to receive from the other party all costs and expenses, including
without limitation reasonable attorneys' fees, incurred by the prevailing party
in connection with such action or proceeding.
15.14. FURTHER ASSURANCES. The parties shall take such actions and
execute and deliver such further documentation as may reasonably be required in
order to give effect to the transactions contemplated by this Management
Services Agreement and the intentions of the parties hereto.
15.15. RIGHTS CUMULATIVE. The various rights and remedies herein
granted to Manager or GROUP shall be cumulative and in addition to any other
rights Manager or GROUP, respectively, may be entitled to under law. The
exercise of one or more rights or remedies shall not impair the right of Manager
or GROUP to exercise any other right or remedy, at law or equity.
15.16. FEDERAL SOCIAL SECURITY REQUIREMENTS. Pursuant to Section
1395x (V)(1)(I) of Title 42 of the United States Code, with respect to any
services furnished under the terms of this Agreement if the value or cost of
which is Ten Thousand Dollars ($10,000) or more over a twelve (12) month period,
until the expiration of four (4) years after the termination of this Agreement,
Manager shall make available upon written request to the Secretary of the United
States Department of Health and Human Services, or upon request by the
Comptroller General of the United States General Accounting Office, or any of
their duly authorized representatives, a copy of this Agreement and such books,
documents and records as are necessary to certify the nature and extent of the
costs of the services provided by Manager under this Agreement.
Manager further agrees that in the event Manager carries out any of
its duties under this Agreement through a subcontract, with a value or cost of
Ten Thousand Dollars ($10,000) or more over a twelve (12) month period, such
subcontract shall contain a clause to the effect that until the expiration of
four (4) years after the furnishing of such services pursuant to such
subcontract, the subcontractor shall make available, upon written request to the
Secretary of the United States Department of Health and Human Services, or upon
request to the Comptroller General of the United States General Accounting
Office, or any of their duly authorized representatives, the subcontract and
such books, documents and records of such organization as are necessary to
verify the nature and extent of such costs.
23
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
"MANAGER" "GROUP"
PROSPECT MEDICAL SYSTEMS, INC. SANTA ANA/TUSTIN PHYSICIANS GROUP INC.
By: By:
------------------------------- -------------------------------
Gregg DeNicola, M.D.
Its: President Its:
-------------------------------
24
<PAGE>
LIST OF EXHIBITS AND SCHEDULES
Exhibits
--------
A - Master Lease
B - Furniture, Fixtures & Equipment
C - Power of Agency
D - Management Fee
Schedule
--------
7.9.2 Practice Employee Liabilities
<PAGE>
EXHIBIT "A"
MASTER LEASE
Set forth below is a list of the leases which comprise the Master Lease and
are attached as Exhibit "A" to the Management Services Agreement, made and
entered into as of July 14, 1997, by and between Prospect Medical Systems, Inc.
and Santa Ana/Tustin Physicians Group, Inc.; these leases have been
intentionally omitted from this copy of said Management Services Agreement.
1. Lease Agreement, dated as of September 9, 1991 entered into by and
between United Western Medical Centers, as original landlord, and Santa
Ana/Tustin Physicians Group, Inc., as amended by an Extension of Lease, made and
entered into as of December 8, 1996 and a Partial Termination of Lease, made and
entered into as of March 1, 1995 (for 999 North Tustin Avenue, Suites 118, 120
and 121, Santa Ana, CA 92705)
2. Medical Office Suite Lease between United Western Medical Centers, as
original landlord, and Santa Ana/Tustin Physicians Group, Inc., a California
professional corporation, dated as of March 1, 1995, as amended by a First
Amendment to Medical office Suite Lease, dated as of December 15, 1996 (for 999
North Tustin Avenue, Suites 213, 214, 216 and 218 and a portion of Suite 220,
Santa Ana, CA 92705)
<PAGE>
EXHIBIT "B"
FURNITURE, FIXTURES & EQUIPMENT
<PAGE>
EXHIBIT "C"
POWER OF AGENCY
<PAGE>
EXHIBIT "C"
POWER OF AGENCY
This Power of Agency is made and entered into in connection with that
certain Management Services Agreement (the "Agreement") dated as of the 14th day
of July, 1997, between Prospect Medical Systems, Inc., a Delaware corporation
("Manager"), and Santa Ana/Tustin Physicians Group, Inc., a professional
corporation ("GROUP"), as amended.
1. DEFINITIONS. Capitalized terms used herein and not otherwise defined
herein shall have the meaning assigned to them in the Agreement.
2. POWER OF MANAGER. GROUP hereby appoints the Manager or its designee
or successor, as GROUP's agent ("Agent") to act for GROUP and in GROUP's name,
place and stead for the purposes of: (a) communicating the terms and conditions
under which GROUP would accept a Contract with each Plan, as set forth in the
Agreement and Exhibit "C" thereto; (b) executing on behalf of GROUP each
Contract that contains said terms and conditions or that contains any other
terms and conditions that are not rejected by GROUP; (c) administering executed
Contracts, as set forth below; (d) performing all actions on behalf of GROUP
contemplated by the Agreement relating to Contracts, including, without
limitation, the evaluation, negotiation and renewal of Contracts; (e)
negotiating and executing all business agreements and leases on GROUP's behalf
in accordance with the Agreement; (f) endorsing all checks made payable to GROUP
for services provided to Members; (g) taking all steps required or desirable to
submit, process and collect all claims for payment to patients, Plans, Medicare,
Medicaid and all other third party payors; and (h) receiving and depositing
capitation and other payments received by GROUP.
3. ADMINISTRATION. Agent shall maintain in his/her files a copy of each
executed Contract and shall provide to GROUP a list of Plans contracting with
GROUP. Notwithstanding anything herein to the contrary, GROUP shall look solely
to Plans and/or enrollees or beneficiaries of Plans, as applicable, for payment
for medical services and supplies and neither Manager nor any officer, employee,
agent or affiliate of Manager shall be liable for such payment.
4. TERM. The term of this Power of Agency shall be coextensive with the
term of the Agreement.
5. FULL AUTHORITY. Agent is hereby granted full authority to act in any
manner proper, necessary or convenient to the exercise of the foregoing powers,
including substitution and revocation. GROUP hereby ratifies every act that
Agent may lawfully perform in exercising those powers.
<PAGE>
IN WITNESS WHEREOF, this Power of Agency is executed effective as of the
day and year first above written.
"MANAGER" "GROUP"
PROSPECT MEDICAL SYSTEMS, INC. SANTA ANA/TUSTIN PHYSICIANS
GROUP INC.
By: By:
------------------------------ -----------------------------
Gregg DeNicola, M.D.
Its: President Its:
------------------------------
<PAGE>
EXHIBIT "D"
MANAGEMENT FEE
<PAGE>
EXHIBIT "D"
MANAGEMENT FEE
A. DEFINITIONS
COST OF MEDICAL SERVICES means with respect to the GROUP, the
aggregate compensation of GROUP's employed physicians and physician extenders
(e.g. physician assistants and nurse practitioners), charges incurred by the
GROUP for independent contractor physicians, the cost of services ordered by
GROUP through its physicians for managed care patients, the cost of GROUP's
employee benefits including, but not limited to, vacation pay, employer and
employee contributions to any 401(k) plan or other retirement plan for the
benefit of GROUP employees, sick pay, health care expenses, GROUP's share of
employment and payroll taxes, GROUP's employees' professional dues and all other
expenses and payments required to be made by GROUP to or for physicians pursuant
to physician employment and independent contractor agreements (including expense
reimbursements, discretionary bonuses, incentives based on profitability or
productivity, and payments paid and accrued or deferred).
MANAGER'S COSTS means all operating and non-operating expenses and
other costs directly or indirectly incurred by Manager, including but not
limited to direct labor costs (for all employees of Manager or its affiliates
and for any independent contractors or consultants to Manager), indirect labor
costs, supplies, all amounts paid by Manager or GROUP to satisfy any obligations
of GROUP to non-professional employees and third parties (other than for the
Cost of Medical Services), obligations under any lease or purchase agreement or
arrangement for which Manager has direct or indirect financial liability, and
direct and indirect overhead and other expenses relating to the operation of
GROUP's administrative and non-medical management affairs and relating to
GROUP's direct and indirect corporate overhead (including but not limited to all
interest expense and other expenses which are attributable generally to
Manager's business operations in accordance with Manager's corporate allocation
policies as such are in effect from time to time).
GROSS REVENUES means all sums which are (i) attributed to GROUP
(determined on an accrual basis) as compensation for the provision of medical
services by GROUP employed and independent contractor physicians and physician
extenders, including but not limited to all capitated income, all rights to
receive GROUP's portion of hospital and other shared risk pool payments, all
copayments, coordination of benefits, third party recovery, insured services,
enrollment protection (or other such revenue as is available to replenish
capitated services) and all rights to receive fee-for-service income for
medical, diagnostic and therapeutic services provided to GROUP patients; and
(ii) derived by GROUP or its employees other than from the provision of medical
services, including but not limited to consulting services, insurance and legal
recoveries, royalties and licensing payments, franchise payments, rents and
lease payments, and proceeds from the sale of assets or the merger or other
business combination of GROUP.
<PAGE>
NET-PRE-TAX INCOME means Gross Revenues less the sum of Manager's
Costs and the Cost of Medical Services after provision of related bonuses but
before provision for income taxes.
B. MANAGEMENT FEE
For its services hereunder, which shall include the providing of all
facilities and furniture, fixtures and equipment at the Premises and all
non-physician employees of Manager who perform services at or for the
Practice and all management services provided hereunder, Manager shall
(i) retain that portion of the Gross Revenues which is equal to Manager's Costs
plus (ii) [ ** ] of Gross Revenues plus (iii) a fee for marketing and public
relations services of [ ** ] per month plus (iv) [ ** ] of Net Pre-tax Income
in excess of [ ** ] of Gross Revenues; provided however, that if after the
payment of Manager's Costs as set forth in item (i) herein GROUP's working
capital is insufficient to meet GROUP's liabilities or other obligations, the
amount of Gross Revenues paid to Manager shall be reduced accordingly such
that GROUP will be able to meet such obligations.
<PAGE>
SCHEDULE 7.9.2
PRACTICE EMPLOYEE LIABILITIES
None
<PAGE>
AMENDMENT NUMBER ONE TO REVOLVING CREDIT AGREEMENT
This AMENDMENT NUMBER ONE TO REVOLVING CREDIT AGREEMENT (this
"AMENDMENT"), dated as of July 14, 1997, is entered into by and between PROSPECT
MEDICAL HOLDINGS, INC., a Delaware corporation ("BORROWER"), and IMPERIAL BANK,
a California banking corporation ("BANK"), with reference to the following
facts:
A. Borrower and Bank have previously entered into that certain
Revolving Credit Agreement, dated as of July 3, 1997 (the "AGREEMENT"); and
B. Borrower and Bank desire to amend the Agreement in accordance
with the terms of this Amendment.
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. DEFINED TERMS. All initially capitalized terms used but not
defined herein shall have the meanings assigned to such terms in the Agreement.
In addition, Section 1.1 of the Agreement is hereby amended by amending the
definitions of "CREDIT SUCCESSION AGREEMENT," "LOAN DOCUMENTS," "OPTION
AGREEMENT," "PHYSICIAN GROUP," and "REAL ESTATE LEASES," in their entirety as
follows:
"`CREDIT SUCCESSION AGREEMENT' means and includes (i) that
certain Amended and Restated Credit Succession Agreement, dated as of
July 14, 1997, among Borrower, Bank, each Guarantor, each Physician
Group and each Physician Group Shareholder, and (ii) each other Credit
Succession Agreement now or hereafter entered into by and among the
foregoing parties.
"`LOAN DOCUMENT(S)' means each of the following documents,
instruments, and agreements individually or collectively, as the
context requires:
(i) the Note;
(ii) the Security Agreement (Borrower);
(iii) the Guaranties;
(iv) the Security Agreements (Guarantor);
(v) the Stock Pledge Agreements (Borrower);
(vi) the Collateral Assignments of Transaction Documents;
1
<PAGE>
(vii) the Credit Succession Agreements;
(viii) the Letter of Credit Applications;
(ix) the Warrant; and
(x) such other documents, instruments, and agreements
(including financing statements and fixture filings) as Bank may
reasonably request in connection with the transactions
contemplated hereunder or to perfect or protect the liens and
security interests granted to Bank in connection herewith.
"`OPTION AGREEMENT' means each certain Assignable Option
Agreement heretofore or hereafter entered into by and among a
Physician Group, its Physician Group Shareholders and its Manager.
"`PHYSICIAN GROUP' means a professional medical corporation.
"`REAL ESTATE LEASES' means all leases, licenses, and any
and all other agreements regarding a right of entry to and/or a
possessory interest in real property now or hereinafter entered into
by Borrower, any Subsidiary or any Physician Group as a tenant or
licensee, or which have been, or are in the future, being purchased,
assigned or sublet to Borrower, any Subsidiary or any Physician Group
as a tenant or licensee."
2. AMENDMENT TO ARTICLE IV. Sections 4.5, 4.6, 4.7, 4.10, 4.13 and
4.18 of the Agreement are hereby amended in their entirety as follows:
"4.5 LIENS. Borrower, each Subsidiary and each Physician
Group has good and marketable title to, or valid leasehold interests
in, all of its Assets, free and clear of all Liens or rights of
others, except for Permitted Liens.
"4.6 DEBT. Borrower, each Subsidiary and each Physician
Group has no Debt other than (i) Permitted Debt and (ii) until August
14, 1997, a $125,000 line of credit from Wells Fargo Bank to Santa/Ana
Tustin Physicians Group, Inc., under which no amounts are outstanding
or owing.
"4.7 LITIGATION. Except as set forth in SCHEDULE 4.7,
there are no suits, proceedings, claims or disputes pending or, to the
knowledge of Borrower after due inquiry, threatened, against or
affecting Borrower, any Subsidiary or any Physician Group, or any of
Borrower's Assets, any of any Subsidiary's Assets or any of any
Physician Group's Assets, which are not fully covered by applicable
insurance and as to which no reservation of rights has been taken by
the insurer thereunder.
2
<PAGE>
"4.10 TAXES. All tax returns required to be filed by
Borrower, the Subsidiaries and the Physician Groups in any
jurisdiction have in fact been filed, and all taxes, assessments, fees
and other governmental charges upon Borrower, the Subsidiaries and the
Physician Groups or upon any of their Assets, income or franchises,
which are due and payable have been paid. The provisions for taxes on
the books of Borrower and each of the Subsidiaries and Physician
Groups are adequate for all open years, and for Borrower's and each of
the Subsidiaries' and Physician Groups' current fiscal period.
"4.13 OTHER OBLIGATIONS. Except as disclosed in SCHEDULE
4.13, Borrower and each of the Subsidiaries and Physician Groups is
not in default on any Debt, and Borrower and each of the Subsidiaries
and Physician Groups is not in default on any other lease, commitment,
contract, instrument or obligation which is material to the operation
of its business.
"4.18 REAL ESTATE LEASES. All of the Real Estate Leases
are listed on SCHEDULE 4.18. All of the Real Estate Leases are
currently in full force and effect, and true and correct copies of all
Real Estate Leases, together with all amendments, exhibits and
schedules thereto, have been delivered to Bank. Except as disclosed
in SCHEDULE 4.13, neither the landlord nor the tenant therein, as the
case may be, is in default on any of its obligations thereunder, and
no event has occurred which, with the passage of time or the giving of
notice, or both, would constitute such a default."
3. AMENDMENT TO SECTION 5.11. Section 5.11 of the Agreement is
hereby amended in its entirety as follows:
"(a) BANK ACCOUNTS. Maintain, and cause each Subsidiary
and each Physician Group to maintain, its cash on hand and cash
equivalent investments in deposit accounts at Bank, which deposits
accounts (other than the deposit accounts of the Physician Groups)
shall be subject to the security interests granted to Bank under the
Security Agreement and the Security Agreements (Guarantor), and all
funds in the deposit accounts of the Physician Groups shall be swept
daily into the deposit account of its Manager established at Bank;
PROVIDED, HOWEVER, notwithstanding the foregoing, the Five Hundred
Seventy-Nine Thousand Four Hundred Fifty-Nine Dollars ($579,454) on
deposit in the "RESERVE ACCOUNT" (as such term is defined in Section
3.5 of that certain Agreement for the Purchase and Sale of Stock of
Santa Ana/Tustin Physicians Group, Inc., by and among Prosect Medical
Group, Inc., Santa Ana/Tustin Physicians Group, Inc., and Melvin L.
Reich, D.O., as in effect on the date hereof) may be maintained in an
account at Merrill Lynch or such other depository other than Bank.
The Reserve Account may consist of cash other or liquid securities,
certificates of deposit or other marketable securities. Such account
may also have the following
3
<PAGE>
added to it, as each item relates to the period prior to July 14,
1997: hospital control pools, stop loss payments, maternity
guaranties, mammogram pools, retroactive capitation payments and
accounts receivable."
4. AMENDMENT TO SECTION 6.2. Section 6.2 of the Agreement is hereby
amended in its entirety as follows:
"6.2 DEBT. Create, incur, assume or suffer to exist, or
permit any Subsidiary or any Physician Group to create, incur, assume
or suffer to exist, any Debt except (i) Permitted Debt, and (ii) a
$125,000 line of credit from Wells Fargo Bank to Santa/Ana Tustin
Physicians Group, Inc., SO LONG AS (x) such line of credit remains
unsecured, (y) no amounts are outstanding or owing at any time, and
(y) such line of credit is terminated not later than 5:00 p.m., Los
Angeles time, August 14, 1997."
5. AMENDMENT TO SECTION 6.8(b). Section 6.8(b) of the Agreement is
hereby amended in its entirety as follows:
"(b) Notwithstanding Section 6.8(a), Borrower shall be
permitted to acquire or form a new Subsidiary in connection with the
funding by it or such Subsidiary of the acquisition of a Physician
Group in accordance with the Transaction Documents with respect to
such Physician Group (a "PERMITTED ACQUISITION") so long as the
following conditions have been fulfilled to the satisfaction of Bank
in its sole and absolute discretion:
(i) Such Subsidiary shall be a corporation,
wholly owned by Borrower;
(ii) Bank shall have received not later than
thirty (30) days prior to the date of the proposed Permitted
Acquisition, (x) a written detailed description of the proposed
Permitted Acquisition, in form and substance satisfactory to Bank,
including historical and projected financial information, accounts
receivable information and reconciliations, and such other supporting
information with respect to the applicable Physician Group and
proposed Permitted Acquisition as Bank shall require, including
historical financial statements and a listing of adjustments to
physician compensation and other ongoing expenses reflected in the
projected EBITDA for the transaction; and (y) draft copies of all
Transaction Documents with respect to the proposed Permitted
Acquisition, in form and substance satisfactory to Bank;
(iii) Bank shall have given its prior written
consent to such Permitted Acquisition if either (x) the total
consideration to be paid to the seller of the applicable Physician
Group is Three Million Dollars ($3,000,000) or more, or (y) the total
consideration to be paid to the seller
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of the applicable Physician Group is One Million Dollars ($1,000,000)
or more but less than Three Million Dollars ($3,000,000) AND both (1)
the total consideration to be paid to the seller of the applicable
Physician Group is in excess of five times such Physician Group's
projected EBITDA and (2) the cash consideration to be paid to the
seller of the applicable Physician Group is in excess of three times
such Physician Group's projected EBITDA;
(iv) Bank shall have received, not later than one
(1) day prior to the date of the closing of such Permitted
Acquisition, final copies of all Transaction Documents with respect
thereto, marked to show changes from the drafts of same previously
provided to Bank, and Bank shall be satisfied with same;
(v) Bank shall have received all of the following
Loan Documents with respect to such proposed Permitted Acquisition, in
form and substance satisfactory to Bank in its sole and absolute
discretion:
(1) a Guaranty duly executed by the applicable
Subsidiary;
(2) a Security Agreement (Guarantor), duly
executed by the applicable Subsidiary;
(3) a Stock Pledge Agreement with respect to the
capital stock of the applicable Subsidiary, duly executed by Borrower
and acknowledged by such Subsidiary;
(4) a Collateral Assignment of Transaction
Documents (Guarantor), duly executed by the applicable Subsidiary and
acknowledged by each of the other Persons party to such Transaction
Documents;
(5) a Security Agreement (Physician Group) and
related financing statement(s) (Form UCC-1) as Bank shall require and
financing statement assignment (Form UCC-2 or UCC-3, as applicable),
duly executed by the applicable Physician Group and Subsidiary;
(6) a Credit Succession Agreement or a joinder
agreement to an existing Credit Succession Agreement, duly executed by
such Subsidiary, Physician Group and the Physician Group Shareholders
of such Physician Group;
(7) such UCC-1 financing statements and/or
fixture filings as Bank shall reasonably require in connection with
the
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<PAGE>
foregoing Loan Documents, duly executed by Borrower or such
Subsidiary, as applicable;
(vi) Bank shall have received the original duly
executed Inter-Company Note (Guarantor), endorsed by allonge by
Borrower to Bank, and the original duly executed Inter-Company Note
(Physician Group Shareholder), endorsed by allonge by the applicable
Guarantor to Bank, evidencing the downstreaming of the funds from
Borrower to the applicable Guarantor to the applicable Physician Group
Shareholder, together with the original duly executed Inter-Company
Security Agreement and UCC-1 Financing Statements as Bank shall
require with respect thereto, duly assigned to Bank, all in form and
substance satisfactory to Bank in its sole and absolute discretion;
(vii) Bank shall have received the certificates
evidencing all of the capital stock of the applicable Physician Group
together with undated stock powers with respect thereto, duly executed
in blank by the applicable Physician Group Shareholder;
(viii) Bank shall have received the certificates
evidencing all of the capital stock of the applicable Subsidiary,
together with undated stock powers with respect thereto, duly executed
in blank by Borrower;
(ix) Bank shall have received a favorable duly
executed opinion of Borrower's and Guarantors' counsel, dated as of
the date of the closing of the proposed Permitted Acquisition, with
respect to the proposed Permitted Acquisition, satisfactory to Bank in
its sole and absolute discretion;
(x) Bank shall have received replacement
Schedules to this Agreement and the Loan Documents, as appropriate, in
form and substance satisfactory to Bank in its sole and absolute
discretion;
(xi) Bank shall have received a Certificate of the
Secretary of the applicable Guarantor, dated as of the date of the
closing of the proposed Permitted Acquisition, certifying (i) the
incumbency and signatures of the Responsible Officers of such
Guarantor who are executing the Loan Documents on behalf of such
Guarantor, (ii) the bylaws of such Guarantor and all amendments
thereto as being true and correct and in full force and effect, and
(iii) the resolutions of the Board of Directors of such Guarantor as
being true and correct and in full force and effect, authorizing the
execution and delivery of the Loan Documents, and authorizing the
transactions contemplated thereunder, and authorizing the Responsible
Officers of such Guarantor to execute the same on behalf of such
Guarantor;
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<PAGE>
(xii) Bank shall have received a certificate of
status and good standing for the applicable Guarantor and Physician
Group, dated as of a recent date prior to the date of the closing of
the proposed Permitted Acquisition, showing that such Guarantor and
Physician Group is in good standing under the laws of the state of its
organization;
(xiii) Bank shall have received the Articles or
Certificate of Incorporation and all amendments thereto of the
applicable Guarantor and Physician Group, certified by the Secretary
of State of the state of its organization;
(xiv) receipt by Bank of certificates of foreign
qualification and good standing with respect to the applicable
Guarantor and Physician Group, dated as of a recent date prior to the
date of the closing of the proposed Permitted Acquisition, showing
that such Guarantor and Physician Group is qualified to do business
and is in good standing under the laws of each state where the failure
to be so qualified would have a Material Adverse Effect;
(xv) receipt by Bank of a certificate signed by
the President and Chief Financial Officer of the applicable Guarantor,
dated as of the date of the closing of the proposed Permitted
Acquisition, certifying to Bank that (i) both immediately before and
immediately after giving effect to the transactions contemplated by
the Loan Documents, such Guarantor is and will be Solvent, (ii) to the
best of their knowledge after due and diligent inquiry, the
representations and warranties of such Guarantor contained in the Loan
Documents are true and correct, (iii) to the best of their knowledge
after due and diligent inquiry, both immediately before and
immediately after giving effect to the transactions contemplated by
the Loan Documents, no Event of Default or Unmatured Event of Default
is continuing or shall occur, and (iv) the business of such Guarantor
and the practice of the Physician Group which is the subject of such
Permitted Acquisition are substantially the same as all other
Guarantors and Physician Groups;
(xvi) Bank shall have received payment in full of
all Bank Expenses pursuant to Section 9.3(a)(i) incurred in connection
with the proposed Permitted Acquisition;
(xvii) Bank shall have received copies of insurance
binders or insurance certificates evidencing Borrower's having caused
to be obtained insurance in accordance with Section 5.5, including the
lender's loss payee endorsements required by such Section;
(xviii) Bank shall have received Uniform
Commercial Code and other public record searches with respect to the
applicable
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Guarantor and Physician Group, in each case satisfactory to Bank in
its sole and absolute discretion; and
(xix) Bank shall have received such other
agreements, instruments and documents as Bank may reasonably require
in connection with such Permitted Acquisition, in form and substance
satisfactory to Bank in its sole and absolute discretion."
6. SCHEDULES. SCHEDULE 4.13 attached to this Amendment is hereby
added to the Agreement. In addition, SCHEDULES 1.1P, 4.7, 4.9, 4.12, 4.18, and
4.20 to the Agreement are hereby deleted in their entirety and replaced,
respectively, with SCHEDULES 1.1P, 4.7, 4.9, 4.12, 4.18, and 4.20 attached to
this Amendment.
7. REPRESENTATIONS AND WARRANTIES. In order to induce Bank to enter
into this Amendment, Borrower represents and warrants to Banks that:
(a) as of the date hereof, no Event of Default, Unmatured Event
of Default or Material Adverse Effect is continuing;
(b) all of the representations and warranties set forth in the
Agreement and the Loan Documents are true, complete and accurate in all respects
as of the date hereof (except for representations and warranties which are
expressly stated to be true and correct as of the Closing Date); and
(c) this Amendment has been duly executed and delivered by
Borrower, and after giving effect to this Amendment, the Agreement continues to
constitute the legal, valid and binding agreements and obligations of Borrower,
enforceable in accordance with its terms, except as enforceability may be
limited by bankruptcy, insolvency, and similar laws and equitable principles
affecting the enforcement of creditors' rights generally.
8. CONDITIONS PRECEDENT TO EFFECTIVENESS OF AMENDMENT. The
effectiveness of this Amendment is subject to and contingent upon the
fulfillment of each and every one of the following conditions:
(a) Bank shall have received this Amendment, duly executed by
Borrower and Bank, and the Consent of Guarantor, duly executed by Prospect
Medical Systems, Inc.;
(b) Bank shall have received all outstanding and unpaid Bank
Expenses, including but not limited to the legal fees of Buchalter, Nemer,
Fields & Younger relating to the negotiation, preparation and documentation of
the Agreement, the Loan Documents and this Amendment;
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<PAGE>
(c) No Event of Default, Unmatured Event of Default or Material
Adverse Effect shall be continuing; and
(d) All of the representations and warranties set forth herein
and in the Agreement shall be true, complete and accurate in all respects as of
the date hereof (except for representations and warranties which are expressly
stated to be true and correct as of Closing Date).
9. COUNTERPARTS; TELEFACSIMILE EXECUTION. This Amendment may be
executed in any number of counterparts and by different parties on separate
counterparts, each of which, when executed and delivered, shall be deemed to be
an original, and all of which, when taken together, shall constitute but one and
the same Amendment. Delivery of an executed counterpart of this Amendment by
telefacsimile shall be equally as effective as delivery of a manually executed
counterpart of this Amendment. Any party delivering an executed counterpart of
this Amendment by telefacsimile also shall deliver a manually executed
counterpart of this Amendment but the failure to deliver a manually executed
counterpart shall not affect the validity, enforceability, and binding effect of
this Amendment.
10. REAFFIRMATION OF THE AGREEMENT. Except as expressly modified by
this Amendment, the Agreement and the Loan Documents shall remain in full force
and effect.
[Remainder of this page intentionally left blank]
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Amendment as of the date first hereinabove written.
PROSPECT MEDICAL HOLDINGS, INC.,
a Delaware corporation
By: /s/ Jacob Y. Terner, M.D.
------------------------------------------
Title: CEO
-------------------------------------
IMPERIAL BANK,
a California banking corporation
By: /s/ Mark W. Campbell
------------------------------------------
Title: SVP
-------------------------------------
10
<PAGE>
CONSENT OF GUARANTOR
The undersigned, as "Guarantor" under that certain Continuing
Guaranty, dated as of July 3, 1997 (the "GUARANTY"), executed in favor of
IMPERIAL BANK, a California banking corporation ("BANK"), with respect to the
obligations of PROSPECT MEDICAL HOLDINGS, INC., a Delaware corporation
("BORROWER"), owing to Bank, hereby acknowledges notice of the foregoing
Amendment Number One to Revolving Credit Agreement, dated as of July 14, 1997,
between Borrower and Bank, consents to the terms contained therein, and agrees
that the Guaranty and all security therefor shall remain in full force and
effect.
Although Bank has informed us of the matters set forth above and we
have acknowledged same, we understand and agree that Bank has no duty under the
Agreement, the Guaranty or any other agreement between us to so notify us or to
seek an acknowledgement, and nothing herein is intended to or shall create such
a duty as to any advances or transactions hereafter.
PROSPECT MEDICAL SYSTEMS, INC.,
a Delaware corporation
By: /s/ Jacob Y. Terner, M.D.
------------------------------------------
Title: CEO
-------------------------------------
11
<PAGE>
AMENDMENT NUMBER ONE TO SECURITY AGREEMENT
(GUARANTOR)
This AMENDMENT NUMBER ONE TO SECURITY AGREEMENT, dated as of July 14,
1997 (this "AMENDMENT"), is entered into between PROSPECT MEDICAL SYSTEMS, INC.,
a Delaware corporation ("GUARANTOR") and Imperial Bank, a California banking
corporation ("BANK"), with reference to the following facts:
R E C I T A L S
A. Guarantor and Bank have previously entered into that certain
Security Agreement, dated as of July 3, 1997 (the "SECURITY AGREEMENT"); and
B. Guarantor has requested that Bank approve certain changes to the
information set forth in SCHEDULE 1 to the Security Agreement, and Bank has
approved of same.
A G R E E M E N T
1. REPLACEMENT OF SCHEDULE. SCHEDULE 1 attached to the Security
Agreement is hereby deleted in its entirety and replaced with SCHEDULE 1
attached to this Amendment.
2. EFFECTIVENESS. The effectiveness of this Amendment is subject to
and contingent upon the execution and delivery of this Amendment by Guarantor
and Bank.
3. COUNTERPARTS. This Amendment may be signed in any number of
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
4. AFFIRMATION. The Security Agreement as amended hereby, the
Continuing Guaranty executed by Guarantor in favor of Bank, and all other
agreements, instruments and documents executed between Guarantor and Bank, or by
Guarantor in favor of Bank, remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first set forth above.
PROSPECT MEDICAL SYSTEMS, INC.,
a Delaware corporation
By /s/ Jacob Y. Terner, M.D.
---------------------------------
Chief Executive Officer
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IMPERIAL BANK,
a California banking corporation
By /s/ Mark W. Campbell
---------------------------------
Senior Vice President
2
<PAGE>
SECURED PROMISSORY NOTE
(Prospect Medical Systems, Inc.)
$3,000,000 Los Angeles, California
July 14, 1997
1. FOR VALUE RECEIVED, PROSPECT MEDICAL SYSTEMS, INC., a Delaware
corporation ("MAKER"), promises to pay to the order of PROSPECT MEDICAL
HOLDINGS, INC., a Delaware corporation ("PAYEE"), on or before the Maturity Date
unless sooner accelerated in accordance with the terms hereof, the principal sum
of Three Million Dollars ($3,000,000). As used herein the term "MATURITY DATE"
has the meaning given to such term in that certain Revolving Credit Agreement,
dated as of July 3, 1997, between Payee and Imperial Bank (as amended or
restated from time to time, the "CREDIT AGREEMENT").
2. This Secured Promissory Note shall bear interest at a per annum
rate equal to six percent (6%). All computations of interest shall be
calculated on the basis of a year of three hundred sixty-five (365) days for the
actual days elapsed. Interest shall accrue from the date of this Secured
Promissory Note to the date of repayment of this Secured Promissory Note in
accordance with the provisions hereof. Maker shall pay all accrued but unpaid
interest on the principal balance hereof, in arrears, on the first day of each
and every month.
3. Maker shall make all payments hereunder in lawful money of the
United States of America and in immediately available funds to the holder hereof
("HOLDER") at Holder's office or to such other address as Holder may from time
to time specify by notice to Maker.
4. In no event shall the interest rate and other charges hereunder
exceed the highest rate permissible under any law which a court of competent
jurisdiction shall, in a final determination, deem applicable hereto. In the
event that such a court determines that Holder has received interest and other
charges hereunder in excess of the highest rate applicable hereto, such excess
shall be deemed received on account of, and shall automatically be applied to
reduce, the principal balance hereof, and the provisions hereof shall be deemed
amended to provide for the highest permissible rate. If there is no principal
balance outstanding, Holder shall refund to Maker such excess.
5. The unpaid principal balance hereof together with all accrued but
unpaid interest thereon shall be all due and payable upon (i) failure by Maker
to pay any installment of principal or interest due hereunder when due,
(ii) commencement of any proceeding by or against Maker under any bankruptcy or
insolvency laws, or (iii) the occurrence of an "Event of Default" under the
Credit Agreement.
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6. This Secured Promissory Note is secured by that certain Security
Agreement, dated as of event date herewith, between Maker and Payee.
7. Maker hereby waives presentment for payment, notice of dishonor,
protest and notice of protest.
8. This Secured Promissory Note shall be governed by and construed
in accordance with the internal laws of the State of California without regard
to principles of conflicts of laws.
IN WITNESS WHEREOF, Maker has duly executed this Secured Promissory
Note as of the date first above written.
PROSPECT MEDICAL SYSTEMS, INC.,
a Delaware corporation
By /s/ Jacob Y. Terner, M.D.
-----------------------------------------------
Title CEO
--------------------------------------------
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<PAGE>
ENDORSEMENT ALLONGE
Pay to the order of Imperial Bank, a California banking corporation,
located at 9920 South La Cienega Blvd., Suite #628, Inglewood,
California 90301 the attached note dated July 14, 1997 made by
Prospect Medical Systems, Inc.
Dated: July 14, 1997 PROSPECT MEDICAL HOLDINGS, INC.,
a Delaware corporation
By: /s/ Jacob Y. Terner, M.D.
----------------------------------------------
Print Name: JACOB Y. TERNER, M.D.
--------------------------------------
Its: CEO
---------------------------------------------
<PAGE>
INTER-COMPANY SECURITY AGREEMENT
This SECURITY AGREEMENT ("SECURITY AGREEMENT"), dated as of July 14,
1997, is entered into between PROSPECT MEDICAL SYSTEMS, INC., a Delaware
corporation ("DEBTOR"), and PROSPECT MEDICAL HOLDINGS, INC. ("SECURED PARTY"),
with reference to the following facts:
R E C I T A L
Secured Party has made a loan to Debtor, evidenced by a Secured
Promissory Note (the "NOTE"), dated as of even date herewith. The Note is
secured by this Security Agreement to insure prompt payment of the Note.
A G R E E M E N T
NOW, THEREFORE, in consideration of the mutual promises, covenants,
conditions, representations, and warranties hereinafter set forth, and for other
good and valuable consideration, the parties hereto agree as follows:
1. DEFINITIONS. As used herein, the following terms shall have the
following meanings:
"ACCOUNT DEBTOR" means any Person who is or who may become
obligated with respect to, or on account of, an Account.
"ACCOUNTS" means any and all of Debtor's presently existing and
hereafter arising accounts and rights to payment, except those evidenced by
Negotiable Collateral, arising out of the sale or lease of goods or the
rendition of services by Debtor, irrespective of whether earned by performance.
"BANKRUPTCY CODE" means The Bankruptcy Reform Act of 1978
(Pub. L. No. 95-598; 11 U.S.C.), as amended or supplemented from time to time,
or any successor statute, and any and all rules and regulations issued or
promulgated in connection therewith.
"CHATTEL PAPER" means all writings of whatever sort which
evidence a monetary obligation and a security interest in or lease of specific
goods, whether now existing or hereafter arising.
"CODE" means the California Uniform Commercial Code except, to
the extent applicable, the Uniform Commercial Code as adopted by the
jurisdiction in which any of the Collateral is located. Any and all terms used
in this Security Agreement which are defined in the Code shall be construed and
defined in accordance with the meaning and definition ascribed to such terms
under the Code, unless otherwise defined herein.
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<PAGE>
"COLLATERAL" means the following, collectively: any and all of
the Accounts, Deposit Accounts, Equipment, Inventory, Investment Property,
General Intangibles, Negotiable Collateral, and Debtor's Books, in each case
whether now existing or hereafter acquired or created, and any Proceeds or
products of any of the foregoing, or any portion thereof, and any and all
Accounts, Deposit Accounts, Equipment, Inventory, Investment Property, General
Intangibles, Negotiable Collateral, money, or other tangible or intangible
property, resulting from the sale or other disposition of the Accounts, Deposit
Accounts, Equipment, Inventory, Investment Property, General Intangibles, or
Negotiable Collateral, or any portion thereof or interest therein, and the
substitutions, replacements, additions, accessions, products and Proceeds
thereof.
"DEBTOR'S BOOKS" means any and all presently existing and
hereafter acquired or created books and records of Debtor, including all records
(including maintenance and warranty records), ledgers, computer programs, disc
or tape files, printouts, runs, and other computer prepared information
indicating, summarizing, or evidencing the Accounts, Deposit Accounts,
Equipment, Inventory, Investment Property, General Intangibles and Negotiable
Collateral.
"DEPOSIT ACCOUNT" means any demand, time, savings, passbook or
like account now or hereafter maintained by or for the benefit of Debtor with a
bank, savings and loan association, credit union or like organization, and all
funds and amounts therein, whether or not restricted or designated for a
particular purpose.
"DOCUMENTS" means any and all documents of title, bills of
lading, dock warrants, dock receipts, warehouse receipts and other documents of
Debtor, whether or not negotiable, and includes all other documents which
purport to be issued by a bailee or agent and purport to cover goods in any
bailee's or agent's possession which are either identified or are fungible
portions of an identified mass, including such documents of title made available
to Debtor for the purpose of ultimate sale or exchange of goods or for the
purpose of loading, unloading, storing, shipping, transshipping, manufacturing,
processing or otherwise dealing with goods in a manner preliminary to their sale
or exchange, in each case whether now existing or hereafter acquired.
"EQUIPMENT" means any and all of Debtor's presently existing and
hereafter acquired machinery, equipment, furniture, furnishings, fixtures,
computer and other electronic data processing equipment and other office
equipment and supplies, computer programs and related data processing software,
spare parts, tools, motors, automobiles, trucks, tractors and other motor
vehicles, rolling stock, jigs, and other goods (other than Inventory, farm
products, and consumer goods), of every kind and description, wherever located,
together with any and all parts, improvements, additions, attachments,
replacements, accessories, and substitutions thereto or therefor, and all other
rights of Debtor relating thereto, whether in the possession and control of
Debtor, or in the possession and control of a third party for the account of
Debtor.
"EVENT OF DEFAULT" has the meaning set forth in Section 5.
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<PAGE>
"GENERAL INTANGIBLES" means any and all of Debtor's presently
existing and hereafter acquired or arising general intangibles and other
intangible personal property of every kind and description, including:
(a) contracts and contract rights, noncompetition covenants,
licensing and distribution agreements, indemnity agreements, guaranties,
insurance policies, franchise agreements and lease agreements;
(b) deposit accounts, uncertificated certificates of deposit,
uncertificated securities, and interests in any joint ventures, partnerships or
limited liability companies;
(c) choices in action and causes of action (whether legal or
equitable, whether in contract or tort or otherwise, and however arising);
(d) licenses, approvals, permits or any other authorizations
issued by any Government Authority;
(e) Intellectual Property Collateral;
(f) computer software, magnetic media, electronic data
processing files, systems and programs;
(g) rights of stoppage in transit, replevin and reclamation,
rebates or credits of every kind and nature to which Debtor may be entitled;
(h) purchase orders, customer lists, subscriber lists and
goodwill;
(i) monies due or recoverable from pension funds, refunds and
claims for tax or other refunds against any Governmental Authority; and
(j) other contractual, equitable and legal rights of whatever
kind and nature.
(k) "GOVERNMENTAL AUTHORITY" means any federal, state, local or
other governmental department, commission, board, bureau, agency, central bank,
court, tribunal or other instrumentality or authority or subdivision thereof,
domestic or foreign, exercising executive, legislative, judicial, regulatory or
administrative functions of or pertaining to government.
"INSTRUMENTS" means any and all negotiable instruments,
certificated securities and every other writing which evidences a right to the
payment of money, in each case whether now existing or hereafter acquired.
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<PAGE>
"INTELLECTUAL PROPERTY COLLATERAL" means the following Assets
owned or held by Debtor or in which Debtor otherwise has any interest, now
existing or hereafter acquired or arising:
(a) all patents and patent applications, domestic or foreign,
all licenses relating to any of the foregoing and all income and royalties with
respect to any licenses, all rights to sue for past, present or future
infringement thereof, all rights arising therefrom and pertaining thereto and
all reissues, divisions, continuations, renewals, extensions and continuations
in-part thereof;
(b) all copyrights and applications for copyright, domestic or
foreign, together with the underlying works of authorship (including titles),
whether or not the underlying works of authorship have been published and
whether said copyrights are statutory or arise under the common law, and all
other rights and works of authorship, all rights, claims and demands in any way
relating to any such copyrights or works, including royalties and rights to sue
for past, present or future infringement, and all rights of renewal and
extension of copyright;
(c) all state (including common law), federal and foreign
trademarks, service marks and trade names, and applications for registration of
such trademarks, service marks and trade names, all licenses relating to any of
the foregoing and all income and royalties with respect to any licenses, whether
registered or unregistered and wherever registered, all rights to sue for past,
present or future infringement or unconsented use thereof, all rights arising
therefrom and pertaining thereto and all reissues, extensions and renewals
thereof;
(d) all trade secrets, confidential information, customer lists,
license rights, advertising materials, operating manuals, methods, processes,
know-how, sales literature, sales and operating plans, drawings, specifications,
blue prints, descriptions, inventions, name plates and catalogs; and
(e) the entire goodwill of or associated with the businesses now
or hereafter conducted by Debtor connected with and symbolized by any of the
aforementioned properties and assets.
"INVENTORY" means any and all of Debtor's presently existing and
hereafter acquired goods of every kind and description (including goods in
transit) which are held for sale or lease, or to be furnished under a contract
of service or which have been so leased or furnished, or other disposition,
wherever located, including those held for display or demonstration or out on
lease or consignment or are raw materials, work in process, finished materials,
or materials used or consumed, or to be used or consumed, in Debtor's business,
and the resulting product or mass, and all repossessed, returned, rejected,
reclaimed and replevied goods, together with all materials, parts, supplies,
packing and shipping materials used or usable in connection with the
manufacture, packing, shipping, advertising, selling or furnishing of such
goods; and all other items hereafter acquired by Debtor by way of substitution,
replacement, return, repossession or otherwise,
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and all additions and accessions thereto, and any Document representing or
relating to any of the foregoing at any time.
"INVESTMENT PROPERTY" has the meaning given to such term in the
Code.
"NEGOTIABLE COLLATERAL" means any and all of Debtor's presently
existing and hereafter acquired or arising letters of credit, advises of credit,
certificates of deposit, notes, drafts, Instruments, Documents and Chattel
Paper.
"PERSON" means and includes natural persons, corporations,
limited partnerships, general partnerships, limited liability companies, limited
liability partnerships, joint stock companies, joint ventures, associations,
companies, trusts, banks, trust companies, land trusts, business trusts, or
other organizations, irrespective of whether they are legal entities, and
governments and agencies and political subdivisions thereof.
"PROCEEDS" means whatever is receivable or received from or upon
the sale, lease, license, collection, use, exchange or other disposition,
whether voluntary or involuntary, of any Collateral or other assets of Debtor,
including "proceeds" as defined in Section 9306 of the Code, any and all
proceeds of any insurance, indemnity, warranty or guaranty payable to or for the
account of Debtor from time to time with respect to any of the Collateral, any
and all payments (in any form whatsoever) made or due and payable to Debtor from
time to time in connection with any requisition, confiscation, condemnation,
seizure or forfeiture of all or any part of the Collateral by any Governmental
Authority (or any Person acting under color of Governmental Authority), any and
all other amounts from time to time paid or payable under or in connection with
any of the Collateral or for or on account of any damage or injury to or
conversion of any Collateral by any Person, any and all other tangible or
intangible property received upon the sale or disposition of Collateral, and all
proceeds of proceeds.
"RIGHTS TO PAYMENT" means all Accounts and any and all rights and
claims to the payment or receipt of money or other forms of consideration of any
kind in, to and under all General Intangibles, Negotiable Collateral and
Proceeds thereof.
"SECURED OBLIGATIONS" shall have the meaning of "Obligations"
under the Loan Agreement and shall also mean any and all debts, liabilities,
obligations, or undertakings owing by Debtor to Secured Party arising under,
advanced pursuant to, or evidenced by this Security Agreement, whether direct or
indirect, absolute or contingent, matured or unmatured, due or to become due,
voluntary or involuntary, whether now existing or hereafter arising, and
including all interest not paid when due and all Secured Party Expenses which
Debtor is required to pay or reimburse pursuant to this Security Agreement, the
Loan Agreement, the other Loan Documents or by law.
"SECURED PARTY" means Prospect Medical Holdings, Inc., a Delaware
corporation.
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"SECURED PARTY EXPENSES" shall mean: any and all costs or
expenses required to be paid by Debtor under this Security Agreement which are
paid or advanced by Secured Party; all costs and expenses of Secured Party,
including its attorneys' fees and expenses (including attorneys' fees incurred
pursuant to proceedings arising under the Secured Bankruptcy Code), incurred or
expended to correct any default or enforce any provision of this Security
Agreement, or in gaining possession of, maintaining, handling, preserving,
storing, shipping, selling, preparing for sale, or advertising to sell the
Collateral, irrespective of whether a sale is consummated; and all costs and
expenses of suit incurred or expended by Secured Party, including its attorneys'
fees and expenses (including attorneys' fees incurred pursuant to proceedings
arising under the Bankruptcy Code) in enforcing or defending this Security
Agreement, irrespective of whether suit is brought.
"SECURITY AGREEMENT" shall mean this Security Agreement, any
concurrent or subsequent riders, exhibits or schedules to this Security
Agreement, and any extensions, supplements, amendments, or modifications to or
in connection with this Security Agreement, or to any such riders, exhibits or
schedules.
2. CONSTRUCTION. Unless the context of this Security Agreement
clearly requires otherwise, references to the plural include the singular,
references to the singular include the plural, the part includes the whole,
"including" is not limiting, and "or" has the inclusive meaning represented by
the phrase "and/or." References in this Security Agreement to "determination"
by Secured Party include reasonable estimates (absent manifest error) by Secured
Party, as applicable (in the case of quantitative determinations) and reasonable
beliefs (absent manifest error) by Secured Party, as applicable (in the case of
qualitative determinations). The words "hereof," "herein," "hereby,"
"hereunder," and similar terms in this Security Agreement refer to this Security
Agreement as a whole and not to any particular provision of this Security
Agreement. Article, section, subsection, exhibit, and schedule references are
to this Security Agreement unless otherwise specified.
3. CREATION OF SECURITY INTEREST. Debtor hereby grants to Secured
Party a continuing security interest in all presently existing and hereafter
acquired or arising Collateral in order to secure the prompt payment and
performance of all of the Secured Obligations. Debtor acknowledges and affirms
that such security interest in the Collateral has attached to all Collateral
without further act on the part of Secured Party or Debtor.
4. FURTHER ASSURANCES.
4.1 Debtor shall execute and deliver to Secured Party
concurrently with Debtor's execution of this Security Agreement, and from time
to time at the request of Secured Party, all financing statements, continuation
financing statements, fixture filings, security agreements, chattel mortgages,
assignments, and all other documents that Secured Party may request, in form
satisfactory to Secured Party, to perfect and maintain perfected Secured Party's
security interests in the Collateral and in order to consummate fully all of the
transactions contemplated by this Security Agreement and the Loan Agreement.
Debtor hereby irrevocably makes, constitutes, and appoints Secured Party (and
Secured Party's officers, employees, or agents) as Debtor's true and lawful
attorney with power to sign the
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name of Debtor on any of the above-described documents or on any other similar
documents which need to be executed, recorded, or filed, and to do any and all
things necessary in the name and on behalf of Debtor in order to perfect, or
continue the perfection of, Secured Party's security interests in the
Collateral. Debtor agrees that neither Secured Party, nor any of its designees
or attorneys-in-fact, will be liable for any act of commission or omission, or
for any error of judgment or mistake of fact or law with respect to the exercise
of the power of attorney granted under this Section 4.1, other than as a result
of its or their gross negligence or wilful misconduct. THE POWER OF ATTORNEY
GRANTED UNDER THIS SECTION 4.1 IS COUPLED WITH AN INTEREST AND SHALL BE
IRREVOCABLE UNTIL ALL OF THE SECURED OBLIGATIONS HAVE BEEN INDEFEASIBLY PAID IN
FULL, THE LOAN AGREEMENT TERMINATED, AND ALL DEBTOR'S DUTIES HEREUNDER AND
THEREUNDER HAVE BEEN DISCHARGED IN FULL.
4.2 Without limiting the generality of the foregoing Section 4.1
or any of the provisions of the Loan Agreement, Debtor will: (i) at the request
of Secured Party, mark conspicuously all of its records pertaining to the
Collateral with a legend, in form and substance satisfactory to Secured Party,
indicating that the Collateral is subject to the security interest granted
hereby; (ii) at the request of Secured Party, appear in and defend any action or
proceeding which may affect Debtor's title to, or the security interest of
Secured Party in, any of the Collateral; and (iii) upon demand of Secured Party,
allow inspection of Collateral by Secured Party or Persons designated by Secured
Party at any time during normal business hours.
4.3 With respect to the Negotiable Collateral (other than drafts
received in the ordinary course of business so long as no Event of Default is
continuing), Debtor shall, immediately upon request by Secured Party, endorse
(where appropriate) and assign the Negotiable Collateral over to Secured Party,
and deliver to Secured Party actual physical possession of the Negotiable
Collateral to Secured Party together with any instruments of transfer or
assignment, all in form and substance satisfactory to Secured Party, in order to
fully perfect the security interest therein of Secured Party.
4.4 Debtor shall cooperate with Secured Party in obtaining a
control agreement in form and substance satisfactory to Secured Party with
respect to all Deposit Accounts and Investment Property.
5. EVENT OF DEFAULT. Failure by Debtor to make any payment required
under the Note when due, whether for principal, interest, or otherwise, shall
constitute an Event of Default under this Security Agreement.
6. RIGHTS AND REMEDIES.
6.1 During the continuance of an Event of Default, Secured
Party, without notice or demand, may do any one or more of the following, all of
which are authorized by Debtor:
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(a) Settle or adjust disputes and claims directly with
Account Debtors for amounts and upon terms which Secured Party considers
advisable, and in such cases, Secured Party will credit the Secured Obligations
with only the net amounts received by Secured Party in payment of such disputed
Accounts after deducting all Secured Party Expenses incurred or expended in
connection therewith;
(b) Cause Debtor to hold all returned Inventory in trust
for Secured Party, segregate all returned Inventory from all other property of
Debtor or in Debtor's possession and conspicuously label said returned Inventory
as the property of Secured Party;
(c) Without notice to or demand upon Debtor or any
guarantor, make such payments and do such acts as Secured Party considers
necessary or reasonable to protect its security interests in the Collateral.
Debtor agrees to assemble the Collateral if Secured Party so requires, and to
make the Collateral available to Secured Party as Secured Party may designate.
Debtor authorizes Secured Party to enter the premises where the Collateral is
located, to take and maintain possession of the Collateral, or any part of it,
and to pay, purchase, contest, or compromise any encumbrance, charge, or Lien
that in Secured Party's determination appears to conflict with its security
interests and to pay all expenses incurred in connection therewith. With
respect to any of Debtor's owned or leased premises, Debtor hereby grants
Secured Party a license to enter into possession of such premises and to occupy
the same, without charge, for up to 120 days in order to exercise any of Secured
Party's rights or remedies provided herein, at law, in equity, or otherwise;
(d) Without notice to Debtor (such notice being expressly
waived), and without constituting a retention of any collateral in satisfaction
of an obligation (within the meaning of Section 9505 of the Code), set off and
apply to the Secured Obligations any and all (i) balances and Deposit Accounts
of Debtor held by Secured Party, or (ii) indebtedness at any time owing to or
for the credit or the account of Debtor held by Secured Party;
(e) Hold, as cash collateral, any and all balances and
Deposit Accounts of Debtor held by Secured Party, to secure the full and final
repayment of all of the Secured Obligations;
(f) Ship, reclaim, recover, store, finish, maintain,
repair, prepare for sale, advertise for sale, and sell (in the manner provided
for herein) the Collateral. Secured Party is hereby granted a license or other
right to use, without charge, Debtor's labels, patents, copyrights, rights of
use of any name, trade secrets, trade names, trademarks, service marks, and
advertising matter, or any property of a similar nature, as it pertains to the
Collateral, in completing production of, advertising for sale, and selling any
Collateral and Debtor's rights under all licenses and all franchise agreements
shall inure to Secured Party's benefit;
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(g) Sell the Collateral at either a public or private sale,
or both, by way of one or more contracts or transactions, for cash or on terms,
in such manner and at such places (including Debtor's premises) as Secured Party
determines is commercially reasonable. It is not necessary that the Collateral
be present at any such sale;
(h) Secured Party shall give notice of the disposition of
the Collateral as follows:
(i) Secured Party shall give Debtor and each holder of
a security interest in the Collateral who has filed with Secured Party a written
request for notice, a notice in writing of the time and place of public sale,
or, if the sale is a private sale or some other disposition other than a public
sale is to be made of the Collateral, then the time on or after which the
private sale or other disposition is to be made;
(ii) The notice shall be personally delivered or
mailed, postage prepaid, to Debtor as provided in SECTION 9 of this Security
Agreement, at least 5 days before the date fixed for the sale, or at least 5
days before the date on or after which the private sale or other disposition is
to be made; no notice needs to be given prior to the disposition of any portion
of the Collateral that is perishable or threatens to decline speedily in value
or that is of a type customarily sold on a recognized market. Notice to Persons
other than Debtor claiming an interest in the Collateral shall be sent to such
addresses as they have furnished to Secured Party;
(iii) If the sale is to be a public sale, Secured Party
also shall give notice of the time and place by publishing a notice one time at
least 5 days before the date of the sale in a newspaper of general circulation
in the county in which the sale is to be held;
(i) Secured Party may credit bid and purchase at any public
sale; and
(j) Any deficiency that exists after disposition of the
Collateral as provided above will be paid immediately by Debtor. Any excess
will be returned, without interest and subject to the rights of third Persons,
by Secured Party to Debtor.
6.2 Upon the exercise by Secured Party of any power, right,
privilege, or remedy pursuant to this Security Agreement which requires any
consent, approval, registration, qualification, or authorization of any
Governmental Authority, Debtor agrees to execute and deliver, or will cause the
execution and delivery of, all applications, certificates, instruments,
assignments, and other documents and papers that Secured Party or any purchaser
of the Collateral may be required to obtain for such governmental consent,
approval, registration, qualification, or authorization.
6.3 The rights and remedies of Secured Party under this Security
Agreement, the Loan Agreement, the other Loan Documents, and all other
agreements
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contemplated hereby and thereby shall be cumulative. Secured Party shall have
all other rights and remedies not inconsistent herewith as provided under the
Code, by law, or in equity. No exercise by Secured Party of any one right or
remedy shall be deemed an election of remedies, and no waiver by Secured Party
of any default on Debtor's part shall be deemed a continuing waiver of any
further defaults. No delay by Secured Party shall constitute a waiver, election
or acquiescence with respect to any right or remedy.
7. SECURED PARTY NOT LIABLE. So long as Secured Party complies with
the obligations, if any, imposed by Section 9207 of the Code, Secured Party
shall not otherwise be liable or responsible in any way or manner for: (a) the
safekeeping of the Collateral; (b) any loss or damage thereto occurring or
arising in any manner or fashion or from any cause; (c) any diminution in the
value thereof; or (d) any act or default of any carrier, warehouseman, bailee,
forwarding agency, or other person whomsoever.
8. INDEFEASIBLE PAYMENT. The Secured Obligations shall not be
considered indefeasibly paid for purposes of this Security Agreement unless and
until all payments to Secured Party are no longer subject to any right on the
part of any Person, including Debtor, Debtor as a debtor in possession, or any
trustee (whether appointed under the Bankruptcy Code or otherwise) of Debtor or
Debtor's Assets to invalidate or set aside such payments or to seek to recoup
the amount of such payments or any portion thereof, or to declare same to be
fraudulent or preferential. In the event that, for any reason, any portion of
such payments to Secured Party is set aside or restored, whether voluntarily or
involuntarily, after the making thereof, then the obligation intended to be
satisfied thereby shall be revived and continued in full force and effect as if
said payment or payments had not been made.
9. NOTICES. All notices, requests and other communications to any
party hereunder shall be in writing (including facsimile transmission or similar
writing) and shall be given to such party at its address or facsimile number set
forth on the signature pages hereof or such other address or facsimile number as
such party may hereafter specify by notice to the other party in accordance with
this Section 9. Each such notice, request or other communication shall be
deemed given on the second business day after mailing; PROVIDED that actual
notice, however and from whomever given or received, shall always be effective
on receipt; PROVIDED FURTHER that notices sent by Secured Party in connection
with Sections 9504 or 9505 of the California Uniform Commercial Code shall be
deemed given when deposited in the mail or personally delivered, or, where
permitted by law, transmitted by facsimile.
10. GENERAL PROVISIONS.
10.1 SUCCESSORS AND ASSIGNS. This Security Agreement shall bind
and inure to the benefit of the respective successors and assigns of Debtor and
Secured Party; PROVIDED, HOWEVER, that Debtor may not assign this Security
Agreement nor delegate any of its duties hereunder without Secured Party's prior
written consent and any prohibited assignment or delegation shall be absolutely
void. No consent by Secured Party to an assignment by Debtor shall release
Debtor from the Secured Obligations. Secured Party
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may assign this Security Agreement and delegate its duties hereunder, if any,
from time to time to Imperial Bank or its assigns without prior notice to, or
the consent of Debtor and Debtor agrees to recognize such lender as Secured
Party's assignee under this Security Agreement.
10.2 EXHIBITS AND SCHEDULES. All of the exhibits and schedules
attached hereto shall be deemed incorporated by reference.
10.3 NO PRESUMPTION AGAINST ANY PARTY. Neither this Security
Agreement nor any uncertainty or ambiguity herein shall be construed or resolved
against Secured Party or Debtor, whether under any rule of construction or
otherwise. On the contrary, this Security Agreement has been reviewed by each
of the parties and their counsel and shall be construed and interpreted
according to the ordinary meaning of the words used so as to accomplish fairly
the purposes and intentions of all parties hereto.
10.4 AMENDMENTS AND WAIVERS. Any provision of this Agreement may
be amended or waived if, but only if, such amendment or waiver is in writing and
is signed by the party asserted to be bound thereby, and then such amendment or
waiver shall be effective only in the specific instance and specific purpose for
which given.
10.5 COUNTERPARTS; INTEGRATION; EFFECTIVENESS. This Security
Agreement may be signed in any number of counterparts, each of which shall be an
original, with the same effect as if the signatures thereto and hereto were upon
the same instrument. This Security Agreement constitutes the entire agreement
and understanding among the parties hereto and supersedes any and all prior
agreements and understandings, oral or written, relating to the subject matter
hereof. This Security Agreement shall become effective when executed by each of
the parties hereto and delivered to Secured Party.
10.6 SEVERABILITY. The provisions of this Agreement are
severable. The invalidity, in whole or in part, of any provision of this
Agreement shall not affect the validity or enforceability of any other of its
provisions. If one or more provisions hereof shall be declared invalid or
unenforceable, the remaining provisions shall remain in full force and effect
and shall be construed in the broadest possible manner to effectuate the
purposes hereof.
11. GOVERNING LAW. This Security Agreement shall be deemed to have
been made in the State of California and the validity, construction,
interpretation, and enforcement hereof, and the rights of the parties hereto,
shall be determined under, governed by, and construed in accordance with the
internal laws of the State of California, without regard to principles of
conflicts of law.
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12. SUBORDINATION OF SECURITY INTEREST. Secured Party hereby
expressly agrees that the security interests granted to it under this Security
Agreement ("SUBORDINATE LIENS") in the Collateral shall be second, junior and
inferior to any and all liens, rights, powers, titles and interests of Imperial
Bank or its assigns in the Collateral ("SENIOR LIENS") granted by Debtor
pursuant to that certain Security Agreement, dated as of July 3, 1997, between
Debtor and Imperial Bank, and Secured Party agrees that all Senior Liens shall
be unconditionally first, prior and superior to any and Subordinate Liens in the
Collateral. Secured Party further agrees that any and all Subordinate Liens
shall be and remain expressly subject and subordinate to any renewal, extension,
refinancing, consolidation, modification or supplement of the liens, rights,
titles and interests of the Senior Liens, as well as any and all increases
thereof.
[Remainder of this page intentionally left blank.]
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IN WITNESS WHEREOF, the parties have executed this Security Agreement
as of the date first set forth above.
PROSPECT MEDICAL SYSTEMS, INC.,
a Delaware corporation
By /s/ Jacob Y. Terner, M.D.
----------------------------------
Title: CEO
------------------------------
Address for Notices:
Prospect Medical Systems, Inc.
18200 Yorba Linda Blvd.
Yorba Linda, CA 92686
Attn: Jacob Y. Terner, M.D.
Telephone: (310) 202-4774
Facsimile: (310) 204-6334
PROSPECT MEDICAL HOLDINGS, INC.,
a Delaware corporation
By /s/ Jacob Y. Terner, M.D.
----------------------------------
Title: CEO
------------------------------
Address for Notices:
Prospect Medical Holdings, Inc.
18200 Yorba Linda Blvd.
Yorba Linda, CA 92686
Attn: Jacob Y. Terner, M.D.
Telephone: (310) 202-4774
Facsimile: (310) 204-6334
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COLLATERAL ASSIGNMENT OF TRANSACTION DOCUMENTS
THIS COLLATERAL ASSIGNMENT OF TRANSACTION DOCUMENTS (this
"ASSIGNMENT") has been executed and delivered as of July 14, 1997, by and
between PROSPECT MEDICAL SYSTEMS, INC. a Delaware corporation ("ASSIGNOR"), and
IMPERIAL BANK, a California banking corporation ("BANK"), with reference to the
following facts:
R E C I T A L S
A. Assignor is a party to certain transaction documents pursuant to
which, among other things, Assignor acquired or will acquire the non-medical
assets of Santa Ana/Tustin Physicians Group, Inc. a California professional
medical corporation ("PHYSICIAN GROUP"), and provides management services to
Physician Group.
B. Assignor has previously executed that certain Continuing
Guaranty, dated as of July 3, 1997, in favor of Bank (as the same may be
amended, restated, supplemented or otherwise modified from time to time, the
"GUARANTY") pursuant to which Assignor guarantees the Guaranteed Obligations (as
defined in the Guaranty), including, without limitation, all obligations,
indebtedness and liabilities owed by Prospect Medical Holdings, Inc., a Delaware
corporation ("BORROWER") to Bank under that certain Revolving Credit Agreement,
dated as of July 3, 1997 (as the same may be amended, restated, supplemented or
otherwise modified from time to time, the "LOAN AGREEMENT").
C. Assignor has executed and delivered that certain Security
Agreement, dated as of even date with the Guaranty ("SECURITY AGREEMENT"), in
order to secure the Guaranteed Obligations.
D. Assignor has agreed to execute and deliver this Assignment to
Bank in order to supplement the terms of the Security Agreement with respect to
the Transaction Documents (as hereinafter defined).
E. Assignor is a wholly-owned subsidiary of Borrower which will
directly and materially benefit from the Loans made by Bank to Borrower under
the Loan Agreement, and Assignor acknowledges that Bank would not enter into the
Loan Agreement absent Assignor's agreements under the Guaranty, the Security
Agreement and hereunder.
A G R E E M E N T
In consideration of the premises and the mutual agreements herein set
forth, Assignor and Bank hereby agree as follows:
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1. DEFINED TERMS. All initially capitalized terms used but not
defined herein shall have the meanings assigned to such terms in the Guaranty.
2. ASSIGNMENT. As additional security for the Guaranteed
Obligations, Assignor hereby collaterally assigns and transfers to Bank, and
acknowledges that pursuant to the Security Agreement Assignor has granted to
Bank a security interest in:
2.1 TRANSACTION DOCUMENTS. All of Assignor's right, title and
interest in and to the following documents (collectively, the "TRANSACTION
DOCUMENTS"):
(a) Management Services Agreement, dated as of July 14,
1997, executed by and between Assignor and Physician Group;
(b) Assignable Option Agreement, dated as of July 14, 1997,
executed by and among Assignor, Physician Group and Prospect Medical Group,
Inc., a California professional corporation ("GROUP");
(c) Security Agreement, dated as of July 14, 1997, executed
by and between Assignor and Physician Group, together with UCC-1 Financing
Statements with respect thereto ("PHYSICIAN GROUP SECURITY AGREEMENT"); and
(d) Secured Promissory Note, dated as of July 14, 1997, in
the principal amount of $3,000,000 ("NOTE"), executed by Group to the order of
Assignor.
2.2 RIGHTS AND REMEDIES. All of the rights, benefits, remedies,
privileges and claims of Assignor with respect to the Transaction Documents
(collectively, the "RIGHTS AND REMEDIES"), including, without limitation, (i)
all rights to monies or payments owing to Assignor under the Transaction
Documents, and any and all security therefor and for all other obligations owing
to Assignor thereunder, (ii) any right that Assignor may have to indemnification
under the Transaction Documents, (iii) all Rights and Remedies of Assignor with
respect to any breach of the representations, warranties and covenants set forth
in any of the Transaction Documents, and (iv) the proceeds thereof (the
Transaction Documents and the Rights and Remedies are collectively referred to
herein as, the "COLLATERAL").
3. RIGHT AND REMEDIES GENERALLY. Prior to the occurrence of a
breach or default of any of the agreements, covenants and obligations of
Assignor under the Guaranty (a "DEFAULT"), Assignor will enforce all of its
Rights and Remedies diligently and in good faith. Effective from and after the
occurrence of a Default, Assignor hereby irrevocably authorizes and empowers
Bank, in Bank's own discretion, to assert as Bank may deem proper, either
directly or on behalf of Assignor, any of the Rights and Remedies which Assignor
may from time to time have under the Transaction Documents, and to receive and
collect all damages, awards and other monies resulting therefrom and to apply
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the same on account of any of the Guaranteed Obligations.
4. FURTHER ASSURANCES. Assignor shall execute and deliver to Bank
concurrently with Assignor's execution of this Assignment, and from time to time
at the request of Bank, all financing statements, continuation financing
statements, fixture filings, security agreements, chattel mortgages,
assignments, and all other documents that Bank may request, in form satisfactory
to Bank, to perfect and maintain perfected Bank's security interests in the
Collateral and in order to consummate fully all of the transactions contemplated
by this Assignment.
5. TRANSACTION DOCUMENTS. Concurrent herewith, Assignor is
delivering to Bank possession of the original Transaction Documents, together
with any and all amendments thereto, as in effect on the date hereof, including
the Note and Physician Group Security Agreement, duly endorsed to Bank pursuant
to an allonge in form and substance satisfactory to Bank, to hold in accordance
with the terms of the Security Agreement until the Security Agreement is
terminated in accordance with its terms.
6. ATTORNEY-IN-FACT. Assignor hereby irrevocably makes,
constitutes, and appoints Bank (and Bank's officers, employees, or agents) as
Assignor's true and lawful agent and attorney-in-fact for the purposes of
enabling Bank or its agent(s) after the occurrence of a Default to (a) assert
such Rights and Remedies and to collect such damages, awards and other monies
and to apply them in the manner set forth hereinabove, and (b) to sign the name
of Assignor on any documents which need to be executed, recorded, or filed, and
to do any and all things necessary in the name and on behalf of Assignor in
order to protect Bank's interests in the Transaction Documents. Assignor agrees
that neither Bank, nor any of its designers or attorneys-in-fact, will be liable
for any act of commission or omission, or for any error of judgment or mistake
of fact or law with respect to the exercise of the power of attorney granted
under this Section 6, other than as a result of its or their gross negligence or
wilful misconduct. The power of attorney granted under this Section 6 is
coupled with an interest and shall be irrevocable until all of the Guaranteed
Obligations have been paid in full, the Guaranty terminated, and Assignor's
duties under this Assignment have been discharged in full.
7. MODIFICATION OF RIGHTS AND REMEDIES. Assignor shall keep Bank
informed of all circumstances bearing upon the Rights and Remedies and shall
immediately provide Bank with copies of any notices delivered to Assignor in
connection with the Transaction Documents. Assignor shall also provide Bank
with a copy of any notice sent by Assignor in connection with the Transaction
Documents, concurrently with the sending of any such notice. Assignor shall not
waive, amend, alter or modify any of the Rights and Remedies in any material
respect without the prior written consent of Bank. Assignor shall not, without
Bank's prior written consent, amend, alter, modify or terminate any of the
Transaction Documents, or waive any of the provisions thereof, or do or permit
any act in contravention thereof.
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8. ASSIGNOR TO REMAIN LIABLE. Notwithstanding the foregoing,
Assignor expressly acknowledges and agrees that it shall remain liable under the
Transaction Documents to observe and perform all of the conditions and
obligations in the Transaction Documents which Assignor is bound to observe and
perform, and that neither this Assignment, nor any action taken pursuant hereto,
shall cause Bank to be under any obligation or liability in any respect
whatsoever to observe or perform any of the representations, warranties,
conditions, covenants, agreements or terms of the Transaction Documents.
9. COUNTERPARTS; EFFECTIVENESS. This Assignment may be executed in
any number of counterparts, each of which, when executed and delivered, shall be
deemed to be an original. All of such counterparts, taken together, shall
constitute but one and the same agreement. This Assignment shall become
effective upon the execution of a counterpart of this Assignment by each of the
parties hereto.
10. NOTICES. All notices, requests and other communications to any
party hereunder shall be sent in accordance with Section 15 of the Guaranty.
11. MODIFICATIONS AND AMENDMENTS. This Assignment shall not be
changed orally but shall be changed only by agreement in writing signed by
Assignor and Bank. No course of dealing between the parties, no usage of trade
and no parole or extrinsic evidence of any nature shall be used to supplement or
modify any of the terms or provisions of this Assignment.
12. SEVERABILITY. If any provision of this Assignment is held to be
illegal, invalid or unenforceable under present or future laws, the legality,
validity and enforceability of the remaining provisions of this Assignment shall
not be affected thereby, and this Assignment shall be liberally construed so as
to carry out the intent of the parties to it.
13. GOVERNING LAW; SUCCESSORS AND ASSIGNS; ENTIRE AGREEMENT. This
Assignment (a) shall be governed and construed according to the laws of the
State of California, without regard to principles of conflicts of law; (b) shall
be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns; and (c) embodies the entire agreement and
understanding between the parties with respect to the subject matter hereof and
supersedes all prior agreements, consents and understandings relating to such
subject matter.
14. JUDICIAL REFERENCE.
14.1 REFERENCE PROCEEDING. Other than (i) nonjudicial
foreclosure and all matters in connection therewith regarding security interests
in real or personal property; or (ii) the appointment of a receiver, or the
exercise of other provisional remedies (any and all of which may be initiated
pursuant to applicable law), each controversy, dispute or claim between the
parties arising out of or relating to this Assignment, which
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controversy, dispute or claim is not settled in writing within thirty (30) days
after the "CLAIM DATE" (defined as the date on which either Assignor or Bank
gives written notice to the other that a controversy, dispute or claim exists),
will be settled by a reference proceeding in California in accordance with the
provisions of Section 638 ET SEQ. of the California Code of Civil Procedure, or
their successor section ("CCP"), which shall constitute the exclusive remedy for
the settlement of any controversy, dispute or claim concerning this Assignment,
including whether such controversy, dispute or claim is subject to the reference
proceeding and except as set forth above, the parties waive their rights to
initiate any legal proceedings against each other in any court or jurisdiction
other than the Superior Court in Los Angeles County (the "COURT"). The referee
shall be a retired Judge of the Court selected by mutual agreement of the
parties, and if they cannot so agree within forty-five (45) days after the Claim
Date, the referee shall be promptly selected by the Presiding Judge of the Court
(or his representative). The referee shall be appointed to sit as a temporary
judge, with all of the powers for a temporary judge, as authorized by law, and
upon selection should take and subscribe to the oath of office as provided for
in Rule 244 of the California Rules of Court (or any subsequently enacted Rule).
Each party shall have one peremptory challenge pursuant to CCP Section 170.6.
The referee shall (a) be requested to set the matter for hearing within sixty
(60) days after the date of selection of the referee and (b) try any and all
issues of law or fact and report a statement of decision upon them, if possible,
within ninety (90) days of the Claim Date. Any decision rendered by the referee
will be final, binding and conclusive and judgment shall be entered pursuant to
CCP Section 644 in any court in the State of California having jurisdiction.
Any party may apply for a reference proceeding at any time after thirty (30)
days following notice to any other party of the nature of the controversy,
dispute or claim, by filing a petition for a hearing and/or trial. All
discovery permitted by this Assignment shall be completed no later than fifteen
(15) days before the first hearing date established by the referee. The referee
may extend such period in the event of a party's refusal to provide requested
discovery for any reason whatsoever, including, without limitation, legal
objections raised to such discovery or unavailability of a witness due to
absence or illness. No party shall be entitled to "priority" in conducting
discovery. Depositions may be taken by either party upon seven (7) days written
notice, and request for production or inspection of documents shall be responded
to within ten (10) days after service. All disputes relating to discovery which
cannot be resolved by the parties shall be submitted to the referee whose
decision shall be final and binding upon the parties. Pending appointment of
the referee as provided herein, the Court is empowered to issue temporary and/or
provisional remedies, as appropriate.
14.2 MANNER OF REFERENCE PROCEEDING. Except as expressly set
forth in this Assignment, the referee shall determine the manner in which the
reference proceeding is conducted including the time and place of all hearings,
the order of presentation of evidence, and all other questions that arise with
respect to the course of the reference proceeding. All proceedings and hearings
conducted before the referee, except for trial, shall be conducted without a
court reporter except that when any party so requests, a court reporter will be
used at any hearing conducted before the referee. The party making such a
request shall have the obligation to arrange for and pay for the court reporter.
The costs
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<PAGE>
of the court reporter at the trial shall be borne equally by the parties.
14.3 DUTIES OF REFEREE. The referee shall be required to
determine all issues in accordance with existing case law and the statutory laws
of the State of California. The rules of evidence applicable to proceedings at
law in the State of California will be applicable to the reference proceeding.
The referee shall be empowered to enter equitable as well as legal relief, to
provide all temporary and/or provisional remedies and to enter equitable orders
that will be binding upon the parties. The referee shall issue a single
judgment at the close of the reference proceeding which shall dispose of all of
the claims of the parties that are the subject of the reference. The parties
hereto expressly reserve the right to contest or appeal from the final judgment
or any appealable order or appealable judgment entered by the referee. The
parties hereto expressly reserve the right to findings of fact, conclusions of
laws, a written statement of decision, and the right to move for a new trial or
a different judgment, which new trial, if granted, is also to be a reference
proceeding under this provision.
14.4 ARBITRATION ALTERNATIVE. In the event that the enabling
legislation which provides for appointment of a referee is repealed (and no
successor statute is enacted), any dispute between the parties that would
otherwise be determined by the reference procedure herein described will be
resolved and determined by arbitration. The arbitration will be conducted by a
retired judge of the Court, in accordance with the California Arbitration Act,
Section 1280 through Section 1294.2 of the CCP as amended from time to time.
The limitations with respect to discovery as set forth hereinabove shall apply
to any
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such arbitration proceeding.
EXECUTED as of the date first above written.
"Assignor"
PROSPECT MEDICAL SYSTEMS, INC.,
a Delaware corporation
By: /s/ Jacob Y. Terner, M.D.
-------------------------------------
Title: CEO
----------------------------------
"Bank"
IMPERIAL BANK,
a California banking corporation
By: Mark W. Campbell
-------------------------------------
Title: SVP
----------------------------------
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CONSENT TO ASSIGNMENT
Each of the undersigned acknowledges the terms of the above
Assignment, consents to the assignment by Assignor to Bank of the transaction
documents identified in Section 2 of the Assignment (the "TRANSACTION
DOCUMENTS") which it is a party, and agrees to recognize Bank as Assignor's
assignee under the Transaction Documents. Each of the undersigned hereby
represents and warrants to Bank that (i) it has no knowledge of any fact or
circumstance which would or could have a material adverse effect on the rights
granted to Bank in the Transaction Documents, (ii) each of the Transaction
Documents complies with all applicable laws and regulations, (iii) each of the
Transaction Documents is in full force and effect, and all signatures, names,
addresses, amounts and other statements and facts contained therein are true and
correct, and (iv) there are no defenses, offsets or counterclaims to enforcement
of the Transaction Documents.
ACKNOWLEDGED AND CONSENTED TO
THIS 14TH DAY OF JULY, 1997:
SANTA ANA/TUSTIN PHYSICIANS GROUP, INC.,
a California professional corporation
By: /s/ Gregg DeNicola
-------------------------------------
Title: Secretary
----------------------------------
PROSPECT MEDICAL GROUP, INC.,
a California professional corporation
By: /s/ Gregg DeNicola
-------------------------------------
Title: President
----------------------------------
8
<PAGE>
SECURITY AGREEMENT
(PHYSICIAN GROUP)
This SECURITY AGREEMENT, dated as of July 14, 1997, is entered into
between SANTA ANA/TUSTIN PHYSICIANS GROUP, INC., a California professional
medical corporation ("PHYSICIAN GROUP") and PROSPECT MEDICAL SYSTEMS, INC., a
Delaware corporation ("MANAGER"), with reference to the following facts:
R E C I T A L S
A. Manager and Physician Group have entered into that certain
Management Services Agreement, effective July 14, 1997 (the "MANAGEMENT
AGREEMENT"), pursuant to which Manager is providing certain management services
to Physician Group;
B. Physician Group has agreed to enter into this Security Agreement
in order to grant Manager a first priority security interest in the Collateral
(as hereinafter defined) to secure prompt payment and performance of its
obligations under the Management Agreement.
A G R E E M E N T
NOW, THEREFORE, in consideration of the mutual promises, covenants,
conditions, representations, and warranties hereinafter set forth, and for other
good and valuable consideration, the parties hereto agree as follows:
1. DEFINITIONS. All initially capitalized terms used but not
defined herein shall have the meanings ascribed thereto in the Management
Agreement. In addition, as used herein, the following terms shall have the
following meanings:
"ACCOUNT DEBTOR" means any person or entity who is or who may
become obligated with respect to, or on account of, an Account.
"ACCOUNTS" means any and all of Physician Group's presently
existing and hereafter arising accounts and rights to payment arising out of the
sale or lease of goods or the rendition of services by Physician Group,
irrespective of whether earned by performance, and all Instruments evidencing
the same or arising in connection therewith.
"APPLICABLE LAW" means all applicable provisions of
constitutions, statutes, rules, regulations and orders of all government bodies
and all orders and decrees of all courts, tribunals and arbitrators.
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"BANKRUPTCY CODE" means The Bankruptcy Reform Act of 1978 (Pub.
L. No. 95-598; 11 U.S.C.), as amended or supplemented from time to time, or any
successor statute, and any and all rules and regulations issued or promulgated
in connection therewith.
"CODE" means the California Uniform Commercial Code. Any and all
terms used in this Security Agreement which are defined in the Code shall be
construed and defined in accordance with the meaning and definition ascribed to
such terms under the Code, unless otherwise defined herein.
"COLLATERAL" means any and all of the Accounts and Physician
Group's Books, in each case whether now existing or hereafter acquired or
created, and any Proceeds or products of any of the foregoing, or any portion
thereof, and any and all Accounts, money, or other tangible or intangible
property, resulting from the sale or other disposition of the Accounts, or any
portion thereof or interest therein, and the substitutions, replacements,
additions, accessions, products and Proceeds thereof.
"EXPENSES" means any and all costs or expenses required to be
paid by Physician Group under this Security Agreement which are paid or advanced
by Manager; all costs and expenses of Manager, including its attorneys' fees and
expenses (including attorneys' fees incurred pursuant to proceedings arising
under the Bankruptcy Code), incurred or expended to correct any default or
enforce any provision of this Security Agreement, or in gaining possession of,
maintaining, handling, preserving, storing, shipping, selling, preparing for
sale, or advertising to sell the Collateral, irrespective of whether a sale is
consummated; and all costs and expenses of suit incurred or expended by Manager,
including its attorneys' fees and expenses (including attorneys' fees incurred
pursuant to proceedings arising under the Bankruptcy Code) in enforcing or
defending this Security Agreement, irrespective of whether suit is brought.
"GOVERNMENTAL AUTHORITY" means any federal, state, local or other
governmental department, commission, board, bureau, agency, central bank, court,
tribunal or other instrumentality or authority or subdivision thereof, domestic
or foreign, exercising executive, legislative, judicial, regulatory or
administrative functions of or pertaining to government.
"HEALTH CARE LAW" means any Applicable Law regulating the
acquisition, construction, operation, maintenance or management of a healthcare
practice, facility, provider or payor.
"INSTRUMENTS" means any and all negotiable instruments,
certificated securities and every other writing which evidences a right to the
payment of money, in each case whether now existing or hereafter acquired.
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<PAGE>
"LIEN" means any mortgage, deed of trust, pledge, security
interest, hypothecation, assignment, deposit arrangement or other preferential
arrangement, charge or encumbrance (including, any conditional sale or other
title retention agreement, or finance lease) of any kind.
"PHYSICIAN GROUP'S BOOKS" means any and all presently existing
and hereafter acquired or created books and records of Physician Group
(excluding patient medical records and peer review records), including all
records (including maintenance and warranty records), ledgers, computer
programs, disc or tape files, printouts, runs, and other computer prepared
information indicating, summarizing, or evidencing the Accounts.
"PROCEEDS" means whatever is receivable or received from or upon
the sale, lease, license, collection, use, exchange or other disposition,
whether voluntary or involuntary, of any Collateral or other assets of Physician
Group, including "proceeds" as defined in Section 9306 of the Code, any and all
proceeds of any insurance, indemnity, warranty or guaranty payable to or for the
account of Physician Group from time to time with respect to any of the
Collateral, any and all payments (in any form whatsoever) made or due and
payable to Physician Group from time to time in connection with any requisition,
confiscation, condemnation, seizure or forfeiture of all or any part of the
Collateral by any Governmental Authority (or any person or entity acting under
color of Governmental Authority), any and all other amounts from time to time
paid or payable under or in connection with any of the Collateral or for or on
account of any damage or injury to or conversion of any Collateral by any person
or entity, any and all other tangible or intangible property received upon the
sale or disposition of Collateral, and all proceeds of proceeds.
"SECURED OBLIGATIONS" shall mean any and all debts, liabilities,
obligations, or undertakings owing by Physician Group to Manager arising under,
advanced pursuant to, or evidenced by the Management Agreement and this Security
Agreement, whether direct or indirect, absolute or contingent, matured or
unmatured, due or to become due, voluntary or involuntary, whether now existing
or hereafter arising.
"SECURITY AGREEMENT" shall mean this Security Agreement, any
concurrent or subsequent riders, exhibits or schedules to this Security
Agreement, and any extensions, supplements, amendments, or modifications to or
in connection with this Security Agreement, or to any such riders, exhibits or
schedules.
2. CONSTRUCTION. Unless the context of this Security Agreement
clearly requires otherwise, references to the plural include the singular,
references to the singular include the plural, the part includes the whole,
"including" is not limiting, and "or" has the inclusive meaning represented
by the phrase "and/or." References in this Security Agreement to
"determination" by Manager include reasonable estimates (absent manifest
error) by Manager, as applicable (in the case of quantitative determinations)
and reasonable beliefs (absent manifest error) by Manager, as applicable (in
the case of qualitative deter-
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<PAGE>
minations). The words "hereof," "herein," "hereby," "hereunder," and similar
terms in this Security Agreement refer to this Security Agreement as a whole
and not to any particular provision of this Security Agreement. Article,
section, subsection, exhibit, and schedule references are to this Security
Agreement unless otherwise specified.
3. CREATION OF SECURITY INTEREST. Physician Group hereby grants to
Manager a continuing security interest in all presently existing and hereafter
acquired or arising Collateral in order to secure the prompt payment and
performance of all of the Secured Obligations. Physician Group acknowledges and
affirms that such security interest in the Collateral has attached to all
Collateral without further act on the part of Manager or Physician Group.
4. FURTHER ASSURANCES.
4.1 FURTHER ASSURANCES. Physician Group shall execute and
deliver to Manager concurrently with Physician Group's execution of this
Security Agreement, and from time to time at the request of Manager, all
financing statements, continuation financing statements, fixture filings,
security agreements, chattel mortgages, assignments, and all other documents
that Manager may request, in form satisfactory to Manager, to perfect and
maintain perfected Manager's security interests in the Collateral and in order
to consummate fully all of the transactions contemplated by this Security
Agreement and the Management Agreement.
5. REPRESENTATIONS AND WARRANTIES. Physician Group represents and
warrants to Manager that:
5.1 TRADE NAMES AND TRADE STYLES Physician Group presently does
not conduct its business operations under any trade names or trade styles.
5.2 OWNERSHIP OF COLLATERAL. Physician Group is and shall
continue to be the sole and complete owner of the Collateral, free from any
Lien, other than the Lien granted to Manager hereunder.
5.3 ENFORCEABILITY; PRIORITY OF SECURITY INTEREST. This
Agreement (i) creates a security interest which is enforceable against the
Collateral in which Physician Group now has rights and will create a security
interest which is enforceable against the Collateral in which Physician Group
hereafter acquires rights at the time Physician Group acquires any such rights,
and (ii) Manager has a perfected security interest (to the fullest extent
perfection can be obtained by filing, notification to third parties or
possession) and a first priority security interest in the Collateral in which
Physician Group now has rights, and will have a perfected and first priority
security interest in the Collateral in which Physician Group hereafter acquires
rights at the time Physician Group acquires any such rights, in each case
securing the payment and performance of the Secured Obligations.
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<PAGE>
5.4 OTHER FINANCING STATEMENTS. Other than financing statements
in favor of Manager, no effective financing statement naming Physician Group as
debtor, assignor, grantor, mortgagor, pledgor or the like and covering all or
any part of the Collateral is on file in any filing or recording office in any
jurisdiction.
6. COVENANTS. In addition to the covenants of Physician Group set
forth in the Management Agreement which are incorporated herein by this
reference, Physician Group agrees that from the date of this Security Agreement
and thereafter until the indefeasible payment, performance and satisfaction in
full of the Secured Obligations, and all of Physician Group's obligations under
the Management Agreement to Manager have been terminated:
6.1 DEFENSE OF COLLATERAL. Physician Group shall appear in and
defend any action, suit or proceeding which may affect its title to or right or
interest in, or Manager's right or interest in, the Collateral.
6.2 PRESERVATION OF COLLATERAL. Physician Group shall do and
perform all acts that may be necessary and appropriate to maintain, preserve and
protect the Collateral.
6.3 CHANGE IN NAME; ADOPTION OF TRADE NAME OR TRADE STYLE.
Physician Group shall give Manager at least 30 days' prior written notice of any
changes in its name, or of the adoption of any trade name or trade style.
6.4 MAINTENANCE OF RECORDS. Physician Group shall keep
separate, accurate and complete Physician Group's Books, disclosing Manager's
security interest hereunder.
6.5 DISPOSITION OF COLLATERAL. Physician Group shall not
surrender or lose possession of (other than to Manager), sell, lease, rent, or
otherwise dispose of or transfer any of the Collateral or any right or interest
therein.
6.6 LIENS. Physician Group shall keep the Collateral free of
all Liens, other than the Lien granted to Manager hereunder.
7. EVENTS OF DEFAULT. The occurrence of any of the following shall
constitute an event of default ("Event of Default") under this Security
Agreement:
7.1 BREACH OF MANAGEMENT AGREEMENT. Physician Group shall
breach, or be in default of, any of its agreements, covenants and obligations
under the Management Agreement;
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<PAGE>
7.2 BREACH OF SECURITY AGREEMENT. Physician Group shall breach,
or be in default of, any of its agreements, covenants and obligations under this
Security Agreement; or
7.3 BREACH OF REPRESENTATIONS OR WARRANTIES. Any representation
or warranty made by Physician Group in this Security Agreement shall have been
untrue in any material respect when made.
8. RIGHTS AND REMEDIES, ETC.
8.1 RIGHTS AND REMEDIES. During the continuance of an Event of
Default, Manager, without notice or demand, may do any one or more of the
following, all of which are authorized by Physician Group:
(a) Make such payments and do such acts as it considers
necessary or reasonable to protect Manager's security interest in the
Collateral. Physician Group agrees to assemble and make available any or all of
the Collateral if Manager so requires. Physician Group authorizes Manager to
enter the premises where the Collateral is located, take and maintain possession
of the Collateral, or any part of it, and to pay, purchase, contest, or
compromise any encumbrance, charge, or lien which, in the opinion of the
Manager, appears to be prior or superior to Manager's security interest, and to
pay all costs and expenses incurred in connection therewith;
(b) Sell the Collateral, at either a public or private
sale, or both, by way of one or more contracts or transactions, for cash or on
terms, in such manner and at such places (including Physician Group's premises)
as is commercially reasonable, and apply any proceeds of any sale or other
disposition of the Collateral in the order provided in Section 9504 of the Code,
including the payment of Expenses. It is not necessary that the Collateral be
present at any such sale;
(c) Without constituting a retention of collateral in
satisfaction of indebtedness as provided for in Section 9505 of the Code, notify
account debtors and other obligors of Physician Group of Manager's security
interests in the Collateral, and proceed to collect the same and apply the net
cash proceeds therefrom to the Secured Obligations;
(d) Manager shall give notice of any disposition of the
Collateral as follows:
(i) Manager shall give Physician Group and each
holder of a security interest in the Collateral who has filed with Manager a
written request for notice, a written notice stating the time and place of a
public sale, or, if the disposition
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<PAGE>
is to be either a private sale or some other disposition that is not a public
sale, the time on or after which the private sale or other disposition is to be
made;
(ii) The notice described in the immediately
preceding paragraph shall be delivered to Physician Group as provided in Section
8.3 of the Management Agreement at least five (5) calendar days before the date
fixed for a sale. Notice to persons other than Physician Group claiming an
interest in the Collateral shall be sent to such addresses as such persons have
furnished to Manager prior to the date of such notice;
(iii) If the disposition is to be a public sale,
Manager shall also give notice of the time and place of said sale by publishing
a notice at least five (5) calendar days before the date of the sale in a
newspaper of general circulation, if one exists, in the county in which the sale
is to be held;
(e) Manager may, in its own name, or in the name of a
designee or nominee, credit bid and purchase at any public sale;
(f) Physician Group shall pay all Expenses; and
(g) Any portion of the Secured Obligations which remains
unpaid after disposition of the Collateral as provided above shall be paid
immediately by Physician Group. Any excess which exists after disposition of
the Collateral and payment in full of the Secured Obligations shall be returned
promptly, without interest and subject to the rights of third persons, to
Physician Group by Manager.
8.2 FURTHER DOCUMENTATION. Upon the exercise by Manager of any
power, right, privilege, or remedy pursuant to this Security Agreement which
requires any consent, approval, registration, qualification, or authorization of
any Governmental Authority, Physician Group agrees to execute and deliver, or
will cause the execution and delivery of, all applications, certificates,
instruments, assignments, and other documents and papers that Manager or any
purchaser of the Collateral may be required to obtain for such governmental
consent, approval, registration, qualification, or authorization.
8.3 CUMULATIVE REMEDIES; WAIVERS. The rights and remedies of
Manager under this Security Agreement, the Management Agreement, and all other
agreements contemplated hereby and thereby shall be cumulative. Manager shall
have all other rights and remedies not inconsistent herewith as provided under
the Code, by law, or in equity. No exercise by Manager of any one right or
remedy shall be deemed an election of remedies, and no waiver by Manager of any
default on Physician Group's part shall be deemed a continuing waiver of any
further defaults. No delay by Manager shall constitute a waiver, election or
acquiescence with respect to any right or remedy.
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9. NOTICES. All notices or demands by any party hereto to the other
party and relating to this Security Agreement shall be made in the manner set
forth in Section 14.6 of the Management Agreement.
10. GENERAL PROVISIONS.
10.1 SUCCESSORS AND ASSIGNS. This Security Agreement shall bind
and inure to the benefit of the respective successors and assigns of Physician
Group and Manager; PROVIDED, HOWEVER, that Physician Group may not assign this
Security Agreement nor delegate any of its duties hereunder without Manager's
prior written consent and any prohibited assignment or delegation shall be
absolutely void. No consent by Manager to an assignment by Physician Group
shall release Physician Group from the Secured Obligations. Manager may assign
this Security Agreement and delegate its duties hereunder, if any, from time to
time to its lender or lenders or to its parent's lender or lenders, without
prior notice to, or the consent of, Physician Group, and Physician Group agrees
to recognize such lender or lenders as Manager's assignee under this Security
Agreement.
10.2 NO PRESUMPTION AGAINST ANY PARTY. Neither this Security
Agreement nor any uncertainty or ambiguity herein shall be construed or resolved
against Manager or Physician Group, whether under any rule of construction or
otherwise. On the contrary, this Security Agreement has been reviewed by each
of the parties and their counsel and shall be construed and interpreted
according to the ordinary meaning of the words used so as to accomplish fairly
the purposes and intentions of all parties hereto.
10.3 AMENDMENTS AND WAIVERS. Any provision of this Security
Agreement or any of the Loan Documents to which Physician Group is a party may
be amended or waived if, but only if, such amendment or waiver is in writing and
is signed by the party asserted to be bound thereby, and then such amendment or
waiver shall be effective only in the specific instance and specific purpose for
which given.
10.4 COUNTERPARTS; INTEGRATION; EFFECTIVENESS. This Security
Agreement may be signed in any number of counterparts, each of which shall be an
original, with the same effect as if the signatures thereto and hereto were upon
the same instrument. This Security Agreement constitutes the entire agreement
and understanding among the parties hereto and supersedes any and all prior
agreements and understandings, oral or written, relating to the subject matter
hereof. This Security Agreement shall become effective when executed by each of
the parties hereto and delivered to Manager.
11. GOVERNING LAW. This Security Agreement shall be deemed to have
been made in the State of California and the validity, construction,
interpretation, and enforcement hereof, and the rights of the parties hereto,
shall be determined under, governed by, and construed in accordance with the
internal laws of the State of California.
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12. NO VIOLATION OF APPLICABLE LAW. To the extent that any lien or
security interest on any Asset(s) granted by Physician Group herein violates any
applicable Health Care Law, the grant of such lien or security interest on such
Asset(s) shall be automatically null and void; provided however, that to the
extent such lien or security interest at any time hereafter no longer violates
any applicable Health Care Law, then such lien or security interest shall
automatically and without any further action attach and become fully effective
at that time (giving effect to any retroactive effect to any change in
applicable law or regulation); and, provided further, that the liens or security
interests on other Asset(s) granted by Physician Group herein that do not
violate any applicable Health Care Law shall remain at all times in full force
and effect.
[Remainder of this page intentionally left blank.]
9
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Security Agreement
as of the date first set forth above.
SANTA ANA/TUSTIN PHYSICIANS GROUP, INC.
a California professional corporation
By: /s/ Gregg DeNicola
------------------------------------
Title: Secretary
---------------------------------
PROSPECT MEDICAL SYSTEMS, INC.
a Delaware corporation
By: /s/ Jacob Y. Terner, M.D.
------------------------------------
Title: CEO
---------------------------------
10
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PROMISSORY NOTE
(Prospect Medical Group, Inc.)
$3,000,000 Los Angeles, California
July 14, 1997
1. FOR VALUE RECEIVED, PROSPECT MEDICAL GROUP, INC., a California
professional corporation ("MAKER"), promises to pay to the order of PROSPECT
MEDICAL SYSTEMS, INC., a Delaware corporation ("PAYEE"), on or before the
Maturity Date unless sooner accelerated in accordance with the terms hereof, the
principal sum of Three Million Dollars ($3,000,000). As used herein the term
"MATURITY DATE" has the meaning given to such term in that certain Revolving
Credit Agreement, dated as of July 3, 1997, between Prospect Medical Holdings,
Inc., a Delaware corporation, and Imperial Bank (as amended or restated from
time to time, the "CREDIT AGREEMENT").
2. This Promissory Note shall bear interest at a per annum rate
equal to six percent (6%). All computations of interest shall be calculated on
the basis of a year of three hundred sixty-five (365) days for the actual days
elapsed. Interest shall accrue from the date of this Promissory Note to the
date of repayment of this Promissory Note in accordance with the provisions
hereof. Maker shall pay all accrued but unpaid interest on the principal
balance hereof, in arrears, on the first day of each and every month.
3. Maker shall make all payments hereunder in lawful money of the
United States of America and in immediately available funds to the holder hereof
("HOLDER") at Holder's office or to such other address as Holder may from time
to time specify by notice to Maker.
4. In no event shall the interest rate and other charges hereunder
exceed the highest rate permissible under any law which a court of competent
jurisdiction shall, in a final determination, deem applicable hereto. In the
event that such a court determines that Holder has received interest and other
charges hereunder in excess of the highest rate applicable hereto, such excess
shall be deemed received on account of, and shall automatically be applied to
reduce, the principal balance hereof, and the provisions hereof shall be deemed
amended to provide for the highest permissible rate. If there is no principal
balance outstanding, Holder shall refund to Maker such excess.
5. The unpaid principal balance hereof together with all accrued but
unpaid interest thereon shall be all due and payable upon (i) failure by Maker
to pay any installment of principal or interest due hereunder when due,
(ii) commencement of any proceeding by or against Maker under any bankruptcy or
insolvency laws, or (iii) the occurrence of an "Event of Default" under the
Credit Agreement.
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6. Maker hereby waives presentment for payment, notice of dishonor,
protest and notice of protest.
7. This Promissory Note shall be governed by and construed in
accordance with the internal laws of the State of California without regard to
principles of conflicts of laws.
IN WITNESS WHEREOF, Maker has duly executed this Promissory Note as of
the date first above written.
PROSPECT MEDICAL GROUP, INC.,
a California professional corporation
By /s/ Gregg DeNicola
---------------------------------------
Title President
------------------------------------
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ENDORSEMENT ALLONGE
Pay to the order of Imperial Bank, a California banking corporation,
located at 9920 South La Cienega Blvd., Suite #628, Inglewood,
California 90301 the attached note dated July 14, 1997 made by
Prospect Medical Group, Inc., a California professional corporation.
Dated: July 14, 1997 PROSPECT MEDICAL SYSTEMS, INC.,
a Delaware corporation
By:/s/ Jacob Y. Terner, M.D.
---------------------------------------
Print name: JACOB Y. TERNER, M.D.
-------------------------------
Its: CEO
-------------------------------------
<PAGE>
AMENDED AND RESTATED CREDIT SUCCESSION AGREEMENT
This AMENDED AND RESTATED CREDIT SUCCESSION AGREEMENT (this "AGREEMENT"),
dated as of July 14, 1997, is entered into by and among Gregg DeNicola, M.D.
("DENICOLA"), Prospect Medical Holdings, Inc., a Delaware corporation
("HOLDINGS"), Prospect Medical Systems, Inc., a Delaware corporation
("SYSTEMS"), Prospect Medical Group, a California professional corporation
("GROUP"), Santa Ana/Tustin Physicians Group, Inc., a California professional
corporation ("SANTA ANA/TUSTIN"), such other entities as may hereafter become
parties hereto by executing a joinder agreement, in form and substance
satisfactory to Imperial Bank, a California banking corporation ("BANK"), making
them a party to this Agreement, and Bank, with reference to the following facts.
A. Group, Santa Ana/Tustin and each other California professional medical
corporation which hereafter becomes a party to this Agreement (collectively,
with Group and Santa Ana/Tustin, the "PROFESSIONAL CORPORATIONS") is a
professional service corporation within the meaning of the Moscone-Knox
Professional Corporation Act of the State of California ("PROFESSIONAL
CORPORATION ACT").
B. Systems and each other subsidiary of Holdings which hereafter becomes
a party to this Agreement (collectively, with Systems, the "MANAGEMENT
COMPANIES") and the Professional Corporations have entered into those certain
Management Services Agreements, all as more fully set forth on SCHEDULE A
attached hereto and incorporated herein by this reference (each such agreement a
"MANAGEMENT AGREEMENT").
C. All of the issued and outstanding shares of the Professional
Corporations are owned by either DeNicola, Group or such other person or entity
as may hereafter become a party to this Agreement, as indicated on SCHEDULE B
attached hereto and incorporated herein by this reference (each such Person, a
"PC SHAREHOLDER") (all such shares collectively held by the PC Shareholders are
referred to herein as the "SHARES").
D. Holdings has entered into that certain Revolving Credit Agreement (the
"CREDIT AGREEMENT"), dated as of July 3, 1997, with Bank pursuant to which Bank
shall extend credit to Holdings. All initially capitalized terms used but not
defined herein shall have the meanings given to them in the Credit Agreement.
E. Each of the Management Companies has entered into a Continuing
Guaranty (each, a "GUARANTY" and collectively, the "GUARANTIES") in favor of
Bank pursuant to which such Management Company has guaranteed the obligations of
the Holdings under the Credit Agreement.
F. The PC Shareholders, the Management Companies and the Professional
Corporations are parties to those certain Assignable Option Agreements, all as
more fully set forth on SCHEDULE C, attached hereto and incorporated herein by
this reference (each such agreement an "OPTION AGREEMENT"). As used herein the
term "SUCCESSOR PHYSICIAN"
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shall have the same meaning as in the Option Agreements or, if such term is
undefined in any Option Agreement, shall mean the shareholder(s) designated to
succeed to the ownership interest of any of the Shares upon the occurrence of
certain succession events.
G. Each Professional Corporation is a member of an affiliated group of
companies that includes Holdings and the Management Companies and the proceeds
of the Loans to be advanced under the Credit Agreement will be used, in part, to
enable Holdings and the Management Companies to make transfers amongst
themselves, the Subsidiaries, the PC Shareholders and the Professional
Corporations in connection with the operation of their respective businesses.
H. The PC Shareholders and the Professional Corporations will derive
direct and substantial benefit from the execution of and performance under the
Credit Agreement by Holdings and from the Loans to be advanced thereunder.
I. The parties hereto desire to promote their mutual interest by imposing
certain restrictions on the sale, transfer or other disposition of the Shares
and by providing for certain disposition of the Shares upon the occurrence of an
Event of Default under the Credit Agreement.
J. The parties hereto (other than Santa Ana/Tustin) have previously
entered into that certain Credit Succession Agreement, dated as of July 3, 1997
(the "PRIOR AGREEMENT"), and the parties hereto desire to amend and restate the
Prior Agreement in accordance with the terms of this Agreement.
NOW, THEREFORE, in consideration of the foregoing recitals and for other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto each represents, warrants, covenants and agrees
as follows:
1. GENERAL PURPOSE; CONSTRUCTION. The purpose of this Agreement is to
grant Bank certain rights to secure the performance and payment of sums due
under the Credit Agreement, the Guaranties and the other Loan Documents upon the
occurrence of a Succession Event, as defined below, and to provide for the
orderly management of the Professional Corporations in the event of a Succession
Event. It is a further purpose of this Agreement to provide for the transfer of
ownership of the Shares in accordance with the terms of this Agreement and the
laws of the relevant jurisdictions and to provide for the orderly transition in
the composition of the Boards of Directors upon the occurrence of a Succession
Event. In connection therewith, it is the intent of the parties hereto, and
each of the PC Shareholders and the Professional Corporations hereby covenants
and agrees that, notwithstanding the occurrence of a Succession Event:
(a) EXISTENCE. Each Professional Corporation shall maintain its
existence as a professional service corporation (a "MEDICAL CORPORATION") under
the laws of its state of formation.
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(b) MANAGEMENT AGREEMENTS. Each Professional Corporation shall
continue to honor the Management Agreement to which it is a party; and
(c) BOARD OF DIRECTORS. The Board of Directors of each Professional
Corporation shall consist of employees of such Corporation or such other persons
who are qualified hereunder and under the laws of the relevant jurisdictions to
serve thereon.
2. SUCCESSION EVENTS. As used herein, the term "SUCCESSION EVENT" shall
mean the occurrence of any one or more of the following events:
(a) DEFAULT. The occurrence of an Event of Default under or as
defined in the Credit Agreement; or
(b) REPRESENTATIONS AND WARRANTIES. Any representation or warranty
of any of the PC Shareholders or any Professional Corporation made under this
Agreement or any statement or certificate at any time given pursuant hereto or
in connection herewith shall be false, misleading or incomplete in any material
respect when made; or
(c) COVENANTS. Failure by any PC Shareholder or any Professional
Corporation to perform, keep or observe any covenant or provision of this
Agreement and the same has not been cured to the Bank's satisfaction within ten
(10) Business Days after such Person shall become aware thereof, whether by
written notice from Bank or otherwise; or
(d) DEATH OR DISQUALIFICATION. Any PC Shareholder dies or is
disqualified under the Professional Corporation Act or is no longer a Qualified
Medical Professional (as hereinafter defined).
3. GENERAL OBLIGATIONS OF SHAREHOLDER. Each PC Shareholder and each
Professional Corporation covenant and agree that, so long as any of the
Revolving Credit Commitment shall be available and until the full and infeasible
payment and performance of the Obligations and of all obligations arising under
the Guaranties (the "GUARANTY OBLIGATIONS"), each PC Shareholder and each
Professional Corporations, shall:
(a) QUALIFIED DIRECTORS. Maintain for each of the Professional
Corporations a Board of Directors of at least three (3) members who shall be
persons (i) duly licensed to practice in the medical industry in the applicable
jurisdiction and that each such person shall be designated as a licensed
professional in accordance with the Professional Corporation Act of such
jurisdiction, (ii) who are otherwise qualified hereunder and (iii) who are not
legally disqualified (temporarily or permanently) under the Professional
Corporation Act (a licensed person who is not legally disqualified is
hereinafter referred to as a "QUALIFIED MEDICAL PROFESSIONAL");
(b) BOARD MEMBERS. Vote the Shares only to elect Qualified Medical
Professionals as members of the Boards of Directors;
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(c) NO TRANSFER. Notwithstanding the terms of any Option Agreement,
not sell, transfer, pledge or otherwise hypothecate the Shares except as set
forth herein;
(d) COMPLIANCE WITH LAW. Cause all directors of each of the
Professional Corporations to take all steps necessary to ensure that each
Professional Corporation complies with all provisions of the Professional
Corporation Act and remains in good standing as a medical corporation in the
state of California.
4. REMEDIES. Upon the occurrence of a Succession Event, pursuant to
Sections 2(a) through 2(c) of this Agreement and the exercise by Bank under the
Credit Agreement, the Guaranties or any of the other Loan Documents, of any of
the remedies provided for therein, or upon the occurrence of a Succession Event
pursuant to Section 2(d) of this Agreement, the following shall occur:
(a) SHAREHOLDER ISSUES. As soon as reasonably practicable following
written notice from Bank of the occurrence of a Succession Event and upon
receipt of Bank's written demand therefor, the PC Shareholders, or their estate,
as the case may be, shall sell the Shares to such person(s) as Bank shall, in
its sole discretion, direct (the "NEW SHAREHOLDER(S)"). The total purchase
price for the Shares for each Professional Corporation shall be $1,000.
(b) DIRECTOR ISSUES. As soon as reasonably practicable following the
notice specified in Section 4(a) and the sale and purchase of the Shares as set
forth in Section 4(a), the New Shareholder(s) shall remove any existing members
of the Boards of Directors, in accordance with the provisions of the by-laws of
the Professional Corporations and any relevant laws, and fill the vacancies on
the Boards of Directors by electing the New Shareholder(s) as the only
director(s) of each of the Professional Corporations to the extent permitted by
applicable law.
5. TERM; AMENDMENT TO CHARTER OR BYLAWS. This Agreement shall be in full
force and effect for so long as the Credit Agreement has not been terminated and
until the full and indefeasible payment and performance of the Obligations and
the Guaranty Obligations. Each PC Shareholder agrees that he or it will not
authorize the issuance of any additional Shares or amend the charter or bylaws
of the Professional Corporations in any manner adverse to the purposes set forth
herein so long as this Agreement is in effect.
6. COMMUNITY PROPERTY INTEREST. DeNicola and each other the PC
Shareholder who is an individual shall cause his spouse to execute an
Acknowledgement and Consent, substantially in the form of EXHIBIT A attached
hereto, signifying such spouse's consent to this Agreement and such spouse's
agreement that any rights that such spouse may have, as a result of a community
property or other interest in the Shares, shall be subject to the provisions of
this Agreement. It is intended by this Agreement that DeNicola and each other
PC Shareholder who is an individual shall subject his or her entire interest in
the Shares to the terms of this Agreement, irrespective of any community
property or other interest of his spouse.
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7. GRANT OF SECURITY INTEREST. In order to secure the timely performance
of the obligations of the PC Shareholders owing to Bank hereunder, each PC
Shareholder hereby grants a security interest in the Shares it owns to Bank.
Such security interest shall attach to all now existing and hereafter acquired
Shares without further action required on the part of Bank or any PC
Shareholder.
8. DELIVERY OF SHARES; STOCK ASSIGNMENTS. Upon the purchase of any
Shares of any of the Professional Corporations hereunder or under any Option
Agreement, the relevant PC Shareholders, New Shareholder, Successor Shareholder
or Professional Corporation, as the case may be, shall deliver to Bank, as
collateral for the Obligations and the Guaranty Obligations, all stock
certificate(s) evidencing the Shares of the Professional Corporation(s)
purchased, together with all necessary or appropriate stock assignments separate
from such certificate(s) in accordance with the terms of this Agreement.
9. REPRESENTATIONS AND WARRANTIES. The PC Shareholders and the
Professional Corporations, hereby represent and warrant to Bank as follows:
(a) SHAREHOLDERS OF RECORDS. The PC Shareholders are the sole holder
of record and the sole beneficial owner of the Shares of each of the
Professional Corporations as indicated on SCHEDULE B, free and clear of any Lien
thereon or affecting title thereto, except for (i) the Lien created by this
Agreement, and (ii) Permitted Liens.
(b) CONSENTS AND APPROVALS. The Shares, the pledge of the Shares
hereunder and the agreements, covenants and restrictions hereby entered into are
not subject to and do not require the consent, approval or authorization under
any agreement to which any of the Professional Corporations are subject,
including, without limitation, under formation documents of any of the
Professional Corporations, any management or professional services agreements,
any loan agreements or similar documents, or of any third party, including,
without limitation, any lender to any of any Professional Corporation.
(c) RESTRICTIVE COVENANTS. Except as otherwise provided in any
Option Agreement, the Shares are not subject to any restrictive covenants,
negative pledges or any similar types of covenants or agreements that would
restrict transferability.
(d) DELIVERY OF CERTIFICATES. All certificates or other instruments
representing or evidencing the Shares, accompanied by appropriate duly executed
instruments of transfer or assignment in blank, have been delivered to Bank
pursuant to the terms of this Agreement and all certificates, cash, instruments
and other property or proceeds from time to time received, receivable or
otherwise distributed in respect of, or in exchange for, any such Shares shall,
immediately upon receipt, be delivered to Bank in accordance with the terms of
this Agreement, together with any necessary endorsements.
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<PAGE>
10. INDEMNIFICATION.
(a) BANK INDEMNIFICATION. The PC Shareholders (other than DeNicola),
Holdings, the Management Companies and the Professional Corporations, jointly
and severally, shall indemnify and defend Bank against any and all claims,
expenses, liabilities and losses, including reasonable attorneys' fees, incurred
or suffered by Bank by reason of the exercise or failure to exercise any rights
of Bank under this Agreement, excluding only such claims, expenses, liabilities
and losses arising solely from the gross negligence or willful misconduct of
Bank. DeNicola shall indemnify and defend Bank against any and all claims,
expenses, liabilities and losses, including reasonable attorneys' fees, incurred
or suffered by Bank by reason of the exercise or failure to exercise any rights
of Bank under this Agreement caused by any act or omission of DeNicola,
excluding only such claims, expenses, liabilities and losses arising solely from
the gross negligence or willful misconduct of Bank.
(b) SURVIVAL. The obligations of the parties under this Section 10
will survive the termination of this Agreement.
11. FURTHER AGREEMENTS.
(a) PARTY TO AGREEMENT. The PC Shareholders, or their estate, as the
case may be, Holdings, the Management Companies and each of the Professional
Corporations hereby agree that they shall cause any New Shareholder and any
Successor Shareholder to become a party to this Agreement upon and as a
condition to becoming a New Shareholder or a Successor Shareholder and agree
that each such New Shareholder or Successor Shareholder shall be, and the PC
Shareholders, and each of the Professional Corporations shall cause them to be,
bound by the terms hereof with the same obligations and liabilities as the PC
Shareholders. The parties hereto agree that any shares of any of the
Professional Corporations acquired by any party hereto, any New Shareholder, any
Successor Shareholder shall be or become Shares hereunder and the PC
Shareholders, the Management Companies, Holdings and the Professional
Corporations shall cause such Shares to be delivered to Bank in accordance with
the terms hereof.
(b) TRANSFER OF SHARES. During the term of this Agreement no New
Shareholder or Successor Shareholder shall sell, transfer, pledge or otherwise
hypothecate the shares of any Professional Corporation which such New
Shareholder or Successor Shareholder owns except to Bank. Such shares of stock
shall be marked with a restrictive legend with respect thereto.
(c) COMPLIANCE. Each New Shareholder and Successor Shareholder
agrees to, and shall cause all directors of the Professional Corporations to
take all steps necessary to, ensure that each Professional Corporation comply
with all provisions of the Professional Corporation Act and remain in good
standing as a professional medical corporation in the State of California.
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12. COPY OF AGREEMENT. Each of the Professional Corporations shall keep a
copy of this Agreement on file in the principal business office of such
Professional Corporation.
13. PRIMACY OF AGREEMENT. Upon the occurrence of a Succession Event, this
Agreement and the provisions hereof shall supersede any Option Agreement with
respect to the subject matter hereof. Upon the occurrence of a Succession
Event, in the case of any conflict or inconsistency between this Agreement and
any Option Agreement, this Agreement shall control.
14. SPECIFIC PERFORMANCE. The PC Shareholders and the Professional
Corporations agree that a breach of any covenants contained in this Agreement
will cause irreparable injury to Bank, that Bank has no adequate remedy at law
in respect of such breach and, as a consequence, each agrees that each and every
covenant contained in this Agreement shall be specifically enforceable against
each of them, and each hereby waives and agrees not to assert any defenses
against an action for specific performance of such covenants.
15. NOTICES. All notices, requests, demands and other communications
under this Agreement shall be in writing and shall be deemed duly given on the
date of service if personally served on the party to whom notice is to be given,
which in the case of the Professional Corporations shall be the Professional
Corporation specified in this Section 15, or on the third day after mailing if
deposited in the United States mail to the party to whom notice is to be given,
certified, postage prepaid, return receipt requested, and properly addressed as
follows:
the PC Shareholders:
Gregg A. DeNicola, M.D.
Prospect Medical Holdings, Inc.
18200 Yorba Linda Blvd., Suite 409
Yorba Linda, CA 92686
Professional Corporations:
c/o Prospect Medical Group
18200 Yorba Linda Blvd., Suite 409
Yorba Linda, CA 92686
Attn: Gregg A. DeNicola, M.D.
Bank:
Imperial Bank
at its address for notice under the Credit Agreement
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Any party hereto may change its address for the purpose of receiving notices,
requests, demands and other communications as herein provided by a written
notice given in the manner set forth above to the other parties hereto; PROVIDED
HOWEVER, that only one Professional Corporation shall at any time be designated
to receive notice for and on behalf of all the Professional Corporations, and
only one PC Shareholder shall at any time be designated to receive notice for
and on behalf of all PC Shareholders.
16. ATTORNEYS' FEES. Should any parties hereto institute any action or
proceeding at law, in equity or in arbitration to enforce any provision of this
Agreement, including an action for declaratory relief or for damages by reason
of an alleged breach of any provision of this Agreement or otherwise in
connection with this Agreement or any provision hereof, the prevailing party
shall be entitled to recover from the losing party such prevailing party's
reasonable attorneys' fees and costs in such action or proceeding.
17. MISCELLANEOUS.
(a) ENTIRE AGREEMENT. This Agreement and the other Loan Documents
constitute the entire understanding and agreement of the parties with respect to
the subject matter hereof and any and all prior agreements, understandings or
representations with respect to such subject matter are hereby terminated and
canceled in their entirety and are of no further force or effect.
(b) SEVERABILITY. Nothing contained herein shall be construed so as
to require the commission of any act contrary to law, and whenever there is any
conflict between any provision contained herein and any present or future
constitution, statute, law, ordinance, rule or regulation, the latter shall
prevail; PROVIDED, HOWEVER, that the provision of this Agreement which is
affected shall be curtailed and limited only to the extent necessary to bring it
within the requirements of the law. In any event, all other provisions of this
Agreement shall be deemed valid and enforceable to the fullest extent possible.
(c) FURTHER ASSURANCES. Each of the parties hereto shall execute and
deliver any and all additional papers, documents, and other assurances, and
shall do any and all acts and things reasonably necessary in connection with the
performance of its obligations hereunder to carry out the intent of the parties
hereto.
(d) MODIFICATIONS OR AMENDMENTS. No amendment, change or
modification of this Agreement shall be valid, unless in writing and signed by
all of the parties hereto.
(e) NO WAIVER; AMENDMENTS. No failure on the part of Bank to
exercise, no delay in exercising and no course of dealing with respect to, any
right hereunder shall operate as a waiver thereof; nor shall any single or
partial exercise of any right hereunder or under any of the other Loan Documents
preclude any other or further exercise thereof or the exercise of any other
right. The remedies herein provided are cumulative and not exclusive of any
remedies provided by law.
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(f) JOINT AND SEVERAL LIABILITY. The PC Shareholders, Holdings, the
Management Companies and the Professional Corporations each agree that the
liability hereunder shall be the immediate, direct, and primary obligation of
such Person and shall not be contingent upon Bank's exercise or enforcement of
any remedy it may have against any of them or against any other Person, or
against the Collateral or any other security for the Obligations or the Guaranty
Obligations. Without limiting the generality of the foregoing, this Agreement
shall remain in full force and effect without regard to and shall not be
impaired or affected by, nor shall the PC Shareholders, Holdings, the Management
Companies, or the Professional Corporations be exonerated or discharged by, any
of the following events:
(i) Insolvency, bankruptcy, reorganization, arrangement,
adjustment, composition, assignment for the benefit of creditors, death,
liquidation, winding up or dissolution of any of them or any other guarantor of
the Obligations or the Guaranty Obligations;
(ii) Any limitation, discharge, or cessation of the liability
of any of them or any other guarantor for the Obligations or the Guaranty
Obligations due to any statute, regulation or rule of law, or any invalidity or
unenforceability in whole or in part of the documents evidencing the Obligations
or the Guaranty Obligations or any other guaranty thereof or any other security
agreement or pledge agreement related thereto;
(iii) Any merger, acquisition, consolidation or change in
structure of any of them or any other guarantor of the Obligations or the
Guaranty Obligations or any sale, lease, transfer or other disposition of any or
all of the assets or shares of any of them or any other guarantor of the
Obligations or the Guaranty Obligations;
(iv) Any assignment or other transfer, in whole or in part, of
Bank's interests in and rights under this Agreement, the Credit Agreement or any
of the other Loan Documents, including, without limitation, Bank's right to
receive payment of the Obligations or the Guaranty Obligations or any assignment
or other transfer, in whole or in part, of Bank's interests in and to the
Collateral or any other collateral securing the Obligations or the Guaranty
Obligations;
(v) Any claim, defense, counterclaim or setoff, other than
that of prior performance, that the PC Shareholders, the Professional
Corporations, Holdings, any of the Management Companies or any guarantor of the
Obligations or the Guaranty Obligations may have or assert, including, but not
limited to, any defense of incapacity or lack of corporate or other authority to
execute any documents relating to the Obligations or the Guaranty Obligations,
the Collateral, or any other collateral securing the Obligations or the Guaranty
Obligations;
(vi) Bank's amendment, modification, renewal, extension,
cancellation or surrender, of any agreement, document or instrument relating to
the Credit Agreement, this Agreement, the Obligations, the Guaranty Obligations,
the Collateral or any
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other collateral securing the Obligations or the Guaranty Obligations, or Bank's
exchange, release, or waiver of any Collateral or of any other collateral
securing the Obligations or the Guaranty Obligations;
(vii) Bank's exercise or nonexercise of any power, right or
remedy with respect to the Obligations, the Guaranty Obligations, the Collateral
or any other collateral securing the Obligations or the Guaranty Obligations,
including, but not limited to, Bank's compromise, release, settlement or waiver
with any of the PC Shareholders, any of the Management Companies, the
Professional Corporations, or of Holdings, any guarantor or any other Person;
(viii) Bank's vote, claim, distribution, election, acceptance,
action or inaction in any bankruptcy case related to the Obligations, the
Guaranty Obligations, the Collateral or any other collateral securing the
Obligations or the Guaranty Obligations; and
(ix) Any impairment or invalidity of the Collateral or any
other collateral securing the Obligations or the Guaranty Obligations or any
failure to perfect any of Bank's Liens thereon or therein.
(g) COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, and all of which taken
together shall constitute one and the same instrument.
(h) NUMBER AND GENDER. In this Agreement, the masculine, feminine or
neuter gender, and the singular or plural number, shall each be deemed to
include the other, whenever the context so requires.
(i) CAPTIONS. The section and other headings contained in this
Agreement are for reference only and shall not in any way limit or amplify the
terms and provisions hereof, nor affect the meaning or interpretation of this
Agreement.
(j) CONTINUED TENURE. The parties hereto acknowledge that nothing
contained in this Agreement shall be deemed a guarantee of any New Shareholder's
or any Successor Shareholder's continued tenure on the Board of Directors of any
of the Professional Corporations.
(k) ASSIGNMENT. This Agreement may not be assigned by any PC
Shareholders, any of the Professional Corporations, any New Shareholder, any
Successor Shareholder, any of the Management Companies or Holdings without the
prior written consent of Bank. Subject to the foregoing, this Agreement will
inure to the benefit of the parties and will be binding upon their respective
successors, executors, administrators, heirs and assigns.
(l) GOVERNING LAW. This Agreement has been delivered to Bank and
accepted by Bank in the State of California. THIS AGREEMENT SHALL BE
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GOVERNED BY, CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE INTERNAL LAWS OF
THE STATE OF CALIFORNIA WITHOUT GIVING EFFECT TO ANY PRINCIPLES OF CONFLICT OF
LAWS.
(m) AMENDED AND RESTATED AGREEMENT. This Agreement shall amend and
restate in its entirety, supersede, and continue the obligations incurred under,
the Prior Agreement.
(n) JUDICIAL REFERENCE. Other than (i) nonjudicial foreclosure and
all matters in connection therewith regarding security interests in real or
personal property; or (ii) the appointment of a receiver, or the exercise of
other provisional remedies (any and all of which may be initiated pursuant to
applicable law), each controversy, dispute or claim between the parties arising
out of or relating to this Agreement, which controversy, dispute or claim is not
settled in writing within thirty (30) days after the "CLAIM DATE" (defined as
the date on which a party subject to the Agreement gives written notice to all
other parties that a controversy, dispute or claim exists), will be settled by a
reference proceeding in California in accordance with the provisions of Section
638 ET SEQ. of the California Code of Civil Procedure, or their successor
section ("CCP"), which shall constitute the exclusive remedy for the settlement
of any controversy, dispute or claim concerning this Agreement, including
whether such controversy, dispute or claim is subject to the reference
proceeding and except as set forth above, the parties waive their rights to
initiate any legal proceedings against each other in any court or jurisdiction
other than the Superior Court in the County where the Real Property, if any, is
located or Los Angeles County if none (the "Court"). The referee shall be a
retired Judge of the Court selected by mutual agreement of the parties, and if
they cannot so agree within forty-five (45) days after the Claim Date, the
referee shall be promptly selected by the Presiding Judge of the Court (or his
representative). The referee shall be appointed to sit as a temporary judge,
with all of the powers for a temporary judge, as authorized by law, and upon
selection should take and subscribe to the oath of office as provided for in
Rule 244 of the California Rules of Court (or any subsequently enacted Rule).
Each party shall have one peremptory challenge pursuant to CCP Section 170.6.
The referee shall (a) be requested to set the matter for hearing within sixty
(60) days after the Claim Date and (b) try any and all issues of law or fact and
report a statement of decision upon them, if possible, within ninety (90) days
of the Claim Date. Any decision rendered by the referee will be final, binding
and conclusive and judgment shall be entered pursuant to CCP Section 644 in any
court in the State of California having jurisdiction. Any party may apply for a
reference proceeding at any time after thirty (30) days following notice to any
other party of the nature of the controversy, dispute or claim, by filing a
petition for a hearing and/or trial. All discovery permitted by this Agreement
shall be completed no later than fifteen (15) days before the first hearing date
established by the referee. The referee may extend such period in the event of
a party's refusal to provide requested discovery for any reason whatsoever,
including, without limitation, legal objections raised to such discovery or
unavailability of a witness due to absence or illness. No party shall be
entitled to "priority" in conducting discovery. Depositions may be taken by
either party upon seven (7) days written notice, and request for production or
inspection of documents shall be responded to within ten (10) days after
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service. All disputes relating to discovery which cannot be resolved by the
parties shall be submitted to the referee whose decision shall be final and
binding upon the parties. Pending appointment of the referee as provided
herein, the Superior Court is empowered to issue temporary and/or provisional
remedies, as appropriate.
Except as expressly set forth in this Agreement, the referee shall
determine the manner in which the reference proceeding is conducted including
the time and place of all hearings, the order of presentation of evidence, and
all other questions that arise with respect to the course of the reference
proceeding. All proceedings and hearings conducted before the referee, except
for trial, shall be conducted without a court reporter except that when any
party so requests, a court reporter will be used at any hearing conducted before
the referee. The party making such a request shall have the obligation to
arrange for and pay for the court reporter. The costs of the court reporter at
the trial shall be borne equally by the parties.
The referee shall be required to determine all issues in accordance
with existing case law and the statutory laws of the State of California. The
rules of evidence applicable to proceedings at law in the State of California
will be applicable to the reference proceeding. The referee shall be empowered
to enter equitable as well as legal relief, to provide all temporary and/or
provisional remedies and to enter equitable orders that will be binding upon the
parties. The referee shall issue a single judgment at the close of the
reference proceeding which shall dispose of all of the claims of the parties
that are the subject of the reference. The parties hereto expressly reserve the
right to contest or appeal from the final judgment or any appealable order or
appealable judgment entered by the referee. The parties hereto expressly
reserve the right to findings of fact, conclusions of laws, a written statement
of decision, and the right to move for a new trial or a different judgment,
which new trial, if granted, is also to be a reference proceeding under this
provision.
In the event that the enabling legislation which provides for
appointment of a referee is repealed (and no successor statute is enacted), any
dispute between the parties that would otherwise be determined by the reference
procedure herein described will be resolved and determined by arbitration. The
arbitration will be conducted by a retired judge of the Court, in accordance
with the California Arbitration Act, Section 1280 through Section 1294.2 of the
CCP as amended from time to time. The limitations with respect to discovery as
set forth hereinabove shall apply to any such arbitration proceeding.
[Remainder of this page intentionally left blank.]
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date and year first above written.
/s/ Gregg DeNicola
---------------------------------------
Gregg DeNicola
SANTA ANA/TUSTIN PHYSICIANS GROUP, INC.
By: /s/ Gregg DeNicola
------------------------------------
Title: Secretary
---------------------------------
PROSPECT MEDICAL HOLDINGS, INC.
By: /s/ Jacob Y. Terner, M.D.
------------------------------------
Title: CEO
---------------------------------
PROSPECT MEDICAL SYSTEMS, INC.
By: /s/ Jacob Y. Terner, M.D.
------------------------------------
Title: CEO
---------------------------------
PROSPECT MEDICAL GROUP, INC.
By: /s/ Gregg DeNicola
------------------------------------
Title: President
---------------------------------
IMPERIAL BANK
By: /s/ Mark W. Campbell
------------------------------------
Title: SVP
---------------------------------
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SPOUSAL JOINDER AND CONSENT
I am the spouse of Gregg DeNicola, M.D., a shareholder (the
"SHAREHOLDER") of Prospect Medical Group, Inc., a California professional
medical corporation ("PROFESSIONAL CORPORATION"). To the extent that I have any
interest in any of the Shares (as that term is defined in the Amended and
Restated Credit Succession Agreement (the "CREDIT SUCCESSION AGREEMENT"),
entered into as of July 14, 1997, by and among Imperial Bank, Prospect Medical
Holdings, Inc., Prospect Medical Systems, Inc., the Shareholder and Prospect
Medical Group, Inc.), I hereby join in the Credit Succession Agreement and agree
to be bound by its terms and conditions to the same extent as my spouse. I have
read the Credit Succession Agreement, understand its terms and conditions, and
to the extent that I have felt it necessary, have retained independent legal
counsel to advise me concerning the legal effect of the Credit Succession
Agreement and this Spousal Joinder and Consent.
I understand and acknowledge that Imperial Bank is significantly
relaying on the validity and accuracy of this Spousal Joinder and Consent in
entering into the Credit Succession Agreement.
Executed this 14 day of July, 1997.
Signature: /s/ Mary DeNicola
------------------------------------------
Printed or Typed Name: Mary DeNicola
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AMENDED AND RESTATED ASSIGNABLE OPTION AGREEMENT
THIS AMENDED AND RESTATED ASSIGNABLE OPTION AGREEMENT ("Agreement") is made
as of the 2nd day of September, 1998, and deemed to have been effective as of
September 25, 1997, by and among Sierra Medical Management, Inc. ("Sierra
Medical Management"), a Delaware corporation, Sierra Primary Care Medical Group,
Inc., a California professional medical corporation ("Group"), and Prospect
Medical Group, Inc., a California professional corporation ("Prospect Medical
Group"), with reference to the following facts:
RECITALS
A. Group is a professional corporation that is organized and operated as
a medical practice (the "Practice").
B. Group, Prospect Medical Group and Karunyan Arulanantham, M.D., S.E.
Moorthy, M.D. and Karunyan Arulanantham, M.D., as Trustee of the Arulanantham
Charitable Remainder Trust (collectively, "Sellers") entered into that certain
Agreement of Purchase and Sale of Stock, dated as of September 23, 1997 (the
"Stock Purchase Agreement"), pursuant to which Sellers are selling all of the
outstanding shares of Group to Prospect Medical Group, Inc. (the "Acquisition").
C. Subject to the conditions set forth herein, effective as of the
Closing of the Acquisition, Prospect Medical Group desires to grant to Sierra
Medical Management, and Sierra Medical Management desires to acquire from
Prospect Medical Group, (i) an assignable option to purchase all of the assets
of Group, and (ii) the right to designate the purchaser ("Successor Physician")
of all or part of the issued and outstanding stock in Group. When used in this
Agreement, the term "Assets" shall mean all of Group's and Prospect Medical
Group's right, title, interest and estate in and to all the assets of every kind
and description used in or pertaining to the Practice, including but not limited
to the assets set forth on Exhibit A. When used in this Agreement, the term
"Stock" shall mean all of Prospect Medical Group's right, title, interest and
estate in and to all of the issued and outstanding stock in Group, including any
rights to any additional stock, preemptive rights, warrants, and the like, as
set forth on Exhibit B.
D. Prospect Medical Group, Group and Sierra Medical Management desire to
enter into this Agreement to incorporate within the terms of one agreement all
of the amendments previously made and to be made as of the date of execution
hereof to an Assignable Option Agreement made as of September 25, 1997 (the
"Original Agreement").
NOW, THEREFORE, in consideration of the foregoing promises and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged by the parties, Group, Prospect Medical Group, and Sierra Medical
Management agree as follows:
<PAGE>
1. GRANT OF OPTION.
1.1 Prospect Medical Group hereby grants to Sierra Medical Management an
assignable option to purchase all or any part of the Assets (the "Assets
Option"), on the terms and subject to the conditions set forth in this
Agreement.
1.2 Group and Prospect Medical Group hereby grant to Sierra Medical
Management the assignable right to designate a Successor Physician or Successor
Physicians, which person or persons must be duly licensed physicians in the
State of California or otherwise permitted by law to be a shareholder in a
professional corporation, to purchase all or part of the Stock (the "Stock
Option"), on the terms and subject to the conditions set forth herein. In its
sole discretion, Sierra Medical Management may designate the amount of Stock
which is to be purchased. The Assets Option and the Stock Option are
collectively referred to herein as the "Option."
1.3 Group and Prospect Medical Group represent and warrant that as of the
day and year first above written and during the term of this Agreement, Exhibits
A and B are true and complete listings of the Assets and Stock, respectively, as
revised from time to time pursuant to this Agreement.
1.4 Other than in connection with that certain Amended and Restated Credit
Succession Agreement, dated as of July 14, 1997, by and among Prospect Medical
Holdings, Inc., a Delaware corporation ("Prospect Medical Holdings"), Prospect
Medical Group, Gregg DeNicola, M.D., Santa Ana/Tustin Physicians Group, Inc., a
California professional corporation ("Santa Ana"), Prospect Medical Systems,
Inc., a Delaware corporation ("Prospect Medical Systems"), and Imperial Bank, a
California banking corporation ("Imperial"), as amended, and as supplemented by
the Joinder Agreement, dated as of September 25, 1997, entered into by and among
Sierra Medical Management, Group, Gregg DeNicola, M.D., Prospect Medical
Holdings, Prospect Medical Systems, Prospect Medical Group, Santa Ana and
Imperial (as amended and supplemented, the "Amended and Restated Credit
Succession Agreement"), Group shall not recognize any share transfer or other
action not in compliance with the terms of this Agreement.
2. TERM OF AGREEMENT. The term of this Agreement commences as of the day and
year first above written and continues for thirty (30) years ("Term"). So long
as the term of the Management Services Agreement, made and entered into of even
date herewith, by and between Sierra Medical Management and Group, as amended
(the "Management Services Agreement"), is automatically extended pursuant
thereto, the term of this Agreement shall be automatically extended for
additional coextensive terms of ten (10) years each. In the event the
Management Services Agreement is terminated pursuant to its terms, this
Agreement shall terminate upon the effective date of termination of said
Management Services Agreement.
3. OPTION PRICE. The purchase price for the Option (the "Option Price") is
One Hundred Dollars ($100) and Group and Prospect Medical Group acknowledge
receipt of such payment.
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4. EXERCISE OF OPTION.
4.1 During the Term of the this Agreement, Sierra Medical Management may
elect to exercise the Option at any time. In the event of an election by Sierra
Medical Management to exercise the Option, Sierra Medical Management may
exercise either the Assets Option or the Stock Option, or both, at Sierra
Medical Management's sole discretion.
4.2 Notwithstanding the provisions of Section 4.1, if the Management
Services Agreement is terminated by either party, for any reason, Sierra Medical
Management's right to exercise the Option is automatically and immediately
exercised as of the termination date of the Management Services Agreement such
that Sierra Medical Management may exercise either the Assets Option or the
Stock Option, or both, at such time.
4.3 To the extent that the Assets Option is exercised by Sierra Medical
Management, Sierra Medical Management will send Group a written notice (the
"Assets Exercise Notice") specifying the Assets to be purchased. Sierra
Medical Management may exercise the Assets Option as many times as Sierra
Medical Management elects in its sole discretion.
4.4 To the extent that the Stock Option is exercised by Sierra Medical
Management, Sierra Medical Management will send Group a written notice (the
"Stock Exercise Notice") specifying the Stock to be purchased. Sierra Medical
Management may designate the Successor Physician(s) who will exercise the Stock
Option as many times as Sierra Medical Management elects in its sole discretion.
4.5 The Assets Option and the Stock Option are independent of each other,
and can be exercised at different times during the Term.
4.6 Sierra Medical Management may cancel any Assets Exercise Notice or
Stock Exercise Notice at any time.
4.7 Group and Prospect Medical Group shall cooperate with Sierra Medical
Management in any due diligence.
5. ASSIGNMENT OF THE OPTION. Sierra Medical Management may elect to assign
either the Assets Option or the Stock Option or both to any person, by a written
assignment, signed by both Sierra Medical Management and the assignee, which
designates the Assets or Stock. The assignee shall agree as a condition of the
assignment to be bound by the terms of this Agreement. Thereafter, only the
assignee named in the assignment (or its nominee) shall have the right to
exercise the applicable Assets Option and/or the Stock Option as to the
designated Assets and/or Stock, and that assignee, rather than Sierra Medical
Management, shall enter into a purchase agreement upon exercise of the Assets
Option and/or the Stock Option, as applicable. Written notice of any such
assignment shall be given by Sierra Medical Management to Group and
3
<PAGE>
Prospect Medical Group within a reasonable time period following execution of
any assignment pursuant to this Agreement. When the context so requires in
this Agreement, the term "Sierra Medical Management" shall be deemed to refer
to an assignee holding an assignment of an Asset Option or Stock Option, and
the terms "party" and "parties" shall be deemed to include that assignee.
The parties further understand and agree that the Assets Option and the Stock
Option are concurrently herewith being collaterally assigned to Imperial
pursuant to that certain Collateral Assignment of Transaction Documents,
dated as of September 25, 1997.
6. PURCHASE PRICE OF THE ASSETS OR STOCK.
6.1 PURCHASE PRICE.
(a) ASSETS PURCHASE PRICE. The purchase price for the Assets to be
purchased pursuant to the exercise of the Assets Option shall be $1,000 ("Assets
Purchase Price"). The purchase price of any partial purchase of the Assets
shall be a pro-rata percentage of the full Assets Purchase Price.
(b) STOCK PURCHASE PRICE. The purchase price for the Stock to be
purchased pursuant to the exercise of the Stock Option shall be $1,000 ("Stock
Purchase Price"). The purchase price of less than all of the issued and
outstanding Stock is a pro-rata percentage of the full Stock Purchase Price.
6.2 PAYMENT. For the Assets, Sierra Medical Management shall pay Group
the Assets Purchase Price at Closing in the form of immediately available funds
transferred by wire to an account at a financial institution designated by
Group. For the Stock, Sierra Medical Management shall cause the Successor
Physician to pay Prospect Medical Group the Stock Purchase Price.
6.3 CLOSING. The transactions contemplated by this Agreement are to close
forty-five (45) days after the date of either the Assets Exercise Notice or the
Stock Exercise Notice, as the case may be ("Closing"), unless extended by Sierra
Medical Management.
7. ADDITIONAL OBLIGATIONS OF GROUP.
7.1 AFFIRMATIVE COVENANTS. To the extent that Group and Prospect Medical
Group participate in the Practice and own, control, or use the Assets, Group and
Prospect Medical Group shall:
(a) CONDUCT OF PRACTICE. Conduct Group's business efficiently and
without voluntary interruption and preserve all rights, privileges, and
franchises held by Group and Group's Practice, including the maintenance of all
contracts, copyrights, trademarks, licenses, registrations, etc.;
4
<PAGE>
(b) USE. Make use of the Assets with reasonable care to prevent
diminution in value of the Practice and the Assets, and keep the Assets in good
repair;
(c) VALUE. Perform all acts necessary to maintain, preserve, and
protect the Assets, and maintain fire and extended coverage insurance on the
Assets in the amounts and under policies acceptable to Sierra Medical
Management, and provide Sierra Medical Management with the original policies and
certificates at Sierra Medical Management's request;
(d) FINANCING STATEMENTS. Execute and deliver to Sierra Medical
Management all financing statements and other documents that Sierra Medical
Management requests, in order to put third parties on notice of this Agreement;
(e) ACCESS. Permit Sierra Medical Management, its representatives,
and its agents to inspect the Assets at any time, and to make copies of records
pertaining to the Assets, at reasonable times at Sierra Medical Management's
request;
(f) REPORTS. Furnish Sierra Medical Management any reports relating
to the Assets at Sierra Medical Management's request;
(g) DEFAULTS. Notify Sierra Medical Management promptly in writing
of any default, potential default, or any development that might have a material
adverse effect on the Assets, the Stock, or the Practice, or of any litigation
that may have a material adverse effect on the Practice;
(h) EXPENSES. Pay all expenses, including attorneys' fees, incurred
by Sierra Medical Management in the perfection, preservation, realization,
enforcement, and exercise of its rights under this Agreement, including but not
limited to accounting, correspondence, collection efforts, filing, recording,
and recordkeeping;
(i) INDEMNITY. Indemnify Sierra Medical Management against losses,
liabilities, or damages, costs and expenses of any kind, including reasonable
attorneys' fees, caused to Sierra Medical Management by reason of its interest
in the Assets and/or the Stock;
(j) TAXES. Pay promptly when due all taxes and assessments owed in
connection with the Assets and the Stock; and
(k) DELIVERY OF CERTIFICATES. Deliver to Sierra Medical Management
all certificates heretofore issued representing all of the shares of Group's
capital stock held of record or beneficially owned by Prospect Medical Group,
and each certificate hereafter issued representing any share of Group's capital
stock, with each certificate endorsed in blank for transfer. Notwithstanding the
foregoing, this Section 7.1.k shall only apply in the event that the Amended and
Restated Credit Succession Agreement is no longer in effect.
5
<PAGE>
7.2 NEGATIVE COVENANTS. Except as required under the Amended and Restated
Credit Succession Agreement, without the prior written consent of Sierra Medical
Management, Group and Prospect Medical Group shall not:
(a) TRANSFER. Sell, lease, transfer, or otherwise dispose of the
Assets and Stock;
(b) DEBT. Incur, guarantee, assume or otherwise become liable for
any borrowing or increase any existing indebtedness; or discharge or cancel any
debt owed to Group;
(c) NO FURTHER HYPOTHECATION. Pledge, hypothecate, encumber, redeem
or dispose of the Assets, the Stock or any interest therein until all of Group's
obligations under this Agreement have been fully satisfied or the Assets or the
Stock has been released;
(d) LOCATION. Move the Assets from their present locations without
the prior written consent of Sierra Medical Management;
(e) USE. Use the Assets or the Stock for any unlawful purpose or in
any way that would void any effective insurance;
(f) NAME AND LOCATION CHANGES. Change the name or place of business
or use a fictitious business name without the prior express consent of Sierra
Medical Management; and
(g) ISSUANCE OF STOCK; CHANGE IN OWNERSHIP; MERGERS AND
CONSOLIDATION. Permit any issuance of Stock, other equity, or debt; permit any
change in the composition or respective percentage ownership of Group; permit
Group to be merged, consolidated or otherwise reorganized with or into any other
corporation, partnership, trade, business, or the like; amend or otherwise
modify its articles of incorporation and bylaws; dissolve; or enter into any
agreement with any person to do any of the foregoing.
8. CONFIDENTIALITY. The parties shall use all good faith efforts to keep the
contents of this Agreement and all other aspects of the negotiations preceding
execution of this Agreement confidential. Unless required by law, Group,
Prospect Medical Group, and Sierra Medical Management shall not disclose the
contents of this Agreement or the negotiations leading to this Agreement to
third parties without the prior written consent of the other party. Sierra
Medical Management shall ensure that all of the assignees likewise comply with
the obligations of confidentiality imposed by this Section, except that Sierra
Medical Management and the assignees may disclose the contents of such to their
respective agents, representatives, contractors, and employees to the extent
necessary to exercise their respective rights or perform their respective
obligations hereunder.
6
<PAGE>
9. GENERAL.
9.1 COMPLIANCE WITH LAW. Group and Prospect Medical Group shall comply
with all applicable requirements of the Joint Commission on the Accreditation of
Healthcare Organizations, the Medicare and Medicaid programs, applicable state
law and regulations, and other licensing and accreditation authorities.
9.2 RELATIONSHIP OF PARTIES. In the exercise of their respective rights
and the performance of their respective obligations under this Agreement, Group
and Prospect Medical Group on the one hand and Sierra Medical Management (or any
assignee) on the other hand are acting in the capacity of the grantor and
grantee of an option to purchase all or a portion of the Assets and/or Stock,
and nothing in this Agreement is intended nor shall be construed to create
between the parties an employer/employee relationship, a partnership or joint
venture relationship or a landlord/tenant relationship.
9.3 ASSIGNMENT. All of Sierra Medical Management' rights and duties under
this Agreement may be assigned or delegated by Sierra Medical Management or
Prospect Medical Holdings, including but not limited to an assignment to
Imperial; provided, however, that Sierra Medical Management or Prospect Medical
Holdings, Inc., shall give written notice of any such assignment to the Group
and Prospect Medical Group within a reasonable time period. Notwithstanding any
other provision of this Agreement, neither this Agreement nor the rights and
duties of this Agreement may be assigned or delegated by Group or Prospect
Medical Group. This Agreement binds the successors, heirs, and authorized
assignees of the parties.
9.4 ENTIRE AGREEMENT. Except as expressly provided in this Agreement to
the contrary, this Agreement, including its incorporated exhibits, constitutes
the entire agreement between the parties with respect to the Option, and
supersedes all other and prior agreements on the same subject, whether written
or oral, and contains all of the covenants and agreements between the parties
with respect to the subject matter hereof. Except as expressly provided in this
Agreement to the contrary, each party to this Agreement acknowledges that no
representations, inducements, promises, or agreements, orally or otherwise, have
been made by any other party hereto, or by anyone acting on behalf of any party
hereto, that are not embodied herein, and that no agreement, statement, or
promise not contained in this Agreement shall be valid or binding. This
Agreement incorporates the Original Agreement, together with all amendments
previously made and to be made to the date of execution hereof, and is deemed
to have been effective as of the date of the Original Agreement.
9.5 COUNTERPARTS. This Agreement, and any amendments hereto, may be
executed in counterparts, each of which shall constitute an original document,
but which together shall constitute one and the same instrument.
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9.6 HEADINGS. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
9.7 NOTICES. Any notices required or permitted to be given hereunder by
any party to another shall be in writing and shall be deemed delivered upon
personal delivery, twenty-four (24) hours following deposit with a courier for
overnight delivery or seventy two (72) hours following deposit in the U.S. Mail,
registered or certified mail, postage prepaid, return-receipt requested,
addressed to the parties at the following addresses or to such other addresses
as the parties may specify in writing:
If to Group or Sierra Primary Care Medical Group, Inc.
Prospect Medical Group: c/o Prospect Medical Group, Inc.
18200 Yorba Linda Boulevard
Yorba Linda, California 92886
Attention: Gregg DeNicola, M.D.
If to Sierra Medical Management: Sierra Medical Management, Inc.
c/o Prospect Medical Holdings
18200 Yorba Linda Boulevard
Yorba Linda, California 92886
Attention: Jacob Y. Terner, M.D.
9.8 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
9.9 AMENDMENT. This Agreement may be amended at any time by agreement of
the parties, provided that any amendment shall be in writing and executed by all
parties.
9.10 SEVERABILITY. If any provision of this Agreement is held by a court
of competent jurisdiction to be invalid or unenforceable, the remaining
provisions will nevertheless continue in full force and effect, unless such
invalidity or unenforceability would defeat an essential business purpose of
this Agreement.
9.11 FEES AND EXPENSES. Group, Prospect Medical Group, and Sierra Medical
Management each shall bear their own expenses, including, without limitation,
attorneys' and accountants' fees, incurred in connection with the preparation of
this Agreement and the transactions contemplated hereby.
9.12 EXHIBITS AND SCHEDULES. All exhibits and schedules attached to this
Agreement are incorporated herein by this reference and all references herein to
"Agreement" shall mean this Agreement together with all such exhibits and
schedules.
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<PAGE>
9.13 TIME OF ESSENCE. Time is expressly made of the essence of this
Agreement and each and every provision hereof of which time of performance is a
factor.
9.14 DISPUTE RESOLUTION. In the event the parties hereto are unable to
resolve any dispute in connection with this Agreement, the parties may mutually
agree to arbitrate as set forth below.
(a) There shall be one arbitrator. If the parties shall fail to
select a mutually acceptable arbitrator within ten (10) days after the demand
for arbitration is mailed, then the parties stipulate to arbitration before a
retired judge sitting on the Los Angeles, California, Judicial Arbitration
Mediation Services (JAMS) panel.
(b) The substantive law of the State of California shall be applied
by the arbitrator.
(c) Arbitration shall take place in Los Angeles, California, unless
Group and a majority of the other parties otherwise agree. As soon as
reasonably practicable, a hearing with respect to the dispute or matter to be
resolved shall be conducted by the arbitrator. As soon as reasonably
practicable thereafter, the arbitrator shall arrive at a final decision, which
shall be reduced to writing, signed by the arbitrator and mailed to each of the
parties and their legal counsel.
(d) All decisions of the arbitrator shall be final, binding and
conclusive on the parties and shall constitute the only method of resolving
disputes or matters subject to arbitration pursuant to this Agreement. The
arbitrator or a court of appropriate jurisdiction may issue a writ of execution
to enforce the arbitrator's judgment. Judgment may be entered upon such a
decision in accordance with applicable law in any court having jurisdiction
thereof.
(e) Notwithstanding the foregoing, because time is of the essence of
this Agreement, the parties specifically reserve the right to seek a judicial
temporary restraining order, preliminary injunction, or other similar short term
equitable relief, and grant the arbitrator the right to make a final
determination of the parties' rights, including whether to make permanent or
dissolve such court order.
(f) Notwithstanding the foregoing, any and all arbitration
proceedings are conditional upon such proceedings being covered within the
parties' respective risk insurance policies.
9.15 ATTORNEYS' FEES. Should any of the parties hereto institute any
action or procedure to enforce this Agreement or any provision hereof (including
without limitation, arbitration), or for damages by reason of any alleged breach
of this Agreement or of any provision hereof, or for a declaration of rights
hereunder (including, without limitation, by means of arbitration), the
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prevailing party in any such action or proceeding shall be entitled to receive
from the other party all costs and expenses, including without limitation
reasonable attorneys' fees, incurred by the prevailing party in connection with
such action or proceeding.
9.16 FURTHER ASSURANCES. The parties shall take such actions and execute
and deliver such further documentation as may reasonably be required in order to
give effect to the transactions contemplated by this Agreement and the
intentions of the parties hereto.
9.17 RIGHTS CUMULATIVE. The various rights and remedies herein granted to
the respective parties hereto shall be cumulative and in addition to any other
rights any such party may be entitled to under law. The exercise of one or more
rights or remedies by a party shall not impair the right of such party to
exercise any other right or remedy, at law or equity.
9.18 CONFLICTS. In the event that any provision contained herein shall
conflict with the Credit Succession Agreement, the provision of the Credit
Succession Agreement shall control and such conflicting provision herein shall
be of no further force or effect.
IN WITNESS WHEREOF, Group, Prospect Medical Group, and Sierra Medical
Management execute this Agreement by their duly authorized representatives as
set forth below.
"SIERRA MEDICAL MANAGEMENT, INC." "GROUP"
Sierra Medical Management, Inc., Sierra Primary Care Medical Group, Inc.,
a Delaware corporation a California professional corporation
By: Karunyan Arulanantham By: Jacob Y. Terner, M.D.
------------------------------- --------------------------------
Karunyan Arulanantham, M.D., Its: CEO
President -------------------------------
"PROSPECT MEDICAL GROUP"
Prospect Medical Group, Inc.,
a California professional corporation
By: Jacob Y. Terner, M.D.
--------------------------------
Its: VP
-------------------------------
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EXHIBIT "A"
ASSETS
1. All contracts and agreements, including all payor contracts, vendor
contracts, loan agreements, leases and subleases.
2. All risk pool or other incentive arrangement payments relating to the
Practice, including hospital incentive funds, and any capitation advances to
physicians.
3. All cash, bank balances, monies in possession of any bank, other cash
items, marketable securities of Group and prepaid deposits relating to the
Practice.
4. All accounts receivable of Group ("Accounts Receivable") relating to the
Practice. As used herein, "Accounts Receivable" shall include all rights to
payment for goods or services rendered, whether or not yet earned by
performance, all other obligations and receivables from others no matter how
evidenced relating to the Practice, including purchase orders, notes,
instruments, drafts and acceptances and all guarantees of the foregoing and
security therefor, relating to the Practice.
5. All supplies and inventory relating to the Practice.
6. All patient records, files and X-rays relating to the Practice.
7. All of Group's goodwill relating to the Practice, which may include
location goodwill, name recognition goodwill, patient allegiance, etc.
8. All business, financial and accounting records and books of account
relating to the Practice, exclusive of Group's Articles, Bylaws, corporate
minutes, stock shares and general ledger.
9. Group's right to reimbursement for all professional services provided to
managed care and fee-for-service patients relating to the Practice.
10. All of Group's furniture, fixtures, leasehold improvements, machinery,
equipment, inventories, supplies and other like tangible personal property used
in the Practice.
11. All trademarks, trade names, fictitious business names, copyrights, logos,
licenses, ownership interests in telephone numbers at the Practice, or related
items of Group that in any way pertain to the Practice.
<PAGE>
EXHIBIT "B"
STOCK
Stock has been pledged to Imperial Bank, a California banking
corporation ("Bank") pursuant to the terms of that certain Joinder Agreement,
dated as of even date herewith, by and among Sierra Medical Management, Inc.,
a Delaware corporation, Sierra Primary Care Medical Group, Inc., a California
professional corporation, Gregg DeNicola, M.D., Prospect Medical Holdings,
Inc., a Delaware corporation ("Borrower"), Prospect Medical Systems, Inc., a
Delaware corporation, ("Systems"), Prospect Medical Group, Inc., a California
professional corporation ("Group"), Santa Ana/Tustin Physicians Group, Inc.,
a California professional corporation ("Santa Ana") and Bank relating to the
Amended and Restated Credit Succession Agreement, dated as of July 14, 1997,
by and among Bank, Borrower, Systems, Group, Santa Ana and Gregg DeNicola,
M.D.
<PAGE>
THIS INSTRUMENT IS SUBJECT TO THE TERMS OF THE AGREEMENT FOR THE PURCHASE AND
SALE OF STOCK ("STOCK PURCHASE AGREEMENT"), DATED AS OF SEPTEMBER 23, 1997, BY
AND AMONG PROSPECT MEDICAL GROUP, INC., A CALIFORNIA PROFESSIONAL CORPORATION
("PURCHASER"), AS BUYER, SINNADURAI E. MOORTHY, M.D., KARUNYAN ARULANANTHAM,
M.D. AND KARUNYAN ARULANANTHAM, M.D. AS TRUSTEE OF THE ARULANANTHAM CHARITABLE
REMAINDER TRUST AND SIERRA PRIMARY CARE MEDICAL GROUP, INC., A CALIFORNIA
PROFESSIONAL CORPORATION ("COMPANY"). TERMS USED HEREIN AND NOT OTHERWISE
DEFINED SHALL HAVE THE MEANINGS ASSIGNED TO THEM IN THE STOCK PURCHASE
AGREEMENT.
THIS INSTRUMENT AND THE OBLIGATIONS EVIDENCED HEREBY ARE SUBORDINATED, IN THE
MANNER AND TO THE EXTENT SET FORTH IN A SUBORDINATION AND NOTE CANCELLATION
AGREEMENT (THE "SUBORDINATION AND NOTE CANCELLATION AGREEMENT") DATED AS OF
SEPTEMBER 25, 1997, BY AND AMONG PURCHASER, IMPERIAL BANK, A CALIFORNIA BANKING
CORPORATION ("BANK"), PROSPECT MEDICAL HOLDINGS, INC., A DELAWARE CORPORATION
("PROSPECT MEDICAL HOLDINGS"), PROSPECT MEDICAL SYSTEMS, INC., A DELAWARE
CORPORATION ("MANAGER"), SINNADURAI E. MOORTHY, M.D. AND THE HOLDER OF THIS
INSTRUMENT, AND THE HOLDER OF THIS INSTRUMENT, BY HIS ACCEPTANCE HEREOF, AGREES
(i) TO BE BOUND BY THE TERMS OF THE SUBORDINATION AND NOTE CANCELLATION
AGREEMENT AND (ii) IN THE EVENT THAT ANY CONFLICT EXISTS BETWEEN THE TERMS OF
THIS INSTRUMENT, ANY DOCUMENT EXECUTED IN CONNECTION WITH THE DELIVERY OF THIS
INSTRUMENT AND THE TERMS OF THE SUBORDINATION AND NOTE CANCELLATION AGREEMENT,
THE TERMS OF THE SUBORDINATION AND NOTE CANCELLATION AGREEMENT SHALL GOVERN AND
BE CONTROLLING.
CONTINGENT PROMISSORY NOTE
$1,125,000 September 25, 1997
Los Angeles, California
For value received, the undersigned Purchaser promises to pay to Karunyan
Arulanantham, M.D. ("Holder"), at 1675 Staffordshire Drive, Lancaster, CA
93534, or at such other place as Holder may from time to time designate, the
principal sum of One Million One Hundred Twenty Five Thousand Dollars
($1,125,000), payable interest only on the tenth (10) day of each month on the
unpaid principal balance at the rate of seven percent (7%) per annum, with
principal payable (i) in quarterly installments of $56,250 plus (ii) annual
payments of $112,500, and continuing thereafter for 18 months until March 24,
1999 (the "Maturity Date"), when the unpaid principal balance of this Note then
outstanding, and all accrued but unpaid interest, shall be due and payable in
full.
<PAGE>
Should interest not be paid when due, it shall thereafter bear like
interest as the principal, but such unpaid interest so compounded shall not
exceed an amount equal to simple interest on the unpaid principal at the maximum
rate permitted by the laws of the State of California. Purchaser shall at its
option be eligible to receive a one-time six month extension of the Maturity
Date of this Note by delivering written notice of such extension election not
later than thirty (30) days prior to the Maturity Date, with principal payments
continuing and 7% interest to be paid monthly on the unpaid principal.
Purchaser may assign its obligations under this Note to an affiliate at any
time provided such affiliate accepts such assignment and assumes all of the
obligations set forth herein. No such assignment shall relieve Purchaser of its
obligations hereunder. This Note is non-negotiable and may not be assigned by
Holder.
Holder may waive compliance with any of the provisions of this Note.
At the option of the holder hereof, this Note shall be immediately due and
payable, without notice or demand, upon the occurrence at any time of any of the
following events:
1. DEFAULT. Any default in the payment of principal or interest when due
hereunder; and
2. BANKRUPTCY. The commencement of proceedings in bankruptcy, or for
the reorganization of any party liable hereon, whether as maker, endorser,
guarantor, surety or otherwise, or for the readjustment of any of the debts
of any of the foregoing parties, under the Federal Bankruptcy Code, as
amended, or any part thereof, or under any other laws, whether state or
federal, for the relief of debtors, now or hereafter existing, by any of the
foregoing parties, or against any of the foregoing parties, which shall not
be discharged within thirty (30) days of their commencement.
The Purchaser may, at any time and from time to time, without penalty,
make prepayments which will be applied to the final payment of principal
under this Note, or the principal components of the remaining payments under
this Note in the order or inverse order of maturity, all as the Purchaser
hereof may determine. Payment of this Note is guarantied by Prospect Medical
Holdings.
In the event AV Hospital, or its affiliates, acquires a portion of
Purchaser's ownership interest in any affiliate of Company, Purchaser agrees
to use up to 25% of any cash proceeds from such transaction to prepay, on a
pro-rata basis, this Note and promissory notes issued to Karunyan
Arulanantham, M.D. and Jayaratnam Jayakumar, in the principal amounts of
$1,125,000 and $250,000, respectively. Purchaser further agrees to prepay
this Note in full in the event of any public offering of the $0.01 par value
common stock of Prospect Medical Holdings pursuant to a registration
statement filed pursuant to the Securities Act of 1933, as amended.
2
<PAGE>
Presentment, demand and protest, and notices of protest, dishonor, and
non-payment of this Note and all notices of every kind, are hereby waived.
No single or partial exercise of any power hereunder shall preclude the
other or further exercise thereof or the exercise of any other power. No delay
or omission on the part of the holder hereof in exercising any right hereunder
shall operate as a waiver of such right or of any other right under this Note.
The payments under this Note are subject to the rights of recoupment,
offset, and setoff available to Purchaser based on any misrepresentation, any
breach of any warranty, or any other breach of the Stock Purchase Agreement by
Holder. In exercising its rights of recoupment, offset, or setoff, Purchaser
shall not hold back and keep from the total outstanding principal balance more
than the amount of the liability, loss, costs, or expense.
Purchaser agrees, and the Holder of this Note by acceptance hereof likewise
agrees, that, notwithstanding the terms of this Note, the payment of the
principal, interest and any other amounts due under this Note is subordinated,
to the extent and in the manner set forth in the Subordination and Note
Cancellation Agreement, to the prior payment of all indebtedness and obligations
of Purchaser owing to Manager and/or Bank, as assignee of Manager, as more
particularly set forth in the Subordination and Note Cancellation Agreement, and
is otherwise subject to cancellation in accordance with the terms and conditions
of the Subordination and Note Cancellation Agreement. In the event that any
conflict exists between the terms of this instrument, any document executed in
connection with the delivery of this instrument and the terms of the
Subordination and Note Cancellation Agreement, the terms of the Subordination
and Note Cancellation Agreement shall govern and be controlling.
This Note shall be governed by and construed in accordance with the laws of
the State of California.
PROSPECT MEDICAL GROUP, INC.,
a California professional corporation
By: /s/ Gregg DeNicola
----------------------------------------
Gregg DeNicola, M.D., President
3
<PAGE>
THIS INSTRUMENT IS SUBJECT TO THE TERMS OF THE AGREEMENT FOR THE PURCHASE AND
SALE OF STOCK ("STOCK PURCHASE AGREEMENT"), DATED AS OF SEPTEMBER 23, 1997,
BY AND AMONG PROSPECT MEDICAL GROUP, INC., A CALIFORNIA PROFESSIONAL
CORPORATION ("PURCHASER"), AS BUYER, SINNADURAI E. MOORTHY, M.D., KARUNYAN
ARULANANTHAM, M.D. AND KARUNYAN ARULANANTHAM, M.D. AS TRUSTEE OF THE
ARULANANTHAM CHARITABLE REMAINDER TRUST AND SIERRA PRIMARY CARE MEDICAL
GROUP, INC., A CALIFORNIA PROFESSIONAL CORPORATION ("COMPANY"). TERMS USED
HEREIN AND NOT OTHERWISE DEFINED SHALL HAVE THE MEANINGS ASSIGNED TO THEM IN
THE STOCK PURCHASE AGREEMENT.
THIS INSTRUMENT AND THE OBLIGATIONS EVIDENCED HEREBY ARE SUBORDINATED, IN THE
MANNER AND TO THE EXTENT SET FORTH IN A SUBORDINATION AND NOTE CANCELLATION
AGREEMENT (THE "SUBORDINATION AND NOTE CANCELLATION AGREEMENT") DATED AS OF
SEPTEMBER 25, 1997, BY AND AMONG PURCHASER, IMPERIAL BANK, A CALIFORNIA
BANKING CORPORATION ("BANK"), PROSPECT MEDICAL HOLDINGS, INC., A DELAWARE
CORPORATION ("PROSPECT MEDICAL HOLDINGS"), PROSPECT MEDICAL SYSTEMS, INC., A
DELAWARE CORPORATION ("MANAGER"), KARUNYAN ARULANANTHAM, M.D. AND THE HOLDER
OF THIS INSTRUMENT, AND THE HOLDER OF THIS INSTRUMENT, BY HIS ACCEPTANCE
HEREOF, AGREES (i) TO BE BOUND BY THE TERMS OF THE SUBORDINATION AND NOTE
CANCELLATION AGREEMENT AND (ii) IN THE EVENT THAT ANY CONFLICT EXISTS BETWEEN
THE TERMS OF THIS INSTRUMENT, ANY DOCUMENT EXECUTED IN CONNECTION WITH THE
DELIVERY OF THIS INSTRUMENT AND THE TERMS OF THE SUBORDINATION AND NOTE
CANCELLATION AGREEMENT, THE TERMS OF THE SUBORDINATION AND NOTE CANCELLATION
AGREEMENT SHALL GOVERN AND BE CONTROLLING.
CONTINGENT PROMISSORY NOTE
$1,125,000 September 25, 1997
Los Angeles, California
For value received, the undersigned Purchaser promises to pay to
Sinnadurai E. Moorthy, M.D. ("Holder"), at 44725 10th Street West, Suite 250,
Lancaster, CA 93534, or at such other place as Holder may from time to time
designate, the principal sum of One Million One Hundred Twenty Five Thousand
Dollars ($1,125,000), payable interest only on the tenth (10) day of each
month on the unpaid principal balance at the rate of seven percent (7%) per
annum, with principal payable (i) in quarterly installments of $56,250 plus
(ii) annual payments of $112,500, and continuing thereafter for 18 months
until March 24, 1999 (the "Maturity Date"), when the unpaid principal balance
of this Note then outstanding, and all accrued but unpaid interest, shall be
due and payable in full.
<PAGE>
Should interest not be paid when due, it shall thereafter bear like
interest as the principal, but such unpaid interest so compounded shall not
exceed an amount equal to simple interest on the unpaid principal at the
maximum rate permitted by the laws of the State of California. Purchaser
shall at its option be eligible to receive a one-time six month extension of
the Maturity Date of this Note by delivering written notice of such extension
election not later than thirty (30) days prior to the Maturity Date, with
principal payments continuing and 7% interest to be paid monthly on the
unpaid principal.
Purchaser may assign its obligations under this Note to an affiliate at
any time provided such affiliate accepts such assignment and assumes all of
the obligations set forth herein. No such assignment shall relieve Purchaser
of its obligations hereunder. This Note is non-negotiable and may not be
assigned by Holder.
Holder may waive compliance with any of the provisions of this Note.
At the option of the holder hereof, this Note shall be immediately due
and payable, without notice or demand, upon the occurrence at any time of any
of the following events:
1. DEFAULT. Any default in the payment of principal or interest when
due hereunder; and
2. BANKRUPTCY. The commencement of proceedings in bankruptcy, or for
the reorganization of any party liable hereon, whether as maker, endorser,
guarantor, surety or otherwise, or for the readjustment of any of the debts
of any of the foregoing parties, under the Federal Bankruptcy Code, as
amended, or any part thereof, or under any other laws, whether state or
federal, for the relief of debtors, now or hereafter existing, by any of the
foregoing parties, or against any of the foregoing parties, which shall not
be discharged within thirty (30) days of their commencement.
The Purchaser may, at any time and from time to time, without penalty,
make prepayments which will be applied to the final payment of principal
under this Note, or the principal components of the remaining payments under
this Note in the order or inverse order of maturity, all as the Purchaser
hereof may determine. Payment of this Note is guarantied by Prospect Medical
Holdings.
In the event AV Hospital, or its affiliates, acquires a portion of
Purchaser's ownership interest in any affiliate of Company, Purchaser agrees
to use up to 25% of any cash proceeds from such transaction to prepay, on a
pro-rata basis, this Note and promissory notes issued to Karunyan
Arulanantham, M.D. and Jayaratnam Jayakumar, in the principal amounts of
$1,125,000 and $250,000, respectively. Purchaser further agrees to prepay
this Note in full in the event of any public offering of the $0.01 par value
common stock of Prospect Medical Holdings pursuant to a registration
statement filed pursuant to the Securities Act of 1933, as amended.
2
<PAGE>
Presentment, demand and protest, and notices of protest, dishonor, and
non-payment of this Note and all notices of every kind, are hereby waived.
No single or partial exercise of any power hereunder shall preclude the
other or further exercise thereof or the exercise of any other power. No
delay or omission on the part of the holder hereof in exercising any right
hereunder shall operate as a waiver of such right or of any other right under
this Note.
The payments under this Note are subject to the rights of recoupment,
offset, and setoff available to Purchaser based on any misrepresentation, any
breach of any warranty, or any other breach of the Stock Purchase Agreement
by Holder. In exercising its rights of recoupment, offset, or setoff,
Purchaser shall not hold back and keep from the total outstanding principal
balance more than the amount of the liability, loss, costs, or expense.
Purchaser agrees, and the Holder of this Note by acceptance hereof
likewise agrees, that, notwithstanding the terms of this Note, the payment of
the principal, interest and any other amounts due under this Note is
subordinated, to the extent and in the manner set forth in the Subordination
and Note Cancellation Agreement, to the prior payment of all indebtedness and
obligations of Purchaser owing to Manager and/or Bank, as assignee of
Manager, as more particularly set forth in the Subordination and Note
Cancellation Agreement, and is otherwise subject to cancellation in
accordance with the terms and conditions of the Subordination and Note
Cancellation Agreement. In the event that any conflict exists between the
terms of this instrument, any document executed in connection with the
delivery of this instrument and the terms of the Subordination and Note
Cancellation Agreement, the terms of the Subordination and Note Cancellation
Agreement shall govern and be controlling.
This Note shall be governed by and construed in accordance with the laws
of the State of California.
PROSPECT MEDICAL GROUP, INC.,
a California professional corporation
By: /s/ Gregg DeNicola
----------------------------------------
Gregg DeNicola, M.D., President
3
<PAGE>
THE OPTIONS AND OPTION SHARES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, AND THE OPTIONS AND THE OPTION SHARES MAY NOT BE EXERCISED,
OFFERED OR SOLD UNLESS THERE IS A REGISTRATION STATEMENT IN EFFECT COVERING THE
OPTIONS AND OPTION SHARES OR THERE IS AVAILABLE AN EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED.
Void after 5:00 p.m. New York Time, on September 24, 2002.
Option to Purchase 15,750 Shares of Common Stock.
OPTION TO PURCHASE COMMON STOCK
OF
PROSPECT MEDICAL HOLDINGS, INC.
This is to Certify that, FOR VALUE RECEIVED, Sinnadurai E. Moorthy, M.D.,
or assigns ("Holder"), is entitled to purchase, subject to the provisions of
this Option, from Prospect Medical Holdings, Inc., a Delaware corporation
("Company"), 15,750 shares of Common Stock, $0.01 par value, of the Company
("Common Stock") at a price of $5.00 per share at any time during the period
from the date hereof to five (5) years from the date hereof (the "Expiration
Date"), but not later than 5:00 p.m., New York Time, on the Expiration Date.
Such number and price may be adjusted from time to time as hereinafter set
forth. The shares of Common Stock deliverable upon such exercise and as
adjusted from time to time are hereinafter sometimes referred to as "Option
Shares" and the exercise price of each share of Common Stock in effect at any
time and as adjusted from time to time is hereinafter sometimes referred to as
the "Exercise Price".
(a) EXERCISE OF OPTION. Subject to the provisions of Section (j) hereof,
this Option may be exercised in whole or in part at any time or from time to
time on or after the date hereof and until the Expiration Date, or if any such
day is a day on which banking institutions in the State of New York are
authorized by law to close, then on the next succeeding day which shall not be
such a day, by presentation and surrender hereof to the Company at its principal
office, or at the office of its stock transfer agent, if any, with the Purchase
Form annexed hereto duly executed and accompanied by payment of the Exercise
Price for the number of Option Shares specified in such form. If this Option
should be exercised in part only, the Company shall, upon surrender of this
Option for cancellation, execute and deliver a new Option evidencing the rights
of the Holder thereof to purchase the balance of the Option Shares purchasable
thereunder. Upon receipt by the Company of this Option at its office, or by the
stock transfer agent of the Company at its office, in proper form for exercise,
the Holder shall be deemed to be the holder of record of the shares of Common
Stock issuable upon such exercise, notwithstanding that the stock transfer books
of the Company shall then be closed or that certificates representing such
shares of Common Stock shall not then be actually delivered to the Holder.
<PAGE>
(b) RESERVATION OF SHARES. The Company hereby agrees that at all times
there shall be reserved for issuance and/or delivery upon exercise of this
Option such number of shares of its Common Stock as shall be required for
issuance and delivery upon exercise of this Option.
(c) FRACTIONAL SHARES. No fractional shares or script representing
fractional shares shall be issued upon the exercise of this Option. With
respect to any fraction of a share called for upon any exercise hereof, the
Company shall pay to the Holder an amount in cash equal to such fraction
multiplied by the current market value of a share, determined as follows:
(1) If the Common Stock is listed on a National Securities Exchange
or admitted to unlisted trading privileges on such exchange or listed for
trading on the NASDAQ system, the current market value shall be the last
reported sale price of the Common Stock on such exchange or system on the
last business day prior to the date of exercise of this Option or if no
such sale is made on such day, the average closing bid and asked prices for
such day on such exchange or system; or
(2) If the Common Stock is not so listed or admitted to unlisted
trading privileges, the current market value shall be the mean of the last
reported bid and asked prices reported by the National Quotation Bureau,
Inc. on the last business day prior to the date of the exercise of this
Option; or
(3) If the Common Stock is not so listed or admitted to unlisted
trading privileges and bid and asked prices are not so reported, the
current market value shall be an amount not less than the book value
thereof at the end of the most recent fiscal year of the Company ending
prior to the date of the exercise of the Option, determined in such
reasonable manner as may be prescribed by the Board of Directors of the
Company.
(d) EXCHANGE, TRANSFER, ASSIGNMENT OR LOSS OF OPTION. This Option is
exchangeable, without expense, at the option of the Holder, upon presentation
and surrender hereof to the Company or at the office of its stock transfer
agent, if any, for other options of different denominations entitling the
holder thereof to purchase in the aggregate the same number of shares of
Common Stock purchasable hereunder. This Option is transferable and may be
assigned or hypothecated from the date hereof. Subject to the provisions of
Section (j), upon surrender of this Option to the Company at its principal
office or at the office of its stock transfer agent, if any, with the
Assignment Form annexed hereto duly executed and funds sufficient to pay any
transfer tax, the Company shall, without charge, execute and deliver a new
Option in the name of the assignee named in such instrument of assignment and
this Option shall promptly be canceled. This Option may be divided or
combined with other options which carry the same rights upon presentation
hereof at the principal office of the Company or at the office of its stock
transfer agent, if any, together with a written notice specifying the names
and denominations in which new Options are to be issued and signed by the
Holder hereof. The term "Option" as used herein includes any Options into
which this Option may be divided or exchanged. Upon receipt by the Company
of evidence satisfactory to it of the loss, theft, destruction or mutilation
of this Option, and in the case of loss, theft or destruction, of reasonably
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<PAGE>
satisfactory indemnification and upon surrender and cancellation of this
Option, if mutilated, the Company will execute and deliver a new Option of
like tenor and date.
(e) RIGHTS OF THE HOLDER. The Holder shall not, by virtue hereof, be
entitled to any rights of a shareholder in the Company, either at law or equity,
and the rights of the Holder are limited to those expressed in the Option and
are not enforceable against the Company except to the extent set forth herein.
Furthermore, Holder by acceptance hereof, consents to and agrees to be bound by
and to comply with all the provisions of this Option, including, without
limitation, all the obligations imposed upon the holder hereof by Section (j).
In addition, the holder of this Option, by accepting the same, agrees that the
Company and the transfer agent may deem and treat the person in whose name this
Option is registered as the absolute, true and lawful owner for all purposes
whatsoever, and neither the Company nor the transfer agent shall be affected by
any notice to the contrary.
(f) ANTI-DILUTION PROVISIONS. The Exercise Price and the number and kind
of securities purchasable upon the exercise of this Option shall be subject to
adjustment from time to time upon the happening of certain events as hereinafter
provided. The Exercise Price in effect at any time and the number and kind of
securities purchasable upon exercise of each Option shall be subject to
adjustment as follows:
(1) In case the Company shall (i) pay a dividend or make a
distribution on its shares of Common Stock in shares of Common Stock, (ii)
subdivide or reclassify its outstanding Common Stock in shares of Common
Stock into a greater number of shares, or (iii) combine or reclassify its
outstanding Common Stock into a smaller number of shares, the Exercise
Price in effect at the time of the record date for such dividend or
distribution or of the effective date of such subdivision, combination or
reclassification shall be proportionately adjusted so that the Holder of
this Option exercised after such date shall be entitled to receive the
aggregate number and kind of shares which, if this Option had been
exercised by such Holder immediately prior to such date, he would have
owned upon such exercise and been entitled to receive upon such dividend,
subdivision, combination or reclassification. For example, if the Company
declares a 2 for 1 stock dividend or stock split and the Exercise Price
immediately prior to such event was $10.00 per share, the adjusted Exercise
Price immediately after such event would be $5.00 per share. Such
adjustment shall be made successively whenever any event listed above shall
occur.
(2) Whenever the Exercise Price payable upon exercise of each Option
is adjusted pursuant to Subsection (1) above, the number of Shares
purchasable upon exercise of this Option shall simultaneously be adjusted
by multiplying the number of Shares initially issuable upon exercise of
this Option by the Exercise Price in effect on the date hereof and dividing
the product so obtained by the Exercise Price, as adjusted.
(3) No adjustment in the Exercise Price shall be required unless such
adjustment would require an increase or decrease of at least five cents
($0.05) in such price; provided, however, that any adjustments which by
reason of this Subsection (3) are
-3-
<PAGE>
not required to be made shall be carried forward and taken into account
in any subsequent adjustment required to be made hereunder. All
calculations under this Section (f) shall be made to the nearest cent
or to the nearest one-hundredth of a share, as the case may be.
Anything in this Section (f) to the contrary notwithstanding, the
Company shall be entitled, but shall not be required, to make such
changes in the Exercise Price, in addition to those required by this
Section (f), as it, in its sole discretion, shall determine to be
advisable in order that any dividend or distribution in shares of
Common Stock, subdivision, reclassification or combination of Common
Stock referred to hereinabove in this Section (f) hereafter made by the
Company to the holders of its Common Stock shall not result in any tax
to the holders of its Common Stock or securities convertible into
Common Stock.
(4) Whenever the Exercise Price is adjusted, as herein provided, the
Company shall promptly cause a notice setting forth the adjusted Exercise
Price and adjusted number of Shares issuable upon exercise of each Option
to be mailed to the Holder of such Option at the Holder's last address
appearing in the Option Register, and shall cause a certified copy thereof
to be mailed to its transfer agent, if any. The Company may retain a firm
of independent certified public accountants selected by the Board of
Directors (who may be the regular accountants employed by the Company) to
make any computation required by this Section (f), and a certificate signed
by such firm shall be conclusive evidence of the correctness of such
adjustment.
(5) In the event that at any time, as a result of an adjustment made
pursuant to Subsection (1) above, the Holder of this Option thereafter
shall become entitled to receive any shares of the Company, other than
Common Stock, thereafter the number of such other shares so receivable upon
exercise of this Option shall be subject to adjustment from time to time in
a manner and on terms as nearly equivalent as practicable to the provisions
with respect to the Common Stock contained in Subsection (1) to (3),
inclusive above.
(6) Irrespective of any adjustments in the Exercise Price or the
number or kind of shares purchasable upon exercise of this Option, Options
theretofore or thereafter issued may continue to express the same price and
number and kind of shares as are stated in the similar Options initially
issuable pursuant to this Agreement.
(g) OFFICER'S CERTIFICATE. Whenever the Exercise Price shall be adjusted
as required by the provisions of the foregoing Section, the Company shall
forthwith file in the custody of its Secretary or an Assistant Secretary at its
principal office and with its stock transfer agent, if any, an officer's
certificate showing the adjusted Exercise Price determined as herein provided,
setting forth in reasonable detail the facts requiring such adjustment,
including a statement of the number of additional shares of Common Stock, if
any, and such other facts as shall be necessary to show the reason for and the
manner of computing such adjustment. Each such officer's certificate shall be
made available at all reasonable times for inspection by the Holder or any
holder of a Option executed and delivered pursuant to Section (a) and the
Company shall, forthwith after each such adjustment, mail a copy by certified
mail of such certificate to the Holder or any such holder.
-4-
<PAGE>
(h) NOTICES TO OPTION HOLDERS. So long as this Option shall be
outstanding, (i) if Company shall pay any dividend or make any distribution upon
the Common Stock or (ii) if the Company shall offer to the holders of Common
Stock for subscription or purchase by them any share of another class of capital
stock or (iii) if any capital reorganization of the Company, reclassification of
the capital stock of the Company, consolidation or merger of the Company with or
into another corporation, sale, lease, or transfer of all or substantially all
of the property and assets of the Company to another corporation, or voluntary
or involuntary dissolution, liquidation or winding up of the Company shall be
effected, then in any such case, the Company shall cause to be mailed by
certified mail to the Holder, at least fifteen days prior the date specified in
(x) or (y) below, as the case may be, a notice containing a brief description of
the proposed action and stating the date on which (x) a record is to be taken
for the purpose of such dividend, distribution or rights, or (y) such
reclassification, reorganization, consolidation, merger, conveyance, lease,
dissolution, liquidation or winding up is to take place and the date, if any is
to be fixed, as of which the holders of Common Stock or other securities shall
receive cash or other property deliverable upon such reclassification,
reorganization, consolidation, merger, conveyance, dissolution, liquidation or
winding up.
(i) RECLASSIFICATION, REORGANIZATION OR MERGER. In case of any
reclassification, capital reorganization or other change of outstanding shares
of Common Stock of the Company, or in case of any consolidation or merger of the
Company with or into another corporation (other than a merger with a subsidiary
in which merger the Company is the continuing corporation and which does not
result in any reclassification, capital reorganization or other change of
outstanding shares of Common Stock of the class issuable upon exercise of this
Option) or in case of any sale, lease, or conveyance to another corporation of
the property of the Company as an entirety, the Company shall, as a condition
precedent to such transaction, cause effective provisions to be made so that the
Holder shall have the right thereafter by exercising this Option at any time
prior to the expiration of the Option, to purchase the kind and amount of shares
of stock and other securities and property receivable upon such
reclassification, capital reorganization and other change, consolidation,
merger, sale, lease or conveyance by a holder of the number of shares of Common
Stock which might have been purchased upon exercise of this Option immediately
prior to such reclassification, reorganization, change, consolidation, merger,
sale, lease or conveyance. Any such provision shall include provision for
adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Option. The foregoing provisions of this
Section (i) shall similarly apply to successive reclassifications, capital
reorganizations, and changes of shares of Common Stock and to successive
consolidations, mergers, sales, leases or conveyances. In the event that in
connection with any such capital reorganization or reclassification, change,
consolidation, merger, sale, lease or conveyance, additional shares of Common
Stock shall be issued in exchange, conversion, substitution, or payment, in
whole or in part, for a security of the Company other than Common Stock, any
such issue shall be treated as an issue of Common Stock covered by the
provisions of Subsection (1) of Section (f) hereof.
(j) EXERCISE AND TRANSFER TO COMPLY WITH THE SECURITIES ACT OF 1933. The
holder of this Option and any transferee hereof, by their acceptance hereof,
hereby agree that: (a) the Options being acquired hereunder are being purchased
for investment purposes
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<PAGE>
only and not with a view to distribution and will not be transferred without
the prior written consent of the Company and unless registered or unless
there is an exemption available from the registration requirements of the
Securities Act of 1933, as amended, which exemption has been established to
the satisfaction of the Company; (b) no public distribution of the Options or
Option Shares will be made in violation of the provisions of the Securities
Act of 1933, as amended, or the Rules and Regulations promulgated thereunder
(such Act and Rules and Regulations being hereinafter referred to as the
"Act") or any applicable state laws; and (c) during such period as delivery
of a prospectus with respect to the Options or Option Shares may be required
by the Act, no public distribution of the Options or Option Shares will be
made in a manner or on terms different from those set forth in, or without
delivery of, a prospectus then meeting the requirements of Section 10 of the
Act and in compliance with all applicable state laws. The holder of this
Option and any such transferee hereof further agree that if any distribution
of any of the Options or Option Shares is proposed to be made by them
otherwise than by delivery of a prospectus meeting the requirements of
Section 10 of the Act, such action shall be taken only after submission to
the Company of an opinion of counsel, reasonably satisfactory in form and
substance to the Company's counsel, to the effect that the proposed
distribution will not be in violation of the Act or of applicable state law.
Furthermore, it shall be a condition to the transfer of the Options or Option
Shares thereof to deliver to the Company his or its written agreement to
accept and be bound by all of the terms and conditions of this Option.
Lastly, the holder of this Option has executed and delivered to the Company a
Stockholder's Representation Agreement containing certain representations and
warranties of the holder which are incorporated herein by reference.
(k) GOVERNING LAW. This Option is made with reference to the laws of the
State of California and shall be governed by and construed in accordance
therewith.
(l) ARBITRATION. The parties firmly desire to resolve all disputes arising
hereunder without resort to litigation in order to protect their respective
business reputations and the confidential nature of certain aspects of their
relationship. Accordingly, any controversy or claim arising out of or relating
to this Option, or the breach thereof, shall be settled by arbitration as set
forth below.
i. All disputes which in any manner arise out of or relate to this
Option or the subject matter thereof, shall be resolved exclusively by
arbitration in accordance with the provisions of this Section (l). Either party
may commence arbitration by sending a written demand for arbitration to the
other party, setting forth the nature of the controversy, the dollar amount
involved, if any, and the remedies sought, and attaching a copy of this Section
to the demand.
ii. The parties stipulate to arbitration before a single, mutually
agreed upon arbitrator sitting on the Los Angeles, California Judicial
Arbitration Mediation Services (JAMS) panel. In the event that the parties are
unable to agree upon the person chosen as arbitrator within 30 days of the
demand for arbitration, the arbitrator shall be selected in the sole discretion
of the JAMS administrator. The arbitrator shall be a member of the California
bar.
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<PAGE>
iii. The parties shall share all costs of arbitration. The prevailing
party shall be entitled to reimbursement by the other party of such party's
attorneys' fees and costs and any arbitration fees and expenses incurred in
connection with the arbitration hereunder.
iv. The substantive law of the State of California shall be applied
by the arbitrator. All proceedings in arbitration shall be in accordance with
the California Code of Civil Procedure, as amended, and the parties shall have
the right to legal discovery in any matter submitted to arbitration in
satisfaction of California Code of Civil Procedure Section 1283.05, as permitted
by California Code of Civil Procedure Section 1283.1(b).
v. Arbitration shall take place in Los Angeles, California unless
the parties otherwise agree. As soon as reasonably practicable, a hearing with
respect to the dispute or matter to be resolved shall be conducted by the
arbitrator. As soon as reasonably practicable thereafter, the arbitrator shall
arrive at a final decision, which shall be reduced to writing, signed by the
arbitrator and mailed to each of the parties and their legal counsel.
vi. All decisions of the arbitrator shall be final, binding and
conclusive on the parties and shall constitute the only method of resolving
disputes or matters subject to arbitration pursuant to this Option. The
arbitrator or a court of appropriate jurisdiction may issue a writ of execution
to enforce the arbitrator's judgment. Judgment may be entered upon such a
decision in accordance with applicable law in any court having jurisdiction
thereof.
vii. Notwithstanding the foregoing, because time is of the essence of
this Option, the parties specifically reserve the right to seek a judicial
temporary restraining order, preliminary injunction, or other similar equitable
relief.
viii. The decision and award of the arbitrator shall be kept
confidential by the parties to the greatest extent possible. No disclosure of
such decision or award shall be made by the parties except as required by law or
as necessary or appropriate to effect the enforcement thereof.
ix. Should either party institute any action or procedure to enforce
this Option or any provision hereof, or for damages by reason of any alleged
breach of this Option or of any provision hereof, or for a declaration of rights
hereunder (including without limitation arbitration), the prevailing party in
any such action or proceeding shall be entitled to receive from the other party
all costs and expenses, including without limitation reasonable attorneys' fees,
incurred by the prevailing party in connection with such action or proceeding.
PROSPECT MEDICAL HOLDINGS, INC.
By: /s/ Thomas A. Maloof
---------------------------------
Thomas A. Maloof,
Chief Financial Officer
Dated: September 25, 1997
-7-
<PAGE>
PURCHASE FORM
Dated: ,
---------- ----
The undersigned irrevocably elects to exercise the within Option to the
extent of purchasing _________ shares of Common Stock and hereby makes payment
of $______________ in payment of the actual exercise price thereof.
INSTRUCTIONS FOR REGISTRATION OF STOCK
Name
----------------------------------
(Please typewrite or print in block letters)
Address
----------------------------------
----------------------------------
Signature
----------------------------------
IT SHALL BE A CONDITION TO THE VALIDITY OF THIS ASSIGNMENT THAT THE TRANSFEREE
DELIVER TO PROSPECT MEDICAL HOLDINGS, INC. HIS OR ITS WRITTEN AGREEMENT TO
ACCEPT AND BE BOUND BY ALL OF THE TERMS AND CONDITIONS OF THIS OPTION
ASSIGNMENT FORM
FOR VALUE RECEIVED, ______________________ hereby sells, assigns and
transfers unto
Name
----------------------------------
(Please typewrite or print in block letters)
Address
----------------------------------
----------------------------------
the right to purchase Common Stock represented by this Option to the extent of
_________ shares as to which such right is exercisable and does hereby
irrevocably constitute and appoint _________________________________ Attorney,
to transfer the same on the books of the Company with full power of substitution
in the premises.
Date ,
---------------- -----
Signature
----------------------------------
-8-
<PAGE>
THE OPTIONS AND OPTION SHARES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, AND THE OPTIONS AND THE OPTION SHARES MAY NOT BE EXERCISED,
OFFERED OR SOLD UNLESS THERE IS A REGISTRATION STATEMENT IN EFFECT COVERING THE
OPTIONS AND OPTION SHARES OR THERE IS AVAILABLE AN EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED.
Void after 5:00 p.m. New York Time, on September 24, 2002.
Option to Purchase 15,750 Shares of Common Stock.
OPTION TO PURCHASE COMMON STOCK
OF
PROSPECT MEDICAL HOLDINGS, INC.
This is to Certify that, FOR VALUE RECEIVED, Karunyan Arulanantham, M.D.,
or assigns ("Holder"), is entitled to purchase, subject to the provisions of
this Option, from Prospect Medical Holdings, Inc., a Delaware corporation
("Company"), 15,750 shares of Common Stock, $0.01 par value, of the Company
("Common Stock") at a price of $5.00 per share at any time during the period
from the date hereof to five (5) years from the date hereof (the "Expiration
Date"), but not later than 5:00 p.m., New York Time, on the Expiration Date.
Such number and price may be adjusted from time to time as hereinafter set
forth. The shares of Common Stock deliverable upon such exercise and as
adjusted from time to time are hereinafter sometimes referred to as "Option
Shares" and the exercise price of each share of Common Stock in effect at any
time and as adjusted from time to time is hereinafter sometimes referred to as
the "Exercise Price".
(a) EXERCISE OF OPTION. Subject to the provisions of Section (j) hereof,
this Option may be exercised in whole or in part at any time or from time to
time on or after the date hereof and until the Expiration Date, or if any such
day is a day on which banking institutions in the State of New York are
authorized by law to close, then on the next succeeding day which shall not be
such a day, by presentation and surrender hereof to the Company at its principal
office, or at the office of its stock transfer agent, if any, with the Purchase
Form annexed hereto duly executed and accompanied by payment of the Exercise
Price for the number of Option Shares specified in such form. If this Option
should be exercised in part only, the Company shall, upon surrender of this
Option for cancellation, execute and deliver a new Option evidencing the rights
of the Holder thereof to purchase the balance of the Option Shares purchasable
thereunder. Upon receipt by the Company of this Option at its office, or by the
stock transfer agent of the Company at its office, in proper form for exercise,
the Holder shall be deemed to be the holder of record of the shares of Common
Stock issuable upon such exercise, notwithstanding that the stock transfer books
of the Company shall then be closed or that certificates representing such
shares of Common Stock shall not then be actually delivered to the Holder.
<PAGE>
(b) RESERVATION OF SHARES. The Company hereby agrees that at all times
there shall be reserved for issuance and/or delivery upon exercise of this
Option such number of shares of its Common Stock as shall be required for
issuance and delivery upon exercise of this Option.
(c) FRACTIONAL SHARES. No fractional shares or script representing
fractional shares shall be issued upon the exercise of this Option. With
respect to any fraction of a share called for upon any exercise hereof, the
Company shall pay to the Holder an amount in cash equal to such fraction
multiplied by the current market value of a share, determined as follows:
(1) If the Common Stock is listed on a National Securities Exchange
or admitted to unlisted trading privileges on such exchange or listed for
trading on the NASDAQ system, the current market value shall be the last
reported sale price of the Common Stock on such exchange or system on the
last business day prior to the date of exercise of this Option or if no
such sale is made on such day, the average closing bid and asked prices for
such day on such exchange or system; or
(2) If the Common Stock is not so listed or admitted to unlisted
trading privileges, the current market value shall be the mean of the last
reported bid and asked prices reported by the National Quotation Bureau,
Inc. on the last business day prior to the date of the exercise of this
Option; or
(3) If the Common Stock is not so listed or admitted to unlisted
trading privileges and bid and asked prices are not so reported, the
current market value shall be an amount not less than the book value
thereof at the end of the most recent fiscal year of the Company ending
prior to the date of the exercise of the Option, determined in such
reasonable manner as may be prescribed by the Board of Directors of the
Company.
(d) EXCHANGE, TRANSFER, ASSIGNMENT OR LOSS OF OPTION. This Option is
exchangeable, without expense, at the option of the Holder, upon presentation
and surrender hereof to the Company or at the office of its stock transfer
agent, if any, for other options of different denominations entitling the
holder thereof to purchase in the aggregate the same number of shares of
Common Stock purchasable hereunder. This Option is transferable and may be
assigned or hypothecated from the date hereof. Subject to the provisions of
Section (j), upon surrender of this Option to the Company at its principal
office or at the office of its stock transfer agent, if any, with the
Assignment Form annexed hereto duly executed and funds sufficient to pay any
transfer tax, the Company shall, without charge, execute and deliver a new
Option in the name of the assignee named in such instrument of assignment and
this Option shall promptly be canceled. This Option may be divided or
combined with other options which carry the same rights upon presentation
hereof at the principal office of the Company or at the office of its stock
transfer agent, if any, together with a written notice specifying the names
and denominations in which new Options are to be issued and signed by the
Holder hereof. The term "Option" as used herein includes any Options into
which this Option may be divided or exchanged. Upon receipt by the Company
of evidence satisfactory to it of the loss, theft, destruction or mutilation
of this Option, and in the case of loss, theft or destruction, of reasonably
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<PAGE>
satisfactory indemnification and upon surrender and cancellation of this
Option, if mutilated, the Company will execute and deliver a new Option of
like tenor and date.
(e) RIGHTS OF THE HOLDER. The Holder shall not, by virtue hereof, be
entitled to any rights of a shareholder in the Company, either at law or equity,
and the rights of the Holder are limited to those expressed in the Option and
are not enforceable against the Company except to the extent set forth herein.
Furthermore, Holder by acceptance hereof, consents to and agrees to be bound by
and to comply with all the provisions of this Option, including, without
limitation, all the obligations imposed upon the holder hereof by Section (j).
In addition, the holder of this Option, by accepting the same, agrees that the
Company and the transfer agent may deem and treat the person in whose name this
Option is registered as the absolute, true and lawful owner for all purposes
whatsoever, and neither the Company nor the transfer agent shall be affected by
any notice to the contrary.
(f) ANTI-DILUTION PROVISIONS. The Exercise Price and the number and kind
of securities purchasable upon the exercise of this Option shall be subject to
adjustment from time to time upon the happening of certain events as hereinafter
provided. The Exercise Price in effect at any time and the number and kind of
securities purchasable upon exercise of each Option shall be subject to
adjustment as follows:
(1) In case the Company shall (i) pay a dividend or make a
distribution on its shares of Common Stock in shares of Common Stock, (ii)
subdivide or reclassify its outstanding Common Stock in shares of Common
Stock into a greater number of shares, or (iii) combine or reclassify its
outstanding Common Stock into a smaller number of shares, the Exercise
Price in effect at the time of the record date for such dividend or
distribution or of the effective date of such subdivision, combination or
reclassification shall be proportionately adjusted so that the Holder of
this Option exercised after such date shall be entitled to receive the
aggregate number and kind of shares which, if this Option had been
exercised by such Holder immediately prior to such date, he would have
owned upon such exercise and been entitled to receive upon such dividend,
subdivision, combination or reclassification. For example, if the Company
declares a 2 for 1 stock dividend or stock split and the Exercise Price
immediately prior to such event was $10.00 per share, the adjusted Exercise
Price immediately after such event would be $5.00 per share. Such
adjustment shall be made successively whenever any event listed above shall
occur.
(2) Whenever the Exercise Price payable upon exercise of each Option
is adjusted pursuant to Subsection (1) above, the number of Shares
purchasable upon exercise of this Option shall simultaneously be adjusted
by multiplying the number of Shares initially issuable upon exercise of
this Option by the Exercise Price in effect on the date hereof and dividing
the product so obtained by the Exercise Price, as adjusted.
(3) No adjustment in the Exercise Price shall be required unless such
adjustment would require an increase or decrease of at least five cents
($0.05) in such price; provided, however, that any adjustments which by
reason of this Subsection (3) are
-3-
<PAGE>
not required to be made shall be carried forward and taken into account
in any subsequent adjustment required to be made hereunder. All
calculations under this Section (f) shall be made to the nearest cent
or to the nearest one-hundredth of a share, as the case may be.
Anything in this Section (f) to the contrary notwithstanding, the
Company shall be entitled, but shall not be required, to make such
changes in the Exercise Price, in addition to those required by this
Section (f), as it, in its sole discretion, shall determine to be
advisable in order that any dividend or distribution in shares of
Common Stock, subdivision, reclassification or combination of Common
Stock referred to hereinabove in this Section (f) hereafter made by the
Company to the holders of its Common Stock shall not result in any tax
to the holders of its Common Stock or securities convertible into
Common Stock.
(4) Whenever the Exercise Price is adjusted, as herein provided, the
Company shall promptly cause a notice setting forth the adjusted Exercise
Price and adjusted number of Shares issuable upon exercise of each Option
to be mailed to the Holder of such Option at the Holder's last address
appearing in the Option Register, and shall cause a certified copy thereof
to be mailed to its transfer agent, if any. The Company may retain a firm
of independent certified public accountants selected by the Board of
Directors (who may be the regular accountants employed by the Company) to
make any computation required by this Section (f), and a certificate signed
by such firm shall be conclusive evidence of the correctness of such
adjustment.
(5) In the event that at any time, as a result of an adjustment made
pursuant to Subsection (1) above, the Holder of this Option thereafter
shall become entitled to receive any shares of the Company, other than
Common Stock, thereafter the number of such other shares so receivable upon
exercise of this Option shall be subject to adjustment from time to time in
a manner and on terms as nearly equivalent as practicable to the provisions
with respect to the Common Stock contained in Subsection (1) to (3),
inclusive above.
(6) Irrespective of any adjustments in the Exercise Price or the
number or kind of shares purchasable upon exercise of this Option, Options
theretofore or thereafter issued may continue to express the same price and
number and kind of shares as are stated in the similar Options initially
issuable pursuant to this Agreement.
(g) OFFICER'S CERTIFICATE. Whenever the Exercise Price shall be adjusted
as required by the provisions of the foregoing Section, the Company shall
forthwith file in the custody of its Secretary or an Assistant Secretary at its
principal office and with its stock transfer agent, if any, an officer's
certificate showing the adjusted Exercise Price determined as herein provided,
setting forth in reasonable detail the facts requiring such adjustment,
including a statement of the number of additional shares of Common Stock, if
any, and such other facts as shall be necessary to show the reason for and the
manner of computing such adjustment. Each such officer's certificate shall be
made available at all reasonable times for inspection by the Holder or any
holder of a Option executed and delivered pursuant to Section (a) and the
Company shall, forthwith after each such adjustment, mail a copy by certified
mail of such certificate to the Holder or any such holder.
-4-
<PAGE>
(h) NOTICES TO OPTION HOLDERS. So long as this Option shall be
outstanding, (i) if Company shall pay any dividend or make any distribution
upon the Common Stock or (ii) if the Company shall offer to the holders of
Common Stock for subscription or purchase by them any share of another class
of capital stock or (iii) if any capital reorganization of the Company,
reclassification of the capital stock of the Company, consolidation or merger
of the Company with or into another corporation, sale, lease, or transfer of
all or substantially all of the property and assets of the Company to another
corporation, or voluntary or involuntary dissolution, liquidation or winding
up of the Company shall be effected, then in any such case, the Company shall
cause to be mailed by certified mail to the Holder, at least fifteen days
prior the date specified in (x) or (y) below, as the case may be, a notice
containing a brief description of the proposed action and stating the date on
which (x) a record is to be taken for the purpose of such dividend,
distribution or rights, or (y) such reclassification, reorganization,
consolidation, merger, conveyance, lease, dissolution, liquidation or winding
up is to take place and the date, if any is to be fixed, as of which the
holders of Common Stock or other securities shall receive cash or other
property deliverable upon such reclassification, reorganization,
consolidation, merger, conveyance, dissolution, liquidation or winding up.
(i) RECLASSIFICATION, REORGANIZATION OR MERGER. In case of any
reclassification, capital reorganization or other change of outstanding
shares of Common Stock of the Company, or in case of any consolidation or
merger of the Company with or into another corporation (other than a merger
with a subsidiary in which merger the Company is the continuing corporation
and which does not result in any reclassification, capital reorganization or
other change of outstanding shares of Common Stock of the class issuable upon
exercise of this Option) or in case of any sale, lease, or conveyance to
another corporation of the property of the Company as an entirety, the
Company shall, as a condition precedent to such transaction, cause effective
provisions to be made so that the Holder shall have the right thereafter by
exercising this Option at any time prior to the expiration of the Option, to
purchase the kind and amount of shares of stock and other securities and
property receivable upon such reclassification, capital reorganization and
other change, consolidation, merger, sale, lease or conveyance by a holder of
the number of shares of Common Stock which might have been purchased upon
exercise of this Option immediately prior to such reclassification,
reorganization, change, consolidation, merger, sale, lease or conveyance.
Any such provision shall include provision for adjustments which shall be as
nearly equivalent as may be practicable to the adjustments provided for in
this Option. The foregoing provisions of this Section (i) shall similarly
apply to successive reclassifications, capital reorganizations, and changes
of shares of Common Stock and to successive consolidations, mergers, sales,
leases or conveyances. In the event that in connection with any such capital
reorganization or reclassification, change, consolidation, merger, sale,
lease or conveyance, additional shares of Common Stock shall be issued in
exchange, conversion, substitution, or payment, in whole or in part, for a
security of the Company other than Common Stock, any such issue shall be
treated as an issue of Common Stock covered by the provisions of Subsection
(1) of Section (f) hereof.
(j) EXERCISE AND TRANSFER TO COMPLY WITH THE SECURITIES ACT OF 1933.
The holder of this Option and any transferee hereof, by their acceptance
hereof, hereby agree that: (a) the Options being acquired hereunder are
being purchased for investment purposes
-5-
<PAGE>
only and not with a view to distribution and will not be transferred without
the prior written consent of the Company and unless registered or unless
there is an exemption available from the registration requirements of the
Securities Act of 1933, as amended, which exemption has been established to
the satisfaction of the Company; (b) no public distribution of the Options or
Option Shares will be made in violation of the provisions of the Securities
Act of 1933, as amended, or the Rules and Regulations promulgated thereunder
(such Act and Rules and Regulations being hereinafter referred to as the
"Act") or any applicable state laws; and (c) during such period as delivery
of a prospectus with respect to the Options or Option Shares may be required
by the Act, no public distribution of the Options or Option Shares will be
made in a manner or on terms different from those set forth in, or without
delivery of, a prospectus then meeting the requirements of Section 10 of the
Act and in compliance with all applicable state laws. The holder of this
Option and any such transferee hereof further agree that if any distribution
of any of the Options or Option Shares is proposed to be made by them
otherwise than by delivery of a prospectus meeting the requirements of
Section 10 of the Act, such action shall be taken only after submission to
the Company of an opinion of counsel, reasonably satisfactory in form and
substance to the Company's counsel, to the effect that the proposed
distribution will not be in violation of the Act or of applicable state law.
Furthermore, it shall be a condition to the transfer of the Options or Option
Shares thereof to deliver to the Company his or its written agreement to
accept and be bound by all of the terms and conditions of this Option.
Lastly, the holder of this Option has executed and delivered to the Company a
Stockholder's Representation Agreement containing certain representations and
warranties of the holder which are incorporated herein by reference.
(k) GOVERNING LAW. This Option is made with reference to the laws of
the State of California and shall be governed by and construed in accordance
therewith.
(l) ARBITRATION. The parties firmly desire to resolve all disputes
arising hereunder without resort to litigation in order to protect their
respective business reputations and the confidential nature of certain
aspects of their relationship. Accordingly, any controversy or claim arising
out of or relating to this Option, or the breach thereof, shall be settled by
arbitration as set forth below.
i. All disputes which in any manner arise out of or relate to this
Option or the subject matter thereof, shall be resolved exclusively by
arbitration in accordance with the provisions of this Section (l). Either party
may commence arbitration by sending a written demand for arbitration to the
other party, setting forth the nature of the controversy, the dollar amount
involved, if any, and the remedies sought, and attaching a copy of this Section
to the demand.
ii. The parties stipulate to arbitration before a single, mutually
agreed upon arbitrator sitting on the Los Angeles, California Judicial
Arbitration Mediation Services (JAMS) panel. In the event that the parties are
unable to agree upon the person chosen as arbitrator within 30 days of the
demand for arbitration, the arbitrator shall be selected in the sole discretion
of the JAMS administrator. The arbitrator shall be a member of the California
bar.
-6-
<PAGE>
iii. The parties shall share all costs of arbitration. The prevailing
party shall be entitled to reimbursement by the other party of such party's
attorneys' fees and costs and any arbitration fees and expenses incurred in
connection with the arbitration hereunder.
iv. The substantive law of the State of California shall be applied
by the arbitrator. All proceedings in arbitration shall be in accordance with
the California Code of Civil Procedure, as amended, and the parties shall have
the right to legal discovery in any matter submitted to arbitration in
satisfaction of California Code of Civil Procedure Section 1283.05, as permitted
by California Code of Civil Procedure Section 1283.1(b).
v. Arbitration shall take place in Los Angeles, California unless
the parties otherwise agree. As soon as reasonably practicable, a hearing with
respect to the dispute or matter to be resolved shall be conducted by the
arbitrator. As soon as reasonably practicable thereafter, the arbitrator shall
arrive at a final decision, which shall be reduced to writing, signed by the
arbitrator and mailed to each of the parties and their legal counsel.
vi. All decisions of the arbitrator shall be final, binding and
conclusive on the parties and shall constitute the only method of resolving
disputes or matters subject to arbitration pursuant to this Option. The
arbitrator or a court of appropriate jurisdiction may issue a writ of execution
to enforce the arbitrator's judgment. Judgment may be entered upon such a
decision in accordance with applicable law in any court having jurisdiction
thereof.
vii. Notwithstanding the foregoing, because time is of the essence of
this Option, the parties specifically reserve the right to seek a judicial
temporary restraining order, preliminary injunction, or other similar equitable
relief.
viii. The decision and award of the arbitrator shall be kept
confidential by the parties to the greatest extent possible. No disclosure of
such decision or award shall be made by the parties except as required by law or
as necessary or appropriate to effect the enforcement thereof.
ix. Should either party institute any action or procedure to enforce
this Option or any provision hereof, or for damages by reason of any alleged
breach of this Option or of any provision hereof, or for a declaration of rights
hereunder (including without limitation arbitration), the prevailing party in
any such action or proceeding shall be entitled to receive from the other party
all costs and expenses, including without limitation reasonable attorneys' fees,
incurred by the prevailing party in connection with such action or proceeding.
PROSPECT MEDICAL HOLDINGS, INC.
By: /s/ Thomas A. Maloof
-----------------------------
Thomas A. Maloof,
Chief Financial Officer
Dated: September 25, 1997
-7-
<PAGE>
PURCHASE FORM
Dated: ,
---------- ----
The undersigned irrevocably elects to exercise the within Option to the
extent of purchasing _________ shares of Common Stock and hereby makes payment
of $______________ in payment of the actual exercise price thereof.
INSTRUCTIONS FOR REGISTRATION OF STOCK
Name
----------------------------------
(Please typewrite or print in block letters)
Address
----------------------------------
----------------------------------
Signature
----------------------------------
IT SHALL BE A CONDITION TO THE VALIDITY OF THIS ASSIGNMENT THAT THE TRANSFEREE
DELIVER TO PROSPECT MEDICAL HOLDINGS, INC. HIS OR ITS WRITTEN AGREEMENT TO
ACCEPT AND BE BOUND BY ALL OF THE TERMS AND CONDITIONS OF THIS OPTION
ASSIGNMENT FORM
FOR VALUE RECEIVED, ______________________ hereby sells, assigns and
transfers unto
Name
----------------------------------
(Please typewrite or print in block letters)
Address
----------------------------------
----------------------------------
the right to purchase Common Stock represented by this Option to the extent of
_________ shares as to which such right is exercisable and does hereby
irrevocably constitute and appoint _________________________________ Attorney,
to transfer the same on the books of the Company with full power of substitution
in the premises.
Date ,
---------------- -----
Signature
----------------------------------
-8-
<PAGE>
SECURITY AGREEMENT
(Guarantor)
This SECURITY AGREEMENT, dated as of September 25, 1997, is entered into
between Prospect Medical Holdings, Inc., a Delaware corporation ("Guarantor"),
and Karunyan Arulanantham, M.D., as agent ("Agent") for the Guarantied Parties,
with reference to the following facts:
R E C I T A L S
A. In order to induce each of the Guarantied Parties to accept the
Subordinate Guaranties for their Subordinated Notes and as a condition thereof,
Guarantor has agreed to enter into this Agreement in order to grant to the
Guarantied Parties a security interest in the Collateral to secure prompt
payment and performance of the Secured Obligations; and
B. Guarantor is materially interested in the financial success of
Purchaser who is the maker of the Subordinated Notes.
A G R E E M E N T
NOW, THEREFORE, in consideration of the mutual promises, covenants,
conditions, representations, and warranties hereinafter set forth, and for other
good and valuable consideration, the parties hereto agree as follows:
1. DEFINITIONS. All initially capitalized terms used but not defined
herein shall have the meanings ascribed thereto in each of the Subordinated
Guaranties. In addition, as used herein, the following terms shall have the
following meanings:
"ACCOUNT DEBTOR" means any Person who is or who may become obligated
with respect to, or on account of, an Account.
"ACCOUNTS" means any and all of Guarantor's presently existing and
hereafter arising accounts (as defined in the UCC) and rights to payment, except
those evidenced by Negotiable Collateral, arising out of the sale or lease of
goods or the rendition of services by Guarantor, irrespective of whether earned
by performance.
"AGENT" has the meaning assigned to that term in the introduction to
this Agreement.
<PAGE>
"AGENT EXPENSES" shall mean: any and all costs or expenses required
to be paid by Guarantor under this Security Agreement which are paid or advanced
by Agent; all costs and expenses of Agent, including its attorneys' fees and
expenses (including attorneys' fees incurred pursuant to proceedings arising
under the Bankruptcy Code), incurred or expended to correct any default or
enforce any provision of this Security Agreement, or in gaining possession of,
maintaining, handling, preserving, storing, shipping, selling, preparing for
sale, or advertising to sell the Collateral, irrespective of whether a sale is
consummated; and all costs and expenses of suit incurred or expended by Agent,
including its attorneys' fees and expenses (including attorneys' fees incurred
pursuant to proceedings arising under the Bankruptcy Code) in enforcing or
defending this Security Agreement, irrespective of whether suit is brought.
"GUARANTOR'S BOOKS" means any and all presently existing and hereafter
acquired or created books and records of all records (including maintenance and
warranty records), ledgers, computer programs, disc or tape files, printouts,
runs, and other computer prepared information indicating, summarizing, or
evidencing the Accounts, Deposit Accounts, Equipment, Inventory, Investment
Property, General Intangibles and Negotiable Collateral.
"CHATTEL PAPER" has the meaning assigned to it in the UCC and includes
all writings of whatever sort which evidence a monetary obligation and a
security interest in or lease of specific goods, whether now existing or
hereafter arising.
"COLLATERAL" means the following, collectively: any and all of the
Accounts, Deposit Accounts, Equipment, Inventory, Investment Property, General
Intangibles, Negotiable Collateral, and Guarantor's Books, in each case whether
now existing or hereafter acquired or created, and any Proceeds or products of
any of the foregoing, or any portion thereof, and any and all Accounts, Deposit
Accounts, Equipment, Inventory, Investment Property, General Intangibles,
Negotiable Collateral, money, or other tangible or intangible property,
resulting from the sale or other disposition of the Accounts, Deposit Accounts,
Equipment, Inventory, Investment Property, General Intangibles, or Negotiable
Collateral, or any portion thereof or interest therein, and the substitutions,
replacements, additions, accessions, products and Proceeds thereof.
"COLLATERAL ACCESS AGREEMENT" means a landlord waiver, mortgagee
waiver, bailee letter, or acknowledgment agreement of any warehouseman,
processor, lessor, consignee, or other person in possession of, having a lien
upon, or having rights or interests in the Equipment or Inventory, in each case,
in form and substance satisfactory to Agent.
"DEPOSIT ACCOUNT" means any demand, time, savings, passbook or like
account now or hereafter maintained by or for the benefit of Guarantor with a
bank, savings and loan association, credit union or like organization, and all
funds and amounts therein, whether or not restricted or designated for a
particular purpose.
"DOCUMENTS" means any and all "documents," as defined in the UCC,
including documents of title, bills of lading, dock warrants, dock receipts,
warehouse receipts and other documents of Guarantor, whether or not negotiable,
and includes all other documents which
2
<PAGE>
purport to be issued by a bailee or agent and purport to cover goods in any
bailee's or agent's possession which are either identified or are fungible
portions of an identified mass, including such documents of title made available
to Guarantor for the purpose of ultimate sale or exchange of goods or for the
purpose of loading, unloading, storing, shipping, transshipping, manufacturing,
processing or otherwise dealing with goods in a manner preliminary to their sale
or exchange, in each case whether now existing or hereafter acquired.
"EQUIPMENT" means all "equipment," as defined in the UCC, and includes
any and all of Guarantor's presently existing and hereafter acquired machinery,
equipment, furniture, furnishings, fixtures, computer and other electronic data
processing equipment and other office equipment and supplies, computer programs
and related data processing. software, spare parts, tools, motors, automobiles,
trucks, tractors and other motor vehicles, rolling stock, jigs, and other goods
(other than Inventory, farm products, and consumes goods), of every kind and
description, wherever located, together with any and all parts, improvements,
additions, attachments, replacements, accessories, and substitutions thereto or
therefor, and all other rights of Guarantor relating thereto, whether in the
possession and control of Guarantor, or in the possession and control of a third
party for the account of Guarantor.
"FEIN" means Federal Employer Identification Number.
"GENERAL INTANGIBLES" means any and all of Guarantor's presently
existing and hereafter acquired or arising "general intangibles," (as defined in
the UCC) and other intangible personal property of every kind and description,
including:
(a) contracts and contract rights, noncompetition covenants,
licensing and distribution agreements, indemnity agreements, guaranties,
insurance policies, franchise agreements and lease agreements;
(b) deposit accounts, uncertificated certificates of deposit,
uncertificated securities, and interests in any joint ventures, partnerships or
limited liability companies;
(c) choses in action and causes of action (whether legal or
equitable, whether in contract or tort or otherwise, and however arising);
(d) licenses, approvals, permits or any other authorizations issued
by any government authority;
(e) Intellectual Property Collateral;
(f) computer software, magnetic media, electronic data processing
files, systems and programs;
(g) rights of stoppage in transit, replevin and reclamation, rebates
or credits of every kind and nature to which Guarantor may be entitled;
(h) purchase orders, customer lists, subscriber lists and goodwill;
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(i) monies due or recoverable from pension funds, refunds and claims
for tax or other refunds against any governmental authority; and
(j) other contractual, equitable and legal rights of whatever kind
and nature.
"GUARANTIED PARTIES" means Sinnadurai E. Moorthy, M.D., and Karunyan
Arulanantham, M.D. "Guarantied Party" means either of them, as appropriate.
"GUARANTY" means one of the Subordinated Guaranties delivered by
Guarantor to one of the Guarantied Parties. "Guaranties" means both of such.
"INSTRUMENTS" has the meaning assigned to it by the UCC and includes
any and all negotiable instruments, certificated securities and every other
writing which evidences a right to the payment of money, in each case whether
now existing or hereafter acquired.
"INTELLECTUAL PROPERTY COLLATERAL" means the following assets owned or
held by Guarantor or in which Guarantor otherwise has any interest, now existing
or hereafter acquired or arising:
(a) all patents and patent applications, domestic or foreign, all
licenses relating to any of the foregoing and all income and royalties with
respect to any licenses, all rights to sue for past, present or future
infringement thereof, all rights arising therefrom and pertaining thereto and
all reissues, divisions, continuations, renewals, extensions and continuations
in part thereof;
(b) all copyrights and applications for copyright, domestic or
foreign, together with the underlying works of authorship (including titles),
whether or not the underlying works of authorship have been published and
whether said copyrights are statutory or arise under the common law, and all
other rights and works of authorship, all rights, claims and demands in any way
relating to any such copyrights or works, including royalties and rights to sue
for past, present or future infringement, and all rights of renewal and
extension of copyright;
(c) all state (including common law), federal and foreign trademarks,
service marks and trade names, and applications for registration of such
trademarks, service marks and trade names, all licenses relating to any of the
foregoing and all income and royalties with respect to any licenses, whether
registered or unregistered and wherever registered, all rights to sue for past,
present or future infringement or unconsented use thereof, all rights arising
therefrom and pertaining thereto and all reissues, extensions and renewals
thereof;
(d) all trade secrets, confidential information, customer lists,
license rights, advertising materials, operating manuals, methods, processes,
know-how, sales literature, sales and operating plans, drawings, specifications,
blue prints, descriptions, inventions, name plates and catalogs; and
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(e) the entire goodwill of or associated with the businesses now or
hereafter conducted by Guarantor connected with and symbolized by any of the
aforementioned properties and assets.
"INVENTORY" has the meaning assigned to it in the UCC and includes any
and all of Guarantor's presently existing and hereafter acquired goods of every
kind and description (including goods in transit) which are held for sale or
lease, or to be furnished under a contract of service or which have been so
leased or furnished, or other disposition, wherever located, including those
held for display or demonstration or out on lease of consignment or are raw
materials, work in process, finished materials, or materials used or consumed,
or to be used or consumed, in Guarantor's business, and the resulting product or
mass, and all repossessed, returned, rejected, reclaimed and replevied goods,
together with all materials, parts, supplies, packing and shipping materials
used or usable, in connection with the manufacture, packing, shipping,
advertising, selling or, furnishing of such goods; and all other items hereafter
acquired by Guarantor by way of substitution, replacement, return, repossession
or otherwise, and all additions and accessions thereto, and any Document
representing or relating to any of the foregoing at any time.
"INVESTMENT PROPERTY" has the meaning given to such term in the UCC.
"NEGOTIABLE COLLATERAL" means any and all of Guarantor's presently
existing and hereafter acquired or arising letters of credit, advises of credit,
certificates of deposit, notes, drafts, Instruments, Documents and Chattel
Paper.
"PROCEEDS" means whatever is receivable or received from or upon the
sale, lease, license, collection, use, exchange or other disposition, whether
voluntary or involuntary, of any Collateral or other assets of Guarantor,
including "proceeds" as defined in Section 9306 of the Code, any and all
proceeds of any insurance, indemnity, warranty or guaranty payable to or for the
account of Guarantor from time to time with respect to any of the Collateral,
any and all payments (in any form whatsoever) made or due and payable to
Guarantor from time to time in connection with any requisition, confiscation,
condemnation, seizure or forfeiture of all or any part of the Collateral by any
governmental authority (or any person acting under color of governmental
authority), any and all other amounts from time to time paid or payable under or
in connection with any of the Collateral or for or on account of any damage or
injury to or conversion of any Collateral by any person, any and all other
tangible or intangible property received upon the sale or disposition of
Collateral, and all proceeds of proceeds.
"PURCHASER" means Prospect Medical Group, Inc., a California
professional corporation.
"RIGHTS TO PAYMENT" means all Accounts and any and all rights and
claims to the payment or receipt of money or other forms of consideration of any
kind in, to and under all General Intangibles, Negotiable Collateral and
Proceeds thereof.
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"SECURED OBLIGATIONS" shall mean the obligations of Guarantor
described in Section 2 of the Guaranties.
"SECURITY AGREEMENT" shall mean this Security Agreement, any
concurrent or subsequent riders, exhibits or schedules to this Security
Agreement, and any extensions, supplements, amendments, or modifications to or
in connection with this Security Agreement, or to any such riders, exhibits or
schedules.
"SENIOR CREDITOR" means Imperial Bank, a California banking
corporation, or its successors and assigns, and any institution which refinances
Guarantor's obligations to Imperial Bank.
"SUBORDINATED NOTES" means the two Contingent Promissory Notes of even
date herewith, each in the amount of $1,125,000, made by Prospect Medical Group,
Inc., one of which is payable to each of the Guarantied Parties.
"SUBORDINATION AND NOTE CANCELLATION AGREEMENT" has the meaning
ascribed to it in the second paragraph of the legend set forth on the front of
each of the Subordinated Notes.
"UCC" means the California Uniform Commercial Code except, to the
extent applicable, the Uniform Commercial Code as adopted by the jurisdiction in
which any of the Collateral is located. Any and all terms used in this Security
Agreement which are defined in the Code shall be construed and defined in
accordance with the meaning and definition ascribed to such terms under the
Code, unless otherwise defined herein.
2. CONSTRUCTION. Unless the context of this Security Agreement clearly
requires otherwise, references to the plural include the singular, references to
the singular include the plural, the part includes the whole, "include" or
"including" is not limiting, and "or" has the inclusive meaning represented by
the phrase "and/or." References in this Security Agreement to "determination"
by Agent include reasonable estimates (absent manifest error) by Agent, as
applicable (in the case of quantitative determinations) and reasonable beliefs
(absent manifest error) by Agent, as applicable (in the case of qualitative
determinations). The words "hereof," "herein," "hereby," "hereunder," and
similar terms in this Security Agreement refer to this Security Agreement as a
whole and not to any particular provision of this Security Agreement. Article,
section, subsection, exhibit, and schedule references are to this Security
Agreement unless otherwise specified. Actions by "Agent" or things received by
"Agent", including the grant of security interest in Section 3 hereof, are done
or received on behalf of the Guaranteed Parties.
3. CREATION OF SECURITY INTEREST. Subject only to prior liens in favor
of Senior Creditor, Guarantor hereby grants to Agent a continuing security
interest in all presently existing and hereafter acquired or arising Collateral
in order to secure the prompt payment and performance of all of the Secured
Obligations. Guarantor acknowledges and affirms that such security interest in
the Collateral has attached to all Collateral without further act on the part of
Agent or Guarantor.
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4. FURTHER ASSURANCES.
4.1 Guarantor shall execute and deliver to Agent concurrently with
Guarantor's execution of this Security Agreement, and from time to time at the
request of Agent, all financing statements, continuation financing statements,
fixture filings, security agreements, chattel mortgages, assignments, and all
other documents that Agent may request, in form satisfactory to Agent, to
perfect and maintain perfected Agent's security interests in the Collateral and
in order to consummate fully all of the transactions contemplated by this
Security Agreement and the Subordinated Notes and the Guaranties. Guarantor
hereby irrevocably makes, constitutes, and appoints Agent as Guarantor's true
and lawful attorney with power to sign the name of Guarantor on any of the
above-described documents or on any other similar documents which need to be
executed, recorded, or filed, and to do any and all things necessary in the name
and on behalf of Guarantor in order to perfect, or continue the perfection of,
Agent's security interests in the Collateral on behalf of the Guarantied
Parties. Guarantor agrees that neither Agent, nor any of its designees or
attorneys-in-fact, will be liable for any act of commission or omission, or for
any error of judgment or of fact or law with respect to the exercise of the
power of attorney granted under this Section 4. 1, other than as a result of its
or their gross negligence or willful misconduct. THE POWER OF ATTORNEY GRANTED
UNDER THIS SECTION 4.1 IS COUPLED WITH AN INTEREST AND SHALL BE IRREVOCABLE
UNTIL ALL OF THE SECURED OBLIGATIONS HAVE BEEN INDEFEASIBLY PAID IN FULL, THE
GUARANTIES TERMINATED, AND ALL GUARANTOR'S DUTIES HEREUNDER AND THEREUNDER HAVE
BEEN DISCHARGED IN FULL.
4.2 Without limiting the generality of the foregoing Section 4.1 or
any of the provisions of the Subordinated Guaranties, Guarantor will: (i) at
the request of Agent, mark conspicuously all of its records pertaining to the
Collateral with a legend, in form and substance satisfactory to Agent,
indicating that the Collateral is subject to the security interest granted
hereby; (ii) at the request of Agent, appear in and defend any action or
proceeding which may affect Guarantor's title to, or the security interest of
Agent in, any of the Collateral; and (iii) upon demand of Agent, allow
inspection of Collateral by Agent or persons designated by Agent at any time
during normal business hours.
4.3 With respect to the Negotiable Collateral (other than drafts
received in the ordinary course of business so long as no Event of Default is
continuing), after (i) Senior Creditor has been paid in full, and (ii) all
obligations of Senior Creditor to make loans to Guarantor have been terminated,
Guarantor shall, immediately upon request by Agent, endorse (where appropriate)
and assign the Negotiable Collateral over to Agent, and deliver to Agent actual
physical possession of the Negotiable Collateral to Agent together with any
instruments of transfer or assignment, all in form and substance satisfactory to
Agent, in order to fully perfect the security interest therein of Agent.
4.4 Subject to any prior liens in favor of Senior Creditor, Guarantor
shall cooperate with Agent in obtaining a control agreement in form and
substance satisfactory to Agent with respect to all Deposit Accounts and
Investment Property.
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5. REPRESENTATIONS AND WARRANTIES. In addition to the representations
and warranties of Guarantor set forth in each Guaranty which are incorporated
herein by this reference, Guarantor represents and warrants to Agent that:
5.1 LOCATION OF CHIEF EXECUTIVE OFFICE AND COLLATERAL; FEIN.
Guarantor's chief executive office is located at the address set forth in
Schedule 1, and all other locations where Guarantor conducts business or
Collateral is kept are set forth in Schedule 1. Guarantor's FEIN is 33-0564370.
5.2 LOCATIONS OF GUARANTOR'S BOOKS. All locations where Guarantor's
Books are kept, including all equipment necessary for accessing Guarantor's
Books and the names and addresses of all service bureaus, computer or data
processing companies and other persons keeping Guarantor's Books or collecting
Rights to Payment for Guarantor, are set forth in Schedule 1.
5.3 TRADE NAMES AND TRADE STYLES. All trade names and trade styles
under which Guarantor presently conducts its business operations are set forth
in SCHEDULE 1, and, except as set forth in Schedule 1, Guarantor has not, at any
time during the preceding five years: (i) been known as or used any other
corporate, name; (ii) changed its name; (iii) been the surviving or resulting
corporation in a merger or consolidation; or (iv) acquired through asset
purchase or otherwise any business of any person.
5.4 OWNERSHIP OF COLLATERAL. Guarantor is and shall continue to be
the sole and complete owner of the Collateral, free from any lien other than
liens in favor of Senior Creditor and the liens created hereby.
5.5 ENFORCEABILITY; PRIORITY OF SECURITY INTEREST. (i) This
Agreement creates a security interest which is enforceable against the
Collateral in which Guarantor now has rights, and will create a security
interest which is enforceable against the Collateral in which Guarantor
hereafter acquires rights at the time Guarantor acquires any such rights, and
(ii) Agent, on behalf of the Guarantied Parties, has a perfected security
interest (to the fullest extent perfection can be obtained by filing,
notification to third parties, possession or control) and a first priority
security interest in the Collateral in which Guarantor now has rights (subject
only to liens in favor of Senior Creditor), and will have a perfected and first
priority security interest in the Collateral in which Guarantor hereafter
acquires rights at the time Guarantor acquires any such rights (subject only to
liens in favor of Senior Creditor), in each case securing the payment and
performance of the Secured Obligations.
5.6 OTHER FINANCING STATEMENTS. Other than financing statements in
favor of Agent and financing statements filed in connection with liens in favor
of Senior Creditor, no effective financing statement naming Guarantor as debtor,
assignor, grantor, mortgagor, pledgor or the like and covering all or any part
of the Collateral is on file in any filing or recording office in any
jurisdiction.
5.7 RIGHTS TO PAYMENT.
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(a) the Rights to Payment represent valid, binding and
enforceable obligations of the Account Debtors or other persons obligated
thereon, representing undisputed, bona fide transactions completed in accordance
with the terms and provisions contained in any documents related thereto, and
are and will be genuine, free from liens (other than liens in favor of Senior
Creditor), adverse claims, counterclaims, setoffs, defaults, disputes, defenses,
retainages, holdbacks and conditions precedent of any kind of character, except
to the extent reflected by Guarantor's reserves for uncollectible Rights to
Payment;
(b) all Account Debtors and other obligors on the Rights to
Payment are solvent and generally paying their debts as they come due;
(c) all Rights to Payment comply with all applicable laws
concerning form, content and manner of preparation and execution, including
where applicable any federal and state consumer credit laws;
(d) Guarantor has not assigned any of its rights under the
Rights to Payment other than to Senior Creditor;
(e) all statements made, all unpaid balances and all other
information in Guarantor's Books and other documentation relating to the Rights
to Payment are true and correct and in all respects what they purport to be; and
(f) Guarantor has no knowledge of any fact or circumstance which
would impair the validity or collectibility of any of the Rights to Payment.
5.8 INVENTORY. No Inventory is stored with any bailee, warehouseman
or similar person or on any premises leased to Guarantor, nor has any Inventory
been consigned to Guarantor or consigned by Guarantor to any person or is held
by Guarantor for any person under any "bill and hold" or other arrangement.
5.9 INTELLECTUAL PROPERTY.
(a) except as set forth in Schedule 1, Guarantor (directly or
through any affiliated entity) does not own, possess or use under any licensing
arrangement any patents, copyrights, trademarks, service marks or trade names,
nor is there currently pending before any governmental authority any application
for registration of any patent, copyright, trademark, service mark or trade
name;
(b) all patents, copyrights, trademarks, service marks and trade
names are subsisting and have not been adjudged invalid or unenforceable in
whole or in part;
(c) all maintenance fees required to be paid on account of any
patents have been timely paid for maintaining such patents in force, and, to the
best of Guarantor's knowledge, each of the patents is valid and enforceable and
Guarantor has notified Agent in writing of all prior art (including public uses
and sales) of which it is aware;
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(d) to the best of Guarantor's knowledge, no infringement or
unauthorized use presently is being made of any Intellectual Property Collateral
by any person;
(e) Guarantor is the sole and exclusive owner of the
Intellectual Property Collateral and the past, present and contemplated future
use of such Intellectual Property Collateral by Guarantor has not, does not and
will not infringe or violate any right, privilege or license agreement of or
with any other person; and
(f) Guarantor owns, has material rights under, is a party to, or
an assignee of a party to all material licenses, patents, patent applications,
copyrights, service marks, trademarks, trademark applications, trade names and
all other intellectual property Collateral necessary to continue to conduct its
business as heretofore conducted.
5.10 EQUIPMENT.
(a) none of the Equipment or other Collateral is affixed to real
property, except Collateral with respect to which Guarantor has supplied Agent
with all information and documentation necessary to make all fixture filings
required to perfect and protect the priority of Agent's security interest in all
such Collateral which may be fixtures as against all persons having an interest
in the premises to which such property may be affixed; and
(b) none of the Equipment is leased from or to any person,
except as set forth in Schedule 1.
5.11 DEPOSIT ACCOUNTS. The names and addresses of all financial
institutions at which Guarantor maintains its Deposit Accounts, and the account
numbers and account names of such Deposit Accounts, are set forth in Schedule 1.
5.12 INVESTMENT PROPERTY. All Investment Property is set forth and
described in Schedule 1, and all financial institutions or financial
intermediaries holding or in possession of such Investment Property are set
forth in Schedule 1.
6. COVENANTS. In addition to the covenants of Guarantor set forth in the
Guaranties which are incorporated herein by this reference, Guarantor agrees
that, until the indefeasible payment, performance and satisfaction in full of
the Secured Obligations:
6.1 DEFENSE OF COLLATERAL. Guarantor shall appear in and defend any
action, suit or proceeding which may affect its title to or right or interest
in, or Agent's right or interest in, the Collateral.
6.2 PRESERVATION OF COLLATERAL. Guarantor shall do and perform all
acts that may be necessary and appropriate to maintain, preserve and protect the
Collateral.
6.3 COMPLIANCE WITH LAWS, ETC. Guarantor shall comply with all laws,
regulations and ordinances, and all policies of insurance, relating to the
possession, operation, maintenance and control of the Collateral.
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6.4 LOCATION OF GUARANTOR'S BOOKS AND CHIEF EXECUTIVE OFFICE.
Guarantor shall: (i) keep all Guarantor's Books at the locations set forth in
Schedule 1; and (ii) maintain the location of Guarantor's chief executive office
or principal place of business at the location set forth in Schedule 1;
provided, however, that Guarantor may amend Schedule 1; so long as (a) such
amendment occurs by written notice to Agent not less than 30 days prior to the
date on which the location of Guarantor's Books or Guarantor's chief executive
office or principal place of business is changed, and (b) at the time of such
written notification, Guarantor executes and delivers any financing statement
amendments or fixture filing amendments necessary to perfect or continue
perfected Agent's security interest in the Collateral and also obtains for Agent
such duly executed Collateral Access Agreement as Agent shall require with
respect to such new location.
6.5 LOCATION OF COLLATERAL. Guarantor shall keep the Inventory and
Equipment only at the locations identified on Schedule 1; PROVIDED, HOWEVER,
that Guarantor may amend Schedule 1 so long as (i) such amendment occurs by
written notice to Agent not less than 30 days prior to the date on which the
Inventory or Equipment is moved to such new location, (ii) such new location is
within the continental United States, and (iii) at the time of such written
notification, Guarantor executes and delivers any financing statements or
fixture filings perfect and continue perfected Agent's security interests in
such assets and also obtains for Agent such duly executed Collateral Access
Agreement as Agent shall require with respect to such new location.
6.6 CHANGE IN NAME, TRADE NAME, TRADE STYLE OR FEIN. Guarantor shall
not change its name, trade names, trade styles or FEIN, or add any new trade
names or trade styles from those listed on Schedule 1; PROVIDED, HOWEVER, that
Guarantor may amend Schedule 1 so long as (i) such amendment occurs by written
notice to Agent not less than 30 days prior to the date on which such new name,
trade name, trade style or FEIN becomes effective, and (ii) at the time of such
written notification, Guarantor executes and delivers any financing statement
amendments or fixture filing amendment necessary to continue perfected Agent's
security interests for the benefit of Guarantied Parties in the Collateral.
6.7 MAINTENANCE OF RECORDS. Guarantor shall keep separate, accurate
and complete Guarantor's Books, disclosing Agent's security interest for the
benefit of Guarantied Parties hereunder.
6.8 DISPOSITION OF COLLATERAL. Guarantor shall not surrender or lose
possession of (other than to Senior Creditor or Agent), sell, lease, rent, or
otherwise dispose of or transfer any of the Collateral or any right or interest
therein, except to the extent permitted herein.
6.9 LIENS. Guarantor shall keep the Collateral free of all liens
except liens in favor of Senior Creditor and Agent for the benefit of Guarantied
Parties.
6.10 LEASED PREMISES. At Agent's request, Guarantor shall obtain from
each person from whom Guarantor leases any premises at which any Collateral is
at any time present, such Collateral Access Agreements as Agent may require.
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6.11 RIGHTS TO PAYMENT. Guarantor shall:
(a) perform and observe all terms and provisions of the Rights
to Payment and all obligations to be performed or observed by it in connection
therewith and maintain the Rights to Payment in full force and effect;
(b) enforce all Rights to Payment strictly in accordance with
their terms, and take all such action to such end as may be from time to time
reasonably requested by Agent;
(c) if, to the knowledge of Guarantor, any dispute, setoff,
claim, counterclaim or defense shall exist or shall be asserted or threatened
with respect to a Right to Payment (whether with or against Guarantor or
otherwise), disclose such fact fully to Agent in Guarantor's Books relating to
such Account or other Right to Payment and in connection with any report
furnished by Guarantor to Agent relating to such Right to Payment;
(d) furnish to Agent such information and reports regarding the
Rights to Payment as Agent may request, and upon request of Agent make such
demands and requests for information and reports as Guarantor is entitled to
make in respect of the Rights to Payment; and
(e) upon the occurrence of any Event of Default, establish such
lockbox or similar arrangements for the payment of the Rights to Payment as
Agent shall require.
6.12 INVENTORY. Guarantor shall:
(a) at such times as Agent shall request, prepare and deliver to
Agent periodic reports pertaining to the Inventory, in form and substance
satisfactory to Agent;
(b) upon the request of Agent, take a physical listing of the
Inventory and promptly deliver a copy of such physical listing to Agent;
(c) not store any Inventory with a bailee, warehouse or similar
Person or on premises leased to Guarantor without obtaining for Agent such
Collateral Access Agreements as Agent shall require; and
(d) not dispose of any Inventory on a bill-and-hold, guaranteed
sale, sale and return sale on approval, consignment or similar basis, nor
acquire any Inventory from any Person on any such basis, without in each case
giving Agent prior written notice thereof.
6.13 EQUIPMENT. Guarantor shall, upon Agent's request, deliver to
Agent a report of each item of Equipment, in form and substance satisfactory to
Agent.
6.14 INTELLECTUAL PROPERTY COLLATERAL. Guarantor shall:
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(a) not enter into any agreement (including any license or
royalty agreement) pertaining to any Intellectual Property Collateral without in
each case giving Agent prior notice thereof;
(b) not allow or suffer any Intellectual Property Collateral to
become abandoned, nor any registration thereof to be terminated, forfeited,
expired or dedicated to the public;
(c) promptly give Agent notice of any rights Guarantor may
obtain to any new patentable inventions, trademarks, servicemarks, copyrightable
works or other new Intellectual Property Collateral, prior to the filing of any
application for registration thereof; and
(d) diligently prosecute all applications for patents,
copyrights and trademarks, and file and prosecute any and all continuations,
continuations-in-part, applications for reissue, applications for certificate of
correction and like matters as shall be reasonable and appropriate in accordance
with prudent business practice, and promptly and timely pay any and all
maintenance, license, registration and other fees, taxes and expenses incurred
in connection with any Intellectual Property Collateral.
6.15 COPIES OF INFORMATION COLLATERAL ACCESS AGREEMENTS. Guarantor
shall provide to Agent for the benefit of Guarantied Parties copies of all
reports, notices or Collateral Access Agreements that it sends to Senior
Creditor with regard to the Collateral. All such Collateral Access Agreements
shall be drafted to include Agent, or its agents, as persons authorized to have
access to the Collateral under such agreements; provided that such right of
access shall in no way interfere with, and shall at all times be subordinate to,
Senior Creditor's rights.
7. COLLECTION OF RIGHTS TO PAYMENT. Guarantor or its agents shall
endeavor in the first instance to collect all amounts due or to become due on or
with respect to the Rights to Payment. At the request of Agent after the
occurrence of an Event of Default, subject to Senior Creditor's rights, all
remittances received by Guarantor shall be held in trust for Agent, and, in
accordance with Agent's instructions, remitted to Agent or deposited to an
account designated by Agent in the form received (with any necessary
endorsements or instruments of assignment or transfer).
8. EVENTS OF DEFAULT. The occurrence of any breach by Guarantor of the
Subordinated Guaranties or this Security Agreement shall constitute an event of
default ("Event of Default") under this Security Agreement.
9. REMEDIES.
9.1 During the continuance of an Event of Default, subject to Senior
Creditor's rights under the Subordination and Note Cancellation Agreement,
Agent, without notice or demand, may do any one or more of the following, all of
which are authorized by Guarantor:
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(a) settle or adjust disputes and claims directly with Account
Debtors for amounts and upon terms which Agent considers advisable, and in such
cases, Agent will credit the Secured Obligations with only the net amounts
received by Agent in payment of such disputed Accounts after deducting all Agent
Expenses incurred or expended in connection therewith;
(b) cause Guarantor to hold all returned Inventory in trust for
Agent, segregate all returned Inventory from all other property of Guarantor or
in Guarantor's possession and conspicuously label said returned Inventory as the
property of Agent;
(c) without notice to or demand upon Guarantor or any guarantor,
make such payments and do such acts as Agent considers necessary or unable to
protect its security interests in the Collateral. Guarantor agrees to assemble
the Collateral if Agent so requires, and to make the Collateral available to
Agent as Agent may designate. Guarantor authorizes Agent to enter the premises
where the Collateral is located, to take and maintain possession of the
Collateral, or any part of it, and to pay, purchase, contest, or compromise any
encumbrance, charge, or lien that in Agent's determination appears to conflict
with its security interests and to pay all expenses incurred in connection
therewith. With respect to any of Guarantor's owned or leased premises,
Guarantor hereby grants Agent a license to enter into possession of such
premises and to occupy the same, without charge, for up to 120 days in order to
exercise any of Agent's rights or remedies provided herein, at law, in equity,
or otherwise;
(d) ship, reclaim, recover, store, finish, maintain, repair,
prepare for sale, advertise for sale, and sell (in the manner provided for
herein) the Collateral. Agent is hereby granted a license or other right to
use, without charge, Guarantor's labels, patents, copyrights, rights of use of
any name, trade secrets, trade names, trademarks, service marks, and advertising
matter, or any property of a similar nature, as it pertains to the Collateral,
in completing production of, advertising for sale, and selling any Collateral
and Guarantor's rights under all licenses and all franchise agreements shall
inure to Agent's benefit;
(e) sell the Collateral at either a public or private sale, or
both, by way of one or more contracts or transactions, for cash or on terms, in
such manner and at such places (including Guarantor's premises) as Agent
determines is commercially reasonable. It is not necessary that the Collateral
be present at any such sale;
(f) agent shall give notice of the disposition of the Collateral
as follows:
(i) agent shall give Guarantor and each holder of a
security interest in the Collateral who has filed with Agent a written request
for notice, a notice in writing of the time and place of public sale, or, if the
sale is a private sale or some other disposition other than a public sale is to
be made of the Collateral, then the time on or after which the private sale or
other disposition is to be made;
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(ii) the notice shall be personally delivered or mailed,
postage prepaid, to Guarantor as provided in SECTION 15 of the Guaranty, at
least 5 days before the date fixed for the sale, or at least 5 days before the
date on or after which the private sale or other disposition is to be made; no
notice needs to be given prior to the disposition of any portion of the
Collateral that is perishable or threatens to decline speedily in value or that
is of a customarily sold on a recognized market. Notice to persons other than
Guarantor claiming an interest in the Collateral shall be sent to such addresses
as they have furnished to Agent;
(iii) if the sale is to be a public sale, Agent also
shall give notice of the time and place by publishing a notice one time at least
5 days before the date of the sale in a newspaper of general circulation in the
county in which the sale is to be held;
(g) agent may credit bid and purchase at any public sale; and
(h) any deficiency that exists after disposition of the
Collateral as provided above will be paid immediately by Guarantor. Any excess
will be returned, without interest and subject to the rights of third persons,
by Agent to Guarantor.
9.2 Upon the exercise by Agent of any power, right, privilege, or
remedy pursuant to this Security Agreement which requires any consent, approval,
registration, qualification, or authorization of any governmental authority,
Guarantor agrees to execute and deliver, or will cause the execution and
delivery of, all applications, certificates, instruments, assignments, and other
documents and papers that Agent or any purchaser of the Collateral may be
required to obtain for such governmental consent, approval, registration,
qualification, or authorization.
9.3 The rights and remedies of Agent under this Security Agreement,
the Guaranty, and all other agreements contemplated hereby and thereby shall be
cumulative. Agent shall have all other rights and remedies not inconsistent
herewith as provided under the UCC, by law, or in equity. No exercise by Agent
of any one right or remedy shall be deemed an election of remedies, and no
waiver by Agent of any default on Guarantor's part shall be deemed a continuing
waiver of any further defaults. No delay by Agent shall constitute a waiver,
election or acquiescence with respect to any right or remedy.
10. AGENT NOT LIABLE. So long as Agent complies with the obligations, if
any, imposed by Section 9207 of the Code, Agent shall not otherwise be liable or
responsible in any way or manner for: (a) the safekeeping of the Collateral;
(b) any loss or damage thereto occurring or arising in any manner or fashion or
from any cause; (c) any diminution in the value thereof; or (d) any act or
default of any carrier, warehouseman, bailee, forwarding agency, or other person
whomsoever.
11. INDEFEASIBLE PAYMENT. The Secured Obligations shall not be considered
indefeasibly paid for purposes of this Security Agreement unless and until all
payments to Guarantied Parties under the Subordinated Notes and Guaranties are
no longer subject to any right on the part of any person, including Purchaser or
Guarantor, Purchaser or Guarantor as a
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debtor in possession, or any trustee (whether appointed under the Bankruptcy
Code or otherwise) of Purchaser or Guarantor or Purchaser's or Guarantor's
assets to invalidate or set aside such payments or to seek to recoup the amount
of such payments or any portion thereof, or to declare same to be fraudulent or
preferential. In the event that, for any reason, any portion of such payments
to Agent is set aside or restored, whether voluntarily or involuntarily, after
the making thereof, then the obligation intended to be satisfied thereby shall
be revived and continued in full force and effect as if said payment or payments
had not been made.
12. NOTICES. All notices or demands by any party hereto to the other
party and relating to this Security Agreement shall be made in the manner and to
the addresses set forth in Section 15 of the Guaranties.
13. GENERAL PROVISIONS.
13.1 SUCCESSORS AND ASSIGNS. This Security Agreement shall bind and
inure to the benefit of the respective successors and assigns of Guarantor and
Agent; PROVIDED, HOWEVER, that Guarantor may not assign this Security Agreement
nor delegate any of its duties hereunder without Agent's prior written consent
and any prohibited assignment or delegation shall be absolutely void. No
consent by Agent to an assignment by Guarantor shall release Guarantor from the
Secured Obligations.
13.2 EXHIBITS AND SCHEDULES. All of the exhibits and schedules
attached hereto shall be deemed incorporated by reference.
13.3 NO PRESUMPTION AGAINST ANY PARTY. Neither this Security
Agreement nor any uncertainty or ambiguity herein shall be construed or resolved
against Agent or Guarantor, whether under any rule of construction or otherwise.
On the contrary, this Security Agreement has been reviewed by each of the
parties and their counsel and shall be construed and interpreted according to
the ordinary meaning of the words used so as to accomplish fairly the purposes
and intentions of all parties hereto.
13.4 AMENDMENTS AND WAIVERS. Any provision of this Security Agreement
or the Guaranties to which Guarantor is a party may be amended or waived if, but
only if, such amendment or waiver is in writing and is signed by the party
asserted to be bound thereby, and then such amendment or waiver shall be
effective only in the specific instance and specific purpose for which given.
13.5 COUNTERPARTS; INTEGRATION; EFFECTIVENESS. This Security
Agreement may be signed in any number of counterparts, each of which shall be an
original, with the same effect as if the signatures thereto and hereto were upon
the same instrument. This Security Agreement constitutes the entire agreement
and understanding among the parties hereto and supersedes any and all prior
agreements and understandings, oral or written, relating to the subject matter
hereof. This Security Agreement shall become effective when executed by each of
the parties hereto and delivered to Agent.
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13.6 SEVERABILITY. The provisions of this Agreement are severable.
The invalidity, in whole or in part, of any provision of this Agreement shall
not affect the validity or enforceability of any other of its provisions. If
one or more provisions hereof shall be declared invalid or unenforceable, the
remaining provisions shall remain in full force and effect and shall be
construed in the broadest possible manner to effectuate the purposes hereof.
14. GOVERNING LAW. This Security Agreement shall be deemed to have been
made in the State of California and the validity, construction, interpretation,
and enforcement hereof, and the rights of the parties hereto, shall be
determined under, governed by, and construed in accordance with the internal
laws of the State of California, without regard to principles of conflicts of
law.
15. ARBITRATION.
The parties firmly desire to resolve all disputes arising hereunder without
resort to litigation in order to protect their respective business reputations
and the confidential nature of certain aspects of their relationship.
Accordingly, any controversy or claim arising out of or relating to this
Agreement, or the breach thereof, shall be settled by arbitration as set forth
below.
(a) All disputes which in any manner arise out of or relate to this
Agreement or the subject matter thereof, shall be resolved exclusively by
arbitration in accordance with the provisions of this Section 15. Either party
may commence arbitration by sending a written demand for arbitration to the
other party, setting forth the nature of the controversy, the dollar amount
involved, if any, and the remedies sought, and attaching a copy of this Section
to the demand.
(b) The parties stipulate to arbitration before a single, mutually
agreed upon arbitrator sitting on the Los Angeles, California Judicial
Arbitration Mediation Services (JAMS) panel. In the event that the parties are
unable to agree upon the person chosen as arbitrator within 30 days of the
demand for arbitration, the arbitrator shall be selected in the sole discretion
of the JAMS administrator. The arbitrator shall be a member of the California
bar.
(c) The parties shall share all costs of arbitration. The prevailing
party shall be entitled to reimbursement by the other party of such party's
attorneys' fees and costs and any arbitration fees and expenses incurred in
connection with the arbitration hereunder.
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(d) The substantive law of the State of California shall be applied
by the arbitrator. All proceedings in arbitration shall be in accordance with
the California Code of Civil Procedure, as amended, and the parties shall have
the right to legal discovery in any matter submitted to arbitration in
satisfaction of California Code of Civil Procedure Section 1283.05, as permitted
by California Code of Civil Procedure Section 1283.1(b).
(e) Arbitration shall take place in Los Angeles, California unless
the parties otherwise agree. As soon as reasonably practicable, a hearing with
respect to the dispute or matter to be resolved shall be conducted by the
arbitrator. As soon as reasonably practicable thereunder, the arbitrator shall
arrive at a final decision, which shall be reduced to writing, signed by the
arbitrator and mailed to each of the parties and their legal counsel.
(f) All decisions of the arbitrator shall be final, binding and
conclusive on the parties and shall constitute the only method of resolving
disputes or matters subject to arbitration pursuant to this Agreement. The
arbitrator or a court of appropriate jurisdiction may issue a write of execution
to enforce the arbitrator's judgment. Judgment may be entered upon such a
decision in accordance with applicable law in any court having jurisdiction
thereof.
(g) Notwithstanding the foregoing, because time is of the essence of
this Agreement, the parties specifically reserve the right to a judicial
temporary restraining order, preliminary injunction, or other similar equitable
relief.
(h) The decision and award of the arbitrator shall be kept
confidential by the parties to the greatest extent possible. No disclosure of
such decision or award shall be made by the parties except as required by law or
as necessary or appropriate to effect the enforcement thereof.
(i) Should either party institute any action or procedure to enforce
this Agreement or any provision hereof, or for damages by reason of any alleged
breach of this Agreement or of any provision hereof, or for a declaration of
rights hereunder (including, without limitation, arbitration), the prevailing
party in any such action or proceeding shall be entitled to
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receive from the other party all costs and expenses, including, without
limitation, reasonable attorneys' fees, incurred by the prevailing party in
connection with such action or proceeding.
IN WITNESS WHEREOF, the parties have executed this Security Agreement as of
the date first set forth above.
Prospect Medical Holdings, Inc.
a Delaware corporation
By /s/ Jacob Y. Terner, M.D.
----------------------------
Title: CEO
------------------------
/s/ Karunyan Arulanantham
------------------------------
Karunyan Arulanantham, M.D.
as Agent for Guarantied Parties
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SECOND AMENDED AND RESTATED
MANAGEMENT SERVICES AGREEMENT
THIS SECOND AMENDED AND RESTATED MANAGEMENT SERVICES AGREEMENT
("Agreement") is made and entered into as of September 15, 1998, and deemed to
have been effective as of September 25, 1997, by and between SIERRA MEDICAL
MANAGEMENT, INC., a Delaware corporation ("Manager"), and SIERRA PRIMARY CARE
MEDICAL GROUP, INC., a California professional corporation ("GROUP").
RECITALS
A. GROUP is a California professional medical corporation duly organized
under the laws of the State of California and operated as a medical group, which
enters into agreements with organizations such as health care service plans
(HMOs), preferred provider organizations (PPOs), exclusive provider
organizations (EPOs), and other purchasers of medical services (hereinafter
collectively referred to as "Plans") for the arrangement of the provision of
health care services to subscribers or enrollees of said Plans (the "Practice");
and
B. Manager has special expertise and experience in the operation,
management and marketing aspects of medical groups of the type operated or
intended to be operated by GROUP. Manager has made a significant investment in
the development of a system of operations, management and marketing necessary
for management of the functions desired by GROUP to be undertaken by Manager;
and
C. GROUP desires to devote all of its time to arranging for the delivery
of health care services to Plan subscribers or enrollees, and in connection
therewith desires to obtain the professional assistance of Manager in managing
the business aspects of the Practice; and
D. Manager has provided GROUP with the necessary support to manage the
business aspects of the Practice, including but not limited to clerical and
billing services, claims pursuit and collection, cash flow management, marketing
and general administrative services (collectively, "Management Services"), to
enable GROUP to concentrate on the development of the professional aspects of
the Practice pursuant to an Amended and Restated Management Services Agreement
made and entered into as of September 25, 1997, by and between Manager and GROUP
(the "Original Management Services Agreement"); and
E. GROUP and Manager desire to enter into this Agreement to incorporate
within the terms of one agreement all of the amendments previously made and to
be made as of the date of execution hereof to the Original Management Services
Agreement; and
F. Pursuant to this Agreement Manager will continue to provide Management
Services to GROUP.
<PAGE>
NOW, THEREFORE, in consideration of the mutual covenants and conditions
hereinafter set forth and in exchange for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:
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AGREEMENT
1. PREMISES. Pursuant to the Master Lease specified below, Manager shall
provide GROUP with adequate administrative office space at the addresses
described therein (the "Premises") and Group shall retain all of its remaining
facilities for the operation of the Practice with leasehold improvements,
auxiliary services and utilities in order that GROUP may effectively perform its
functions and duties.
In consideration of the sums to be paid to Manager under the terms of
this Agreement, Manager hereby leases to GROUP during the term of this Agreement
the furniture, fixtures and equipment (the "FF&E") listed on Exhibit "B"
attached hereto and incorporated herein by this reference, under the following
terms and conditions:
1.1. Manager is the lessee under certain leases for the Premises
(hereinafter collectively referred to as the "Master Lease") copies of which are
attached hereto as Exhibit "A" and incorporated herein by this reference. GROUP
hereby acknowledges that the Premises described in the Master Lease are suitable
for the administrative office of the Practice. Based and contingent upon
GROUP's promise to timely pay all amounts due under this Agreement, Manager
hereby agrees to sublease the leased Premises to GROUP upon the following terms
and conditions:
1.1.1. This sublease between Manager and GROUP of the
Premises shall be subject to all of the terms and conditions of the Master
Lease. In the event of the termination of Manager's interest as lessee under
the Master Lease for any reason, then the sublease created hereby shall
simultaneously terminate unless GROUP is willing to assume the obligations under
the Master Lease and the Lessor consents thereto.
1.1.2. All of the terms and conditions contained in the
Master Lease are incorporated herein as terms and conditions of the sublease
(with each reference therein to "Lessor" and "Lessee," to be deemed to refer to
Manager and GROUP, respectively) and, along with the provisions of this Section
1.1 and Exhibit "A," shall be the complete terms and conditions of the sublease
created hereby.
1.1.3. Notwithstanding the foregoing, as between Manager
and GROUP, Manager shall remain responsible for meeting the financial
obligations of "Lessee" under the Master Lease, and GROUP shall have no monetary
obligation in that regard. In addition, as between Manager and GROUP, Manager
shall retain all rights to exercise any options to purchase the Premises, or
other similar rights of ownership or possession, which may be granted under the
Master Lease, and GROUP shall have no rights in that regard.
1.1.4. In the event this Agreement is terminated according
to its terms, this sublease shall also terminate automatically.
1.1.5. If the Master Lease contains an option to renew the
term thereof, Manager shall notify GROUP, at least thirty (30) days prior to the
expiration of the time for exercising such option, of Manager's intention to
renew or not to renew such term. If Manager
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determines not to renew such term, Manager shall, at GROUP's option and upon the
consent of the Landlord in accordance with the terms of the Master Lease, assign
the Master Lease to GROUP, including Manager's right to renew the term thereof.
2. PROVISION OF FURNITURE, FURNISHINGS AND EQUIPMENT ("FF&E"). Manager
hereby provides to GROUP, and GROUP hereby leases from Manager, all the FF&E,
which FF&E GROUP agrees are suitable and sufficient for GROUP's use in the
operation of GROUP's medical practice at the Premises and are generally in good
repair. The use by GROUP of said FF&E shall be subject to the following
conditions:
2.1. Title to all of the FF&E shall remain in Manager at all times,
and upon the termination of this Management Services Agreement, GROUP shall
immediately surrender the FF&E to Manager in as good condition as of the date
hereof, normal wear and tear excepted. Alternatively, GROUP, in its sole
discretion, shall have the option to purchase any or all of the FF&E upon
termination hereof. GROUP shall exercise such option, if at all, by giving
Manager written notice of same (the "Notice") within twenty (20) days of the
effective date of termination hereof. Upon exercise of such option, Manager
shall convey to GROUP within thirty (30) days of the effective date of
termination hereof, all of the FF&E identified in the Notice, together with (i)
any manufacturer's warranties that Manager has received in connection with such
FF&E and (ii) a bill of sale or such other instrument of conveyance as is
reasonably necessary to accomplish said purchase; and GROUP shall simultaneously
convey to Manager the purchase price for said FF&E. The purchase price shall be
paid all in cash, and shall equal the fair market value of the FF&E.
2.2. Manager shall be responsible for all repairs and maintenance
of the FF&E other than damage caused by negligence or willful misuse by GROUP;
provided, however, GROUP shall employ reasonable efforts to prevent damage to
and excessive wear of the FF&E, and shall promptly notify Manager of any needed
repairs thereto.
2.3. Manager shall be responsible for all property taxes and other
assessments relating to or arising out of ownership or use of the FF&E that
accrue on and after the date hereof.
2.4. Manager shall provide and maintain, at its expense, such
additional or replacement FF&E as the Practice reasonably requires from time to
time, as determined by Manager in its sole discretion, in consultation with
GROUP. Such additional or replacement FF&E shall be subject to all of the terms
of Section 2.1 above.
2.5. GROUP may provide additional equipment at the Practice ("GROUP
Equipment") at its sole cost and expense. GROUP shall be responsible for all
repairs, maintenance and replacement of, as well as all property taxes and other
assessments relating to or arising out of ownership or use of, such additional
equipment, unless GROUP requests that Manager provide such repairs, maintenance
and replacement upon such terms and conditions as the parties may agree
including, without limitation, an increase in the Management Fee (as defined in
Section 9 below). Title to said GROUP Equipment shall remain in GROUP's name at
all times.
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2.6. All revenues of the GROUP derived directly or indirectly from
any and all FF&E or GROUP Equipment located at or used in connection with the
Practice, shall be included in "Gross Revenues" as defined in Exhibit "D."
3. MANAGER RESPONSIBILITIES.
3.1. During the term of this Agreement, GROUP appoints and engages
Manager to serve as its exclusive manager and administrator of all non-physician
functions and services relating to the operation of the Practice, and Manager
agrees to furnish to GROUP those Management Services set forth below.
Notwithstanding such appointment and engagement, GROUP will have exclusive
authority and control over the professional aspects of the Practice to the
extent the same constitute or directly affect the practice of medicine,
including all diagnosis, treatment and ethical determinations with respect to
patients which are required by applicable law to be decided by a physician.
3.1.1. GENERAL ADMINISTRATIVE SERVICES. Manager shall
provide general business management, administration and supervision for the
business operations of GROUP, which shall include secretarial and other office
personnel support services, staff support for GROUP'S board of directors and
committee meetings, administrative record keeping, and other similar
administrative services required in the day-to-day operation of GROUP.
3.1.2. ACCOUNTING AND FINANCIAL MANAGEMENT SERVICES.
Manager shall provide the following accounting and financial management
services:
3.1.2.1. Manager shall have exclusive
decision-making authority with respect to the establishment and preparation of
annual budgets for the Practice, which budgets shall reflect in reasonable
detail anticipated revenues and expenses.
3.1.2.2. Manager shall, in consultation with
GROUP, establish bank accounts in the name of GROUP ("Accounts") for the deposit
of all sums received by GROUP for services provided to Members. GROUP agrees
that Manager shall have the authority to endorse all checks made payable to
GROUP and deposit checks and funds received by GROUP in Accounts. Manager shall
further have the authority to make transfers of funds to Accounts and further,
Manager shall have the authority to sign checks and stop payment on any checks
drawn on Accounts.
3.1.2.3. Manager agrees to reconcile checks
written with bank statements on a monthly basis;
3.1.2.4. Manager agrees to make recommendations
regarding check signature approvals and banking procedures of GROUP;
3.1.2.5. Manager agrees to prepare balance sheets
and income statements on a monthly basis during the term of this Agreement.
Such financial statements shall
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not be audited statements. Manager agrees to cooperate with any annual audit
GROUP obtains at its sole cost and expense by an independent public accountant
selected by GROUP;
3.1.2.6. Manager shall receive and deposit on a
timely basis capitation and other payments received by GROUP;
3.1.2.7. Manager shall calculate primary care
capitation and specialty, ancillary and other payable claims based on the
records provided by the Participating Plans and shall prepare checks to pay such
amounts due and shall mail said payments to the respective providers;
3.1.2.8. Manager shall monitor Plan subscribers
or enrollees exceeding stop loss deductibles and communicate with Plans orally
or in writing to seek reimbursement on behalf of GROUP;
3.1.2.9. Manager shall bill other payors for
coordination of benefits and other third party liability payments according to
the terms of the Plan/GROUP Agreements;
3.1.2.10. Manager shall administer capitation and
other distributions from Plans including auditing and monitoring of risk pools,
negotiation settlement of GROUP's share of such pools and establishment and
maintenance of incurred but not reported ("IBNR") reserves for GROUP;
3.1.2.11. Manager shall monitor any other revenue
receipt programs Plans may have, including but not limited to pre-existing
pregnancy recovery, and seek reimbursement from said Plans; and
3.1.2.12. Manager shall assist GROUP in
establishing and administering a physician incentive system and a system to
establish and adjust reserves for medical expenses.
3.1.3. OFFICE SERVICE; BILLING. Manager shall provide
bookkeeping and accounting services, including, without limitation, maintenance,
custody and supervision of GROUP's business records, papers and documents,
ledgers, journals and reports, and the preparation, distribution and recording
of all bills and statements for professional services rendered by GROUP, as well
as all reports and forms required by applicable third party payors. GROUP shall
at all times have the ultimate responsibility for setting all fees for
professional services provided on a fee for service basis to patients of the
Practice, as well as negotiating with each managed care contract Payor. All
billings for services rendered to patients by the Practice shall be made under
GROUP's name and provider number(s), and Manager shall act as GROUP's agent in
the preparation, rendering and collection of such billings. GROUP hereby
appoints Manager for the term hereof as its true and lawful agent for the
following purposes:
3.1.3.1. to bill patients in GROUP's name and on
its behalf;
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3.1.3.2. to collect accounts receivable generated
by such billings in GROUP's name and on GROUP's behalf;
3.1.3.3. to submit, process and collect all
claims for payment to, and receive on behalf of GROUP payments from, the
patients, Plans, Medicare, Medicaid, and all other third-party payors;
3.1.3.4. to take possession of, endorse and
deposit in the name and on behalf of GROUP to one or more Accounts designated by
GROUP any notes, checks, money orders, insurance payments, and any other
instruments received as payment of accounts receivable; and
3.1.3.5. to collect in GROUP's name and on its
behalf all collections of Gross Revenues (as defined in Exhibit "D" hereto).
3.1.4. CLAIM SETTLEMENT; EXCULPATION. GROUP acknowledges
and agrees that Manager shall have discretion to compromise, settle, write off
or determine not to appeal a denial of any claim for payment for any particular
professional service rendered at the Practice. Further, GROUP agrees to hold
harmless Manager and its officers, directors, agents, contractors,
representatives and employees, from and against any and all liability, loss,
damages, claims, causes of action, and expenses associated therewith (including,
without limitation, attorneys' fees) caused or asserted to have been caused,
directly or indirectly, by or as a result of any acts, errors or omissions
hereunder of Manager or any of its officers, directors, agents, contractors,
representatives and employees, in performing Manager's billing or collection
duties hereunder.
3.1.5. FINANCIAL REPORTS. Manager shall furnish to GROUP
monthly and annual financial reports reflecting the GROUP's financial status,
provided that Manager shall have no obligations with respect to any
shareholder's of GROUP personal finances or any tax returns of the GROUP or any
shareholder of GROUP.
3.1.6. PROVIDER CONTRACT ADMINISTRATION. During the term
of this Agreement, Manager shall provide the following provider contract
administration services to GROUP:
3.1.6.1. Identify and solicit participation of
health care providers identified by the GROUP as necessary for GROUP operations;
3.1.6.2. Review and make recommendations
regarding the business terms of agreements between GROUP and Participating
Providers;
3.1.6.3. Make recommendations regarding
compensation to Participating Providers;
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3.1.6.4. Make recommendations for the
development, in conjunction with GROUP, of guidelines for the selection, hiring
or firing of Participating Providers;
3.1.6.5. Make recommendations regarding the
definition of primary, specialty and ancillary services;
3.1.6.6. Establish and exercise exclusive
decision-making authority over the establishment of GROUP policies and
procedures, including without limitation, patient acceptance policies and
procedures, except with respect to the professional aspects of the Practice to
the extent the same constitute or directly affect the practice of medicine which
are required by applicable law to be decided by a physician;
3.1.6.7. Instruct all Participating Providers and
their office staff regarding established GROUP policies and procedures at least
annually during the term of this Agreement.
3.1.6.6. Coordinate the preparation, negotiation
and renewal of GROUP Participating Provider Agreements.
3.1.7. ADMINISTER MEMBER ELIGIBILITY PROCESS. Manager
shall provide the following services regarding administration of the member
eligibility process:
3.1.7.1 Maintain and update a current
eligibility list to Plan subscribers and enrollees under all Plan agreements.
3.1.7.2 Verify eligibility on claims and
referrals based on the most current information provided by Plans;
3.1.7.3 Administer system for retroactive
eligibility determination and assist GROUP in identifying outstanding accounts
receivable from ineligible patients.
3.1.8. UTILIZATION MANAGEMENT/QUALITY ASSURANCE. Manager
agrees to provide the following services regarding utilization management and
quality assurance.
3.1.8.1. Manager shall implement systems,
programs and procedures necessary for GROUP and Participating Providers to
perform utilization and quality management.
3.1.8.2 Manager shall recommend procedures for
prior authorization of elective, urgent and emergent out-patient ambulatory
surgery and hospital procedures;
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3.1.8.3 Manager shall assist GROUP with
prospective, concurrent and retrospective review of medical procedures in
accordance with GROUP policies and Plan requirements;
3.1.8.4 Manager shall provide data regarding the
use of outpatient and inpatient services by provider to GROUP;
3.1.8.5 Manager shall provide data regarding the
use of noncontracting providers;
3.1.8.6 Manager shall provide secretarial
support, logs, and minutes to the Medical Director and the Quality and
Utilization Management Committee of GROUP;
3.1.8.7 Manager shall assist Medical Director
and the Quality and Utilization Management Committee in responding to Plan
Member grievances based on the instructions of the Medical Director;
3.1.8.8 Manager shall provide staff assistance
to GROUP in the credentialing process GROUP is required to conduct to assure
that providers have current licenses and medical staff privileges.
3.1.9. SUPPLIES. Manager shall order and purchase all
supplies required by GROUP in connection with the operation of the
administrative office of the Practice, including furnishing to GROUP all
necessary forms, supplies, postage and duplication services, provided that all
supplies acquired and services provided shall be reasonably necessary in
connection with the day-to-day operations of the Practice.
3.1.10. FILING OF REPORTS. Manager shall prepare and file
all forms, reports, and returns required by law in connection with unemployment
insurance, workers' compensation insurance, disability benefits, social
security, and other similar laws (excluding income or franchise tax forms of
GROUP or any of GROUP's shareholders, employees or contractors or providing any
other tax-related services on their behalf) now in effect or hereafter imposed.
3.1.11. MARKETING AND PUBLIC RELATIONS SERVICES. Manager
will assist GROUP in GROUP's marketing, public relations and advertising of the
health care services provided by GROUP. Manager, shall provide and be
principally responsible for marketing and advertising services for GROUP and
prepare signs, brochures, letterhead, advertisements, and other marketing
materials for GROUP. Manager may, at its discretion, contract with third
parties to assist it in the provision of GROUP marketing and public relations
services, should Manager deem such action advisable. Manager shall produce and
distribute such written descriptive materials concerning GROUP's professional
services, subject to the prior approval of GROUP, as may be necessary or
appropriate to the conduct of the Practice. In providing such marketing
services, Manager is acting solely in its capacity as administrator for the
GROUP. At no time
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shall Manager hold itself out as providing, or actually provide, medical
services on behalf of GROUP. All such marketing services shall be conducted in
accordance with the laws, rules, regulations and guidelines of all applicable
governmental and quasi-governmental agencies, including but not limited to the
Medical Board of California. Manager shall be the owner and holder of all
right, title and interest in and to any such marketing and advertising
materials.
3.1.12. PROFESSIONAL AND OTHER SERVICES. Manager shall be
responsible for arranging and paying for payroll, legal and accounting services
related to GROUP operations in the ordinary course of business, including the
cost of enforcing any managed care plan, physician or subcontractor contracts,
but excluding the cost of malpractice suits.
3.2. MANAGED CARE CONTRACTING.
3.2.1. Manager shall act as GROUP's exclusive agent in
seeking and negotiating managed care contracts ("Contracts"). Manager is hereby
authorized to negotiate, in its sole discretion, all terms of the Contracts.
GROUP hereby appoints Manager for the term hereof as its true and lawful agent
to perform all actions contemplated by this Section including, without
limitation, the evaluation, negotiation, administration, renewal and execution
of Contracts on GROUP's behalf and binding GROUP to performance thereunder,
provided that the Plan with whom each Contract is entered agrees to pay an
amount for GROUP's professional services thereunder equal to or greater than the
minimum rate that GROUP shall specify to Manager. GROUP shall complete and
execute the Power of Agency attached hereto as Exhibit "C."
3.2.2. Manager shall also be responsible for general
monitoring of GROUP compliance with the requirements, terms and conditions of
Plan Contracts.
3.2.3. Manager shall notify and provide copies to GROUP of
each Contract (together with all related materials received from the applicable
Payor) that Manager executes as GROUP's agent. GROUP shall comply with all
terms of each Contract including, without limitation, the terms of all documents
or instruments incorporated therein by reference and all documents or
instruments related thereto that Manager executes or agrees to on GROUP's
behalf, as well as all applicable law. GROUP further agrees that an essential
term of this Agreement is GROUP's undertaking to provide cost-effective medical
care consistent with accepted medical practices prevailing in the GROUP's
service area.
3.2.4. Nothing in this Agreement shall prevent Manager from
entering into similar agreements with Plans on behalf of other independent
practice associations, medical groups, physicians, health care professionals or
entities comprised of physician or health care professionals.
3.2.5. GROUP acknowledges and agrees that (i) Manager shall
in no way be responsible for payment of any sums payable to GROUP under any such
Contract (whether by any Payor or otherwise), and (ii) Manager in no way
guarantees or insures the payment to GROUP of any such amounts.
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3.3. PERSONNEL. Manager shall employ or contract with and provide
all necessary non-physician personnel, including quality assurance, utilization
review, claims processing, secretarial and clerical personnel as are reasonably
necessary for the conduct of the Practice (collectively, "Manager Personnel").
Manager shall, in its sole and absolute discretion, determine the types and
numbers of personnel and the number of hours and schedules of said personnel it
determines are necessary or appropriate to provide the administrative and
management services to be provided pursuant to this Agreement. Manager shall
provide such personnel at its sole cost and expense and such personnel may, at
the sole and absolute discretion of Manager, be employees or independent
contractors of Manager. Manager shall, in its sole and absolute discretion,
have the right, but shall not be required, to engage as Manager Personnel any or
all of those individuals who were employees of GROUP immediately prior to the
effective date hereof ("GROUP's Former Employees"). Manager shall have sole
control over promotion and employee disciplinary and termination matters with
respect to Manager Personnel (including, without limitation, GROUP's Former
Employees), and shall not be responsible for any accrued vacation, paid time off
or other benefits to such individuals that have accrued prior to the date that
Manager engages them as its employees.
3.4. All professional medical and health care services provided to
subscribers or enrollees shall be the ultimate responsibility of the GROUP's
Participating Providers. GROUP shall use its best efforts to cause
Participating Providers to cooperate with Manager in the implementation of the
protocols, programs, policies, and procedures developed for GROUP by Manager.
3.5. Manager is hereby expressly authorized by GROUP to perform all
services required of Manager pursuant to the terms of this Agreement in the
manner Manager deems reasonable and appropriate to meet the day-to-day
requirements of GROUP. To the extent required or desirable to enable Manager to
perform such services, GROUP hereby appoints Manager for the term hereof as its
true and lawful agent. GROUP acknowledges and agrees that Manager may
subcontract with other persons or entities, including entities related to
Manager by ownership or control, to perform any part or all of the services
required of Manager hereunder.
3.6. Subject to applicable securities, health care and other laws
or regulations, Manager agrees to use its best efforts to cause the holding
company of Manager to issue, or otherwise make available, stock or
exchange-listed stock options or warrants of such holding company for use as
consideration for the acquisition by GROUP of medical groups, IPAs or other
forms of physician practices or, as consideration for any other appropriate use.
3.7. Upon the request of GROUP, Manager shall provide or arrange
for the provision of additional services, beyond those described herein. Any
additional services provided by Manager are subject to Manager's capacity and
availability to provide the services so requested. Should Manager provide such
additional services, GROUP agrees to pay Manager for such services at its then
current rates as a supplemental payment to the Management Fee described herein.
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3.8. Notwithstanding any other provision contained herein, Manager
shall not be liable to GROUP and shall not be deemed to be in default hereunder
for the failure to perform or provide any of the services, personnel or other
obligations to be performed or provided by Manager pursuant to this Agreement if
such failure is a result of collective bargaining, a labor dispute, act(s) of
God, or any other event which is beyond the reasonable control of Manager or
which was not reasonably foreseeable by Manager.
4. RESPONSIBILITIES OF GROUP.
4.1. GROUP covenants and agrees that, at all times during the term
of this Agreement and any extension thereof, it shall conduct all corporate
activities required by its Articles of Incorporation and Bylaws, including but
not limited to election of a Board of Directors, election of Officers,
appointment of committee members including but not limited to the Quality and
Utilization Management Committee. In addition, GROUP agrees to appoint a
Medical Director. GROUP shall be solely responsible for payment of any and all
compensation, payroll taxes, fringe benefits, disability insurance, workers'
compensation insurance and any other benefits of all such individuals.
4.2. GROUP shall not enter into any agreements with Participating
Providers unless such Participating Providers have: (i) current unrestricted
licenses to practice their respective professions in the State of California and
(ii) current unrestricted Federal Drug Enforcement Agency ("DEA") numbers. In
addition, where GROUP contracts with individual physicians, such physicians
shall have medical staff membership at the hospitals required by Participating
Plans and where GROUP contracts with licensed clinics and medical groups, at
least one primary care physician practicing at each clinic or medical group
shall have medical staff membership at the hospitals required by Participating
Plans. GROUP further agrees to establish procedures to ensure that
Participating Providers meet these requirements on an ongoing basis. Manager
shall reasonably cooperate with and assist GROUP to meet its obligations under
this Section 4.2; provided however, that GROUP acknowledges and agrees that it
shall retain ultimate responsibility for meeting such obligations.
4.3. GROUP acknowledges and agrees that it is solely responsible
for making all required reports to the Medical Board of California under Section
805 of the California Business and Professions Code and the National
Practitioner Data Bank.
4.4. GROUP shall, at its sole cost and expense, procure and
maintain at all times during the term of this Agreement comprehensive general
and professional liability insurance covering all activities of GROUP directly
or indirectly relating to GROUP, each policy in a minimum amount of
$1,000,000.00 per occurrence and $3,000,000.00 in the aggregate. The
aforedescribed comprehensive general and professional liability insurance shall
be issued by a company or companies authorized to do business in California with
a financial rating of at least A:12 or better in "Best's Key Rating Guide" or
its equivalent. In the event GROUP procures a "claims made" policy as
distinguished from an "occurrence" policy, GROUP shall procure and maintain at
its sole cost and expense, prior to termination of such insurance, "tail"
coverage to continue and extend coverage complying with this Agreement after the
end of the "claims made"
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policy. Upon reasonable request from Manager, GROUP shall cause to be issued to
Manager proper certificates of insurance, evidencing that the foregoing
provisions of this Agreement have been complied with, and said certificates
shall provide that prior to any cancellation or change in the underlying
insurance during the policy period, the insurance carrier shall first give
thirty (30) calendar days written notice to Manager.
4.5. Subject to the terms and conditions of Sections 3.1.6.3 and
3.1.6.4 herein, GROUP shall, at its sole cost and expense, including, but not
limited to, the payment of all salaries, benefits, medical malpractice
insurance, employ or contract with such physicians as shall be reasonably
necessary for the conduct of the Practice.
4.6. GROUP shall ensure that Participating Providers procure and
maintain professional liability insurance with minimum coverage amounts of
$1,000,000.00 per occurrence and $3,000,000.00 in the aggregate. GROUP shall
ensure that any Participating Provider who procures insurance required hereunder
on a "claims made" rather than an "occurrences" form will obtain either extended
reporting insurance coverage ("tail coverage") with liability limits equal to
those most recently in effect prior to the day of termination of such
Participating Provider's contract with GROUP, or will enter into such other
arrangements as shall reasonably assure the maintenance of coverage for such
Provider, GROUP, and Manager against the risk of loss in respect of professional
services rendered by such provider while this Agreement was in effect and for a
period of not less than seven (7) years after the date of termination of this
Agreement.
4.7. GROUP acknowledges and agrees that it shall reasonably assist
and cooperate with Manager to meet all of Manager's obligations under this
Agreement, including approval of agreements and provision of information. GROUP
acknowledges and agrees that Manager shall have no liability for GROUP's failure
to pay any and all of GROUP's debts and expenses.
5. TERM; TERMINATION.
5.1. TERM. The term of this Agreement (the "Term") shall commence
on the date hereof and shall expire on the thirtieth (30th) annual anniversary
hereof unless earlier terminated as provided below. The term of this Agreement
shall be automatically extended for additional terms of ten (10) years each,
unless either party delivers to the other party, not less then twelve (12)
months nor earlier than fifteen (15) months prior to the expiration of the
preceding term, written notice of such party's intention not to extend the term
of this Agreement.
5.2. TERMINATION FOR CAUSE.
5.2.1. Manager may terminate this Agreement for cause at
any time during the Term immediately upon written notice (except as otherwise
provided below). For purposes of this Section 5.2.1 "cause" shall include,
without limitation, the following:
5.2.1.1. If Group fails to materially perform any
obligation required hereunder, and such default shall continue for sixty (60)
calendar days after written notice
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from Manager specifying the nature and extent of failure to materially perform
such obligation, this Agreement shall terminate automatically and immediately
upon the expiration of said sixty (60) calendar day period; provided, however,
that if the obligation which Group fails to perform is other than the failure to
make payment of money, and greater than sixty (60) calendar days are required to
perform said obligation, then such party shall not be in default of this
Agreement and the Agreement shall not terminate as provided hereinabove if such
party commences performance within said sixty day period and diligently pursues
said obligation to completion.
5.2.1.2. In the event the performance by either
party hereto of any term, covenant, condition or provision of this Agreement
should be determined by a state or federal court or governmental agency or court
of law to be in violation of any statute, ordinance, or be otherwise deemed
illegal ("Jeopardy Event"), then the parties shall use their best efforts to
meet forthwith and attempt to negotiate an amendment to this Agreement to remove
or negate the effect of the Jeopardy Event. In the event the parties are unable
to negotiate such an amendment within thirty (30) days following written notice
by either party of the Jeopardy Event, then Manager may terminate this Agreement
immediately upon written notice.
5.2.2. GROUP may terminate this Agreement for cause at any
time during the Term immediately upon written notice (except as otherwise
provided below). For purposes of this Section 5.2.2 "cause" shall include,
without limitation, the following:
5.2.2.1. If Manager fails to materially perform
any obligation required hereunder which failure amounts to gross negligence,
fraud or an illegal act on the part of Manager, and such default shall continue
for sixty (60) calendar days after written notice from GROUP specifying the
nature and extent of failure to materially perform such obligation, this
Agreement shall terminate automatically and immediately upon the expiration of
said sixty (60) calendar day period; provided, however, that if the obligation
which Manager fails to perform is other than the failure to make payment of
money, and greater than sixty (60) calendar days are required to perform said
obligation, then such party shall not be in default of this Agreement and the
Agreement shall not terminate as provided hereinabove if such party commences
performance within said sixty day period and diligently pursues said obligation
to completion.
5.2.3. Either party may terminate this Agreement for cause at
any time during the Term immediately upon written notice. For purposes of this
Section 5.2.3 "cause" shall include, without limitation, the following:
5.2.3.1. If either party shall apply for or
consent to the appointment of a receiver, trustee or liquidator in bankruptcy,
make a general assignment for the benefit of creditors, file a petition or
answer seeking reorganization or arrangement with creditors, or take advantage
of any bankruptcy, insolvency, reorganization, moratorium or other law for the
benefit of creditors, or if any order, judgment, or decree shall be entered by
any court of competent jurisdiction on the application of a creditor or
otherwise adjudicating either party bankrupt or approving a petition seeking
reorganization of either party or appointment of a receiver, trustee or
liquidator of either party of all or a substantial part of its assets, and such
order, judgment or decree shall continue stayed and in effect for sixty (60)
calendar days after its
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entry, termination shall be effective automatically and immediately upon the
occurrence of the foregoing.
5.3. JEOPARDY. In the event the performance by either party hereto
of any term, covenant, condition or provision of this Agreement should be
determined by a state or federal court or governmental agency to be in violation
of any statute, ordinance, or be otherwise deemed illegal ("Jeopardy Event"),
then the parties shall use their best efforts to meet forthwith and attempt to
negotiate an amendment to this Agreement to remove or negate the effect of the
Jeopardy Event. In the event the parties are unable to negotiate such an
amendment within thirty (30) days following written notice by either party of
the Jeopardy Event, then either party may terminate this Agreement immediately
upon written notice.
6. RIGHTS OF MANAGER UPON TERMINATION.
6.1. In the event of the termination of this Agreement for any
reason, including without limitation the breach of this Agreement by either
party, Manager shall be entitled to recover (out of the Accounts (as defined in
Section 3.1.2.2 hereof) or otherwise) from GROUP all fees, and any and all
advances and other charges owed to Manager that had accrued but were unpaid as
of the date of termination.
6.2. In the event of termination of this Agreement for any reason,
Manager shall remain entitled to its Management Fee with respect to all Gross
Revenues (as defined in Exhibit "D" hereto) that have accrued on or before the
effective date of termination, which shall be payable, without limitation, out
of Net Revenues attributable thereto whether received before, on or after the
effective date of termination. Further, GROUP shall remain obligated to
reimburse Manager for any and all other unpaid Management Fees that have accrued
hereunder as of the date of termination.
7. REPRESENTATIONS AND WARRANTIES OF GROUP. The following
representations and warranties of GROUP are made to Manager for the purpose of
inducing Manager to enter into this Agreement. GROUP represents and warrants as
follows:
7.1. GROUP is a corporation duly organized, validly existing and in
good standing under the laws of the State of California and has all necessary
corporate powers to own its properties and to operate pursuant to its corporate
purposes.
7.2. GROUP's Board of Directors has all requisite power to execute,
deliver and perform this Agreement. Neither the execution and delivery of this
Agreement, nor the consummation and performance of the transaction contemplated
in this Agreement, shall constitute a default or an event that would constitute
a default under, or violation or breach of, GROUP's Articles of Incorporation,
Bylaws or any license, lease, franchise, mortgage, instrument, or other
agreement to which GROUP may be bound.
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7.3. GROUP has furnished Manager full and complete copies of all
contracts and agreements affecting GROUP including, but not limited to, all
contracts to which GROUP is a party.
7.4. GROUP and any and all physicians providing services to
Participating Plans have each complied with, and are not in violation of,
applicable federal, state or local statutes, laws and regulations including, but
not limited to, statutes, laws and regulations regarding the practice of
medicine and surgery in California, participation in the Medicaid and Medicare
programs or the operation of GROUP and all applicable standards of practice
relating to the provision of professional services hereunder.
7.5. GROUP and any and all Participating Providers providing
services for the GROUP have each obtained and currently maintain all necessary
licenses, permits, contracts, and approvals required by federal, state or local
statutes and regulations for the proper conduct of the business of the GROUP as
it is now being conducted and have been approved by the Board of Directors or
its properly designated committee, as documented by written committee minutes.
7.6. There is no action, suit, proceeding, investigation or
litigation outstanding, pending or, to the best of GROUP's knowledge,
threatened, affecting GROUP other than routine patient collection matters and
professional liability cases adequately covered by insurance.
7.7. GROUP represents and warrants that each GROUP Participating
Provider is as of the date hereof, and shall at all times during the term hereof
be and remain:
7.7.1. duly licensed to practice medicine within the State
of California and in possession of a federal DEA number, all without limitation,
restriction or condition whatsoever;
7.7.2. entitled to receive Medicare and Medicaid
reimbursement without limitation, restriction or condition whatsoever;
7.7.3. in compliance with the insurance requirements set
forth in Section 4.6 hereof.
7.8. GROUP represents and warrants that it and each GROUP
Participating Provider shall (i) comply with all applicable governmental laws,
regulations, ordinances, and directives and (ii) perform his or her work and
functions at all times in strict accordance with currently approved methods and
practices in his or her field.
7.9. GROUP represents and warrants that, as of the date hereof:
7.9.1. (i) All of GROUP's Former Employees have been
properly terminated as of the closing under the Stock Purchase Agreement (the
"Closing") without creating any cause of action or otherwise giving rise to any
liability for wrongful discharge, breach of contract, tort or other cause of
action at law or in equity, and there are no such actions pending or, to GROUP's
knowledge, threatened, and GROUP has satisfied all obligations to such
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employees for all accrued salaries and benefits. Any current non-professional
employees of GROUP related to the Practice ("Practice Employees") are subject to
such other disposition as is satisfactory to Manager.
7.9.2. There is no liability to any employee or third
party, including any governmental agency, for any employee benefits,
compensation, taxes or withholdings of any kind with respect to any of the
Practice Employees other than those items arising in the normal course of
business immediately prior to the Closing, all of which items shall be set forth
in Schedule 7.9.2. There are no accrued vacations or sick leave for any of the
Practice Employees for which Manager may become liable by reason of any of the
transactions contemplated under this Agreement. GROUP shall be solely
responsible to comply with the requirements, if any, of the federal Worker
Adjustment and Retraining Notification Act.
7.9.3. There are no threats of strikes or work stoppages by
any of the Practice Employees. The GROUP is not a party to any contract or
agreement with a labor union or any local or subdivision thereof, and has not
been charged with any unresolved unfair labor practices, and there are no labor
grievances or any present union organizing activity among any of the Practice
Employees.
8. REPRESENTATIONS AND WARRANTIES OF MANAGER. The following
representations and warranties of Manager are made to GROUP for the purpose of
inducing GROUP to enter into this Agreement. Manager represents and warrants as
follows:
8.1. Manager is a corporation duly organized, validly existing and
in good standing under the laws of the State of California and has all necessary
corporate powers to own its properties and to operate pursuant to its corporate
purposes.
8.2. Manager has all requisite power to execute, deliver and
perform this Agreement. Neither the execution and delivery of this Agreement,
nor the consummation and performance of the transaction contemplated in this
Agreement, shall constitute a default, or an event that would constitute a
default under, or violation or breach of, Manager's Certificate of
Incorporation, Bylaws or any license, lease, franchise, mortgage, instrument, or
other agreement to which Manager may be bound.
8.3. There is no action, suit, proceeding, investigation or
litigation outstanding, pending or, to the best of Manager's knowledge,
threatened, affecting Manager.
9. MANAGER COMPENSATION.
9.1. As compensation for its services hereunder, Manager shall be
reimbursed its Costs (as defined in Exhibit D attached hereto) and paid a
management fee (the "Management Fee") in the amount set forth on Exhibit D
attached hereto and incorporated herein by reference.
9.2. After deduction of amounts which are reimbursed to Manager and
which are retained by Manager as Management Fee compensation, all remaining
Gross Revenues shall
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be remitted to GROUP. From such sums, Manager shall pay, on GROUP's behalf, the
Cost of Medical Services (as defined in Exhibit D attached hereto), such other
payments or disbursement which Manager may be authorized or required to make
pursuant to this Agreement and such payments or disbursements which GROUP shall
direct Manager to make. Should the funds in GROUP's accounts not be sufficient
at any time during the term of this Agreement to make such disbursements and to
meet the GROUP's financial obligations, Manager shall have the right (but not
the obligation) to loan to GROUP funds in an amount sufficient to allow GROUP to
meet its financial obligations. Such loan shall bear interest at a rate that is
at or above fair market value and shall have such other terms as the parties may
agree from time to time. Manager shall not lend any funds to GROUP for such
purposes without the prior approval of GROUP's Board of Directors or the
officer(s) of GROUP delegated such power of approval by GROUP's Board of
Directors.
10. RECORDS.
10.1. All medical records and documents, including reports, x-rays,
and other similar types of reports for patients of GROUP providers shall be the
property of GROUP's providers. GROUP agrees to require GROUP providers to allow
Manager and its duly authorized representatives to inspect, audit and duplicate
any data or records necessary for Manager to perform its duties pursuant to this
Agreement. GROUP and Manager shall comply with all applicable federal, state,
and local laws and regulations pertaining to the confidentiality of said medical
records.
10.2. All business records, information, software and systems of the
Manager relating to the provision of its services under this Agreement shall
remain the property of the Manager and may be removed by the Manager upon any
termination of this Agreement.
11. INDEMNIFICATION. Each party shall indemnify, defend and hold harmless
the other, its officers, directors, agents, contractors, representatives and
employees, and each of its affiliates from and against any and all liability,
loss, damages, claims, causes of action, and expenses associated therewith
(including, without limitation, attorneys' fees) caused or asserted to have been
caused, directly or indirectly, by or as a result of any acts, errors or
omissions hereunder of the other, its contractors, shareholders, employees or
agents during the term hereof. The provisions of this section shall survive the
expiration or earlier termination of this Agreement.
12. PROPRIETARY INFORMATION.
12.1. At all times during the term hereof and following the
expiration or earlier termination of this Agreement, all trade secrets and
proprietary confidential information of Manager, including without limitation,
all forms of contracts and other business documents or information of Manager,
whether currently or in the future developed or maintained by Manager and
including any and all deletions, additions, modifications and amendments thereto
and further including the amount of compensation to be paid to Manager for its
services hereunder (collectively, "Manager's Proprietary Materials"), shall be
the exclusive, sole and absolute property of Manager. Both parties acknowledge
and agree that Manager has developed Manager's
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Proprietary Materials at significant expense, and that said Proprietary
Materials are not available for review or use by members of the public. All of
Manager's Proprietary Materials are and shall at all times remain confidential
and proprietary and constitute valuable trade secrets of Manager. Except in the
ordinary course of performing its obligations under this Agreement and except
upon Manager's prior written consent, GROUP shall not disclose to anyone, use,
copy, or take any such trade secrets or confidential and proprietary information
for GROUP's benefit or gain either during the term of this Agreement or at any
time after the termination hereof. Upon any expiration or earlier termination
of this Agreement for any reason, GROUP shall not, without the prior written
consent of Manager, take or use any of Manager's Proprietary Materials, and
shall return to Manager all of Manager's Proprietary Materials in GROUP's
possession or control.
12.2. At all times during the term hereof and following the
termination of this Agreement, GROUP shall not, directly or indirectly,
interfere with, disrupt or attempt to disrupt the relationship, contractual or
otherwise, between Manager and any health care provider or supplier (including,
without limitation, any physician or osteopath), or any employee, independent
contractor, consultant or agent of Manager. GROUP further agrees not to hire,
engage or contract with, either as an independent contractor, employee or in any
other capacity, any personnel of Manager, other than personnel of Manager who
are GROUP's Former Employees, during the first twelve (12) months following the
effective expiration or termination date hereof without Manager's prior written
consent.
12.3. The provisions of this Section 12 shall survive the
termination of this Agreement.
13. INDEPENDENT CONTRACTORS. The parties hereto acknowledge and agree
that the relationship created between Manager and GROUP is strictly that of
independent contractors. Nothing contained herein shall be construed as
creating a partnership or joint venture relationship between the parties. Each
party hereto shall be responsible for all compensation, salaries, taxes,
withholdings, contributions, benefits, and workers' compensation insurance with
respect to all personnel employed or contracted by said party and shall
indemnify, defend and hold harmless the other party and its officers, directors,
agents, contractors, representatives and employees (and, in the case of GROUP's
indemnification of Manager, Manager's affiliates and subcontractors) from and
against any and all liability, loss, damages, claims, causes of action, and
expenses associated therewith (including, without limitation, attorneys' fees)
caused or asserted to have been caused, directly or indirectly, by or as a
result of same. The provisions of this Section shall survive the expiration or
earlier termination of this Agreement.
14. ASSIGNABLE OPTION AGREEMENT. The parties shall enter into an
Assignable Option Agreement in the form attached hereto as Exhibit E.
15. MISCELLANEOUS.
15.1. NO THIRD PARTY BENEFICIARIES. The parties intend that the
benefits of this Agreement shall inure only to Manager and GROUP and not to any
third person, except as expressly so stated herein. Notwithstanding anything
contained herein, or any conduct or course
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of conduct by any party hereto, before or after signing this Agreement, this
Agreement shall not be construed as creating any right, claim or cause of action
against either Manager or GROUP by any other person or entity.
15.2. ENTIRE AGREEMENT. This Agreement, together with all exhibits
and schedules hereto, and all documents referred to herein, constitutes the
entire agreement between the parties with respect to the subject matter hereof,
supersedes all other and prior agreements on the same subject, whether written
or oral, including but not limited to the Management Services Agreement, made
and entered into as of May 21, 1997, by and between Sierra Medical Management,
Inc., predecessor in interest to Manager hereunder, and GROUP, and contains all
of the covenants and agreements between the parties with respect to the subject
matter hereof. Each party to this Agreement acknowledges that no
representations, inducements, promises, or agreements, orally or otherwise, have
been made by the other party(ies), or by anyone acting on behalf of any party,
that are not embodied herein, and that no other agreement, statement, or promise
not contained in this Agreement shall be valid or binding. This Agreement
incorporates the Original Management Services Agreement, together with all
amendments previously made and to be made to the date of execution hereof, and
is deemed to have been effective as of the date of the Original Management
Services Agreement.
15.3. SUCCESSORS AND ASSIGNS. All of Manager's rights and duties
under this Agreement may be assigned or delegated by Manager, including but not
limited to, an assignment to Imperial Bank, a California banking corporation.
Notwithstanding any other provision of this Agreement, neither this Agreement
nor the rights and duties of this Agreement may be assigned or delegated by
GROUP. This Agreement binds the successors, heirs, and authorized assignees of
the parties.
15.4. COUNTERPARTS. This Agreement, and any amendments thereto, may
be executed in counterparts, each of which shall constitute an original
document, but which together shall constitute one and the same instrument.
15.5. HEADINGS. The section headings contained in this Agreement
are inserted for convenience only and shall not effect in any way the meaning or
interpretation of this Agreement.
15.6. NOTICES. Any notices required or permitted to be given
hereunder by either party to the other shall be in writing and shall be deemed
delivered upon personal delivery or delivery by electronic facsimile;
twenty-four (24) hours following deposit with a courier for overnight delivery;
or seventy-two (72) hours following deposit in the U.S. Mail, registered or
certified mail, postage prepaid, return-receipt requested, addressed to the
parties at the following addresses or to such other addresses as the parties may
specify in writing:
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If to GROUP: Sierra Primary Care Medical Group, Inc.
18200 Yorba Linda Boulevard, Suite 409
Yorba Linda, California 92886
Attention: President
If to Manager: Sierra Medical Management, Inc.
18200 Yorba Linda Boulevard, Suite 409
Yorba Linda, California 92886
Attention: President
15.7. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of California.
15.8. AMENDMENT. This Agreement may be amended at any time by
agreement of the parties, provided that any amendment shall be in writing and
executed by both parties.
15.9. SEVERABILITY. If any provision of this Agreement is held by a
court of competent jurisdiction to be invalid or unenforceable, the remaining
provisions will nevertheless continue in full force and effect, unless such
invalidity or unenforceability would defeat an essential business purpose of
this Agreement.
15.10. EXHIBITS AND SCHEDULES. All exhibits and schedules attached
to this Agreement are incorporated herein by this reference and all references
herein to "Agreement" shall mean this Agreement together with all such exhibits
and schedules.
15.11. TIME OF ESSENCE. Time is expressly made of the essence of
this Agreement and each and every provision hereof of which time of performance
is a factor.
15.12. DISPUTE RESOLUTION.
15.12.1. Subject to the terms of Section 15.12.2, in the event
the parties hereto are unable to resolve any and all disputes in connection with
this Agreement, either party may commence arbitration by sending a written
demand for arbitration to the other party, setting forth the nature of the
matter to be resolved by arbitration. Except as may be expressly provided to
the contrary herein, the arbitration procedure described in this Section shall
be the sole means of resolving any disputes hereunder.
15.12.2. Notwithstanding the foregoing, it is expressly
understood by the parties that the arbitration procedure described in this
Section shall not be applicable to any disputes between the parties as to
matters over which Manager has exclusive decision-making authority pursuant to
the terms hereof, including without limitation, the Manager's exclusive
decision-making authority with respect to the development of guidelines for the
selection, hiring and firing of health care professionals, compensation payable
to health care professionals, scope of services to be provided, patient
acceptance policies and procedures, pricing of services, negotiation and
execution of contracts, and approval of operating and capital budgets.
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15.12.3. There shall be one arbitrator. If the parties shall
fail to select a mutually acceptable arbitrator within ten (10) days after the
demand for arbitration is mailed, then the parties stipulate to arbitration
before a retired judge sitting on the Los Angeles Judicial Arbitration Mediation
Services (JAMS) panel.
15.12.4. The parties shall share all costs of arbitration.
The prevailing party shall be entitled to reimbursement by the other party of
such party's attorneys' fees and costs and any arbitration fees and expenses
incurred in connection with the arbitration hereunder.
15.12.5. The substantive law of the State of California shall
be applied by the arbitrator. The parties shall have the rights of discovery as
provided for in Part 4 of the California Code of Civil Procedure and as provided
for in Section 1283.05 of said Code. The California Code of Evidence shall
apply to testimony and documents submitted to the arbitrator.
15.12.6. Arbitration shall take place in Los Angeles,
California unless the parties otherwise agree. As soon as reasonably
practicable, a hearing with respect to the dispute or matter to be resolved
shall be conducted by the arbitrator. As soon as reasonably practicable
thereafter, the arbitrator shall arrive at a final decision, which shall be
reduced to writing, signed by the arbitrator and mailed to each of the parties
and their legal counsel.
15.12.7. All decisions of the arbitrator shall be final,
binding and conclusive on the parties and shall constitute the only method of
resolving disputes or matters subject to arbitration pursuant to this Agreement.
The arbitrator or a court of appropriate jurisdiction may issue a writ of
execution to enforce the arbitrator's judgment. Judgment may be entered upon
such a decision in accordance with applicable law in any court having
jurisdiction thereof.
15.12.8. Notwithstanding the foregoing, because time is of the
essence of this Agreement, the parties specifically reserve the right to seek a
judicial temporary restraining order, preliminary injunction, or other similar
short term equitable relief, and grant the arbitrator the right to make a final
determination of the parties' rights, including whether to make permanent or
dissolve such court order.
15.12.9. Notwithstanding the foregoing, any and all
arbitration proceedings are conditional upon such proceedings being covered
under the parties' respective risk insurance policies.
15.13. ATTORNEYS' FEES. Should either party institute any action or
procedure to enforce this Agreement or any provision hereof, or for damages by
reason of any alleged breach of this Agreement or of any provision hereof, or
for a declaration of rights hereunder (including, without limitation,
arbitration), the prevailing party in any such action or proceeding shall be
entitled to receive from the other party all costs and expenses, including
without limitation reasonable attorneys' fees, incurred by the prevailing party
in connection with such action or proceeding.
22
<PAGE>
15.14. FURTHER ASSURANCES. The parties shall take such actions and
execute and deliver such further documentation as may reasonably be required in
order to give effect to the transactions contemplated by this Management
Services Agreement and the intentions of the parties hereto.
15.15. RIGHTS CUMULATIVE. The various rights and remedies herein
granted to Manager or GROUP shall be cumulative and in addition to any other
rights Manager or GROUP, respectively, may be entitled to under law. The
exercise of one or more rights or remedies shall not impair the right of Manager
or GROUP to exercise any other right or remedy, at law or equity.
15.16. FEDERAL SOCIAL SECURITY REQUIREMENTS. Pursuant to Section
1395x (V)(1)(I) of Title 42 of the United States Code, with respect to any
services furnished under the terms of this Agreement if the value or cost of
which is Ten Thousand Dollars ($10,000) or more over a twelve (12) month period,
until the expiration of four (4) years after the termination of this Agreement,
Manager shall make available upon written request to the Secretary of the United
States Department of Health and Human Services, or upon request by the
Comptroller General of the United States General Accounting Office, or any of
their duly authorized representatives, a copy of this Agreement and such books,
documents and records as are necessary to certify the nature and extent of the
costs of the services provided by Manager under this Agreement.
Manager further agrees that in the event Manager carries out any of
its duties under this Agreement through a subcontract, with a value or cost of
Ten Thousand Dollars ($10,000) or more over a twelve (12) month period, such
subcontract shall contain a clause to the effect that until the expiration of
four (4) years after the furnishing of such services pursuant to such
subcontract, the subcontractor shall make available, upon written request to the
Secretary of the United States Department of Health and Human Services, or upon
request to the Comptroller General of the United States General Accounting
Office, or any of their duly authorized representatives, the subcontract and
such books, documents and records of such organization as are necessary to
verify the nature and extent of such costs.
23
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
"MANAGER" "GROUP"
SIERRA MEDICAL MANAGEMENT, INC. SIERRA PRIMARY CARE MEDICAL
GROUP, INC.
By: By:
--------------------------------- ----------------------------------
Its: Its:
--------------------------------- ----------------------------------
24
<PAGE>
LIST OF EXHIBITS AND SCHEDULES
Exhibits
--------
A - Master Lease
B - Furniture, Fixtures & Equipment
C - Power of Agency
D - Management Fee
Schedule
--------
7.9.2 Practice Employee Liabilities
<PAGE>
EXHIBIT "A"
MASTER LEASE
Set forth below is a list of the leases which comprise the Master Lease and
are attached as Exhibit "A" to the Amended and Restated Management Services
Agreement, made and entered into as of September 25, 1997, by and between Sierra
Medical Management, Inc. and Sierra Primary Care Medical Group, Inc.; these
leases have been intentionally omitted from this copy of said Management
Services Agreement.
1. Commercial Lease (General Form) made and entered into on August 1,
1996 by and between M. Paramesvaran and Sierra Primary Care Medical Group, Inc.,
as amended by the Amendment to Lease, entered into as of September 25, 1997, by
and among M. Paramesvaran and Sierra Primary Care Medical Group, Inc. and Sierra
Medical Management, Inc. (for 44714 10th Street West, Lancaster, California
93534).
2. Lease dated September 15, 1993, by and between Sinnadurai E. Moorthy,
M.D. and Claudia Shanthi Moorthy, as Trustees of the Moorthy Family Trust, and
Karunyan Arulanantham, M.D. and Inpamani Arulanantham, as Trustees of the
Arulanantham Family Trust and Sierra Primary Care Medical Group, Inc., as
amended by the Amendment to Lease, entered into as of September 25, 1997, by and
among Sinnadurai E. Moorthy, M.D. and Claudia Shanthi Moorthy, as Trustees of
the Moorthy Family Trust, and Karunyan Arulanantham, M.D. and Inpamani
Arulanantham, as Trustees of the Arulanantham Family Trust and Sierra Primary
Care Medical Group, Inc. and Sierra Medical Management, Inc. (for 44471 10th
Street West, Lancaster, California 93534).
3. Lease dated January 1, 1991 by and between Sinnadurai E. Moorthy, M.D.
and Claudia Shanthi Moorthy, as Trustees of the Moorthy Family Trust, and
Karunyan Arulanantham, M.D. and Inpamani Arulanantham, as Trustees of the
Arulanantham Family Trust and Sierra Primary Care Medical Group, Inc., as
amended by the (i) letter dated October 1, 1996, from J. Jayakumar,
Administrator to S.E. Moorthy, M.D., Trustee, Moorthy Family Trust and K.
Arulanantham, M.D., Trustee, Arul Family Trust, and (ii) Amendment to Lease,
entered into as of September 25, 1997, by and among Sinnadurai E. Moorthy, M.D.
and Claudia Shanthi Moorthy, as Trustees of the Moorthy Family Trust, and
Karunyan Arulanantham, M.D. and Inpamani Arulanantham, as Trustees of the
Arulanantham Family Trust and Sierra Primary Care Medical Group, Inc. and Sierra
Medical Management, Inc. (for 44469 10th Street West, Lancaster, California
93534).
4. Real Estate Lease dated December 1, 1996 by and between M.
Paramesvaran, Trustee, Moorthy Children's Trust, DBA Ana Verde Medical Center
and Sierra Primary Care Medical Group, Inc., as amended by the Amendment to
Lease, entered into as of September 25, 1997, by and among M. Paramesvaran,
Trustee, Moorthy Children's Trust, DBA Ana Verde Medical Center and Sierra
Primary Care Medical Group, Inc. and Sierra Medical Management, Inc. (for 1037
East Palmdale Blvd., Palmdale, California 93550).
<PAGE>
EXHIBIT "B"
FURNITURE, FIXTURES & EQUIPMENT
<PAGE>
EXHIBIT "C"
POWER OF AGENCY
<PAGE>
EXHIBIT "C"
POWER OF AGENCY
This Power of Agency is made and entered into in connection with that
certain Management Services Agreement (the "Agreement") dated as of the
day of September, 1997, between Sierra Medical Management, Inc., a Delaware
corporation ("Manager"), and Sierra Primary Care Medical Group, Inc., a
professional corporation ("GROUP"), as amended.
1. DEFINITIONS. Capitalized terms used herein and not otherwise defined
herein shall have the meaning assigned to them in the Agreement.
2. POWER OF MANAGER. GROUP hereby appoints the Manager or its designee
or successor, as GROUP's agent ("Agent") to act for GROUP and in GROUP's name,
place and stead for the purposes of: (a) communicating the terms and conditions
under which GROUP would accept a Contract with each Plan, as set forth in the
Agreement and Exhibit "C" thereto; (b) executing on behalf of GROUP each
Contract that contains said terms and conditions or that contains any other
terms and conditions that are not rejected by GROUP; (c) administering executed
Contracts, as set forth below; (d) performing all actions on behalf of GROUP
contemplated by the Agreement relating to Contracts, including, without
limitation, the evaluation, negotiation and renewal of Contracts; (e)
negotiating and executing all business agreements and leases on GROUP's behalf
in accordance with the Agreement; (f) endorsing all checks made payable to GROUP
for services provided to Members; (g) taking all steps required or desirable to
submit, process and collect all claims for payment to patients, Plans, Medicare,
Medicaid and all other third party payors; and (h) receiving and depositing
capitation and other payments received by GROUP.
3. ADMINISTRATION. Agent shall maintain in his/her files a copy of each
executed Contract and shall provide to GROUP a list of Plans contracting with
GROUP. Notwithstanding anything herein to the contrary, GROUP shall look solely
to Plans and/or enrollees or beneficiaries of Plans, as applicable, for payment
for medical services and supplies and neither Manager nor any officer, employee,
agent or affiliate of Manager shall be liable for such payment.
4. TERM. The term of this Power of Agency shall be coextensive with the
term of the Agreement.
5. FULL AUTHORITY. Agent is hereby granted full authority to act in any
manner proper, necessary or convenient to the exercise of the foregoing powers,
including substitution and revocation. GROUP hereby ratifies every act that
Agent may lawfully perform in exercising those powers.
<PAGE>
IN WITNESS WHEREOF, this Power of Agency is executed effective as of the
day and year first above written.
"MANAGER" "GROUP"
SIERRA MEDICAL MANAGEMENT, INC. SIERRA PRIMARY CARE MEDICAL
GROUP, INC.
By: By:
--------------------------------- ----------------------------------
Its: Its:
--------------------------------- ----------------------------------
<PAGE>
EXHIBIT "D"
MANAGEMENT FEE
<PAGE>
EXHIBIT "D"
MANAGEMENT FEE
A. DEFINITIONS
COST OF MEDICAL SERVICES means with respect to the GROUP, the
aggregate compensation of GROUP's employed physicians and physician extenders
(e.g. physician assistants and nurse practitioners), charges incurred by the
GROUP for independent contractor physicians, the cost of services ordered by
GROUP through its physicians for managed care patients, the cost of GROUP's
employee benefits including, but not limited to, vacation pay, employer and
employee contributions to any 401(k) plan or other retirement plan for the
benefit of GROUP employees, sick pay, health care expenses, GROUP's share of
employment and payroll taxes, GROUP's employees' professional dues and all other
expenses and payments required to be made by GROUP to or for physicians pursuant
to physician employment and independent contractor agreements (including expense
reimbursements, discretionary bonuses, incentives based on profitability or
productivity, and payments paid and accrued or deferred).
MANAGER'S COSTS means all operating and non-operating expenses and
other costs directly or indirectly incurred by Manager, including but not
limited to direct labor costs (for all employees of Manager or its affiliates
and for any independent contractors or consultants to Manager), indirect labor
costs, supplies, all amounts paid by Manager or GROUP to satisfy any obligations
of GROUP to non-professional employees and third parties (other than for the
Cost of Medical Services), obligations under any lease or purchase agreement or
arrangement for which Manager has direct or indirect financial liability, and
direct and indirect overhead and other expenses relating to the operation of
GROUP's administrative and non-medical management affairs and relating to
GROUP's direct and indirect corporate overhead (including but not limited to all
interest expense and other expenses which are attributable generally to
Manager's business operations in accordance with Manager's corporate allocation
policies as such are in effect from time to time).
GROSS REVENUES means all sums which are (i) attributed to GROUP
(determined on an accrual basis) as compensation for the provision of medical
services by GROUP employed and independent contractor physicians and physician
extenders, including but not limited to all capitated income, all rights to
receive GROUP's portion of hospital and other shared risk pool payments, all
copayments, coordination of benefits, third party recovery, insured services,
enrollment protection (or other such revenue as is available to replenish
capitated services) and all rights to receive fee-for-service income for
medical, diagnostic and therapeutic services provided to GROUP patients; and
(ii) derived by GROUP or its employees other than from the provision of medical
services, including but not limited to consulting services, insurance and legal
recoveries, royalties and licensing payments, franchise payments, rents and
lease payments, and proceeds from the sale of assets or the merger or other
business combination of GROUP.
<PAGE>
NET-PRE-TAX INCOME means Gross Revenues less the sum of Manager's
Costs and the Cost of Medical Services after provision of related bonuses but
before provision for income taxes.
B. MANAGEMENT FEE
For its services hereunder, which shall include the providing of all
facilities and furniture, fixtures and equipment at the Premises and all
non-physician employees of Manager who perform services at or for the Practice
and all management services provided hereunder, Manager shall (i) retain that
portion of the Gross Revenues which is equal to Manager's Costs plus (ii) [ ** ]
of Gross Revenues plus (iii) a fee for marketing and public relations services
of [ ** ] per month plus (iv) [ ** ] of Net Pre-tax Income in excess of [ ** ]
of Gross Revenues; provided however, that if after the payment of Manager's
Costs as set forth in item (i) herein GROUP's working capital is insufficient to
meet GROUP's liabilities or other obligations, the amount of Gross Revenues paid
to Manager shall be deferred until GROUP is able to meet such obligations.
<PAGE>
SCHEDULE 7.9.2
PRACTICE EMPLOYEE LIABILITIES
None
<PAGE>
THIS INSTRUMENT IS SUBJECT TO THE TERMS OF THE AGREEMENT FOR THE PURCHASE AND
SALE OF STOCK ("STOCK PURCHASE AGREEMENT"), DATED AS OF SEPTEMBER 23, 1997, BY
AND AMONG PROSPECT MEDICAL GROUP, INC., A CALIFORNIA PROFESSIONAL CORPORATION
("PURCHASER"), AS BUYER, SINNADURAI E. MOORTHY, M.D., KARUNYAN ARULANANTHAM,
M.D. AND KARUNYAN ARULANANTHAM, M.D. AS TRUSTEE OF THE ARULANANTHAM CHARITABLE
REMAINDER TRUST, AND SIERRA PRIMARY CARE MEDICAL GROUP, INC., A CALIFORNIA
PROFESSIONAL CORPORATION ("COMPANY"). TERMS USED HEREIN AND NOT OTHERWISE
DEFINED SHALL HAVE THE MEANINGS ASSIGNED TO THEM IN THE STOCK PURCHASE
AGREEMENT.
THIS INSTRUMENT AND THE OBLIGATIONS EVIDENCED HEREBY ARE SUBORDINATED, IN THE
MANNER AND TO THE EXTENT SET FORTH IN A SUBORDINATION AND NOTE CANCELLATION
AGREEMENT (THE "SUBORDINATION AND NOTE CANCELLATION AGREEMENT") DATED SEPTEMBER
25, 1997, BY AND AMONG PURCHASER, IMPERIAL BANK, A CALIFORNIA BANKING
CORPORATION("BANK"), PROSPECT MEDICAL HOLDINGS, INC., A DELAWARE CORPORATION
("PROSPECT MEDICAL HOLDINGS"), PROSPECT MEDICAL SYSTEMS, INC., A DELAWARE
CORPORATION ("MANAGER"), SINNADURAI E. MOORTHY, M.D. AND THE HOLDER OF THIS
INSTRUMENT, AND THE HOLDER OF THIS INSTRUMENT, BY ITS ACCEPTANCE HEREOF, AGREES
(i) TO BE BOUND BY THE TERMS OF THE SUBORDINATION AND NOTE CANCELLATION
AGREEMENT AND (ii) IN THE EVENT THAT ANY CONFLICT EXISTS BETWEEN THE TERMS OF
THIS INSTRUMENT, ANY DOCUMENT EXECUTED IN CONNECTION WITH THE DELIVERY OF THIS
INSTRUMENT AND THE TERMS OF THE SUBORDINATION AND NOTE CANCELLATION AGREEMENT,
THE TERMS OF THE SUBORDINATION AND NOTE CANCELLATION AGREEMENT SHALL GOVERN AND
BE CONTROLLING
SUBORDINATE GUARANTY
This SUBORDINATE GUARANTY (this "GUARANTY"), dated as of September 25,
1997, is executed and delivered by Prospect Medical Holdings, Inc., a Delaware
corporation ("Guarantor"), in favor of Karanyan Arulanantham, M.D. ("Guarantied
Party") with reference to the following facts:
R E C I T A L S
A. Prospect Medical Group, Inc., a California professional corporation
("Purchaser"), Guarantied Party, and certain others have entered into the Stock
Purchase Agreement in which certain financial accommodations were granted to
Purchaser by Guarantied Party.
<PAGE>
B. Guarantor is materially interested in the financial success of
Purchaser, agrees that the Stock Purchase Agreement is in Purchaser's best
interests, and acknowledges that the execution and delivery of this Guaranty
formed a material part of the consideration to Guarantied Party to induce
Guarantied Party to enter into the Stock Purchase Agreement.
A G R E E M E N T
NOW, THEREFORE, in consideration of the foregoing, Guarantor hereby agrees,
in favor of Guarantied Party, as follows:
1. DEFINITIONS AND CONSTRUCTION.
(a) DEFINITIONS. The following terms, as used in this Guaranty,
shall have the following meanings:
"Bankruptcy Code" shall mean The Bankruptcy Reform Act of 1978
(11 U.S.C. Sections 101-1330), as amended or supplemented from time to time, and
any successor statute, and any and all rules issued or promulgated in connection
therewith.
"Guarantied Obligations" shall mean the due and punctual payment
of the principal of, and interest (including, any and all interest which, but
for the application of the provisions of the Bankruptcy Code, would have accrued
on such amounts) on, and premium, if any, on the Subordinated Note.
"Guarantied Party" shall have the meaning set forth in the
preamble of this Guaranty.
"Guarantor" shall have the meaning set forth in the preamble to
this Guaranty.
"Guaranty" shall have the meaning set forth in the preamble to
this document.
"Subordinated Note" shall mean the Contingent Promissory Note of
even date herewith, in the amount of $1,125,000, issued by Purchaser to
Guarantied Party pursuant to the terms of the Stock Purchase Agreement.
(b) CONSTRUCTION. Unless the context of this Guaranty clearly
requires otherwise, references to the plural include the singular, references to
the singular include the plural, the part includes the whole, the terms
"include" and "including" are not limiting, and the term "or" has the inclusive
meaning represented by the phrase "and/or." The words "hereof," "herein,"
"hereby," "hereunder," and other similar terms refer to this Guaranty as a whole
and not to any particular provision of this Guaranty. Any reference in this
Guaranty to any of the following documents includes any and all alterations,
amendments, extensions, modifications,
2
<PAGE>
renewals, or supplements thereto or thereof, as applicable: this Guaranty and
the Subordinated Note. Neither this Guaranty nor any uncertainty or ambiguity
herein shall be construed or resolved against the Guarantied Party or Guarantor,
whether under any rule of construction or otherwise. On the contrary, this
Guaranty has been reviewed by Guarantor, Guarantied Party, and their respective
counsel, and shall be construed and interpreted according to the ordinary
meaning of the words used so as to fairly accomplish the purposes and intentions
of Guarantied Party and Guarantor.
2. GUARANTEED OBLIGATIONS. Guarantor hereby irrevocably and
unconditionally guarantees to Guarantied Party, as and for Guarantor's own debt,
until final and indefeasible payment thereof has been made, (a) payment of the
Guaranteed Obligations, in each case when and as the same shall become due and
payable, whether at maturity, pursuant to a mandatory prepayment requirement, by
acceleration, or otherwise; it being the intent of Guarantor that the guaranty
set forth herein shall be a guaranty of payment and not a guaranty of
collection, and (b) the punctual and faithful performance, keeping, observance,
and fulfillment by Purchaser of all of the agreements, conditions, covenants,
and obligations of Purchaser contained in the Subordinated Note and the Security
Agreement referred to in Section 20.
3. OMITTED.
4. PERFORMANCE UNDER THIS GUARANTY. In the event that Purchaser fails to
make any payment of any Guaranteed Obligations on or before the due date
thereof, or if Purchaser shall fail to perform, keep, observe, or fulfill any
other obligation referred to in clause (b) of Section 2 hereof in the manner
provided in the Subordinated Note, Guarantor immediately shall cause such
payment to be made or each of such obligations to be performed, kept, observed,
or fulfilled.
3
<PAGE>
5. PRIMARY OBLIGATIONS. This Guaranty is a primary and original
obligation of Guarantor, is not merely the creation of a surety relationship,
and is an absolute, unconditional, and continuing guaranty of payment and
performance which shall remain in full force and effect without respect to
future changes in conditions, including any change of law or any invalidity or
irregularity with respect to the Subordinated Note. Guarantor agrees that
Guarantor is directly, jointly and severally liable, with any other guarantor of
the Guaranteed Obligations, to Guarantied Party, to the extent set forth in
Section 2 hereof, that the obligations of Guarantor hereunder are independent of
the obligations of Purchaser or any other guarantor, and that a separate action
may be brought against Guarantor whether such action is brought against
Purchaser or any other guarantor or whether Purchaser or any such other
guarantor is joined in such action. Guarantor agrees that Guarantor's liability
hereunder shall be immediate and shall not be contingent upon the exercise or
enforcement by Guarantied Party of whatever remedies it may have against
Purchaser or any other guarantor, or the enforcement of any lien or realization
upon any security Guarantied Party may at any time possess. Guarantor agrees
that any release which may be given by Guarantied Party to Purchaser or any
other guarantor shall not release Guarantor. Guarantor consents and agrees that
Guarantied Party shall be under no obligation to marshal any assets of Purchaser
or any other guarantor in favor of Guarantor, or against or in payment of any or
all of the Guaranteed Obligations.
6. WAIVERS.
(a) Guarantor absolutely, unconditionally, knowingly, and expressly
waives:
(i) (A) notice of acceptance hereof; (B) notice of the
creation or existence of any Guaranteed Obligations; (C) notice of the amount of
the Guaranteed Obligations, subject, however, to Guarantor's right to make
inquiry of Guarantied Party to ascertain the amount of the Guaranteed
Obligations at any reasonable time; (D) notice of any adverse change in the
financial condition of Purchaser or of any other fact that might increase
Guarantor's risk hereunder; (E) notice of presentment for payment, demand,
protest, and notice thereof as to the subordinated Note or any other
instruments; (F) notice of any unmatured event of default or Event of Default
under the Subordinated Note; and (G) all other notices (except if such notice is
specifically required to be given to Guarantor hereunder or under this Guaranty)
and demands to which Guarantor might otherwise be entitled.
(ii) its right, under Sections 2845 or 2850 of the California
Civil Code, or otherwise, to require Guarantied Party to institute suit against,
or to exhaust any rights and remedies which Guarantied Party has or may have
against, Purchaser or any third party, or against any collateral for the
Guaranteed Obligations provided by Purchaser or any third party. In this
regard, Guarantor agrees that Guarantor is bound to the payment of all
Guaranteed Obligations, whether now existing or hereafter accruing, as fully as
if such Guaranteed Obligations were directly owing to Guarantied Party by
Guarantor. Guarantor further waives any defense arising by reason of any
disability or other defense (other than the defense that the Guaranteed
Obligations shall have been fully and finally performed and indefeasibly paid)
of Purchaser or by reason of the cessation from any cause whatsoever of the
liability of Purchaser in respect thereof.
4
<PAGE>
(iii) (A) any rights to assert against Guarantied Party any
defense (legal or equitable), set-off, counterclaim, or claim which Guarantor
may now or at any time hereafter have against Purchaser or any other party
liable to Guarantied Party; (B) any defense, set-off, counterclaim, or claim, of
any kind or nature, arising directly or indirectly from the present or future
lack of perfection, sufficiency, validity, or enforceability of the Guaranteed
Obligations or any security therefor; (C) any defense Guarantor has to
performance hereunder, and any right Guarantor has to be exonerated, provided by
Sections 2819, 2822, or 2825 of the California Civil Code, or otherwise, arising
by reason of: the impairment or suspension of Guarantied Party's rights or
remedies against Purchaser; the alteration by Guarantied Party of the Guaranteed
Obligations; any discharge of Purchaser's obligations to Guarantied Party by
operation of law as a result of Guarantied Party's intervention or omission; or
the acceptance by Guarantied Party of anything in partial satisfaction of the
Guaranteed Obligations; (D) the benefit of any statute of limitations affecting
Guarantor's liability hereunder or the enforcement thereof, and any act which
shall defer or delay the operation of any statute of limitations applicable to
the Guaranteed Obligations shall similarly operate to defer or delay the
operation of such statute of limitations applicable to Guarantor's liability
hereunder.
(b) Guarantor absolutely, unconditionally, knowingly, and expressly
waives any defense arising by reason of or deriving from (i) any claim or
defense based upon an election of remedies by Guarantied Party including any
defense based upon an election of remedies by Guarantied Party under the
provisions of Sections 580a, 580b, 580d, and 726 of the California Code of Civil
Procedure or any similar law of California or any other jurisdiction; or (ii)
any election by Guarantied Party under Bankruptcy Code Section 1111(b) to limit
the amount of, or any collateral securing, its claim against Purchaser.
Pursuant to Section 2856 of the California Civil Code:
Guarantor waives all rights and defenses arising out of an
election of remedies by the creditor, even though that election of remedies,
such as a nonjudicial foreclosure with respect to security for a guaranteed
obligation, has destroyed Guarantor's rights of subrogation and reimbursement
against Purchaser by the operation of Section 580(d) of the California Code of
Civil Procedure or otherwise.
Guarantor waives all rights and defenses that Guarantor may have
because Purchaser's obligations are secured by real property. This means, among
other things:
(i) Guarantied Party may collect from Guarantor without first
foreclosing on any real or personal property collateral pledged by Purchaser.
(ii) If Guarantied Party forecloses on any real property
collateral pledged by Purchaser:
(A) The amount of the Guaranteed Obligations may be
reduced only by the price for which that collateral is sold at the foreclosure
sale, even if the collateral is worth more than the sale price.
5
<PAGE>
(B) Guarantied Party may collect from Guarantor even
if Guarantied Party, by foreclosing on the real property collateral, has
destroyed any right Guarantor may have to collect from Purchaser.
This is an unconditional and irrevocable waiver of any rights and
defenses Guarantor may have because Purchaser's Obligations are secured by real
property. These rights and defenses include, but are not limited to, any rights
or defenses based upon Section 580a, 580b, 580d, or 726 of the California Code
of Civil Procedure.
If any of the Guaranteed Obligations at any time are secured by a mortgage or
deed of trust upon real property, Guarantied Party may elect, in its sole
discretion, upon a default with respect to the Guaranteed Obligations, to
foreclose such mortgage or deed of trust judicially or nonjudicially in any
manner permitted by law, before or after enforcing the Subordinated Note,
without diminishing or affecting the liability of Guarantor hereunder except to
the extent the Guaranteed Obligations are repaid with the proceeds of such
foreclosure. Guarantor understands that (a) by virtue of the operation of
California's antideficiency law applicable to nonjudicial foreclosures, an
election by Guarantied Party nonjudicially to foreclose such a mortgage or deed
of trust probably would have the effect of impairing or destroying rights of
subrogation, reimbursement, contribution, or indemnity of Guarantor against
Purchaser or other guarantors or sureties, and (b) absent the waiver given by
Guarantor, such an election would prevent Guarantied Party from enforcing the
Subordinated Note against Guarantor. Understanding the foregoing, and
understanding that Guarantor is hereby relinquishing a defense to the
enforceability of the Subordinated Note, Guarantor hereby waives any right to
assert against Guarantied Party any defense to the enforcement of the
Subordinated Note, whether denominated "estoppel" or otherwise, based on or
arising from an election by Guarantied Party nonjudicially to foreclose any such
mortgage or deed of trust. Guarantor understands that the effect of the
foregoing waiver may be that Guarantor may have liability hereunder for amounts
with respect to which Guarantor may be left without rights of subrogation,
reimbursement, contribution, or indemnity against Purchaser or other guarantors
or sureties. Guarantor also agrees that the "fair market value" provisions of
Section 580a of the California Code of Civil Procedure shall have no
applicability with respect to the determination of Guarantor's liability under
the Subordinated Note.
(c) Guarantor hereby absolutely, unconditionally, knowingly, and
expressly waives: (i) any right of subrogation Guarantor has or may have as
against Purchaser with respect to the Guaranteed Obligations; (ii) any right to
proceed against Purchaser or any other person or entity, now, or hereafter, for
contribution, indemnity, reimbursement, or any other suretyship rights and
claims, whether direct or indirect, liquidated or contingent, whether arising
under express or implied contract or by operation of law, which Guarantor may
now have or hereafter have as against Purchaser with respect to the Guaranteed
Obligations; and (iii) any right to proceed or seek recourse against or with
respect to any property or asset of Purchaser. Guarantor hereby agrees that, in
light of the waivers contained in this section, Guarantor shall not be deemed to
be a "creditor" (as that term is defined in the Bankruptcy Code or otherwise) of
Purchaser, whether for purposes of the application of Sections 547 or 550 of the
Bankruptcy Code or otherwise.
6
<PAGE>
(d) WITHOUT LIMITING THE GENERALITY OF ANY OTHER WAIVER OR OTHER
PROVISION SET FORTH IN THIS GUARANTY, GUARANTOR HEREBY ABSOLUTELY, KNOWINGLY,
UNCONDITIONALLY, AND EXPRESSLY WAIVES AND AGREES NOT TO ASSERT ANY AND ALL
BENEFITS OR DEFENSES ARISING DIRECTLY OR INDIRECTLY UNDER ANY ONE OR MORE OF
CALIFORNIA CIVIL CODE SECTIONS 2799, 2808, 2809, 2810, 2815, 2819, 2820, 2821,
2822, 2825, 2839, 2845, 2848, 2849, AND 2850, CALIFORNIA CODE OF CIVIL PROCEDURE
SECTIONS 580a, 580b, 580c, 580d, AND 726, AND CHAPTER 2 OF TITLE 14 OF PART 4 OF
DIVISION 3 OF THE CALIFORNIA CIVIL CODE.
7. RELEASES. Guarantor consents and agrees that, without notice to or by
Guarantor, and without affecting or impairing the obligations of Guarantor
hereunder, Guarantied Party may, by action or inaction:
(a) compromise, settle, extend the duration or the time for the
payment of, or discharge the performance of, or may refuse to or otherwise not
enforce this Guaranty, the Subordinated Note, or any part thereof, with respect
to Purchaser or any other Person;
(b) release Purchaser or any other person or grant other indulgences
to Purchaser or any other Person in respect thereof;
(c) amend or modify in any manner and at any time (or from time to
time) the Subordinated Note; or
(d) release or substitute any other guarantor, if any, of the
Guaranteed Obligations, or enforce, exchange, release, or waive any security for
the Guaranteed Obligations or any other guaranty of the Guaranteed Obligations,
or any portion thereof.
8. NO ELECTION. Guarantied Party shall have all of the rights to seek
recourse against Guarantor to the fullest extent provided for herein, and no
election by Guarantied Party to proceed in one form of action or proceeding, or
against any party, or on any obligation, shall constitute a waiver of Guarantied
Party's right to proceed in any other form of action or proceeding or against
other parties unless Guarantied Party has expressly waived such right in
writing. Specifically, but without limiting the generality of the foregoing, no
action or proceeding by Guarantied Party under any document or instrument
evidencing the Guaranteed Obligations shall serve to diminish the liability of
Guarantor under this Guaranty except to the extent that Guarantied Party finally
and unconditionally shall have realized indefeasible payment by such action or
proceeding.
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9. INDEFEASIBLE PAYMENT. The Guaranteed Obligations shall not be
considered indefeasibly paid for purposes of this Guaranty unless and until all
payments to Guarantied Party are no longer subject to any right on the part of
any person, including Purchaser, Purchaser as a debtor in possession, or any
trustee (whether appointed under the Bankruptcy Code or otherwise) of any of
Purchaser's assets, to invalidate or set aside such payments or to seek to
recoup the amount of such payments or any portion thereof, or to declare same to
be fraudulent or preferential. Upon such full and final performance and
indefeasible payment of the Guaranteed Obligations, whether by Purchaser
pursuant to the Subordinated Note or by any other person, Guarantied Party shall
have no obligation whatsoever to transfer or assign its interests in the
Subordinated Note to Guarantor. In the event that, for any reason, any portion
of such payments to Guarantied Party is set aside or restored, whether
voluntarily or involuntarily, after the making thereof, then the obligation
intended to be satisfied thereby shall be revived and continued in full force
and effect as if said payment or payments had not been made, and Guarantor shall
be liable for the full amount Guarantied Party is required to repay plus any and
all costs and expenses (including attorneys' fees and expenses and attorneys'
fees and expenses incurred pursuant to proceedings arising under the Bankruptcy
Code) paid by Guarantied Party in connection therewith.
10. FINANCIAL CONDITION OF PURCHASER. Guarantor represents and warrants
to Guarantied Party that Guarantor is currently informed of the financial
condition of Purchaser and of all other circumstances which a diligent inquiry
would reveal and which bear upon the risk of nonpayment of the Guaranteed
Obligations. Guarantor further represents and warrants to Guarantied Party that
Guarantor has read and understands the terms and conditions of the Subordinated
Note. Guarantor hereby covenants that Guarantor will continue to keep informed
of Purchaser's financial condition, the financial condition of other guarantors,
if any, and of all other circumstances which bear upon the risk of nonpayment or
nonperformance of the Guaranteed Obligations.
11. SUBORDINATION. Guarantor and Guarantied Party agree that,
notwithstanding the terms of this Guaranty, the payment of the Guarantied
Obligations and all other obligations of Guarantor hereunder is subordinated, to
the extent and in the manner set forth in the Subordination and Note
Cancellation Agreement, to the prior payment of all indebtedness and obligations
of Guarantor owing to Bank, as more particularly set forth in the Subordination
and Note Cancellation Agreement. In the event that any conflict exists between
the terms of this Guaranty, any document executed in connection with the
delivery of this Guaranty and the terms of the Subordination and Note
Cancellation Agreement, the terms of the Subordination and Note Cancellation
Agreement shall govern and be controlling.
12. PAYMENTS; APPLICATION. All payments to be made hereunder by Guarantor
shall be made in lawful money of the United States of America at the time of
payment, shall be made in immediately available funds, and shall be made without
deduction (whether for taxes or otherwise) or offset. All payments made by
Guarantor hereunder shall be applied as follows: first, to all costs and
expenses (including attorneys' fees and expenses and attorneys' fees and
expenses incurred pursuant to proceedings arising under the Bankruptcy Code)
incurred by Guarantied Party in enforcing this Guaranty or in collecting the
Guaranteed Obligations; second,
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to all accrued and unpaid interest, premium, if any, and fees owing to
Guarantied Party constituting Guaranteed Obligations; and third, to the balance
of the Guaranteed Obligations.
13. REPRESENTATIONS AND WARRANTIES. Guarantor hereby represents and
warrants to Guarantied Party that:
(a) Guarantor is a corporation duly organized and existing under the
laws of Delaware and has the power and authority to own its own properties and
assets, and to transact the business in which it is engaged, and is properly
licensed, qualified to do business and in good standing in every jurisdiction
where the conduct of its business requires it to be so qualified.
(b) The execution, delivery and performance of this Guaranty are
within Guarantor's powers, are not in conflict with the terms of any charter,
bylaw, certificate of incorporation or other organization papers of Guarantor,
and do not result in a breach of or constitute a default under any contract,
obligation, indenture or other instrument to which Guarantor is a party or by
which Guarantor is bound or affected. There is no law, rule or regulation, nor
is there any judgment, decree or order of any court or governmental authority
binding on Guarantor which would be contravened by the execution, delivery,
performance or enforcement of this Guaranty.
(c) Guarantor has taken all corporate action necessary to authorize
the execution and delivery of this Guaranty, and the consummation of the
transactions contemplated hereby and thereby. Upon their execution and delivery
in accordance with their respective terms, this Guaranty will constitute legal,
valid and binding agreements and obligations of Guarantor enforceable against
Guarantor in accordance with its terms, except as enforceability may be limited
by Bankruptcy, insolvency, fraudulent conveyance, and similar laws and equitable
principles affecting the enforcement of creditors' rights generally.
(d) No approval, consent, exemption or other action by, or notice to
or filing with, any governmental authority is necessary in connection with the
execution, delivery, performance or enforcement of this Guaranty except as may
have been obtained by Guarantor and certified copies of which have been
delivered to Guarantied Party.
14. ATTORNEYS' FEES AND COSTS. Guarantor agrees to pay, on demand, all
attorneys' fees (including attorneys' fees incurred pursuant to proceedings
arising under the Bankruptcy Code) and all other costs and expenses which may be
incurred by Guarantied Party in the enforcement of this Guaranty or in any way
arising out of, or consequential to the protection, assertion, or enforcement of
the Guaranteed Obligations (or any security therefor), whether or not suit is
brought.
15. NOTICES. Unless otherwise specifically provided herein, any notice or
other communication herein required or permitted to be given shall be in writing
and may be personally served, sent by telefacsimile, telexed, or sent by courier
service or United States mail and shall be deemed to have been given when
delivered in person or by courier service, on the next business day after
receipt of a telefacsimile or telex, or four business days after deposit in
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the United States mail (registered or certified, with postage prepaid and
properly addressed). For the purposes hereof, the addresses of the parties
hereto (until notice of a change thereof is delivered as provided in this
Section 15) shall be set forth below, or, as to each party, at such other
address as may be designated by such party in a written notice to all of the
other parties:
If to Guarantor: Prospect Medical Holdings, Inc.
18200 Yorba Linda Boulevard
Yorba Linda, California 92686
Attention: President
Telecopier No.:
If to Guarantied Party: Karunyan Arulananthan, M.D
1675 Staffordshire Drive
Lancaster, California 93534
Telecopier No.:
With a copy to: Jack Goldman, Esq.
Arter & Hadden
700 South Flower Street
Suite 3000+
Los Angeles, California 90017
Telecopier No.: 213-617-9255
16. CUMULATIVE REMEDIES. No remedy under this Guaranty or the
Subordinated Note is intended to be exclusive of any other remedy, but each and
every remedy shall be cumulative and in addition to any and every other remedy
given hereunder or under the Subordinated Note, and those provided by law or in
equity. No delay or omission by Guarantied Party to exercise any right under
this Guaranty shall impair any such right nor be construed to be a waiver
thereof. No failure on the part of Guarantied Party to exercise, and no delay
in exercising, any right hereunder shall operate as a waiver thereof; nor shall
any single or partial exercise of any right hereunder preclude any other or
further exercise thereof or the exercise of any other right.
17. BOOKS AND RECORDS. Guarantor agrees Guarantied Party's books and
records showing the account between Guarantied Party and Purchaser shall be
admissible in any action or proceeding and shall be binding upon Guarantor for
the purpose of establishing the items therein set forth and shall constitute
prima facie proof thereof.
18. SEVERABILITY OF PROVISIONS. If any provision of this Guaranty is for
any reason held to be invalid, illegal or unenforceable in any respect, that
provision shall not affect the validity, legality or enforceability of any other
provision of this Guaranty.
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19. ENTIRE AGREEMENT, AMENDMENTS AND WAIVERS. This Guaranty constitutes
the entire agreement between Guarantor and Guarantied Party pertaining to the
subject matter contained herein. Any provision of this Guaranty may be amended
or waived if, but only if, such amendment or waiver is in writing and is signed
by the party asserted to be bound thereby, and then such amendment or waiver
shall be effective only in the specific instance and specific purpose for which
given.
20. SECURITY. This Guaranty is secured by that certain Security
Agreement, as of even date herewith, between Guarantor and Guarantied Party, as
the same may be amended from time to time.
21. SUCCESSORS AND ASSIGNS. This Guaranty shall bind the successors and
assigns of Guarantor, and shall inure to the benefit of the respective
successors and assigns of Guarantied Party; PROVIDED, HOWEVER, Guarantor may not
assign this Guaranty or delegate any of his duties hereunder without Guarantied
Party's prior written consent and any such prohibited assignment shall be
absolutely null and void. In the event of any assignment or other transfer of
rights by a Guarantied Party, the rights and benefits herein conferred upon such
Guarantied Party shall automatically extend to and be vested in such assignee or
other transferee.
22. GOVERNING LAW. This Guaranty shall be deemed to have been made in the
State of California and the validity, construction, interpretation, and
enforcement hereof, and the rights of the parties hereto, shall be determined
under, governed by, and construed in accordance with the internal laws of the
State of California, without regard to principles of conflicts of law.
23. ARBITRATION. The parties firmly desire to resolve all disputes
arising hereunder without resort to litigation in order to protect their
respective business reputations and the confidential nature of certain aspects
of their relationship. Accordingly, any controversy or claim arising out of or
relating to this Guaranty, or the breach thereof, shall be settled by
arbitration as set forth below.
(a) All disputes which in any manner arise out of or relate to this
Guaranty or the subject matter thereof, shall be resolved exclusively by
arbitration in accordance with the provisions of this Section 23. Either party
may commence arbitration by sending a written demand for arbitration to the
other party, setting forth the nature of the controversy, the dollar amount
involved, if any, and the remedies sought, and attaching a copy of this Section
to the demand.
(b) The parties stipulate to arbitration before a single, mutually
agreed upon arbitrator sitting on the Los Angeles, California Judicial
Arbitration Mediation Services (JAMS) panel. In the event that the parties are
unable to agree upon the person chosen as arbitrator within 30 days of the
demand for arbitration, the arbitrator shall be selected in the sole discretion
of the JAMS administrator. The arbitrator shall be a member of the California
bar.
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(c) The parties shall share all costs of arbitration. The prevailing
party shall be entitled to reimbursement by the other party of such party's
attorneys' fees and costs and any arbitration fees and expenses incurred in
connection with the arbitration hereunder.
(d) The substantive law of the State of California shall be applied
by the arbitrator. All proceedings in arbitration shall be in accordance with
the California Code of Civil Procedure, as amended, and the parties shall have
the right to legal discovery in any matter submitted to arbitration in
satisfaction of California Code of Civil Procedure Section 1283.05, as permitted
by California Code of Civil Procedure Section 1283.1(b).
(e) Arbitration shall take place in Los Angeles, California unless
the parties otherwise agree. As soon as reasonably practicable, a hearing with
respect to the dispute or matter to be resolved shall be conducted by the
arbitrator. As soon as reasonably practicable thereunder, the arbitrator shall
arrive at a final decision, which shall be reduced to writing, signed by the
arbitrator and mailed to each of the parties and their legal counsel.
(f) All decisions of the arbitrator shall be final, binding and
conclusive on the parties and shall constitute the only method of resolving
disputes or matters subject to arbitration pursuant to this Guaranty. The
arbitrator or a court of appropriate jurisdiction may issue a write of execution
to enforce the arbitrator's judgment. Judgment may be entered upon such a
decision in accordance with applicable law in any court having jurisdiction
thereof.
(g) Notwithstanding the foregoing, because time is of the essence of
this Guaranty, the parties specifically reserve the right to a judicial
temporary restraining order, preliminary injunction, or other similar equitable
relief.
(h) The decision and award of the arbitrator shall be kept
confidential by the parties to the greatest extent possible. No disclosure of
such decision or award shall be made by the parties except as required by law or
as necessary or appropriate to effect the enforcement thereof.
(i) Should either party institute any action or procedure to enforce
this Guaranty or any provision hereof, or for damages by reason of any alleged
breach of this Guaranty or of any provision hereof, or for a declaration of
rights hereunder (including, without limitation, arbitration), the prevailing
party in any such action or proceeding shall be entitled to
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receive from the other party all costs and expenses, including, without
limitation, reasonable attorneys' fees, incurred by the prevailing party in
connection with such action or proceeding.
IN WITNESS WHEREOF, Guarantor has executed and delivered this Guaranty as
of the date set forth in the first paragraph hereof.
PROSPECT MEDICAL HOLDINGS, INC.
By /s/ Jacob Y. Terner, M.D.
--------------------------------
Title: CEO
--------------------------
ACCEPTED AND AGREED:
/s/ Karunyan Arulanantham
- ------------------------------------
Print Name Karunyan Arulanantham
-------------------------
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THIS INSTRUMENT IS SUBJECT TO THE TERMS OF THE AGREEMENT FOR THE PURCHASE AND
SALE OF STOCK ("STOCK PURCHASE AGREEMENT"), DATED AS OF SEPTEMBER 23, 1997, BY
AND AMONG PROSPECT MEDICAL GROUP, INC., A CALIFORNIA PROFESSIONAL CORPORATION
("PURCHASER"), AS BUYER, SINNADURAI E. MOORTHY, M.D., KARUNYAN ARULANANTHAM,
M.D. AND KARUNYAN ARULANANTHAM, M.D. AS TRUSTEE OF THE ARULANANTHAM CHARITABLE
REMAINDER TRUST, AND SIERRA PRIMARY CARE MEDICAL GROUP, INC., A CALIFORNIA
PROFESSIONAL CORPORATION ("COMPANY"). TERMS USED HEREIN AND NOT OTHERWISE
DEFINED SHALL HAVE THE MEANINGS ASSIGNED TO THEM IN THE STOCK PURCHASE
AGREEMENT.
THIS INSTRUMENT AND THE OBLIGATIONS EVIDENCED HEREBY ARE SUBORDINATED, IN THE
MANNER AND TO THE EXTENT SET FORTH IN A SUBORDINATION AND NOTE CANCELLATION
AGREEMENT (THE "SUBORDINATION AND NOTE CANCELLATION AGREEMENT") DATED SEPTEMBER
25, 1997, BY AND AMONG PURCHASER, IMPERIAL BANK, A CALIFORNIA BANKING
CORPORATION("BANK"), PROSPECT MEDICAL HOLDINGS, INC., A DELAWARE CORPORATION
("PROSPECT MEDICAL HOLDINGS"), PROSPECT MEDICAL SYSTEMS, INC., A DELAWARE
CORPORATION ("MANAGER"), KARUNYAN ARULANANTHAM, M.D. AND THE HOLDER OF THIS
INSTRUMENT, AND THE HOLDER OF THIS INSTRUMENT, BY ITS ACCEPTANCE HEREOF, AGREES
(i) TO BE BOUND BY THE TERMS OF THE SUBORDINATION AND NOTE CANCELLATION
AGREEMENT AND (ii) IN THE EVENT THAT ANY CONFLICT EXISTS BETWEEN THE TERMS OF
THIS INSTRUMENT, ANY DOCUMENT EXECUTED IN CONNECTION WITH THE DELIVERY OF THIS
INSTRUMENT AND THE TERMS OF THE SUBORDINATION AND NOTE CANCELLATION AGREEMENT,
THE TERMS OF THE SUBORDINATION AND NOTE CANCELLATION AGREEMENT SHALL GOVERN AND
BE CONTROLLING
SUBORDINATE GUARANTY
This SUBORDINATE GUARANTY (this "GUARANTY"), dated as of September 25,
1997, is executed and delivered by Prospect Medical Holdings, Inc., a Delaware
corporation ("Guarantor"), in favor of Sinnadurai E. Moorthy, M.D. ("Guarantied
Party") with reference to the following facts:
R E C I T A L S
A. Prospect Medical Group, Inc., a California professional corporation
("Purchaser"), Guarantied Party, and certain others have entered into the Stock
Purchase Agreement in which certain financial accommodations were granted to
Purchaser by Guarantied Party.
<PAGE>
B. Guarantor is materially interested in the financial success of
Purchaser, agrees that the Stock Purchase Agreement is in Purchaser's best
interests, and acknowledges that the execution and delivery of this Guaranty
formed a material part of the consideration to Guarantied Party to induce
Guarantied Party to enter into the Stock Purchase Agreement.
A G R E E M E N T
NOW, THEREFORE, in consideration of the foregoing, Guarantor hereby agrees,
in favor of Guarantied Party, as follows:
1. DEFINITIONS AND CONSTRUCTION.
(a) DEFINITIONS. The following terms, as used in this Guaranty,
shall have the following meanings:
"Bankruptcy Code" shall mean The Bankruptcy Reform Act of 1978
(11 U.S.C. Sections 101-1330), as amended or supplemented from time to time, and
any successor statute, and any and all rules issued or promulgated in connection
therewith.
"Guarantied Obligations" shall mean the due and punctual payment
of the principal of, and interest (including, any and all interest which, but
for the application of the provisions of the Bankruptcy Code, would have accrued
on such amounts) on, and premium, if any, on the Subordinated Note.
"Guarantied Party" shall have the meaning set forth in the
preamble of this Guaranty.
"Guarantor" shall have the meaning set forth in the preamble to
this Guaranty.
"Guaranty" shall have the meaning set forth in the preamble to
this document.
"Subordinated Note" shall mean the Contingent Promissory Note of
even date herewith, in the amount of $1,125,000, issued by Purchaser to
Guarantied Party pursuant to the terms of the Stock Purchase Agreement.
(b) CONSTRUCTION. Unless the context of this Guaranty clearly
requires otherwise, references to the plural include the singular, references to
the singular include the plural, the part includes the whole, the terms
"include" and "including" are not limiting, and the term "or" has the inclusive
meaning represented by the phrase "and/or." The words "hereof," "herein,"
"hereby," "hereunder," and other similar terms refer to this Guaranty as a whole
and not to any particular provision of this Guaranty. Any reference in this
Guaranty to any of the following documents includes any and all alterations,
amendments, extensions, modifications,
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renewals, or supplements thereto or thereof, as applicable: this Guaranty and
the Subordinated Note. Neither this Guaranty nor any uncertainty or ambiguity
herein shall be construed or resolved against the Guarantied Party or Guarantor,
whether under any rule of construction or otherwise. On the contrary, this
Guaranty has been reviewed by Guarantor, Guarantied Party, and their respective
counsel, and shall be construed and interpreted according to the ordinary
meaning of the words used so as to fairly accomplish the purposes and intentions
of Guarantied Party and Guarantor.
2. GUARANTEED OBLIGATIONS. Guarantor hereby irrevocably and
unconditionally guarantees to Guarantied Party, as and for Guarantor's own debt,
until final and indefeasible payment thereof has been made, (a) payment of the
Guaranteed Obligations, in each case when and as the same shall become due and
payable, whether at maturity, pursuant to a mandatory prepayment requirement, by
acceleration, or otherwise; it being the intent of Guarantor that the guaranty
set forth herein shall be a guaranty of payment and not a guaranty of
collection, and (b) the punctual and faithful performance, keeping, observance,
and fulfillment by Purchaser of all of the agreements, conditions, covenants,
and obligations of Purchaser contained in the Subordinated Note and the Security
Agreement referred to in Section 20.
3. PERFORMANCE UNDER THIS GUARANTY. In the event that Purchaser fails to
make any payment of any Guaranteed Obligations on or before the due date
thereof, or if Purchaser shall fail to perform, keep, observe, or fulfill any
other obligation referred to in clause (b) of Section 2 hereof in the manner
provided in the Subordinated Note, Guarantor immediately shall cause such
payment to be made or each of such obligations to be performed, kept, observed,
or fulfilled.
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4. PRIMARY OBLIGATIONS. This Guaranty is a primary and original
obligation of Guarantor, is not merely the creation of a surety relationship,
and is an absolute, unconditional, and continuing guaranty of payment and
performance which shall remain in full force and effect without respect to
future changes in conditions, including any change of law or any invalidity or
irregularity with respect to the Subordinated Note. Guarantor agrees that
Guarantor is directly, jointly and severally liable, with any other guarantor of
the Guaranteed Obligations, to Guarantied Party, to the extent set forth in
Section 2 hereof, that the obligations of Guarantor hereunder are independent of
the obligations of Purchaser or any other guarantor, and that a separate action
may be brought against Guarantor whether such action is brought against
Purchaser or any other guarantor or whether Purchaser or any such other
guarantor is joined in such action. Guarantor agrees that Guarantor's liability
hereunder shall be immediate and shall not be contingent upon the exercise or
enforcement by Guarantied Party of whatever remedies it may have against
Purchaser or any other guarantor, or the enforcement of any lien or realization
upon any security Guarantied Party may at any time possess. Guarantor agrees
that any release which may be given by Guarantied Party to Purchaser or any
other guarantor shall not release Guarantor. Guarantor consents and agrees that
Guarantied Party shall be under no obligation to marshal any assets of Purchaser
or any other guarantor in favor of Guarantor, or against or in payment of any or
all of the Guaranteed Obligations.
5. WAIVERS.
(a) Guarantor absolutely, unconditionally, knowingly, and expressly
waives:
(i) (A) notice of acceptance hereof; (B) notice of the
creation or existence of any Guaranteed Obligations; (C) notice of the amount of
the Guaranteed Obligations, subject, however, to Guarantor's right to make
inquiry of Guarantied Party to ascertain the amount of the Guaranteed
Obligations at any reasonable time; (D) notice of any adverse change in the
financial condition of Purchaser or of any other fact that might increase
Guarantor's risk hereunder; (E) notice of presentment for payment, demand,
protest, and notice thereof as to the subordinated Note or any other
instruments; (F) notice of any unmatured event of default or Event of Default
under the Subordinated Note; and (G) all other notices (except if such notice is
specifically required to be given to Guarantor hereunder or under this Guaranty)
and demands to which Guarantor might otherwise be entitled.
(ii) its right, under Sections 2845 or 2850 of the
California Civil Code, or otherwise, to require Guarantied Party to institute
suit against, or to exhaust any rights and remedies which Guarantied Party has
or may have against, Purchaser or any third party, or against any collateral for
the Guaranteed Obligations provided by Purchaser or any third party. In this
regard, Guarantor agrees that Guarantor is bound to the payment of all
Guaranteed Obligations, whether now existing or hereafter accruing, as fully as
if such Guaranteed Obligations were directly owing to Guarantied Party by
Guarantor. Guarantor further waives any defense arising by reason of any
disability or other defense (other than the defense that the Guaranteed
Obligations shall have been fully and finally performed and indefeasibly paid)
of Purchaser or by reason of the cessation from any cause whatsoever of the
liability of Purchaser in respect thereof.
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(iii) (A) any rights to assert against Guarantied Party any
defense (legal or equitable), set-off, counterclaim, or claim which Guarantor
may now or at any time hereafter have against Purchaser or any other party
liable to Guarantied Party; (B) any defense, set-off, counterclaim, or claim, of
any kind or nature, arising directly or indirectly from the present or future
lack of perfection, sufficiency, validity, or enforceability of the Guaranteed
Obligations or any security therefor; (C) any defense Guarantor has to
performance hereunder, and any right Guarantor has to be exonerated, provided by
Sections 2819, 2822, or 2825 of the California Civil Code, or otherwise, arising
by reason of: the impairment or suspension of Guarantied Party's rights or
remedies against Purchaser; the alteration by Guarantied Party of the Guaranteed
Obligations; any discharge of Purchaser's obligations to Guarantied Party by
operation of law as a result of Guarantied Party's intervention or omission; or
the acceptance by Guarantied Party of anything in partial satisfaction of the
Guaranteed Obligations; (D) the benefit of any statute of limitations affecting
Guarantor's liability hereunder or the enforcement thereof, and any act which
shall defer or delay the operation of any statute of limitations applicable to
the Guaranteed Obligations shall similarly operate to defer or delay the
operation of such statute of limitations applicable to Guarantor's liability
hereunder.
(b) Guarantor absolutely, unconditionally, knowingly, and expressly
waives any defense arising by reason of or deriving from (i) any claim or
defense based upon an election of remedies by Guarantied Party including any
defense based upon an election of remedies by Guarantied Party under the
provisions of Sections 580a, 580b, 580d, and 726 of the California Code of Civil
Procedure or any similar law of California or any other jurisdiction; or (ii)
any election by Guarantied Party under Bankruptcy Code Section 1111(b) to limit
the amount of, or any collateral securing, its claim against Purchaser.
Pursuant to Section 2856 of the California Civil Code:
Guarantor waives all rights and defenses arising out of an
election of remedies by the creditor, even though that election of remedies,
such as a nonjudicial foreclosure with respect to security for a guaranteed
obligation, has destroyed Guarantor's rights of subrogation and reimbursement
against Purchaser by the operation of Section 580(d) of the California Code of
Civil Procedure or otherwise.
Guarantor waives all rights and defenses that Guarantor may have
because Purchaser's obligations are secured by real property. This means, among
other things:
(i) Guarantied Party may collect from Guarantor without
first foreclosing on any real or personal property collateral pledged by
Purchaser.
(ii) If Guarantied Party forecloses on any real property
collateral pledged by Purchaser:
(A) The amount of the Guaranteed Obligations may be reduced
only by the price for which that collateral is sold at the foreclosure sale,
even if the collateral is worth more than the sale price.
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(B) Guarantied Party may collect from Guarantor even if
Guarantied Party, by foreclosing on the real property collateral, has destroyed
any right Guarantor may have to collect from Purchaser.
This is an unconditional and irrevocable waiver of any rights and
defenses Guarantor may have because Purchaser's Obligations are secured by real
property. These rights and defenses include, but are not limited to, any rights
or defenses based upon Section 580a, 580b, 580d, or 726 of the California Code
of Civil Procedure.
If any of the Guaranteed Obligations at any time are secured by a mortgage or
deed of trust upon real property, Guarantied Party may elect, in its sole
discretion, upon a default with respect to the Guaranteed Obligations, to
foreclose such mortgage or deed of trust judicially or nonjudicially in any
manner permitted by law, before or after enforcing the Subordinated Note,
without diminishing or affecting the liability of Guarantor hereunder except to
the extent the Guaranteed Obligations are repaid with the proceeds of such
foreclosure. Guarantor understands that (a) by virtue of the operation of
California's antideficiency law applicable to nonjudicial foreclosures, an
election by Guarantied Party nonjudicially to foreclose such a mortgage or deed
of trust probably would have the effect of impairing or destroying rights of
subrogation, reimbursement, contribution, or indemnity of Guarantor against
Purchaser or other guarantors or sureties, and (b) absent the waiver given by
Guarantor, such an election would prevent Guarantied Party from enforcing the
Subordinated Note against Guarantor. Understanding the foregoing, and
understanding that Guarantor is hereby relinquishing a defense to the
enforceability of the Subordinated Note, Guarantor hereby waives any right to
assert against Guarantied Party any defense to the enforcement of the
Subordinated Note, whether denominated "estoppel" or otherwise, based on or
arising from an election by Guarantied Party nonjudicially to foreclose any such
mortgage or deed of trust. Guarantor understands that the effect of the
foregoing waiver may be that Guarantor may have liability hereunder for amounts
with respect to which Guarantor may be left without rights of subrogation,
reimbursement, contribution, or indemnity against Purchaser or other guarantors
or sureties. Guarantor also agrees that the "fair market value" provisions of
Section 580a of the California Code of Civil Procedure shall have no
applicability with respect to the determination of Guarantor's liability under
the Subordinated Note.
(c) Guarantor hereby absolutely, unconditionally, knowingly, and
expressly waives: (i) any right of subrogation Guarantor has or may have as
against Purchaser with respect to the Guaranteed Obligations; (ii) any right to
proceed against Purchaser or any other person or entity, now, or hereafter, for
contribution, indemnity, reimbursement, or any other suretyship rights and
claims, whether direct or indirect, liquidated or contingent, whether arising
under express or implied contract or by operation of law, which Guarantor may
now have or hereafter have as against Purchaser with respect to the Guaranteed
Obligations; and (iii) any right to proceed or seek recourse against or with
respect to any property or asset of Purchaser. Guarantor hereby agrees that, in
light of the waivers contained in this section, Guarantor shall not be deemed to
be a "creditor" (as that term is defined in the Bankruptcy Code or otherwise) of
Purchaser, whether for purposes of the application of Sections 547 or 550 of the
Bankruptcy Code or otherwise.
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(d) WITHOUT LIMITING THE GENERALITY OF ANY OTHER WAIVER OR OTHER
PROVISION SET FORTH IN THIS GUARANTY, GUARANTOR HEREBY ABSOLUTELY, KNOWINGLY,
UNCONDITIONALLY, AND EXPRESSLY WAIVES AND AGREES NOT TO ASSERT ANY AND ALL
BENEFITS OR DEFENSES ARISING DIRECTLY OR INDIRECTLY UNDER ANY ONE OR MORE OF
CALIFORNIA CIVIL CODE SECTIONS 2799, 2808, 2809, 2810, 2815, 2819, 2820, 2821,
2822, 2825, 2839, 2845, 2848, 2849, AND 2850, CALIFORNIA CODE OF CIVIL PROCEDURE
SECTIONS 580a, 580b, 580c, 580d, AND 726, AND CHAPTER 2 OF TITLE 14 OF PART 4 OF
DIVISION 3 OF THE CALIFORNIA CIVIL CODE.
6. RELEASES. Guarantor consents and agrees that, without notice to or by
Guarantor, and without affecting or impairing the obligations of Guarantor
hereunder, Guarantied Party may, by action or inaction:
(a) compromise, settle, extend the duration or the time for the
payment of, or discharge the performance of, or may refuse to or otherwise not
enforce this Guaranty, the Subordinated Note, or any part thereof, with respect
to Purchaser or any other Person;
(b) release Purchaser or any other person or grant other indulgences
to Purchaser or any other Person in respect thereof;
(c) amend or modify in any manner and at any time (or from time to
time) the Subordinated Note; or
(d) release or substitute any other guarantor, if any, of the
Guaranteed Obligations, or enforce, exchange, release, or waive any security for
the Guaranteed Obligations or any other guaranty of the Guaranteed Obligations,
or any portion thereof.
7. NO ELECTION. Guarantied Party shall have all of the rights to seek
recourse against Guarantor to the fullest extent provided for herein, and no
election by Guarantied Party to proceed in one form of action or proceeding, or
against any party, or on any obligation, shall constitute a waiver of Guarantied
Party's right to proceed in any other form of action or proceeding or against
other parties unless Guarantied Party has expressly waived such right in
writing. Specifically, but without limiting the generality of the foregoing, no
action or proceeding by Guarantied Party under any document or instrument
evidencing the Guaranteed Obligations shall serve to diminish the liability of
Guarantor under this Guaranty except to the extent that Guarantied Party finally
and unconditionally shall have realized indefeasible payment by such action or
proceeding.
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8. INDEFEASIBLE PAYMENT. The Guaranteed Obligations shall not be
considered indefeasibly paid for purposes of this Guaranty unless and until all
payments to Guarantied Party are no longer subject to any right on the part of
any person, including Purchaser, Purchaser as a debtor in possession, or any
trustee (whether appointed under the Bankruptcy Code or otherwise) of any of
Purchaser's assets, to invalidate or set aside such payments or to seek to
recoup the amount of such payments or any portion thereof, or to declare same to
be fraudulent or preferential. Upon such full and final performance and
indefeasible payment of the Guaranteed Obligations, whether by Purchaser
pursuant to the Subordinated Note or by any other person, Guarantied Party shall
have no obligation whatsoever to transfer or assign its interests in the
Subordinated Note to Guarantor. In the event that, for any reason, any portion
of such payments to Guarantied Party is set aside or restored, whether
voluntarily or involuntarily, after the making thereof, then the obligation
intended to be satisfied thereby shall be revived and continued in full force
and effect as if said payment or payments had not been made, and Guarantor shall
be liable for the full amount Guarantied Party is required to repay plus any and
all costs and expenses (including attorneys' fees and expenses and attorneys'
fees and expenses incurred pursuant to proceedings arising under the Bankruptcy
Code) paid by Guarantied Party in connection therewith.
9. FINANCIAL CONDITION OF PURCHASER. Guarantor represents and warrants
to Guarantied Party that Guarantor is currently informed of the financial
condition of Purchaser and of all other circumstances which a diligent inquiry
would reveal and which bear upon the risk of nonpayment of the Guaranteed
Obligations. Guarantor further represents and warrants to Guarantied Party that
Guarantor has read and understands the terms and conditions of the Subordinated
Note. Guarantor hereby covenants that Guarantor will continue to keep informed
of Purchaser's financial condition, the financial condition of other guarantors,
if any, and of all other circumstances which bear upon the risk of nonpayment or
nonperformance of the Guaranteed Obligations.
10. SUBORDINATION. Guarantor and Guarantied Party agree that,
notwithstanding the terms of this Guaranty, the payment of the Guaranteed
Obligations and all other obligations of Guarantor hereunder is subordinated, to
the extent and in the manner set forth in the Subordination and Note
Cancellation Agreement, to the prior payment of all indebtedness and obligations
of Guarantor owing to Bank, as more particularly set forth in the Subordination
and Note Cancellation Agreement. In the event that any conflict exists between
the terms of this Guaranty, any document executed in connection with the
delivery of this Guaranty and the terms of the Subordination and Note
Cancellation Agreement, the terms of the Subordination and Note Cancellation
Agreement shall govern and be controlling.
11. PAYMENTS; APPLICATION. All payments to be made hereunder by Guarantor
shall be made in lawful money of the United States of America at the time of
payment, shall be made in immediately available funds, and shall be made without
deduction (whether for taxes or otherwise) or offset. All payments made by
Guarantor hereunder shall be applied as follows: first, to all costs and
expenses (including attorneys' fees and expenses and attorneys' fees and
expenses incurred pursuant to proceedings arising under the Bankruptcy Code)
incurred by Guarantied Party in enforcing this Guaranty or in collecting the
Guaranteed Obligations; second,
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to all accrued and unpaid interest, premium, if any, and fees owing to
Guarantied Party constituting Guaranteed Obligations; and third, to the balance
of the Guaranteed Obligations.
12. REPRESENTATIONS AND WARRANTIES. Guarantor hereby represents and
warrants to Guarantied Party that:
(a) Guarantor is a corporation duly organized and existing under the
laws of Delaware and has the power and authority to own its own properties and
assets, and to transact the business in which it is engaged, and is properly
licensed, qualified to do business and in good standing in every jurisdiction
where the conduct of its business requires it to be so qualified.
(b) The execution, delivery and performance of this Guaranty are
within Guarantor's powers, are not in conflict with the terms of any charter,
bylaw, certificate of incorporation or other organization papers of Guarantor,
and do not result in a breach of or constitute a default under any contract,
obligation, indenture or other instrument to which Guarantor is a party or by
which Guarantor is bound or affected. There is no law, rule or regulation, nor
is there any judgment, decree or order of any court or governmental authority
binding on Guarantor which would be contravened by the execution, delivery,
performance or enforcement of this Guaranty.
(c) Guarantor has taken all corporate action necessary to authorize
the execution and delivery of this Guaranty, and the consummation of the
transactions contemplated hereby and thereby. Upon their execution and delivery
in accordance with their respective terms, this Guaranty will constitute legal,
valid and binding agreements and obligations of Guarantor enforceable against
Guarantor in accordance with its terms, except as enforceability may be limited
by Bankruptcy, insolvency, fraudulent conveyance, and similar laws and equitable
principles affecting the enforcement of creditors' rights generally.
(d) No approval, consent, exemption or other action by, or notice to
or filing with, any governmental authority is necessary in connection with the
execution, delivery, performance or enforcement of this Guaranty except as may
have been obtained by Guarantor and certified copies of which have been
delivered to Guarantied Party.
13. ATTORNEYS' FEES AND COSTS. Guarantor agrees to pay, on demand, all
attorneys' fees (including attorneys' fees incurred pursuant to proceedings
arising under the Bankruptcy Code) and all other costs and expenses which may be
incurred by Guarantied Party in the enforcement of this Guaranty or in any way
arising out of, or consequential to the protection, assertion, or enforcement of
the Guaranteed Obligations (or any security therefor), whether or not suit is
brought.
14. NOTICES. Unless otherwise specifically provided herein, any notice or
other communication herein required or permitted to be given shall be in writing
and may be personally served, sent by telefacsimile, telexed, or sent by courier
service or United States mail and shall be deemed to have been given when
delivered in person or by courier service, on the next business day after
receipt of a telefacsimile or telex, or four business days after deposit in
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the United States mail (registered or certified, with postage prepaid and
properly addressed). For the purposes hereof, the addresses of the parties
hereto (until notice of a change thereof is delivered as provided in this
Section 15) shall be set forth below, or, as to each party, at such other
address as may be designated by such party in a written notice to all of the
other parties:
If to Guarantor: Prospect Medical Holdings, Inc.
18200 Yorba Linda Boulevard
Yorba Linda, California 92686
Attention: President
Telecopier No.:
-------------
If to Guarantied Party: Sinnadurai E. Moorthy, M.D
44725 10th Street West
Suite 250
Lancaster, California 93534
Telecopier No.:
-------------
With a copy to: Jack Goldman, Esq.
Arter & Hadden
700 South Flower Street
Suite 3000+
Los Angeles, California 90017
Telecopier No.: 213-617-9255
15. CUMULATIVE REMEDIES. No remedy under this Guaranty or the
Subordinated Note is intended to be exclusive of any other remedy, but each and
every remedy shall be cumulative and in addition to any and every other remedy
given hereunder or under the Subordinated Note, and those provided by law or in
equity. No delay or omission by Guarantied Party to exercise any right under
this Guaranty shall impair any such right nor be construed to be a waiver
thereof. No failure on the part of Guarantied Party to exercise, and no delay
in exercising, any right hereunder shall operate as a waiver thereof; nor shall
any single or partial exercise of any right hereunder preclude any other or
further exercise thereof or the exercise of any other right.
16. BOOKS AND RECORDS. Guarantor agrees Guarantied Party's books and
records showing the account between Guarantied Party and Purchaser shall be
admissible in any action or proceeding and shall be binding upon Guarantor for
the purpose of establishing the items therein set forth and shall constitute
prima facie proof thereof.
17. SEVERABILITY OF PROVISIONS. If any provision of this Guaranty is for
any reason held to be invalid, illegal or unenforceable in any respect, that
provision shall not affect the validity, legality or enforceability of any other
provision of this Guaranty.
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18. ENTIRE AGREEMENT, AMENDMENTS AND WAIVERS. This Guaranty constitutes
the entire agreement between Guarantor and Guarantied Party pertaining to the
subject matter contained herein. Any provision of this Guaranty may be amended
or waived if, but only if, such amendment or waiver is in writing and is signed
by the party asserted to be bound thereby, and then such amendment or waiver
shall be effective only in the specific instance and specific purpose for which
given.
19. SECURITY. This Guaranty is secured by that certain Security
Agreement, as of even date herewith, between Guarantor and Guarantied Party, as
the same may be amended from time to time.
20. SUCCESSORS AND ASSIGNS. This Guaranty shall bind the successors and
assigns of Guarantor, and shall inure to the benefit of the respective
successors and assigns of Guarantied Party; PROVIDED, HOWEVER, Guarantor may not
assign this Guaranty or delegate any of his duties hereunder without Guarantied
Party's prior written consent and any such prohibited assignment shall be
absolutely null and void. In the event of any assignment or other transfer of
rights by a Guarantied Party, the rights and benefits herein conferred upon such
Guarantied Party shall automatically extend to and be vested in such assignee or
other transferee.
21. GOVERNING LAW. This Guaranty shall be deemed to have been made in the
State of California and the validity, construction, interpretation, and
enforcement hereof, and the rights of the parties hereto, shall be determined
under, governed by, and construed in accordance with the internal laws of the
State of California, without regard to principles of conflicts of law.
22. ARBITRATION. The parties firmly desire to resolve all disputes
arising hereunder without resort to litigation in order to protect their
respective business reputations and the confidential nature of certain aspects
of their relationship. Accordingly, any controversy or claim arising out of or
relating to this Guaranty, or the breach thereof, shall be settled by
arbitration as set forth below.
(a) All disputes which in any manner arise out of or relate to this
Guaranty or the subject matter thereof, shall be resolved exclusively by
arbitration in accordance with the provisions of this Section 23. Either party
may commence arbitration by sending a written demand for arbitration to the
other party, setting forth the nature of the controversy, the dollar amount
involved, if any, and the remedies sought, and attaching a copy of this Section
to the demand.
(b) The parties stipulate to arbitration before a single, mutually
agreed upon arbitrator sitting on the Los Angeles, California Judicial
Arbitration Mediation Services (JAMS) panel. In the event that the parties are
unable to agree upon the person chosen as arbitrator within 30 days of the
demand for arbitration, the arbitrator shall be selected in the sole discretion
of the JAMS administrator. The arbitrator shall be a member of the California
bar.
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(c) The parties shall share all costs of arbitration. The prevailing
party shall be entitled to reimbursement by the other party of such party's
attorneys' fees and costs and any arbitration fees and expenses incurred in
connection with the arbitration hereunder.
(d) The substantive law of the State of California shall be applied
by the arbitrator. All proceedings in arbitration shall be in accordance with
the California Code of Civil Procedure, as amended, and the parties shall have
the right to legal discovery in any matter submitted to arbitration in
satisfaction of California Code of Civil Procedure Section 1283.05, as permitted
by California Code of Civil Procedure Section 1283.1(b).
(e) Arbitration shall take place in Los Angeles, California unless
the parties otherwise agree. As soon as reasonably practicable, a hearing with
respect to the dispute or matter to be resolved shall be conducted by the
arbitrator. As soon as reasonably practicable thereunder, the arbitrator shall
arrive at a final decision, which shall be reduced to writing, signed by the
arbitrator and mailed to each of the parties and their legal counsel.
(f) All decisions of the arbitrator shall be final, binding and
conclusive on the parties and shall constitute the only method of resolving
disputes or matters subject to arbitration pursuant to this Guaranty. The
arbitrator or a court of appropriate jurisdiction may issue a write of execution
to enforce the arbitrator's judgment. Judgment may be entered upon such a
decision in accordance with applicable law in any court having jurisdiction
thereof.
(g) Notwithstanding the foregoing, because time is of the essence of
this Guaranty, the parties specifically reserve the right to a judicial
temporary restraining order, preliminary injunction, or other similar equitable
relief.
(h) The decision and award of the arbitrator shall be kept
confidential by the parties to the greatest extent possible. No disclosure of
such decision or award shall be made by the parties except as required by law or
as necessary or appropriate to effect the enforcement thereof.
(i) Should either party institute any action or procedure to enforce
this Guaranty or any provision hereof, or for damages by reason of any alleged
breach of this Guaranty or of any provision hereof, or for a declaration of
rights hereunder (including, without limitation, arbitration), the prevailing
party in any such action or proceeding shall be entitled to
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receive from the other party all costs and expenses, including, without
limitation, reasonable attorneys' fees, incurred by the prevailing party in
connection with such action or proceeding.
IN WITNESS WHEREOF, Guarantor has executed and delivered this Guaranty as
of the date set forth in the first paragraph hereof.
PROSPECT MEDICAL HOLDINGS, INC.
By /s/ Jacob Y. Terner, M.D.
---------------------------------
Title: CEO
-------------------------
ACCEPTED AND AGREED:
/s/ Sinnadurai E. Moorthy M.D.
- ---------------------------------------------
Print Name SINNADURAI E. MOORTHY M.D.
-----------------------------------
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EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is executed this
25th day of September, 1997, by and between Sierra Primary Care Medical Group,
Inc., a California professional corporation (hereinafter referred to as the
"Employer"), and Karunyan Arulanantham, M.D. (hereinafter referred to as the
"Physician").
R E C I T A L S
A. Employer owns and operates a medical practice, under the name Sierra
Primary Care Medical Group, Inc. (the "Practice"), located at 1037 East Palmdale
Blvd., Palmdale, California 93550; 44469 10th Street West, Lancaster,
California; and 44471 10th West, Lancaster, California.
B. Physician was formally a shareholder of Employer, but sold his
shares to Prospect Medical Group, Inc., a California professional corporation;
and
C. Following such sale, Employer desires to obtain the services of
Physician, and Physician desires to be employed by Employer, upon the terms and
conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the sufficiency of which is hereby acknowledged, the
parties agree as follows:
1. TERMS AND CONDITIONS OF EMPLOYMENT
1.1 EMPLOYMENT. Employer hereby employs Physician and Physician hereby
accepts employment at the Practice subject to the terms and conditions
hereinafter set forth.
1.2 SERVICES TO BE PROVIDED. Physician shall render such services as
may be mutually agreed upon by Physician and Employer as being required for the
administration and operation of the Practice. Physician shall also provide
medical services at the Practice as mutually agreed upon by Physician and
Employer.
1.3 FACILITIES. Employer agrees to provide adequate office space for
the performance of the duties of Physician as contemplated in this Agreement
including, but not limited to, an appropriate examination room and waiting room
space at the Practice for conducting Physician's medical services in conformity
with the prevailing standard of care in the community.
1.4 NON-PHYSICIAN PERSONNEL. Through necessary arrangements, Employer
will provide Physician with adequate non-physician personnel including, but not
limited to, nursing staff, reception and secretarial staff, to assist Physician
in the performance of his or her duties.
<PAGE>
Physician may recommend certain persons to Employer for any or all of the
above positions, provided that all hiring and firing decisions shall be made
by Employer in its sole discretion.
1.5 QUALIFICATIONS.
(a) Physician hereby represents and warrants to Employer that
Physician:
(i) Is currently duly licensed and qualified to engage in
the practice of medicine in the State of California pursuant to the requirements
of the Medical Board of California;
(ii) Has or will obtain such qualifications required to
meet the criteria necessary to provide professional services at the Practice;
(iii) Has all necessary narcotics and controlled substances
registration numbers and licenses for the performance of his duties hereunder;
(iv) In no state has Physician's license to practice
medicine ever been suspended, restricted, denied or revoked:
(v) Has never been reprimanded, sanctioned or disciplined
by a licensing board or state or local medical society or specialty board or any
healthcare facility;
(vi) Physician has maintained professional liability
insurance coverage in the amount of $1,000,000 individually, and $3,000,000 in
the aggregate;
(vii) No action based on an allegation of malpractice by
Physician has ever been settled by payment to the plaintiff of an aggregate
amount in excess of Thirty Thousand Dollars ($30,000); and
(viii) Has never resigned from or been denied membership or
reappointment of membership on the medical staff of any hospital, and no
hospital medical staff membership or clinical privileges of Physician have ever
been suspended, curtailed, denied or revoked.
(b) In the event any representation or warranty set forth above
becomes untrue or inaccurate in any material respect during the Term (as
hereinafter defined), Physician shall send the Practice a notice (the "Physician
Warranty Notice") within ten (10) days thereafter setting forth with reasonable
particularity the reasons why such representation or warranty has become untrue
or inaccurate.
(c) In addition, Physician shall at all times during the Term of
this Agreement comply with applicable federal, state and municipal laws
including, without limitation, all
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licensing requirements, other applicable statutes and ordinances, rules and
regulations of governmental agencies regulating Physician's profession, and
applicable ethical standards.
1.6 FEES, BILLINGS AND COLLECTIONS. Employer shall bill and collect
all fees for the services that are provided for the patients of Physician
("collected revenues"), and Physician agrees that Physician shall not take
any actions whatsoever to bill (or cause to be billed, other than by Employer
or its designee) any patient or other individual or entity for any such
services. The fees for services rendered by Physician shall be established by
Employer. The fees for services may be changed from time to time by Employer
to reflect charges that may have been agreed upon between Employer and
third-party providers, including insurance companies, managed care plans,
HMOs and PPOs. Employer (or its designee) shall bill Physician's charges and
collect payments for all Physician's services, and Physician agrees to work
with Employer's office staff to ensure the prompt billing of all patients for
all services rendered and to use his or her best efforts to help office staff
(or Employer's designee) collect all patient accounts. The "Physician
charges" shall mean all billings for all of Physician's services provided
hereunder. All fees from billings generated by Physician shall be the sole
and exclusive income of Employer, and Physician expressly and irrevocably
transfers, assigns or otherwise conveys to employer all right, title and
interest of Physician in and to any fees resulting from or incident to
Physician's practice of medicine under this Agreement.
1.7 PHYSICIAN MEDICAL RECORDS. The medical records maintained by
Physician relating to patients seen by him during the term of this Agreement are
the property of Employer, and Physician will comply with all applicable laws
with regard to maintaining them.
1.8 EMPLOYMENT. Physician agrees to devote his professional working
time and attention to the practice of medicine and the management of the
Practice for the benefit of the Practice under the terms of this Agreement.
Physician shall not engage in the practice of medicine, either directly or
indirectly, alone or in association with others, including covering calls for
other physicians except as an employee of Employer and for the benefit of
Employer and the Practice. Further, Physician shall not become an employee of
any other group, hospital or institution wherein Physician provides direct or
indirect services to patients of such entities. All fees and billings produced
by Physician for services for patients other than patients of the Practice shall
be income of the Practice. Physician's duties shall include, but not be limited
to the following:
(a) Providing professional medical services within Physician's
field of practice to any and all patients of the Practice in any office of the
Practice, regardless of whether the patients are covered by managed care plans,
Medicaid (Medi-Cal) or Medicare plans;
(b) Keeping, preparing and maintaining appropriate records,
claims reports and correspondence (including, without limitation, patient
charts) relating to all services rendered by him under this Agreement in
accordance with all Practice, professional, and governmental record
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keeping and reporting requirements, all of which records shall be and remain
the property or in the possession of Employer;
(c) Attending professional conventions and medical education
seminars and generally performing all things necessary to maintain and improve
his medical practice and professional skills, provided that all absences from
the Practice for such purposes must be approved in advance by Employer, in its
sole discretion; and
(d) Performing such other duties as Employer shall from time to
time reasonably direct.
Nothing in this Agreement is intended nor shall be construed as
limiting or restricting Physician's right to engage in any activity unrelated to
the direct practice of medicine, provided that such activities do not interfere
with Physician's performance of his obligations hereunder. The parties agree
that nothing herein shall be construed to limit Inpamani Arulanantham, M.D., the
spouse of Physician, from practicing medicine.
During the Term, Physician shall not, at any time or place, either
directly or indirectly, engage in the practice of medicine or surgery to any
extent whatsoever, except pursuant to and in accordance with this Agreement.
Except as otherwise expressly provided herein, Physician shall comply with all
policies and procedures applicable to Practice employees generally.
Nothing herein shall be construed to prevent Physician from
receiving honoraria or other stipends for performing services outside the scope
of his employment hereunder; provided however, that Physician shall not perform
any such services on behalf of any competitor of Employer or its affiliates.
Further, Physician shall be entitled (i) to perform charity services in India or
while on vacation, and (ii) to "cover," without compensation, for other
physicians, provided that physician spends no more than twelve (12) days per
year covering for other physicians.
2. COMPENSATION
2.1 SALARY. Employer shall pay Physician Two Hundred Thousand Dollars
($200,000) annually. Employer shall pay Physician on a bi-weekly basis in
arrears in accordance with Employer's policies in effect from time to time.
Such salary shall be increased at Employer's sole discretion, based on
performance criteria established by Employer.
2.2 BENEFITS. During the term of this Agreement, Employer shall provide
Physician and his or her beneficiaries with certain employment benefits
commensurate with those received by Employer's and Prospect Medical Holdings,
Inc. senior management, including, but not limited to, the following:
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(a) Physician shall be entitled to participate in Employer's
retirement 401(k) and other benefit plans as offered from time to time at a
level commensurate with the retirement benefits offered to Employer's other
employees;
(b) A policy of disability insurance;
(c) Participation in Employer's Stock Option Plan;
(d) A policy of medical insurance for Physician and Physician's
immediate family;
(e) A policy of dental insurance for Physician and Physician's
immediate family; and
(f) A policy of vision insurance for Physician and Physician's
immediate family.
However, with respect to the foregoing benefits, Employer's life insurance
company, if any, and/or disability insurer, if any, may require Physician to
satisfactorily pass a physical examination in order to issue a life insurance
policy to Physician, and Physician shall comply with all such reasonable
requirements. In addition, Employer may elect to obtain key-man life insurance
coverage on Physician, and Physician agrees to submit to any required
examination therefor.
2.3 FRINGE BENEFITS/REIMBURSEMENT OF EXPENSES. During the term of this
Agreement, Employer shall provide Physician with the following fringe benefits
or reimburse the following expenses, as the case may be, which are incurred in
the performance of Physician's duties on behalf of the Company:
(a) reimbursement of up to $800 per month for automobile
expenses;
(b) reimbursement of up to $400 per month for phone expenses; and
(c) reimbursement of up to $1,000 per year for continuing
education classes.
2.4 VACATION BENEFITS. Physician shall be entitled to four weeks of
paid vacation each year, commencing on the date hereof. Additionally, Physician
shall be entitled to take up to one week per year for continuing medical
education classes.
2.5 MALPRACTICE INSURANCE. Employer will purchase and maintain a
professional liability insurance policy for Physician which will cover acts or
omissions commencing with the Effective Date through the termination of this
Agreement at a level commensurate with that paid Employer for other physician
employees.
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3. TERM AND TERMINATION OF AGREEMENT
3.1 CONTRACT TERM. The initial term of this Agreement shall commence on
September 25, 1997 (the "Effective Date"), and shall continue for a period of
three (3) years, terminating on September 24, 2000, subject to earlier
termination of this Agreement as provided herein.
3.2 TERMINATION WITHOUT CAUSE. No party may terminate this Agreement or
Physician's employment hereunder, without cause.
3.3 TERMINATION BY EMPLOYER. Employer may terminate Physician's
employment hereunder at any time for "cause" by giving notice of termination
(the "Termination Notice") to the Physician. Cause includes the following:
(a) Upon material violation by Physician of any provisions of
this Agreement or the rules, policies, and/or procedures of the Practice.
(b) Upon repeated failure by Physician to meet utilization,
performance, or productivity standards established by Employer for the Practice.
(c) Upon revocation, cancellation, suspension or limitation of
Physician's professional license, or disciplinary action in any state by an
appropriate licensing authority including, without limitation, the revocation,
suspension, limitation, or reduction of such license or of Physician's DEA
license.
(d) Upon cancellation of Physician's coverage, or his
uninsurability, under the terms and conditions of the professional liability
insurance provided by Employer as set forth above.
(e) Upon the imposition of any restrictions or limitations on
Physician by any governmental or professional authority having jurisdiction over
Physician to such an extent that Physician cannot engage in the practice of
medicine as required hereunder.
(f) Upon Physician's conviction of a felony or crime of moral
turpitude.
(g) Upon repeated failure by Physician to conform and comply with
Employer's professional requirements concerning maintenance of medical records.
(h) Upon the use of alcohol or a controlled substance which
materially impairs the ability of Physician to effectively perform Physician's
duties and obligations under this Agreement.
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(i) If Employer, in good faith, determines that Physician is not
providing adequate patient care or that the health, safety or welfare of
patients is jeopardized by continuing the employment of Physician.
(j) In the event the performance by either party hereto of any
term, covenant, condition or provision of this Agreement should jeopardize (1)
the licensure of Employer, any Affiliate of Employer, or Physician, or (2)
Employer's (or any Affiliate's) or Physician's participation in, or
reimbursement from, Medicare, Medicaid (Medi-Cal) or other reimbursement or
payment programs; or if for any other reason said performance should be in
violation of any statute, ordinance, or be otherwise deemed illegal, by a state
or federal court or governmental agency (collectively, "Jeopardy Event"), then
the parties shall use their best efforts to meet forthwith and attempt to
negotiate an amendment to this Agreement to remove or negate the effect of the
Jeopardy Event. In the event the parties are unable to negotiate such an
amendment within fifteen (15) days following such notice, then the provisions of
this Agreement that give rise to the Jeopardy Event shall be ineffective only to
the extent that they are in contravention of applicable law or otherwise give
rise to the Jeopardy Event, without invalidating the remaining provisions of
this Agreement, unless the same should defeat an essential business purpose of
this Agreement.
3.4 TERMINATION BY PHYSICIAN. Physician may terminate his or her
employment hereunder at any time for "cause." Cause is limited to a material
breach by Employer of a material term of this Agreement by Employer. In the
event Physician terminates this Agreement for cause, termination shall be
effective upon two (2) weeks notification to Employer by Physician. In such
case, upon notification, Employer shall have a two (2) week period in which to
cure such breach.
3.5 EFFECT OF TERMINATION. Unless otherwise set forth below, Physician
shall not be entitled to any severance pay upon the termination this Agreement
by Employer for cause; Physician shall only be entitled to receive accrued but
unpaid salary through the date of such termination. Upon and after termination
of this Agreement, Physician will be provided full access to copy Employer
patient medical records in the event of a malpractice action or administrative
investigation or proceeding against Physician.
4. CONFIDENTIALITY/TRADE SECRETS. Physician acknowledges that his position
with the Practice will be one of the highest trust and confidence both by reason
of his position and by reason of his access to and contact with the trade
secrets and confidential and proprietary business information of Employer and
all of its Affiliates (as defined below), during the term of this Agreement and
thereafter. Physician covenants and agrees as follows:
4.1 PROTECTION. That Physician shall use his best efforts and
exercise utmost diligence to protect and safeguard the trade secrets and
confidential and proprietary information of Employer and its "Affiliates"
(which term as used in this Agreement shall include any person, corporation,
partnership, general partner or other entity that (i) provides management or
other
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services to the Practice ("Manager"), or (ii) directly, or indirectly through
one or more intermediaries, controls or is controlled by or is under common
control with Employer or Manager), including, without limitation, their trade
secrets, proprietary information, the identity of their customers and
suppliers, their arrangements with their customers and suppliers, and their
technical data, records, compilations of information, processes, computer
software, and specifications relating to their customers, suppliers, products
and services (collectively, "Confidential Information").
4.2 NONDISCLOSURE. That Physician shall not disclose any Confidential
Information, except as may be required in the course of his employment or as may
be required by law.
4.3 NON-USAGE. That Physician shall not use, directly or indirectly,
for his own benefit or for the benefit of another, any Confidential Information.
The covenants contained in this Section 4 shall not be applicable to any
information which is in the public domain other than as a result of action by
Physician or which Physician can establish was obtained from sources other than
Employer or any of its Affiliates, who are not under a duty of nondisclosure.
All Confidential Information and all files, records, documents, drawings,
specifications, computer software, memorandums, notes, or other documents
relating thereto or otherwise relating to the business of Employer and its
Affiliates or the Practice, whether prepared by Physician or otherwise coming
into his possession, shall be the exclusive property of Employer (and/or its
Affiliates, as applicable) and shall be delivered to Employer or its Affiliates
as appropriate and not retained by (nor any copies thereof retained by)
Physician upon termination of his employment for any reason whatsoever.
5. NON-SOLICITATION; NON-DIVERSION.
5.1 PLAN MEMBER CONTACT. Physician acknowledges and agrees that
Employer has expended a great deal of time, effort and money in developing
its business and obtaining the patients enrolled in prepaid capitated health
plans (each a "Plan Member") that are enrolled with Employer, and that all of
the patients to whom Physician renders professional medical services pursuant
to this Agreement are and will remain patients of Employer ("Employer
Patients"). Because of this, Employer considers, and Physician acknowledges,
that the Employer Patients constitute an important corporate asset and
Employer's Plan Member lists constitute valuable proprietary information. In
consideration of Employer providing current Employer Patients (I.E. Plan
Members), as well as future Employer Patients, to Physician, Physician
acknowledges and agrees that Employer will suffer irreparable harm and injury
if Physician attempts to, or does, communicate with Employer Patients in any
way concerning termination of this Agreement or concerning any other Employer
business matter. As such, Physician expressly waives any rights (including
those set forth in California Business and Professions Code Section 651) to
contact Employer Patients in any way about the termination of this Agreement
or about any other Employer business matter. Physician agrees that, except
to the extent that Employer has provided written authorization, Physician
shall not directly contact Employer Patients, their employers or
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health plans in regard to business related matters pertaining to Employer
contracted heath plans including, but not limited to, (1) switching plans or
similar entities or contracting directly with Physician (or some other
provider organization that Physician is a member of) instead of Employer; (2)
the options Employer Patients have to transfer to other plans (or to switch
to other providers as a result of termination of this Agreement; or (3) the
fact that the Employer Patient will no longer be able to obtain services from
Physician. Understanding and acknowledging the foregoing, Physician agrees
to cooperate fully with Employer in any communications to Employer Patients
concerning termination of this Agreement and other Employer business matters,
and Physician agrees not to interfere in any way with the relationship
between Employer and Employer Patients. In the event that Physician violates
this provision, Employer may seek a temporary restraining order and/or
injunction to preclude such activity, as well as all appropriate damages
resulting from Physician's breach of this provision. Notwithstanding the
foregoing, nothing contained herein shall be construed to limit the
Physician's opportunity to discuss with any Employer Patient information
relevant to such Employer Patient's medical condition, including such
Employer Patient's treatment options, alternative plans or other coverage
arrangements.
5.2 NON-SOLICITATION OF PLAN MEMBERS. As part of the consideration for
Employer to enter into this Agreement, during the initial and any succeeding
term of this Agreement and for a period of three (3) years following the date of
termination of this Agreement, Physician will not directly or indirectly, either
individually or on behalf of or as a provider for any person or entity other
than Employer whose business competes with the business of Employer, (i) advise
any Employer Plan Member or patient to disenroll from Employer, or (ii) solicit
any Plan Member or patient or any Plan Member's or patient's employer to become
enrolled with any other health maintenance organization, provider organization,
or any other similar hospitalization or medical payment plan or insurance
program. Physician shall use his best efforts to ensure that no employee, agent
or independent contractor of Physician makes any derogatory remarks regarding
Employer to any Plan Member, Plan Member's employer, health plan or health
maintenance organization.
5.3 OTHER AGREEMENTS FOLLOWING TERMINATION. Nothing contained herein
shall prevent Physician, following the termination of this Agreement, from:
(a) Entering into contracts or other agreements with any
capitated health plan that does not have an agreement or contract with Employer
as of the date of this Agreement;
(b) Providing services to fee for service patients; or
(c) Joining or otherwise becoming a member of an independent
practice association or physician network.
Notwithstanding the foregoing, in the event an Employer Patient seeks,
without being solicited or otherwise contacted by Physician or any agent of
Physician in violation of the
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provisions of Sections 5.1 and 5.2 herein, to receive medical services from
Physician and Physician desires to provide medical services to such former
Employer Patient, Physician shall only be entitled to provide such services
as an outside provider of Employer under the terms of Employer's standard
participating provider agreement then in effect, and pursuant to Employer's
agreement with the respective health plan under which the capitation payments
for such former Employer Patient are paid.
6. REMEDIES FOR BREACH OF COVENANTS OF PHYSICIAN. The covenants set forth in
Sections 4 and 5 of this Agreement shall continue to be binding upon Physician
notwithstanding the termination of his employment with Employer for any reason
whatsoever. Such covenants shall be deemed and construed as separate agreements
independent of any other provision of this Agreement. The existence of any
claim or cause of action by Physician against Employer or any of its Affiliates,
whether predicated on this Agreement or otherwise, shall not constitute a
defense to the enforcement by Employer or any of its Affiliates of any or all of
such covenants. It is expressly agreed that the remedy at law for the breach of
any such covenant is inadequate and that temporary and permanent injunctive
relief shall be available to prevent the breach or any threatened breach
thereof, without the necessity of proof of actual damages and without the
necessity of posting a bond, cash or otherwise. In this connection, Physician
agrees not to assert any defense that monetary damages would be sufficient.
7. DEFAULT. Any default by Employer in the payment when due, of any amount
owed by Employer to Physician under the Contingent Promissory Note, of even date
herewith, payable from Employer to Physician, in the principal amount of
$1,125,000, which default continues for a period of ten (10) days, shall
constitute a default under this Agreement. Upon written notice from Physician
of such default, Employer shall have a thirty (30) day period in which to cure
such default. In the event Employer fails to cure such default within thirty
(30) days of such notice, at Physician's option, except for the provisions
contained in Sections 4 and 5 hereinabove, which shall remain in full force and
effect, this Agreement shall terminate and Physician shall have no further
obligations hereunder.
8. ARBITRATION. The parties firmly desire to resolve all disputes arising
hereunder without resort to litigation in order to protect their respective
business reputations and the confidential nature of certain aspects of their
relationship. Accordingly, any controversy or claim arising out of or relating
to this Agreement, or the breach thereof, shall be settled by arbitration as set
forth below.
8.1 All disputes which in any manner arise out of or relate to this
Agreement or the subject matter thereof, shall be resolved exclusively by
arbitration in accordance with the provisions of this Section 8. Either party
may commence arbitration by sending a written demand for arbitration to the
other party, setting forth the nature of the controversy, the dollar amount
involved, if any, and the remedies sought, and attaching a copy of this Section
to the demand.
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8.2 There shall be one arbitrator. If the parties shall fail to select
a mutually acceptable arbitrator within ten (10) days after the demand for
arbitration is mailed, then the parties stipulate to arbitration before a single
arbitrator sitting on the Los Angeles, California Judicial Arbitration Mediation
Services (JAMS) panel, and selected in the sole discretion of the JAMS
administrator.
8.3 The parties shall share all costs of arbitration. The prevailing
party shall be entitled to reimbursement by the other party of such party's
attorneys' fees and costs and any arbitration fees and expenses incurred in
connection with the arbitration hereunder.
8.4 The substantive law of the State of California shall be applied by
the arbitrator.
8.5 Arbitration shall take place in Los Angeles, California unless the
parties otherwise agree. As soon as reasonably practicable, a hearing with
respect to the dispute or matter to be resolved shall be conducted by the
arbitrator. As soon as reasonably practicable thereafter, the arbitrator shall
arrive at a final decision, which shall be reduced to writing, signed by the
arbitrator and mailed to each of the parties and their legal counsel.
8.6 All decisions of the arbitrator shall be final, binding and
conclusive on the parties and shall constitute the only method of resolving
disputes or matters subject to arbitration pursuant to this Agreement. The
arbitrator or a court of appropriate jurisdiction may issue a writ of execution
to enforce the arbitrator's judgment. Judgment may be entered upon such a
decision in accordance with applicable law in any court having jurisdiction
thereof.
8.7 Notwithstanding the foregoing, because time is of the essence of
this Agreement, the parties specifically reserve the right to seek a judicial
temporary restraining order, preliminary injunction, or other similar short term
equitable relief, and grant the arbitrator the right to make a final
determination of the parties' rights, including whether to make permanent or
dissolve such court order.
8.8 The decision and award of the arbitrator shall be kept confidential
by the parties to the greatest extent possible. No disclosure of such decision
or award shall be made by the parties except as required by law or as necessary
or appropriate to effect the enforcement thereof.
9. CONTRACTS. Physician shall not have the right or authority and hereby
expressly covenants not to, enter into a contract in the name of Employer or the
Practice or otherwise bind Employer or the Practice, in any way, without the
express written consent of Employer. Physician shall hold Employer and the
Practice harmless from any loss attributable to a violation of this covenant.
10. USE OF PREMISES. Physician covenants not to use, or permit any other
personnel under the control of Physician to use, any part of the premises of the
Practice for any purpose other than the performance of services hereunder.
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11. MISCELLANEOUS.
11.1 NOTICES. Any notice, demand, or communication required, permitted
or desired to be given hereunder shall be deemed effectively given when
personally delivered or mailed by prepaid certified mail, return receipt
requested, addressed as follows:
Physician: Karunyan Arulanantham, M.D.
1675 Staffordshire Drive
Lancaster, California 93534
with a copy to: Arter & Hadden
700 S. Flower St., Ste. 3000
Los Angeles, California 90017
Attention: Jack Goldman, Esq.
Employer: Sierra Primary Care Medical Group, Inc.
c/o Prospect Medical Group, Inc.
18200 Yorba Linda Blvd., Suite 409
Yorba Linda, California 92686
Attention: Gregg DeNicola, M.D.
with a copy to: Miller & Holguin
1801 Century Park East, 7th Floor
Los Angeles, California 90067
Attention: Dale S. Miller, Esq.
11.2 GOVERNING LAW. This Agreement has been executed and delivered and
shall be interpreted, construed, and enforced in accordance with the laws of the
State of California.
11.3 ENFORCEMENT. In the event that either party shall be required to
enforce the terms of this Agreement, whether with or without arbitration, the
prevailing party shall be entitled to recover the costs of such action,
including reasonable attorneys' fees.
11.4 ENTIRE AGREEMENT. This Agreement shall constitute the entire
agreement of the parties with respect to the subject matter hereof and may not
be amended except in writing signed by both of the parties hereto. No oral
statements or prior written materials not specifically incorporated herein shall
be of any force or effect.
11.5 SEVERABILITY. In the event any provision of this Agreement is held
to be unenforceable or void for any reason, the remainder of the Agreement shall
be unaffected and shall remain in full force and effect in accordance with its
terms, unless such unenforceability or voidness defeats an essential business
term hereof.
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11.6 NO ASSIGNMENT; BINDING EFFECT. Physician shall not assign this
Agreement to any other party or parties without the prior written consent of
Employer. Except for an assignment to Imperial Bank, a California banking
corporation, pursuant to applicable law. Employer shall not assign this
Agreement to any other party or parties without the prior written consent of
Physician. This Agreement shall inure to the benefit of and be binding upon the
parties hereto and their respective successors and permitted assigns.
11.7 HEADINGS. The headings used herein are for convenience only and do
not limit the contents of this Agreement.
11.8 COUNTERPARTS. This Agreement may be executed in counterparts, each
of which will be deemed to be an original, but all of which together will
constitute one and the same agreement.
11.9 CHANGE OF CIRCUMSTANCES. In the event (i) Medicare, Medicaid
(Medi-Cal), any third-party payor or any federal, state or local legislative or
regulatory authority adopts any law, rule, regulation, policy, procedure or
interpretation thereof which establishes a material change in the method or
amount of reimbursement or payment for services under this Agreement, or (ii)
any or all of such payors/authorities impose requirements which require a
material change in the manner of either party's operations under this Agreement
and/or the costs related thereto, then, upon the request of either party
materially affected by any such change in circumstances, the parties shall enter
into good faith negotiations for the purpose of establishing such amendments or
modifications as may be appropriate in order to accommodate the new requirements
and change of circumstances while preserving the original intent of this
Agreement to the greatest extent possible. If, after thirty (30) days of such
negotiations, the parties are unable to reach an agreement as to how or whether
this Agreement shall continue, then either party may terminate this Agreement
upon thirty (30) days prior written notice.
11.10 COMPLIANCE WITH LAW. The parties recognize that this Agreement at
all times is to be subject to applicable state, local and federal law.
11.11 WAIVERS. Waivers of any of the provisions hereof may be effective
only if signed by the party intending to be bound thereby.
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IN WITNESS WHEREOF, this Agreement has been executed by the parties on the
day and year first above written.
EMPLOYER: PHYSICIAN:
SIERRA PRIMARY CARE MEDICAL
GROUP, INC.
By: /s/ Jacob Y. Terner M.D. /s/ Karunyan Arulanantham
------------------------------ --------------------------------
Jacob Y. Terner, M.D. Karunyan Arulanantham, M.D.
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EXHIBIT 10.43
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is executed this
25th day of September, 1997, by and between Sierra Primary Care Medical
Group, Inc., a California professional corporation (hereinafter referred to
as the "Employer"), and Sinnadurai E. Moorthy, M.D. (hereinafter referred to
as the "Physician").
R E C I T A L S
A. Employer owns and operates a medical practice, under the name
Sierra Primary Care Medical Group, Inc. (the "Practice"), located at 1037
East Palmdale Blvd., Palmdale, California 93550; 44469 10th Street West,
Lancaster, California; and 44471 10th West, Lancaster, California.
B. Physician was formally a shareholder of Employer, but sold his
shares to Prospect Medical Group, Inc., a California professional
corporation; and
C. Following such sale, Employer desires to obtain the services of
Physician, and Physician desires to be employed by Employer, upon the terms
and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the sufficiency of which is hereby acknowledged, the
parties agree as follows:
1. TERMS AND CONDITIONS OF EMPLOYMENT
1.1 EMPLOYMENT. Employer hereby employs Physician and Physician
hereby accepts employment at the Practice subject to the terms and conditions
hereinafter set forth.
1.2 SERVICES TO BE PROVIDED. Physician shall render such services as
may be mutually agreed upon by Physician and Employer as being required for
the administration and operation of the Practice. Physician shall also
provide medical services at the Practice as mutually agreed upon by Physician
and Employer.
1.3 FACILITIES. Employer agrees to provide adequate office space for
the performance of the duties of Physician as contemplated in this Agreement
including, but not limited to, an appropriate examination room and waiting
room space at the Practice for conducting Physician's medical services in
conformity with the prevailing standard of care in the community.
1.4 NON-PHYSICIAN PERSONNEL. Through necessary arrangements, Employer
will provide Physician with adequate non-physician personnel including, but
not limited to, nursing staff, reception and secretarial staff, to assist
Physician in the performance of his or her duties.
<PAGE>
Physician may recommend certain persons to Employer for any or all of the
above positions, provided that all hiring and firing decisions shall be made
by Employer in its sole discretion.
1.5 QUALIFICATIONS.
(a) Physician hereby represents and warrants to Employer that
except as set forth on Exhibit A attached hereto, Physician:
(i) Is currently duly licensed and qualified to engage
in the practice of medicine in the State of California pursuant to the
requirements of the Medical Board of California;
(ii) Has or will obtain such qualifications required to
meet the criteria necessary to provide professional services at the Practice;
(iii) Has all necessary narcotics and controlled
substances registration numbers and licenses for the performance of his
duties hereunder;
(iv) In no state has Physician's license to practice
medicine ever been suspended, restricted, denied or revoked:
(v) Has never been reprimanded, sanctioned or
disciplined by a licensing board or state or local medical society or
specialty board or any healthcare facility;
(vi) Physician has maintained professional liability
insurance coverage in the amount of $1,000,000 individually, and $3,000,000
in the aggregate;
(vii) No action based on an allegation of malpractice by
Physician has ever been settled by payment to the plaintiff of an aggregate
amount in excess of Thirty Thousand Dollars ($30,000); and
(viii) Has never resigned from or been denied membership
or reappointment of membership on the medical staff of any hospital, and no
hospital medical staff membership or clinical privileges of Physician have
ever been suspended, curtailed, denied or revoked.
(b) In the event any representation or warranty set forth
above becomes untrue or inaccurate in any material respect during the Term
(as hereinafter defined), Physician shall send the Practice a notice (the
"Physician Warranty Notice") within ten (10) days thereafter setting forth
with reasonable particularity the reasons why such representation or warranty
has become untrue or inaccurate.
(c) In addition, Physician shall at all times during the Term
of this Agreement
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comply with applicable federal, state and municipal laws including, without
limitation, all licensing requirements, other applicable statutes and
ordinances, rules and regulations of governmental agencies regulating
Physician's profession, and applicable ethical standards.
1.6 FEES, BILLINGS AND COLLECTIONS. Employer shall bill and collect
all fees for the services that are provided for the patients of Physician
("collected revenues"), and Physician agrees that Physician shall not take
any actions whatsoever to bill (or cause to be billed, other than by Employer
or its designee) any patient or other individual or entity for any such
services. The fees for services rendered by Physician shall be established by
Employer. The fees for services may be changed from time to time by Employer
to reflect charges that may have been agreed upon between Employer and
third-party providers, including insurance companies, managed care plans,
HMOs and PPOs. Employer (or its designee) shall bill Physician's charges and
collect payments for all Physician's services, and Physician agrees to work
with Employer's office staff to ensure the prompt billing of all patients for
all services rendered and to use his or her best efforts to help office staff
(or Employer's designee) collect all patient accounts. The "Physician
charges" shall mean all billings for all of Physician's services provided
hereunder. All fees from billings generated by Physician shall be the sole
and exclusive income of Employer, and Physician expressly and irrevocably
transfers, assigns or otherwise conveys to Employer all right, title and
interest of Physician in and to any fees resulting from or incident to
Physician's practice of medicine under this Agreement.
1.7 PHYSICIAN MEDICAL RECORDS. The medical records maintained by
Physician relating to patients seen by him during the term of this Agreement
are the property of Employer, and Physician will comply with all applicable
laws with regard to maintaining them.
1.8 EMPLOYMENT. Except for services rendered at Physician's
gastroenterology practice, as provided hereinbelow, Physician agrees to
devote his professional working time and attention to the practice of
medicine and the management of the Practice for the benefit of the Practice
under the terms of this Agreement. Physician shall not engage in the
practice of medicine, either directly or indirectly, alone or in association
with others, including covering calls for other physicians except as an
employee of Employer and for the benefit of Employer and the Practice.
Further, Physician shall not become an employee of any other group, hospital
or institution wherein Physician provides direct or indirect services to
patients of such entities. Except for services rendered in Physician's
internal medicine and gastroenterology practice, as provided hereinbelow, all
fees and billings produced by Physician for services for patients other than
patients of the Practice shall be income of the Practice. Physician's duties
shall include, but not be limited to the following:
(a) Providing professional medical services within Physician's
field of practice to any and all patients of the Practice in any office of
the Practice, regardless of whether the patients are covered by managed care
plans, Medicaid (Medi-Cal) or Medicare plans;
(b) Keeping, preparing and maintaining appropriate records,
claims reports and
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correspondence (including, without limitation, patient charts) relating to
all services rendered by him under this Agreement in accordance with all
Practice, professional, and governmental record keeping and reporting
requirements, all of which records shall be and remain the property or in the
possession of Employer;
(c) Attending professional conventions and medical education
seminars and generally performing all things necessary to maintain and
improve his medical practice and professional skills, provided that all
absences from the Practice for such purposes must be approved in advance by
Employer, in its sole discretion; and
(d) Performing such other duties as Employer shall from time
to time reasonably direct.
Nothing in this Agreement is intended nor shall be construed as
limiting or restricting Physician's right to engage in any activity unrelated
to the direct practice of medicine, provided that such activities do not
interfere with Physician's performance of his or her obligations hereunder.
During the Term, Physician shall not, at any time or place,
either directly or indirectly, engage in the practice of medicine or surgery
to any extent whatsoever, except pursuant to and in accordance with this
Agreement. Except as otherwise expressly provided herein, Physician shall
comply with all policies and procedures applicable to Practice employees
generally. Notwithstanding the foregoing, Physician shall be entitled to
maintain an internal medicine and gastroenterology practice located at 44725
10th Street West, Suite 250, Lancaster, CA 93534 provided that he shall not
perform medical services for any capitated primary care patient outside his
employment with Employer.
Nothing herein shall be construed to prevent Physician from
receiving honoraria or other stipends for performing services outside the
scope of his employment hereunder; provided however, that Physician shall not
perform any such services on behalf of any competitor of Employer or its
affiliates.
2. COMPENSATION
2.1 SALARY. Employer shall pay Physician Seventy Thousand Dollars
($70,000) annually. Employer shall pay Physician on a bi-weekly basis in
arrears in accordance with Employer's policies in effect from time to time.
Such salary shall be increased at Employer's sole discretion, based on
performance criteria established by Employer.
2.2 BENEFITS. During the term of this Agreement, Employer shall
provide Physician and his or her beneficiaries with certain employment
benefits commensurate with those received by Employer's and Prospect Medical
Holdings, Inc. senior management, including, but not limited to, the
following:
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(a) Physician shall be entitled to participate in Employer's
retirement 401(k) and other benefit plans as offered from time to time at a
level commensurate with the retirement benefits offered to Employer's other
employees;
(b) A policy of disability insurance;
(c) Participation in Employer's Stock Option Plan;
(d) A policy of medical insurance for Physician and
Physician's immediate family;
(e) A policy of dental insurance for Physician and Physician's
immediate family; and
(f) A policy of vision insurance for Physician and Physician's
immediate family.
However, with respect to the foregoing benefits, Employer's life
insurance company, if any, and/or disability insurer, if any, may require
Physician to satisfactorily pass a physical examination in order to issue a
life insurance policy to Physician, and Physician shall comply with all such
reasonable requirements. In addition, Employer may elect to obtain key-man
life insurance coverage on Physician, and Physician agrees to submit to any
required examination therefor.
2.3 FRINGE BENEFITS/REIMBURSEMENT OF EXPENSES. During the term of
this Agreement, Employer shall provide Physician with the following fringe
benefits or reimburse the following expenses, as the case may be, which are
incurred in the performance of Physician's duties on behalf of the Company:
(a) reimbursement of up to $800 per month for automobile
expenses;
(b) reimbursement of up to $400 per month for phone expenses;
and
(c) reimbursement of up to $1,000 per year for continuing
education classes.
2.4 VACATION BENEFITS. Physician shall be entitled to four weeks of
paid vacation each year, commencing on the date hereof. Additionally,
Physician shall be entitled to take up to one week per year for continuing
medical education classes.
2.5 MALPRACTICE INSURANCE. Employer will purchase and maintain a
professional liability insurance policy for Physician which will cover acts
or omissions commencing with the Effective Date through the termination of
this Agreement at a level commensurate with that paid by Employer for other
physician employees.
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3. TERM AND TERMINATION OF AGREEMENT
3.1 CONTRACT TERM. The initial term of this Agreement shall commence
on September 25, 1997 (the "Effective Date"), and shall continue for a period
of three (3) years, terminating on September 24, 2000, subject to earlier
termination of this Agreement as provided herein.
3.2 TERMINATION WITHOUT CAUSE. No party may terminate this Agreement
or Physician's employment hereunder, without cause.
3.3 TERMINATION BY EMPLOYER. Employer may terminate Physician's
employment hereunder at any time for "cause" by giving notice of termination
(the "Termination Notice") to the Physician. Cause includes the following:
(a) Upon material violation by Physician of any provisions of
this Agreement or the rules, policies, and/or procedures of the Practice.
(b) Upon repeated failure by Physician to meet utilization,
performance, or productivity standards established by Employer for the
Practice.
(c) Upon revocation, cancellation, suspension or limitation of
Physician's professional license, or disciplinary action in any state by an
appropriate licensing authority including, without limitation, the
revocation, suspension, limitation, or reduction of such license or of
Physician's DEA license.
(d) Upon cancellation of Physician's coverage, or his
uninsurability, under the terms and conditions of the professional liability
insurance provided by Employer as set forth above.
(e) Upon the imposition of any restrictions or limitations on
Physician by any governmental or professional authority having jurisdiction
over Physician to such an extent that Physician cannot engage in the practice
of medicine as required hereunder.
(f) Upon Physician's conviction of a felony or crime of moral
turpitude.
(g) Upon repeated failure by Physician to conform and comply
with Employer's professional requirements concerning maintenance of medical
records.
(h) Upon the use of alcohol or a controlled substance which
materially impairs the ability of Physician to effectively perform
Physician's duties and obligations under this Agreement.
(i) If Employer, in good faith, determines that Physician is
not providing
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adequate patient care or that the health, safety or welfare of patients is
jeopardized by continuing the employment of Physician.
(j) In the event the performance by either party hereto of any
term, covenant, condition or provision of this Agreement should jeopardize
(1) the licensure of Employer, any Affiliate of Employer, or Physician, or
(2) Employer's (or any Affiliate's) or Physician's participation in, or
reimbursement from, Medicare, Medicaid (Medi-Cal) or other reimbursement or
payment programs; or if for any other reason said performance should be in
violation of any statute, ordinance, or be otherwise deemed illegal, by a
state or federal court or governmental agency (collectively, "Jeopardy
Event"), then the parties shall use their best efforts to meet forthwith and
attempt to negotiate an amendment to this Agreement to remove or negate the
effect of the Jeopardy Event. In the event the parties are unable to
negotiate such an amendment within fifteen (15) days following such notice,
then the provisions of this Agreement that give rise to the Jeopardy Event
shall be ineffective only to the extent that they are in contravention of
applicable law or otherwise give rise to the Jeopardy Event, without
invalidating the remaining provisions of this Agreement, unless the same
should defeat an essential business purpose of this Agreement.
3.4 TERMINATION BY PHYSICIAN. Physician may terminate his or her
employment hereunder at any time for "cause." Cause is limited to a material
breach by Employer of a material term of this Agreement by Employer. In the
event Physician terminates this Agreement for cause, termination shall be
effective upon two (2) weeks notification to Employer by Physician. In such
case, upon notification, Employer shall have a two (2) week period in which
to cure such breach.
3.5 EFFECT OF TERMINATION. Unless otherwise set forth below,
Physician shall not be entitled to any severance pay upon the termination
this Agreement by Employer for cause; Physician shall only be entitled to
receive accrued but unpaid salary through the date of such termination. Upon
and after termination of this Agreement, Physician will be provided full
access to copy Employer patient medical records in the event of a malpractice
action or administrative investigation or proceeding against Physician.
4. CONFIDENTIALITY/TRADE SECRETS. Physician acknowledges that his position
with the Practice will be one of the highest trust and confidence both by
reason of his position and by reason of his access to and contact with the
trade secrets and confidential and proprietary business information of
Employer and all of its Affiliates (as defined below), during the term of
this Agreement and thereafter. Physician covenants and agrees as follows:
4.1 PROTECTION. That Physician shall use his best efforts and
exercise utmost diligence to protect and safeguard the trade secrets and
confidential and proprietary information of Employer and its "Affiliates"
(which term as used in this Agreement shall include any person, corporation,
partnership, general partner or other entity that (i) provides management or
other services to the Practice ("Manager"), or (ii) directly, or indirectly
through one or more intermediaries, controls or is controlled by or is under
common control with Employer or
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Manager), including, without limitation, their trade secrets, proprietary
information, the identity of their customers and suppliers, their
arrangements with their customers and suppliers, and their technical data,
records, compilations of information, processes, computer software, and
specifications relating to their customers, suppliers, products and services
(collectively, "Confidential Information").
4.2 NONDISCLOSURE. That Physician shall not disclose any
Confidential Information, except as may be required in the course of his
employment or as may be required by law.
4.3 NON-USAGE. That Physician shall not use, directly or indirectly,
for his own benefit or for the benefit of another, any Confidential
Information.
The covenants contained in this Section 4 shall not be applicable to any
information which is in the public domain other than as a result of action by
Physician or which Physician can establish was obtained from sources other
than Employer or any of its Affiliates, who are not under a duty of
nondisclosure. All Confidential Information and all files, records,
documents, drawings, specifications, computer software, memorandums, notes,
or other documents relating thereto or otherwise relating to the business of
Employer and its Affiliates or the Practice, whether prepared by Physician or
otherwise coming into his possession, shall be the exclusive property of
Employer (and/or its Affiliates, as applicable) and shall be delivered to
Employer or its Affiliates as appropriate and not retained by (nor any copies
thereof retained by) Physician upon termination of his employment for any
reason whatsoever.
5. NON-SOLICITATION; NON-DIVERSION.
5.1 PLAN MEMBER CONTACT. Physician acknowledges and agrees that
Employer has expended a great deal of time, effort and money in developing
its business and obtaining the patients enrolled in prepaid capitated health
plans (each a "Plan Member") that are enrolled with Employer, and that all of
the patients to whom Physician renders professional medical services pursuant
to this Agreement are and will remain patients of Employer ("Employer
Patients"). Because of this, Employer considers, and Physician acknowledges,
that the Employer Patients constitute an important corporate asset and
Employer's Plan Member lists constitute valuable proprietary information. In
consideration of Employer providing current Employer Patients (I.E. Plan
Members), as well as future Employer Patients, to Physician, Physician
acknowledges and agrees that Employer will suffer irreparable harm and injury
if Physician attempts to, or does, communicate with Employer Patients in any
way concerning termination of this Agreement or concerning any other Employer
business matter. As such, Physician expressly waives any rights (including
those set forth in California Business and Professions Code Section 651) to
contact Employer Patients in any way about the termination of this Agreement
or about any other Employer business matter. Physician agrees that, except
to the extent that Employer has provided written authorization, Physician
shall not directly contact Employer Patients, their employers or health plans
in regard to business related matters pertaining to Employer contracted heath
plans including, but not limited to, (1) switching plans or similar entities
or contracting directly with
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Physician (or some other provider organization that Physician is a member of)
instead of Employer; (2) the options Employer Patients have to transfer to
other plans (or to switch to other providers as a result of termination of
this Agreement; or (3) the fact that the Employer Patient will no longer be
able to obtain services from Physician. Understanding and acknowledging the
foregoing, Physician agrees to cooperate fully with Employer in any
communications to Employer Patients concerning termination of this Agreement
and other Employer business matters, and Physician agrees not to interfere in
any way with the relationship between Employer and Employer Patients. In the
event that Physician violates this provision, Employer may seek a temporary
restraining order and/or injunction to preclude such activity, as well as all
appropriate damages resulting from Physician's breach of this provision.
Notwithstanding the foregoing, nothing contained herein shall be construed to
limit the Physician's opportunity to discuss with any Employer Patient
information relevant to such Employer Patient's medical condition, including
such Employer Patient's treatment options, alternative plans or other
coverage arrangements.
5.2 NON-SOLICITATION OF PLAN MEMBERS. As part of the consideration
for Employer to enter into this Agreement, during the initial and any
succeeding term of this Agreement and for a period of three (3) years
following the date of termination of this Agreement, Physician will not
directly or indirectly, either individually or on behalf of or as a provider
for any person or entity other than Employer whose business competes with the
business of Employer, (i) advise any Employer Plan Member or patient to
disenroll from Employer, or (ii) solicit any Plan Member or patient or any
Plan Member's or patient's employer to become enrolled with any other health
maintenance organization, provider organization, or any other similar
hospitalization or medical payment plan or insurance program. Physician
shall use his best efforts to ensure that no employee, agent or independent
contractor of Physician makes any derogatory remarks regarding Employer to
any Plan Member, Plan Member's employer, health plan or health maintenance
organization.
5.3 OTHER AGREEMENTS FOLLOWING TERMINATION. Nothing contained herein
shall prevent Physician, following the termination of this Agreement, from:
(a) Entering into contracts or other agreements with any
capitated health plan that does not have an agreement or contract with
Employer as of the date of this Agreement;
(b) Providing services to fee for service patients; or
(c) Joining or otherwise becoming a member of an independent
practice association or physician network.
Notwithstanding the foregoing, in the event an Employer Patient seeks,
without being solicited or otherwise contacted by Physician or any agent of
Physician in violation of the provisions of Sections 5.1 and 5.2 herein, to
receive medical services from Physician and Physician desires to provide
medical services to such former Employer Patient, Physician shall
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<PAGE>
only be entitled to provide such services as an outside provider of Employer
under the terms of Employer's standard participating provider agreement then
in effect, and pursuant to Employer's agreement with the respective health
plan under which the capitation payments for such former Employer Patient are
paid.
6. REMEDIES FOR BREACH OF COVENANTS OF PHYSICIAN. The covenants set forth
in Sections 4 and 5 of this Agreement shall continue to be binding upon
Physician notwithstanding the termination of his employment with Employer for
any reason whatsoever. Such covenants shall be deemed and construed as
separate agreements independent of any other provision of this Agreement.
The existence of any claim or cause of action by Physician against Employer
or any of its Affiliates, whether predicated on this Agreement or otherwise,
shall not constitute a defense to the enforcement by Employer or any of its
Affiliates of any or all of such covenants. It is expressly agreed that the
remedy at law for the breach of any such covenant is inadequate and that
temporary and permanent injunctive relief shall be available to prevent the
breach or any threatened breach thereof, without the necessity of proof of
actual damages and without the necessity of posting a bond, cash or
otherwise. In this connection, Physician agrees not to assert any defense
that monetary damages would be sufficient.
7. DEFAULT. Any default by Employer in the payment when due of any amount
owed by Employer to Physician under the Contingent Promissory Note, of even
date herewith, issued from Employer to Physician, in the principal amount of
$1,125,000, which default continues for a period of ten (10) days, shall
constitute a default under this Agreement. Upon written notice from
Physician of such default, Employer shall have a thirty (30) day period in
which to cure such default. In the event Employer fails to cure such default
within thirty (30) days of such notice, at Physician's option, except for the
provisions continued in Sections 4 and 5 hereinabove, which shall remain in
full force and effect, this Agreement shall terminate and Physician shall
have no further obligations hereunder.
8. ARBITRATION. The parties firmly desire to resolve all disputes arising
hereunder without resort to litigation in order to protect their respective
business reputations and the confidential nature of certain aspects of their
relationship. Accordingly, any controversy or claim arising out of or
relating to this Agreement, or the breach thereof, shall be settled by
arbitration as set forth below.
8.1 All disputes which in any manner arise out of or relate to this
Agreement or the subject matter thereof, shall be resolved exclusively by
arbitration in accordance with the provisions of this Section 8. Either
party may commence arbitration by sending a written demand for arbitration to
the other party, setting forth the nature of the controversy, the dollar
amount involved, if any, and the remedies sought, and attaching a copy of
this Section to the demand.
8.2 There shall be one arbitrator. If the parties shall fail to
select a mutually acceptable arbitrator within ten (10) days after the demand
for arbitration is mailed, then the parties stipulate to arbitration before a
single arbitrator sitting on the Los Angeles, California Judicial Arbitration
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Mediation Services (JAMS) panel, and selected in the sole discretion of the
JAMS administrator.
8.3 The parties shall share all costs of arbitration. The prevailing
party shall be entitled to reimbursement by the other party of such party's
attorneys' fees and costs and any arbitration fees and expenses incurred in
connection with the arbitration hereunder.
8.4 The substantive law of the State of California shall be applied
by the arbitrator.
8.5 Arbitration shall take place in Los Angeles, California unless
the parties otherwise agree. As soon as reasonably practicable, a hearing
with respect to the dispute or matter to be resolved shall be conducted by
the arbitrator. As soon as reasonably practicable thereafter, the arbitrator
shall arrive at a final decision, which shall be reduced to writing, signed
by the arbitrator and mailed to each of the parties and their legal counsel.
8.6 All decisions of the arbitrator shall be final, binding and
conclusive on the parties and shall constitute the only method of resolving
disputes or matters subject to arbitration pursuant to this Agreement. The
arbitrator or a court of appropriate jurisdiction may issue a writ of
execution to enforce the arbitrator's judgment. Judgment may be entered upon
such a decision in accordance with applicable law in any court having
jurisdiction thereof.
8.7 Notwithstanding the foregoing, because time is of the essence of
this Agreement, the parties specifically reserve the right to seek a judicial
temporary restraining order, preliminary injunction, or other similar short
term equitable relief, and grant the arbitrator the right to make a final
determination of the parties' rights, including whether to make permanent or
dissolve such court order.
8.8 The decision and award of the arbitrator shall be kept
confidential by the parties to the greatest extent possible. No disclosure
of such decision or award shall be made by the parties except as required by
law or as necessary or appropriate to effect the enforcement thereof.
9. CONTRACTS. Physician shall not have the right or authority and hereby
expressly covenants not to, enter into a contract in the name of Employer or
the Practice or otherwise bind Employer or the Practice, in any way, without
the express written consent of Employer. Physician shall hold Employer and
the Practice harmless from any loss attributable to a violation of this
covenant.
10. USE OF PREMISES. Physician covenants not to use, or permit any other
personnel under the control of Physician to use, any part of the premises of
the Practice for any purpose other than the performance of services hereunder.
11. MISCELLANEOUS.
11.1 NOTICES. Any notice, demand, or communication required,
permitted or desired to
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be given hereunder shall be deemed effectively given when personally
delivered or mailed by prepaid certified mail, return receipt requested,
addressed as follows:
Physician: Sinnadurai E. Moorthy, M.D.
44725 10th Street West, Suite 250
Lancaster, California 93534
with a copy to: Arter & Hadden
700 S. Flower St., Ste. 3000
Los Angeles, California 90017
Attention: Jack Goldman, Esq.
Employer: Sierra Primary Care Medical Group, Inc.
c/o Prospect Medical Group, Inc.
18200 Yorba Linda Blvd., Suite 409
Yorba Linda, California 92686
Attention: Gregg DeNicola, M.D.
with a copy to: Miller & Holguin
1801 Century Park East, 7th Floor
Los Angeles, California 90067
Attention: Dale S. Miller, Esq.
11.2 GOVERNING LAW. This Agreement has been executed and delivered
and shall be interpreted, construed, and enforced in accordance with the laws
of the State of California.
11.3 ENFORCEMENT. In the event that either party shall be required to
enforce the terms of this Agreement, whether with or without arbitration, the
prevailing party shall be entitled to recover the costs of such action,
including reasonable attorneys' fees.
11.4 ENTIRE AGREEMENT. This Agreement shall constitute the entire
agreement of the parties with respect to the subject matter hereof and may
not be amended except in writing signed by both of the parties hereto. No
oral statements or prior written materials not specifically incorporated
herein shall be of any force or effect.
11.5 SEVERABILITY. In the event any provision of this Agreement is
held to be unenforceable or void for any reason, the remainder of the
Agreement shall be unaffected and shall remain in full force and effect in
accordance with its terms, unless such unenforceability or voidness defeats
an essential business term hereof.
11.6 NO ASSIGNMENT; BINDING EFFECT. Physician shall not assign this
Agreement to any other party or parties without the prior written consent of
Employer. Except for an assignment to Imperial Bank, a California banking
corporation, pursuant to applicable law, Employer shall
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not assign this Agreement to any other party or parties without the prior
written consent of Physician. This Agreement shall inure to the benefit of
and be binding upon the parties hereto and their respective successors and
permitted assigns.
11.7 HEADINGS. The headings used herein are for convenience only and
do not limit the contents of this Agreement.
11.8 COUNTERPARTS. This Agreement may be executed in counterparts,
each of which will be deemed to be an original, but all of which together
will constitute one and the same agreement.
11.9 CHANGE OF CIRCUMSTANCES. In the event (i) Medicare, Medicaid
(Medi-Cal), any third-party payor or any federal, state or local legislative
or regulatory authority adopts any law, rule, regulation, policy, procedure
or interpretation thereof which establishes a material change in the method
or amount of reimbursement or payment for services under this Agreement, or
(ii) any or all of such payors/authorities impose requirements which require
a material change in the manner of either party's operations under this
Agreement and/or the costs related thereto, then, upon the request of either
party materially affected by any such change in circumstances, the parties
shall enter into good faith negotiations for the purpose of establishing such
amendments or modifications as may be appropriate in order to accommodate the
new requirements and change of circumstances while preserving the original
intent of this Agreement to the greatest extent possible. If, after thirty
(30) days of such negotiations, the parties are unable to reach an agreement
as to how or whether this Agreement shall continue, then either party may
terminate this Agreement upon thirty (30) days prior written notice.
11.10 COMPLIANCE WITH LAW. The parties recognize that this Agreement
at all times is to be subject to applicable state, local and federal law.
11.11 WAIVERS. Waivers of any of the provisions hereof may be
effective only if signed by the party intending to be bound thereby.
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IN WITNESS WHEREOF, this Agreement has been executed by the parties on
the day and year first above written.
EMPLOYER: PHYSICIAN:
SIERRA PRIMARY CARE
MEDICAL GROUP, INC.
By: /s/ Jacob Y. Terner, M.D. /s/ Sinnadurai E. Moorthy, M.D.
-------------------------- -------------------------------
Jacob Y. Terner, M.D. Sinnadurai E. Moorthy, M.D.
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NON-COMPETITION AGREEMENT
THIS NON-COMPETITION AGREEMENT ("Agreement") is made effective as of the
25th day of September, 1997, by and between Prospect Medical Group, Inc., a
California professional corporation ("Purchaser"), and Karunyan Arulanantham,
M.D. ("Physician"). All capitalized terms used herein and not otherwise
expressly defined shall have the same meanings set forth in the Agreement for
the Purchase and Sale of Stock, made and entered into as of September 23, 1997,
by and among Sierra Primary Care Medical Group, Inc., a California professional
corporation ("Company"), Physician (individually and as Trustee of the
Arulanantham Charitable Remainder Trust), Sinnadurai E. Moorthy, M.D., and
Purchaser ("Stock Purchase Agreement").
R E C I T A L S
A. Purchaser is developing an integrated delivery system, a key
component of which is a strong network of physicians who can provide the
necessary professional medical services to payors in a designated geographic
area.
B. To build the physician component of its integrated delivery
systems, Purchaser provides a range of alternative services to and relationships
with physicians including the recruitment of physicians to a designated
geographic area, the management of physician practices, the acquisition of
assets and/or physician practices, the consolidation of physician practices, the
formation of medical groups, the establishment of outpatient clinics, etc.
C. Physician owns 400 shares directly, and controls 100 shares
indirectly through a trust, of the issued and outstanding capital stock of the
Company.
D. Physician is selling to Purchaser and Purchaser is purchasing
from Physician all of Physician's stock in Company ("Stock") pursuant to the
Stock Purchase Agreement.
E. Purchaser desires to purchase the Stock pursuant to
Purchaser's goal of developing an integrated delivery system.
F. Physician will benefit from the sale of the Stock to
Purchaser.
G. As conditions to the Closing of the transactions contemplated
by the Stock Purchase Agreement, Physician shall have entered into an agreement
in the form of this Agreement to be delivered to Purchaser, and shall have
entered into an Employment Agreement
<PAGE>
with Company.
NOW, THEREFORE, in consideration of the foregoing premises and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows.
1. PHYSICIAN'S COVENANTS.
A. As a material inducement to Purchaser to enter into the Stock
Purchase Agreement and during the term of this Agreement in the Service Area
described in Section 4 below and except as set forth herein or as permitted
under the Employment Agreement between Physician and Company, Physician
(directly or indirectly through any business, enterprise, venture, partnership,
corporation or any other entity controlled directly or indirectly by Physician
whether alone or as a partner, stockholder, creditor or otherwise):
(i) shall not practice medicine, or engage, participate, aid,
assist, or hold any interest in any business or provision of any service which
is, or as of Physician's engagement or participation, would become, competitive
with any aspect of Purchaser's or any of Purchaser's Affiliates' outpatient or
other healthcare services;
(ii) shall not sell, transfer, assign or otherwise permit another
party to benefit from, any remaining goodwill attributable to Physician based
upon the provision of physician services by or through Physician;
(iii) shall not engage or contract (other than with Purchaser or
any of Purchaser's Affiliates) for the provision of any management services to
Physician or any physician employed or under contract to Physician (as
applicable) which are the same as or substantially similar to any of the
services that Purchaser or any of Purchaser's Affiliates furnishes;
(iv) shall not solicit or assist any other person to solicit any
business relating to a competing line of business (other than for Purchaser or
any of Purchaser's Affiliates) from any present or potential customer (including
all third party payors) of Physician, any other Seller, Purchaser, or any of
their affiliates;
(v) shall not commit any other act or assist others to commit any
other act which might injure the business of Purchaser or Purchaser's
Affiliates;
(vi) shall not directly or indirectly employ, contract, solicit or
encourage any employee or other person under contract with Purchaser or any of
Purchaser's Affiliates to leave the employ of any such entity, except pursuant
to the terms of the Stock Purchase Agreement; and
(vii) shall not directly or indirectly solicit, request, advise, or
encourage any present or future supplier, customer, patient or employee of
Purchaser or Purchaser's Affiliates
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(including practices managed by Purchaser or Purchaser's Affiliates) to
withdraw, curtail, disenroll, or become enrolled with another provider of health
care, or cancel its business dealings with Purchaser or Purchaser's Affiliates,
or take any actions that might impair the relations of Purchaser or any of
Purchaser's Affiliates and their respective suppliers, customers, employees or
others.
B. The parties agree that Inpamani Arulanantham, M.D., the spouse of
Physician, shall not be bound by any of the terms herein.
C. If any term or provision of this Section is determined to be
illegal, unenforceable or invalid in whole or in part for any reason, such
illegal, unenforceable or invalid provision or part thereof shall be stricken
from this Agreement, and such provision shall not affect the legality,
enforceability or validity of the remainder of this Agreement. If any provision
or part thereof of this Agreement is stricken from this Agreement, in accordance
with the provisions of this Section, then the stricken provision shall
automatically be replaced to the extent possible, with a legal, enforceable and
valid provision which is as similar in tenor to the stricken provision as is
legally possible.
2. CONFIDENTIALITY. From and after the Closing Date, Physician shall keep
secret and retain in strictest confidence, and shall not use for the benefit of
any other party, except for Purchaser or any of Purchaser's Affiliates, all
confidential matters and trade secrets known to Physician relating to the
business and operations of Physician, any other Seller, Purchaser or any of
their affiliates, including without limitation, customer lists, pricing
policies, operational methods, utilization data, provider contract terms,
patient records, marketing plans or strategies, product development techniques
or plans, business acquisition plans, new personnel designs and design projects,
invention and research projects and other business affairs relating to the
business and operations of Physician, any other Seller, Purchaser or any of
their affiliates learned by Physician before or after the date of this
Agreement, and shall not disclose them to anyone outside of Purchaser and
Purchaser's Affiliates, provided however, that this section shall not apply to
information in the public domain or to information that is sought from Physician
pursuant to subpoena or court order (but Physician must provide notice to
Purchaser or Purchaser's Affiliates in order for them to contest such subpoenas
or court orders).
3. PHYSICIAN'S REPRESENTATION. Physician specifically acknowledges,
represents, and warrants that (i) Physician's covenants set forth in this
Agreement are being purchased in connection with the sale of the Stock to
Purchaser, (ii) such covenants are reasonable and necessary to protect the
legitimate interests of Purchaser, and (iii) Purchaser would not have entered
into the Stock Purchase Agreement in the absence of such restrictions.
Physician acknowledges that this Agreement is subject to all representations,
warranties and covenants in the Stock Purchase Agreement.
4. SERVICE AREA. The Service Area to which Physician's covenants in Section 1
apply is defined as the fifteen (15) mile radius area around 1037 E. Palmdale
Blvd., Palmdale, California
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93550; 44469 10th Street West, Lancaster, California 93534; and 44471 10th
Street West, Lancaster, California 93534.
5. TERM. The term of this Agreement commences as of the day and year first
above written and terminates upon the earlier to occur of:
(i) the date which is five (5) years following the day and year
first above written; or
(ii) the date which is three (3) years following the termination
or expiration of the Employment Agreement through no fault of Physician; or
(iii) the date upon which Company, as employer, is in material
default of any of Company obligations under its Employment Agreement with
Physician, and Physician terminates the Employment Agreement as a result of such
material breach.
6. DEFAULT. Any default by Company in the payment when due, of any amount
owed by Company to Physician under the Contingent Promissory Note, of even date
herewith, issued from Company to Physician, in the principal amount of
$1,125,000, which default continues for a period of ten (10) days, shall
constitute a default under this Agreement. Upon written notice from Physician
of such default, Company shall have a thirty (30) day period in which to cure
such default. In the event Company fails to cure such default within thirty
(30) days of such notice, at Physician's option, this Agreement shall terminate
and Physician shall have no further obligations hereunder.
7. MISCELLANEOUS.
A. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
shall inure to the benefit of the parties and their respective heirs (as
applicable), legal representatives, and permitted successors and assigns. No
party may assign this Agreement or the rights, interests or obligations
hereunder. Any assignment or delegation in contravention of this Section 7
shall be null and void.
B. MEDICAL STAFF PRIVILEGES. Nothing in this Agreement is intended to
prohibit Physician from maintaining professional staff membership or clinical
privileges at any acute care hospital or other health facility licensed to
provide patient care for stays in excess of twenty-four (24) hours.
C. COUNTERPARTS. This Agreement, and any amendments thereto, may be
executed in counterparts, each of which shall constitute an original document,
but which together shall constitute one and the same instrument.
D. HEADINGS. The section headings contained in this Agreement are
inserted for
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convenience only and shall not affect in any way the meaning or interpretation
of this Agreement.
E. AMENDMENT. This Agreement may not be amended except in writing and
as executed by all parties.
F. TIME OF ESSENCE. Time is expressly made of the essence of this
Agreement and each and every provision hereof of which time of performance is a
factor.
G. NOTICES. Any notices required or permitted to be given hereunder by
any party to the other shall be in writing and shall be deemed delivered upon
personal delivery; twenty-four (24) hours following deposit with a courier for
overnight delivery; or seventy-two (72) hours following deposit in the U.S.
Mail, registered or certified mail, postage prepaid, return-receipt requested,
addressed to the parties at the following addresses or to such other addresses
as the parties may specify in writing:
If to Physician: Karunyan Arulanantham, M.D.
1675 Staffordshire Drive
Lancaster, California 93534
With copy to: Jack Goldman, Esq.
Arter & Hadden
700 S. Flower St., Suite 3000
Los Angeles, California 90017
If to Purchaser: Gregg DeNicola, M.D.
Prospect Medical Group, Inc.
18200 Yorba Linda Blvd., Suite 409
Yorba Linda, California 92886
With copy to: Dale S. Miller, Esq.
Miller & Holguin
1801 Century Park East, Suite 700
Los Angeles, CA 90067
H. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
I. INJUNCTIVE RELIEF. The parties hereto acknowledge and agree that a
breach by Physician of this Agreement will cause irreparable damage to
Purchaser, the exact amount of which will be difficult to ascertain, and that
remedies at law for any such breach will be inadequate. Accordingly, Physician
agrees that if Physician breaches this Agreement, then Purchaser shall be
entitled to injunctive relief, without bond, and Physician agrees not to assert
in any proceeding that Purchaser has an adequate remedy at law. Physician shall
pay the
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reasonable fees and expenses, including attorneys' fees, incurred by Purchaser
or any successor or assign in enforcing this Agreement.
J. SEVERABILITY. If any provision or portion of this Agreement is held
by a court of competent jurisdiction to be invalid or unenforceable, the
remainder of this Agreement will nevertheless continue in full force and effect
and shall not be invalidated or rendered unenforceable or otherwise adversely
affected, unless such invalidity or unenforceability would defeat an essential
business purpose of this Agreement. Without limiting the generality of the
foregoing, if the provisions of this Agreement shall be deemed to create a
restriction which is unreasonable as to either duration or geographical area, or
both, the parties agree that the provisions of this Agreement shall be enforced
for such duration and in such geographical area as any court of competent
jurisdiction may determine to be reasonable.
K. ATTORNEYS' FEES. Should either Purchaser or Physician institute any
action or procedure to enforce this Agreement or any provision hereof, or for
damages by reason of any alleged breach of this Agreement or of any provision
hereof, or for a declaration of rights hereunder (including without limitation
arbitration), the prevailing party in any such action or proceeding shall be
entitled to receive from the other party all costs and expenses, including
without limitation reasonable attorneys' fees, incurred by the prevailing party
in connection with such action or proceeding.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement of the
day and year first written above.
"Purchaser":
PROSPECT MEDICAL GROUP, INC.
By: /s/ Jacob Y. Terner, M.D.
--------------------------------
Jacob Y. Terner, M.D., President
"Physician":
/s/ Karunyan Arulanantham
------------------------------------
Karunyan Arulanantham, M.D.
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NON-COMPETITION AGREEMENT
THIS NON-COMPETITION AGREEMENT ("Agreement") is made effective as of the
25th day of September, 1997, by and between Prospect Medical Group, Inc., a
California professional corporation ("Purchaser"), and Sinnadurai E. Moorthy,
M.D. ("Physician"). All capitalized terms used herein and not otherwise
expressly defined shall have the same meanings set forth in the Agreement for
the Purchase and Sale of Stock, made and entered into as of September 23, 1997,
by and among Sierra Primary Care Medical Group, Inc., a California professional
corporation ("Company"), Physician, Karunyan Arulanantham, M.D., Karunyan
Arulanantham, M.D. as Trustee of the Arulanantham Charitable Remainder Trust,
and Purchaser ("Stock Purchase Agreement").
R E C I T A L S
A. Purchaser is developing an integrated delivery system, a key
component of which is a strong network of physicians who can provide the
necessary professional medical services to payors in a designated geographic
area.
B. To build the physician component of its integrated delivery
systems, Purchaser provides a range of alternative services to and relationships
with physicians including the recruitment of physicians to a designated
geographic area, the management of physician practices, the acquisition of
assets and/or physician practices, the consolidation of physician practices, the
formation of medical groups, the establishment of outpatient clinics, etc.
C. Physician owns 500 shares of the issued and outstanding
capital stock of the Company.
D. Physician is selling to Purchaser and Purchaser is purchasing
from Physician all of Physician's stock in Company ("Stock") pursuant to the
Stock Purchase Agreement.
E. Purchaser desires to purchase the Stock pursuant to
Purchaser's goal of developing an integrated delivery system.
F. Physician will benefit from the sale of the Stock to
Purchaser.
G. As conditions to the Closing of the transactions
contemplated by the Stock Purchase Agreement, Physician shall have entered
into an agreement in the form of this Agreement to be delivered to Purchaser,
and shall have entered into an Employment Agreement
<PAGE>
with Company.
NOW, THEREFORE, in consideration of the foregoing premises and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows.
1. PHYSICIAN'S COVENANTS.
A. As a material inducement to Purchaser to enter into the Stock
Purchase Agreement and during the term of this Agreement in the Service Area
described in Section 4 below and except as set forth herein or as permitted
under the Employment Agreement between Physician and Company, Physician
(directly or indirectly through any business, enterprise, venture, partnership,
corporation or any other entity controlled directly or indirectly by Physician
whether alone or as a partner, stockholder, creditor or otherwise):
(i) shall not practice medicine, or engage, participate, aid,
assist, or hold any interest in any business or provision of any service which
is, or as of Physician's engagement or participation, would become, competitive
with any aspect of Purchaser's or any of Purchaser's Affiliates' outpatient or
other healthcare services;
(ii) shall not sell, transfer, assign or otherwise permit another
party to benefit from, any remaining goodwill attributable to Physician based
upon the provision of physician services by or through Physician;
(iii) shall not engage or contract (other than with Purchaser or
any of Purchaser's Affiliates) for the provision of any management services to
Physician or any physician employed or under contract to Physician (as
applicable) which are the same as or substantially similar to any of the
services that Purchaser or any of Purchaser's Affiliates furnishes;
(iv) shall not solicit or assist any other person to solicit any
business relating to a competing line of business (other than for Purchaser or
any of Purchaser's Affiliates) from any present or potential customer (including
all third party payors) of Physician, any other Seller, Purchaser, or any of
their affiliates;
(v) shall not commit any other act or assist others to commit any
other act which might injure the business of Purchaser or Purchaser's
Affiliates;
(vi) shall not directly or indirectly employ, contract, solicit or
encourage any employee or other person under contract with Purchaser or any of
Purchaser's Affiliates to leave the employ of any such entity, except pursuant
to the terms of the Stock Purchase Agreement; and
(vii) shall not directly or indirectly solicit, request, advise,
or encourage any present or future supplier, customer, patient or employee of
Purchaser or Purchaser's Affiliates
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(including practices managed by Purchaser or Purchaser's Affiliates) to
withdraw, curtail, disenroll, or become enrolled with another provider of
health care, or cancel its business dealings with Purchaser or Purchaser's
Affiliates, or take any actions that might impair the relations of Purchaser
or any of Purchaser's Affiliates and their respective suppliers, customers,
employees or others.
B. If any term or provision of this Section is determined to be
illegal, unenforceable or invalid in whole or in part for any reason, such
illegal, unenforceable or invalid provision or part thereof shall be stricken
from this Agreement, and such provision shall not affect the legality,
enforceability or validity of the remainder of this Agreement. If any provision
or part thereof of this Agreement is stricken from this Agreement, in accordance
with the provisions of this Section, then the stricken provision shall
automatically be replaced to the extent possible, with a legal, enforceable and
valid provision which is as similar in tenor to the stricken provision as is
legally possible.
2. CONFIDENTIALITY. From and after the Closing Date, Physician shall keep
secret and retain in strictest confidence, and shall not use for the benefit of
any other party, except for Purchaser or any of Purchaser's Affiliates, all
confidential matters and trade secrets known to Physician relating to the
business and operations of Physician, any other Seller, Purchaser or any of
their affiliates, including without limitation, customer lists, pricing
policies, operational methods, utilization data, provider contract terms,
patient records, marketing plans or strategies, product development techniques
or plans, business acquisition plans, new personnel designs and design projects,
invention and research projects and other business affairs relating to the
business and operations of Physician, any other Seller, Purchaser or any of
their affiliates learned by Physician before or after the date of this
Agreement, and shall not disclose them to anyone outside of Purchaser and
Purchaser's Affiliates, provided however, that this section shall not apply to
information in the public domain or to information that is sought from Physician
pursuant to subpoena or court order (but Physician must provide notice to
Purchaser or Purchaser's Affiliates in order for them to contest such subpoenas
or court orders).
3. PHYSICIAN'S REPRESENTATION. Physician specifically acknowledges,
represents, and warrants that (i) Physician's covenants set forth in this
Agreement are being purchased in connection with the sale of the Stock to
Purchaser, (ii) such covenants are reasonable and necessary to protect the
legitimate interests of Purchaser, and (iii) Purchaser would not have entered
into the Stock Purchase Agreement in the absence of such restrictions.
Physician acknowledges that this Agreement is subject to all representations,
warranties and covenants in the Stock Purchase Agreement.
4. SERVICE AREA. The Service Area to which Physician's covenants in Section 1
apply is defined as the fifteen (15) mile radius area around 1037 E. Palmdale
Blvd., Palmdale, California 93550; 44469 10th Street West, Lancaster, California
93534 and 44471 10th Street West, Lancaster, California 93534.
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<PAGE>
5. TERM. The term of this Agreement commences as of the day and year first
above written and terminates upon the earlier to occur of:
(i) the date which is five (5) years following the day and year
first above written; or
(ii) the date which is three (3) years following the termination
or expiration of the Employment Agreement through no fault of Physician; or
(iii) the date upon which Company, as employer, is in material
default of any of Company's obligations under its Employment Agreement with
Physician, and Physician terminates the Employment Agreement as a result of such
material breach.
6. DEFAULT. Any default by Company in the payment when due, of any amount
owed by Company to Physician under the Contingent Promissory Note, of even date
herewith, issued from Company to Physician, in the principal amount of
$1,125,000, which default continues for a period of ten (10) days, shall
constitute a default under this Agreement. Upon written notice from Physician
of such default, Company shall have a thirty (30) day period in which to cure
such default. In the event Company fails to cure such default within thirty
(30) days of such notice, at Physician's option, this Agreement shall terminate
and Physician shall have no further obligations hereunder.
7. MISCELLANEOUS.
A. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
shall inure to the benefit of the parties and their respective heirs (as
applicable), legal representatives, and permitted successors and assigns. No
party may assign this Agreement or the rights, interests or obligations
hereunder. Any assignment or delegation in contravention of this Section 6
shall be null and void.
B. MEDICAL STAFF PRIVILEGES. Nothing in this Agreement is intended to
prohibit Physician from maintaining professional staff membership or clinical
privileges at any acute care hospital or other health facility licensed to
provide patient care for stays in excess of twenty-four (24) hours.
C. COUNTERPARTS. This Agreement, and any amendments thereto, may be
executed in counterparts, each of which shall constitute an original document,
but which together shall constitute one and the same instrument.
D. HEADINGS. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
E. AMENDMENT. This Agreement may not be amended except in writing
and as
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<PAGE>
executed by all parties.
F. TIME OF ESSENCE. Time is expressly made of the essence of this
Agreement and each and every provision hereof of which time of performance is a
factor.
G. NOTICES. Any notices required or permitted to be given hereunder by
any party to the other shall be in writing and shall be deemed delivered upon
personal delivery; twenty-four (24) hours following deposit with a courier for
overnight delivery; or seventy-two (72) hours following deposit in the U.S.
Mail, registered or certified mail, postage prepaid, return-receipt requested,
addressed to the parties at the following addresses or to such other addresses
as the parties may specify in writing:
If to Physician: Sinnadurai E. Moorthy, M.D.
44725 10th Street West, Suite 250
Lancaster, California 93534
With copy to: Jack Goldman, Esq.
Arter & Hadden
700 S. Flower St., Suite 3000
Los Angeles, California 90017
If to Purchaser: Gregg DeNicola, M.D.
Prospect Medical Group, Inc.
18200 Yorba Linda Blvd., Suite 409
Yorba Linda, California 92886
With copy to: Dale S. Miller, Esq.
Miller & Holguin
1801 Century Park East, Suite 700
Los Angeles, CA 90067
H. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
I. INJUNCTIVE RELIEF. The parties hereto acknowledge and agree that a
breach by Physician of this Agreement will cause irreparable damage to
Purchaser, the exact amount of which will be difficult to ascertain, and that
remedies at law for any such breach will be inadequate. Accordingly, Physician
agrees that if Physician breaches this Agreement, then Purchaser shall be
entitled to injunctive relief, without bond, and Physician agrees not to assert
in any proceeding that Purchaser has an adequate remedy at law. Physician shall
pay the reasonable fees and expenses, including attorneys' fees, incurred by
Purchaser or any successor or assign in enforcing this Agreement.
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<PAGE>
J. SEVERABILITY. If any provision or portion of this Agreement is held
by a court of competent jurisdiction to be invalid or unenforceable, the
remainder of this Agreement will nevertheless continue in full force and effect
and shall not be invalidated or rendered unenforceable or otherwise adversely
affected, unless such invalidity or unenforceability would defeat an essential
business purpose of this Agreement. Without limiting the generality of the
foregoing, if the provisions of this Agreement shall be deemed to create a
restriction which is unreasonable as to either duration or geographical area, or
both, the parties agree that the provisions of this Agreement shall be enforced
for such duration and in such geographical area as any court of competent
jurisdiction may determine to be reasonable.
K. ATTORNEYS' FEES. Should either Purchaser or Physician institute any
action or procedure to enforce this Agreement or any provision hereof, or for
damages by reason of any alleged breach of this Agreement or of any provision
hereof, or for a declaration of rights hereunder (including without limitation
arbitration), the prevailing party in any such action or proceeding shall be
entitled to receive from the other party all costs and expenses, including
without limitation reasonable attorneys' fees, incurred by the prevailing party
in connection with such action or proceeding.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement of the
day and year first written above.
"Purchaser":
PROSPECT MEDICAL GROUP, INC.
By: /s/ Jacob Y. Terner, M.D.
-------------------------------------
Jacob Y. Terner, M.D., President
"Physician":
/s/ Sinnadurai E. Moorthy, M.D.
-----------------------------------------
Sinnadurai E. Moorthy, M.D.
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<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is executed as of the
25th day of September, 1997, by and between Sierra Medical Management, Inc., a
Delaware corporation formerly known as Prospect Acquisition Corporation, Inc.
("Employer"), and Jayaratnam Jayakumar ("Employee").
R E C I T A L S
A. Employer is a provider of management services to medical practices;
B. Employee was formerly a shareholder of Sierra Medical Management,
Inc., a Delaware corporation which merged with and into Employer; and
C. Employer desires to obtain the services of Employee, and Employee
desires to be employed by Employer, upon the terms and conditions hereinafter
set forth.
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the sufficiency of which is hereby acknowledged, the
parties agree as follows:
1. TERMS AND CONDITIONS OF EMPLOYMENT.
1.1 EMPLOYMENT. Employer hereby employs Employee and Employee hereby
accepts employment subject to the terms and conditions hereinafter set forth.
1.2 FULL-TIME EMPLOYMENT. Employee agrees to devote his full time and
attention to the performance of his duties as Chief Operating Officer of
Employer. Employee's duties shall include, but not be limited to, the
following:
(a) Employee shall serve as the Chief Operating Officer of Employer
and shall be responsible for performing those duties which are customarily
performed by the Chief Operating Officer, including but not limited to,
overseeing in the management of Employer's Palmdale, Lancaster and other
Antelope Valley operations, subject to the control of the Board of Directors;
(b) Such other powers and duties as may be prescribed by the Board of
Directors or the Bylaws of Employer.
2. COMPENSATION.
2.1 SALARY. Employer shall pay Employee the salary of One Hundred Fifty
Thousand dollars ($150,000.00) per annum. Employer shall pay Employee in
accordance with Employer's policies for the payment of salaried employees in
effect from time to time. Salary payments are to be reduced by the cost of and
subject to all state and federal withholding taxes and any other applicable
payroll taxes.
<PAGE>
2.2 BONUSES/PERFORMANCE CRITERIA. Employer may determine from time to
time to pay Employee additional compensation/discretionary bonus(es). Employee
shall participate in any executive bonus plan of Employer or Prospect Medical
Holdings, Inc. ("Prospect Medical Holdings"). Any such determination shall be
made by the Compensation Committee, or similar committee, if any, of the Board
of Directors of Employer or, if there is no such committee, by the Board of
Directors of Employer.
2.3 BENEFITS. During the term of this Agreement, Employer shall provide
Employee and his beneficiaries with certain employment benefits at a level
commensurate with other members of Employer's and Prospect Medical Holdings'
senior management. Such benefits include but are not limited to the following:
(a) Employee shall be entitled to participate in Employer's
retirement 401(k) and other benefit plans as offered from time to time.
Employee be given credit for past service on behalf of Sierra Primary Care
Medical Group, Inc., subject to applicable laws or plan provisions;
(b) A policy of disability insurance;
(c) A policy of term life insurance in the principal amount of
$300,000, naming Employee's family members as beneficiaries;
(d) Participation in the Prospect Medical Holdings, Inc. Stock Option
Plan;
(e) A policy of medical insurance for Employee and Employee's
immediate family;
(f) A policy of dental insurance for Employee and Employee's
immediate family; and
(g) A policy of vision insurance for Employee and Employee's
immediate family.
However, with respect to the foregoing health benefits, Employer's life
insurance company and/or disability insurer may require Employee to
satisfactorily pass a physical examination in order to issue a life insurance
policy to Employee, and Employee shall comply with all such reasonable
requirements. In addition, Employer may elect to obtain key-man life insurance
coverage on Employee, and Employee agrees to submit to any required examination
therefor.
2.4 FRINGE BENEFITS/REIMBURSEMENT OF EXPENSES. During the term of this
Agreement, Employer shall provide Employee with the following fringe benefits
or reimburse the following expenses, as the case may be, which are incurred in
the performance of Employee's duties on behalf of the Company:
(a) An allowance of $800 per month for automobile expenses;
(b) An allowance of $400 per month for cellular and other phone
expenses; and
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2.5 VACATION BENEFITS. Employee shall be entitled to four weeks of paid
vacation each year, commencing on the date hereof. Employee shall also be given
full credit for 210 hours of vacation time that Employee accrued while employed
by Sierra Primary Care Medical Group, Inc., a California professional
corporation; provided however, that Employee shall only be entitled to take such
time as vacation and shall not be entitled to any salary for any of such time
that is not taken as vacation.
3. TERM AND TERMINATION OF AGREEMENT.
3.1 CONTRACT TERM. The initial term of this Agreement shall commence on
September 25, 1997 (the "Effective Date"), and shall continue for a period of
three (3) years, subject to earlier termination of this Agreement as provided
herein.
3.2 TERMINATION WITHOUT CAUSE. Employer may not terminate this Agreement
without cause.
3.3 TERMINATION BY EMPLOYER. Employer may terminate Employee's employment
hereunder at any time for "cause" by giving notice of termination to the
Employee (the "Termination Notice"). Cause includes the following:
(a) Upon the material violation by Employee of any provision of this
Agreement or the rules, policies and/or procedures of Employer.
(b) Upon the total disability of Employee, as defined in Employer's
policies and procedures;
(c) Upon the inability or failure of Employee to perform the duties
required hereunder as President.
(d) Upon Employee's conviction of a felony or crime of moral
turpitude.
(e) Upon the habitual use of alcohol or a controlled substance which
materially impairs the ability of Employee to effectively perform Employee's
duties and obligations under this Agreement.
(f) Upon repeated failure by Employee to meet individual performance
or productivity standards established by Employer for Employee.
In the event of termination pursuant to subsections (a), (c) or (f)
above, Employer shall be required to provide prior notice to Employee, after
which Employee shall have a thirty (30) day period in which to cure such breach.
3.4 TERMINATION BY EMPLOYEE. Employee may terminate his employment
hereunder at any time for "cause." Cause is limited to a material breach by
Employer of a material term of this Agreement. In the event Employee terminates
this Agreement for cause, termination shall be effective immediately upon
notification to Employer by Employee.
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4. CONFIDENTIALITY/TRADE SECRETS. Employee acknowledges that his position
with Employer will be one of the highest trust and confidence both by reason of
his position and by reason of his access to and contact with the trade secrets
and confidential and propriety business information of Employer and all of its
Affiliates (as defined below), during the term of this Agreement and thereafter.
Employee covenants and agrees at all times during and after the term of this
Agreement as follows:
4.1 PROTECTION. That Employee shall use his best efforts and exercise
utmost diligence to protect and safeguard the trade secrets and confidential and
proprietary information of Employer and its "Affiliates" (which term as used in
this Agreement shall include any person, corporation, partnership, general
partner or other entity that directly, or indirectly through one or more
intermediaries, controls or is controlled by or is under common control with
Employer), including, without limitation, their trade secrets, proprietary
information, the identity of their customers and suppliers, their arrangements
with their customers and suppliers, and their technical data, records,
compilations of information, processes, computer software, and specifications
relating to their customers, suppliers, products and services (collectively,
"Confidential Information").
4.2 NON-DISCLOSURE. That Employee shall not disclose any Confidential
Information, except as may be required in the course of his employment or as
may be required by law.
4.3 NON-USAGE. That Employee shall not use, directly or indirectly, for
his own benefit or for the benefit of another, any Confidential Information.
The covenants contained in this Section 4 shall not be applicable to any
information which is in the public domain other than as a result of action by
Employee or which Employee can establish was obtained from sources other than
Employer or any of its Affiliates, who are not under a duty of nondisclosure.
All Confidential Information and all files, records, documents, drawings,
specifications, computer software, memoranda, notes, or other documents relating
thereto or otherwise relating to the business of Employer and its Affiliates,
whether prepared by Employee or otherwise coming into his possession, shall be
the exclusive property of Employer (and/or its Affiliates, as applicable) and
shall be delivered to Employer or its Affiliates as appropriate and not retained
by (nor any copies thereof retained by) Employee upon termination of his
employment for any reason whatsoever.
5. REMEDIES FOR BREACH OF COVENANTS OF EMPLOYEE. The covenants set forth in
Section 4 of this Agreement shall continue to be binding upon Employee
notwithstanding the termination of his employment with Employer for any reason
whatsoever. Such covenants shall be deemed and construed as separate agreements
independent of any other provision of this Agreement. The existence of any
claim or cause of action by Employee against Employer or any of its Affiliates,
whether predicated on this Agreement or otherwise, shall not constitute a
defense to the enforcement by Employer or any of its Affiliates of any or all of
such covenants. It is expressly agreed that the remedy at law for the breach of
any such covenant is inadequate and that temporary and permanent injunctive
relief shall be available to prevent the breach or any threatened breach
thereof, without the necessity of proof of actual damages and without the
necessity of posting a bond, cash or otherwise. In this connection, Employee
agrees not to assert any defense that monetary damages would be sufficient.
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6. DEFAULT. Any default by Prospect Medical Holdings, Inc. in the payment
when due, of any amount owed by Prospect Medical Holdings, Inc. to Employee
under the Promissory Note, of even date herewith, issued from Prospect Medical
Holdings, Inc. to Employee, in the principal amount of $250,000, which default
continues for a period of ten (10) days, shall constitute a default under this
Agreement. Upon written notice from Employee of such default, Prospect Medical
Holdings, Inc. shall have a thirty (30) day period in which to cure such
default. In the event Prospect Medical Holdings, Inc. fails to cure such
default within thirty (30) days of such notice, at Employee's option, this
Agreement shall terminate and Employee shall have no further obligations
hereunder.
7. ARBITRATION. The parties firmly desire to resolve all disputes arising
hereunder without resort to litigation in order to protect their respective
business reputations and the confidential nature of certain aspects of their
relationship. Accordingly, any controversy or claim arising out of or relating
to this Agreement, or the breach thereof, shall be settled by arbitration as set
forth below.
7.1 All disputes which in any manner arise out of or relate to this
Agreement or the subject matter thereof, shall be resolved exclusively by
arbitration in accordance with the provisions of this Section 7. Either party
may commence arbitration by sending a written demand for arbitration to the
other party, setting forth the nature of the controversy, the dollar amount
involved, if any, and the remedies sought, and attaching a copy of this Section
to the demand.
7.2 There shall be one arbitrator. If the parties shall fail to select a
mutually acceptable arbitrator within ten (10) days after the demand for
arbitration is mailed, then the parties stipulate to arbitration before a single
arbitrator sitting on the Los Angeles, California Judicial Arbitration Mediation
Services (JAMS) panel, and selected in the sole discretion of the JAMS
administrator.
7.3 The parties shall share all costs of arbitration. The prevailing
party shall be entitled to reimbursement by the other party of such party's
attorneys' fees and costs and any arbitration fees and expenses incurred in
connection with the arbitration hereunder.
7.4 The substantive law of the State of California shall be applied by the
arbitrator.
7.5 Arbitration shall take place in Los Angeles, California unless the
parties otherwise agree. As soon as reasonably practicable, a hearing with
respect to the dispute or matter to be resolved shall be conducted by the
arbitrator. As soon as reasonably practicable thereafter, the arbitrator shall
arrive at a final decision, which shall be reduced to writing, signed by the
arbitrator and mailed to each of the parties and their legal counsel.
7.6 All decisions of the arbitrator shall be final, binding and conclusive
on the parties and shall constitute the only method of resolving disputes or
matters subject to arbitration pursuant to this Agreement. The arbitrator or a
court of appropriate jurisdiction may issue a writ of execution to enforce the
arbitrator's judgment. Judgment may be entered upon such a decision in
accordance with applicable law in any court having jurisdiction thereof.
7.7 Notwithstanding the foregoing, because time is of the essence of this
Agreement, the parties specifically reserve the right to seek a judicial
temporary restraining order, preliminary injunction, or other similar short term
equitable relief, and grant the arbitrator the right to make a
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final determination of the parties' rights, including whether to make permanent
or dissolve such court order.
7.8 The decision and award of the arbitrator shall be kept confidential by
the parties to the greatest extent possible. No disclosure of such decision or
award shall be made by the parties except as required by law or as necessary or
appropriate to effect the enforcement thereof.
8. MISCELLANEOUS.
8.1 NOTICES. Any notice, demand, or communication required, permitted or
desired to be given hereunder shall be deemed effectively given when personally
delivered or mailed by prepaid certified mail, return receipt requested,
addressed as follows:
Employee: Jayaratnam Jayakumar
44343 Soft Avenue
Lancaster, CA 93536
Employer: Sierra Medical Management, Inc.
c/o Prospect Medical Holdings
18200 Yorba Linda Blvd., Suite 409
Yorba Linda, CA 92886
8.2 GOVERNING LAW. This Agreement has been executed and delivered and
shall be interpreted, construed, and enforced in accordance with the laws of the
State of California.
8.3 ENFORCEMENT. In the event that either party shall be required to
enforce the terms of this Agreement, whether with or without arbitration, the
prevailing party shall be entitled to recover the costs of such action,
including reasonable attorneys' fees.
8.4 ENTIRE AGREEMENT. This Agreement shall constitute the entire
agreement of the parties with respect to the subject matter hereof and may not
be amended except in writing signed by both of the parties hereto. No oral
statements or prior written materials not specifically incorporated herein shall
be of any force or effect.
8.5 SEVERABILITY. In the event any provision of this Agreement is held to
be unenforceable or void for any reason, the remainder of the Agreement shall be
unaffected and shall remain in full force and effect in accordance with its
terms, unless such unenforceability or voidness defeats an essential business
term hereof.
8.6 ASSIGNMENT. Except for any assignment to Imperial Bank, a California
banking corporation, neither this Agreement nor any of the rights of obligations
of the parties hereunder shall be assignable by either party, whether
voluntarily or by operation of law. Any attempted assignment, transfer, pledge
or hypothecation or other disposition of this Agreement or of any such rights,
interests and benefits shall be null and void and without effect.
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8.7 BINDING EFFECT. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective heirs, legal representatives,
executors, administrators, successors and permitted assigns.
8.8 HEADINGS. The headings used herein are for convenience only and do
not limit the contents of this Agreement.
8.9 COUNTERPARTS. This Agreement may be executed in counterparts, each of
which will be deemed to be an original, but all of which together will
constitute one and the same agreement.
8.10 COMPLIANCE WITH LAW. The parties recognize that this Agreement at all
times is to be subject to applicable state, local and federal law.
8.11 WAIVERS. The waiver of any of the provisions hereof shall not be
effective unless in writing and signed by the party intending to be bound
thereby. The waiver by either party of any act to be performed hereunder will
not constitute a waiver of any other act or identical act required to be
performed at a later time.
IN WITNESS WHEREOF, this Agreement has been executed by the parties as of
the day and year first above written.
EMPLOYER: EMPLOYEE:
SIERRA MEDICAL MANAGEMENT, INC.
By: /s/ Thomas A. Maloof /s/ Jayaratnam Jayakumar
--------------------------- -------------------------------
Jayaratnam Jayakumar
Its: CFO
---------------------------
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<PAGE>
NON-COMPETITION AGREEMENT
THIS NON-COMPETITION AGREEMENT ("Agreement") is made effective as of the
25th day of September, 1997, by and between Sierra Medical Management, Inc., a
Delaware corporation formerly known as Prospect Acquisition Corporation, Inc.
("Sierra Medical Management"), and Jayaratnam Jayakumar ("Employee").
R E C I T A L S
A. Employee owned 3,032 shares of the issued and outstanding
capital stock of Sierra Medical Management.
B. Employee is exchanging his shares of Sierra Medical
Management for those of Prospect Medical Holdings, Inc. pursuant to the terms of
that certain Agreement and Plan of Reorganization made and entered into as of
September 23, 1997, by and among Prospect Medical Holdings, Inc., Sierra Medical
Management, Sinnadurai E. Moorthy, M.D., Karunyan Arulanantham, M.D., and
Employee ("Merger Agreement").
C. All capitalized terms used herein and not otherwise expressly
defined shall have the same meanings set forth in the Merger Agreement.
D. Employee will benefit from the Merger.
E. As conditions to the Closing of the Merger Agreement,
Employee shall have entered into an agreement in the form of this Agreement to
be delivered to Sierra Medical Management, and shall have entered into an
Employment Agreement with Sierra Medical Management.
NOW, THEREFORE, in consideration of the foregoing premises and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows.
1. EMPLOYEE'S COVENANTS.
(a) As a material inducement to Sierra Medical Management to enter into
the Merger Agreement and during the term of this Agreement in the Service Area
described in Section 4 below and except as set forth herein or as permitted
under the Employment Agreement between Employee and Sierra Medical Management,
Employee (directly or indirectly through any business, enterprise, venture,
partnership, corporation or any other entity controlled directly or indirectly
by Employee whether alone or as a partner, stockholder, creditor or otherwise):
(i) shall not engage or contract for (other than with Sierra
Medical Management or any of Sierra Medical Management's Affiliates) any medical
management services which are the
<PAGE>
same as or substantially similar to any of the services that Sierra Medical
Management or any of Sierra Medical Management's Affiliates furnishes;
(ii) shall not solicit or assist any other person to solicit any
business relating to a competing line of business (other than for Sierra Medical
Management or any of Sierra Medical Management's Affiliates) from any present or
potential customer (including all third party payors) of Employee, any other
Seller, Sierra Medical Management, or any of their affiliates;
(iii) shall not commit any other act or assist others to commit any
other act which might injure the business of Sierra Medical Management or Sierra
Medical Management's Affiliates;
(iv) shall not directly or indirectly employ, contract, solicit or
encourage any employee or other person under contract with Sierra Medical
Management or any of Sierra Medical Management's Affiliates to leave the employ
of any such entity, except pursuant to the terms of the Merger Agreement; and
(v) shall not directly or indirectly solicit, request, advise, or
encourage any present or future supplier, customer, patient or employee of
Sierra Medical Management or Sierra Medical Management's Affiliates (including
practices managed by Sierra Medical Management or Sierra Medical Management's
Affiliates) to withdraw, curtail, disenroll, or become enrolled with another
provider of health care, or cancel its business dealings with Sierra Medical
Management or Sierra Medical Management's Affiliates, or take any actions that
might impair the relations of Sierra Medical Management or any of Sierra Medical
Management's Affiliates and their respective suppliers, customers, employees or
others.
(b) If any term or provision of this Section is determined to be
illegal, unenforceable or invalid in whole or in part for any reason, such
illegal, unenforceable or invalid provision or part thereof shall be stricken
from this Agreement, and such provision shall not affect the legality,
enforceability or validity of the remainder of this Agreement. If any provision
or part thereof of this Agreement is stricken from this Agreement, in accordance
with the provisions of this Section, then the stricken provision shall
automatically be replaced to the extent possible, with a legal, enforceable and
valid provision which is as similar in tenor to the stricken provision as is
legally possible.
2. CONFIDENTIALITY. From and after the Closing Date, Employee shall keep
secret and retain in strictest confidence, and shall not use for the benefit of
any other party, except for Sierra Medical Management or any of Sierra Medical
Management's Affiliates, all confidential matters and trade secrets known to
Employee relating to the business and operations of Employee, any other Seller,
Sierra Medical Management or any of their affiliates, including without
limitation, customer lists, pricing policies, operational methods, utilization
data, provider contract terms, patient records, marketing plans or strategies,
product development techniques or plans, business acquisition plans, new
personnel designs and design projects, invention and research projects and other
business affairs relating to the business and operations of Employee, any other
Seller, Sierra Medical Management or any of their affiliates learned by Employee
before or after the date of this Agreement, and shall not disclose them to
anyone outside of Sierra Medical Management and Sierra Medical Management's
Affiliates, provided however, that this section shall not apply to information
in the
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<PAGE>
public domain or to information that is sought from Employee pursuant to
subpoena or court order (but Employee must provide notice to Sierra Medical
Management or Sierra Medical Management's Affiliates in order for them to
contest such subpoenas or court orders).
3. EMPLOYEE'S REPRESENTATION. Employee specifically acknowledges, represents,
and warrants that (i) Employee's covenants set forth in this Agreement are being
purchased in connection with the Merger, (ii) such covenants are reasonable and
necessary to protect the legitimate interests of Sierra Medical Management, and
(iii) Sierra Medical Management would not have entered into the Merger Agreement
in the absence of such restrictions. Employee acknowledges that this Agreement
is subject to all representations, warranties and covenants in the Merger
Agreement.
4. SERVICE AREA. The Service Area to which Employee's covenants in Section 1
apply is defined as the fifteen (15) mile radius area around 1037 E. Palmdale
Blvd., Palmdale, California 93550; 44469 10th Street West, Lancaster, California
93534; and 44471 10th Street West, Lancaster, California 93534.
5. TERM. The term of this Agreement commences as of the day and year first
above written and terminates upon the earlier to occur of:
(i) the date which is five (5) years following the day and year
first above written; or
(ii) the date of the termination or expiration of the Employment
Agreement through no fault of Employee; or
(iii) the date upon which Employer is in material default of any of
Employer's obligations under its Employment Agreement with Employee, and
Employee terminates the Employment Agreement as a result of such material
breach.
6. DEFAULT. Any default by Prospect Medical Holdings, Inc., a Delaware
corporation in the payment when due, of any amount owed by Prospect Medical
Holdings, Inc., to Employee under the Promissory Note, of even date herewith,
issued from Prospect Medical Holdings, Inc. to Employee, in the principal amount
of $250,000, which default continues for a period of ten (10) days, shall
constitute a default under this Agreement. Upon written notice from Employee of
such default, Prospect Medical Holdings, Inc. shall have a thirty (30) day
period in which to cure such default. In the event Prospect Medical Holdings,
Inc. fails to cure such default within thirty (30) days of such notice, at
Employee's option, this Agreement shall terminate and Employee shall have no
further obligations hereunder.
7. MISCELLANEOUS.
7.1 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
shall inure to the benefit of the parties and their respective heirs (as
applicable), legal representatives, and permitted successors and assigns. No
party may assign this Agreement or the rights, interests or obligations
hereunder. Any assignment or delegation in contravention of this Section 7
shall be null and void.
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<PAGE>
7.2 COUNTERPARTS. This Agreement, and any amendments thereto, may be
executed in counterparts, each of which shall constitute an original document,
but which together shall constitute one and the same instrument.
7.3 HEADINGS. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
7.4 AMENDMENT. This Agreement may not be amended except in writing and
as executed by all parties.
7.5 TIME OF ESSENCE. Time is expressly made of the essence of this
Agreement and each and every provision hereof of which time of performance is a
factor.
7.6 NOTICES. Any notices required or permitted to be given hereunder by
any party to the other shall be in writing and shall be deemed delivered upon
personal delivery; twenty-four (24) hours following deposit with a courier for
overnight delivery; or seventy-two (72) hours following deposit in the U.S.
Mail, registered or certified mail, postage prepaid, return-receipt requested,
addressed to the parties at the following addresses or to such other addresses
as the parties may specify in writing:
If to Employee: Jayaratnam Jayakumar
44343 Soft Avenue
Lancaster, California 93536
With copy to: Jack Goldman, Esq.
Arter & Hadden
700 S. Flower Street, 30th Floor
Los Angeles, California 90017-4101
If to Sierra Medical Management: Gregg DeNicola, M.D.
Sierra Medical Management, Inc.
18200 Yorba Linda Blvd., Suite 409
Yorba Linda, California 92886
With copy to: Dale S. Miller, Esq.
Miller & Holguin
1801 Century Park East, Suite 700
Los Angeles, CA 90067
7.7 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
7.8 INJUNCTIVE RELIEF. The parties hereto acknowledge and agree that a
breach by Employee of this Agreement will cause irreparable damage to Sierra
Medical Management, the exact amount of which will be difficult to ascertain,
and that remedies at law for any such breach will be
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<PAGE>
inadequate. Accordingly, Employee agrees that if Employee breaches this
Agreement, then Sierra Medical Management shall be entitled to injunctive
relief, without bond, and Employee agrees not to assert in any proceeding that
Sierra Medical Management has an adequate remedy at law. Employee shall pay the
reasonable fees and expenses, including attorneys' fees, incurred by Sierra
Medical Management or any successor or assign in enforcing this Agreement.
7.9 SEVERABILITY. If any provision or portion of this Agreement is held
by a court of competent jurisdiction to be invalid or unenforceable, the
remainder of this Agreement will nevertheless continue in full force and effect
and shall not be invalidated or rendered unenforceable or otherwise adversely
affected, unless such invalidity or unenforceability would defeat an essential
business purpose of this Agreement. Without limiting the generality of the
foregoing, if the provisions of this Agreement shall be deemed to create a
restriction which is unreasonable as to either duration or geographical area, or
both, the parties agree that the provisions of this Agreement shall be enforced
for such duration and in such geographical area as any court of competent
jurisdiction may determine to be reasonable.
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7.10 ATTORNEYS' FEES. Should either Sierra Medical Management or
Employee institute any action or procedure to enforce this Agreement or any
provision hereof, or for damages by reason of any alleged breach of this
Agreement or of any provision hereof, or for a declaration of rights hereunder
(including without limitation arbitration), the prevailing party in any such
action or proceeding shall be entitled to receive from the other party all costs
and expenses, including without limitation reasonable attorneys' fees, incurred
by the prevailing party in connection with such action or proceeding.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement of the
day and year first written above.
"Sierra Medical Management":
SIERRA MEDICAL MANAGEMENT, INC.
By: /s/ Jacob Y. Terner, M.D.
-----------------------------------------
Jacob Y. Terner, M.D. Chief Executive Officer
"Employee":
/s/ Jayaratnam Jayakumar
----------------------------------------------
Jayaratnam Jayakumar
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<PAGE>
THIS INSTRUMENT IS SUBJECT TO THE TERMS OF THE AGREEMENT AND PLAN OF
REORGANIZATION ("AGREEMENT OF REORGANIZATION"), DATED AS OF SEPTEMBER 23, 1997,
BY AND AMONG PROSPECT MEDICAL HOLDINGS, INC., A DELAWARE CORPORATION ("PROSPECT
MEDICAL HOLDINGS"), SIERRA MEDICAL MANAGEMENT, INC., SINNADURAI E. MOORTHY,
M.D., KARUNYAN ARULANANTHAM, M.D. AND THE HOLDER. TERMS USED HEREIN AND NOT
OTHERWISE DEFINED SHALL HAVE THE MEANINGS ASSIGNED TO THEM IN THE AGREEMENT OF
REORGANIZATION.
THIS INSTRUMENT AND THE OBLIGATIONS EVIDENCED HEREBY ARE SUBORDINATED, IN THE
MANNER AND TO THE EXTENT SET FORTH IN A SUBORDINATION AGREEMENT (THE
"SUBORDINATION AGREEMENT") DATED AS OF SEPTEMBER 25, 1997, BY AND AMONG IMPERIAL
BANK, A CALIFORNIA BANKING CORPORATION ("BANK"), PROSPECT MEDICAL HOLDINGS,
INC., A DELAWARE CORPORATION ("PROSPECT MEDICAL HOLDINGS"), PROSPECT MEDICAL
SYSTEMS, INC., A DELAWARE CORPORATION ("MANAGER"), AND THE HOLDER OF THIS
INSTRUMENT, AND THE HOLDER OF THIS INSTRUMENT, BY HIS ACCEPTANCE HEREOF, AGREES
(i) TO BE BOUND BY THE TERMS OF THE SUBORDINATION AGREEMENT AND (ii) IN THE
EVENT THAT ANY CONFLICT EXISTS BETWEEN THE TERMS OF THIS INSTRUMENT, ANY
DOCUMENT EXECUTED IN CONNECTION WITH THE DELIVERY OF THIS INSTRUMENT AND THE
TERMS OF THE SUBORDINATION AGREEMENT, THE TERMS OF THE SUBORDINATION AGREEMENT
SHALL GOVERN AND BE CONTROLLING.
SUBORDINATED PROMISSORY NOTE
$250,000 September 25, 1997
Los Angeles, California
For value received, the undersigned Prospect Medical Holdings promises to
pay to Jayaratnam Jayakumar ("Holder"), at 44343 Soft Avenue, Lancaster, CA
93536, or at such other place as Holder may from time to time designate, the
principal sum of Two Hundred Fifty Thousand Dollars ($250,000), payable interest
only on the tenth (10) day of each month on the unpaid principal balance at the
rate of seven percent (7%) per annum, with principal payable (i) in quarterly
installments of $12,500 plus (ii) annual payments of $25,000 and continuing
thereafter for 18 months until March 24, 1999 (the "Maturity Date"), when the
unpaid principal balance of this Subordinated Promissory Note ("Note") then
outstanding, and all accrued but unpaid interest, shall be due and payable in
full.
Should interest not be paid when due, it shall thereafter bear like
interest as the principal, but such unpaid interest so compounded shall not
exceed an amount equal to simple interest on the unpaid principal at the
maximum rate permitted by the laws of the State of California. Prospect
Medical Holdings shall at its option be eligible to receive a one-time six
month extension of the Maturity Date of this Note by delivering written notice
of such extension election not later than thirty
<PAGE>
(30) days prior to the Maturity Date, with principal payments continuing and
7% interest to be paid monthly on the unpaid principal.
Prospect Medical Holdings may assign its obligations under this Note to
an affiliate at any time provided such affiliate accepts such assignment and
assumes all of the obligations set forth herein. No such assignment shall
relieve Prospect Medical Holdings of its obligations hereunder. This Note is
non-negotiable and may not be assigned by Holder.
Holder may waive compliance with any of the provisions of this Note.
At the option of the holder hereof, this Note shall be immediately due and
payable, without notice or demand, upon the occurrence at any time of any of the
following events:
1. DEFAULT. Any default in the payment of principal or interest when due
hereunder; and
2. BANKRUPTCY. The commencement of proceedings in bankruptcy, or for the
reorganization of any party liable hereon, whether as maker, endorser,
guarantor, surety or otherwise, or for the readjustment of any of the debts of
any of the foregoing parties, under the Federal Bankruptcy Code, as amended, or
any part thereof, or under any other laws, whether state or federal, for the
relief of debtors, now or hereafter existing, by any of the foregoing parties,
or against any of the foregoing parties, which shall not be discharged within
thirty (30) days of their commencement.
Prospect Medical Holdings may, at any time and from time to time, without
penalty, make prepayments which will be applied to the final payment of
principal under this Note, or the principal components of the remaining payments
under this Note in the order or inverse order of maturity, all as the Prospect
Medical Holdings hereof may determine.
In the event AV Hospital, or its affiliates, acquires a portion of
Purchaser's ownership interest in any affiliate of Sierra Primary Care Medical
Group, Inc., a California professional corporation, Prospect Medical Holdings
agrees to use up to 25% of any cash proceeds received by it or Prospect Medical
Group, Inc., a California professional corporation ("Prospect Medical Group") in
such transaction to prepay, on a pro-rata basis, this Note and promissory notes
issued to Sinnadurai E. Moorthy, M.D. and Karunyan Arulanantham, M.D., each in
the principal amount of $1,125,000.
Presentment, demand and protest, and notices of protest, dishonor, and
non-payment of this Note and all notices of every kind, are hereby waived.
No single or partial exercise of any power hereunder shall preclude the
other or further exercise thereof or the exercise of any other power. No delay
or omission on the part of the holder hereof in exercising any right hereunder
shall operate as a waiver of such right or of any other right under this Note.
The payments under this Note are subject to the rights of recoupment,
offset, and setoff available to Prospect Medical Holdings based on any
misrepresentation, any breach of any warranty, or any other breach of the
Agreement of Reorganization by Holder. In exercising its rights of
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<PAGE>
recoupment, offset, or setoff, Prospect Medical Holdings shall not hold back
and keep from the total outstanding principal balance more than the amount of
the liability, loss, costs, or expense.
Prospect Medical Holdings agrees, and the Holder of this Note by acceptance
hereof likewise agrees, that, notwithstanding the terms of this Note, the
payment of the principal, interest and any other amounts due under this Note is
subordinated, to the extent and in the manner set forth in the Subordination
Agreement, to the prior payment of all indebtedness and obligations of Prospect
Medical Holdings owing to Bank, as more particularly set forth in the
Subordination Agreement. In the event that any conflict exists between the
terms of this instrument, any document executed in connection with the delivery
of this instrument and the terms of the Subordination Agreement, the terms of
the Subordination Agreement shall govern and be controlling.
This Note shall be governed by and construed in accordance with the laws of
the State of California.
PROSPECT MEDICAL HOLDINGS, INC.,
a Delaware corporation
By: /s/ Jacob Y. Terner,M.D.
-----------------------------------------
Jacob Y. Terner, M.D.
Chief Executive Officer
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<PAGE>
EXHIBIT 10.49
THE OPTIONS AND OPTION SHARES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, AND THE OPTIONS AND THE OPTION SHARES MAY NOT BE
EXERCISED, OFFERED OR SOLD UNLESS THERE IS A REGISTRATION STATEMENT IN EFFECT
COVERING THE OPTIONS AND OPTION SHARES OR THERE IS AVAILABLE AN EXEMPTION
FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED.
Void after 5:00 p.m. New York Time, on September 24, 2002.
Option to Purchase 3,500 Shares of Common Stock.
OPTION TO PURCHASE COMMON STOCK
OF
PROSPECT MEDICAL HOLDINGS, INC.
This is to Certify that, FOR VALUE RECEIVED, Jayaratnam Jayakumar, or
assigns ("Holder"), is entitled to purchase, subject to the provisions of
this Option, from Prospect Medical Holdings, Inc., a Delaware corporation
("Company"), 3,500 shares of Common Stock, $0.01 par value, of the Company
("Common Stock") at a price of $5.00 per share at any time during the period
from the date hereof to five (5) years from the date hereof (the "Expiration
Date"), but not later than 5:00 p.m., New York Time, on the Expiration Date.
Such number and price may be adjusted from time to time as hereinafter set
forth. The shares of Common Stock deliverable upon such exercise and as
adjusted from time to time are hereinafter sometimes referred to as "Option
Shares" and the exercise price of each share of Common Stock in effect at any
time and as adjusted from time to time is hereinafter sometimes referred to
as the "Exercise Price".
(a) EXERCISE OF OPTION. Subject to the provisions of Section (j)
hereof, this Option may be exercised in whole or in part at any time or from
time to time on or after the date hereof and until the Expiration Date, or if
any such day is a day on which banking institutions in the State of New York
are authorized by law to close, then on the next succeeding day which shall
not be such a day, by presentation and surrender hereof to the Company at its
principal office, or at the office of its stock transfer agent, if any, with
the Purchase Form annexed hereto duly executed and accompanied by payment of
the Exercise Price for the number of Option Shares specified in such form.
If this Option should be exercised in part only, the Company shall, upon
surrender of this Option for cancellation, execute and deliver a new Option
evidencing the rights of the Holder thereof to purchase the balance of the
Option Shares purchasable thereunder. Upon receipt by the Company of this
Option at its office, or by the stock transfer agent of the Company at its
office, in proper form for exercise, the Holder shall be deemed to be the
holder of record of the shares of Common Stock issuable upon such exercise,
notwithstanding that the stock transfer books of the Company shall then be
closed or that certificates representing such shares of Common Stock shall
not then be actually delivered to the Holder.
<PAGE>
(b) RESERVATION OF SHARES. The Company hereby agrees that at all times
there shall be reserved for issuance and/or delivery upon exercise of this
Option such number of shares of its Common Stock as shall be required for
issuance and delivery upon exercise of this Option.
(c) FRACTIONAL SHARES. No fractional shares or script representing
fractional shares shall be issued upon the exercise of this Option. With
respect to any fraction of a share called for upon any exercise hereof, the
Company shall pay to the Holder an amount in cash equal to such fraction
multiplied by the current market value of a share, determined as follows:
(1) If the Common Stock is listed on a National Securities
Exchange or admitted to unlisted trading privileges on such exchange or
listed for trading on the NASDAQ system, the current market value shall
be the last reported sale price of the Common Stock on such exchange or
system on the last business day prior to the date of exercise of this
Option or if no such sale is made on such day, the average closing bid
and asked prices for such day on such exchange or system; or
(2) If the Common Stock is not so listed or admitted to unlisted
trading privileges, the current market value shall be the mean of the
last reported bid and asked prices reported by the National Quotation
Bureau, Inc. on the last business day prior to the date of the exercise
of this Option; or
(3) If the Common Stock is not so listed or admitted to unlisted
trading privileges and bid and asked prices are not so reported, the
current market value shall be an amount not less than the book value
thereof at the end of the most recent fiscal year of the Company ending
prior to the date of the exercise of the Option, determined in such
reasonable manner as may be prescribed by the Board of Directors of the
Company.
(d) EXCHANGE, TRANSFER, ASSIGNMENT OR LOSS OF OPTION. This Option is
exchangeable, without expense, at the option of the Holder, upon presentation
and surrender hereof to the Company or at the office of its stock transfer
agent, if any, for other options of different denominations entitling the
holder thereof to purchase in the aggregate the same number of shares of
Common Stock purchasable hereunder. This Option is transferable and may be
assigned or hypothecated from the date hereof. Subject to the provisions of
Section (j), upon surrender of this Option to the Company at its principal
office or at the office of its stock transfer agent, if any, with the
Assignment Form annexed hereto duly executed and funds sufficient to pay any
transfer tax, the Company shall, without charge, execute and deliver a new
Option in the name of the assignee named in such instrument of assignment and
this Option shall promptly be canceled. This Option may be divided or
combined with other options which carry the same rights upon presentation
hereof at the principal office of the Company or at the office of its stock
transfer agent, if any, together with a written notice specifying the names
and denominations in which new Options are to be issued and signed by the
Holder hereof. The term "Option" as used herein includes any Options into
which this Option may be divided or exchanged. Upon receipt by the Company
of evidence satisfactory to it of the loss, theft, destruction or mutilation
of this Option, and in the case of loss, theft or destruction, of reasonably
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satisfactory indemnification and upon surrender and cancellation of this
Option, if mutilated, the Company will execute and deliver a new Option of
like tenor and date.
(e) RIGHTS OF THE HOLDER. The Holder shall not, by virtue hereof, be
entitled to any rights of a shareholder in the Company, either at law or
equity, and the rights of the Holder are limited to those expressed in the
Option and are not enforceable against the Company except to the extent set
forth herein. Furthermore, Holder by acceptance hereof, consents to and
agrees to be bound by and to comply with all the provisions of this Option,
including, without limitation, all the obligations imposed upon the holder
hereof by Section (j). In addition, the holder of this Option, by accepting
the same, agrees that the Company and the transfer agent may deem and treat
the person in whose name this Option is registered as the absolute, true and
lawful owner for all purposes whatsoever, and neither the Company nor the
transfer agent shall be affected by any notice to the contrary.
(f) ANTI-DILUTION PROVISIONS. The Exercise Price and the number and
kind of securities purchasable upon the exercise of this Option shall be
subject to adjustment from time to time upon the happening of certain events
as hereinafter provided. The Exercise Price in effect at any time and the
number and kind of securities purchasable upon exercise of each Option shall
be subject to adjustment as follows:
(1) In case the Company shall (i) pay a dividend or make a
distribution on its shares of Common Stock in shares of Common Stock,
(ii) subdivide or reclassify its outstanding Common Stock in shares of
Common Stock into a greater number of shares, or (iii) combine or
reclassify its outstanding Common Stock into a smaller number of
shares, the Exercise Price in effect at the time of the record date for
such dividend or distribution or of the effective date of such
subdivision, combination or reclassification shall be proportionately
adjusted so that the Holder of this Option exercised after such date
shall be entitled to receive the aggregate number and kind of shares
which, if this Option had been exercised by such Holder immediately
prior to such date, he would have owned upon such exercise and been
entitled to receive upon such dividend, subdivision, combination or
reclassification. For example, if the Company declares a 2 for 1 stock
dividend or stock split and the Exercise Price immediately prior to
such event was $10.00 per share, the adjusted Exercise Price
immediately after such event would be $5.00 per share. Such adjustment
shall be made successively whenever any event listed above shall occur.
(2) Whenever the Exercise Price payable upon exercise of each
Option is adjusted pursuant to Subsection (1) above, the number of
Shares purchasable upon exercise of this Option shall simultaneously be
adjusted by multiplying the number of Shares initially issuable upon
exercise of this Option by the Exercise Price in effect on the date
hereof and dividing the product so obtained by the Exercise Price, as
adjusted.
(3) No adjustment in the Exercise Price shall be required unless
such adjustment would require an increase or decrease of at least five
cents ($0.05) in such price; provided, however, that any adjustments
which by reason of this Subsection (3) are
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<PAGE>
not required to be made shall be carried forward and taken into account
in any subsequent adjustment required to be made hereunder. All
calculations under this Section (f) shall be made to the nearest cent
or to the nearest one-hundredth of a share, as the case may be.
Anything in this Section (f) to the contrary notwithstanding, the
Company shall be entitled, but shall not be required, to make such
changes in the Exercise Price, in addition to those required by this
Section (f), as it, in its sole discretion, shall determine to be
advisable in order that any dividend or distribution in shares of
Common Stock, subdivision, reclassification or combination of Common
Stock referred to hereinabove in this Section (f) hereafter made by the
Company to the holders of its Common Stock shall not result in any tax
to the holders of its Common Stock or securities convertible into
Common Stock.
(4) Whenever the Exercise Price is adjusted, as herein provided,
the Company shall promptly cause a notice setting forth the adjusted
Exercise Price and adjusted number of Shares issuable upon exercise of
each Option to be mailed to the Holder of such Option at the Holder's
last address appearing in the Option Register, and shall cause a
certified copy thereof to be mailed to its transfer agent, if any. The
Company may retain a firm of independent certified public accountants
selected by the Board of Directors (who may be the regular accountants
employed by the Company) to make any computation required by this
Section (f), and a certificate signed by such firm shall be conclusive
evidence of the correctness of such adjustment.
(5) In the event that at any time, as a result of an adjustment
made pursuant to Subsection (1) above, the Holder of this Option
thereafter shall become entitled to receive any shares of the Company,
other than Common Stock, thereafter the number of such other shares so
receivable upon exercise of this Option shall be subject to adjustment
from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the Common Stock
contained in Subsection (1) to (3), inclusive above.
(6) Irrespective of any adjustments in the Exercise Price or the
number or kind of shares purchasable upon exercise of this Option,
Options theretofore or thereafter issued may continue to express the
same price and number and kind of shares as are stated in the similar
Options initially issuable pursuant to this Agreement.
(g) OFFICER'S CERTIFICATE. Whenever the Exercise Price shall be
adjusted as required by the provisions of the foregoing Section, the Company
shall forthwith file in the custody of its Secretary or an Assistant
Secretary at its principal office and with its stock transfer agent, if any,
an officer's certificate showing the adjusted Exercise Price determined as
herein provided, setting forth in reasonable detail the facts requiring such
adjustment, including a statement of the number of additional shares of
Common Stock, if any, and such other facts as shall be necessary to show the
reason for and the manner of computing such adjustment. Each such officer's
certificate shall be made available at all reasonable times for inspection by
the Holder or any holder of a Option executed and delivered pursuant to
Section (a) and the Company shall, forthwith after each such adjustment, mail
a copy by certified mail of such certificate to the Holder or any such holder.
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<PAGE>
(h) NOTICES TO OPTION HOLDERS. So long as this Option shall be
outstanding, (i) if Company shall pay any dividend or make any distribution
upon the Common Stock or (ii) if the Company shall offer to the holders of
Common Stock for subscription or purchase by them any share of another class
of capital stock or (iii) if any capital reorganization of the Company,
reclassification of the capital stock of the Company, consolidation or merger
of the Company with or into another corporation, sale, lease, or transfer of
all or substantially all of the property and assets of the Company to another
corporation, or voluntary or involuntary dissolution, liquidation or winding
up of the Company shall be effected, then in any such case, the Company shall
cause to be mailed by certified mail to the Holder, at least fifteen days
prior the date specified in (x) or (y) below, as the case may be, a notice
containing a brief description of the proposed action and stating the date on
which (x) a record is to be taken for the purpose of such dividend,
distribution or rights, or (y) such reclassification, reorganization,
consolidation, merger, conveyance, lease, dissolution, liquidation or winding
up is to take place and the date, if any is to be fixed, as of which the
holders of Common Stock or other securities shall receive cash or other
property deliverable upon such reclassification, reorganization,
consolidation, merger, conveyance, dissolution, liquidation or winding up.
(i) RECLASSIFICATION, REORGANIZATION OR MERGER. In case of any
reclassification, capital reorganization or other change of outstanding
shares of Common Stock of the Company, or in case of any consolidation or
merger of the Company with or into another corporation (other than a merger
with a subsidiary in which merger the Company is the continuing corporation
and which does not result in any reclassification, capital reorganization or
other change of outstanding shares of Common Stock of the class issuable upon
exercise of this Option) or in case of any sale, lease, or conveyance to
another corporation of the property of the Company as an entirety, the
Company shall, as a condition precedent to such transaction, cause effective
provisions to be made so that the Holder shall have the right thereafter by
exercising this Option at any time prior to the expiration of the Option, to
purchase the kind and amount of shares of stock and other securities and
property receivable upon such reclassification, capital reorganization and
other change, consolidation, merger, sale, lease or conveyance by a holder of
the number of shares of Common Stock which might have been purchased upon
exercise of this Option immediately prior to such reclassification,
reorganization, change, consolidation, merger, sale, lease or conveyance.
Any such provision shall include provision for adjustments which shall be as
nearly equivalent as may be practicable to the adjustments provided for in
this Option. The foregoing provisions of this Section (i) shall similarly
apply to successive reclassifications, capital reorganizations, and changes
of shares of Common Stock and to successive consolidations, mergers, sales,
leases or conveyances. In the event that in connection with any such capital
reorganization or reclassification, change, consolidation, merger, sale,
lease or conveyance, additional shares of Common Stock shall be issued in
exchange, conversion, substitution, or payment, in whole or in part, for a
security of the Company other than Common Stock, any such issue shall be
treated as an issue of Common Stock covered by the provisions of Subsection
(1) of Section (f) hereof.
(j) EXERCISE AND TRANSFER TO COMPLY WITH THE SECURITIES ACT OF 1933.
The holder of this Option and any transferee hereof, by their acceptance
hereof, hereby agree that: (a) the Options being acquired hereunder are
being purchased for investment purposes
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<PAGE>
only and not with a view to distribution and will not be transferred without
the prior written consent of the Company and unless registered or unless
there is an exemption available from the registration requirements of the
Securities Act of 1933, as amended, which exemption has been established to
the satisfaction of the Company; (b) no public distribution of the Options or
Option Shares will be made in violation of the provisions of the Securities
Act of 1933, as amended, or the Rules and Regulations promulgated thereunder
(such Act and Rules and Regulations being hereinafter referred to as the
"Act") or any applicable state laws; and (c) during such period as delivery
of a prospectus with respect to the Options or Option Shares may be required
by the Act, no public distribution of the Options or Option Shares will be
made in a manner or on terms different from those set forth in, or without
delivery of, a prospectus then meeting the requirements of Section 10 of the
Act and in compliance with all applicable state laws. The holder of this
Option and any such transferee hereof further agree that if any distribution
of any of the Options or Option Shares is proposed to be made by them
otherwise than by delivery of a prospectus meeting the requirements of
Section 10 of the Act, such action shall be taken only after submission to
the Company of an opinion of counsel, reasonably satisfactory in form and
substance to the Company's counsel, to the effect that the proposed
distribution will not be in violation of the Act or of applicable state law.
Furthermore, it shall be a condition to the transfer of the Options or Option
Shares thereof to deliver to the Company his or its written agreement to
accept and be bound by all of the terms and conditions of this Option.
Lastly, the holder of this Option has executed and delivered to the Company a
Stockholder's Representation Agreement containing certain representations and
warranties of the holder which are incorporated herein by reference.
(k) GOVERNING LAW. This Option is made with reference to the laws of
the State of California and shall be governed by and construed in accordance
therewith.
(l) ARBITRATION. The parties firmly desire to resolve all disputes
arising hereunder without resort to litigation in order to protect their
respective business reputations and the confidential nature of certain
aspects of their relationship. Accordingly, any controversy or claim arising
out of or relating to this Option, or the breach thereof, shall be settled by
arbitration as set forth below.
i. All disputes which in any manner arise out of or relate to
this Option or the subject matter thereof, shall be resolved exclusively by
arbitration in accordance with the provisions of this Section (l). Either
party may commence arbitration by sending a written demand for arbitration to
the other party, setting forth the nature of the controversy, the dollar
amount involved, if any, and the remedies sought, and attaching a copy of
this Section to the demand.
ii. The parties stipulate to arbitration before a single, mutually
agreed upon arbitrator sitting on the Los Angeles, California Judicial
Arbitration Mediation Services (JAMS) panel. In the event that the parties
are unable to agree upon the person chosen as arbitrator within 30 days of
the demand for arbitration, the arbitrator shall be selected in the sole
discretion of the JAMS administrator. The arbitrator shall be a member of
the California bar.
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<PAGE>
iii. The parties shall share all costs of arbitration. The
prevailing party shall be entitled to reimbursement by the other party of
such party's attorneys' fees and costs and any arbitration fees and expenses
incurred in connection with the arbitration hereunder.
iv. The substantive law of the State of California shall be
applied by the arbitrator. All proceedings in arbitration shall be in
accordance with the California Code of Civil Procedure, as amended, and the
parties shall have the right to legal discovery in any matter submitted to
arbitration in satisfaction of California Code of Civil Procedure Section
1283.05, as permitted by California Code of Civil Procedure Section 1283.1(b).
v. Arbitration shall take place in Los Angeles, California unless
the parties otherwise agree. As soon as reasonably practicable, a hearing
with respect to the dispute or matter to be resolved shall be conducted by
the arbitrator. As soon as reasonably practicable thereafter, the arbitrator
shall arrive at a final decision, which shall be reduced to writing, signed
by the arbitrator and mailed to each of the parties and their legal counsel.
vi. All decisions of the arbitrator shall be final, binding and
conclusive on the parties and shall constitute the only method of resolving
disputes or matters subject to arbitration pursuant to this Option. The
arbitrator or a court of appropriate jurisdiction may issue a writ of
execution to enforce the arbitrator's judgment. Judgment may be entered upon
such a decision in accordance with applicable law in any court having
jurisdiction thereof.
vii. Notwithstanding the foregoing, because time is of the essence
of this Option, the parties specifically reserve the right to seek a judicial
temporary restraining order, preliminary injunction, or other similar
equitable relief.
viii. The decision and award of the arbitrator shall be kept
confidential by the parties to the greatest extent possible. No disclosure
of such decision or award shall be made by the parties except as required by
law or as necessary or appropriate to effect the enforcement thereof.
ix. Should either party institute any action or procedure to
enforce this Option or any provision hereof, or for damages by reason of any
alleged breach of this Option or of any provision hereof, or for a
declaration of rights hereunder (including without limitation arbitration),
the prevailing party in any such action or proceeding shall be entitled to
receive from the other party all costs and expenses, including without
limitation reasonable attorneys' fees, incurred by the prevailing party in
connection with such action or proceeding.
PROSPECT MEDICAL HOLDINGS, INC.
By: /s/ Thomas A. Maloof
-----------------------------
Thomas A. Maloof,
Chief Financial Officer
Dated: September 25, 1997
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<PAGE>
PURCHASE FORM
Dated: ,
---------- ----
The undersigned irrevocably elects to exercise the within Option to the
extent of purchasing _________ shares of Common Stock and hereby makes
payment of $______________ in payment of the actual exercise price thereof.
INSTRUCTIONS FOR REGISTRATION OF STOCK
Name
--------------------------------------------
(Please typewrite or print in block letters)
Address
--------------------------------------------
--------------------------------------------
Signature
--------------------------------------------
IT SHALL BE A CONDITION TO THE VALIDITY OF THIS ASSIGNMENT THAT THE
TRANSFEREE DELIVER TO PROSPECT MEDICAL HOLDINGS, INC. HIS OR ITS WRITTEN
AGREEMENT TO ACCEPT AND BE BOUND BY ALL OF THE TERMS AND CONDITIONS OF THIS
OPTION
ASSIGNMENT FORM
FOR VALUE RECEIVED, ______________________ hereby sells, assigns and
transfers unto
Name
--------------------------------------------
(Please typewrite or print in block letters)
Address
--------------------------------------------
--------------------------------------------
the right to purchase Common Stock represented by this Option to the extent
of _________ shares as to which such right is exercisable and does hereby
irrevocably constitute and appoint _________________________________
Attorney, to transfer the same on the books of the Company with full power of
substitution in the premises.
Date ,
---------------- -----
Signature
----------------------------------
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<PAGE>
SECURITY AGREEMENT
This SECURITY AGREEMENT, dated as of September 25, 1997, is entered into
between Prospect Medical Holdings, Inc., a Delaware corporation ("Debtor"), and
Jayaratnam Jayakumar ("Secured Party"), with reference to the following facts:
R E C I T A L S
In order to induce the Secured Party to accept the Promissory Note and as a
condition thereof, Debtor has agreed to enter into this Agreement in order to
grant to the Secured Party a security interest in the Collateral to secure
prompt payment and performance of the Secured Obligations.
A G R E E M E N T
NOW, THEREFORE, in consideration of the mutual promises, covenants,
conditions, representations, and warranties hereinafter set forth, and for other
good and valuable consideration, the parties hereto agree as follows:
1. DEFINITIONS. All initially capitalized terms used but not defined
herein shall have the meanings ascribed thereto in the Promissory Note. In
addition, as used herein, the following terms shall have the following meanings:
"ACCOUNT DEBTOR" means any Person who is or who may become obligated
with respect to, or on account of, an Account.
"ACCOUNTS" means any and all of Debtor's presently existing and
hereafter arising accounts (as defined in the UCC) and rights to payment, except
those evidenced by Negotiable Collateral, arising out of the sale or lease of
goods or the rendition of services by Debtor, irrespective of whether earned by
performance.
"AGREEMENT AND PLAN OF REORGANIZATION" means that certain Agreement
and Plan of Reorganization By and Among Prospect Medical Holdings, Inc. and
Sierra Medical Management, Inc. and Sinnadurai E. Moorthy, M.D., Karunyan
Arulanantham, M.D. and Secured Party, dated September 19, 1997.
"DEBTOR'S BOOKS" means any and all presently existing and hereafter
acquired or created books and records of all records (including maintenance and
warranty records), ledgers, computer programs, disc or tape files, printouts,
runs, and other computer prepared information indicating, summarizing, or
evidencing the Accounts, Deposit Accounts, Equipment, Inventory, Investment
Property, General Intangibles and Negotiable Collateral.
<PAGE>
"CHATTEL PAPER" has the meaning assigned to it in the UCC and includes
all writings of whatever sort which evidence a monetary obligation and a
security interest in or lease of specific goods, whether now existing or
hereafter arising.
"COLLATERAL" means the following, collectively: any and all of the
Accounts, Deposit Accounts, Equipment, Inventory, Investment Property, General
Intangibles, Negotiable Collateral, and Debtor's Books, in each case whether now
existing or hereafter acquired or created, and any Proceeds or products of any
of the foregoing, or any portion thereof, and any and all Accounts, Deposit
Accounts, Equipment, Inventory, Investment Property, General Intangibles,
Negotiable Collateral, money, or other tangible or intangible property,
resulting from the sale or other disposition of the Accounts, Deposit Accounts,
Equipment, Inventory, Investment Property, General Intangibles, or Negotiable
Collateral, or any portion thereof or interest therein, and the substitutions,
replacements, additions, accessions, products and Proceeds thereof.
"COLLATERAL ACCESS AGREEMENT" means a landlord waiver, mortgagee
waiver, bailee letter, or acknowledgment agreement of any warehouseman,
processor, lessor, consignee, or other person in possession of, having a lien
upon, or having rights or interests in the Equipment or Inventory, in each case,
in form and substance satisfactory to Secured Party.
"DEPOSIT ACCOUNT" means any demand, time, savings, passbook or like
account now or hereafter maintained by or for the benefit of Debtor with a bank,
savings and loan association, credit union or like organization, and all funds
and amounts therein, whether or not restricted or designated for a particular
purpose.
"DOCUMENTS" means any and all "documents," as defined in the UCC,
including documents of title, bills of lading, dock warrants, dock receipts,
warehouse receipts and other documents of Debtor, whether or not negotiable, and
includes all other documents which purport to be issued by a bailee or agent and
purport to cover goods in any bailee's or agent's possession which are either
identified or are fungible portions of an identified mass, including such
documents of title made available to Debtor for the purpose of ultimate sale or
exchange of goods or for the purpose of loading, unloading, storing, shipping,
transshipping, manufacturing, processing or otherwise dealing with goods in a
manner preliminary to their sale or exchange, in each case whether now existing
or hereafter acquired.
"EQUIPMENT" means all "equipment," as defined in the UCC, and includes
any and all of Debtor's presently existing and hereafter acquired machinery,
equipment, furniture, furnishings, fixtures, computer and other electronic data
processing equipment and other office equipment and supplies, computer programs
and related data processing. software, spare parts, tools, motors, automobiles,
trucks, tractors and other motor vehicles, rolling stock, jigs, and other goods
(other than Inventory, farm products, and consumes goods), of every kind and
description, wherever located, together with any and all parts, improvements,
additions, attachments, replacements, accessories, and substitutions thereto or
therefor, and all other rights of Debtor relating thereto, whether in the
possession and control of Debtor, or in the possession and control of a third
party for the account of Debtor.
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<PAGE>
"FEIN" means Federal Employer Identification Number.
"GENERAL INTANGIBLES" means any and all of Debtor's presently existing
and hereafter acquired or arising "general intangibles," (as defined in the UCC)
and other intangible personal property of every kind and description, including:
(a) contracts and contract rights, noncompetition covenants,
licensing and distribution agreements, indemnity agreements, guaranties,
insurance policies, franchise agreements and lease agreements;
(b) deposit accounts, uncertificated certificates of deposit,
uncertificated securities, and interests in any joint ventures, partnerships or
limited liability companies;
(c) choses in action and causes of action (whether legal or
equitable, whether in contract or tort or otherwise, and however arising);
(d) licenses, approvals, permits or any other authorizations issued
by any government authority;
(e) Intellectual Property Collateral;
(f) computer software, magnetic media, electronic data processing
files, systems and programs;
(g) rights of stoppage in transit, replevin and reclamation, rebates
or credits of every kind and nature to which Debtor may be entitled;
(h) purchase orders, customer lists, subscriber lists and goodwill;
(i) monies due or recoverable from pension funds, refunds and claims
for tax or other refunds against any governmental authority; and
(j) other contractual, equitable and legal rights of whatever kind
and nature.
"INSTRUMENTS" has the meaning assigned to it by the UCC and includes
any and all negotiable instruments, certificated securities and every other
writing which evidences a right to the payment of money, in each case whether
now existing or hereafter acquired.
"INTELLECTUAL PROPERTY COLLATERAL" means the following assets owned or
held by Debtor or in which Debtor otherwise has any interest, now existing or
hereafter acquired or arising:
(a) all patents and patent applications, domestic or foreign, all
licenses relating to any of the foregoing and all income and royalties with
respect to any licenses, all rights to sue for past, present or future
infringement thereof, all rights arising therefrom and pertaining thereto and
all reissues, divisions, continuations, renewals, extensions and continuations
in part thereof;
3
<PAGE>
(b) all copyrights and applications for copyright, domestic or
foreign, together with the underlying works of authorship (including titles),
whether or not the underlying works of authorship have been published and
whether said copyrights are statutory or arise under the common law, and all
other rights and works of authorship, all rights, claims and demands in any way
relating to any such copyrights or works, including royalties and rights to sue
for past, present or future infringement, and all rights of renewal and
extension of copyright;
(c) all state (including common law), federal and foreign trademarks,
service marks and trade names, and applications for registration of such
trademarks, service marks and trade names, all licenses relating to any of the
foregoing and all income and royalties with respect to any licenses, whether
registered or unregistered and wherever registered, all rights to sue for past,
present or future infringement or unconsented use thereof, all rights arising
therefrom and pertaining thereto and all reissues, extensions and renewals
thereof;
(d) all trade secrets, confidential information, customer lists,
license rights, advertising materials, operating manuals, methods, processes,
know-how, sales literature, sales and operating plans, drawings, specifications,
blue prints, descriptions, inventions, name plates and catalogs; and
(e) the entire goodwill of or associated with the businesses now or
hereafter conducted by Debtor connected with and symbolized by any of the
aforementioned properties and assets.
"INVENTORY" has the meaning assigned to it in the UCC and includes any
and all of Debtor's presently existing and hereafter acquired goods of every
kind and description (including goods in transit) which are held for sale or
lease, or to be furnished under a contract of service or which have been so
leased or furnished, or other disposition, wherever located, including those
held for display or demonstration or out on lease of consignment or are raw
materials, work in process, finished materials, or materials used or consumed,
or to be used or consumed, in Debtor's business, and the resulting product or
mass, and all repossessed, returned, rejected, reclaimed and replevied goods,
together with all materials, parts, supplies, packing and shipping materials
used or usable, in connection with the manufacture, packing, shipping,
advertising, selling or, furnishing of such goods; and all other items hereafter
acquired by Debtor by way of substitution, replacement, return, repossession or
otherwise, and all additions and accessions thereto, and any Document
representing or relating to any of the foregoing at any time.
"INVESTMENT PROPERTY" has the meaning given to such term in the UCC.
"NEGOTIABLE COLLATERAL" means any and all of Debtor's presently
existing and hereafter acquired or arising letters of credit, advises of credit,
certificates of deposit, notes, drafts, Instruments, Documents and Chattel
Paper.
"PROCEEDS" means whatever is receivable or received from or upon the
sale, lease, license, collection, use, exchange or other disposition, whether
voluntary or involuntary, of any Collateral or other assets of Debtor, including
"proceeds" as defined in Section 9306 of the Code,
4
<PAGE>
any and all proceeds of any insurance, indemnity, warranty or guaranty payable
to or for the account of Debtor from time to time with respect to any of the
Collateral, any and all payments (in any form whatsoever) made or due and
payable to Debtor from time to time in connection with any requisition,
confiscation, condemnation, seizure or forfeiture of all or any part of the
Collateral by any governmental authority (or any person acting under color of
governmental authority), any and all other amounts from time to time paid or
payable under or in connection with any of the Collateral or for or on account
of any damage or injury to or conversion of any Collateral by any person, any
and all other tangible or intangible property received upon the sale or
disposition of Collateral, and all proceeds of proceeds.
"PROMISSORY NOTE" means the Promissory Note of even date herewith, in
the amount of $250,000 made by Debtor, and payable to Secured Party.
"RIGHTS TO PAYMENT" means all Accounts and any and all rights and
claims to the payment or receipt of money or other forms of consideration of any
kind in, to and under all General Intangibles, Negotiable Collateral and
Proceeds thereof.
"SECURED OBLIGATIONS" shall mean any and all debts, liabilities,
obligations, or undertakings owing by Debtor to Secured Party arising under,
advanced pursuant to, or evidenced by the Promissory Note or Security Agreement,
whether direct or indirect, absolute or contingent, matured or unmatured, due or
to become due, voluntary or involuntary, whether now existing or hereafter
arising, and including all interest not paid when due and all Secured Party
Expenses which Debtor is required to pay or reimburse pursuant to this Security
Agreement, the Promissory Note or by law.
"SECURED PARTY" means Jayaratnam Jayakumar.
"SECURED PARTY EXPENSES" shall mean: any and all costs or expenses
required to be paid by Debtor under this Security Agreement which are paid or
advanced by Secured Party; all costs and expenses of Secured Party, including
his attorneys' fees and expenses (including attorneys' fees incurred pursuant to
proceedings arising under the Bankruptcy Code), incurred or expended to correct
any default or enforce any provision of this Security Agreement, or in gaining
possession of, maintaining, handling, preserving, storing, shipping, selling,
preparing for sale, or advertising to sell the Collateral, irrespective of
whether a sale is consummated; and all costs and expenses of suit incurred or
expended by Secured Party, including his attorneys' fees and expenses (including
attorneys' fees incurred pursuant to proceedings arising under the Bankruptcy
Code) in enforcing or defending this Security Agreement, irrespective of whether
suit is brought.
"SECURITY AGREEMENT" shall mean this Security Agreement, any
concurrent or subsequent riders, exhibits or schedules to this Security
Agreement, and any extensions, supplements, amendments, or modifications to or
in connection with this Security Agreement, or to any such riders, exhibits or
schedules.
5
<PAGE>
"SENIOR CREDITOR" means Imperial Bank, a California banking
corporation, or its successors and assigns, and any institution which refinances
Debtor's obligations to Imperial Bank.
"SUBORDINATION AGREEMENT" has the meaning ascribed to it in the second
paragraph of the legend set forth on the front of the Promissory Note.
"UCC" means the California Uniform Commercial Code except, to the
extent applicable, the Uniform Commercial Code as adopted by the jurisdiction in
which any of the Collateral is located. Any and all terms used in this Security
Agreement which are defined in the Code shall be construed and defined in
accordance with the meaning and definition ascribed to such terms under the
Code, unless otherwise defined herein.
2. CONSTRUCTION. Unless the context of this Security Agreement clearly
requires otherwise, references to the plural include the singular, references to
the singular include the plural, the part includes the whole, "include" or
"including" is not limiting, and "or" has the inclusive meaning represented by
the phrase "and/or." References in this Security Agreement to "determination"
by Secured Party include reasonable estimates (absent manifest error) by Secured
Party, as applicable (in the case of quantitative determinations) and reasonable
beliefs (absent manifest error) by Secured Party, as applicable (in the case of
qualitative determinations). The words "hereof," "herein," "hereby,"
"hereunder," and similar terms in this Security Agreement refer to this Security
Agreement as a whole and not to any particular provision of this Security
Agreement. Article, section, subsection, exhibit, and schedule references are
to this Security Agreement unless otherwise specified.
3. CREATION OF SECURITY INTEREST. Subject only to prior liens in favor
of Senior Creditor, Debtor hereby grants to Secured Party a continuing security
interest in all presently existing and hereafter acquired or arising Collateral
in order to secure the prompt payment and performance of all of the Secured
Obligations. Debtor acknowledges and affirms that such security interest in the
Collateral has attached to all Collateral without further act on the part of
Secured Party or Debtor.
4. FURTHER ASSURANCES.
4.1 Debtor shall execute and deliver to Secured Party concurrently
with Debtor's execution of this Security Agreement, and from time to time at the
request of Secured Party, all financing statements, continuation financing
statements, fixture filings, security agreements, chattel mortgages,
assignments, and all other documents that Secured Party may request, in form
satisfactory to Secured Party, to perfect and maintain perfected Secured Party's
security interests in the Collateral and in order to consummate fully all of the
transactions contemplated by this Security Agreement and the Promissory Note.
Debtor hereby irrevocably makes, constitutes, and appoints Secured Party as
Debtor's true and lawful attorney with power to sign the name of Debtor on any
of the above-described documents or on any other similar documents which need to
be executed, recorded, or filed, and to do any and all things necessary in the
name and on behalf of Debtor in order to perfect, or continue the perfection of,
Secured
6
<PAGE>
Party's security interests in the Collateral. Debtor agrees that neither
Secured Party, nor any of his designees or attorneys-in-fact, will be liable for
any act of commission or omission, or for any error of judgment or of fact or
law with respect to the exercise of the power of attorney granted under this
Section 4. 1, other than as a result of his or their gross negligence or willful
misconduct. THE POWER OF ATTORNEY GRANTED UNDER THIS SECTION 4.1 IS COUPLED
WITH AN INTEREST AND SHALL BE IRREVOCABLE UNTIL ALL OF THE SECURED OBLIGATIONS
HAVE BEEN INDEFEASIBLY PAID IN FULL, THE PROMISSORY NOTE TERMINATED, AND ALL
DEBTOR'S DUTIES HEREUNDER AND THEREUNDER HAVE BEEN DISCHARGED IN FULL.
4.2 Without limiting the generality of the foregoing Section 4.1 or
any of the provisions of the Promissory Note, Debtor will: (i) at the request
of Secured Party, mark conspicuously all of its records pertaining to the
Collateral with a legend, in form and substance satisfactory to Secured Party,
indicating that the Collateral is subject to the security interest granted
hereby; (ii) at the request of Secured Party, appear in and defend any action or
proceeding which may affect Debtor's title to, or the security interest of
Secured Party in, any of the Collateral; and (iii) upon demand of Secured Party,
allow inspection of Collateral by Secured Party or persons designated by Secured
Party at any time during normal business hours.
4.3 With respect to the Negotiable Collateral (other than drafts
received in the ordinary course of business so long as no Event of Default is
continuing), after (i) Senior Creditor has been paid in full, and (ii) all
obligations of Senior Creditor to make loans to Debtor have been terminated,
Debtor shall, immediately upon request by Secured Party, endorse (where
appropriate) and assign the Negotiable Collateral over to Secured Party, and
deliver to Secured Party actual physical possession of the Negotiable Collateral
together with any instruments of transfer or assignment, all in form and
substance satisfactory to Secured Party, in order to fully perfect the security
interest therein of Secured Party.
4.4 Subject to any prior liens in favor of Senior Creditor, Debtor
shall cooperate with Secured Party in obtaining a control agreement in form and
substance satisfactory to Secured Party with respect to all Deposit Accounts and
Investment Property.
5. REPRESENTATIONS AND WARRANTIES. In addition to the representations
and warranties of Debtor set forth in the Promissory Note, which are
incorporated herein by this reference, Debtor represents and warrants to Secured
Party that:
5.1 LOCATION OF CHIEF EXECUTIVE OFFICE AND COLLATERAL; FEIN.
Debtor's chief executive office is located at the address set forth in Schedule
1, and all other locations where Debtor conducts business or Collateral is kept
are set forth in Schedule 1. Debtor's FEIN is 33-0564370.
5.2 LOCATIONS OF DEBTOR'S BOOKS. All locations where Debtor's Books
are kept, including all equipment necessary for accessing Debtor's Books and the
names and addresses of all service bureaus, computer or data processing
companies and other persons keeping Debtor's Books or collecting Rights to
Payment for Debtor, are set forth in Schedule 1.
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<PAGE>
5.3 TRADE NAMES AND TRADE STYLES. All trade names and trade styles
under which Debtor presently conducts its business operations are set forth in
Schedule 1, Debtor has not, at any time during the preceding five years: (i)
been known as or used any other corporate, name; (ii) changed its name; (iii)
been the surviving or resulting corporation in a merger or consolidation; or
(iv) acquired through asset purchase or otherwise any business of any person.
5.4 OWNERSHIP OF COLLATERAL. Debtor is and shall continue to be the
sole and complete owner of the Collateral, free from any lien other than liens
in favor of Senior Creditor and the liens created hereby.
5.5 ENFORCEABILITY; PRIORITY OF SECURITY INTEREST. (i) This
Agreement creates a security interest which is enforceable against the
Collateral in which Debtor now has rights, and will create a security interest
which is enforceable against the Collateral in which Debtor hereafter acquires
rights at the time Debtor acquires any such rights, and (ii) Secured Party has a
perfected security interest (to the fullest extent perfection can be obtained by
filing, notification to third parties, possession or control) and a first
priority security interest in the Collateral in which Debtor now has rights
(subject only to liens in favor of Senior Creditor), and will have a perfected
and first priority security interest in the Collateral in which Debtor hereafter
acquires rights at the time Debtor acquires any such rights (subject only to
liens in favor of Senior Creditor), in each case securing the payment and
performance of the Secured Obligations.
5.6 OTHER FINANCING STATEMENTS. Other than financing statements in
favor of Secured Party and financing statements filed in connection with liens
in favor of Senior Creditor, no effective financing statement naming Debtor as
debtor, assignor, grantor, mortgagor, pledgor or the like and covering all or
any part of the Collateral is on file in any filing or recording office in any
jurisdiction.
5.7 RIGHTS TO PAYMENT.
(a) the Rights to Payment represent valid, binding and
enforceable obligations of the Account Debtors or other persons obligated
thereon, representing undisputed, bona fide transactions completed in accordance
with the terms and provisions contained in any documents related thereto, and
are and will be genuine, free from liens (other than liens in favor of Senior
Creditor), adverse claims, counterclaims, setoffs, defaults, disputes, defenses,
retainages, holdbacks and conditions precedent of any kind of character, except
to the extent reflected by Debtor's reserves for uncollectible Rights to
Payment;
(b) all Account Debtors and other obligors on the Rights to
Payment are solvent and generally paying their debts as they come due;
(c) all Rights to Payment comply with all applicable laws
concerning form, content and manner of preparation and execution, including
where applicable any federal and state consumer credit laws;
(d) Debtor has not assigned any of its rights under the Rights
to Payment other than to Senior Creditor;
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(e) all statements made, all unpaid balances and all other
information in Debtor's Books and other documentation relating to the Rights to
Payment are true and correct and in all respects what they purport to be; and
(f) Debtor has no knowledge of any fact or circumstance which
would impair the validity or collectibility of any of the Rights to Payment.
5.8 INVENTORY. No Inventory is stored with any bailee, warehouseman
or similar person or on any premises leased to Debtor, nor has any Inventory
been consigned to Debtor or consigned by Debtor to any person or is held by
Debtor for any person under any "bill and hold" or other arrangement.
5.9 INTELLECTUAL PROPERTY.
(a) except as set forth in Schedule 1, Debtor (directly or
through any affiliated entity) does not own, possess or use under any licensing
arrangement any patents, copyrights, trademarks, service marks or trade names,
nor is there currently pending before any governmental authority any application
for registration of any patent, copyright, trademark, service mark or trade
name;
(b) all patents, copyrights, trademarks, service marks and trade
names are subsisting and have not been adjudged invalid or unenforceable in
whole or in part;
(c) all maintenance fees required to be paid on account of any
patents have been timely paid for maintaining such patents in force, and, to the
best of Debtor's knowledge, each of the patents is valid and enforceable and
Debtor has notified Secured Party in writing of all prior art (including public
uses and sales) of which it is aware;
(d) to the best of Debtor's knowledge, no infringement or
unauthorized use presently is being made of any Intellectual Property Collateral
by any person;
(e) Debtor is the sole and exclusive owner of the Intellectual
Property Collateral and the past, present and contemplated future use of such
Intellectual Property Collateral by Debtor has not, does not and will not
infringe or violate any right, privilege or license agreement of or with any
other person; and
(f) Debtor owns, has material rights under, is a party to, or an
assignee of a party to all material licenses, patents, patent applications,
copyrights, service marks, trademarks, trademark applications, trade names and
all other intellectual property Collateral necessary to continue to conduct its
business as heretofore conducted.
5.10 EQUIPMENT.
(a) none of the Equipment or other Collateral is affixed to real
property, except Collateral with respect to which Debtor has supplied Secured
Party with all information and documentation necessary to make all fixture
filings required to perfect and
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protect the priority of Secured Party's security interest in all such Collateral
which may be fixtures as against all persons having an interest in the premises
to which such property may be affixed; and
(b) none of the Equipment is leased from or to any person,
except as set forth in Schedule 1.
5.11 DEPOSIT ACCOUNTS. The names and addresses of all financial
institutions at which Debtor maintains its Deposit Accounts, and the account
numbers and account names of such Deposit Accounts, are set forth in Schedule 1.
5.12 INVESTMENT PROPERTY. All Investment Property is set forth and
described in Schedule 1, and all financial institutions or financial
intermediaries holding or in possession of such Investment Property are set
forth in Schedule 1.
6. COVENANTS. In addition to the covenants of Debtor set forth in the
Promissory Note which are incorporated herein by this reference, Debtor agrees
that, until the indefeasible payment, performance and satisfaction in full of
the Secured Obligations:
6.1 DEFENSE OF COLLATERAL. Debtor shall appear in and defend any
action, suit or proceeding which may affect its title to or right or interest
in, or Secured Party's right or interest in, the Collateral.
6.2 PRESERVATION OF COLLATERAL. Debtor shall do and perform all acts
that may be necessary and appropriate to maintain, preserve and protect the
Collateral.
6.3 COMPLIANCE WITH LAWS, ETC. Debtor shall comply with all laws,
regulations and ordinances, and all policies of insurance, relating to the
possession, operation, maintenance and control of the Collateral.
6.4 LOCATION OF DEBTOR'S BOOKS AND CHIEF EXECUTIVE OFFICE. Debtor
shall: (i) keep all Debtor's Books at the locations set forth in Schedule 1;
and (ii) maintain the location of Debtor's chief executive office or principal
place of business at the location set forth in Schedule 1; provided, however,
that Debtor may amend Schedule 1; so long as (a) such amendment occurs by
written notice to Secured Party not less than 30 days prior to the date on which
the location of Debtor's Books or Debtor's chief executive office or principal
place of business is changed, and (b) at the time of such written notification,
Debtor executes and delivers any financing statement amendments or fixture
filing amendments necessary to perfect or continue perfected Secured Party's
security interest in the Collateral and also obtains for Secured Party such duly
executed Collateral Access Agreement as Secured Party shall require with respect
to such new location.
6.5 LOCATION OF COLLATERAL. Debtor shall keep the Inventory and
Equipment only at the locations identified on Schedule 1; PROVIDED, HOWEVER,
that Debtor may amend Schedule 1 so long as (i) such amendment occurs by written
notice to Secured Party not less than 30 days prior to the date on which the
Inventory or Equipment is moved to such new location, (ii) such new location is
within the continental United States, and (iii) at the time of such written
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notification, Debtor executes and delivers any financing statements or fixture
filings perfect and continue perfected Secured Party's security interests in
such assets and also obtains for Secured Party such duly executed Collateral
Access Agreement as Secured Party shall require with respect to such new
location.
6.6 CHANGE IN NAME, TRADE NAME, TRADE STYLE OR FEIN. Debtor shall
not change its name, trade names, trade styles or FEIN, or add any new trade
names or trade styles from those listed on Schedule 1; PROVIDED, HOWEVER, that
Debtor may amend Schedule 1 so long as (i) such amendment occurs by written
notice to Secured Party not less than 30 days prior to the date on which such
new name, trade name, trade style or FEIN becomes effective, and (ii) at the
time of such written notification, Debtor executes and delivers any financing
statement amendments or fixture filing amendment necessary to continue perfected
Secured Party's security interests in the Collateral.
6.7 MAINTENANCE OF RECORDS. Debtor shall keep separate, accurate and
complete Debtor's Books, disclosing Secured Party's security interest hereunder.
6.8 DISPOSITION OF COLLATERAL. Debtor shall not surrender or lose
possession of (other than to Senior Creditor or Secured Party), sell, lease,
rent, or otherwise dispose of or transfer any of the Collateral or any right or
interest therein, except to the extent permitted herein.
6.9 LIENS. Debtor shall keep the Collateral free of all liens except
liens in favor of Senior Creditor and Secured Party for the benefit of Secured
Party.
6.10 LEASED PREMISES. At Secured Party's request, Debtor shall obtain
from each person from whom Debtor leases any premises at which any Collateral is
at any time present, such Collateral Access Agreements as Secured Party may
require.
6.11 RIGHTS TO PAYMENT. Debtor shall:
(a) perform and observe all terms and provisions of the Rights
to Payment and all obligations to be performed or observed by it in connection
therewith and maintain the Rights to Payment in full force and effect;
(b) enforce all Rights to Payment strictly in accordance with
their terms, and take all such action to such end as may be from time to time
reasonably requested by Secured Party;
(c) if, to the knowledge of Debtor, any dispute, setoff, claim,
counterclaim or defense shall exist or shall be asserted or threatened with
respect to a Right to Payment (whether with or against Debtor or otherwise),
disclose such fact fully to Secured Party in Debtor's Books relating to such
Account or other Right to Payment and in connection with any report furnished by
Debtor to Secured Party relating to such Right to Payment;
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(d) furnish to Secured Party such information and reports
regarding the Rights to Payment as Secured Party may request, and upon request
of Secured Party make such demands and requests for information and reports as
Debtor is entitled to make in respect of the Rights to Payment; and
(e) upon the occurrence of any Event of Default, establish such
lockbox or similar arrangements for the payment of the Rights to Payment as
Secured Party shall require.
6.12 INVENTORY. Debtor shall:
(a) at such times as Secured Party shall request, prepare and
deliver to Secured Party periodic reports pertaining to the Inventory, in form
and substance satisfactory to Secured Party;
(b) upon the request of Secured Party, take a physical listing
of the Inventory and promptly deliver a copy of such physical listing to Secured
Party;
(c) not store any Inventory with a bailee, warehouse or similar
Person or on premises leased to Debtor without obtaining for Secured Party such
Collateral Access Agreements as Secured Party shall require; and
(d) not dispose of any Inventory on a bill-and-hold, guaranteed
sale, sale and return sale on approval, consignment or similar basis, nor
acquire any Inventory from any Person on any such basis, without in each case
giving Secured Party prior written notice thereof.
6.13 EQUIPMENT. Debtor shall, upon Secured Party's request, deliver
to Secured Party a report of each item of Equipment, in form and substance
satisfactory to Secured Party.
6.14 INTELLECTUAL PROPERTY COLLATERAL. Debtor shall:
(a) not enter into any agreement (including any license or
royalty agreement) pertaining to any Intellectual Property Collateral without in
each case giving Secured Party prior notice thereof;
(b) not allow or suffer any Intellectual Property Collateral to
become abandoned, nor any registration thereof to be terminated, forfeited,
expired or dedicated to the public;
(c) promptly give Secured Party notice of any rights Debtor may
obtain to any new patentable inventions, trademarks, servicemarks, copyrightable
works or other new Intellectual Property Collateral, prior to the filing of any
application for registration thereof; and
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(d) diligently prosecute all applications for patents,
copyrights and trademarks, and file and prosecute any and all continuations,
continuations-in-part, applications for reissue, applications for certificate of
correction and like matters as shall be reasonable and appropriate in accordance
with prudent business practice, and promptly and timely pay any and all
maintenance, license, registration and other fees, taxes and expenses incurred
in connection with any Intellectual Property Collateral.
6.15 COPIES OF INFORMATION COLLATERAL ACCESS AGREEMENTS. Debtor shall
provide to Secured Party for the benefit of Secured Party copies of all reports,
notices or Collateral Access Agreements that it sends to Senior Creditor with
regard to the Collateral. All such Collateral Access Agreements shall be
drafted to include Secured Party, or his agents as, persons authorized to have
access to the Collateral under such agreements; provided that such right of
access shall in no way interfere with, and shall at all times be subordinate to,
Senior Creditor's rights.
7. COLLECTION OF RIGHTS TO PAYMENT. Debtor or its agents shall endeavor
in the first instance to collect all amounts due or to become due on or with
respect to the Rights to Payment. At the request of Secured Party after the
occurrence of an Event of Default, subject to Senior Creditor's rights, all
remittances received by Debtor shall be held in trust for Secured Party, and, in
accordance with Secured Party's instructions, remitted to Secured Party or
deposited to an account designated by Secured Party in the form received (with
any necessary endorsements or instruments of assignment or transfer).
8. EVENTS OF DEFAULT. The occurrence of any breach by Debtor of the
Promissory Note or this Security Agreement shall constitute an event of default
("Event of Default") under this Security Agreement.
9. REMEDIES.
9.1 During the continuance of an Event of Default, subject to Senior
Creditor's rights under the Subordination Agreement, Secured Party, without
notice or demand, may do any one or more of the following, all of which are
authorized by Debtor:
(a) settle or adjust disputes and claims directly with Account
Debtors for amounts and upon terms which Secured Party considers advisable, and
in such cases, Secured Party will credit the Secured Obligations with only the
net amounts received by Secured Party in payment of such disputed Accounts after
deducting all Secured Party Expenses incurred or expended in connection
therewith;
(b) cause Debtor to hold all returned Inventory in trust for
Secured Party, segregate all returned Inventory from all other property of
Debtor or in Debtor's possession and conspicuously label said returned Inventory
as the property of Secured Party;
(c) without notice to or demand upon Debtor or any Debtor, make
such payments and do such acts as Secured Party considers necessary or unable to
protect his security interests in the Collateral. Debtor agrees to assemble the
Collateral if Secured Party so
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requires, and to make the Collateral available to Secured Party as Secured Party
may designate. Debtor authorizes Secured Party to enter the premises where the
Collateral is located, to take and maintain possession of the Collateral, or any
part of it, and to pay, purchase, contest, or compromise any encumbrance,
charge, or lien that in Secured Party's determination appears to conflict with
his security interests and to pay all expenses incurred in connection therewith.
With respect to any of Debtor's owned or leased premises, Debtor hereby grants
Secured Party a license to enter into possession of such premises and to occupy
the same, without charge, for up to 120 days in order to exercise any of Secured
Party's rights or remedies provided herein, at law, in equity, or otherwise;
(d) ship, reclaim, recover, store, finish, maintain, repair,
prepare for sale, advertise for sale, and sell (in the manner provided for
herein) the Collateral. Secured Party is hereby granted a license or other
right to use, without charge, Debtor's labels, patents, copyrights, rights of
use of any name, trade secrets, trade names, trademarks, service marks, and
advertising matter, or any property of a similar nature, as it pertains to the
Collateral, in completing production of, advertising for sale, and selling any
Collateral and Debtor's rights under all licenses and all franchise agreements
shall inure to Secured Party's benefit;
(e) sell the Collateral at either a public or private sale, or
both, by way of one or more contracts or transactions, for cash or on terms, in
such manner and at such places (including Debtor's premises) as Secured Party
determines is commercially reasonable. It is not necessary that the Collateral
be present at any such sale;
(f) Secured Party shall give notice of the disposition of the
Collateral as follows:
(i) Secured Party shall give Debtor and each holder of
a security interest in the Collateral who has filed with Secured Party a written
request for notice, a notice in writing of the time and place of public sale,
or, if the sale is a private sale or some other disposition other than a public
sale is to be made of the Collateral, then the time on or after which the
private sale or other disposition is to be made;
(ii) the notice shall be personally delivered or
mailed, postage prepaid to Debtor, as provided in the Agreement and Plan of
Reorganization, at least 5 days before the date fixed for the sale, or at least
5 days before the date on or after which the private sale or other disposition
is to be made; no notice needs to be given prior to the disposition of any
portion of the Collateral that is perishable or threatens to decline speedily in
value or that is of a customarily sold on a recognized market. Notice to
persons other than Debtor claiming an interest in the Collateral shall be sent
to such addresses as they have furnished to Secured Party;
(iii) if the sale is to be a public sale, Secured Party
also shall give notice of the time and place by publishing a notice one time at
least 5 days before the date of the sale in a newspaper of general circulation
in the county in which the sale is to be held;
(g) Secured Party may credit bid and purchase at any public
sale; and
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(h) any deficiency that exists after disposition of the
Collateral as provided above will be paid immediately by Debtor. Any excess
will be returned, without interest and subject to the rights of third persons,
by Secured Party to Debtor.
9.2 Upon the exercise by Secured Party of any power, right,
privilege, or remedy pursuant to this Security Agreement which requires any
consent, approval, registration, qualification, or authorization of any
governmental authority, Debtor agrees to execute and deliver, or will cause the
execution and delivery of, all applications, certificates, instruments,
assignments, and other documents and papers that Secured Party or any purchaser
of the Collateral may be required to obtain for such governmental consent,
approval, registration, qualification, or authorization.
9.3 The rights and remedies of Secured Party under this Security
Agreement, the Promissory Note, and all other agreements contemplated hereby and
thereby shall be cumulative. Secured Party shall have all other rights and
remedies not inconsistent herewith as provided under the UCC, by law, or in
equity. No exercise by Secured Party of any one right or remedy shall be deemed
an election of remedies, and no waiver by Secured Party of any default on
Debtor's part shall be deemed a continuing waiver of any further defaults. No
delay by Secured Party shall constitute a waiver, election or acquiescence with
respect to any right or remedy.
10. SECURED PARTY NOT LIABLE. So long as Secured Party complies with the
obligations, if any, imposed by Section 9207 of the Code, Secured Party shall
not otherwise be liable or responsible in any way or manner for: (a) the
safekeeping of the Collateral; (b) any loss or damage thereto occurring or
arising in any manner or fashion or from any cause; (c) any diminution in the
value thereof; or (d) any act or default of any carrier, warehouseman, bailee,
forwarding agency, or other person whomsoever.
11. INDEFEASIBLE PAYMENT. The Secured Obligations shall not be considered
indefeasibly paid for purposes of this Security Agreement unless and until all
payments to Secured Party under the Promissory Notes are no longer subject to
any right on the part of any person, including Debtor as a debtor in possession,
or any trustee (whether appointed under the Bankruptcy Code or otherwise) of
Debtor or Debtor's assets to invalidate or set aside such payments or to seek to
recoup the amount of such payments or any portion thereof, or to declare same to
be fraudulent or preferential. In the event that, for any reason, any portion
of such payments to Secured Party is set aside or restored, whether voluntarily
or involuntarily, after the making thereof, then the obligation intended to be
satisfied thereby shall be revived and continued in full force and effect as if
said payment or payments had not been made.
12. NOTICES. All notices or demands by any party hereto to the other
party and relating to this Security Agreement shall be made in the manner and to
the addresses set forth in the Agreement and Plan of Reorganization.
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13. GENERAL PROVISIONS.
13.1 SUCCESSORS AND ASSIGNS. This Security Agreement shall bind and
inure to the benefit of the respective successors and assigns of Debtor and
Secured Party; PROVIDED, HOWEVER, that Debtor may not assign this Security
Agreement nor delegate any of its duties hereunder without Secured Party's prior
written consent and any prohibited assignment or delegation shall be absolutely
void. No consent by Secured Party to an assignment by Debtor shall release
Debtor from the Secured Obligations.
13.2 EXHIBITS AND SCHEDULES. All of the exhibits and schedules
attached hereto shall be deemed incorporated by reference.
13.3 NO PRESUMPTION AGAINST ANY PARTY. Neither this Security
Agreement nor any uncertainty or ambiguity herein shall be construed or resolved
against Secured Party or Debtor, whether under any rule of construction or
otherwise. On the contrary, this Security Agreement has been reviewed by each
of the parties and their counsel and shall be construed and interpreted
according to the ordinary meaning of the words used so as to accomplish fairly
the purposes and intentions of all parties hereto.
13.4 AMENDMENTS AND WAIVERS. Any provision of this Security Agreement
or the Promissory Note to which Debtor is a party may be amended or waived if,
but only if, such amendment or waiver is in writing and is signed by the party
asserted to be bound thereby, and then such amendment or waiver shall be
effective only in the specific instance and specific purpose for which given.
13.5 COUNTERPARTS; INTEGRATION; EFFECTIVENESS. This Security
Agreement may be signed in any number of counterparts, each of which shall be an
original, with the same effect as if the signatures thereto and hereto were upon
the same instrument. This Security Agreement constitutes the entire agreement
and understanding among the parties hereto and supersedes any and all prior
agreements and understandings, oral or written, relating to the subject matter
hereof. This Security Agreement shall become effective when executed by each of
the parties hereto and delivered to Secured Party.
13.6 SEVERABILITY. The provisions of this Agreement are severable.
The invalidity, in whole or in part, of any provision of this Agreement shall
not affect the validity or enforceability of any other of its provisions. If
one or more provisions hereof shall be declared invalid or unenforceable, the
remaining provisions shall remain in full force and effect and shall be
construed in the broadest possible manner to effectuate the purposes hereof.
14. GOVERNING LAW. This Security Agreement shall be deemed to have been
made in the State of California and the validity, construction, interpretation,
and enforcement hereof, and the rights of the parties hereto, shall be
determined under, governed by, and construed in accordance with the internal
laws of the State of California, without regard to principles of conflicts of
law.
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15. ARBITRATION.
The parties firmly desire to resolve all disputes arising hereunder without
resort to litigation in order to protect their respective business reputations
and the confidential nature of certain aspects of their relationship.
Accordingly, any controversy or claim arising out of or relating to this
Agreement, or the breach thereof, shall be settled by arbitration as set forth
below.
(a) All disputes which in any manner arise out of or relate to this
Agreement or the subject matter thereof, shall be resolved exclusively by
arbitration in accordance with the provisions of this Section 15. Either party
may commence arbitration by sending a written demand for arbitration to the
other party, setting forth the nature of the controversy, the dollar amount
involved, if any, and the remedies sought, and attaching a copy of this Section
to the demand.
(b) The parties stipulate to arbitration before a single, mutually
agreed upon arbitrator sitting on the Los Angeles, California Judicial
Arbitration Mediation Services (JAMS) panel. In the event that the parties are
unable to agree upon the person chosen as arbitrator within 30 days of the
demand for arbitration, the arbitrator shall be selected in the sole discretion
of the JAMS administrator. The arbitrator shall be a member of the California
bar.
(c) The parties shall share all costs of arbitration. The
prevailing party shall be entitled to reimbursement by the other party of
such party's attorneys' fees and costs and any arbitration fees and expenses
incurred in connection with the arbitration hereunder.
(d) The substantive law of the State of California shall be applied
by the arbitrator. All proceedings in arbitration shall be in accordance
with the California Code of Civil Procedure, as amended, and the parties
shall have the right to legal discovery in any matter submitted to
arbitration in satisfaction of California Code of Civil Procedure Section
1283.05, as permitted by California Code of Civil Procedure Section 1283.1(b).
(e) Arbitration shall take place in Los Angeles, California unless
the parties otherwise agree. As soon as reasonably practicable, a hearing with
respect to the dispute or matter to be resolved shall be conducted by the
arbitrator. As soon as reasonably practicable thereunder, the arbitrator shall
arrive at a final decision, which shall be reduced to writing, signed by the
arbitrator and mailed to each of the parties and their legal counsel.
(f) All decisions of the arbitrator shall be final, binding and
conclusive on the parties and shall constitute the only method of resolving
disputes or matters subject to arbitration pursuant to this Agreement. The
arbitrator or a court of appropriate jurisdiction may issue a write of execution
to enforce the arbitrator's judgment. Judgment may be entered upon such a
decision in accordance with applicable law in any court having jurisdiction
thereof.
(g) Notwithstanding the foregoing, because time is of the essence of
this Agreement, the parties specifically reserve the right to a judicial
temporary restraining order, preliminary injunction, or other similar equitable
relief.
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(h) The decision and award of the arbitrator shall be kept
confidential by the parties to the greatest extent possible. No disclosure of
such decision or award shall be made by the parties except as required by law or
as necessary or appropriate to effect the enforcement thereof.
(i) Should either party institute any action or procedure to enforce
this Agreement or any provision hereof, or for damages by reason of any alleged
breach of this Agreement or of any provision hereof, or for a declaration of
rights hereunder (including, without limitation, arbitration), the prevailing
party in any such action or proceeding shall be entitled to receive from the
other party all costs and expenses, including, without limitation, reasonable
attorneys' fees, incurred by the prevailing party in connection with such action
or proceeding.
IN WITNESS WHEREOF, the parties have executed this Security Agreement as of
the date first set forth above.
Prospect Medical Holdings, Inc.
a Delaware corporation
By /s/ Jacob Y. Terner, M.D.
---------------------------------
Title: CEO
-----------------------------
/s/ Jayaratnam Jayakumar
-----------------------------------
Jayaratnam Jayakumar
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AMENDMENT NUMBER TWO TO REVOLVING CREDIT AGREEMENT
This AMENDMENT NUMBER TWO TO REVOLVING CREDIT AGREEMENT (this
"AMENDMENT"), dated as of September 25, 1997, is entered into by and between
PROSPECT MEDICAL HOLDINGS, INC., a Delaware corporation ("BORROWER"), and
IMPERIAL BANK, a California banking corporation ("BANK"), with reference to the
following facts:
A. Borrower and Bank have previously entered into that certain
Revolving Credit Agreement, dated as of July 3, 1997, as amended by that certain
Amendment Number One, dated as of July 14, 1997 (the "AGREEMENT"); and
B. Borrower and Bank desire to amend the Agreement in accordance
with the terms of this Amendment.
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. DEFINED TERMS. All initially capitalized terms used but not
defined herein shall have the meanings assigned to such terms in the Agreement.
In addition, Section 1.1 of the Agreement is hereby amended by amending the
definition of "LOAN DOCUMENTS" in its entirety as follows:
"'LOAN DOCUMENT(S)' means each of the following documents,
instruments, and agreements individually or collectively, as the
context requires:
(a) the Note;
(b) the Security Agreement (Borrower);
(c) the Guaranties;
(d) the Security Agreements (Guarantor);
(e) the Stock Pledge Agreements (Borrower);
(f) the Collateral Assignments of Transaction Documents;
(g) the Credit Succession Agreements;
(h) the Letter of Credit Applications;
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(i) each certain Subordination and Note Cancellation
Agreement, now or hereafter entered into by and among Bank, Borrower
and any other party or parties;
(j) each certain Subordination Agreement, now or hereafter
entered into by and among Bank, Borrower and any other party or
parties;
(k) the Warrant; and
(l) such other documents, instruments, and agreements
(including financing statements and fixture filings) as Bank may
reasonably request in connection with the transactions contemplated
hereunder or to perfect or protect the liens and security interests
granted to Bank in connection herewith."
All initially capitalized terms used but not defined herein shall have the
meanings assigned to such terms in the Agreement.
2. SCHEDULES. SCHEDULES 1.1P, 4.7, 4.9, 4.12, 4.18 AND 4.20 to the
Agreement are hereby deleted in their entirety and replaced, respectively, with
SCHEDULES 1.1P, 4.7, 4.9, 4.12, 4.18 AND 4.20 attached to this Amendment.
3. AMENDMENT TO SECTION 4.6. Section 4.6 of the Agreement is hereby
amended in its entirety as follows:
"4.6 DEBT. Borrower, each Subsidiary and each Physician
Group has no Debt other than (i) Permitted Debt and (ii) until
September 29, 1997, a $150,000 line of credit from Antelope Valley
Bank to Sierra Primary Care Medical Group, Inc., under which no
amounts are outstanding or owing."
4. AMENDMENT TO SECTION 5.11. Section 5.11 of the Agreement is
hereby amended in its entirety as follows:
"5.11 BANK ACCOUNTS. Maintain, and cause each
Subsidiary and each Physician Group to maintain, its cash on hand and
cash equivalent investments in deposit accounts at Bank, which
deposits accounts (other than the deposit accounts of the Physician
Groups) shall be subject to the security interests granted to Bank
under the Security Agreement and the Security Agreements (Guarantor),
and all funds in the deposit accounts of the Physician Groups shall be
swept daily into the deposit account of its Manager established at
Bank; PROVIDED, HOWEVER, the Subsidiary, Sierra Medical Management,
Inc., shall be permitted to maintain a deposit account at Bank of
America SO LONG AS all funds in such deposit account in excess of
Fifteen
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<PAGE>
Thousand Dollars ($15,000) are swept on a daily basis into the account of
such Subsidiary maintained at Bank."
5. AMENDMENT TO SECTIONS 6.2 AND 6.11. Sections 6.2 and 6.11 of the
Agreement are hereby amended in their entirety as follows:
"6.2 DEBT. Create, incur, assume or suffer to exist, or
permit any Subsidiary or any Physician Group to create, incur, assume
or suffer to exist, any Debt except (i) Permitted Debt and (ii) a
$150,000 line of credit from Antelope Valley Bank to Sierra Primary
Care Medical Group, Inc., SO LONG AS (x) such line of credit remains
unsecured, (y) no amounts are outstanding or owing at any time, and
(y) such line of credit is terminated not later than 5:00 p.m., Los
Angeles time, September 29, 1997."
"6.11 GUARANTY. Assume, guaranty, endorse (other than
checks and drafts received by Borrower in the ordinary course of
business so long as an Event of Default has not occurred), or
otherwise be or become directly or contingently responsible or liable,
or permit any Subsidiary to assume, guaranty, endorse, or otherwise be
or become directly or contingently responsible or liable (including,
any agreement to purchase any obligation, stock, Assets, goods, or
services or to supply or advance any funds, Assets, goods, or
services, or any agreement to maintain or cause such Person to
maintain, a minimum working capital or net worth, or otherwise to
assure the creditors of any Person against loss) for the obligations
of any other Person; or pledge or hypothecate, or permit any
Subsidiary to pledge or hypothecate, any of its Assets as security for
any liabilities or obligations of any other Person; PROVIDED, HOWEVER,
notwithstanding the foregoing, Borrower shall be permitted to execute
and deliver the guarantees listed on SCHEDULE 1.1P."
6. REPRESENTATIONS AND WARRANTIES. In order to induce Bank to enter
into this Amendment, Borrower represents and warrants to Bank that:
(a) as of the date hereof, no Event of Default, Unmatured Event
of Default or Material Adverse Effect is continuing;
(b) all of the representations and warranties set forth in the
Agreement and the Loan Documents are true, complete and accurate in all respects
as of the date hereof (except for representations and warranties which are
expressly stated to be true and correct as of the Closing Date); and
(c) this Amendment has been duly executed and delivered by
Borrower, and after giving effect to this Amendment, the Agreement continues to
constitute the legal, valid and binding agreements and obligations of Borrower,
enforceable in accordance with its terms, except as enforceability may be
limited by bankruptcy,
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insolvency, and similar laws and equitable principles affecting the enforcement
of creditors' rights generally.
7. CONDITIONS PRECEDENT TO EFFECTIVENESS OF AMENDMENT. The
effectiveness of this Amendment is subject to and contingent upon the
fulfillment of each and every one of the following conditions:
(a) Bank shall have received this Amendment, duly executed by
Borrower and Bank, and the Consent of Guarantor, duly executed by Prospect
Medical Systems, Inc.;
(b) Bank shall have received all outstanding and unpaid Bank
Expenses, including but not limited to the legal fees of Buchalter, Nemer,
Fields & Younger relating to the negotiation, preparation and documentation of
the Agreement, the Loan Documents and this Amendment;
(c) No Event of Default, Unmatured Event of Default or Material
Adverse Effect shall be continuing; and
(d) All of the representations and warranties set forth herein
and in the Agreement shall be true, complete and accurate in all respects as of
the date hereof (except for representations and warranties which are expressly
stated to be true and correct as of Closing Date).
8. COUNTERPARTS; TELEFACSIMILE EXECUTION. This Amendment may be
executed in any number of counterparts and by different parties on separate
counterparts, each of which, when executed and delivered, shall be deemed to be
an original, and all of which, when taken together, shall constitute but one and
the same Amendment. Delivery of an executed counterpart of this Amendment by
telefacsimile shall be equally as effective as delivery of a manually executed
counterpart of this Amendment. Any party delivering an executed counterpart of
this Amendment by telefacsimile also shall deliver a manually executed
counterpart of this Amendment but the failure to deliver a manually executed
counterpart shall not affect the validity, enforceability, and binding effect of
this Amendment.
9. REAFFIRMATION OF THE AGREEMENT. Except as expressly modified by
this Amendment, the Agreement and the Loan Documents shall remain in full force
and effect.
[Remainder of this page intentionally left blank]
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Amendment as of the date first hereinabove written.
PROSPECT MEDICAL HOLDINGS, INC.,
a Delaware corporation
By: /s/ Thomas A. Maloof
-----------------------------------
Title: CFO
---------------------------
IMPERIAL BANK,
a California banking corporation
By: /s/ Mark W. Campbell
-----------------------------------
Title: SVP
---------------------------
5
<PAGE>
CONSENT OF GUARANTOR
The undersigned, as "Guarantor" under that certain Continuing
Guaranty, dated as of July 3, 1997 (the "GUARANTY"), executed in favor of
IMPERIAL BANK, a California banking corporation ("BANK"), with respect to the
obligations of PROSPECT MEDICAL HOLDINGS, INC., a Delaware corporation
("BORROWER"), owing to Bank, hereby acknowledges notice of the foregoing
Amendment Number Two to Revolving Credit Agreement, dated as of September 25,
1997, between Borrower and Bank, consents to the terms contained therein, and
agrees that the Guaranty and all security therefor shall remain in full force
and effect.
Although Bank has informed us of the matters set forth above and we
have acknowledged same, we understand and agree that Bank has no duty under the
Agreement, the Guaranty or any other agreement between us to so notify us or to
seek an acknowledgement, and nothing herein is intended to or shall create such
a duty as to any advances or transactions hereafter.
PROSPECT MEDICAL SYSTEMS, INC.,
a Delaware corporation
By: /s/ Thomas A. Maloof
-----------------------------------
Title: CFO
---------------------------
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<PAGE>
SECURED PROMISSORY NOTE
[PROSPECT MEDICAL SYSTEMS, INC.]
$5,000,000 Los Angeles, California
September 25, 1997
1. FOR VALUE RECEIVED, PROSPECT MEDICAL SYSTEMS, INC., a Delaware
corporation ("MAKER"), promises to pay to the order of PROSPECT MEDICAL
HOLDINGS, INC., a Delaware corporation ("PAYEE"), on or before the Maturity Date
unless sooner accelerated in accordance with the terms hereof, the principal sum
of Five Million Dollars ($5,000,000), or such lesser sum as shall equal the
aggregate outstanding principal amount of the loans made by Payee to Maker
hereunder. As used herein the term "MATURITY DATE" has the meaning given to
such term in that certain Revolving Credit Agreement, dated as of July 3, 1997,
between Payee and Imperial Bank (as amended or restated from time to time, the
"CREDIT AGREEMENT").
2. This Secured Promissory Note shall bear interest at a per annum
rate equal to six percent (6%). All computations of interest shall be
calculated on the basis of a year of three hundred sixty-five (365) days for the
actual days elapsed. Interest shall accrue from the date of this Secured
Promissory Note to the date of repayment of this Secured Promissory Note in
accordance with the provisions hereof. Maker shall pay all accrued but unpaid
interest on the principal balance hereof, in arrears, on the first day of each
and every month.
3. Maker hereby authorizes Payee to record in its books and records
the date and amount of the loans made by Payee to Maker hereunder, and of each
payment of principal made by Maker, and Maker agrees that all such notations
shall, in the absence of manifest error, be conclusive as to the matters so
noted; PROVIDED, HOWEVER, any failure by Payee to make such notation with
respect to any loan or payment thereof shall not limit or otherwise affect
Maker's obligations under the Secured Promissory Note.
4. Maker shall make all payments hereunder in lawful money of the
United States of America and in immediately available funds to the holder hereof
("HOLDER") at Holder's office or to such other address as Holder may from time
to time specify by notice to Maker.
5. In no event shall the interest rate and other charges
hereunder exceed the highest rate permissible under any law which a court of
competent jurisdiction shall, in a final determination, deem applicable
hereto. In the event that such a court determines that Holder has received
interest and other charges hereunder in excess of the highest rate applicable
hereto, such excess shall be deemed received on account of, and shall
automatically be applied to reduce, the principal balance hereof, and the
provisions hereof shall be
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deemed amended to provide for the highest permissible rate. If there is no
principal balance outstanding, Holder shall refund to Maker such excess.
6. The unpaid principal balance hereof together with all accrued but
unpaid interest thereon shall be all due and payable upon (i) failure by Maker
to pay any installment of principal or interest due hereunder when due,
(ii) commencement of any proceeding by or against Maker under any bankruptcy or
insolvency laws, or (iii) the occurrence of an "Event of Default" under the
Credit Agreement.
7. This Secured Promissory Note is secured by that certain Security
Agreement, dated as of event date herewith, between Maker and Payee.
8. Maker hereby waives presentment for payment, notice of dishonor,
protest and notice of protest.
9. This Secured Promissory Note shall be governed by and construed
in accordance with the internal laws of the State of California without regard
to principles of conflicts of laws.
IN WITNESS WHEREOF, Maker has duly executed this Secured Promissory
Note as of the date first above written.
Maker: PROSPECT MEDICAL SYSTEMS, INC.,
a Delaware corporation
By /s/ Thomas A. Maloof
-----------------------------------
Title CFO
--------------------------------
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<PAGE>
ENDORSEMENT ALLONGE
Pay to the order of Imperial Bank, a California banking corporation, located at
9920 South La Cienega Blvd., Suite #628, Inglewood, California 90301 the
attached note dated September 25, 1997 made by Prospect Medical Systems, Inc., a
Delaware corporation.
Dated: September 25, 1997 PROSPECT MEDICAL HOLDINGS, INC., a Delaware
corporation
By: /s/ Thomas A. Maloof
--------------------------------------
Print Name: Thomas A. Maloof
------------------------------
Its: CFO
-------------------------------------
<PAGE>
AMENDMENT NUMBER ONE TO INTER-COMPANY SECURITY AGREEMENT
(PROSPECT MEDICAL SYSTEMS, INC.)
This AMENDMENT NUMBER ONE TO INTER-COMPANY SECURITY AGREEMENT, dated
as of September 25, 1997 (this "AMENDMENT"), is entered into between PROSPECT
MEDICAL SYSTEMS, INC., a Delaware corporation ("DEBTOR"), and PROSPECT MEDICAL
HOLDINGS, INC., a Delaware corporation ("SECURED PARTY"), with reference to the
following facts:
R E C I T A L S
A. Debtor and Secured Party have previously entered into that
certain Security Agreement, dated as of July 14, 1997 (the "SECURITY
AGREEMENT"), in order to secure obligations owing by Debtor to Secured Party
under a Secured Promissory Note, dated as of even date with the Security
Agreement;
B. Debtor is issuing to Secured Party a second Secured Promissory
Note in the principal amount of Five Million Dollars ($5,000,000), dated as of
even date herewith (the "NOTE TWO)"; and
B. Debtor and Secured Party are entering into this Amendment in
order to secure the payment of Note Two and all other obligations of Debtor
owing to Secured Party by the Security Agreement.
A G R E E M E N T
1. AMENDMENT TO SECTION 1.1. The definition of "SECURED
OBLIGATIONS" set forth in Section 1.1 of the Security Agreement is hereby
amended in its entirety as follows:
"SECURED OBLIGATIONS" shall mean any and all debts,
liabilities, obligations, or undertakings owing by Debtor to Secured
Party, whether direct or indirect, absolute or contingent, matured or
unmatured, due or to become due, voluntary or involuntary, whether now
existing or hereafter arising, and including all interest not paid
when due and all Secured Party Expenses which Debtor is required to
pay or reimburse pursuant to this Security Agreement, the other Loan
Documents or by law. Without limiting the generality of the
foregoing, the Secured Obligations include, without limitation, all
obligations evidenced by the Note and the Note Two.
2. AMENDMENT TO SECTION 5. Section 5 of the Security Agreement is
hereby amended in its entirety as follows:
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<PAGE>
"5. EVENT OF DEFAULT. Failure by Debtor to make any
payment required under any Secured Obligation when due, whether
for principal, interest, or otherwise, shall constitute an Event
of Default under this Security Agreement.
3. EFFECTIVENESS. The effectiveness of this Amendment is subject to
and contingent upon the execution and delivery of this Amendment by Debtor and
Secured Party.
4. COUNTERPARTS. This Amendment may be signed in any number of
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
5. AFFIRMATION. The Security Agreement as amended hereby, and all
other agreements, instruments and documents executed between Debtor and Secured
Party, or by Debtor in favor of Secured Party, remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first set forth above.
PROSPECT MEDICAL SYSTEMS, INC.,
a Delaware corporation
By /s/ Thomas A. Maloof
-----------------------------------
Title CFO
----------------------------
PROSPECT MEDICAL HOLDINGS, INC.
a Delaware corporation
By /s/ Thomas A. Maloof
----------------------------------
Title CFO
--------------------------
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<PAGE>
CONTINUING GUARANTY
This CONTINUING GUARANTY (this "GUARANTY"), dated as of September 25,
1997, is executed and delivered by SIERRA MEDICAL MANAGEMENT, INC., a Delaware
corporation ("GUARANTOR"), with reference to the following facts:
R E C I T A L S
A. Prospect Medical Holdings, Inc., a Delaware corporation
("BORROWER"), and Imperial Bank, a California banking corporation ("BANK"), have
entered into that certain Revolving Credit Agreement, dated as of July 3, 1997
(as the same may be amended, restated, supplemented or otherwise modified from
time to time, the "LOAN AGREEMENT").
B. Guarantor is materially interested in the financial success of
Borrower, agrees that the Loan Agreement is in Borrower's best interests, and
acknowledges that the execution and delivery of this Guaranty formed a material
part of the consideration to Bank to induce Bank to enter into the Loan
Agreement.
A G R E E M E N T
NOW, THEREFORE, in consideration of the foregoing, Guarantor hereby
agrees, in favor of Bank, as follows:
1. DEFINITIONS AND CONSTRUCTION.
(a) DEFINITIONS. All initially capitalized terms used but not
defined herein shall have the meanings assigned to such terms in the Loan
Agreement. In addition, the following terms, as used in this Guaranty, shall
have the following meanings:
"GUARANTEED OBLIGATIONS" means any and all obligations,
indebtedness, or liabilities of any kind or character owed by Borrower to Bank
(including without limitation, all principal and interest owing under the Loans,
all Bank Expenses, the Fees, any other fees and expenses due under the Loan
Agreement, and all other indebtedness evidenced by the Loan Agreement and the
other Loan Documents), including all such obligations, indebtedness, or
liabilities, whether for principal, interest (including any interest which, but
for the application of the provisions of the Bankruptcy Code, would have accrued
on such amounts), premium, reimbursement obligations, fees, costs, expenses
(including, attorneys' fees and attorneys' fees incurred pursuant to proceedings
arising under the Bankruptcy Code), or indemnity obligations, whether
heretofore, now, or hereafter made, incurred, or created, whether voluntarily or
involuntarily made, incurred, or created, whether secured or unsecured (and if
secured, regardless of the nature or extent of the security), whether absolute
or contingent, liquidated or unliquidated, determined or indeterminate, whether
Borrower is liable individually or jointly with others, and whether
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<PAGE>
recovery is or hereafter becomes barred by any statute of limitations or
otherwise becomes unenforceable for any reason whatsoever, including any act or
failure to act by Bank.
"LOAN DOCUMENTS" shall mean the Loan Agreement, this
Guaranty, and the other Loan Documents (as defined in the Loan Agreement).
(b) CONSTRUCTION. Unless the context of this Guaranty clearly
requires otherwise, references to the plural include the singular, references to
the singular include the plural, and the term "including" is not limiting. The
words "hereof," "herein," "hereby," "hereunder," and other similar terms refer
to this Guaranty as a whole and not to any particular provision of this
Guaranty. Any reference herein to any of the Loan Documents includes any and
all alterations, amendments, extensions, modifications, renewals, or supplements
thereto or thereof, as applicable. Neither this Guaranty nor any uncertainty or
ambiguity herein shall be construed or resolved against Bank or Guarantor,
whether under any rule of construction or otherwise. On the contrary, this
Guaranty has been reviewed by Guarantor, Bank, and their respective counsel, and
shall be construed and interpreted according to the ordinary meaning of the
words used so as to fairly accomplish the purposes and intentions of Bank and
Guarantor.
2. GUARANTEED OBLIGATIONS. Guarantor hereby irrevocably and
unconditionally guarantees to Bank, as and for Guarantor's own debt, until final
and indefeasible payment thereof has been made, (a) payment of the Guaranteed
Obligations, in each case when and as the same shall become due and payable,
whether at maturity, pursuant to a mandatory prepayment requirement, by
acceleration, or otherwise; it being the intent of Guarantor that the guaranty
set forth herein shall be a guaranty of payment and not a guaranty of
collection, and (b) the punctual and faithful performance, keeping, observance,
and fulfillment by Borrower of all of the agreements, conditions, covenants, and
obligations of Borrower contained in the Loan Documents.
3. CONTINUING GUARANTY. This Guaranty includes Guaranteed
Obligations arising under successive transactions continuing, compromising,
extending, increasing, modifying, releasing, or renewing the Guaranteed
Obligations, changing the interest rate, payment terms, or other terms and
conditions thereof, or creating new or additional Guaranteed Obligations after
prior Guaranteed Obligations have been satisfied in whole or in part. To the
maximum extent permitted by law, Guarantor hereby waives and agrees not to
assert any right Guarantor has under Section 2815 of the California Civil Code,
or otherwise, to revoke this Guaranty as to future indebtedness.
4. PERFORMANCE UNDER THIS GUARANTY. In the event that Borrower
fails to make any payment of any Guaranteed Obligations on or before the due
date thereof, or if Borrower shall fail to perform, keep, observe, or fulfill
any other obligation referred to in clause (b) of Section 2 hereof in the manner
provided in the Loan Documents, Guarantor immediately shall cause such payment
to be made or each of such obligations to be performed, kept, observed, or
fulfilled.
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<PAGE>
5. PRIMARY OBLIGATIONS. This Guaranty is a primary and original
obligation of Guarantor, is not merely the creation of a surety relationship,
and is an absolute, unconditional, and continuing guaranty of payment and
performance which shall remain in full force and effect without respect to
future changes in conditions, including any change of law or any invalidity or
irregularity with respect to the Loan Documents. Guarantor agrees that
Guarantor is severally and not jointly and severally liable, with any other
guarantor of the Guaranteed Obligations, to Bank, to the extent set forth in
Section 2 hereof, that the obligations of Guarantor hereunder are independent of
the obligations of Borrower or any other guarantor, and that a separate action
may be brought against Guarantor whether such action is brought against Borrower
or any other guarantor or whether Borrower or any such other guarantor is joined
in such action. Guarantor agrees that Guarantor's liability hereunder shall be
immediate and shall not be contingent upon the exercise or enforcement by Bank
of whatever remedies it may have against Borrower or any other guarantor, or the
enforcement of any lien or realization upon any security Bank may at any time
possess. Guarantor agrees that any release which may be given by Bank to
Borrower or any other guarantor shall not release Guarantor. Guarantor consents
and agrees that Bank shall be under no obligation to marshal any assets of
Borrower or any other guarantor in favor of Guarantor, or against or in payment
of any or all of the Guaranteed Obligations.
6. WAIVERS.
(a) Guarantor absolutely, unconditionally, knowingly, and
expressly waives:
(i) (1) notice of acceptance hereof; (2) notice of any
loans or other financial accommodations made or extended under the Loan
Documents or the creation or existence of any Guaranteed Obligations; (3) notice
of the amount of the Guaranteed Obligations, subject, however, to Guarantor's
right to make inquiry of Bank to ascertain the amount of the Guaranteed
Obligations at any reasonable time; (4) notice of any adverse change in the
financial condition of Borrower or of any other fact that might increase
Guarantor's risk hereunder; (5) notice of presentment for payment, demand,
protest, and notice thereof as to any instruments among the Loan Documents;
(6) notice of any Unmatured Event of Default or Event of Default; and (7) all
other notices (except if such notice is specifically required to be given to
Guarantor hereunder or under the Loan Documents) and demands to which Guarantor
might otherwise be entitled.
(ii) its right, under Sections 2845 or 2850 of the
California Civil Code, or otherwise, to require Bank to institute suit against,
or to exhaust any rights and remedies which Bank has or may have against,
Borrower or any third party, or against any collateral for the Guaranteed
Obligations provided by Borrower or any third party. In this regard, Guarantor
agrees that Guarantor is bound to the payment of all Guaranteed Obligations,
whether now existing or hereafter accruing, as fully as if such Guaranteed
Obligations were directly owing to Bank by Guarantor. Guarantor further waives
any defense arising by reason of any disability or other defense (other than the
defense that the
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<PAGE>
Guaranteed Obligations shall have been fully and finally performed and
indefeasibly paid) of Borrower or by reason of the cessation from any cause
whatsoever of the liability of Borrower in respect thereof.
(iii) (1) any rights to assert against Bank any defense
(legal or equitable), set-off, counterclaim, or claim which Guarantor may now or
at any time hereafter have against Borrower or any other party liable to Bank;
(2) any defense, set-off, counterclaim, or claim, of any kind or nature, arising
directly or indirectly from the present or future lack of perfection,
sufficiency, validity, or enforceability of the Guaranteed Obligations or any
security therefor; (3) any defense Guarantor has to performance hereunder, and
any right Guarantor has to be exonerated, provided by Sections 2819, 2822, or
2825 of the California Civil Code, or otherwise, arising by reason of: the
impairment or suspension of Bank's rights or remedies against Borrower; the
alteration by Bank of the Guaranteed Obligations; any discharge of Borrower's
obligations to Bank by operation of law as a result of Bank's intervention or
omission; or the acceptance by Bank of anything in partial satisfaction of the
Guaranteed Obligations; (4) the benefit of any statute of limitations affecting
Guarantor's liability hereunder or the enforcement thereof, and any act which
shall defer or delay the operation of any statute of limitations applicable to
the Guaranteed Obligations shall similarly operate to defer or delay the
operation of such statute of limitations applicable to Guarantor's liability
hereunder.
(b) Guarantor absolutely, unconditionally, knowingly, and
expressly waives any defense arising by reason of or deriving from (i) any claim
or defense based upon an election of remedies by Bank including any defense
based upon an election of remedies by Bank under the provisions of
Sections 580a, 580b, 580d, and 726 of the California Code of Civil Procedure or
any similar law of California or any other jurisdiction; or (ii) any election by
Bank under Bankruptcy Code Section 1111(b) to limit the amount of, or any
collateral securing, its claim against Borrower. Pursuant to Section 2856 of
the California Civil Code:
Guarantor waives all rights and defenses arising out of an
election of remedies by the creditor, even though that election of remedies,
such as a nonjudicial foreclosure with respect to security for a guaranteed
obligation, has destroyed Guarantor's rights of subrogation and reimbursement
against Borrower by the operation of Section 580(d) of the California Code of
Civil Procedure or otherwise.
Guarantor waives all rights and defenses that Guarantor may have
because Borrower's Obligations are secured by real property. This means, among
other things:
(1) Bank may collect from Guarantor without first foreclosing on
any real or personal property collateral pledged by Borrower.
(2) If Bank forecloses on any real property collateral pledged
by Borrower:
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<PAGE>
(A) The amount of the Guaranteed Obligations may be reduced
only by the price for which that collateral is sold at the foreclosure sale,
even if the collateral is worth more than the sale price.
(B) Bank may collect from Guarantor even if Bank, by
foreclosing on the real property collateral, has destroyed any right Guarantor
may have to collect from Borrower.
This is an unconditional and irrevocable waiver of any rights and
defenses Guarantor may have because Borrower's Obligations are secured by real
property. These rights and defenses include, but are not limited to, any rights
or defenses based upon Section 580a, 580b, 580d, or 726 of the California Code
of Civil Procedure.
If any of the Guaranteed Obligations at any time are secured by a mortgage or
deed of trust upon real property, Bank may elect, in its sole discretion, upon a
default with respect to the Guaranteed Obligations, to foreclose such mortgage
or deed of trust judicially or nonjudicially in any manner permitted by law,
before or after enforcing the Loan Documents, without diminishing or affecting
the liability of Guarantor hereunder except to the extent the Guaranteed
Obligations are repaid with the proceeds of such foreclosure. Guarantor
understands that (a) by virtue of the operation of California's antideficiency
law applicable to nonjudicial foreclosures, an election by Bank nonjudicially to
foreclose such a mortgage or deed of trust probably would have the effect of
impairing or destroying rights of subrogation, reimbursement, contribution, or
indemnity of Guarantor against Borrower or other guarantors or sureties, and
(b) absent the waiver given by Guarantor, such an election would prevent Bank
from enforcing the Loan Documents against Guarantor. Understanding the
foregoing, and understanding that Guarantor is hereby relinquishing a defense to
the enforceability of the Loan Documents, Guarantor hereby waives any right to
assert against Bank any defense to the enforcement of the Loan Documents,
whether denominated "estoppel" or otherwise, based on or arising from an
election by Bank nonjudicially to foreclose any such mortgage or deed of trust.
Guarantor understands that the effect of the foregoing waiver may be that
Guarantor may have liability hereunder for amounts with respect to which
Guarantor may be left without rights of subrogation, reimbursement,
contribution, or indemnity against Borrower or other guarantors or sureties.
Guarantor also agrees that the "fair market value" provisions of Section 580a of
the California Code of Civil Procedure shall have no applicability with respect
to the determination of Guarantor's liability under the Loan Documents.
(c) Guarantor hereby absolutely, unconditionally, knowingly, and
expressly waives: (i) any right of subrogation Guarantor has or may have as
against Borrower with respect to the Guaranteed Obligations; (ii) any right to
proceed against Borrower or any other person or entity, now or hereafter, for
contribution, indemnity, reimbursement, or any other suretyship rights and
claims, whether direct or indirect, liquidated or contingent, whether arising
under express or implied contract or by operation of law, which Guarantor may
now have or hereafter have as against Borrower with respect
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<PAGE>
to the Guaranteed Obligations; and (iii) any right to proceed or seek recourse
against or with respect to any property or asset of Borrower.
(d) WITHOUT LIMITING THE GENERALITY OF ANY OTHER WAIVER OR OTHER
PROVISION SET FORTH IN THIS GUARANTY, GUARANTOR HEREBY ABSOLUTELY, KNOWINGLY,
UNCONDITIONALLY, AND EXPRESSLY WAIVES AND AGREES NOT TO ASSERT ANY AND ALL
BENEFITS OR DEFENSES ARISING DIRECTLY OR INDIRECTLY UNDER ANY ONE OR MORE OF
CALIFORNIA CIVIL CODE SECTIONS 2799, 2808, 2809, 2810, 2815, 2819, 2820, 2821,
2822, 2825, 2839, 2845, 2848, 2849, AND 2850, CALIFORNIA CODE OF CIVIL PROCEDURE
SECTIONS 580a, 580b, 580c, 580d, AND 726, AND CHAPTER 2 OF TITLE 14 OF PART 4 OF
DIVISION 3 OF THE CALIFORNIA CIVIL CODE.
7. RELEASES. Guarantor consents and agrees that, without notice to
or by Guarantor, and without affecting or impairing the obligations of Guarantor
hereunder, Bank may, by action or inaction:
(a) compromise, settle, extend the duration or the time for the
payment of, or discharge the performance of, or may refuse
to or otherwise not enforce this Guaranty, the other Loan
Documents, or any part thereof, with respect to Borrower or
any other Person;
(b) release Borrower or any other Person or grant other
indulgences to Borrower or any other Person in respect
thereof;
(c) amend or modify in any manner and at any time (or from time
to time) any of the Loan Documents; or
(d) release or substitute any other guarantor, if any, of the
Guaranteed Obligations, or enforce, exchange, release, or
waive any security for the Guaranteed Obligations or any
other guaranty of the Guaranteed Obligations, or any portion
thereof.
8. NO ELECTION. Bank shall have all of the rights to seek recourse
against Guarantor to the fullest extent provided for herein, and no election by
Bank to proceed in one form of action or proceeding, or against any party, or on
any obligation, shall constitute a waiver of Bank's right to proceed in any
other form of action or proceeding or against other parties unless Bank has
expressly waived such right in writing. Specifically, but without limiting the
generality of the foregoing, no action or proceeding by Bank under any document
or instrument evidencing the Guaranteed Obligations shall serve to diminish the
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liability of Guarantor under this Guaranty except to the extent that Bank
finally and unconditionally shall have realized indefeasible payment by such
action or proceeding.
9. INDEFEASIBLE PAYMENT. The Guaranteed Obligations shall not be
considered indefeasibly paid for purposes of this Guaranty unless and until all
payments to Bank are no longer subject to any right on the part of any Person,
including Borrower, Borrower as a debtor in possession, or any trustee (whether
appointed under the Bankruptcy Code or otherwise) of any of Borrower's assets,
to invalidate or set aside such payments or to seek to recoup the amount of such
payments or any portion thereof, or to declare same to be fraudulent or
preferential. Upon such full and final performance and indefeasible payment of
the Guaranteed Obligations, whether by Borrower pursuant to the Loan Agreement
or by any other Person, Bank shall have no obligation whatsoever to transfer or
assign its interests in the Loan Documents to Guarantor. In the event that, for
any reason, any portion of such payments to Bank is set aside or restored,
whether voluntarily or involuntarily, after the making thereof, then the
obligation intended to be satisfied thereby shall be revived and continued in
full force and effect as if said payment or payments had not been made, and
Guarantor shall be liable for the full amount Bank is required to repay plus any
and all costs and expenses (including attorneys' fees and expenses and
attorneys' fees and expenses incurred pursuant to proceedings arising under the
Bankruptcy Code) paid by Bank in connection therewith.
10. FINANCIAL CONDITION OF BORROWER. Guarantor represents and
warrants to Bank that Guarantor is currently informed of the financial condition
of Borrower and of all other circumstances which a diligent inquiry would reveal
and which bear upon the risk of nonpayment of the Guaranteed Obligations.
Guarantor further represents and warrants to Bank that Guarantor has read and
understands the terms and conditions of the Loan Documents. Guarantor hereby
covenants that Guarantor will continue to keep informed of Borrower's financial
condition, the financial condition of other guarantors, if any, and of all other
circumstances which bear upon the risk of nonpayment or nonperformance of the
Guaranteed Obligations.
11. SUBORDINATION. Guarantor hereby agrees that any and all present
and future indebtedness of Borrower owing to Guarantor is postponed in favor of
and subordinated to payment, in full, in cash, of the Guaranteed Obligations.
In this regard, no payment of any kind whatsoever shall be made with respect to
such indebtedness until the Guaranteed Obligations have been indefeasibly paid
in full.
12. PAYMENTS; APPLICATION. All payments to be made hereunder by
Guarantor shall be made in lawful money of the United States of America at the
time of payment, shall be made in immediately available funds, and shall be made
without deduction (whether for taxes or otherwise) or offset. All payments made
by Guarantor hereunder shall be applied as follows: first, to all costs and
expenses (including attorneys' fees and expenses and attorneys' fees and
expenses incurred pursuant to proceedings arising under the Bankruptcy Code)
incurred by Bank in enforcing this Guaranty or in collecting the Guaranteed
Obligations; second, to all accrued and unpaid interest, premium, if any, and
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fees owing to Bank constituting Guaranteed Obligations; and third, to the
balance of the Guaranteed Obligations.
13. REPRESENTATIONS AND WARRANTIES. Guarantor hereby represents and
warrants to Bank that:
(a) Guarantor is a corporation duly organized and existing under
the laws of Delaware and has the power and authority to own its own properties
and assets, and to transact the business in which it is engaged, and is properly
licensed, qualified to do business and in good standing in every jurisdiction
where the conduct of its business requires it to be so qualified.
(b) The execution, delivery and performance of this Guaranty are
within Guarantor's powers, are not in conflict with the terms of any charter,
bylaw, [certificate/articles] of incorporation or other organization papers of
Guarantor, and do not result in a breach of or constitute a default under any
contract, obligation, indenture or other instrument to which Guarantor is a
party or by which Guarantor is bound or affected. There is no law, rule or
regulation, nor is there any judgment, decree or order of any court or
governmental authority binding on Guarantor which would be contravened by the
execution, delivery, performance or enforcement of this Guaranty and the other
Loan Documents to which Guarantor is a party.
(c) Guarantor has taken all corporate action necessary to
authorize the execution and delivery of this Guaranty and the other Loan
Documents to which Guarantor is a party, and the consummation of the
transactions contemplated hereby and thereby. Upon their execution and delivery
in accordance with their respective terms, this Guaranty and the other Loan
Documents to which Guarantor is a party will constitute legal, valid and binding
agreements and obligations of Guarantor enforceable against Guarantor in
accordance with their respective terms, except as enforceability may be limited
by bankruptcy, insolvency, fraudulent conveyance, and similar laws and equitable
principles affecting the enforcement of creditors' rights generally.
(d) No approval, consent, exemption or other action by, or
notice to or filing with, any governmental authority is necessary in connection
with the execution, delivery, performance or enforcement of this Guaranty and
the other Loan Documents to which Guarantor is a party except as may have been
obtained by Guarantor and certified copies of which have been delivered to Bank.
(e) Guarantor has no Debt other than Debt owing to Bank
hereunder, and Guarantor covenants and agrees that until the indefeasible
payment, performance and satisfaction in full of the Guaranteed Obligations,
Guarantor will not create, incur, assume or suffer to exist any Debt without the
prior written consent of Bank.
14. ATTORNEYS' FEES AND COSTS. Guarantor agrees to pay, on demand,
all attorneys' fees (including attorneys' fees incurred pursuant to proceedings
arising under the
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Bankruptcy Code) and all other costs and expenses which may be incurred by Bank
in the enforcement of this Guaranty or in any way arising out of, or
consequential to the protection, assertion, or enforcement of the Guaranteed
Obligations (or any security therefor), whether or not suit is brought.
15. NOTICES. All notices, requests and other communications to any
party hereunder shall be sent in accordance with Section 9.1 of the Loan
Agreement to the following addresses:
If to Guarantor: SIERRA MEDICAL MANAGEMENT, INC.
18200 Yorba Linda Boulevard
Yorba Linda, CA 92886
Attn: Jacob Y. Terner, M.D.
Facsimile No: (714) 572-5900
Telephone No: (714) 572-3269
If to Bank: (as set forth in Section 9.1 of the Loan
Agreement)
16. CUMULATIVE REMEDIES. No remedy under this Guaranty or under any
Loan Document is intended to be exclusive of any other remedy, but each and
every remedy shall be cumulative and in addition to any and every other remedy
given hereunder or under any Loan Document, and those provided by law or in
equity. No delay or omission by Bank to exercise any right under this Guaranty
shall impair any such right nor be construed to be a waiver thereof. No failure
on the part of Bank to exercise, and no delay in exercising, any right hereunder
shall operate as a waiver thereof; nor shall any single or partial exercise of
any right hereunder preclude any other or further exercise thereof or the
exercise of any other right.
17. BOOKS AND RECORDS. Guarantor agrees Bank's books and records
showing the account between Bank and Borrower shall be admissible in any action
or proceeding and shall be binding upon Guarantor for the purpose of
establishing the items therein set forth and shall constitute prima facie proof
thereof.
18. SEVERABILITY OF PROVISIONS. If any provision of this Guaranty is
for any reason held to be invalid, illegal or unenforceable in any respect, that
provision shall not affect the validity, legality or enforceability of any other
provision of this Guaranty.
19. ENTIRE AGREEMENT; AMENDMENTS AND WAIVERS. This Guaranty
constitutes the entire agreement between Guarantor and Bank pertaining to the
subject matter contained herein. Any provision of this Guaranty may be amended
or waived if, but only if, such amendment or waiver is in writing and is signed
by the party asserted to be bound thereby, and then such amendment or waiver
shall be effective only in the specific instance and specific purpose for which
given.
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20. SECURITY. This Guaranty is secured by that certain Security
Agreement and Collateral Assignment of Transaction Documents, each dated as of
even date herewith, between Guarantor and Bank, as the same may be amended from
time to time.
21. SUCCESSORS AND ASSIGNS. This Guaranty shall bind the successors
and assigns of Guarantor, and shall inure to the benefit of the respective
successors and assigns of Bank; PROVIDED, HOWEVER, Guarantor may not assign this
Guaranty or delegate any of his duties hereunder without Bank's prior written
consent and any such prohibited assignment shall be absolutely null and void.
Bank reserves its right to sell, assign, transfer, negotiate, or grant
participations in all or any part of, or any interest in, the rights and
benefits hereunder pursuant to and in accordance with the provisions of the Loan
Documents. In connection therewith, Bank may disclose all documents and
information which Bank now or hereafter may have relating to Guarantor,
Guarantor's business, or this Guaranty to any such prospective or actual
transferee.
22. GOVERNING LAW. This Guaranty shall be deemed to have been made
in the State of California and the validity, construction, interpretation, and
enforcement hereof, and the rights of the parties hereto, shall be determined
under, governed by, and construed in accordance with the internal laws of the
State of California, without regard to principles of conflicts of law.
23. JUDICIAL REFERENCE.
(a) Other than (i) nonjudicial foreclosure and all matters in
connection therewith regarding security interests in real or personal property;
or (ii) the appointment of a receiver, or the exercise of other provisional
remedies (any and all of which may be initiated pursuant to applicable law),
each controversy, dispute or claim between the parties arising out of or
relating to this Guaranty, which controversy, dispute or claim is not settled in
writing within thirty (30) days after the "CLAIM DATE" (defined as the date on
either Guarantor or Bank gives written notice to the other that a controversy,
dispute or claim exists), will be settled by a reference proceeding in
California in accordance with the provisions of Section 638 ET SEQ. of the
California Code of Civil Procedure, or their successor section ("CCP"), which
shall constitute the exclusive remedy for the settlement of any controversy,
dispute or claim concerning this Guaranty, including whether such controversy,
dispute or claim is subject to the reference proceeding and except as set forth
above, the parties waive their rights to initiate any legal proceedings against
each other in any court or jurisdiction other than the Superior Court in the
County where any real property collateral for this Guaranty is located or Los
Angeles County if none (the "COURT"). The referee shall be a retired Judge of
the Court selected by mutual agreement of the parties, and if they cannot so
agree within forty-five (45) days after the Claim Date, the referee shall be
promptly selected by the Presiding Judge of the Court (or his representative).
The referee shall be appointed to sit as a temporary judge, with all of the
powers for a temporary judge, as authorized by law, and upon selection should
take and subscribe to the oath of office as provided for in Rule 244 of the
California Rules of Court (or any subsequently enacted Rule). Each party shall
have one peremptory challenge
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pursuant to CCP Section 170.6. The referee shall (a) be requested to set the
matter for hearing within sixty (60) days after the date of selection of the
referee and (b) try any and all issues of law or fact and report a statement of
decision upon them, if possible, within ninety (90) days of the Claim Date. Any
decision rendered by the referee will be final, binding and conclusive and
judgment shall be entered pursuant to CCP Section 644 in any court in the State
of California having jurisdiction. Any party may apply for a reference
proceeding at any time after thirty (30) days following notice to any other
party of the nature of the controversy, dispute or claim, by filing a petition
for a hearing and/or trial. All discovery permitted by this Guaranty shall be
completed no later than fifteen (15) days before the first hearing date
established by the referee. The referee may extend such period in the event of
a party's refusal to provide requested discovery for any reason whatsoever,
including, without limitation, legal objections raised to such discovery or
unavailability of a witness due to absence or illness. No party shall be
entitled to "priority" in conducting discovery. Depositions may be taken by
either party upon seven (7) days written notice, and request for production or
inspection of documents shall be responded to within ten (10) days after
service. All disputes relating to discovery which cannot be resolved by the
parties shall be submitted to the referee whose decision shall be final and
binding upon the parties. Pending appointment of the referee as provided
herein, the Superior Court is empowered to issue temporary and/or provisional
remedies, as appropriate.
(b) Except as expressly set forth in this Guaranty, the referee
shall determine the manner in which the reference proceeding is conducted
including the time and place of all hearings, the order of presentation of
evidence, and all other questions that arise with respect to the course of the
reference proceeding. All proceedings and hearings conducted before the
referee, except for trial, shall be conducted without a court reporter except
that when any party so requests, a court reporter will be used at any hearing
conducted before the referee. The party making such a request shall have the
obligation to arrange for and pay for the court reporter. The costs of the
court reporter at the trial shall be borne equally by the parties.
(c) The referee shall be required to determine all issues in
accordance with existing case law and the statutory laws of the State of
California. The rules of evidence applicable to proceedings at law in the State
of California will be applicable to the reference proceeding. The referee shall
be empowered to enter equitable as well as legal relief, to provide all
temporary and/or provisional remedies and to enter equitable orders that will be
binding upon the parties. The referee shall issue a single judgment at the
close of the reference proceeding which shall dispose of all of the claims of
the parties that are the subject of the reference. The parties hereto expressly
reserve the right to contest or appeal from the final judgment or any appealable
order or appealable judgment entered by the referee. The parties hereto
expressly reserve the right to findings of fact, conclusions of laws, a written
statement of decision, and the right to move for a new trial or a different
judgment, which new trial, if granted, is also to be a reference proceeding
under this provision.
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(d) In the event that the enabling legislation which provides
for appointment of a referee is repealed (and no successor statute is enacted),
any dispute between the parties that would otherwise be determined by the
reference procedure herein described will be resolved and determined by
arbitration. The arbitration will be conducted by a retired judge of the Court,
in accordance with the California Arbitration Act, Section 1280 through Section
1294.2 of the CCP as amended from time to time. The limitations with respect
to discovery as set forth hereinabove shall apply to any such arbitration
proceeding.
[Remainder of this page intentionally left blank.]
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IN WITNESS WHEREOF, Guarantor has executed and delivered this Guaranty
as of the date set forth in the first paragraph hereof.
SIERRA MEDICAL MANAGEMENT, INC.,
a Delaware corporation
By /s/ Thomas A. Maloof
-----------------------------------
Title: CFO
-------------------------------
ACCEPTED AND AGREED:
IMPERIAL BANK,
a California banking corporation
By /s/ Mark W. Campbell
-----------------------------
Title SVP
---------------------------
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SECURITY AGREEMENT
(GUARANTOR)
This SECURITY AGREEMENT, dated as of September 25, 1997, is entered
into between SIERRA MEDICAL MANAGEMENT, INC., a Delaware corporation
("GUARANTOR"), and IMPERIAL BANK, a California banking corporation ("Bank"),
with reference to the following facts:
R E C I T A L S
A. Prospect Medical Holdings, Inc., a Delaware corporation
("BORROWER"), and Bank have entered into the Loan Agreement; and
B. In order to induce Bank to continue to make Loans under the Loan
Agreement and as a condition thereof, Guarantor has executed that certain
Continuing Guaranty, of even date herewith (as the same may be amended,
restated, supplemented or otherwise modified from time to time, the "GUARANTY"),
pursuant to which Guarantor guarantees the full payment and performance of all
obligations owing to Bank by the Borrower under the Loan Agreement; and
C. In order to induce Bank to continue to make Loans under the Loan
Agreement and as a condition thereof, Guarantor has agreed to enter into this
Security Agreement in order to grant to Bank a first priority security interest
in the Collateral to secure prompt payment and performance of the Secured
Obligations.
A G R E E M E N T
NOW, THEREFORE, in consideration of the mutual promises, covenants,
conditions, representations, and warranties hereinafter set forth, and for other
good and valuable consideration, the parties hereto agree as follows:
1. DEFINITIONS. All initially capitalized terms used but not
defined herein shall have the meanings ascribed thereto in the Loan Agreement.
In addition, as used herein, the following terms shall have the following
meanings:
"ACCOUNT DEBTOR" means any Person who is or who may become
obligated with respect to, or on account of, an Account.
"ACCOUNTS" means any and all of Guarantor's presently existing
and hereafter arising accounts and rights to payment, except those evidenced by
Negotiable Collateral, arising out of the sale or lease of goods or the
rendition of services by Guarantor, irrespective of whether earned by
performance.
"BANK" means Imperial Bank, a California banking corporation.
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"BANK EXPENSES" shall mean: any and all costs or expenses
required to be paid by Guarantor under this Security Agreement which are paid or
advanced by Bank; all costs and expenses of Bank, including its attorneys' fees
and expenses (including attorneys' fees incurred pursuant to proceedings arising
under the Bankruptcy Code), incurred or expended to correct any default or
enforce any provision of this Security Agreement, or in gaining possession of,
maintaining, handling, preserving, storing, shipping, selling, preparing for
sale, or advertising to sell the Collateral, irrespective of whether a sale is
consummated; and all costs and expenses of suit incurred or expended by Bank,
including its attorneys' fees and expenses (including attorneys' fees incurred
pursuant to proceedings arising under the Bankruptcy Code) in enforcing or
defending this Security Agreement, irrespective of whether suit is brought.
"GUARANTOR'S BOOKS" means any and all presently existing and
hereafter acquired or created books and records of Guarantor, including all
records (including maintenance and warranty records), ledgers, computer
programs, disc or tape files, printouts, runs, and other computer prepared
information indicating, summarizing, or evidencing the Accounts, Deposit
Accounts, Equipment, Inventory, Investment Property, General Intangibles and
Negotiable Collateral.
"CHATTEL PAPER" means all writings of whatever sort which
evidence a monetary obligation and a security interest in or lease of specific
goods, whether now existing or hereafter arising.
"CODE" means the California Uniform Commercial Code except, to
the extent applicable, the Uniform Commercial Code as adopted by the
jurisdiction in which any of the Collateral is located. Any and all terms used
in this Security Agreement which are defined in the Code shall be construed and
defined in accordance with the meaning and definition ascribed to such terms
under the Code, unless otherwise defined herein.
"COLLATERAL" means the following, collectively: any and all of
the Accounts, Deposit Accounts, Equipment, Inventory, Investment Property,
General Intangibles, Negotiable Collateral, and Guarantor's Books, in each case
whether now existing or hereafter acquired or created, and any Proceeds or
products of any of the foregoing, or any portion thereof, and any and all
Accounts, Deposit Accounts, Equipment, Inventory, Investment Property, General
Intangibles, Negotiable Collateral, money, or other tangible or intangible
property, resulting from the sale or other disposition of the Accounts, Deposit
Accounts, Equipment, Inventory, Investment Property, General Intangibles, or
Negotiable Collateral, or any portion thereof or interest therein, and the
substitutions, replacements, additions, accessions, products and Proceeds
thereof.
"COLLATERAL ACCESS AGREEMENT" means a landlord waiver, mortgagee
waiver, bailee letter, or acknowledgement agreement of any warehouseman,
processor, lessor, consignee, or other Person in possession of, having a Lien
upon, or having rights or interests in the Equipment or Inventory, in each case,
in form and substance satisfactory to Bank.
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"DEPOSIT ACCOUNT" means any demand, time, savings, passbook or
like account now or hereafter maintained by or for the benefit of Guarantor with
a bank, savings and loan association, credit union or like organization, and all
funds and amounts therein, whether or not restricted or designated for a
particular purpose.
"DOCUMENTS" means any and all documents of title, bills of
lading, dock warrants, dock receipts, warehouse receipts and other documents of
Guarantor, whether or not negotiable, and includes all other documents which
purport to be issued by a bailee or agent and purport to cover goods in any
bailee's or agent's possession which are either identified or are fungible
portions of an identified mass, including such documents of title made available
to Guarantor for the purpose of ultimate sale or exchange of goods or for the
purpose of loading, unloading, storing, shipping, transshipping, manufacturing,
processing or otherwise dealing with goods in a manner preliminary to their sale
or exchange, in each case whether now existing or hereafter acquired.
"EQUIPMENT" means any and all of Guarantor's presently existing
and hereafter acquired machinery, equipment, furniture, furnishings, fixtures,
computer and other electronic data processing equipment and other office
equipment and supplies, computer programs and related data processing software,
spare parts, tools, motors, automobiles, trucks, tractors and other motor
vehicles, rolling stock, jigs, and other goods (other than Inventory, farm
products, and consumer goods), of every kind and description, wherever located,
together with any and all parts, improvements, additions, attachments,
replacements, accessories, and substitutions thereto or therefor, and all other
rights of Guarantor relating thereto, whether in the possession and control of
Guarantor, or in the possession and control of a third party for the account of
Guarantor.
"FEIN" means Federal Employer Identification Number.
"GENERAL INTANGIBLES" means any and all of Guarantor's presently
existing and hereafter acquired or arising general intangibles and other
intangible personal property of every kind and description, including:
(a) contracts and contract rights, noncompetition covenants,
licensing and distribution agreements, indemnity agreements, guaranties,
insurance policies, franchise agreements and lease agreements;
(b) deposit accounts, uncertificated certificates of deposit,
uncertificated securities, and interests in any joint ventures, partnerships or
limited liability companies;
(c) choses in action and causes of action (whether legal or
equitable, whether in contract or tort or otherwise, and however arising);
(d) licenses, approvals, permits or any other authorizations
issued by any Government Authority;
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(e) Intellectual Property Collateral;
(f) computer software, magnetic media, electronic data
processing files, systems and programs;
(g) rights of stoppage in transit, replevin and reclamation,
rebates or credits of every kind and nature to which Guarantor may be entitled;
(h) purchase orders, customer lists, subscriber lists and
goodwill;
(i) monies due or recoverable from pension funds, refunds and
claims for tax or other refunds against any Governmental Authority; and
(j) other contractual, equitable and legal rights of whatever
kind and nature.
"GUARANTY" has the meaning set forth in Recital B hereto.
"INSTRUMENTS" means any and all negotiable instruments,
certificated securities and every other writing which evidences a right to the
payment of money, in each case whether now existing or hereafter acquired.
"INTELLECTUAL PROPERTY COLLATERAL" means the following Assets
owned or held by Guarantor or in which Guarantor otherwise has any interest, now
existing or hereafter acquired or arising:
(a) all patents and patent applications, domestic or foreign,
all licenses relating to any of the foregoing and all income and royalties with
respect to any licenses, all rights to sue for past, present or future
infringement thereof, all rights arising therefrom and pertaining thereto and
all reissues, divisions, continuations, renewals, extensions and continuations
in-part thereof;
(b) all copyrights and applications for copyright, domestic or
foreign, together with the underlying works of authorship (including titles),
whether or not the underlying works of authorship have been published and
whether said copyrights are statutory or arise under the common law, and all
other rights and works of authorship, all rights, claims and demands in any way
relating to any such copyrights or works, including royalties and rights to sue
for past, present or future infringement, and all rights of renewal and
extension of copyright;
(c) all state (including common law), federal and foreign
trademarks, service marks and trade names, and applications for registration of
such trademarks, service marks and trade names, all licenses relating to any of
the foregoing and all income and royalties with respect to any licenses, whether
registered or unregistered and
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wherever registered, all rights to sue for past, present or future infringement
or unconsented use thereof, all rights arising therefrom and pertaining thereto
and all reissues, extensions and renewals thereof;
(d) all trade secrets, confidential information, customer lists,
license rights, advertising materials, operating manuals, methods, processes,
know-how, sales literature, sales and operating plans, drawings, specifications,
blue prints, descriptions, inventions, name plates and catalogs; and
(e) the entire goodwill of or associated with the businesses now
or hereafter conducted by Guarantor connected with and symbolized by any of the
aforementioned properties and assets.
"INVENTORY" means any and all of Guarantor's presently existing
and hereafter acquired goods of every kind and description (including goods in
transit) which are held for sale or lease, or to be furnished under a contract
of service or which have been so leased or furnished, or other disposition,
wherever located, including those held for display or demonstration or out on
lease or consignment or are raw materials, work in process, finished materials,
or materials used or consumed, or to be used or consumed, in Guarantor's
business, and the resulting product or mass, and all repossessed, returned,
rejected, reclaimed and replevied goods, together with all materials, parts,
supplies, packing and shipping materials used or usable in connection with the
manufacture, packing, shipping, advertising, selling or furnishing of such
goods; and all other items hereafter acquired by Guarantor by way of
substitution, replacement, return, repossession or otherwise, and all additions
and accessions thereto, and any Document representing or relating to any of the
foregoing at any time.
"INVESTMENT PROPERTY" has the meaning given to such term in the
Code.
"LOAN AGREEMENT" means that certain Revolving Credit Agreement,
dated as of July 3, 1997, between Borrower and Bank, as amended by that certain
Amendment Number One, dated as of July 14, 1997, that certain Amendment Number
Two, dated as of even date herewith, and as may be at any time hereafter further
supplemented, modified, amended or restated.
"NEGOTIABLE COLLATERAL" means any and all of Guarantor's
presently existing and hereafter acquired or arising letters of credit, advises
of credit, certificates of deposit, notes, drafts, Instruments, Documents and
Chattel Paper.
"PROCEEDS" means whatever is receivable or received from or upon
the sale, lease, license, collection, use, exchange or other disposition,
whether voluntary or involuntary, of any Collateral or other assets of
Guarantor, including "proceeds" as defined in Section 9306 of the Code, any and
all proceeds of any insurance, indemnity, warranty or guaranty payable to or for
the account of Guarantor from time to time with respect to any
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of the Collateral, any and all payments (in any form whatsoever) made or due and
payable to Guarantor from time to time in connection with any requisition,
confiscation, condemnation, seizure or forfeiture of all or any part of the
Collateral by any Governmental Authority (or any Person acting under color of
Governmental Authority), any and all other amounts from time to time paid or
payable under or in connection with any of the Collateral or for or on account
of any damage or injury to or conversion of any Collateral by any Person, any
and all other tangible or intangible property received upon the sale or
disposition of Collateral, and all proceeds of proceeds.
"RIGHTS TO PAYMENT" means all Accounts and any and all rights and
claims to the payment or receipt of money or other forms of consideration of any
kind in, to and under all General Intangibles, Negotiable Collateral and
Proceeds thereof.
"SECURED OBLIGATIONS" shall have the meaning of "Guaranteed
Obligations" under the Guaranty and shall also mean any and all debts,
liabilities, obligations, or undertakings owing by Guarantor to Bank arising
under, advanced pursuant to, or evidenced by this Security Agreement, whether
direct or indirect, absolute or contingent, matured or unmatured, due or to
become due, voluntary or involuntary, whether now existing or hereafter arising,
and including all interest not paid when due and all Bank Expenses which
Guarantor is required to pay or reimburse pursuant to this Security Agreement,
the Loan Agreement, the other Loan Documents or by law.
"SECURITY AGREEMENT" shall mean this Security Agreement, any
concurrent or subsequent riders, exhibits or schedules to this Security
Agreement, and any extensions, supplements, amendments, or modifications to or
in connection with this Security Agreement, or to any such riders, exhibits or
schedules.
2. CONSTRUCTION. Unless the context of this Security Agreement
clearly requires otherwise, references to the plural include the singular,
references to the singular include the plural, the part includes the whole,
"including" is not limiting, and "or" has the inclusive meaning represented by
the phrase "and/or." References in this Security Agreement to "determination"
by Bank include reasonable estimates (absent manifest error) by Bank, as
applicable (in the case of quantitative determinations) and reasonable beliefs
(absent manifest error) by Bank, as applicable (in the case of qualitative
determinations). The words "hereof," "herein," "hereby," "hereunder," and
similar terms in this Security Agreement refer to this Security Agreement as a
whole and not to any particular provision of this Security Agreement. Article,
section, subsection, exhibit, and schedule references are to this Security
Agreement unless otherwise specified.
3. CREATION OF SECURITY INTEREST. Guarantor hereby grants to Bank a
continuing security interest in all presently existing and hereafter acquired or
arising Collateral in order to secure the prompt payment and performance of all
of the Secured Obligations. Guarantor acknowledges and affirms that such
security interest in the Collateral has attached to all Collateral without
further act on the part of Bank or Guarantor.
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4. FURTHER ASSURANCES.
4.1 Guarantor shall execute and deliver to Bank concurrently
with Guarantor's execution of this Security Agreement, and from time to time at
the request of Bank, all financing statements, continuation financing
statements, fixture filings, security agreements, chattel mortgages,
assignments, and all other documents that Bank may request, in form satisfactory
to Bank, to perfect and maintain perfected Bank's security interests in the
Collateral and in order to consummate fully all of the transactions contemplated
by this Security Agreement and the Loan Agreement. Guarantor hereby irrevocably
makes, constitutes, and appoints Bank (and Bank's officers, employees, or
agents) as Guarantor's true and lawful attorney with power to sign the name of
Guarantor on any of the above-described documents or on any other similar
documents which need to be executed, recorded, or filed, and to do any and all
things necessary in the name and on behalf of Guarantor in order to perfect, or
continue the perfection of, Bank's security interests in the Collateral.
Guarantor agrees that neither Bank, nor any of its designees or
attorneys-in-fact, will be liable for any act of commission or omission, or for
any error of judgment or mistake of fact or law with respect to the exercise of
the power of attorney granted under this Section 4.1, other than as a result of
its or their gross negligence or wilful misconduct. THE POWER OF ATTORNEY
GRANTED UNDER THIS SECTION 4.1 IS COUPLED WITH AN INTEREST AND SHALL BE
IRREVOCABLE UNTIL ALL OF THE SECURED OBLIGATIONS HAVE BEEN INDEFEASIBLY PAID IN
FULL, THE LOAN AGREEMENT TERMINATED, AND ALL GUARANTOR'S DUTIES HEREUNDER AND
THEREUNDER HAVE BEEN DISCHARGED IN FULL.
4.2 Without limiting the generality of the foregoing Section 4.1
or any of the provisions of the Loan Agreement, Guarantor will: (i) at the
request of Bank, mark conspicuously all of its records pertaining to the
Collateral with a legend, in form and substance satisfactory to Bank, indicating
that the Collateral is subject to the security interest granted hereby; (ii) at
the request of Bank, appear in and defend any action or proceeding which may
affect Guarantor's title to, or the security interest of Bank in, any of the
Collateral; and (iii) upon demand of Bank, allow inspection of Collateral by
Bank or Persons designated by Bank at any time during normal business hours.
4.3 With respect to the Negotiable Collateral (other than drafts
received in the ordinary course of business so long as no Event of Default is
continuing), Guarantor shall, immediately upon request by Bank, endorse (where
appropriate) and assign the Negotiable Collateral over to Bank, and deliver to
Bank actual physical possession of the Negotiable Collateral to Bank together
with any instruments of transfer or assignment, all in form and substance
satisfactory to Bank, in order to fully perfect the security interest therein of
Bank.
4.4 Guarantor shall cooperate with Bank in obtaining a control
agreement in form and substance satisfactory to Bank with respect to all Deposit
Accounts and Investment Property.
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5. REPRESENTATIONS AND WARRANTIES. In order to induce Bank to
continue to make Loans to Borrower, in addition to the representations and
warranties of Guarantor set forth in the Guaranty which are incorporated herein
by this reference, Guarantor represents and warrants to Bank that on the date of
each and every Borrowing:
5.1 LOCATION OF CHIEF EXECUTIVE OFFICE AND COLLATERAL; FEIN.
Guarantor's chief executive office is located at the address set forth in
SCHEDULE 1, and all other locations where Guarantor conducts business or
Collateral is kept are set forth in SCHEDULE 1. Guarantor's FEIN is 33-0564370.
5.2 LOCATIONS OF GUARANTOR'S BOOKS. All locations where
Guarantor's Books are kept, including all equipment necessary for accessing
Guarantor's Books and the names and addresses of all service bureaus, computer
or data processing companies and other Persons keeping Guarantor's Books or
collecting Rights to Payment for Guarantor, are set forth in SCHEDULE 1.
5.3 TRADE NAMES AND TRADE STYLES. All trade names and trade
styles under which Guarantor presently conducts its business operations are set
forth in SCHEDULE 1, and, except as set forth in SCHEDULE 1, Guarantor has not,
at any time during the preceding five years: (i) been known as or used any other
corporate, trade or fictitious name; (ii) changed its name; (iii) been the
surviving or resulting corporation in a merger or consolidation; or (iv)
acquired through asset purchase or otherwise any business of any Person.
5.4 OWNERSHIP OF COLLATERAL. Guarantor is and shall continue to
be the sole and complete owner of the Collateral, free from any Lien other than
Permitted Liens.
5.5 ENFORCEABILITY; PRIORITY OF SECURITY INTEREST. (i) This
Agreement creates a security interest which is enforceable against the
Collateral in which Guarantor now has rights and will create a security interest
which is enforceable against the Collateral in which Guarantor hereafter
acquires rights at the time Guarantor acquires any such rights, and (ii) Bank
has a perfected security interest (to the fullest extent perfection can be
obtained by filing, notification to third parties, possession or control) and a
first priority security interest in the Collateral in which Guarantor now has
rights (subject only to Permitted Liens), and will have a perfected and first
priority security interest in the Collateral in which Guarantor hereafter
acquires rights at the time Guarantor acquires any such rights (subject only to
Permitted Liens), in each case securing the payment and performance of the
Secured Obligations.
5.6 OTHER FINANCING STATEMENTS. Other than financing statements
in favor of Bank and financing statements filed in connection with Permitted
Liens, no effective financing statement naming Guarantor as debtor, assignor,
grantor, mortgagor, pledgor or the like and covering all or any part of the
Collateral is on file in any filing or recording office in any jurisdiction.
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5.7 RIGHTS TO PAYMENT.
(a) the Rights to Payment represent valid, binding and
enforceable obligations of the Account Debtors or other Persons obligated
thereon, representing undisputed, bona fide transactions completed in accordance
with the terms and provisions contained in any documents related thereto, and
are and will be genuine, free from Liens, adverse claims, counterclaims,
setoffs, defaults, disputes, defenses, retainages, holdbacks and conditions
precedent of any kind of character, except to the extent reflected by
Guarantor's reserves for uncollectible Rights to Payment;
(b) all Account Debtors and other obligors on the Rights to
Payment are Solvent and generally paying their debts as they come due;
(c) all Rights to Payment comply with all applicable laws
concerning form, content and manner of preparation and execution, including
where applicable any federal and state consumer credit laws;
(d) Guarantor has not assigned any of its rights under the
Rights to Payment other than to Bank pursuant to this Agreement;
(e) all statements made, all unpaid balances and all other
information in Guarantor's Books and other documentation relating to the Rights
to Payment are true and correct and in all respects what they purport to be; and
(f) Guarantor has no knowledge of any fact or circumstance
which would impair the validity or collectibility of any of the Rights to
Payment.
5.8 INVENTORY. No Inventory is stored with any bailee,
warehouseman or similar Person or on any premises leased to Guarantor, nor has
any Inventory been consigned to Guarantor or consigned by Guarantor to any
Person or is held by Guarantor for any Person under any "bill and hold" or other
arrangement.
5.9 INTELLECTUAL PROPERTY.
(a) except as set forth in SCHEDULE 1, Guarantor (directly
or through any Subsidiary) does not own, possess or use under any licensing
arrangement any patents, copyrights, trademarks, service marks or trade names,
nor is there currently pending before any Governmental Authority any application
for registration of any patent, copyright, trademark, service mark or trade
name;
(b) all patents, copyrights, trademarks, service marks and
trade names are subsisting and have not been adjudged invalid or unenforceable
in whole or in part;
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(c) all maintenance fees required to be paid on account of
any patents have been timely paid for maintaining such patents in force, and, to
the best of Guarantor's knowledge, each of the patents is valid and enforceable
and Guarantor has notified Bank in writing of all prior art (including public
uses and sales) of which it is aware;
(d) to the best of Guarantor's knowledge, no infringement
or unauthorized use presently is being made of any Intellectual Property
Collateral by any Person;
(e) Guarantor is the sole and exclusive owner of the
Intellectual Property Collateral and the past, present and contemplated future
use of such Intellectual Property Collateral by Guarantor has not, does not and
will not infringe or violate any right, privilege or license agreement of or
with any other Person; and
(f) Guarantor owns, has material rights under, is a party
to, or an assignee of a party to all material licenses, patents, patent
applications, copyrights, service marks, trademarks, trademark applications,
trade names and all other intellectual property Collateral necessary to continue
to conduct its business as heretofore conducted.
5.10 EQUIPMENT.
(a) none of the Equipment or other Collateral is affixed to
real property, except Collateral with respect to which Guarantor has supplied
Bank with all information and documentation necessary to make all fixture
filings required to perfect and protect the priority of Bank's security interest
in all such Collateral which may be fixtures as against all Persons having an
interest in the premises to which such property may be affixed; and
(b) none of the Equipment is leased from or to any Person,
except as set forth in SCHEDULE 1.
5.11 DEPOSIT ACCOUNTS. The names and addresses of all financial
institutions at which Guarantor maintains its Deposit Accounts, and the account
numbers and account names of such Deposit Accounts, are set forth in SCHEDULE 1.
5.12 INVESTMENT PROPERTY. All Investment Property is set forth
and described in SCHEDULE 1, and all financial institutions or financial
intermediaries holding or in possession of such Investment Property are set
forth in SCHEDULE 1.
6. COVENANTS. In addition to the covenants of Guarantor set forth
in the Loan Agreement which are incorporated herein by this reference, Guarantor
agrees that until the indefeasible payment, performance and satisfaction in full
of the Secured Obligations, and all of Bank's obligations under the Loan
Agreement to Borrower have been terminated:
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6.1 DEFENSE OF COLLATERAL. Guarantor shall appear in and defend
any action, suit or proceeding which may affect its title to or right or
interest in, or Bank's right or interest in, the Collateral.
6.2 PRESERVATION OF COLLATERAL. Guarantor shall do and perform
all acts that may be necessary and appropriate to maintain, preserve and protect
the Collateral.
6.3 COMPLIANCE WITH LAWS, ETC. Guarantor shall comply with all
laws, regulations and ordinances, and all policies of insurance, relating to the
possession, operation, maintenance and control of the Collateral.
6.4 LOCATION OF GUARANTOR'S BOOKS AND CHIEF EXECUTIVE OFFICE.
Guarantor shall: (i) keep all Guarantor's Books at the locations set forth in
SCHEDULE 1; and (ii) maintain the location of Guarantor's chief executive office
or principal place of business at the location set forth in SCHEDULE 1;
PROVIDED, HOWEVER, that Guarantor may amend SCHEDULE 1 so long as (i) such
amendment occurs by written notice to Bank not less than 30 days prior to the
date on which the location of Guarantor's Books or Guarantor's chief executive
office or principal place of business is changed, and (ii) at the time of such
written notification, Guarantor executes and delivers any financing statement
amendments or fixture filing amendments necessary to perfect or continue
perfected Bank's security interests in the Collateral and also obtains for Bank
such duly executed Collateral Access Agreement as Bank shall require with
respect to such new location.
6.5 LOCATION OF COLLATERAL. Guarantor shall keep the Inventory
and Equipment only at the locations identified on SCHEDULE 1; PROVIDED, HOWEVER,
that Guarantor may amend SCHEDULE 1 so long as (i) such amendment occurs by
written notice to Bank not less than 30 days prior to the date on which the
Inventory or Equipment is moved to such new location, (ii) such new location is
within the continental United States, and (iii) at the time of such written
notification, Guarantor executes and delivers any financing statements or
fixture filings necessary to perfect and continue perfected Bank's security
interests in such Assets and also obtains for Bank such duly executed Collateral
Access Agreement as Bank shall require with respect to such new location.
6.6 CHANGE IN NAME, TRADE NAME, TRADE STYLE OR FEIN. Guarantor
shall not change its name, trade names, trade styles or FEIN, or add any new
trade names or trade styles from those listed on SCHEDULE 1; PROVIDED, HOWEVER,
that Guarantor may amend SCHEDULE 1 so long as (i) such amendment occurs by
written notice to Bank not less than 30 days prior to the date on which such new
name, trade name, trade style or FEIN becomes effective, and (ii) at the time of
such written notification, Guarantor executes and delivers any financing
statement amendments or fixture filing amendments necessary to continue
perfected Bank's security interests in the Collateral.
6.7 MAINTENANCE OF RECORDS. Guarantor shall keep separate,
accurate and complete Guarantor's Books, disclosing Bank's security interest
hereunder.
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6.8 DISPOSITION OF COLLATERAL. Guarantor shall not surrender or
lose possession of (other than to Bank), sell, lease, rent, or otherwise dispose
of or transfer any of the Collateral or any right or interest therein, except to
the extent permitted by the Loan Agreement.
6.9 LIENS. Guarantor shall keep the Collateral free of all
Liens except Permitted Liens.
6.10 LEASED PREMISES. At Bank's request, Guarantor shall obtain
from each Person from whom Guarantor leases any premises at which any Collateral
is at any time present, such Collateral Access Agreements as Bank may require.
6.11 RIGHTS TO PAYMENT. Guarantor shall:
(a) perform and observe all terms and provisions of the
Rights to Payment and all obligations to be performed or observed by it in
connection therewith and maintain the Rights to Payment in full force and
effect;
(b) enforce all Rights to Payment strictly in accordance
with their terms, and take all such action to such end as may be from time to
time reasonably requested by Bank;
(c) if, to the knowledge of Guarantor, any dispute, setoff,
claim, counterclaim or defense shall exist or shall be asserted or threatened
with respect to a Right to Payment (whether with or against Guarantor or
otherwise), disclose such fact fully to Bank in Guarantor's Books relating to
such Account or other Right to Payment and in connection with any report
furnished by Guarantor to Bank relating to such Right to Payment;
(d) furnish to Bank such information and reports regarding
the Rights to Payment as Bank may request, and upon request of Bank make such
demands and requests for information and reports as Guarantor is entitled to
make in respect of the Rights to Payment; and
(e) upon the occurrence of any Event of Default, establish
such lockbox or similar arrangements for the payment of the Rights to Payment as
Bank shall require.
6.12 INVENTORY. Guarantor shall:
(a) at such times as Bank shall request, prepare and
deliver to Bank periodic reports pertaining to the Inventory, in form and
substance satisfactory to Bank;
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(b) upon the request of Bank, take a physical listing of
the Inventory and promptly deliver a copy of such physical listing to Bank;
(c) not store any Inventory with a bailee, warehouseman or
similar Person or on premises leased to Guarantor without obtaining for Bank
such Collateral Access Agreements as Bank shall require; and
(d) not dispose of any Inventory on a bill-and-hold,
guaranteed sale, sale and return, sale on approval, consignment or similar
basis, nor acquire any Inventory from any Person on any such basis, without in
each case giving Bank prior written notice thereof.
6.13 EQUIPMENT. Guarantor shall, upon Bank's request, deliver to
Bank a report of each item of Equipment, in form and substance satisfactory to
Bank.
6.14 INTELLECTUAL PROPERTY COLLATERAL. Guarantor shall:
(a) not enter into any agreement (including any license or
royalty agreement) pertaining to any Intellectual Property Collateral without in
each case giving Bank prior notice thereof;
(b) not allow or suffer any Intellectual Property
Collateral to become abandoned, nor any registration thereof to be terminated,
forfeited, expired or dedicated to the public;
(c) promptly give Bank notice of any rights Guarantor may
obtain to any new patentable inventions, trademarks, servicemarks, copyrightable
works or other new Intellectual Property Collateral, prior to the filing of any
application for registration thereof; and
(d) diligently prosecute all applications for patents,
copyrights and trademarks, and file and prosecute any and all continuations,
continuations-in-part, applications for reissue, applications for certificate of
correction and like matters as shall be reasonable and appropriate in accordance
with prudent business practice, and promptly and timely pay any and all
maintenance, license, registration and other fees, taxes and expenses incurred
in connection with any Intellectual Property Collateral.
7. COLLECTION OF RIGHTS TO PAYMENT. Guarantor or its agents shall
endeavor in the first instance to collect all amounts due or to become due on or
with respect to the Rights to Payment. At the request of Bank after the
occurrence of an Event of Default, all remittances received by Guarantor shall
be held in trust for Bank, and, in accordance with Bank's instructions, remitted
to Bank or deposited to an account with Bank in the form received (with any
necessary endorsements or instruments of assignment or transfer).
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8. EVENTS OF DEFAULT. The occurrence of any Event of Default under
the Loan Agreement shall constitute an event of default ("Event of Default")
under this Security Agreement.
9. RIGHTS AND REMEDIES.
9.1 During the continuance of an Event of Default, Bank, without
notice or demand, may do any one or more of the following, all of which are
authorized by Guarantor:
(a) Settle or adjust disputes and claims directly with
Account Debtors for amounts and upon terms which Bank considers advisable, and
in such cases, Bank will credit the Secured Obligations with only the net
amounts received by Bank in payment of such disputed Accounts after deducting
all Bank Expenses incurred or expended in connection therewith;
(b) Cause Guarantor to hold all returned Inventory in trust
for Bank, segregate all returned Inventory from all other property of Guarantor
or in Guarantor's possession and conspicuously label said returned Inventory as
the property of Bank;
(c) Without notice to or demand upon Guarantor or any
guarantor, make such payments and do such acts as Bank considers necessary or
reasonable to protect its security interests in the Collateral. Guarantor
agrees to assemble the Collateral if Bank so requires, and to make the
Collateral available to Bank as Bank may designate. Guarantor authorizes Bank
to enter the premises where the Collateral is located, to take and maintain
possession of the Collateral, or any part of it, and to pay, purchase, contest,
or compromise any encumbrance, charge, or Lien that in Bank's determination
appears to conflict with its security interests and to pay all expenses incurred
in connection therewith. With respect to any of Guarantor's owned or leased
premises, Guarantor hereby grants Bank a license to enter into possession of
such premises and to occupy the same, without charge, for up to 120 days in
order to exercise any of Bank's rights or remedies provided herein, at law, in
equity, or otherwise;
(d) Without notice to Guarantor (such notice being
expressly waived), and without constituting a retention of any collateral in
satisfaction of an obligation (within the meaning of Section 9505 of the Code),
set off and apply to the Secured Obligations any and all (i) balances and
Deposit Accounts of Guarantor held by Bank, or (ii) indebtedness at any time
owing to or for the credit or the account of Guarantor held by Bank;
(e) Hold, as cash collateral, any and all balances and
Deposit Accounts of Guarantor held by Bank, to secure the full and final
repayment of all of the Secured Obligations;
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(f) Ship, reclaim, recover, store, finish, maintain,
repair, prepare for sale, advertise for sale, and sell (in the manner provided
for herein) the Collateral. Bank is hereby granted a license or other right to
use, without charge, Guarantor's labels, patents, copyrights, rights of use of
any name, trade secrets, trade names, trademarks, service marks, and advertising
matter, or any property of a similar nature, as it pertains to the Collateral,
in completing production of, advertising for sale, and selling any Collateral
and Guarantor's rights under all licenses and all franchise agreements shall
inure to Bank's benefit;
(g) Sell the Collateral at either a public or private sale,
or both, by way of one or more contracts or transactions, for cash or on terms,
in such manner and at such places (including Guarantor's premises) as Bank
determines is commercially reasonable. It is not necessary that the Collateral
be present at any such sale;
(h) Bank shall give notice of the disposition of the
Collateral as follows:
(i) Bank shall give Guarantor and each holder of a
security interest in the Collateral who has filed with Bank a written request
for notice, a notice in writing of the time and place of public sale, or, if the
sale is a private sale or some other disposition other than a public sale is to
be made of the Collateral, then the time on or after which the private sale or
other disposition is to be made;
(ii) The notice shall be personally delivered or
mailed, postage prepaid, to Guarantor as provided in SECTION 15 of the Guaranty,
at least 5 days before the date fixed for the sale, or at least 5 days before
the date on or after which the private sale or other disposition is to be made;
no notice needs to be given prior to the disposition of any portion of the
Collateral that is perishable or threatens to decline speedily in value or that
is of a type customarily sold on a recognized market. Notice to Persons other
than Guarantor claiming an interest in the Collateral shall be sent to such
addresses as they have furnished to Bank;
(iii) If the sale is to be a public sale, Bank also
shall give notice of the time and place by publishing a notice one time at least
5 days before the date of the sale in a newspaper of general circulation in the
county in which the sale is to be held;
(i) Bank may credit bid and purchase at any public sale;
and
(j) Any deficiency that exists after disposition of the
Collateral as provided above will be paid immediately by Guarantor. Any excess
will be returned, without interest and subject to the rights of third Persons,
by Bank to Guarantor.
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9.2 Upon the exercise by Bank of any power, right, privilege, or
remedy pursuant to this Security Agreement which requires any consent, approval,
registration, qualification, or authorization of any Governmental Authority,
Guarantor agrees to execute and deliver, or will cause the execution and
delivery of, all applications, certificates, instruments, assignments, and other
documents and papers that Bank or any purchaser of the Collateral may be
required to obtain for such governmental consent, approval, registration,
qualification, or authorization.
9.3 The rights and remedies of Bank under this Security
Agreement, the Guaranty, the other Loan Documents, and all other agreements
contemplated hereby and thereby shall be cumulative. Bank shall have all other
rights and remedies not inconsistent herewith as provided under the Code, by
law, or in equity. No exercise by Bank of any one right or remedy shall be
deemed an election of remedies, and no waiver by Bank of any default on
Guarantor's part shall be deemed a continuing waiver of any further defaults.
No delay by Bank shall constitute a waiver, election or acquiescence with
respect to any right or remedy.
10. BANK NOT LIABLE. So long as Bank complies with the obligations,
if any, imposed by Section 9207 of the Code, Bank shall not otherwise be liable
or responsible in any way or manner for: (a) the safekeeping of the Collateral;
(b) any loss or damage thereto occurring or arising in any manner or fashion or
from any cause; (c) any diminution in the value thereof; or (d) any act or
default of any carrier, warehouseman, bailee, forwarding agency, or other person
whomsoever.
11. INDEFEASIBLE PAYMENT. The Secured Obligations shall not be
considered indefeasibly paid for purposes of this Security Agreement unless and
until all payments to Bank are no longer subject to any right on the part of any
Person, including Guarantor, Guarantor as a debtor in possession, or any trustee
(whether appointed under the Bankruptcy Code or otherwise) of Guarantor or
Guarantor's Assets to invalidate or set aside such payments or to seek to recoup
the amount of such payments or any portion thereof, or to declare same to be
fraudulent or preferential. In the event that, for any reason, any portion of
such payments to Bank is set aside or restored, whether voluntarily or
involuntarily, after the making thereof, then the obligation intended to be
satisfied thereby shall be revived and continued in full force and effect as if
said payment or payments had not been made.
12. NOTICES. All notices or demands by any party hereto to the other
party and relating to this Security Agreement shall be made in the manner and to
the addresses set forth in Section 15 of the Guaranty.
13. GENERAL PROVISIONS.
13.1 SUCCESSORS AND ASSIGNS. This Security Agreement shall bind
and inure to the benefit of the respective successors and assigns of Guarantor
and Bank; PROVIDED, HOWEVER, that Guarantor may not assign this Security
Agreement nor delegate any
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of its duties hereunder without Bank's prior written consent and any prohibited
assignment or delegation shall be absolutely void. No consent by Bank to an
assignment by Guarantor shall release Guarantor from the Secured Obligations.
Bank reserves its right to sell, assign, transfer, negotiate, or grant
participations in all or any part of, or any interest in, the rights and
benefits hereunder pursuant to and in accordance with the provisions of the Loan
Agreement. In connection therewith, Bank may disclose all documents and
information which Bank now or hereafter may have relating to Guarantor,
Guarantor's business, or the Collateral to any such prospective or actual
Transferee, subject to the terms of Section 9.5(e) of the Loan Agreement.
13.2 EXHIBITS AND SCHEDULES. All of the exhibits and schedules
attached hereto shall be deemed incorporated by reference.
13.3 NO PRESUMPTION AGAINST ANY PARTY. Neither this Security
Agreement nor any uncertainty or ambiguity herein shall be construed or resolved
against Bank or Guarantor, whether under any rule of construction or otherwise.
On the contrary, this Security Agreement has been reviewed by each of the
parties and their counsel and shall be construed and interpreted according to
the ordinary meaning of the words used so as to accomplish fairly the purposes
and intentions of all parties hereto.
13.4 AMENDMENTS AND WAIVERS. Any provision of this Agreement or
any of the Loan Documents to which Guarantor is a party may be amended or waived
if, but only if, such amendment or waiver is in writing and is signed by the
party asserted to be bound thereby, and then such amendment or waiver shall be
effective only in the specific instance and specific purpose for which given.
13.5 COUNTERPARTS; INTEGRATION; EFFECTIVENESS. This Security
Agreement may be signed in any number of counterparts, each of which shall be an
original, with the same effect as if the signatures thereto and hereto were upon
the same instrument. This Security Agreement constitutes the entire agreement
and understanding among the parties hereto and supersedes any and all prior
agreements and understandings, oral or written, relating to the subject matter
hereof. This Security Agreement shall become effective when executed by each of
the parties hereto and delivered to Bank.
13.6 SEVERABILITY. The provisions of this Agreement are
severable. The invalidity, in whole or in part, of any provision of this
Agreement shall not affect the validity or enforceability of any other of its
provisions. If one or more provisions hereof shall be declared invalid or
unenforceable, the remaining provisions shall remain in full force and effect
and shall be construed in the broadest possible manner to effectuate the
purposes hereof.
14. GOVERNING LAW. This Security Agreement shall be deemed to have
been made in the State of California and the validity, construction,
interpretation, and enforcement hereof, and the rights of the parties hereto,
shall be determined under,
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governed by, and construed in accordance with the internal laws of the State of
California, without regard to principles of conflicts of law.
15. JUDICIAL REFERENCE.
15.1 Other than (i) nonjudicial foreclosure and all matters in
connection therewith regarding security interests in real or personal property;
or (ii) the appointment of a receiver, or the exercise of other provisional
remedies (any and all of which may be initiated pursuant to applicable law),
each controversy, dispute or claim between the parties arising out of or
relating to this Security Agreement, which controversy, dispute or claim is not
settled in writing within thirty (30) days after the "Claim Date" (defined as
the date on which Guarantor or Bank gives written notice to the other that a
controversy, dispute or claim exists), will be settled by a reference proceeding
in California in accordance with the provisions of Section 638 ET SEQ. of the
California Code of Civil Procedure, or their successor section ("CCP"), which
shall constitute the exclusive remedy for the settlement of any controversy,
dispute or claim concerning this Security Agreement, including whether such
controversy, dispute or claim is subject to the reference proceeding and except
as set forth above, the parties waive their rights to initiate any legal
proceedings against each other in any court or jurisdiction other than the
Superior Court in the County where any real property Collateral is located or
Los Angeles County if none (the "Court"). The referee shall be a retired Judge
of the Court selected by mutual agreement of the parties, and if they cannot so
agree within forty-five (45) days after the Claim Date, the referee shall be
promptly selected by the Presiding Judge of the Court (or his representative).
The referee shall be appointed to sit as a temporary judge, with all of the
powers for a temporary judge, as authorized by law, and upon selection should
take and subscribe to the oath of office as provided for in Rule 244 of the
California Rules of Court (or any subsequently enacted Rule). Each party shall
have one peremptory challenge pursuant to CCP Section 170.6. The referee shall
(a) be requested to set the matter for hearing within sixty (60) days after the
Claim Date and (b) try any and all issues of law or fact and report a statement
of decision upon them, if possible, within ninety (90) days of the Claim Date.
Any decision rendered by the referee will be final, binding and conclusive and
judgment shall be entered pursuant to CCP Section 644 in any court in the State
of California having jurisdiction. Any party may apply for a reference
proceeding at any time after thirty (30) days following notice to any other
party of the nature of the controversy, dispute or claim, by filing a petition
for a hearing and/or trial. All discovery permitted by this Security Agreement
shall be completed no later than fifteen (15) days before the first hearing date
established by the referee. The referee may extend such period in the event of
a party's refusal to provide requested discovery for any reason whatsoever,
including, without limitation, legal objections raised to such discovery or
unavailability of a witness due to absence or illness. No party shall be
entitled to "priority" in conducting discovery. Depositions may be taken by
either party upon seven (7) days written notice, and request for production or
inspection of documents shall be responded to within ten (10) days after
service. All disputes relating to discovery which cannot be resolved by the
parties shall be submitted to the referee whose decision shall be final and
binding upon the parties. Pending
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appointment of the referee as provided herein, the Superior Court is empowered
to issue temporary and/or provisional remedies, as appropriate.
15.2 Except as expressly set forth in this Security Agreement,
the referee shall determine the manner in which the reference proceeding is
conducted including the time and place of all hearings, the order of
presentation of evidence, and all other questions that arise with respect to the
course of the reference proceeding. All proceedings and hearings conducted
before the referee, except for trial, shall be conducted without a court
reporter except that when any party so requests, a court reporter will be used
at any hearing conducted before the referee. The party making such a request
shall have the obligation to arrange for and pay for the court reporter. The
costs of the court reporter at the trial shall be borne equally by the parties.
15.3 The referee shall be required to determine all issues in
accordance with existing case law and the statutory laws of the State of
California. The rules of evidence applicable to proceedings at law in the State
of California will be applicable to the reference proceeding. The referee shall
be empowered to enter equitable as well as legal relief, to provide all
temporary and/or provisional remedies and to enter equitable orders that will be
binding upon the parties. The referee shall issue a single judgment at the
close of the reference proceeding which shall dispose of all of the claims of
the parties that are the subject of the reference. The parties hereto expressly
reserve the right to contest or appeal from the final judgment or any appealable
order or appealable judgment entered by the referee. The parties hereto
expressly reserve the right to findings of fact, conclusions of laws, a written
statement of decision, and the right to move for a new trial or a different
judgment, which new trial, if granted, is also to be a reference proceeding
under this provision.
15.4 In the event that the enabling legislation which provides
for appointment of a referee is repealed (and no successor statute is enacted),
any dispute between the parties that would otherwise be determined by the
reference procedure herein described will be resolved and determined by
arbitration. The arbitration will be conducted by a retired judge of the Court,
in accordance with the California Arbitration Act, Section 1280 through Section
1294.2 of the CCP as amended from time to time. The limitations with respect to
discovery as set forth hereinabove shall apply to any such arbitration
proceeding.
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IN WITNESS WHEREOF, the parties have executed this Security Agreement
as of the date first set forth above.
SIERRA MEDICAL MANAGEMENT, INC.,
a Delaware corporation
By /s/ Thomas A. Maloof
--------------------------------
Title: CFO
----------------------------
IMPERIAL BANK,
a California banking corporation
By /s/ Mark W. Campbell
--------------------------------
Title: SVP
----------------------------
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SECURITY AGREEMENT - STOCK PLEDGE
This SECURITY AGREEMENT - STOCK PLEDGE (this "AGREEMENT"), dated as of
September 25, 1997, is entered into by and between PROSPECT MEDICAL HOLDINGS,
INC., a Delaware corporation ("PLEDGOR"), and IMPERIAL BANK, a California
banking corporation ("PLEDGEE"), with reference to the following facts:
R E C I T A L S
A. Pledgor and Pledgee have entered into that certain Revolving
Credit Agreement, dated as of July 3, 1997 (as the same may be amended,
restated, modified or supplemented from time to time in accordance with its
terms, the "LOAN AGREEMENT").
B. Pledgor has agreed to provide additional security for its
obligations under the Loan Agreement by pledging to Pledgee all of Pledgor's
right, title and interest in and to the Collateral (as hereinafter defined), to
secure the Secured Obligations (as hereinafter defined).
A G R E E M E N T
NOW THEREFORE, in consideration of the mutual promises, covenants,
conditions, representations, and warranties hereinafter set forth and for other
good and valuable consideration, the parties hereto mutually agree as follows:
1. DEFINITIONS AND CONSTRUCTION.
(a) DEFINITIONS. All initially capitalized terms used but not
defined in this Agreement shall have the meanings ascribed to such terms in the
Loan Agreement. In addition, the following terms, as used in this Agreement,
have the following meanings:
"CERTIFICATED SECURITY, "ENDORSEMENT", "REGISTERED FORM",
"SECURITY", "SECURITY CERTIFICATE", and "UNCERTIFICATED SECURITY" have the
meanings ascribed to such terms in Division 8 of the Code.
"CODE" means the California Uniform Commercial Code, as
amended and supplemented from time to time, and any successor statute.
"COLLATERAL" means all of the following:
(i) One thousand (1,000) shares of the outstanding Common
Stock of Company, which shares constitute one hundred percent (100%) of the
capital stock of Company, and all of the hereafter-acquired shares of Common
Stock of Company in which Pledgor has an interest at any time while this
Agreement is in effect (collectively, the "SHARES");
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(ii) All of Pledgor's presently existing and hereafter
arising stock subscription warrants, stock options, or other rights to purchase
Company's capital stock and all rights represented thereby (the "OPTIONS"); and
(iii) The proceeds of each of the foregoing, including any
and all dividends, cash, stock, instruments, and other property from time to
time received, receivable, or otherwise distributed in respect of or in exchange
for any of the Shares or Options (the "PROCEEDS").
"COMPANY" means Sierra Medical Management, Inc., a Delaware
corporation.
"EVENT OF DEFAULT" has the meaning given to such term in
Section 11.
"SECURED OBLIGATIONS" means Obligations (as defined in the
Loan Agreement) and the obligations of Pledgor hereunder.
"'33 ACT" means the Securities Act of 1933, as amended and
supplemented from time to time, and any successor statute, and any and all rules
promulgated in connection therewith.
(b) CONSTRUCTION. Unless the context of this Agreement clearly
requires otherwise, references to the plural include the singular, references to
the singular include the plural, the part includes the whole, "including" is not
limiting, and "or" has the inclusive meaning represented by the phrase "and/or."
References in this Agreement to "determination" by Pledgee include reasonable
estimates (absent manifest error) by Pledgee, as applicable (in the case of
quantitative determinations) and reasonable beliefs (absent manifest error) by
Pledgee, as applicable (in the case of qualitative determinations). The words
"hereof," "herein," "hereby," "hereunder," and similar terms in this Agreement
refer to this Agreement as a whole and not to any particular provision of this
Agreement. Article, section, subsection, exhibit, and schedule references are
to this Agreement unless otherwise specified.
2. PLEDGE. As security for the prompt and complete payment and
performance of the Secured Obligations, Pledgor hereby delivers, pledges, and
grants to Pledgee a continuing security interest in all of Pledgor's now-owned
or hereafter-acquired right, title, and interest in and to the Collateral.
3. CONTROL OF COLLATERAL. Pledgor shall promptly deliver to Pledgee
any and all Certificated Securities comprising all or any portion of the
Collateral for Pledgee to hold pursuant to the terms hereof, and if such
Certificated Securities are in Registered Form, (i) such Certificated Securities
shall be endorsed in blank by an effective undated Endorsement, in form and
substance satisfactory to Pledgee in its sole and absolute discretion, or (ii)
Pledgor shall cause the Company or the Company's transfer agent to
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transfer such Securities into the name of Pledgee and issue a replacement
Security Certificate evidencing the same in the name of Pledgee. In the event
that all or any portion of the Collateral consists of Uncertificated Securities,
Pledgor shall cause the Company to enter into a control agreement with respect
to such Uncertificated Securities, in form and substance satisfactory to Pledgee
in its sole and absolute discretion.
4. FURTHER ASSURANCES. Pledgor agrees that it shall cooperate with
Pledgee and shall execute and deliver, or cause to be executed and delivered, to
Pledgee all stock powers, proxies, assignments, financing statements,
instruments, control agreements and other documents, and shall take all further
action, at the expense of Pledgor, from time to time requested by Pledgee, in
order to maintain a continuing, first-priority, perfected security interest in
the Collateral in favor of Pledgee, and to enable Pledgee to exercise and
enforce its rights and remedies hereunder with respect to the Collateral, and
Pledgor agrees that it shall execute and deliver to Pledgee at Pledgee's request
any further applications, agreements, documents and instruments, and shall
perform any and all acts deemed necessary by Pledgee to carry into effect the
terms, conditions, and provisions of this Agreement and the transactions
connected herewith. Should Pledgor fail to execute or deliver any such
applications, agreements, documents, financing statements and instruments, or to
perform any such acts, Pledgor acknowledges that Pledgee may execute and deliver
the same and perform such acts in the name of Pledgor and on its behalf as its
attorney-in-fact in accordance with Section 13.
5. PLEDGEE'S DUTIES. Pledgee shall not have any duties with respect
to the Collateral other than the duty to use reasonable care if the Collateral
is in its possession. In accordance with Section 9207 of the Code, Pledgee
shall be deemed to have used reasonable care if it observes substantially the
same standard of care with respect to the custody or preservation of the
Collateral as it observes with respect to similar assets owned by Pledgee.
Without limiting the generality of the foregoing, Pledgee shall be under no
obligation to take any steps necessary to preserve rights in the Collateral
against any other parties, to sell the same if it threatens to decline in value,
or to exercise any rights represented thereby (including rights with respect to
calls, conversions, exchanges, maturities, or tenders); PROVIDED, HOWEVER, that
Pledgee may, at its option, do so, and any and all expenses incurred in
connection therewith shall be for the account of Pledgor.
6. VOTING RIGHTS; DIVIDENDS; ETC.
6.1 During the term of this Agreement, and as long as no Event
of Default is continuing:
(a) Pledgor shall be entitled to exercise any and all
voting and other consensual rights pertaining to the Shares or any part thereof;
PROVIDED, HOWEVER, no vote shall be cast or any consent, waiver or ratification
given or any action taken which would violate or be inconsistent with the terms
of this Agreement, the Loan Agreement or any other instrument or agreement
referred to therein or herein, or which could have the effect of impairing the
value of the Collateral or any part thereof or the position or interest
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of Pledgee therein.
(b) Pledgor shall be entitled to receive and retain any and
all dividends and distributions paid in respect of the Shares not otherwise
prohibited by the Loan Agreement; PROVIDED, HOWEVER, that any and all:
(i) dividends and distributions paid or payable other
than in cash in respect of, and any and all additional Shares or instruments or
other property received, receivable, or otherwise distributed in respect of, or
in exchange for, any Shares;
(ii) dividends and distributions paid or payable in
cash in respect of any Shares in connection with a partial or total liquidation
or dissolution, merger, consolidation of the Company, or any exchange of stock,
conveyance of assets, or similar corporate reorganization; and
(iii) cash paid with respect to, payable, or otherwise
distributed on redemption of, or in exchange for, any Shares,
shall be forthwith delivered to Pledgee to hold as Collateral and shall, if
received by Pledgor, be received in trust for the benefit of Pledgee, be
segregated from the other property or funds of Pledgor, and be forthwith
delivered to Pledgee as Collateral in the same form as so received (with any
necessary endorsement), and, if deemed appropriate by Pledgee, Pledgor shall
take such actions, including the actions described in Section 2, as Pledgee may
require.
6.2 Upon the occurrence of an Event of Default or if any amounts
shall be due and payable (whether by acceleration, maturity, or otherwise) under
any of the Secured Obligations, all rights of Pledgor to exercise the voting and
other consensual rights that it would otherwise be entitled to exercise pursuant
to Section 6.1(a) and to receive the dividends and distributions that it would
otherwise be authorized to receive and retain pursuant to Section 5.1(b) shall,
at Pledgee's option, cease, and all such rights shall, at Pledgee's option,
thereupon become vested in Pledgee, and Pledgee shall, at its option, thereupon
have the sole right to exercise such voting and other consensual rights and to
receive and hold as Collateral such dividends and interest payments. Any
payments received by Pledgor contrary to the provisions of this Section 6.2
shall be held in trust by Pledgor for the benefit of Pledgee, shall be
segregated from other funds of Pledgor, and shall be promptly paid over to
Pledgee, with any necessary endorsement.
7. REPRESENTATIONS, WARRANTIES, AND COVENANTS. In order to induce
Pledgee to continue to make Loans to Pledgor, Pledgor hereby warrants,
represents, and covenants that:
7.1 There are no restrictions upon the transfer of any of the
Collateral to or by Pledgee and Pledgor is the sole beneficial owner of the
Collateral and has the right to pledge and grant a security interest in or
otherwise transfer such Collateral
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free of any encumbrances or rights of third Persons.
7.2 All of the Collateral is and shall remain free from all
Liens except as created hereby. Pledgor shall not, without Pledgee's prior
written consent, sell or otherwise dispose of any of the Collateral.
7.3 The execution and delivery of this Agreement, and the
completion of the actions described in Section 3, creates a valid, perfected and
first-priority security interest in the Collateral in favor of Pledgee, and all
actions necessary or desirable to such perfection have been duly taken.
7.4 No authorization or other action by, and no notice to or
filing with, any Governmental Authority is required either: (a) for the grant
by Pledgor of the security interest granted hereby or for the execution,
delivery, or performance of this Agreement by Pledgor; (b) for the perfection of
or exercise by Pledgee of its rights and remedies hereunder except as may be
required in connection with a disposition of the Collateral by laws affecting
the offering and sale of securities generally; or (c) for the exercise by
Pledgee of the voting or other rights provided for in this Agreement or the
remedies in respect of the Collateral pursuant to this Agreement except as may
be required in connection with a disposition of the Collateral by laws affecting
the offering and sale of securities generally.
7.5 The pledge of the Collateral pursuant to this Agreement, and
the making of the loans in accordance with the terms of the Loan Agreement, does
not violate Regulation G, T, U, or X of the Board of Governors of the Federal
Reserve System.
7.6 The Company presently has issued and outstanding one
thousand (1,000) shares of Common Stock of which one hundred percent (100%) is
owned by Pledgor and they constitute, respectively, all of the capital stock of
Company and the Shares referenced herein.
7.7 There are no presently existing Options.
7.8 All of the outstanding Shares have been duly and validly
issued by the Company, and they are fully paid and nonassessable.
7.9 Pledgor has made its own arrangements for keeping informed
of changes or potential changes affecting the Collateral (including, but not
limited to, rights to convert, rights to subscribe, payment of dividends,
reorganization or other exchanges, tender offers, and voting rights), and
Pledgor agrees that Pledgee shall not have any responsibility or liability for
informing Pledgor of any such changes or potential changes or for taking any
action or omitting to take any action with respect thereto.
7.10 Pledgor shall at all times keep its books and records
concerning the Collateral at its chief executive office. Pledgor shall not
change the location of its chief
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executive office without giving Pledgee at least thirty (30) days' prior written
notice thereof.
7.11 Pledgor shall prevent the Company from issuing any
additional Shares or Options.
8. SHARE ADJUSTMENTS. In the event that during the term of this
Agreement any reclassification, readjustment, or other change is declared or
made in the capital structure of any Company, Pledgor shall give Pledgee prompt
written notice thereof and all new substituted and additional shares or other
Securities, issued or issuable to Pledgor by reason of any such change or
exercise shall be subject to the security interest created hereby and Pledgor
shall as soon as practicable but in no event more than 10 days thereafter, take
all of the actions required under Section 3 with respect thereto.
9. OPTIONS. In the event that during the term of this Agreement
Options shall be issued or exercised in connection with the Collateral, Pledgor
shall give Pledgee prompt written notice thereof and such Options acquired by
Pledgor shall be immediately assigned by Pledgor to Pledgee pursuant to an
assignment agreement in form and substance satisfactory to Pledgee in its sole
and absolute discretion, and all new shares or other Securities so acquired by
Pledgor shall also be subject to the security interest created hereby and
Pledgor shall as soon as practicable but in no event more than 10 days
thereafter, take all of the actions required under Section 3 with respect
thereto.
10. CONSENT. Pledgor hereby consents that, from time to time, before
or after the occurrence or existence of any Event of Default with or without
notice to or assent from Pledgor, any other security at any time held by or
available to Pledgee for any of the Secured Obligations or any other security at
any time held by or available to Pledgee of any other person, firm, or
corporation secondarily or otherwise liable for any of the Secured Obligations,
may be exchanged, surrendered, or released and any of the Secured Obligations
may be changed, altered, renewed, extended, continued, surrendered, compromised,
waived, or released, in whole or in part, as Pledgee may see fit. Pledgor shall
remain bound under this Agreement notwithstanding any such exchange, surrender,
release, alteration, renewal, extension, continuance, compromise, waiver, or
inaction, or extension of further credit.
11. EVENTS OF DEFAULT. The occurrence of an Event of Default under
the Loan Agreement shall constitute an event of default ("EVENT OF DEFAULT")
under this Agreement.
12. REMEDIES UPON DEFAULT.
12.1 Upon the occurrence of an Event of Default, Pledgee shall
have, in addition to any other rights given by law or in this Agreement, in the
Loan Agreement, or in any other agreement between Pledgee and Pledgor, all of
the rights and remedies with respect to the Collateral of a secured party under
the Code, and also shall have, without limitation, the following rights, which
Pledgor hereby agrees to be
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commercially reasonable:
(a) to receive all amounts payable in respect of the
Collateral to Pledgor under Section 6.1(b) hereof;
(b) to register all or any part of the Collateral on the
books of the Company in Pledgee's name or the name of its nominee or nominees;
(c) to vote all or any part of the Shares (whether or not
transferred into the name of the Pledgee) in accordance with Section 6.2 hereof,
and give all consents, waivers and ratifications in respect of the Collateral
and otherwise act with respect thereto as though it were the outright owner
thereof; PLEDGOR HEREBY IRREVOCABLY CONSTITUTES AND APPOINTS PLEDGEE THE PROXY
AND ATTORNEY-IN-FACT OF PLEDGOR, COUPLED WITH AN INTEREST, WITH FULL POWER OF
SUBSTITUTION FOR ANY AND ALL OF SUCH PURPOSES; WHICH PROXY AND POWER OF
ATTORNEY SHALL CONTINUE IN FULL FORCE AND EFFECT AND TERMINATE UPON THE EARLIER
TO OCCUR OF (a) UPON THE INDEFEASIBLE PAYMENT IN FULL OF THE SECURED
OBLIGATIONS, AND (b) TEN (10) YEARS FROM THE DATE HEREOF.
(d) at any time or from time to time, to sell, assign and
deliver, or grant options to purchase, all or any part of the Collateral, or any
interest therein, at any public or private sale, without demand of performance,
advertisement or notice of intention to sell or of the time or place of sale or
adjournment thereof or to redeem or otherwise (all of which are hereby waived by
Pledgor), for cash, on credit or for other property, for immediate or future
delivery without any assumption of credit risk, and for such price or prices and
on such terms as the Pledgee in its absolute discretion may determine; PROVIDED,
that at least five (5) days notice of the time and place of any such sale shall
be given to Pledgor. Pledgee shall not be obligated to make any such sale of
Collateral regardless of whether any such notice of sale has therefore been
given. Pledgor hereby waives any other requirement of notice, demand, or
advertisement for sale, to the extent permitted by law. Pledgor hereby waives
and releases to the fullest extent permitted by law any right or equity of
redemption with respect to the Collateral, whether before or after sale
hereunder, and all rights, if any, of marshalling the Collateral and any other
security for the Secured Obligations or otherwise. At any such sale, unless
prohibited by applicable law, Pledgee may bid for and purchase all or any part
of the Collateral so sold free from any such right or equity of redemption.
Pledgee shall not be liable for failure to collect or realize upon any or all of
the Collateral or for any delay in so doing nor shall Pledgee be under any
obligation to take any action whatsoever with regard thereto;
(e) to buy the Collateral, in its own name, or in the name
of a designee or nominee. Pledgee shall have the right to execute any document
or form, in its name or in the name of the Pledgor, that may be necessary or
desirable in connection with such sale of the Collateral.
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(f) to sell all or any part of the Collateral by a private
placement, restricting bidders and prospective purchasers to those who will
represent and agree that they are purchasing for investment only and not for
distribution. In so doing, Pledgee may solicit offers to buy the Collateral, or
any part of it for cash, from a limited number of investors deemed by Pledgee,
in its reasonable judgment, to be responsible parties who might be interested in
purchasing the Collateral. If Pledgee shall solicit such offers from not less
than four (4) such investors, then the acceptance by Pledgee of the highest
offer obtained therefore shall be deemed to be a commercial reasonable method of
disposition of such Collateral, even though the sales price established and/or
obtained may be substantially less than the price that would be obtained
pursuant to a public offering. Notwithstanding the foregoing, should Pledgee
determine that, prior to any public offering of any securities contained in the
Collateral, such securities should be registered under the '33 Act and/or
registered or qualified under any other federal or state law, and that such
registration and/or qualification is not practical, Pledgor agrees that it will
be commercially reasonable if a private sale is arranged so as to avoid a public
offering even if offers are solicited from fewer than four (4) investors, and
even though the sales price established and/or obtained may be substantially
less than the price that would be obtained pursuant to a public offering.
13. PLEDGEE AS PLEDGOR'S ATTORNEY-IN FACT. Pledgor hereby
irrevocably appoints Pledgee as its attorney-in-fact, coupled with an interest,
(i) to arrange for the register, at any time after the occurrence of an Event of
Default, of the Collateral on the books of the Company to the name of Pledgee or
to the name of Pledgee's nominee and (ii) to receive, endorse and collect all
instruments made payable to Pledgor of any dividend, distribution or other
payment on account of the Collateral, or any part thereof, and to give full
discharge for the same and to execute and file governmental notifications and
reporting forms. Pledgor hereby further authorizes Pledgee to perform any and
all acts which Pledgee deems necessary for the protection and preservation of
the Collateral or of the value of Pledgee's security interest therein, including
but not limited to receiving income thereon as additional security hereunder,
and all expenses paid or incurred by Pledgee in connection therewith shall
constitute Bank Expenses. Pledgor hereby further grants to Pledgee a power of
attorney coupled with an interest to execute all agreements, forms,
applications, documents and instruments and to take all actions and do all
things as could be executed, taken, or done by Pledgor in connection with the
protection and preservation of the Collateral or this Agreement. This power of
attorney is irrevocable and authorizes Pledgee to act for Pledgor in connection
with the matters described herein without notice to or demand upon Pledgor.
14. GENERAL PROVISIONS.
14.1 CUMULATIVE REMEDIES; NO PRIOR RECOURSE TO COLLATERAL. The
enumeration herein of Pledgee's rights and remedies is not intended to be
exclusive, and such rights and remedies are in addition to and not by way of
limitation of any other rights or remedies that the Pledgee may have under the
Loan Agreement, the Loan Documents, the Code, or other applicable law. Pledgee
shall have the right, in its sole discretion, to
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determine which rights and remedies are to be exercised and in which order. The
exercise of one right or remedy shall not preclude the exercise of any others,
all of which shall be cumulative.
14.2 NO IMPLIED WAIVERS. No act, failure, or delay by Pledgee
shall constitute a waiver of any of its rights and remedies. No single or
partial waiver by Pledgee of any provision of this Agreement or any other Loan
Document, or of a breach or default hereunder or thereunder, or of any right or
remedy which the Pledgee may have, shall operate as a waiver of any other
provision, breach, default, right, or remedy or of the same provision, breach,
default, right, or remedy on a future occasion. No waiver by Pledgee shall
affect its rights to require strict performance of this Agreement.
14.3 NOTICES. All notices or demands by any party hereto to the
other party and relating to this Agreement shall be sent in accordance with the
terms of Section 9.1 of the Loan Agreement.
14.4 SUCCESSORS AND ASSIGNS. This Agreement shall bind the
successors and assigns of Pledgor, and shall inure to the benefit of the
successors and assigns of Pledgee; PROVIDED, HOWEVER, that Pledgor may not
assign this Agreement nor delegate any of its duties hereunder without Pledgee's
prior written consent and any prohibited assignment shall be absolutely void.
Pledgee may assign this Agreement and its rights and duties hereunder and no
consent or approval by Pledgor is required in connection with any such
assignment. Pledgee reserves the right to sell, assign, transfer, negotiate, or
grant participations in all or any part of, or any interest in Pledgee's rights
and benefits hereunder. In connection with any such assignment or
participation, Pledgee may disclose all documents and information which Pledgee
now or hereafter may have relating to Pledgor or Pledgor's business to any
prospective or actual Transferee, subject to the terms of Section 9.5(e) of the
Loan Agreement.
14.5 EXHIBITS AND SCHEDULES. All of the exhibits and schedules
attached hereto shall be deemed incorporated by reference.
14.6 NO PRESUMPTION AGAINST ANY PARTY. Neither this Agreement
nor any uncertainty or ambiguity herein shall be construed or resolved against
Pledgor or Pledgee, whether under any rule of construction or otherwise. On the
contrary, this Agreement has been reviewed by each of the parties and their
counsel and shall be construed and interpreted according to the ordinary meaning
of the words used so as to accomplish fairly the purposes and intentions of all
parties hereto.
14.7 SECTION HEADINGS. Headings and numbers have been set forth
herein for convenience only. Unless the contrary is compelled by the context,
everything contained in each section applies equally to this entire Agreement.
14.8 SEVERABILITY OF PROVISIONS. If any provision of this
Agreement is for any reason held to be invalid, illegal or unenforceable in any
respect, that provision
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shall not affect the validity, legality or enforceability of any other provision
of this Agreement.
14.9 ENTIRE AGREEMENT; AMENDMENTS AND WAIVERS. This Agreement
constitutes the entire agreement between Pledgor and Pledgee pertaining to the
subject matter contained herein. Any provision of this Agreement may be amended
or waived if, but only if, such amendment or waiver is in writing and is signed
by the party asserted to be bound thereby, and then such amendment or waiver
shall be effective only in the specific instance and specific purpose for which
given.
14.10 COUNTERPARTS; TELEFACSIMILE EXECUTION. This Agreement
may be executed in any number of counterparts and by different parties on
separate counterparts, each of which, when executed and delivered, shall be
deemed to be an original, and all of which, when taken together, shall
constitute but one and the same Agreement. Delivery of an executed counterpart
of this Agreement by telefacsimile shall be equally as effective as delivery of
a manually executed counterpart of this Agreement. Any party delivering an
executed counterpart of this Agreement by telefacsimile also shall deliver a
manually executed counterpart of this Agreement but the failure to deliver a
manually executed counterpart shall not affect the validity, enforceability, and
binding effect of this Agreement.
14.11 TERMINATION BY PLEDGEE. After termination of the Loan
Agreement and when Pledgee has received payment and performance, in full, of the
Secured Obligations, Pledgee shall execute and deliver to Pledgor a termination
of all of the security interests granted by Pledgor hereunder and, to the extent
they have been delivered to Pledgee and not disposed of in accordance with this
Agreement, certificates evidencing the Shares.
15. GOVERNING LAW; JUDICIAL REFERENCE.
15.1 GOVERNING LAW. This Agreement shall be deemed to have been
made in the State of California and the validity, construction, interpretation,
and enforcement hereof, and the rights of the parties hereto, shall be
determined under, governed by, and construed in accordance with the internal
laws of the State of California, without regard to principles of conflicts of
law.
15.2 JUDICIAL REFERENCE.
(a) Other than (i) nonjudicial foreclosure and all matters
in connection therewith regarding security interests in real or personal
property; or (ii) the appointment of a receiver, or the exercise of other
provisional remedies (any and all of which may be initiated pursuant to
applicable law), each controversy, dispute or claim between the parties arising
out of or relating to this Agreement, which controversy, dispute or claim is not
settled in writing within thirty (30) days after the "CLAIM DATE" (defined as
the date on which a party subject to this Agreement gives written notice to all
other parties that a controversy, dispute or claim exists), will be settled by a
reference proceeding in
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California in accordance with the provisions of Section 638 ET SEQ. of the
California Code of Civil Procedure, or their successor section ("CCP"), which
shall constitute the exclusive remedy for the settlement of any controversy,
dispute or claim concerning this Agreement, including whether such controversy,
dispute or claim is subject to the reference proceeding and except as set forth
above, the parties waive their rights to initiate any legal proceedings against
each other in any court or jurisdiction other than the Superior Court in the
County where the Real Property, if any, is located or Los Angeles County if none
(the "COURT"). The referee shall be a retired Judge of the Court selected by
mutual agreement of the parties, and if they cannot so agree within forty-five
(45) days after the Claim Date, the referee shall be promptly selected by the
Presiding Judge of the Court (or his representative). The referee shall be
appointed to sit as a temporary judge, with all of the powers for a temporary
judge, as authorized by law, and upon selection should take and subscribe to the
oath of office as provided for in Rule 244 of the California Rules of Court (or
any subsequently enacted Rule). Each party shall have one peremptory challenge
pursuant to CCP Section 170.6. The referee shall (a) be requested to set the
matter for hearing within sixty (60) days after the date of selection of the
referee and (b) try any and all issues of law or fact and report a statement of
decision upon them, if possible, within ninety (90) days of the Claim Date. Any
decision rendered by the referee will be final, binding and conclusive and
judgment shall be entered pursuant to CCP Section 644 in any court in the State
of California having jurisdiction. Any party may apply for a reference
proceeding at any time after thirty (30) days following notice to any other
party of the nature of the controversy, dispute or claim, by filing a petition
for a hearing and/or trial. All discovery permitted by this Agreement shall be
completed no later than fifteen (15) days before the first hearing date
established by the referee. The referee may extend such period in the event of
a party's refusal to provide requested discovery for any reason whatsoever,
including, without limitation, legal objections raised to such discovery or
unavailability of a witness due to absence or illness. No party shall be
entitled to "priority" in conducting discovery. Depositions may be taken by
either party upon seven (7) days written notice, and request for production or
inspection of documents shall be responded to within ten (10) days after
service. All disputes relating to discovery which cannot be resolved by the
parties shall be submitted to the referee whose decision shall be final and
binding upon the parties. Pending appointment of the referee as provided
herein, the Superior Court is empowered to issue temporary and/or provisional
remedies, as appropriate.
(b) Except as expressly set forth in this Agreement, the
referee shall determine the manner in which the reference proceeding is
conducted including the time and place of all hearings, the order of
presentation of evidence, and all other questions that arise with respect to the
course of the reference proceeding. All proceedings and hearings conducted
before the referee, except for trial, shall be conducted without a court
reporter except that when any party so requests, a court reporter will be used
at any hearing conducted before the referee. The party making such a request
shall have the obligation to arrange for and pay for the court reporter. The
costs of the court reporter at the trial shall be borne equally by the parties.
(c) The referee shall be required to determine all issues
in
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<PAGE>
accordance with existing case law and the statutory laws of the State of
California. The rules of evidence applicable to proceedings at law in the State
of California will be applicable to the reference proceeding. The referee shall
be empowered to enter equitable as well as legal relief, to provide all
temporary and/or provisional remedies and to enter equitable orders that will be
binding upon the parties. The referee shall issue a single judgment at the
close of the reference proceeding which shall dispose of all of the claims of
the parties that are the subject of the reference. The parties hereto expressly
reserve the right to contest or appeal from the final judgment or any appealable
order or appealable judgment entered by the referee. The parties hereto
expressly reserve the right to findings of fact, conclusions of laws, a written
statement of decision, and the right to move for a new trial or a different
judgment, which new trial, if granted, is also to be a reference proceeding
under this provision.
(d) In the event that the enabling legislation which
provides for appointment of a referee is repealed (and no successor statute is
enacted), any dispute between the parties that would otherwise be determined by
the reference procedure herein described will be resolved and determined by
arbitration. The arbitration will be conducted by a retired judge of the Court,
in accordance with the California Arbitration Act, Section 1280 through Section
1294.2 of the CCP as amended from time to time. The limitations with respect to
discovery as set forth hereinabove shall apply to any such arbitration
proceeding.
IN WITNESS WHEREOF, the parties have executed this Agreement on the
date first written above.
"PLEDGOR"
PROSPECT MEDICAL HOLDINGS, INC.,
a Delaware corporation
By: /s/ Thomas A. Maloof
------------------------------
Title: CFO
-----------------------
"Pledgee"
IMPERIAL BANK,
a California banking corporation
By: /s/ Mark W. Campbell
-------------------------------
Title: SVP
------------------------
12
<PAGE>
CONTROL AGREEMENT
Sierra Medical Management, Inc., a Delaware corporation ("COMPANY")
hereby acknowledges the terms of the foregoing Security Agreement - Stock Pledge
(the "AGREEMENT"), dated as of September 25, 1997, by and between Prospect
Medical Holdings, Inc., a Delaware corporation ("PLEDGOR"), and Imperial Bank, a
California banking corporation ("PLEDGEE"). Company agrees that it will comply
with all instructions from Pledgee with respect to transfers of all or any part
of the Collateral (as defined in the Agreement), whether by sale or otherwise,
without further consent from Pledgor. Company further acknowledges and agrees
that it has received a copy of the Agreement and has registered the pledge of
the Collateral (as defined in the Agreement) in the name of Pledgee. Company
acknowledges that, in entering into the Loan Agreement (as defined in the
Agreement), Pledgee is relying on the Agreement and on Company's agreement
herein; and Company agrees that any offset or claim Company may now or hereafter
have against Pledgor (or against Pledgor's interests, claims or rights) shall be
subordinate to the claims, rights and interests of Pledgee under the Agreement.
The signatories below hereby represent and warrant to Pledgee that they are duly
authorized to execute and deliver this Control Agreement to Pledgee and thereby
bind the Company as set forth herein.
Dated: September 25, 1997 SIERRA MEDICAL MANAGEMENT,
INC., a Delaware corporation
By: /s/ Thomas A. Maloof
---------------------------------------
Title: CFO
-----------------------------------
13
<PAGE>
PROMISSORY NOTE
[PROSPECT MEDICAL GROUP, INC.]
$5,000,000 Los Angeles, California
September 25, 1997
1. FOR VALUE RECEIVED, Prospect Medical Group, Inc., a California
professional corporation ("MAKER"), promises to pay to the order of Prospect
Medical Systems, Inc., a Delaware corporation ("PAYEE"), on or before the
Maturity Date unless sooner accelerated in accordance with the terms hereof, the
principal sum of Five Million Dollars ($5,000,000), or such lesser sum as shall
equal the aggregate outstanding principal amount of the loans made by Payee to
Maker hereunder. As used herein the term "MATURITY DATE" has the meaning given
to such term in that certain Revolving Credit Agreement, dated as of July 3,
1997, between Prospect Medical Holdings, Inc., a Delaware corporation, and
Imperial Bank (as amended or restated from time to time, the "CREDIT
AGREEMENT").
2. This Promissory Note shall bear interest at a per annum rate
equal to six percent (6%). All computations of interest shall be calculated on
the basis of a year of three hundred sixty-five (365) days for the actual days
elapsed. Interest shall accrue from the date of this Promissory Note to the
date of repayment of this Promissory Note in accordance with the provisions
hereof. Maker shall pay all accrued but unpaid interest on the principal
balance hereof, in arrears, on the first day of each and every month.
3. Maker hereby authorizes Payee to record in its books and records
the date and amount of the loans made by Payee to Maker hereunder, and of each
payment of principal made by Maker, and Maker agrees that all such notations
shall, in the absence of manifest error, be conclusive as to the matters so
noted; PROVIDED, HOWEVER, any failure by Payee to make such notation with
respect to any loan or payment thereof shall not limit or otherwise affect
Maker's obligations under this Promissory Note.
4. Maker shall make all payments hereunder in lawful money of the
United States of America and in immediately available funds to the holder hereof
("HOLDER") at Holder's office or to such other address as Holder may from time
to time specify by notice to Maker.
5. In no event shall the interest rate and other charges hereunder
exceed the highest rate permissible under any law which a court of competent
jurisdiction shall, in a final determination, deem applicable hereto. In the
event that such a court determines that Holder has received interest and other
charges hereunder in excess of the highest rate applicable hereto, such excess
shall be deemed received on account of, and shall automatically be applied to
reduce, the principal balance hereof, and the provisions hereof shall be
1
<PAGE>
deemed amended to provide for the highest permissible rate. If there is no
principal balance outstanding, Holder shall refund to Maker such excess.
6. The unpaid principal balance hereof together with all accrued but
unpaid interest thereon shall be all due and payable upon (i) failure by Maker
to pay any installment of principal or interest due hereunder when due,
(ii) commencement of any proceeding by or against Maker under any bankruptcy or
insolvency laws, or (iii) the occurrence of an "Event of Default" under the
Credit Agreement.
7. Maker hereby waives presentment for payment, notice of dishonor,
protest and notice of protest.
8. This Promissory Note shall be governed by and construed in
accordance with the internal laws of the State of California without regard to
principles of conflicts of laws.
IN WITNESS WHEREOF, Maker has duly executed this Promissory Note as of
the date first above written.
Maker: PROSPECT MEDICAL GROUP, INC.,
a California professional corporation
By /s/ Gregg DeNicola
--------------------------------------
Title President
----------------------------------
2
<PAGE>
ENDORSEMENT ALLONGE
Pay to the order of Imperial Bank, a California banking corporation, located at
9920 South La Cienega Blvd., Suite #628, Inglewood, California 90301 the
attached note dated September 25, 1997 made by Prospect Medical Group, Inc.
Dated: September 25, 1997 PROSPECT MEDICAL SYSTEMS, INC., a
Delaware corporation
By: /s/ Gregg DeNicola
-------------------------------------
Print Name: Gregg DeNicola M.D.
-----------------------------
Its: President
------------------------------------
<PAGE>
COLLATERAL ASSIGNMENT OF TRANSACTION DOCUMENTS
THIS COLLATERAL ASSIGNMENT OF TRANSACTION DOCUMENTS (this
"ASSIGNMENT") has been executed and delivered as of September 25, 1997, by and
between SIERRA MEDICAL MANAGEMENT, INC. a Delaware corporation ("ASSIGNOR"), and
IMPERIAL BANK, a California banking corporation ("BANK"), with reference to the
following facts:
R E C I T A L S
A. Assignor is a party to certain transaction documents pursuant to
which, among other things, Assignor acquired or will acquire the non-medical
assets of Sierra Primary Care Medical Group, Inc. a California professional
medical corporation ("PHYSICIAN GROUP"), and provides management services to
Physician Group.
B. Assignor has executed and delivered that certain Continuing
Guaranty, dated as of even date herewith, in favor of Bank (as the same may be
amended, restated, supplemented or otherwise modified from time to time, the
"GUARANTY") pursuant to which Assignor guarantees the Guaranteed Obligations (as
defined in the Guaranty), including, without limitation, all obligations,
indebtedness and liabilities owed by Prospect Medical Holdings, Inc., a Delaware
corporation ("BORROWER") to Bank under that certain Revolving Credit Agreement,
dated as of July 3, 1997 (as the same may be amended, restated, supplemented or
otherwise modified from time to time, the "LOAN AGREEMENT").
C. Assignor has executed and delivered that certain Security
Agreement, dated as of even date herewith ("SECURITY AGREEMENT"), in order to
secure the Guaranteed Obligations.
D. Assignor has agreed to execute and deliver this Assignment to
Bank in order to supplement the terms of the Security Agreement with respect to
the Transaction Documents (as hereinafter defined).
E. Assignor is a wholly-owned subsidiary of Borrower which will
directly and materially benefit from the Loans made by Bank to Borrower under
the Loan Agreement, and Assignor acknowledges that Bank would not enter into the
Loan Agreement absent Assignor's agreements under the Guaranty, the Security
Agreement and hereunder.
A G R E E M E N T
In consideration of the premises and the mutual agreements herein set
forth, Assignor and Bank hereby agree as follows:
1. DEFINED TERMS. All initially capitalized terms used but not
defined herein shall have the meanings assigned to such terms in the Guaranty.
1
<PAGE>
2. ASSIGNMENT. As additional security for the Guaranteed
Obligations, Assignor hereby collaterally assigns and transfers to Bank, and
acknowledges that pursuant to the Security Agreement Assignor has granted to
Bank a security interest in:
2.1 TRANSACTION DOCUMENTS. All of Assignor's right, title and
interest in and to the following documents (collectively, the "TRANSACTION
DOCUMENTS"):
(a) Amended and Restated Management Services Agreement,
dated as of September 25, 1997, executed by and between Assignor and Physician
Group;
(b) Assignable Option Agreement, dated as of September 25,
1997, executed by and among Assignor, Physician Group and Prospect Medical
Group, Inc., a California professional corporation ("GROUP");
(c) Security Agreement, dated as of September 25, 1997,
executed by and between Assignor and Physician Group, together with UCC-1
Financing Statements with respect thereto ("PHYSICIAN GROUP SECURITY
AGREEMENT");
(d) Secured Promissory Note, dated as of September 25,
1997, in the principal amount of $5,000,000 ("NOTE"), executed by Group to the
order of Assignor;
(e) Commercial Lease, dated August 1, 1996, between
M. Paramesvaran ("LANDLORD 1"), and Physician Group, Inc., as amended by that
certain Amendment to Lease, dated as of September 25, 1997, among Landlord 1,
Physician Group, and Assignor, with respect to 44714 10th Street West,
Lancaster, CA 93534;
(f) Lease, dated September 15, 1993, between Sinnaduri E.
Moorthy, M.D. and Claudia Shanthi Moorthy, as Trustees of the Moorthy Family
Trust, and Karunanyan Arulanantham, M.D. and Impamani Arulanantham, as Trustees
of the Arulanantham Family Trust ("LANDLORD 2"), and Physician Group, as amended
by that certain Amendment to Lease, dated as of September 25, 1997, among
Landlord 2, Physician Group, and Assignor, with respect to 44471 10th Street
West, Lancaster, CA 93534;
(g) Lease, dated January 1, 1991, as extended by a letter
agreement dated October 1, 1996, between Landlord 2 and Physician Group, as
amended by that certain Amendment to Lease, dated as of September 25, 1997,
among Landlord 2, Physician Group, and Assignor, with respect to 44469 10th
Street West, Lancaster, CA 93534; and
(h) Real Estate Lease, dated December 1, 1996, between M.
Paramesvaran, Trustee, Moorthy Children's Trust, DBA Ana Verde Medical Center
("LANDLORD 3"), and Physician Group, as amended by that certain Amendment to
Lease,
2
<PAGE>
dated as of September 25, 1997, among Landlord 3, Physician Group, and Assignor,
with respect to 1037 East Palmdale Blvd., Palmdale, CA 93550.
2.2 RIGHTS AND REMEDIES. All of the rights, benefits, remedies,
privileges and claims of Assignor with respect to the Transaction Documents
(collectively, the "RIGHTS AND REMEDIES"), including, without limitation, (i)
all rights to monies or payments owing to Assignor under the Transaction
Documents, and any and all security therefor and for all other obligations owing
to Assignor thereunder, (ii) any right that Assignor may have to indemnification
under the Transaction Documents, (iii) all Rights and Remedies of Assignor with
respect to any breach of the representations, warranties and covenants set forth
in any of the Transaction Documents, and (iv) the proceeds thereof (the
Transaction Documents and the Rights and Remedies are collectively referred to
herein as, the "COLLATERAL").
3. RIGHT AND REMEDIES GENERALLY. Prior to the occurrence of a
breach or default of any of the agreements, covenants and obligations of
Assignor under the Guaranty (a "DEFAULT"), Assignor will enforce all of its
Rights and Remedies diligently and in good faith. Effective from and after the
occurrence of a Default, Assignor hereby irrevocably authorizes and empowers
Bank, in Bank's own discretion, to assert as Bank may deem proper, either
directly or on behalf of Assignor, any of the Rights and Remedies which Assignor
may from time to time have under the Transaction Documents, and to receive and
collect all damages, awards and other monies resulting therefrom and to apply
the same on account of any of the Guaranteed Obligations.
4. FURTHER ASSURANCES. Assignor shall execute and deliver to Bank
concurrently with Assignor's execution of this Assignment, and from time to time
at the request of Bank, all financing statements, continuation financing
statements, fixture filings, security agreements, chattel mortgages,
assignments, and all other documents that Bank may request, in form satisfactory
to Bank, to perfect and maintain perfected Bank's security interests in the
Collateral and in order to consummate fully all of the transactions contemplated
by this Assignment.
5. TRANSACTION DOCUMENTS. Concurrent herewith, Assignor is
delivering to Bank possession of the original Transaction Documents, together
with any and all amendments thereto, as in effect on the date hereof, including
the Note and Physician Group Security Agreement, duly endorsed to Bank pursuant
to an allonge in form and substance satisfactory to Bank, to hold in accordance
with the terms of the Security Agreement until the Security Agreement is
terminated in accordance with its terms.
6. ATTORNEY-IN-FACT. Assignor hereby irrevocably makes,
constitutes, and appoints Bank (and Bank's officers, employees, or agents) as
Assignor's true and lawful agent and attorney-in-fact for the purposes of
enabling Bank or its agent(s) after the occurrence of a Default to (a) assert
such Rights and Remedies and to collect such damages, awards and other monies
and to apply them in the manner set forth hereinabove, and (b) to sign the name
of Assignor on any documents which need to be executed, recorded, or filed,
3
<PAGE>
and to do any and all things necessary in the name and on behalf of Assignor in
order to protect Bank's interests in the Transaction Documents. Assignor agrees
that neither Bank, nor any of its designers or attorneys-in-fact, will be liable
for any act of commission or omission, or for any error of judgment or mistake
of fact or law with respect to the exercise of the power of attorney granted
under this Section 6, other than as a result of its or their gross negligence or
wilful misconduct. The power of attorney granted under this Section 6 is
coupled with an interest and shall be irrevocable until all of the Guaranteed
Obligations have been paid in full, the Guaranty terminated, and Assignor's
duties under this Assignment have been discharged in full.
7. MODIFICATION OF RIGHTS AND REMEDIES. Assignor shall keep Bank
informed of all circumstances bearing upon the Rights and Remedies and shall
immediately provide Bank with copies of any notices delivered to Assignor in
connection with the Transaction Documents. Assignor shall also provide Bank
with a copy of any notice sent by Assignor in connection with the Transaction
Documents, concurrently with the sending of any such notice. Assignor shall not
waive, amend, alter or modify any of the Rights and Remedies in any material
respect without the prior written consent of Bank. Assignor shall not, without
Bank's prior written consent, amend, alter, modify or terminate any of the
Transaction Documents, or waive any of the provisions thereof, or do or permit
any act in contravention thereof.
8. ASSIGNOR TO REMAIN LIABLE. Notwithstanding the foregoing,
Assignor expressly acknowledges and agrees that it shall remain liable under the
Transaction Documents to observe and perform all of the conditions and
obligations in the Transaction Documents which Assignor is bound to observe and
perform, and that neither this Assignment, nor any action taken pursuant hereto,
shall cause Bank to be under any obligation or liability in any respect
whatsoever to observe or perform any of the representations, warranties,
conditions, covenants, agreements or terms of the Transaction Documents.
9. COUNTERPARTS; EFFECTIVENESS. This Assignment may be executed in
any number of counterparts, each of which, when executed and delivered, shall be
deemed to be an original. All of such counterparts, taken together, shall
constitute but one and the same agreement. This Assignment shall become
effective upon the execution of a counterpart of this Assignment by each of the
parties hereto.
10. NOTICES. All notices, requests and other communications to any
party hereunder shall be sent in accordance with Section 15 of the Guaranty.
11. MODIFICATIONS AND AMENDMENTS. This Assignment shall not be
changed orally but shall be changed only by agreement in writing signed by
Assignor and Bank. No course of dealing between the parties, no usage of trade
and no parole or extrinsic evidence of any nature shall be used to supplement or
modify any of the terms or provisions of this Assignment.
4
<PAGE>
12. SEVERABILITY. If any provision of this Assignment is held to be
illegal, invalid or unenforceable under present or future laws, the legality,
validity and enforceability of the remaining provisions of this Assignment shall
not be affected thereby, and this Assignment shall be liberally construed so as
to carry out the intent of the parties to it.
13. GOVERNING LAW; SUCCESSORS AND ASSIGNS; ENTIRE AGREEMENT. This
Assignment (a) shall be governed and construed according to the laws of the
State of California, without regard to principles of conflicts of law; (b) shall
be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns; and (c) embodies the entire agreement and
understanding between the parties with respect to the subject matter hereof and
supersedes all prior agreements, consents and understandings relating to such
subject matter.
14. JUDICIAL REFERENCE.
14.1 REFERENCE PROCEEDING. Other than (i) nonjudicial
foreclosure and all matters in connection therewith regarding security interests
in real or personal property; or (ii) the appointment of a receiver, or the
exercise of other provisional remedies (any and all of which may be initiated
pursuant to applicable law), each controversy, dispute or claim between the
parties arising out of or relating to this Assignment, which controversy,
dispute or claim is not settled in writing within thirty (30) days after the
"CLAIM DATE" (defined as the date on which either Assignor or Bank gives written
notice to the other that a controversy, dispute or claim exists), will be
settled by a reference proceeding in California in accordance with the
provisions of Section 638 ET SEQ. of the California Code of Civil Procedure, or
their successor section ("CCP"), which shall constitute the exclusive remedy for
the settlement of any controversy, dispute or claim concerning this Assignment,
including whether such controversy, dispute or claim is subject to the reference
proceeding and except as set forth above, the parties waive their rights to
initiate any legal proceedings against each other in any court or jurisdiction
other than the Superior Court in Los Angeles County (the "COURT"). The referee
shall be a retired Judge of the Court selected by mutual agreement of the
parties, and if they cannot so agree within forty-five (45) days after the Claim
Date, the referee shall be promptly selected by the Presiding Judge of the Court
(or his representative). The referee shall be appointed to sit as a temporary
judge, with all of the powers for a temporary judge, as authorized by law, and
upon selection should take and subscribe to the oath of office as provided for
in Rule 244 of the California Rules of Court (or any subsequently enacted Rule).
Each party shall have one peremptory challenge pursuant to CCP Section 170.6.
The referee shall (a) be requested to set the matter for hearing within sixty
(60) days after the date of selection of the referee and (b) try any and all
issues of law or fact and report a statement of decision upon them, if possible,
within ninety (90) days of the Claim Date. Any decision rendered by the referee
will be final, binding and conclusive and judgment shall be entered pursuant to
CCP Section 644 in any court in the State of California having jurisdiction.
Any party may apply for a reference proceeding at any time after thirty (30)
days following notice to any other party of the nature of the controversy,
dispute or claim, by filing a petition for a hearing and/or
5
<PAGE>
trial. All discovery permitted by this Assignment shall be completed no later
than fifteen (15) days before the first hearing date established by the referee.
The referee may extend such period in the event of a party's refusal to provide
requested discovery for any reason whatsoever, including, without limitation,
legal objections raised to such discovery or unavailability of a witness due to
absence or illness. No party shall be entitled to "priority" in conducting
discovery. Depositions may be taken by either party upon seven (7) days written
notice, and request for production or inspection of documents shall be responded
to within ten (10) days after service. All disputes relating to discovery which
cannot be resolved by the parties shall be submitted to the referee whose
decision shall be final and binding upon the parties. Pending appointment of
the referee as provided herein, the Court is empowered to issue temporary and/or
provisional remedies, as appropriate.
14.2 MANNER OF REFERENCE PROCEEDING. Except as expressly set
forth in this Assignment, the referee shall determine the manner in which the
reference proceeding is conducted including the time and place of all hearings,
the order of presentation of evidence, and all other questions that arise with
respect to the course of the reference proceeding. All proceedings and hearings
conducted before the referee, except for trial, shall be conducted without a
court reporter except that when any party so requests, a court reporter will be
used at any hearing conducted before the referee. The party making such a
request shall have the obligation to arrange for and pay for the court reporter.
The costs of the court reporter at the trial shall be borne equally by the
parties.
14.3 DUTIES OF REFEREE. The referee shall be required to
determine all issues in accordance with existing case law and the statutory laws
of the State of California. The rules of evidence applicable to proceedings at
law in the State of California will be applicable to the reference proceeding.
The referee shall be empowered to enter equitable as well as legal relief, to
provide all temporary and/or provisional remedies and to enter equitable orders
that will be binding upon the parties. The referee shall issue a single
judgment at the close of the reference proceeding which shall dispose of all of
the claims of the parties that are the subject of the reference. The parties
hereto expressly reserve the right to contest or appeal from the final judgment
or any appealable order or appealable judgment entered by the referee. The
parties hereto expressly reserve the right to findings of fact, conclusions of
laws, a written statement of decision, and the right to move for a new trial or
a different judgment, which new trial, if granted, is also to be a reference
proceeding under this provision.
14.4 ARBITRATION ALTERNATIVE. In the event that the enabling
legislation which provides for appointment of a referee is repealed (and no
successor statute is enacted), any dispute between the parties that would
otherwise be determined by the reference procedure herein described will be
resolved and determined by arbitration. The arbitration will be conducted by a
retired judge of the Court, in accordance with the California Arbitration Act,
Section 1280 through Section 1294.2 of the CCP as amended from time to
6
<PAGE>
time. The limitations with respect to discovery as set forth hereinabove shall
apply to any such arbitration proceeding.
EXECUTED as of the date first above written.
"Assignor"
SIERRA MEDICAL MANAGEMENT, INC.,
a Delaware corporation
By: /s/ Thomas A. Maloof
----------------------------------------
Title: CFO
-------------------------------------
"Bank"
IMPERIAL BANK,
a California banking corporation
By: /s/ Mark W. Campbell
----------------------------------------
Title: SVP
-------------------------------------
7
<PAGE>
CONSENT TO ASSIGNMENT
Each of the undersigned acknowledges the terms of the above
Assignment, consents to the collateral assignment by Assignor to Bank of the
transaction documents identified in Section 2 of the Assignment (the
"TRANSACTION DOCUMENTS") to which it is a party, and hereby irrevocably agrees
to recognize Bank or Bank's nominee as Assignor's assignee under the Transaction
Documents upon notice from Bank that an "Event of Default" has occurred. Each
of the undersigned hereby represents and warrants to Bank that (i) he, she or it
has no knowledge of any fact or circumstance which would or could have a
material adverse effect on the rights granted to Bank in the Transaction
Documents, (ii) each of the Transaction Documents complies with all applicable
laws and regulations, (iii) each of the Transaction Documents is in full force
and effect, and all signatures, names, addresses, amounts and other statements
and facts contained therein are true and correct, and (iv) there are no
defenses, offsets or counterclaims to enforcement of the Transaction Documents.
ACKNOWLEDGED AND CONSENTED TO
THIS 25th DAY OF SEPTEMBER, 1997:
SIERRA PRIMARY CARE MEDICAL GROUP, INC.,
a California professional corporation
By: /s/ Gregg DeNicola
----------------------------------
Title: President
-------------------------------
PROSPECT MEDICAL GROUP, INC.,
a California professional corporation
By:/s/ Gregg DeNicola
----------------------------------
Title: President
-------------------------------
/s/ M. Paramesvaran
- ----------------------------------
M. Paramesvaran
/s/ Sinnadurai E. Moorthy
- --------------------------------
Sinnaduri E. Moorthy, M.D., co-trustee of
the Moorthy Family Trust
8
<PAGE>
SECURITY AGREEMENT
(SIERRA PRIMARY CARE MEDICAL GROUP, INC.)
This SECURITY AGREEMENT, dated as of September 25, 1997, is entered
into between SIERRA PRIMARY CARE MEDICAL GROUP, INC., a California professional
medical corporation ("PHYSICIAN GROUP"), and SIERRA MEDICAL MANAGEMENT, INC., a
Delaware corporation ("MANAGER"), with reference to the following facts:
R E C I T A L S
A. Manager and Physician Group have entered into that certain
Amended and Restated Management Services Agreement, effective September 25, 1997
(the "MANAGEMENT AGREEMENT"), pursuant to which Manager is providing certain
management services to Physician Group;
B. Physician Group has agreed to enter into this Security Agreement
in order to grant Manager a first priority security interest in the Collateral
(as hereinafter defined) to secure prompt payment and performance of its
obligations under the Management Agreement.
A G R E E M E N T
NOW, THEREFORE, in consideration of the mutual promises, covenants,
conditions, representations, and warranties hereinafter set forth, and for other
good and valuable consideration, the parties hereto agree as follows:
1. DEFINITIONS. All initially capitalized terms used but not
defined herein shall have the meanings ascribed thereto in the Management
Agreement. In addition, as used herein, the following terms shall have the
following meanings:
"ACCOUNT DEBTOR" means any person or entity who is or who may
become obligated with respect to, or on account of, an Account.
"ACCOUNTS" means any and all of Physician Group's presently
existing and hereafter arising accounts and rights to payment arising out of the
sale or lease of goods or the rendition of services by Physician Group,
irrespective of whether earned by performance, and all Instruments evidencing
the same or arising in connection therewith.
"APPLICABLE LAW" means all applicable provisions of
constitutions, statutes, rules, regulations and orders of all government bodies
and all orders and decrees of all courts, tribunals and arbitrators.
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"BANKRUPTCY CODE" means The Bankruptcy Reform Act of 1978 (Pub.
L. No. 95-598; 11 U.S.C.), as amended or supplemented from time to time, or any
successor statute, and any and all rules and regulations issued or promulgated
in connection therewith.
"CODE" means the California Uniform Commercial Code. Any and all
terms used in this Security Agreement which are defined in the Code shall be
construed and defined in accordance with the meaning and definition ascribed to
such terms under the Code, unless otherwise defined herein.
"COLLATERAL" means any and all of the Accounts and Physician
Group's Books, in each case whether now existing or hereafter acquired or
created, and any Proceeds or products of any of the foregoing, or any portion
thereof, and any and all Accounts, money, or other tangible or intangible
property, resulting from the sale or other disposition of the Accounts, or any
portion thereof or interest therein, and the substitutions, replacements,
additions, accessions, products and Proceeds thereof.
"EXPENSES" means any and all costs or expenses required to be
paid by Physician Group under this Security Agreement which are paid or advanced
by Manager; all costs and expenses of Manager, including its attorneys' fees and
expenses (including attorneys' fees incurred pursuant to proceedings arising
under the Bankruptcy Code), incurred or expended to correct any default or
enforce any provision of this Security Agreement, or in gaining possession of,
maintaining, handling, preserving, storing, shipping, selling, preparing for
sale, or advertising to sell the Collateral, irrespective of whether a sale is
consummated; and all costs and expenses of suit incurred or expended by Manager,
including its attorneys' fees and expenses (including attorneys' fees incurred
pursuant to proceedings arising under the Bankruptcy Code) in enforcing or
defending this Security Agreement, irrespective of whether suit is brought.
"GOVERNMENTAL AUTHORITY" means any federal, state, local or other
governmental department, commission, board, bureau, agency, central bank, court,
tribunal or other instrumentality or authority or subdivision thereof, domestic
or foreign, exercising executive, legislative, judicial, regulatory or
administrative functions of or pertaining to government.
"HEALTH CARE LAW" means any Applicable Law regulating the
acquisition, construction, operation, maintenance or management of a healthcare
practice, facility, provider or payor.
"INSTRUMENTS" means any and all negotiable instruments,
certificated securities and every other writing which evidences a right to the
payment of money, in each case whether now existing or hereafter acquired.
"LIEN" means any mortgage, deed of trust, pledge, security
interest, hypothecation, assignment, deposit arrangement or other preferential
arrangement, charge
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or encumbrance (including, any conditional sale or other title retention
agreement, or finance lease) of any kind.
"PHYSICIAN GROUP'S BOOKS" means any and all presently existing
and hereafter acquired or created books and records of Physician Group,
including all records (including maintenance and warranty records), ledgers,
computer programs, disc or tape files, printouts, runs, and other computer
prepared information indicating, summarizing, or evidencing the Accounts.
"PROCEEDS" means whatever is receivable or received from or upon
the sale, lease, license, collection, use, exchange or other disposition,
whether voluntary or involuntary, of any Collateral or other assets of Physician
Group, including "proceeds" as defined in Section 9306 of the Code, any and all
proceeds of any insurance, indemnity, warranty or guaranty payable to or for the
account of Physician Group from time to time with respect to any of the
Collateral, any and all payments (in any form whatsoever) made or due and
payable to Physician Group from time to time in connection with any requisition,
confiscation, condemnation, seizure or forfeiture of all or any part of the
Collateral by any Governmental Authority (or any person or entity acting under
color of Governmental Authority), any and all other amounts from time to time
paid or payable under or in connection with any of the Collateral or for or on
account of any damage or injury to or conversion of any Collateral by any person
or entity, any and all other tangible or intangible property received upon the
sale or disposition of Collateral, and all proceeds of proceeds.
"SECURED OBLIGATIONS" shall mean any and all debts, liabilities,
obligations, or undertakings owing by Physician Group to Manager arising under,
advanced pursuant to, or evidenced by the Management Agreement and this Security
Agreement, whether direct or indirect, absolute or contingent, matured or
unmatured, due or to become due, voluntary or involuntary, whether now existing
or hereafter arising.
"SECURITY AGREEMENT" shall mean this Security Agreement, any
concurrent or subsequent riders, exhibits or schedules to this Security
Agreement, and any extensions, supplements, amendments, or modifications to or
in connection with this Security Agreement, or to any such riders, exhibits or
schedules.
2. CONSTRUCTION. Unless the context of this Security Agreement
clearly requires otherwise, references to the plural include the singular,
references to the singular include the plural, the part includes the whole,
"including" is not limiting, and "or" has the inclusive meaning represented by
the phrase "and/or." References in this Security Agreement to "determination"
by Manager include reasonable estimates (absent manifest error) by Manager, as
applicable (in the case of quantitative determinations) and reasonable beliefs
(absent manifest error) by Manager, as applicable (in the case of qualitative
determinations). The words "hereof," "herein," "hereby," "hereunder," and
similar terms in this Security Agreement refer to this Security Agreement as a
whole and not to any particular provision of this Security Agreement. Article,
section, subsection, exhibit, and schedule references are to this Security
Agreement unless otherwise specified.
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3. CREATION OF SECURITY INTEREST. Physician Group hereby grants to
Manager a continuing security interest in all presently existing and hereafter
acquired or arising Collateral in order to secure the prompt payment and
performance of all of the Secured Obligations. Physician Group acknowledges and
affirms that such security interest in the Collateral has attached to all
Collateral without further act on the part of Manager or Physician Group.
4. FURTHER ASSURANCES.
4.1 FURTHER ASSURANCES. Physician Group shall execute and
deliver to Manager concurrently with Physician Group's execution of this
Security Agreement, and from time to time at the request of Manager, all
financing statements, continuation financing statements, fixture filings,
security agreements, chattel mortgages, assignments, and all other documents
that Manager may request, in form satisfactory to Manager, to perfect and
maintain perfected Manager's security interests in the Collateral and in order
to consummate fully all of the transactions contemplated by this Security
Agreement and the Management Agreement.
5. REPRESENTATIONS AND WARRANTIES. Physician Group represents and
warrants to Manager that:
5.1 TRADE NAMES AND TRADE STYLES Physician Group presently does
not conduct its business operations under any trade names or trade styles other
than Sierra Primary Care Associates, Sierra Medical Group, Sierra Urgent Care
and Sierra Physical Therapy.
5.2 OWNERSHIP OF COLLATERAL. Physician Group is and shall
continue to be the sole and complete owner of the Collateral, free from any
Lien, other than the Lien granted to Manager hereunder.
5.3 ENFORCEABILITY; PRIORITY OF SECURITY INTEREST. This
Agreement (i) creates a security interest which is enforceable against the
Collateral in which Physician Group now has rights and will create a security
interest which is enforceable against the Collateral in which Physician Group
hereafter acquires rights at the time Physician Group acquires any such rights,
and (ii) Manager has a perfected security interest (to the fullest extent
perfection can be obtained by filing, notification to third parties or
possession) and a first priority security interest in the Collateral in which
Physician Group now has rights, and will have a perfected and first priority
security interest in the Collateral in which Physician Group hereafter acquires
rights at the time Physician Group acquires any such rights, in each case
securing the payment and performance of the Secured Obligations.
5.4 OTHER FINANCING STATEMENTS. Other than financing statements
in favor of Manager, no effective financing statement naming Physician Group as
debtor, assignor, grantor, mortgagor, pledgor or the like and covering all or
any part of the Collateral is on file in any filing or recording office in any
jurisdiction.
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6. COVENANTS. In addition to the covenants of Physician Group set
forth in the Management Agreement which are incorporated herein by this
reference, Physician Group agrees that from the date of this Security Agreement
and thereafter until the indefeasible payment, performance and satisfaction in
full of the Secured Obligations, and all of Physician Group's obligations under
the Management Agreement to Manager have been terminated:
6.1 DEFENSE OF COLLATERAL. Physician Group shall appear in and
defend any action, suit or proceeding which may affect its title to or right or
interest in, or Manager's right or interest in, the Collateral.
6.2 PRESERVATION OF COLLATERAL. Physician Group shall do and
perform all acts that may be necessary and appropriate to maintain, preserve and
protect the Collateral.
6.3 CHANGE IN NAME; ADOPTION OF TRADE NAME OR TRADE STYLE.
Physician Group shall give Manager at least 30 days' prior written notice of any
changes in its name, or of the adoption of any trade name or trade style.
6.4 MAINTENANCE OF RECORDS. Physician Group shall keep
separate, accurate and complete Physician Group's Books, disclosing Manager's
security interest hereunder.
6.5 DISPOSITION OF COLLATERAL. Physician Group shall not
surrender or lose possession of (other than to Manager), sell, lease, rent, or
otherwise dispose of or transfer any of the Collateral or any right or interest
therein.
6.6 LIENS. Physician Group shall keep the Collateral free of
all Liens, other than the Lien granted to Manager hereunder.
7. EVENTS OF DEFAULT. The occurrence of any of the following shall
constitute an event of default ("Event of Default") under this Security
Agreement:
7.1 BREACH OF MANAGEMENT AGREEMENT. Physician Group shall
breach, or be in default of, any of its agreements, covenants and obligations
under the Management Agreement;
7.2 BREACH OF SECURITY AGREEMENT. Physician Group shall breach,
or be in default of, any of its agreements, covenants and obligations under this
Security Agreement; or
7.3 BREACH OF REPRESENTATIONS OR WARRANTIES. Any representation
or warranty made by Physician Group in this Security Agreement shall have been
untrue in any material respect when made.
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8. RIGHTS AND REMEDIES, ETC.
8.1 RIGHTS AND REMEDIES. During the continuance of an Event of
Default, Manager, without notice or demand, may do any one or more of the
following, all of which are authorized by Physician Group:
(a) Make such payments and do such acts as it considers
necessary or reasonable to protect Manager's security interest in the
Collateral. Physician Group agrees to assemble and make available any or all of
the Collateral if Manager so requires. Physician Group authorizes Manager to
enter the premises where the Collateral is located, take and maintain possession
of the Collateral, or any part of it, and to pay, purchase, contest, or
compromise any encumbrance, charge, or lien which, in the opinion of the
Manager, appears to be prior or superior to Manager's security interest, and to
pay all costs and expenses incurred in connection therewith;
(b) Sell the Collateral, at either a public or private
sale, or both, by way of one or more contracts or transactions, for cash or on
terms, in such manner and at such places (including Physician Group's premises)
as is commercially reasonable, and apply any proceeds of any sale or other
disposition of the Collateral in the order provided in Section 9504 of the Code,
including the payment of Expenses. It is not necessary that the Collateral be
present at any such sale;
(c) Without constituting a retention of collateral in
satisfaction of indebtedness as provided for in Section 9505 of the Code, notify
account debtors and other obligors of Physician Group of Manager's security
interests in the Collateral, and proceed to collect the same and apply the net
cash proceeds therefrom to the Secured Obligations;
(d) Manager shall give notice of any disposition of the
Collateral as follows:
(i) Manager shall give Physician Group and each
holder of a security interest in the Collateral who has filed with Manager a
written request for notice, a written notice stating the time and place of a
public sale, or, if the disposition is to be either a private sale or some other
disposition that is not a public sale, the time on or after which the private
sale or other disposition is to be made;
(ii) The notice described in the immediately
preceding paragraph shall be delivered to Physician Group as provided in Section
8.3 of the Management Agreement at least five (5) calendar days before the date
fixed for a sale. Notice to persons other than Physician Group claiming an
interest in the Collateral shall be sent to such addresses as such persons have
furnished to Manager prior to the date of such notice;
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(iii) If the disposition is to be a public sale,
Manager shall also give notice of the time and place of said sale by publishing
a notice at least five (5) calendar days before the date of the sale in a
newspaper of general circulation, if one exists, in the county in which the sale
is to be held;
(e) Manager may, in its own name, or in the name of a
designee or nominee, credit bid and purchase at any public sale;
(f) Physician Group shall pay all Expenses; and
(g) Any portion of the Secured Obligations which remains
unpaid after disposition of the Collateral as provided above shall be paid
immediately by Physician Group. Any excess which exists after disposition of
the Collateral and payment in full of the Secured Obligations shall be returned
promptly, without interest and subject to the rights of third persons, to
Physician Group by Manager.
8.2 FURTHER DOCUMENTATION. Upon the exercise by Manager of any
power, right, privilege, or remedy pursuant to this Security Agreement which
requires any consent, approval, registration, qualification, or authorization of
any Governmental Authority, Physician Group agrees to execute and deliver, or
will cause the execution and delivery of, all applications, certificates,
instruments, assignments, and other documents and papers that Manager or any
purchaser of the Collateral may be required to obtain for such governmental
consent, approval, registration, qualification, or authorization.
8.3 CUMULATIVE REMEDIES; WAIVERS. The rights and remedies of
Manager under this Security Agreement, the Management Agreement, and all other
agreements contemplated hereby and thereby shall be cumulative. Manager shall
have all other rights and remedies not inconsistent herewith as provided under
the Code, by law, or in equity. No exercise by Manager of any one right or
remedy shall be deemed an election of remedies, and no waiver by Manager of any
default on Physician Group's part shall be deemed a continuing waiver of any
further defaults. No delay by Manager shall constitute a waiver, election or
acquiescence with respect to any right or remedy.
9. NOTICES. All notices or demands by any party hereto to the other
party and relating to this Security Agreement shall be made in the manner set
forth in Section 14.6 of the Management Agreement to the following addresses:
If to Physician Group: Sierra Primary Care Medical Group, Inc.
18200 Yorba Linda Boulevard
Yorba Linda, CA 92886
Attn: Jacob Y. Terner, M.D.
Facsimile No: (714) 572-5900
Telephone No: (714) 572-3269
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If to Manager: Sierra Medical Management, Inc.
18200 Yorba Linda Boulevard
Yorba Linda, CA 92886
Attn: Jacob Y. Terner, M.D.
Facsimile No: (714) 572-5900
Telephone No: (714) 572-3269
10. GENERAL PROVISIONS.
10.1 SUCCESSORS AND ASSIGNS. This Security Agreement shall bind
and inure to the benefit of the respective successors and assigns of Physician
Group and Manager; PROVIDED, HOWEVER, that Physician Group may not assign this
Security Agreement nor delegate any of its duties hereunder without Manager's
prior written consent and any prohibited assignment or delegation shall be
absolutely void. No consent by Manager to an assignment by Physician Group
shall release Physician Group from the Secured Obligations. Manager may assign
this Security Agreement and delegate its duties hereunder, if any, from time to
time to its lender or lenders or to its Parent's lender or lenders, without
prior notice to, or the consent of, Physician Group, and Physician Group agrees
to recognize such lender or lenders as Manager's assignee under this Security
Agreement.
10.2 NO PRESUMPTION AGAINST ANY PARTY. Neither this Security
Agreement nor any uncertainty or ambiguity herein shall be construed or resolved
against Manager or Physician Group, whether under any rule of construction or
otherwise. On the contrary, this Security Agreement has been reviewed by each
of the parties and their counsel and shall be construed and interpreted
according to the ordinary meaning of the words used so as to accomplish fairly
the purposes and intentions of all parties hereto.
10.3 AMENDMENTS AND WAIVERS. Any provision of this Security
Agreement or any of the Loan Documents to which Physician Group is a party may
be amended or waived if, but only if, such amendment or waiver is in writing and
is signed by the party asserted to be bound thereby, and then such amendment or
waiver shall be effective only in the specific instance and specific purpose for
which given.
10.4 COUNTERPARTS; INTEGRATION; EFFECTIVENESS. This Security
Agreement may be signed in any number of counterparts, each of which shall be an
original, with the same effect as if the signatures thereto and hereto were upon
the same instrument. This Security Agreement constitutes the entire agreement
and understanding among the parties hereto and supersedes any and all prior
agreements and understandings, oral or written, relating to the subject matter
hereof. This Security Agreement shall become effective when executed by each of
the parties hereto and delivered to Manager.
11. GOVERNING LAW. This Security Agreement shall be deemed to have
been made in the State of California and the validity, construction,
interpretation, and enforcement hereof, and the rights of the parties hereto,
shall be determined under, governed by, and construed in accordance with the
internal laws of the State of California.
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12. NO VIOLATION OF APPLICABLE LAW. To the extent that any lien or
security interest on any Asset(s) granted by Physician Group herein violates any
applicable Health Care Law, the grant of such lien or security interest on such
Asset(s) shall be automatically null and void; provided however, that to the
extent such lien or security interest at any time hereafter no longer violates
any applicable Health Care Law, then such lien or security interest shall
automatically and without any further action attach and become fully effective
at that time (giving effect to any retroactive effect to any change in
applicable law or regulation); and, provided further, that the liens or security
interests on other Asset(s) granted by Physician Group herein that do not
violate any applicable Health Care Law shall remain at all times in full force
and effect.
[Remainder of this page intentionally left blank.]
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IN WITNESS WHEREOF, the parties have executed this Security Agreement
as of the date first set forth above.
SIERRA PRIMARY CARE MEDICAL GROUP, INC.,
a California professional corporation
By: /s/ Gregg DeNicola
-------------------------------------
Title: President
----------------------------------
SIERRA MEDICAL MANAGEMENT, INC.,
a Delaware corporation
By: /s/ Thomas A. Maloof
-------------------------------------
Title: CFO
----------------------------------
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JOINDER AGREEMENT
This JOINDER AGREEMENT, dated as of September 25, 1997 (this "JOINDER
AGREEMENT"), is entered into by and among SIERRA MEDICAL MANAGEMENT, INC., a
Delaware corporation ("SIERRA MANAGEMENT"), SIERRA PRIMARY CARE MEDICAL GROUP,
INC., a California professional corporation ("SIERRA PRIMARY CARE"), Gregg
DeNicola, M.D. ("DENICOLA"), Prospect Medical Holdings, Inc., a Delaware
corporation ("HOLDINGS"), Prospect Medical Systems, Inc., a Delaware corporation
("SYSTEMS"), Prospect Medical Group, Inc., a California professional corporation
("GROUP"), Santa Ana/Tustin Physicians Group, Inc., a California professional
corporation ("SANTA ANA/TUSTIN"), and IMPERIAL BANK, a California banking
corporation ("BANK"), with reference to the following facts:
A. The parties hereto (other than Sierra Management and Sierra
Primary Care) have previously entered into that certain Amended and Restated
Credit Succession Agreement, dated as of July 14, 1997 (the "AGREEMENT").
B. Pursuant to the acquisition of Sierra Primary Care by Group,
Holdings formed Sierra Management as a new wholly-owned subsidiary.
C. Pursuant to the terms of the Agreement, Sierra Management and
Sierra Primary Care are required to execute, among other documents, a joinder
agreement in order to become parties to the Agreement.
NOW THEREFORE, in consideration of the premises and other good and
valuable consideration, the parties hereto hereby agree as follows:
1. JOINDER OF SIERRA MANAGEMENT AND SIERRA PRIMARY CARE.
(a) JOINDER OF SIERRA MANAGEMENT. Pursuant to Section 11(a) of
the Agreement, Sierra Management hereby agrees that it is a Management Company
under the Agreement as if a signatory thereof on the date of its execution, and
Sierra Management shall comply with and be subject to and have the benefit of
all of the terms, conditions, covenants, agreements, obligations, and waivers
set forth therein. Sierra Management hereby agrees that each reference to a
"Management Company" or "Management Companies" in the Agreement shall include
Sierra Management. Sierra Management hereby acknowledges that it has received a
copy of the Agreement and that it has read and understands the terms thereof.
(b) JOINDER OF SIERRA PRIMARY CARE. Pursuant to Section 11(a)
of the Agreement, Sierra Primary Care hereby agrees that it is a Professional
Corporation under the Agreement as if a signatory thereof on the date of its
execution, and Sierra Primary Care shall comply with and be subject to and have
the benefit of all of the terms, conditions, covenants, agreements, obligations,
and waivers set forth therein. Sierra
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Primary Care hereby agrees that each reference to a "Professional Corporation"
or "Professional Corporations" in the Agreement shall include Sierra Management.
Sierra Management hereby acknowledges that it has received a copy of the
Agreement and that it has read and understands the terms thereof.
(c) SCHEDULES. Attached hereto are updated copies of each
Schedule referenced in the Agreement revised to include all information required
to be provided therein with respect to (and only with respect to) Sierra
Management and Sierra Primary Care.
2. EFFECTIVENESS. This Agreement shall become effective upon
receipt by Bank of (i) the original stock certificates evidencing all of the
issued and outstanding capital stock of Sierra Primary Care owned by Group,
together with a stock power with respect thereto, duly executed in blank,
undated, by Group, (ii) a counterpart hereof, duly executed by each of the
parties hereto, and (iii) any other agreement or document required to be
delivered in accordance with the terms and conditions of the Agreement.
3. GENERAL PROVISIONS.
(a) REPRESENTATIONS AND WARRANTIES. Each PC Shareholder and
each Professional Corporation hereby confirms that each representation and
warranty made by it under the Agreement is true and correct in all material
respects as of the date hereof and that no Succession Event has occurred or is
continuing under the Agreement. Each PC Shareholder and each Professional
Corporation hereby represents and warrants that as of the date hereof there are
no claims or offsets against, or defenses or counterclaims to, their respective
obligations under the Agreement.
(b) LIMITED EFFECT. Except as supplemented hereby, the Agreement
shall continue to be, and shall remain, in full force and effect. This Joinder
Agreement shall not be deemed (i) to be a waiver of, or consent to, or a
modification or amendment of, any other term or condition of the Agreement or
(ii) to prejudice any right or rights which Bank may now have or may have in the
future under or in connection with the Agreement or any of the instruments or
agreements referred to therein, as the same may be amended or modified from time
to time.
(c) COUNTERPARTS. This Joinder Agreement may be executed by one
or more of the parties hereto in any number of separate counterparts and all of
said counterparts taken together shall be deemed to constitute one and the same
instrument.
(d) DEFINITIONS. All initially capitalized terms used and not
defined herein shall have the meanings given thereto in the Agreement.
(e) GOVERNING LAW. THIS JOINDER AGREEMENT SHALL BE GOVERNED BY,
AND CONSTRUED AND INTERPRETED IN ACCORDANCE
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WITH, THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT REFERENCE TO THE CONFLICTS OR
CHOICE OF LAW PRINCIPLES THEREOF.
IN WITNESS WHEREOF the undersigned hereby causes this Joinder
Agreement to be executed and delivered as of the date first above written.
/s/ Gregg DeNicola
----------------------------------------
GREGG DENICOLA
SANTA ANA/TUSTIN PHYSICIANS GROUP, INC.
By: /s/ Gregg DeNicola
-------------------------------------
Title: President
----------------------------------
PROSPECT MEDICAL HOLDINGS, INC.
By: /s/ Thomas A. Maloof
-------------------------------------
Title: CFO
----------------------------------
PROSPECT MEDICAL SYSTEMS, INC.
By: /s/ Thomas A. Maloof
-------------------------------------
Title: CFO
----------------------------------
PROSPECT MEDICAL GROUP, INC.
By: /s/ Gregg DeNicola
-------------------------------------
Title: President
----------------------------------
SIERRA MEDICAL MANAGEMENT, INC.
By: /s/ Thomas A. Maloof
-------------------------------------
Title: CFO
----------------------------------
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SIERRA PRIMARY CARE MEDICAL GROUP, INC.
By: /s/ Gregg DeNicola
-------------------------------------
Title: President
----------------------------------
IMPERIAL BANK
By: /s/ Mark W. Campbell
-------------------------------------
Title: SVP
----------------------------------
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SUBORDINATION AND NOTE CANCELLATION AGREEMENT
This SUBORDINATION AND NOTE CANCELLATION AGREEMENT (this "AGREEMENT"),
dated as of September 25, 1997, is entered into by and among SINNADURAI E.
MOORTHY, M.D. ("DR. MOORTHY"), KARUNYAN ARULANANTHAM, M.D. ("DR. ARULANANTHAM")
(Dr. Moorthy and Dr. Arulanantham are sometimes collectively referred to herein
as "SUBORDINATE CREDITORS" and individually as a "SUBORDINATE CREDITOR"),
PROSPECT MEDICAL HOLDINGS, INC., a Delaware corporation ("BORROWER"), PROSPECT
MEDICAL SYSTEMS, INC., a Delaware corporation ("MANAGER"), PROSPECT MEDICAL
GROUP, INC., a California professional corporation ("PURCHASER"), and IMPERIAL
BANK, a California banking corporation ("SENIOR CREDITOR"), with reference to
the following facts:
R E C I T A L S
A. Subordinate Creditors, The Arulanantham Charitable Remainder Trust
("TRUST"), Purchaser, and Sierra Primary Care Medical Group, Inc., a California
professional corporation ("COMPANY"), are party to that certain Agreement for
the Purchase and Sale of Stock of Sierra Primary Care Medical Group, Inc., dated
as of September 23, 1997 (the "STOCK PURCHASE AGREEMENT"), pursuant to which
Purchaser is purchasing one hundred percent (100%) of the stock of Company from
Subordinate Creditors and Trust.
B. Pursuant to the terms of the Stock Purchase Agreement, Purchaser is
concurrently herewith executing and delivering to each Subordinate Creditor a
Contingent Promissory Note, dated as of September 25, 1997 (each as it may have
been renewed, extended or rearranged, a "SUBORDINATE NOTE" and collectively, the
"SUBORDINATE NOTES"), each in the original principal sum of One Million One
Hundred Twenty-Five Thousand Dollars ($1,125,000). In addition, pursuant to the
terms of the Stock Purchase Agreement, Borrower is concurrently herewith
executing and delivering to each Subordinate Creditor a Subordinated Guaranty,
dated as of September 25, 1997 (each, a "SUBORDINATE GUARANTY" and collectively,
the "SUBORDINATE GUARANTEES"), in order to guaranty the payment of the
Subordinate Notes. All liens, security interests and assignments now or
hereafter securing payment or performance of the Subordinate Notes and/or the
Subordinate Guarantees are herein called "SUBORDINATE LIENS."
C. Borrower has previously executed and delivered to Senior Creditor that
certain Secured Revolving Note, dated July 3, 1997 (as it may have been renewed,
extended and rearranged, the "NOTE"), in the original principal sum of Ten
Million Dollars ($10,000,000). The Note has been issued pursuant to that
certain Revolving Credit Agreement of even date with the Note (as it may have
been amended, supplemented or restated, the "LOAN AGREEMENT") between Borrower
and Senior Creditor. All liens, security interests and assignments now or
hereafter securing payment or performance of the Note and/or the Loan Agreement
are herein called "SENIOR LIENS." The Senior Liens include,
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without limitation, the security instruments described on EXHIBIT A, attached
hereto and incorporated herein.
D. Manager has previously executed and delivered to Senior Creditor that
certain Continuing Guaranty, dated as of even date with the Loan Agreement and
the Note ("MANAGER GUARANTY"), pursuant to which Manager has guaranteed the
payment and performance of Borrower's obligations owing to Senior Creditor under
the Note and the Loan Agreement.
E. Manager and Purchaser have previously executed and delivered that
certain Management Services Agreement, dated as of June 4, 1996, as amended (the
"MANAGEMENT AGREEMENT"), pursuant to which Manager provides management services
to Purchaser in consideration of certain management fees, all as more
particularly set forth in the Management Agreement. In order to secure
Purchaser's obligations owing to Manager, Manager and Purchaser have previously
executed and delivered that certain Security Agreement, dated as of July 3,
1997, as amended by that certain Amendment Number One, dated July 14, 1997 (the
"SECURITY AGREEMENT"), pursuant to which Purchaser has granted to Manager a
first priority security interest and lien upon certain assets of Company. Both
the Management Agreement and the Security Agreement have been collaterally
assigned by Manager to Senior Creditor, pursuant to a Collateral Assignment of
Transaction Documents, dated as of July 3, 1997, between Manager and Senior
Creditor, in order to secure Manager's obligations owing to Senior Creditor
under the Manager Guaranty.
F. Borrower, Manager and Purchaser are part of a group of companies under
common control which all benefit from the loans made by Senior Creditor under
the Loan Agreement and evidenced by the Note. Borrower has requested that
Senior Creditor make a loan under the Loan Agreement to Borrower, which Borrower
shall relend to Manager and Manager shall relend to Purchaser such that
Purchaser will be able to have funds necessary to pay the cash consideration to
Subordinate Creditors and Trust pursuant to the terms of the Stock Purchase
Agreement to acquire the stock of Company. As a condition to its making such
loan to Borrower, Senior Creditor has required that Borrower's obligations under
the Subordinate Guarantees and Purchaser's obligations under the Subordinate
Notes and the Stock Purchase Agreement, and the Subordinate Liens securing any
of the same, be subordinated to Borrower's indebtedness under the Loan Agreement
and the Note, the Senior Liens securing same, and Purchaser's obligations under
the Management Agreement and the Security Agreement.
G. The parties hereto now hereby agree to subordinate the lien position,
payment and performance of the Subordinate Notes, the Stock Purchase Agreement,
the Subordinate Guarantees and the Subordinate Liens to the payment and
performance of the Management Agreement, the Security Agreement, the Note, the
Loan Agreement and the Senior Liens, all as set forth in the succeeding
provisions of this Agreement (which shall control over any conflicting or
inconsistent recitals above).
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<PAGE>
A G R E E M E N T S
In consideration of the premises and the mutual agreements herein set
forth, Borrower, Manager, Purchaser, Subordinate Creditors and Senior Creditor
hereby agree as follows:
1. All initially capitalized terms used but not defined in this Agreement
shall have the meanings given to such terms in the Loan Agreement. In addition,
as used in this Agreement, the following terms shall have the respective
meanings indicated:
"SENIOR DEBT" shall mean all Debt now existing or hereafter created of
Borrower or Purchaser to Senior Creditor, whether direct or indirect, primary or
secondary, joint or several, fixed or contingent and whether originally payable
to Senior Creditor or to Manager or any other third Person and subsequently
acquired by or assigned to Senior Creditor, and whether evidenced by note,
application for or agreement for reimbursement of advance under letter of
credit, open account, overdraft, indorsement, surety agreement, guaranty or
otherwise, including, without limitation, all indebtedness evidenced by the Note
and all renewals, extensions, rearrangements, refundings and modifications of
the Note, and all Debt arising under or incurred pursuant to the Loan Agreement
and any other documents executed or delivered in connection therewith, and all
Debt arising under or incurred pursuant to the Management Agreement or the
Security Agreement. The Senior Debt shall include amounts accruing subsequent
to the filing of any bankruptcy, receivership, insolvency or like petition.
Without limiting the generality of the foregoing, Senior Debt shall include all
obligations for fees, to indemnify, to reimburse for expenses and to reimburse
for advances (whether for the payment of taxes, insurance premiums, the
preservation or protection of property or the title thereto or for any other
reason).
"SUBORDINATED DEBT" shall mean all Debt now existing or hereafter
created of Borrower or Purchaser to Subordinate Creditors, whether direct or
indirect, primary or secondary, joint or several, fixed or contingent and
whether originally payable to Subordinate Creditors or to a third Person and
subsequently acquired by Subordinate Creditors, and whether evidenced by note,
application for or agreement for reimbursement of advance under letter of
credit, open account, overdraft, indorsement, surety agreement, guaranty or
otherwise, including, without limitation, all Debt evidenced by the Subordinate
Notes and all renewals, extensions, rearrangements, refundings and modifications
of the Subordinate Notes, and all Debt arising under or incurred pursuant to the
Subordinate Guarantees and any other documents executed or delivered in
connection therewith.
2. (a) Unless and until all Senior Debt shall have been fully paid and
satisfied and the obligation of Senior Creditor to make any further loans or
advances to Borrower shall have ceased and terminated, Subordinate Creditors
will not, except as otherwise provided in SECTION 2(b) hereof, (i) ask, demand,
sue for, take or receive, or retain, from Borrower, Purchaser or any other
Person, by setoff or in any other manner, payment of all or any part of the
Subordinated Debt, (ii) forgive, cancel or discharge, or permit to be converted
into any evidence of equity or ownership, any of the Subordinated Debt, (iii)
ask,
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demand or receive any security for the Subordinated Debt in addition to the
security described on EXHIBIT B attached hereto and incorporated herein
("PERMITTED SUBORDINATED LIENS"), (iv) amend the Subordinate Notes, the
Subordinate Guarantees, or any other document existing in connection with the
Subordinated Debt, or (v) declare the Subordinated Debt due and payable by
reason of any default or for any other reason, or bring or join with any
creditor in bringing any proceeding against Borrower or Purchaser under any
bankruptcy, reorganization, readjustment or arrangement of debt, suspension of
payments, receivership, liquidation or insolvency or similar law or statute now
or hereafter in effect ("PROCEEDINGS"). Subordinate Creditors hereby direct
Borrower and Purchaser to make, and Borrower and Purchaser hereby agree to make,
such prior payment of the Senior Debt to Senior Creditor.
(b) Notwithstanding the foregoing, Purchaser may make regularly
scheduled payments (but no prepayments) of interest and principal due on the
Subordinate Notes, PROVIDED that on the date of the proposed payment, no Event
of Default has occurred and is continuing or will result from the making of such
payment. Upon the occurrence of an Event of Default and upon written notice
thereof given to Borrower, Purchaser and Subordinate Creditors by Senior
Creditor or its representative, no further payments shall be made by Purchaser
with respect to the principal of or interest on the Subordinate Notes, and the
Subordinate Notes shall thereupon be immediately and automatically cancelled,
and all unpaid obligations thereunder shall thereupon be immediately and
automatically extinguished, without further action required on the part of
Senior Creditor, Borrower, Purchaser, Subordinate Creditors or any other Person.
SUBORDINATE CREDITORS HEREBY ACKNOWLEDGE THAT THE TERMS OF THIS SECTION 2(b)
FORM A MATERIAL PART OF THE CONSIDERATION FOR SENIOR CREDITOR'S AGREEMENT TO
MAKE THE LOAN DESCRIBED IN RECITAL F HEREINABOVE WHICH ULTIMATELY PROVIDED THE
FUNDS TO PURCHASER FOR PAYMENT TO SUBORDINATE CREDITORS OF THE PURCHASE PRICE
UNDER THE STOCK PURCHASE AGREEMENT.
SEM KA
Initial here: ------------- -------------
Dr. Moorthy Dr. Arulanantham
3. (a) Upon any distribution of the assets of Borrower and/or Purchaser
in connection with any dissolution, winding up, liquidation or reorganization of
Borrower and/or Purchaser (whether in Proceedings or upon an assignment for the
benefit of creditors or any other marshalling of the assets and liabilities of
Borrower and/or Purchaser, or otherwise), Senior Creditor shall first be
entitled to receive payment in full of all Senior Debt before Subordinate
Creditors shall be entitled to receive any payment in respect of the
Subordinated Debt. Upon any such dissolution, winding up, liquidation or
reorganization, any payment or distribution of assets of Borrower and/or
Purchaser of any kind or character, whether in cash, property or securities, to
which Subordinate Creditors would be entitled except for the provisions of this
Agreement (including any such payment or distribution which may be payable or
deliverable by virtue of the provisions of any securities which are subordinated
as junior in right of payment to the Subordinated Debt)
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<PAGE>
shall be made by the liquidating trustee or agent or other Persons making such
payment or distribution (whether a trustee in bankruptcy, a receiver or
liquidating trustee or otherwise) (a "PAYING PARTY"), or if received by either
Subordinate Creditor, by such Subordinate Creditor, directly to Senior Creditor,
to the extent necessary to pay in full the Senior Debt remaining unpaid, after
giving effect to any concurrent payment or distribution to Senior Creditor.
Subordinate Creditors hereby authorize and direct each Paying Party to pay over
to Senior Creditor upon demand by Senior Creditor, all such payments or
distributions without the necessity of any inquiry as to the status or balance
of the Senior Debt, and without further notice to or consent of Subordinate
Creditors. In furtherance of the foregoing, but not by way of limitation
thereof, in the event Borrower and/or Purchaser is subject to any Proceeding,
with the result that Borrower and/or Purchaser is excused from the obligation to
pay all or part of the interest otherwise payable in respect of the Senior Debt
during the period subsequent to the commencement of any such Proceeding,
Subordinate Creditors agree that all or such part of such interest, as the case
may be, shall be payable out of, and to that extent diminish and be at the
expense of, reorganization dividends or distributions in respect of the
Subordinated Debt.
(b) Subordinate Creditors hereby irrevocably authorize and empower
Senior Creditor to demand, sue for, collect and receive every such payment or
distribution and give acquittance therefor, to execute, sign, endorse, transfer
and deliver any and all receipts and instruments, and to file claims and take
such other proceedings, all in the name of Subordinate Creditors, or otherwise,
as Senior Creditor may deem necessary or advisable for the enforcement of this
Agreement, but Senior Creditor has no obligation to do so. Each Subordinate
Creditor hereby (i) agrees duly and promptly to take such action as may be
required by Senior Creditor to collect the Subordinated Debt for the account of
Senior Creditor and/or to file appropriate proofs of claim in respect of the
Subordinated Debt, (ii) authorizes and empowers Senior Creditor to vote the full
amount of the Subordinated Debt in any bankruptcy, reorganization or similar
proceeding affecting Borrower and/or Purchaser and in any meeting of creditors
of Borrower and/or Purchaser, (iii) agrees to execute and deliver to Senior
Creditor or its representatives on demand such powers of attorney, proofs of
claim and other instruments as may be requested by Senior Creditor or its
representatives in order to enable Senior Creditor to enforce any and all claims
upon or with respect to the Subordinated Debt, to collect and receive any and
all such payments or distributions which may be payable or deliverable at any
time upon or with respect to the Subordinated Debt, and to vote the full amount
of the Subordinated Debt in any proceeding or meeting referred to in clause (ii)
of this subparagraph (b).
(c) In the event any payment or distribution of assets of Borrower
and/or Purchaser of any kind or character, whether in cash, property or
securities, and whether or not pursuant to any dissolution, winding up,
liquidation or reorganization, not permitted by or in accordance with the
provisions of this Agreement shall be received by either Subordinate Creditor,
such payment or distribution to such Subordinate Creditor shall not be
commingled with other funds and shall be held in trust for the benefit of, and
shall be paid over or delivered to, Senior Creditor, or to its representative,
in precisely the form received (except for the endorsement or assignment of such
Subordinate Creditor where
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<PAGE>
necessary). In the event of any failure by such Subordinate Creditor to make
any such endorsement or assignment, Senior Creditor is hereby irrevocably
authorized to make same.
(d) Notwithstanding the terms and provisions of this Agreement,
Subordinate Creditors shall not be entitled to be subrogated to any of the
rights of Senior Creditor against Borrower, Purchaser or any other Person or any
Senior Liens or other collateral security or rights of offset held by Senior
Creditor for the payment of the Senior Debt, nor shall Subordinate Creditors
have any right of indemnity, reimbursement or contribution against Borrower,
Purchaser or any other Person for any payment of the Senior Debt, and
Subordinate Creditors hereby expressly waive each and every such right of
subrogation, indemnity, reimbursement and contribution.
(e) The provisions of this Agreement are and are intended solely for
the purpose of defining the relative rights of Subordinate Creditors and Senior
Creditor, and are solely for the benefit of Senior Creditor and may not be
relied upon or enforced by any party other than Senior Creditor, and nothing
contained in this Agreement is intended to or shall impair the obligation of
Borrower and/or Purchaser, which is unconditional and absolute, to pay to
Subordinate Creditors the principal of and interest on the Subordinated Debt as
and when the same shall become due and payable in accordance with its terms
(except as otherwise provided in Section 2(b) hereof), or to affect the relative
rights of Subordinate Creditors and creditors of Borrower and Purchaser other
than Senior Creditor.
(f) Senior Creditor may, at any time and from time to time, without
the consent of or notice to Subordinate Creditors, and without impairing or
releasing the obligations of Subordinate Creditors hereunder (i) change the
manner, place or terms of payment or change or extend the time of payment of, or
renew or alter, the Senior Debt or the security therefor, or otherwise amend in
any manner the Management Agreement, the Note, the Loan Agreement or any
document executed in connection therewith; (ii) exercise or refrain from
exercising any rights against Borrower, Purchaser and others; (iii) apply any
sums by whomsoever paid or however realized to the Senior Debt; (iv) sell,
exchange, release, surrender, realize upon or otherwise deal with in any manner
and in any order any property whatsoever and by whomsoever at any time pledged
or mortgaged to secure, or howsoever securing, any Senior Debt; (v) release
anyone liable in any manner for the payment or collection of any Senior Debt;
and (vi) settle or compromise all or any part of the Senior Debt, and
subordinate the payment of any part of the Senior Debt to the payment of any
other indebtedness (including any other part of the Senior Debt). No
invalidity, irregularity or unenforceability of all or any part of the Senior
Debt or of any of the Senior Liens shall affect, impair or be a defense to this
Agreement.
4. Subordinate Creditors jointly and severally represent and warrant that
no liens, security interests or assignments exist to secure any Subordinated
Debt other than the Permitted Subordinated Liens, and agree that no further
liens, security interests or assignments will arise or will be taken in the
future to secure any Subordinated Debt. Without limiting the foregoing,
Subordinate Creditors hereby agree (a) that Subordinate Creditors will not
enforce the Subordinate Liens without the prior written consent of Senior
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<PAGE>
Creditor and (b) that the Subordinate Liens, to the extent enforceable, will be
enforceable by Senior Creditor. All amounts, whether in the form of cash,
proceeds, checks, drafts, orders or other instruments for the payment of money,
recovered with respect to any property of Borrower subject to the Subordinate
Liens by the enforcement of the Subordinate Liens shall immediately upon receipt
thereof by either Subordinate Creditor be paid over and delivered in the form
received, but with any necessary endorsements or instruments required for
payment to Senior Creditor, and, until so delivered shall not be commingled with
any other funds or property but shall be held by such Subordinate Creditor upon
an express trust for the benefit of Senior Creditor.
5. Subordinate Creditors do hereby expressly subordinate and make second,
junior and inferior any and all liens, rights, powers, titles and interests of
Subordinate Creditors under, pursuant to or by virtue of the Subordinate Liens
to all liens, rights, titles and interests of Senior Creditor under, pursuant to
or by virtue of the Senior Liens, and Subordinate Creditors agree that all
liens, rights, titles and interests of the Senior Liens shall be unconditionally
first, prior and superior to any and all liens, rights, powers, titles and
interests of Subordinate Creditors under, pursuant to or by virtue of the
Subordinate Liens. Subordinate Creditors further agree that any and all liens,
rights, titles and interests of Subordinate Creditors under, pursuant to or by
virtue of the Subordinate Liens shall be and remain expressly subject and
subordinate to any renewal, extension, refinancing, consolidation, modification
or supplement of the liens, rights, titles and interests of the Senior Liens, as
well as any and all increases thereof.
6. Subordinate Creditors, their successors or assigns or any other legal
holder of the Subordinated Debt shall not acquire by subrogation, contract or
otherwise any lien upon or other estate, right or interest in any property
(including but not limited to any which may arise in respect to real estate
taxes, assessments or other governmental charges) which is or may be prior in
right to the Senior Liens or any renewal, extension, refinancing, consolidation,
modification or supplement thereof.
7. Subordinate Creditors, their successors or assigns or any other legal
holder of the Subordinated Debt hereby assign and release to the legal holder of
the Senior Debt:
(i) all of their right, title, interest or claim, if any, in and to
the proceeds of all policies of insurance covering any property
for application upon the indebtedness secured by or other
disposition thereof in accordance with the provisions of the
Senior Liens;
(ii) all of their right, title and interest or claim, if any, in and
to all awards or other compensation made for any taking of any
part of any property covered by the Senior Liens to be applied
upon the indebtedness secured by or disposed of in accordance
with the provisions of the Senior Liens.
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<PAGE>
In the event that following any such application and disposition of the
insurance proceeds and condemnation award and other compensation, any balance
remains, then, except as Borrower and Subordinate Creditors may otherwise agree,
such excess shall be made payable to the joint order of Subordinate Creditors
and Borrower or their successors or assigns. If the legal holder of the Senior
Liens shall at any time release to Borrower any such insurance proceeds or
condemnation award for the purpose of restoration, such release shall not be
deemed to be an additional advance under the Senior Liens nor shall it otherwise
be deemed to be in violation of any restriction of this instrument upon the
amount permitted to be secured by Senior Liens and to which the Subordinate
Liens are subordinate.
8. The Subordinate Liens shall be and the same are hereby are and shall
continue subject and subordinate to any and all leases upon all or any part of
any property covered by the Senior Liens and to which the Senior Liens shall now
be or shall hereafter have been made subject and subordinate.
9. Subordinate Creditors represent to Senior Creditor that the
Subordinated Debt is in good standing and in full force and effect and no
breaches or defaults exist thereunder which have not been cured or waived, that
all accrued interest on the Subordinate Notes has been paid in full through
September 25, 1997 and that the aggregate outstanding principal balance of the
Subordinate Notes on this date is $2,250,000.
10. This Agreement extends to and covers all amounts due on the Senior
Debt both before and after any filing of any Proceeding by or against Borrower
or Purchaser, and Senior Creditor shall be entitled to amounts accruing on the
Senior Debt from the date of filing of said Proceeding to the date of full and
final payment of the Senior Debt.
11. No part of the Subordinated Debt or any instrument evidencing or
securing the same has been heretofore transferred or assigned, and Subordinate
Creditors will not transfer or assign any part of the Subordinated Debt nor any
instrument evidencing the same while the Senior Debt remains unpaid.
Subordinate Creditors shall promptly deliver to Senior Creditor any instrument
evidencing the Subordinated Debt, including without limitation, the Subordinate
Notes and the Subordinate Guarantees for Senior Creditor to hold for the term of
this Agreement.
12. In the event of a breach by any party hereto of any of the provisions
of this Agreement, or in the event any representation or warranty contained
herein or furnished to Senior Creditor by any party hereto shall prove to have
been false when made, Senior Creditor shall have all rights provided to it under
law or equity, including without limitation the right to sue the breaching party
or parties to recover damages suffered by Senior Creditor as a result of such
breach, and the right to obtain injunctive relief.
13. Subordinate Creditors shall give, execute and deliver any notice,
statement, instrument, document, agreement or other papers, and shall permit
Senior Creditor, upon request, to make any notation or endorsement upon any
promissory note or other instrument or documents evidencing or securing the
Subordinated Debt, that may be
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<PAGE>
necessary or desirable, or that Senior Creditor any reasonably request, in order
to create, preserve or validate the rights of Senior Creditor hereunder, to
enable Senior Creditor to exercise or enforce its rights hereunder, or otherwise
to effect the purposes of this Agreement.
14. This Agreement is a continuing one, and all Senior Debt to which it
applies or may apply under the terms hereof shall conclusively be presumed to
have been created in reliance hereon.
15. Borrower hereby agrees to pay upon demand all attorneys' fees and
expenses reasonably incurred by Senior Creditor in connection with the
enforcement of its rights under this Agreement.
16. Subordinate Creditors and Borrower agree that, if at any time all or
any part of any payment previously applied by Senior Creditor to the Senior Debt
is or must be returned by Senior Creditor--or recovered from Senior
Creditor--for any reason (including the order of any bankruptcy court), this
Agreement shall automatically be reinstated to the same effect, as if the prior
application had not been made, and, in addition, Borrower hereby agrees to
indemnify Senior Creditor against, and to save and hold Senior Creditor harmless
from any required return by Senior Creditor--or recovery from Senior
Creditor--of any such payments because of its being deemed preferential under
applicable bankruptcy, receivership or insolvency laws, or for any other reason.
17. Each Subordinate Creditor acknowledges that he has received a copy and
is familiar with the terms of and conditions of the Note, the Loan Agreement,
the Management Agreement and the other Loan Documents, and that each Subordinate
Creditor approves all such terms and conditions and consents to the execution
and delivery thereof and of this Agreement by Borrower and Purchaser, and to the
performance of each thereof by Borrower and Purchaser.
18. All notices, requests and other communications to any party hereunder
shall be in writing (including facsimile transmission or similar writing) and
shall be given to such party at its address or facsimile number set forth below
or such other address or facsimile number as such party may hereafter specify by
notice to the other party in accordance with this Section 18. Each such notice,
request or other communication shall be deemed given on the second business day
after mailing; PROVIDED that actual notice, however and from whomever given or
received, shall always be effective on receipt.
If to Dr. Moorthy: 44725 10th Street West, Suite 250
Lancaster, CA 93534
If to Dr. Arulanantham: 1675 Staffordshire Drive
Lancaster, CA 93534
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If to Borrower, Manager or
Purchaser: c/o Prospect Medical Holdings, Inc.
18200 Yorba Linda Boulevard
Yorba Linda, CA 92886
Attn: Jacob Y. Terner, M.D.
Telephone: (310) 202-4774
Facsimile: (310) 204-6334
If to Senior
Creditor: 201 N. Figueroa Street
Los Angeles, CA 90012
Attn: Mark W. Campbell
Telephone: (213) 484-3738
Facsimile: (213) 484-3721
19. This Agreement shall not be changed orally but shall be changed only
by agreement in writing signed by Subordinate Creditors and Senior Creditor
(without any necessity for notice to or consent by Borrower or Purchaser, which
are expressly WAIVED by Borrower and Purchaser). No course of dealing between
the parties, no usage of trade and no parole or extrinsic evidence of any nature
shall be used to supplement or modify any of the terms or provisions of this
Agreement.
20. This Agreement may be signed in any number of counterparts, each of
which shall be an original, with the same effect as if the signatures thereto
and hereto were upon the same instrument. This Agreement constitutes the entire
agreement and understanding among the parties hereto and supersedes any and all
prior agreements and understandings, oral or written, relating to the subject
matter hereof and thereof.
21. The provisions of this Agreement are severable. The invalidity, in
whole or in part, of any provision of this Agreement shall not affect the
validity or enforceability of any other of its provisions. If one or more
provisions hereof shall be declared invalid or unenforceable, the remaining
provisions shall remain in full force and effect and shall be construed in the
broadest possible manner to effectuate the purposes hereof.
22. This Agreement shall be deemed to have been made in the State of
California and the validity, construction, interpretation, and enforcement
hereof, and the rights of the parties hereto, shall be determined under,
governed by, and construed in accordance with the internal laws of the State of
California, without regard to principles of conflicts of law.
23. (a) Each controversy, dispute or claim between the parties arising
out of or relating to this Agreement, which controversy, dispute or claim is not
settled in writing within thirty (30) days after the "CLAIM DATE" (defined as
the date on which a party subject to this Agreement gives written notice to all
other parties that a controversy, dispute or claim exists), will be settled by a
reference proceeding in California in accordance with the provisions of Section
638 ET SEQ. of the California Code of Civil Procedure, or their
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<PAGE>
successor section ("CCP"), which shall constitute the exclusive remedy for the
settlement of any controversy, dispute or claim concerning this Agreement,
including whether such controversy, dispute or claim is subject to the reference
proceeding and except as set forth above, the parties waive their rights to
initiate any legal proceedings against each other in any court or jurisdiction
other than Los Angeles County (the "COURT"). The referee shall be a retired
Judge of the Court selected by mutual agreement of the parties, and if they
cannot so agree within forty-five (45) days after the Claim Date, the referee
shall be promptly selected by the Presiding Judge of the Court (or his or her
representative). The referee shall be appointed to sit as a temporary judge,
with all of the powers for a temporary judge, as authorized by law, and upon
selection should take and subscribe to the oath of office as provided for in
Rule 244 of the California Rules of Court (or any subsequently enacted Rule).
Each party shall have one peremptory challenge pursuant to CCP Section 170.6.
The referee shall (i) be requested to set the matter for hearing within sixty
(60) days after the Claim Date and (ii) try any and all issues of law or fact
and report a statement of decision upon them, if possible, within ninety (90)
days of the Claim Date. Any decision rendered by the referee will be final,
binding and conclusive and judgment shall be entered pursuant to CCP Section 644
in any court in the State of California having jurisdiction. Any party may
apply for a reference proceeding at any time after thirty (30) days following
notice to any other party of the nature of the controversy, dispute or claim, by
filing a petition for a hearing and/or trial. All discovery permitted by this
Agreement shall be completed no later than fifteen (15) days before the first
hearing date established by the referee. The referee may extend such period in
the event of a party's refusal to provide requested discovery for any reason
whatsoever, including, without limitation, legal objections raised to such
discovery or unavailability of a witness due to absence or illness. No party
shall be entitled to "priority" in conducting discovery. Depositions may be
taken by either party upon seven (7) days written notice, and request for
production or inspection of documents shall be responded to within ten (10) days
after service. All disputes relating to discovery which cannot be resolved by
the parties shall be submitted to the referee whose decision shall be final and
binding upon the parties. Pending appointment of the referee as provided
herein, the Superior Court is empowered to issue temporary and/or provisional
remedies, as appropriate.
(b) Except as expressly set forth in this Agreement, the referee
shall determine the manner in which the reference proceeding is conducted
including the time and place of all hearings, the order of presentation of
evidence, and all other questions that arise with respect to the course of the
reference proceeding. All proceedings and hearings conducted before the
referee, except for trial, shall be conducted without a court reporter except
that when any party so requests, a court reporter will be used at any hearing
conducted before the referee. The party making such a request shall have the
obligation to arrange for and pay for the court reporter. The costs of the
court reporter at the trial shall be borne equally by the parties.
(c) The referee shall be required to determine all issues in
accordance with existing case law and the statutory laws of the State of
California. The rules of evidence applicable to proceedings at law in the State
of California will be applicable to the
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reference proceeding. The referee shall be empowered to enter equitable as well
as legal relief, to provide all temporary and/or provisional remedies and to
enter equitable orders that will be binding upon the parties. The referee shall
issue a single judgment at the close of the reference proceeding which shall
dispose of all of the claims of the parties that are the subject of the
reference. The parties hereto expressly reserve the right to contest or appeal
from the final judgment or any appealable order or appealable judgment entered
by the referee. The parties hereto expressly reserve the right to findings of
fact, conclusions of laws, a written statement of decision, and the right to
move for a new trial or a different judgment, which new trial, if granted, is
also to be a reference proceeding under this provision.
(d) In the event that the enabling legislation which provides for
appointment of a referee is repealed (and no successor statute is enacted), any
dispute between the parties that would otherwise be determined by the reference
procedure herein described will be resolved and determined by arbitration. The
arbitration will be conducted by a retired judge of the Court, in accordance
with the California Arbitration Act, Section 1280 through Section 1294.2 of the
CCP as amended from time to time. The limitations with respect to discovery as
set forth hereinabove shall apply to any such arbitration proceeding.
[Remainder of this page intentionally left blank]
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IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Agreement as of the date set forth in the first paragraph hereof.
/s/ Sinnadurai E. Moorthy, M.D.
Subordinate Creditors: ----------------------------------------------
SINNADURAI E. MOORTHY, M.D.
/s/ Karunyan Arulanantham, M.D.
----------------------------------------------
KARUNYAN ARULANANTHAM, M.D.
Borrower: PROSPECT MEDICAL HOLDINGS, INC.,
a Delaware corporation
By /s/ Gregg DeNicola
-----------------------------------------
Title President
-----------------------------------------
Manager: PROSPECT MEDICAL SYSTEMS, INC.,
a Delaware corporation
By /s/ Gregg DeNicola
-----------------------------------------
Title President
-----------------------------------------
Purchaser: PROSPECT MEDICAL GROUP, INC.,
a California professional corporation
By /s/ Gregg DeNicola
-----------------------------------------
Title President
-----------------------------------------
Senior Creditor: IMPERIAL BANK,
a California banking corporation
By /s/ Mark W. Campbell
-----------------------------------------
Title SVP
-----------------------------------------
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SUBORDINATION AGREEMENT
This SUBORDINATION AGREEMENT (this "AGREEMENT"), dated as of September 25,
1997, is entered into by and among JAYARATNAM JAYAKUMAR, an individual
("SUBORDINATE CREDITOR"), PROSPECT MEDICAL HOLDINGS, INC., a Delaware
corporation ("BORROWER"), and IMPERIAL BANK, a California banking corporation
("SENIOR CREDITOR"), with reference to the following facts:
R E C I T A L S
A. Borrower, Sierra Medical Management Inc., a Delaware corporation,
Sinnadurai E. Moorthy, M.D., Karunyan Arulanantham, and Subordinate Creditor,
are concurrently herewith entering into that certain Agreement and Plan of
Reorganization, dated as of September 23, 1997 (the "REORGANIZATION AGREEMENT").
B. Pursuant to the terms of the Reorganization Agreement, Borrower is
concurrently herewith executing and delivering to Subordinate Creditor a
Subordinated Promissory Note, dated as of even date herewith, 1997 (as it may
have been renewed, extended or rearranged, "SUBORDINATE NOTE"), in the original
principal sum of Two Hundred Fifty Thousand Dollars ($250,000). All liens,
security interests and assignments now or hereafter securing payment or
performance of the Subordinate Note are herein called "SUBORDINATE LIENS."
C. Borrower has previously executed and delivered to Senior Creditor that
certain Secured Revolving Note, dated July 3, 1997 (as it may have been renewed,
extended and rearranged, the "NOTE"), in the original principal sum of Ten
Million Dollars ($10,000,000). The Note has been issued pursuant to that
certain Revolving Credit Agreement of even date with the Note (as it may have
been amended, supplemented or restated, the "LOAN AGREEMENT") between Borrower
and Senior Creditor. All liens, security interests and assignments now or
hereafter securing payment or performance of the Note and/or the Loan Agreement
are herein called "SENIOR LIENS." The Senior Liens include, without limitation,
the security instruments described on EXHIBIT A, attached hereto and
incorporated herein.
D. Borrower has requested that Senior Creditor make a loan under the Loan
Agreement to Borrower, which Borrower shall use to, among other things, fund its
obligations owing to Subordinate Creditor under the Reorganization Agreement.
As a condition to its making such loan to Borrower, Senior Creditor has required
that Borrower's obligations under the Subordinate Note and the Reorganization
Agreement, and the Subordinate Liens securing any of the same, be subordinated
to Borrower's indebtedness under the Loan Agreement and the Note, the Senior
Liens securing same.
E. The parties hereto now hereby agree to subordinate the lien position,
payment and performance of the Subordinate Note, the Reorganization Agreement
and the
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Subordinate Liens to the payment and performance of the Note, the Loan Agreement
and the Senior Liens, all as set forth in the succeeding provisions of this
Agreement (which shall control over any conflicting or inconsistent recitals
above).
A G R E E M E N T S
In consideration of the premises and the mutual agreements herein set
forth, Borrower, Subordinate Creditor and Senior Creditor hereby agree as
follows:
1. All initially capitalized terms used but not defined in this Agreement
shall have the meanings given to such terms in the Loan Agreement. In addition,
as used in this Agreement, the following terms shall have the respective
meanings indicated:
"SENIOR DEBT" shall mean all Debt now existing or hereafter created of
Borrower to Senior Creditor, whether direct or indirect, primary or secondary,
joint or several, fixed or contingent and whether originally payable to Senior
Creditor or any third Person and subsequently acquired by or assigned to Senior
Creditor, and whether evidenced by note, application for or agreement for
reimbursement of advance under letter of credit, open account, overdraft,
indorsement, surety agreement, guaranty or otherwise, including, without
limitation, all indebtedness evidenced by the Note and all renewals, extensions,
rearrangements, refundings and modifications of the Note, and all Debt arising
under or incurred pursuant to the Loan Agreement and any other documents
executed or delivered in connection therewith. The Senior Debt shall include
amounts accruing subsequent to the filing of any bankruptcy, receivership,
insolvency or like petition. Without limiting the generality of the foregoing,
Senior Debt shall include all obligations for fees, to indemnify, to reimburse
for expenses and to reimburse for advances (whether for the payment of taxes,
insurance premiums, the preservation or protection of property or the title
thereto or for any other reason).
"SUBORDINATED DEBT" shall mean all Debt now existing or hereafter
created of Borrower to Subordinate Creditor, whether direct or indirect, primary
or secondary, joint or several, fixed or contingent and whether originally
payable to Subordinate Creditor or to a third Person and subsequently acquired
by Subordinate Creditor, and whether evidenced by note, application for or
agreement for reimbursement of advance under letter of credit, open account,
overdraft, indorsement, surety agreement, guaranty or otherwise, including,
without limitation, all Debt evidenced by the Subordinate Note and all renewals,
extensions, rearrangements, refundings and modifications of the Subordinate Note
and any other documents executed or delivered in connection therewith.
2. (a) Unless and until all Senior Debt shall have been fully paid and
satisfied and the obligation of Senior Creditor to make any further loans or
advances to Borrower shall have ceased and terminated, Subordinate Creditor will
not, except as otherwise provided in SECTION 2(B) hereof, (i) ask, demand, sue
for, take or receive, or retain, from Borrower or any other Person, by setoff or
in any other manner, payment of all or any part of the Subordinated Debt, (ii)
forgive, cancel or discharge, or permit to be converted into
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any evidence of equity or ownership, any of the Subordinated Debt, (iii) ask,
demand or receive any security for the Subordinated Debt in addition to the
security described on EXHIBIT B attached hereto and incorporated herein
("PERMITTED SUBORDINATED LIENS"), (iv) amend the Subordinate Note or any other
document existing in connection with the Subordinated Debt, or (v) declare the
Subordinated Debt due and payable by reason of any default or for any other
reason, or bring or join with any creditor in bringing any proceeding against
Borrower under any bankruptcy, reorganization, readjustment or arrangement of
debt, suspension of payments, receivership, liquidation or insolvency or similar
law or statute now or hereafter in effect ("PROCEEDINGS"). Subordinate Creditor
hereby directs Borrower to make, and Borrower hereby agrees to make, such prior
payment of the Senior Debt to Senior Creditor.
(b) Notwithstanding the foregoing, Borrower may make regularly
scheduled payments (but no prepayments) of interest and principal due on the
Subordinate Note, PROVIDED that on the date of the proposed payment, no Event of
Default has occurred and is continuing or will result from the making of such
payment. Upon the occurrence of an Event of Default and upon written notice
thereof given to Borrower and Subordinate Creditor by Senior Creditor or its
representative, no further payments shall be made by Purchaser with respect to
the principal of or interest on the Subordinate Note.
3. (a) Upon any distribution of the assets of Borrower in connection
with any dissolution, winding up, liquidation or reorganization of Borrower
(whether in Proceedings or upon an assignment for the benefit of creditors or
any other marshalling of the assets and liabilities of Borrower or otherwise),
Senior Creditor shall first be entitled to receive payment in full of all Senior
Debt before Subordinate Creditor shall be entitled to receive any payment in
respect of the Subordinated Debt. Upon any such dissolution, winding up,
liquidation or reorganization, any payment or distribution of assets of Borrower
of any kind or character, whether in cash, property or securities, to which
Subordinate Creditor would be entitled except for the provisions of this
Agreement (including any such payment or distribution which may be payable or
deliverable by virtue of the provisions of any securities which are subordinated
as junior in right of payment to the Subordinated Debt) shall be made by the
liquidating trustee or agent or other Persons making such payment or
distribution (whether a trustee in bankruptcy, a receiver or liquidating trustee
or otherwise) (a "PAYING PARTY"), or if received by Subordinate Creditor, by
Subordinate Creditor, directly to Senior Creditor, to the extent necessary to
pay in full the Senior Debt remaining unpaid, after giving effect to any
concurrent payment or distribution to Senior Creditor. Subordinate Creditor
hereby authorizes and directs each Paying Party to pay over to Senior Creditor
upon demand by Senior Creditor, all such payments or distributions without the
necessity of any inquiry as to the status or balance of the Senior Debt, and
without further notice to or consent of Subordinate Creditor. In furtherance of
the foregoing, but not by way of limitation thereof, in the event Borrower is
subject to any Proceeding, with the result that Borrower is excused from the
obligation to pay all or part of the interest otherwise payable in respect of
the Senior Debt during the period subsequent to the commencement of any such
Proceeding, Subordinate Creditor agrees that all or such part of such interest,
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as the case may be, shall be payable out of, and to that extent diminish and be
at the expense of, reorganization dividends or distributions in respect of the
Subordinated Debt.
(b) Subordinate Creditor hereby irrevocably authorizes and empowers
Senior Creditor to demand, sue for, collect and receive every such payment or
distribution and give acquittance therefor, to execute, sign, endorse, transfer
and deliver any and all receipts and instruments, and to file claims and take
such other proceedings, all in the name of Subordinate Creditor, or otherwise,
as Senior Creditor may deem necessary or advisable for the enforcement of this
Agreement, but Senior Creditor has no obligation to do so. Subordinate Creditor
hereby (i) agrees duly and promptly to take such action as may be required by
Senior Creditor to collect the Subordinated Debt for the account of Senior
Creditor and/or to file appropriate proofs of claim in respect of the
Subordinated Debt, (ii) authorizes and empowers Senior Creditor to vote the full
amount of the Subordinated Debt in any bankruptcy, reorganization or similar
proceeding affecting Borrower and in any meeting of creditors of Borrower, (iii)
agrees to execute and deliver to Senior Creditor or its representatives on
demand such powers of attorney, proofs of claim and other instruments as may be
requested by Senior Creditor or its representatives in order to enable Senior
Creditor to enforce any and all claims upon or with respect to the Subordinated
Debt, to collect and receive any and all such payments or distributions which
may be payable or deliverable at any time upon or with respect to the
Subordinated Debt, and to vote the full amount of the Subordinated Debt in any
proceeding or meeting referred to in clause (ii) of this subparagraph (b).
(c) In the event any payment or distribution of assets of Borrower of
any kind or character, whether in cash, property or securities, and whether or
not pursuant to any dissolution, winding up, liquidation or reorganization, not
permitted by or in accordance with the provisions of this Agreement shall be
received by Subordinate Creditor, such payment or distribution to Subordinate
Creditor shall not be commingled with other funds and shall be held in trust for
the benefit of, and shall be paid over or delivered to, Senior Creditor, or to
its representative, in precisely the form received (except for the endorsement
or assignment of Subordinate Creditor where necessary). In the event of any
failure by Subordinate Creditor to make any such endorsement or assignment,
Senior Creditor is hereby irrevocably authorized to make same.
(d) Notwithstanding the terms and provisions of this Agreement,
Subordinate Creditor shall not be entitled to be subrogated to any of the rights
of Senior Creditor against Borrower or any other Person or any Senior Liens or
other collateral security or rights of offset held by Senior Creditor for the
payment of the Senior Debt, nor shall Subordinate Creditor have any right of
indemnity, reimbursement or contribution against Borrower or any other Person
for any payment of the Senior Debt, and Subordinate Creditor hereby expressly
waives each and every such right of subrogation, indemnity, reimbursement and
contribution.
(e) The provisions of this Agreement are and are intended solely for
the purpose of defining the relative rights of Subordinate Creditor and Senior
Creditor, and are
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solely for the benefit of Senior Creditor and may not be relied upon or enforced
by any party other than Senior Creditor, and nothing contained in this Agreement
is intended to or shall impair the obligation of Borrower, which is
unconditional and absolute, to pay to Subordinate Creditor the principal of and
interest on the Subordinated Debt as and when the same shall become due and
payable in accordance with its terms (except as otherwise provided in Section
2(b) hereof), or to affect the relative rights of Subordinate Creditor and
creditors of Borrower other than Senior Creditor.
(f) Senior Creditor may, at any time and from time to time, without
the consent of or notice to Subordinate Creditor, and without impairing or
releasing the obligations of Subordinate Creditor hereunder (i) change the
manner, place or terms of payment or change or extend the time of payment of, or
renew or alter, the Senior Debt or the security therefor, or otherwise amend in
any manner the Note, the Loan Agreement or any document executed in connection
therewith; (ii) exercise or refrain from exercising any rights against Borrower
and others; (iii) apply any sums by whomsoever paid or however realized to the
Senior Debt; (iv) sell, exchange, release, surrender, realize upon or otherwise
deal with in any manner and in any order any property whatsoever and by
whomsoever at any time pledged or mortgaged to secure, or howsoever securing,
any Senior Debt; (v) release anyone liable in any manner for the payment or
collection of any Senior Debt; and (vi) settle or compromise all or any part of
the Senior Debt, and subordinate the payment of any part of the Senior Debt to
the payment of any other indebtedness (including any other part of the Senior
Debt). No invalidity, irregularity or unenforceability of all or any part of
the Senior Debt or of any of the Senior Liens shall affect, impair or be a
defense to this Agreement.
4. Subordinate Creditor represents and warrants that no liens, security
interests or assignments exist to secure any Subordinated Debt other than the
Permitted Subordinated Liens, and agree that no further liens, security
interests or assignments will arise or will be taken in the future to secure any
Subordinated Debt. Without limiting the foregoing, Subordinate Creditor hereby
agrees (a) that Subordinate Creditor will not enforce the Subordinate Liens
without the prior written consent of Senior Creditor and (b) that the
Subordinate Liens, to the extent enforceable, will be enforceable by Senior
Creditor. All amounts, whether in the form of cash, proceeds, checks, drafts,
orders or other instruments for the payment of money, recovered with respect to
any property of Borrower subject to the Subordinate Liens by the enforcement of
the Subordinate Liens shall immediately upon receipt thereof by Subordinate
Creditor be paid over and delivered in the form received, but with any necessary
endorsements or instruments required for payment to Senior Creditor, and, until
so delivered shall not be commingled with any other funds or property but shall
be held by Subordinate Creditor upon an express trust for the benefit of Senior
Creditor.
5. Subordinate Creditor does hereby expressly subordinate and make
second, junior and inferior any and all liens, rights, powers, titles and
interests of Subordinate Creditor under, pursuant to or by virtue of the
Subordinate Liens to all liens, rights, titles and interests of Senior Creditor
under, pursuant to or by virtue of the Senior Liens, and Subordinate Creditor
agrees that all liens, rights, titles and interests of the Senior Liens shall
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be unconditionally first, prior and superior to any and all liens, rights,
powers, titles and interests of Subordinate Creditor under, pursuant to or by
virtue of the Subordinate Liens. Subordinate Creditor further agrees that any
and all liens, rights, titles and interests of Subordinate Creditor under,
pursuant to or by virtue of the Subordinate Liens shall be and remain expressly
subject and subordinate to any renewal, extension, refinancing, consolidation,
modification or supplement of the liens, rights, titles and interests of the
Senior Liens, as well as any and all increases thereof.
6. Subordinate Creditor, his successors or assigns or any other legal
holder of the Subordinated Debt shall not acquire by subrogation, contract or
otherwise any lien upon or other estate, right or interest in any property
(including but not limited to any which may arise in respect to real estate
taxes, assessments or other governmental charges) which is or may be prior in
right to the Senior Liens or any renewal, extension, refinancing, consolidation,
modification or supplement thereof.
7. Subordinate Creditors, his successors or assigns or any other legal
holder of the Subordinated Debt hereby assigns and releases to the legal holder
of the Senior Debt:
(i) all of his right, title, interest or claim, if any, in and to
the proceeds of all policies of insurance covering any
property for application upon the indebtedness secured by or
other disposition thereof in accordance with the provisions of
the Senior Liens;
(ii) all of his right, title and interest or claim, if any, in and
to all awards or other compensation made for any taking of any
part of any property covered by the Senior Liens to be applied
upon the indebtedness secured by or disposed of in accordance
with the provisions of the Senior Liens.
In the event that following any such application and disposition of the
insurance proceeds and condemnation award and other compensation, any balance
remains, then, except as Borrower and Subordinate Creditor may otherwise agree,
such excess shall be made payable to the joint order of Subordinate Creditor and
Borrower or their successors or assigns. If the legal holder of the Senior Liens
shall at any time release to Borrower any such insurance proceeds or
condemnation award for the purpose of restoration, such release shall not be
deemed to be an additional advance under the Senior Liens nor shall it otherwise
be deemed to be in violation of any restriction of this instrument upon the
amount permitted to be secured by Senior Liens and to which the Subordinate
Liens are subordinate.
8. The Subordinate Liens shall be and the same are hereby are and shall
continue subject and subordinate to any and all leases upon all or any part of
any property covered by the Senior Liens and to which the Senior Liens shall now
be or shall hereafter have been made subject and subordinate.
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9. Subordinate Creditor represents to Senior Creditor that the
Subordinated Debt is in good standing and in full force and effect and no
breaches or defaults exist thereunder which have not been cured or waived, that
all accrued interest on the Subordinate Note has been paid in full through
September 25, 1997 and that the aggregate outstanding principal balance of the
Subordinate Note on this date is $250,000.
10. This Agreement extends to and covers all amounts due on the Senior
Debt both before and after any filing of any Proceeding by or against Borrower,
and Senior Creditor shall be entitled to amounts accruing on the Senior Debt
from the date of filing of said Proceeding to the date of full and final payment
of the Senior Debt.
11. No part of the Subordinated Debt or any instrument evidencing or
securing the same has been heretofore transferred or assigned, and Subordinate
Creditor will not transfer or assign any part of the Subordinated Debt nor any
instrument evidencing the same while the Senior Debt remains unpaid.
Subordinate Creditors shall promptly deliver to Senior Creditor any instrument
evidencing the Subordinated Debt, including without limitation, the Subordinate
Note for Senior Creditor to hold for the term of this Agreement.
12. In the event of a breach by any party hereto of any of the provisions
of this Agreement, or in the event any representation or warranty contained
herein or furnished to Senior Creditor by any party hereto shall prove to have
been false when made, Senior Creditor shall have all rights provided to it under
law or equity, including without limitation the right to sue the breaching party
or parties to recover damages suffered by Senior Creditor as a result of such
breach, and the right to obtain injunctive relief.
13. Subordinate Creditor shall give, execute and deliver any notice,
statement, instrument, document, agreement or other papers, and shall permit
Senior Creditor, upon request, to make any notation or endorsement upon any
promissory note or other instrument or documents evidencing or securing the
Subordinated Debt, that may be necessary or desirable, or that Senior Creditor
any reasonably request, in order to create, preserve or validate the rights of
Senior Creditor hereunder, to enable Senior Creditor to exercise or enforce its
rights hereunder, or otherwise to effect the purposes of this Agreement.
14. This Agreement is a continuing one, and all Senior Debt to which it
applies or may apply under the terms hereof shall conclusively be presumed to
have been created in reliance hereon.
15. Borrower hereby agrees to pay upon demand all attorneys' fees and
expenses reasonably incurred by Senior Creditor in connection with the
enforcement of its rights under this Agreement.
16. Subordinate Creditor and Borrower agree that, if at any time all or
any part of any payment previously applied by Senior Creditor to the Senior Debt
is or must be returned by Senior Creditor--or recovered from Senior
Creditor--for any reason (including
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the order of any bankruptcy court), this Agreement shall automatically be
reinstated to the same effect, as if the prior application had not been made,
and, in addition, Borrower hereby agrees to indemnify Senior Creditor against,
and to save and hold Senior Creditor harmless from any required return by Senior
Creditor--or recovery from Senior Creditor--of any such payments because of its
being deemed preferential under applicable bankruptcy, receivership or
insolvency laws, or for any other reason.
17. Subordinate Creditor acknowledges that he has received a copy and is
familiar with the terms of and conditions of the Note, the Loan Agreement, and
the other Loan Documents, and that Subordinate Creditor approves all such terms
and conditions and consents to the execution and delivery thereof and of this
Agreement by Borrower and to the performance of each thereof by Borrower.
18. All notices, requests and other communications to any party hereunder
shall be in writing (including facsimile transmission or similar writing) and
shall be given to such party at its address or facsimile number set forth below
or such other address or facsimile number as such party may hereafter specify by
notice to the other party in accordance with this Section 18. Each such notice,
request or other communication shall be deemed given on the second business day
after mailing; PROVIDED that actual notice, however and from whomever given or
received, shall always be effective on receipt.
If to Subordinate Creditor: 44343 Soft Avenue
Lancaster, CA 93536
If to Borrower: c/o Prospect Medical Holdings, Inc.
18200 Yorba Linda Boulevard
Yorba Linda, CA 92886
Attn: Jacob Y. Terner, M.D.
Telephone: (310) 202-4774
Facsimile: (310) 204-6334
If to Senior
Creditor: 201 N. Figueroa Street
Los Angeles, CA 90012
Attn: Mark W. Campbell
Telephone: (213) 484-3738
Facsimile: (213) 484-3721
19. This Agreement shall not be changed orally but shall be changed only
by agreement in writing signed by Subordinate Creditor and Senior Creditor
(without any necessity for notice to or consent by Borrower, which are expressly
WAIVED by Borrower). No course of dealing between the parties, no usage of
trade and no parole or extrinsic evidence of any nature shall be used to
supplement or modify any of the terms or provisions of this Agreement.
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20. This Agreement may be signed in any number of counterparts, each of
which shall be an original, with the same effect as if the signatures thereto
and hereto were upon the same instrument. This Agreement constitutes the entire
agreement and understanding among the parties hereto and supersedes any and all
prior agreements and understandings, oral or written, relating to the subject
matter hereof and thereof.
21. The provisions of this Agreement are severable. The invalidity, in
whole or in part, of any provision of this Agreement shall not affect the
validity or enforceability of any other of its provisions. If one or more
provisions hereof shall be declared invalid or unenforceable, the remaining
provisions shall remain in full force and effect and shall be construed in the
broadest possible manner to effectuate the purposes hereof.
22. This Agreement shall be deemed to have been made in the State of
California and the validity, construction, interpretation, and enforcement
hereof, and the rights of the parties hereto, shall be determined under,
governed by, and construed in accordance with the internal laws of the State of
California, without regard to principles of conflicts of law.
23. (a) Each controversy, dispute or claim between the parties arising
out of or relating to this Agreement, which controversy, dispute or claim is not
settled in writing within thirty (30) days after the "CLAIM DATE" (defined as
the date on which a party subject to this Agreement gives written notice to all
other parties that a controversy, dispute or claim exists), will be settled by a
reference proceeding in California in accordance with the provisions of Section
638 ET SEQ. of the California Code of Civil Procedure, or their successor
section ("CCP"), which shall constitute the exclusive remedy for the settlement
of any controversy, dispute or claim concerning this Agreement, including
whether such controversy, dispute or claim is subject to the reference
proceeding and except as set forth above, the parties waive their rights to
initiate any legal proceedings against each other in any court or jurisdiction
other than Los Angeles County (the "COURT"). The referee shall be a retired
Judge of the Court selected by mutual agreement of the parties, and if they
cannot so agree within forty-five (45) days after the Claim Date, the referee
shall be promptly selected by the Presiding Judge of the Court (or his or her
representative). The referee shall be appointed to sit as a temporary judge,
with all of the powers for a temporary judge, as authorized by law, and upon
selection should take and subscribe to the oath of office as provided for in
Rule 244 of the California Rules of Court (or any subsequently enacted Rule).
Each party shall have one peremptory challenge pursuant to CCP Section 170.6.
The referee shall (i) be requested to set the matter for hearing within sixty
(60) days after the Claim Date and (ii) try any and all issues of law or fact
and report a statement of decision upon them, if possible, within ninety (90)
days of the Claim Date. Any decision rendered by the referee will be final,
binding and conclusive and judgment shall be entered pursuant to CCP Section 644
in any court in the State of California having jurisdiction. Any party may
apply for a reference proceeding at any time after thirty (30) days following
notice to any other party of the nature of the controversy, dispute or claim, by
filing a petition for a hearing and/or trial. All discovery permitted by this
Agreement shall be completed no later than fifteen (15) days before the first
hearing date established by the referee. The referee may extend such period in
the event of a party's refusal to
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provide requested discovery for any reason whatsoever, including, without
limitation, legal objections raised to such discovery or unavailability of a
witness due to absence or illness. No party shall be entitled to "priority" in
conducting discovery. Depositions may be taken by either party upon seven (7)
days written notice, and request for production or inspection of documents shall
be responded to within ten (10) days after service. All disputes relating to
discovery which cannot be resolved by the parties shall be submitted to the
referee whose decision shall be final and binding upon the parties. Pending
appointment of the referee as provided herein, the Superior Court is empowered
to issue temporary and/or provisional remedies, as appropriate.
(b) Except as expressly set forth in this Agreement, the referee
shall determine the manner in which the reference proceeding is conducted
including the time and place of all hearings, the order of presentation of
evidence, and all other questions that arise with respect to the course of the
reference proceeding. All proceedings and hearings conducted before the
referee, except for trial, shall be conducted without a court reporter except
that when any party so requests, a court reporter will be used at any hearing
conducted before the referee. The party making such a request shall have the
obligation to arrange for and pay for the court reporter. The costs of the
court reporter at the trial shall be borne equally by the parties.
(c) The referee shall be required to determine all issues in
accordance with existing case law and the statutory laws of the State of
California. The rules of evidence applicable to proceedings at law in the State
of California will be applicable to the reference proceeding. The referee shall
be empowered to enter equitable as well as legal relief, to provide all
temporary and/or provisional remedies and to enter equitable orders that will be
binding upon the parties. The referee shall issue a single judgment at the
close of the reference proceeding which shall dispose of all of the claims of
the parties that are the subject of the reference. The parties hereto expressly
reserve the right to contest or appeal from the final judgment or any appealable
order or appealable judgment entered by the referee. The parties hereto
expressly reserve the right to findings of fact, conclusions of laws, a written
statement of decision, and the right to move for a new trial or a different
judgment, which new trial, if granted, is also to be a reference proceeding
under this provision.
(d) In the event that the enabling legislation which provides for
appointment of a referee is repealed (and no successor statute is enacted), any
dispute between the parties that would otherwise be determined by the reference
procedure herein described will be resolved and determined by arbitration. The
arbitration will be conducted by a retired judge of the Court, in accordance
with the California Arbitration Act, Section 1280 through Section 1294.2 of the
CCP as amended from time to time. The limitations with respect to discovery as
set forth hereinabove shall apply to any such arbitration proceeding.
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IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Agreement as of the date set forth in the first paragraph hereof.
Subordinate Creditor: /s/ Jayaratnam Jayakumar
----------------------------------------
JAYARATNAM JAYAKUMAR
Borrower: PROSPECT MEDICAL HOLDINGS, INC.,
a Delaware corporation
By /s/ Jacob Y. Terner
--------------------------------------
Title CEO
-----------------------------------
Senior Creditor: IMPERIAL BANK,
a California banking corporation
By /s/ Mark W. Campbell
--------------------------------------
Title SVP
-----------------------------------
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AMENDED AND RESTATED MANAGEMENT SERVICES AGREEMENT
THIS AMENDED AND RESTATED MANAGEMENT SERVICES AGREEMENT ("Agreement") is
made and entered into as of September 15, 1998, and deemed to have been
effective as of October 31, 1997, by and between SIERRA MEDICAL MANAGEMENT,
INC., a Delaware corporation ("Manager"), and PEGASUS MEDICAL GROUP, INC., a
California professional corporation ("GROUP").
RECITALS
A. GROUP is a California professional medical corporation duly organized
under the laws of the State of California and operated as a medical group, which
enters into agreements with organizations such as health care service plans
(HMOs), preferred provider organizations (PPOs), exclusive provider
organizations (EPOs), and other purchasers of medical services (hereinafter
collectively referred to as "Plans") for the arrangement of the provision of
health care services (the "Practice") to subscribers or enrollees of said Plans
("Members"); and
B. Manager has special expertise and experience in the operation,
management and marketing aspects of medical groups of the type operated or
intended to be operated by GROUP. Manager has made a significant investment in
the development of a system of operations, management and marketing necessary
for management of the functions desired by GROUP to be undertaken by Manager;
and
C. GROUP desires to devote all of its time to arranging for the delivery
of health care services to Plan subscribers or enrollees, and in connection
therewith desires to obtain the professional assistance of Manager in managing
the business aspects of the Practice; and
D. Manager has provided GROUP with the necessary support to manage the
business aspects of the Practice, including but not limited to clerical and
billing services, claims pursuit and collection, cash flow management, marketing
and general administrative services (collectively, "Management Services"), to
enable GROUP to concentrate on the development of the professional aspects of
the Practice pursuant to a Management Services Agreement made and entered into
as of October 31, 1997, by and between Manager and GROUP (the "Original
Management Services Agreement"); and
E. Manager and GROUP desire to enter into this Agreement to incorporate
within the terms of one agreement all of the amendments previously made and to
be made as of the date of execution hereof to the Original Management Services
Agreement; and
F. Pursuant to this Agreement Manager will continue to provide Management
Services to GROUP.
<PAGE>
NOW, THEREFORE, in consideration of the mutual covenants and conditions
hereinafter set forth and in exchange for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:
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AGREEMENT
1. PREMISES. Pursuant to the Master Lease specified below, Manager
intends to provide GROUP with adequate administrative office space at the
addresses described therein (the "Premises") and Group shall retain all of its
remaining facilities for the operation of the Practice with leasehold
improvements, auxiliary services and utilities in order that GROUP may
effectively perform its functions and duties.
1.1. Manager intends to become the lessee under certain leases for
the Premises (hereinafter collectively referred to as the "Master Lease") copies
of which are attached hereto as Exhibit "A" and incorporated herein by this
reference. GROUP hereby acknowledges that the Premises described in the Master
Lease are suitable for the administrative office of the Practice. Based and
contingent upon GROUP's promise to timely pay all amounts due under this
Agreement, Manager hereby intends to sublease the leased Premises to GROUP upon
the following terms and conditions:
1.1.1. This sublease between Manager and GROUP of the
Premises shall be subject to all of the terms and conditions of the Master
Lease. In the event of the termination of Manager's interest as lessee under
the Master Lease for any reason, then the sublease created hereby shall
simultaneously terminate unless GROUP is willing to assume the obligations under
the Master Lease and the Lessor consents thereto.
1.1.2. All of the terms and conditions contained in the
Master Lease are incorporated herein as terms and conditions of the sublease
(with each reference therein to "Lessor" and "Lessee," to be deemed to refer to
Manager and GROUP, respectively) and, along with the provisions of this Section
1.1 and Exhibit "A," shall be the complete terms and conditions of the sublease
created hereby.
1.1.3. Notwithstanding the foregoing, as between Manager
and GROUP, Manager shall remain responsible for meeting the financial
obligations of "Lessee" under the Master Lease, and GROUP shall have no monetary
obligation in that regard. In addition, as between Manager and GROUP, Manager
shall retain all rights to exercise any options to purchase the Premises, or
other similar rights of ownership or possession, which may be granted under the
Master Lease, and GROUP shall have no rights in that regard.
1.1.4. In the event this Agreement is terminated according
to its terms, this sublease shall also terminate automatically.
1.1.5. If the Master Lease contains an option to renew the
term thereof, Manager shall notify GROUP, at least thirty (30) days prior to the
expiration of the time for exercising such option, of Manager's intention to
renew or not to renew such term. If Manager determines not to renew such term,
Manager shall, at GROUP's option and upon the consent of the Landlord in
accordance with the terms of the Master Lease, assign the Master Lease to GROUP,
including Manager's right to renew the term thereof.
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2. PROVISION OF FURNITURE, FURNISHINGS AND EQUIPMENT. Manager hereby
intends to provide to GROUP, and GROUP hereby intends to lease from Manager, all
the furniture, fixtures and equipment (the "FF&E") listed on Exhibit "B"
attached hereto and incorporated herein by this reference, which FF&E GROUP
agrees are suitable and sufficient for GROUP's use in the operation of GROUP's
medical practice at the Premises and are generally in good repair. The use by
GROUP of said FF&E shall be subject to the following conditions:
2.1. Title to all of the FF&E shall remain in Manager at all times,
and upon the termination of this Management Services Agreement, GROUP shall
immediately surrender the FF&E to Manager in as good condition as of the date
hereof, normal wear and tear excepted. Alternatively, GROUP, in its sole
discretion, shall have the option to purchase any or all of the FF&E upon
termination hereof. GROUP shall exercise such option, if at all, by giving
Manager written notice of same (the "Notice") within twenty (20) days of the
effective date of termination hereof. Upon exercise of such option, Manager
shall convey to GROUP within thirty (30) days of the effective date of
termination hereof, all of the FF&E identified in the Notice, together with (i)
any manufacturer's warranties that Manager has received in connection with such
FF&E and (ii) a bill of sale or such other instrument of conveyance as is
reasonably necessary to accomplish said purchase; and GROUP shall simultaneously
convey to Manager the purchase price for said FF&E. The purchase price shall be
paid all in cash, and shall equal the fair market value of the FF&E.
2.2. Manager shall be responsible for all repairs and maintenance
of the FF&E other than damage caused by negligence or willful misuse by GROUP;
provided, however, GROUP shall employ reasonable efforts to prevent damage to
and excessive wear of the FF&E, and shall promptly notify Manager of any needed
repairs thereto.
2.3. Manager shall be responsible for all property taxes and other
assessments relating to or arising out of ownership or use of the FF&E that
accrue on and after the date hereof.
2.4. Manager shall provide and maintain, at its expense, such
additional or replacement FF&E as the Practice reasonably requires from time to
time, as determined by Manager in its sole discretion, in consultation with
GROUP. Such additional or replacement FF&E shall be subject to all of the terms
of Section 2.1 above.
2.5. GROUP may provide additional equipment at the Practice ("GROUP
Equipment") at its sole cost and expense. GROUP shall be responsible for all
repairs, maintenance and replacement of, as well as all property taxes and other
assessments relating to or arising out of ownership or use of, such additional
equipment, unless GROUP requests that Manager provide such repairs, maintenance
and replacement upon such terms and conditions as the parties may agree
including, without limitation, an increase in the Management Fee (as defined in
Section 9 below). Title to said GROUP Equipment shall remain in GROUP's name at
all times.
2.6. All revenues of the GROUP derived directly or indirectly from
any and all FF&E or GROUP Equipment located at or used in connection with the
Practice, shall be included in "Gross Revenues" as defined in Exhibit "D."
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3. MANAGER RESPONSIBILITIES.
3.1. During the term of this Agreement, GROUP appoints and engages
Manager to serve as its exclusive manager and administrator of all non-physician
functions and services relating to the operation of the Practice, and Manager
agrees to furnish to GROUP those Management Services set forth below.
Notwithstanding such appointment and engagement, GROUP will have exclusive
authority and control over the professional aspects of the Practice to the
extent the same constitute or directly affect the practice of medicine,
including all diagnosis, treatment and ethical determinations with respect to
patients which are required by applicable law to be decided by a physician.
3.1.1. GENERAL ADMINISTRATIVE SERVICES. Manager shall
provide general business management, administration and supervision for the
business operations of GROUP, which shall include secretarial and other office
personnel support services, staff support for GROUP'S board of directors and
committee meetings, administrative record keeping, and other similar
administrative services required in the day-to-day operation of GROUP.
3.1.2. ACCOUNTING AND FINANCIAL MANAGEMENT SERVICES.
Manager shall provide the following accounting and financial management
services:
3.1.2.1. Manager shall have exclusive
decision-making authority with respect to the establishment and preparation of
annual budgets for the Practice, which budgets shall reflect in reasonable
detail anticipated revenues and expenses;
3.1.2.2. Manager shall, in consultation with
GROUP, establish bank accounts in the name of GROUP ("Accounts") for the deposit
of all sums received by GROUP for services provided to Members. GROUP agrees
that Manager shall have the authority to endorse all checks made payable to
GROUP and deposit checks and funds received by GROUP in Accounts. Manager shall
further have the authority to make transfers of funds to Accounts and further,
Manager shall have the authority to sign checks and stop payment on any checks
drawn on Accounts;
3.1.2.3. Manager agrees to reconcile checks
written with bank statements on a monthly basis;
3.1.2.4. Manager agrees to make recommendations
regarding check signature approvals and banking procedures of GROUP;
3.1.2.5. Manager agrees to prepare balance sheets
and income statements on a monthly basis during the term of this Agreement.
Such financial statements shall not be audited statements. Manager agrees to
cooperate with any annual audit GROUP obtains at its sole cost and expense by an
independent public accountant selected by GROUP;
3.1.2.6. Manager shall receive and deposit on a
timely basis capitation and other payments received by GROUP;
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3.1.2.7. Manager shall calculate primary care
capitation and specialty, ancillary and other payable claims based on the
records provided by the Plans and shall prepare checks to pay such amounts due
and shall mail said payments to the respective providers;
3.1.2.8. Manager shall monitor Plan subscribers
or enrollees exceeding stop loss deductibles and communicate with Plans orally
or in writing to seek reimbursement on behalf of GROUP;
3.1.2.9. Manager shall bill other payors for
coordination of benefits and other third party liability payments according to
the terms of the Plan/GROUP Agreements;
3.1.2.10. Manager shall administer capitation and
other distributions from Plans including auditing and monitoring of risk pools,
negotiating settlement of GROUP's share of such pools and establishment and
maintenance of incurred but not reported ("IBNR") reserves for GROUP;
3.1.2.11. Manager shall monitor any other revenue
receipt programs Plans may have, including but not limited to pre-existing
pregnancy recovery, and seek reimbursement from said Plans; and
3.1.2.12. Manager shall assist GROUP in
establishing and administering a physician incentive system and a system to
establish and adjust reserves for medical expenses.
3.1.3. OFFICE SERVICE; BILLING. Manager shall provide
bookkeeping and accounting services, including, without limitation, maintenance,
custody and supervision of GROUP's business records, papers and documents,
ledgers, journals and reports, and the preparation, distribution and recording
of all bills and statements for professional services rendered by GROUP, as well
as all reports and forms required by applicable third party payors. GROUP shall
at all times have the ultimate responsibility for setting all fees for
professional services provided on a fee for service basis to patients of the
Practice, as well as negotiating with each managed care contract Payor. All
billings for services rendered to patients by the Practice shall be made under
GROUP's name and provider number(s), and Manager shall act as GROUP's agent in
the preparation, rendering and collection of such billings. GROUP hereby
appoints Manager for the term hereof as its true and lawful agent for the
following purposes:
3.1.3.1. to bill patients in GROUP's name and on
its behalf;
3.1.3.2. to collect accounts receivable generated
by such billings in GROUP's name and on GROUP's behalf;
3.1.3.3. to submit, process and collect all
claims for payment to, and receive on behalf of GROUP payments from, the
patients, Plans, Medicare, Medicaid, and all other third-party payors;
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3.1.3.4. to take possession of, endorse and
deposit in the name and on behalf of GROUP to one or more Accounts designated by
GROUP any notes, checks, money orders, insurance payments, and any other
instruments received as payment of accounts receivable; and
3.1.3.5. to collect in GROUP's name and on its
behalf all collections of Gross Revenues (as defined in Exhibit "D" hereto).
3.1.4. CLAIM SETTLEMENT; EXCULPATION. GROUP acknowledges
and agrees that Manager shall have discretion to compromise, settle, write off
or determine not to appeal a denial of any claim for payment for any particular
professional service rendered at the Practice. Further, GROUP agrees to hold
harmless Manager and its officers, directors, agents, contractors,
representatives and employees, from and against any and all liability, loss,
damages, claims, causes of action, and expenses associated therewith (including,
without limitation, attorneys' fees) caused or asserted to have been caused,
directly or indirectly, by or as a result of any acts, errors or omissions
hereunder of Manager or any of its officers, directors, agents, contractors,
representatives and employees, in performing Manager's billing or collection
duties hereunder.
3.1.5. FINANCIAL REPORTS. Manager shall furnish to GROUP
monthly and annual financial reports reflecting the GROUP's financial status,
provided that Manager shall have no obligations with respect to any
shareholder's of GROUP personal finances or any tax returns of the GROUP or any
shareholder of GROUP.
3.1.6. PROVIDER CONTRACT ADMINISTRATION. During the term
of this Agreement, Manager shall provide the following provider contract
administration services to GROUP:
3.1.6.1. Identify and solicit participation of
health care providers identified by the GROUP as necessary for GROUP operations;
3.1.6.2. Review and make recommendations
regarding the business terms of agreements between GROUP and health care
providers who will provide or are providing services to GROUP ("Participating
Providers");
3.1.6.3. Make recommendations regarding
compensation to Participating Providers;
3.1.6.4. Make recommendations for the
development, in conjunction with GROUP, of guidelines for the selection, hiring
or firing of Participating Providers;
3.1.6.5. Make recommendations regarding the
definition of primary, specialty and ancillary services;
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3.1.6.6. Establish and exercise exclusive
decision-making authority over the establishment of GROUP policies and
procedures, including without limitation, patient acceptance policies and
procedures, except with respect to the professional aspects of the Practice to
the extent the same constitute or directly affect the practice of medicine which
are required by applicable law to be decided by a physician;
3.1.6.7. Instruct all Participating Providers and
their office staff regarding established GROUP policies and procedures at least
annually during the term of this Agreement; and
3.1.6.8. Coordinate the preparation, negotiation
and renewal of GROUP Participating Provider Agreements.
3.1.7. ADMINISTER MEMBER ELIGIBILITY PROCESS. Manager
shall provide the following services regarding administration of the member
eligibility process:
3.1.7.1 Maintain and update a current
eligibility list to Plan subscribers and enrollees under all Plan agreements;
3.1.7.2 Verify eligibility on claims and
referrals based on the most current information provided by Plans; and
3.1.7.3 Administer system for retroactive
eligibility determination and assist GROUP in identifying outstanding accounts
receivable from ineligible patients.
3.1.8. UTILIZATION MANAGEMENT/QUALITY ASSURANCE. Manager
agrees to provide the following services regarding utilization management and
quality assurance.
3.1.8.1. Manager shall implement systems,
programs and procedures necessary for GROUP and Participating Providers to
perform utilization and quality management;
3.1.8.2 Manager shall recommend procedures for
prior authorization of elective, urgent and emergent out-patient ambulatory
surgery and hospital procedures;
3.1.8.3 Manager shall assist GROUP with
prospective, concurrent and retrospective review of medical procedures in
accordance with GROUP policies and Plan requirements;
3.1.8.4 Manager shall provide data regarding the
use of outpatient and inpatient services by provider to GROUP;
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3.1.8.5 Manager shall provide data regarding the
use of noncontracting providers;
3.1.8.6 Manager shall provide secretarial
support, logs, and minutes to the Medical Director and the Quality and
Utilization Management Committee of GROUP;
3.1.8.7 Manager shall assist Medical Director
and the Quality and Utilization Management Committee in responding to Plan
Member grievances based on the instructions of the Medical Director;
3.1.8.8 Manager shall provide staff assistance
to GROUP in the credentialing process GROUP is required to conduct to assure
that providers have current licenses and medical staff privileges.
3.1.9. SUPPLIES. Manager shall order and purchase all
supplies required by GROUP in connection with the operation of the
administrative office of the Practice, including furnishing to GROUP all
necessary forms, supplies, postage and duplication services, provided that all
supplies acquired and services provided shall be reasonably necessary in
connection with the day-to-day operations of the Practice.
3.1.10. FILING OF REPORTS. Manager shall prepare and file
all forms, reports, and returns required by law in connection with unemployment
insurance, workers' compensation insurance, disability benefits, social
security, and other similar laws (excluding income or franchise tax forms of
GROUP or any of GROUP's shareholders, employees or contractors or providing any
other tax-related services on their behalf) now in effect or hereafter imposed.
3.1.11. MARKETING AND PUBLIC RELATIONS SERVICES. Manager
will assist GROUP in GROUP's marketing, public relations and advertising of the
health care services provided by GROUP. Manager shall provide and be
principally responsible for marketing and advertising services for GROUP and
prepare signs, brochures, letterhead, advertisements, and other marketing
materials for GROUP. Manager may, at its discretion, contract with third
parties to assist it in the provision of GROUP marketing and public relations
services, should Manager deem such action advisable. Manager shall produce and
distribute such written descriptive materials concerning GROUP's professional
services, subject to the prior approval of GROUP, as may be necessary or
appropriate to the conduct of the Practice. In providing such marketing
services, Manager is acting solely in its capacity as administrator for the
GROUP. At no time shall Manager hold itself out as providing, or actually
provide, medical services on behalf of GROUP. All such marketing services shall
be conducted in accordance with the laws, rules, regulations and guidelines of
all applicable governmental and quasi-governmental agencies, including but not
limited to the Medical Board of California. Manager shall be the owner and
holder of all right, title and interest in and to any such marketing and
advertising materials.
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3.1.12. PROFESSIONAL AND OTHER SERVICES. Manager shall be
responsible for arranging and paying for payroll, legal and accounting services
related to GROUP operations in the ordinary course of business, including the
cost of enforcing any managed care plan, physician or subcontractor contracts,
but excluding the cost of malpractice suits.
3.2. MANAGED CARE CONTRACTING.
3.2.1. Manager shall act as GROUP's exclusive agent in
seeking and negotiating managed care contracts ("Contracts"). Manager is hereby
authorized to negotiate, in its sole discretion, all terms of the Contracts.
GROUP hereby appoints Manager for the term hereof as its true and lawful agent
to perform all actions contemplated by this Section including, without
limitation, the evaluation, negotiation, administration, renewal and execution
of Contracts on GROUP's behalf and binding GROUP to performance thereunder,
provided that the Plan with whom each Contract is entered agrees to pay an
amount for GROUP's professional services thereunder equal to or greater than the
minimum rate that GROUP shall specify to Manager. GROUP shall complete and
execute the Power of Agency attached hereto as Exhibit "C."
3.2.2. Manager shall also be responsible for general
monitoring of GROUP compliance with the requirements, terms and conditions of
Contracts.
3.2.3. Manager shall notify and provide copies to GROUP of
each Contract (together with all related materials received from the applicable
Payor) that Manager executes as GROUP's agent. GROUP shall comply with all
terms of each Contract including, without limitation, the terms of all documents
or instruments incorporated therein by reference and all documents or
instruments related thereto that Manager executes or agrees to on GROUP's
behalf, as well as all applicable law. GROUP further agrees that an essential
term of this Agreement is GROUP's undertaking to provide cost-effective medical
care consistent with accepted medical practices prevailing in the GROUP's
service area.
3.2.4. Nothing in this Agreement shall prevent Manager from
entering into similar agreements with Plans on behalf of other independent
practice associations, medical groups, physicians, health care professionals or
entities comprised of physician or health care professionals.
3.2.5. GROUP acknowledges and agrees that (i) Manager shall
in no way be responsible for payment of any sums payable to GROUP under any such
Contract (whether by any Payor or otherwise), and (ii) Manager in no way
guarantees or insures the payment to GROUP of any such amounts.
3.3. PERSONNEL. Manager shall employ or contract with and provide
all necessary non-physician personnel, including quality assurance, utilization
review, claims processing, secretarial and clerical personnel as are reasonably
necessary for the conduct of the Practice (collectively, "Manager Personnel").
Manager shall, in its sole and absolute discretion, determine the types and
numbers of personnel and the number of hours and schedules of said personnel it
determines are necessary or appropriate to provide the administrative and
management
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services to be provided pursuant to this Agreement. Manager shall provide such
personnel at its sole cost and expense and such personnel may, at the sole and
absolute discretion of Manager, be employees or independent contractors of
Manager. Manager shall, in its sole and absolute discretion, have the right,
but shall not be required, to engage as Manager Personnel any or all of those
individuals who were employees of GROUP immediately prior to the effective date
hereof ("GROUP's Former Employees"). Manager shall have sole control over
promotion and employee disciplinary and termination matters with respect to
Manager Personnel (including, without limitation, GROUP's Former Employees), and
shall not be responsible for any accrued vacation, paid time off or other
benefits to such individuals that have accrued prior to the date that Manager
engages them as its employees.
3.4. All professional medical and health care services provided to
subscribers or enrollees shall be the ultimate responsibility of the GROUP's
Participating Providers. GROUP shall use its best efforts to cause
Participating Providers to cooperate with Manager in the implementation of the
protocols, programs, policies, and procedures developed for GROUP by Manager.
3.5. Manager is hereby expressly authorized by GROUP to perform all
services required of Manager pursuant to the terms of this Agreement in the
manner Manager deems reasonable and appropriate to meet the day-to-day
requirements of GROUP. To the extent required or desirable to enable Manager to
perform such services, GROUP hereby appoints Manager for the term hereof as its
true and lawful agent. GROUP acknowledges and agrees that Manager may
subcontract with other persons or entities, including entities related to
Manager by ownership or control, to perform any part or all of the services
required of Manager hereunder.
3.6. Subject to applicable securities, health care and other laws
or regulations, Manager agrees to use its best efforts to cause the holding
company of Manager to issue, or otherwise make available, stock or
exchange-listed stock options or warrants of such holding company for use as
consideration for the acquisition by GROUP of medical groups, IPAs or other
forms of physician practices or, as consideration for any other appropriate use.
3.7. Upon the request of GROUP, Manager shall provide or arrange
for the provision of additional services, beyond those described herein. Any
additional services provided by Manager are subject to Manager's capacity and
availability to provide the services so requested. Should Manager provide such
additional services, GROUP agrees to pay Manager for such services at its then
current rates as a supplemental payment to the Management Fee described herein.
3.8. Notwithstanding any other provision contained herein, Manager
shall not be liable to GROUP and shall not be deemed to be in default hereunder
for the failure to perform or provide any of the services, personnel or other
obligations to be performed or provided by Manager pursuant to this Agreement if
such failure is a result of collective bargaining, a labor dispute, act(s) of
God, or any other event which is beyond the reasonable control of Manager or
which was not reasonably foreseeable by Manager.
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4. RESPONSIBILITIES OF GROUP.
4.1. GROUP covenants and agrees that, at all times during the term
of this Agreement and any extension thereof, it shall conduct all corporate
activities required by its Articles of Incorporation and Bylaws, including but
not limited to election of a Board of Directors, election of Officers, and
appointment of committee members including but not limited to the Quality and
Utilization Management Committee. In addition, GROUP agrees to appoint a
Medical Director. GROUP shall be solely responsible for payment of any and all
compensation, payroll taxes, fringe benefits, disability insurance, workers'
compensation insurance and any other benefits of all such individuals.
4.2. GROUP shall not enter into any agreements with Participating
Providers unless such Participating Providers have: (i) current unrestricted
licenses to practice their respective professions in the State of California and
(ii) current unrestricted Federal Drug Enforcement Agency ("DEA") numbers. In
addition, where GROUP contracts with individual physicians, such physicians
shall have medical staff membership at the hospitals required by the Plans and
where GROUP contracts with licensed clinics and medical groups, at least one
primary care physician practicing at each clinic or medical group shall have
medical staff membership at the hospitals required by the Plans. GROUP further
agrees to establish procedures to ensure that Participating Providers meet these
requirements on an ongoing basis. Manager shall reasonably cooperate with and
assist GROUP to meet its obligations under this Section 4.2; provided however,
that GROUP acknowledges and agrees that it shall retain ultimate responsibility
for meeting such obligations.
4.3. GROUP acknowledges and agrees that it is solely responsible
for making all required reports to the Medical Board of California under Section
805 of the California Business and Professions Code and the National
Practitioner Data Bank.
4.4. GROUP shall, at its sole cost and expense, procure and
maintain at all times during the term of this Agreement comprehensive general
and professional liability insurance covering all activities of GROUP directly
or indirectly relating to GROUP, each policy in a minimum amount of
$1,000,000.00 per occurrence and $3,000,000.00 in the aggregate. The
aforedescribed comprehensive general and professional liability insurance shall
be issued by a company or companies authorized to do business in California with
a financial rating of at least A:12 or better in "Best's Key Rating Guide" or
its equivalent. In the event GROUP procures a "claims made" policy as
distinguished from an "occurrence" policy, GROUP shall procure and maintain at
its sole cost and expense, prior to termination of such insurance, "tail"
coverage to continue and extend coverage complying with this Agreement after the
end of the "claims made" policy. Upon reasonable request from Manager, GROUP
shall cause to be issued to Manager proper certificates of insurance, evidencing
that the foregoing provisions of this Agreement have been complied with, and
said certificates shall provide that prior to any cancellation or change in the
underlying insurance during the policy period, the insurance carrier shall first
give thirty (30) calendar days written notice to Manager.
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4.5. Subject to the terms and conditions of Sections 3.1.6.3 and
3.1.6.4 herein, GROUP shall, at its sole cost and expense, including, but not
limited to, the payment of all salaries, benefits, medical malpractice
insurance, employ or contract with such physicians as shall be reasonably
necessary for the conduct of the Practice.
4.6. GROUP shall ensure that Participating Providers procure and
maintain professional liability insurance with minimum coverage amounts of
$1,000,000.00 per occurrence and $3,000,000.00 in the aggregate. GROUP shall
ensure that any Participating Provider who procures insurance required hereunder
on a "claims made" rather than an "occurrences" form will obtain either extended
reporting insurance coverage ("tail coverage") with liability limits equal to
those most recently in effect prior to the day of termination of such
Participating Provider's contract with GROUP, or will enter into such other
arrangements as shall reasonably assure the maintenance of coverage for such
Provider, GROUP, and Manager against the risk of loss in respect of professional
services rendered by such provider while this Agreement was in effect and for a
period of not less than seven (7) years after the date of termination of this
Agreement.
4.7. GROUP acknowledges and agrees that it shall reasonably assist
and cooperate with Manager to meet all of Manager's obligations under this
Agreement, including approval of agreements and provision of information. GROUP
acknowledges and agrees that Manager shall have no liability for GROUP's failure
to pay any and all of GROUP's debts and expenses.
5. TERM; TERMINATION.
5.1. TERM. The term of this Agreement (the "Term") shall commence
on the date hereof and shall expire on the thirtieth (30th) annual anniversary
hereof unless earlier terminated as provided below. The term of this Agreement
shall be automatically extended for additional terms of ten (10) years each,
unless either party delivers to the other party, not less then twelve (12)
months nor earlier than fifteen (15) months prior to the expiration of the
preceding term, written notice of such party's intention not to extend the term
of this Agreement.
5.2. TERMINATION FOR CAUSE.
5.2.1. Manager may terminate this Agreement for cause at
any time during the Term immediately upon written notice (except as otherwise
provided below). For purposes of this Section 5.2.1 "cause" shall include,
without limitation, the following:
5.2.1.1. If GROUP fails to materially perform any
obligation required hereunder, and such default shall continue for sixty (60)
calendar days after written notice from Manager specifying the nature and extent
of failure to materially perform such obligation, this Agreement shall terminate
automatically and immediately upon the expiration of said sixty (60) calendar
day period; provided, however, that if the obligation which GROUP fails to
perform is other than the failure to make payment of money, and greater than
sixty (60) calendar days are required to perform said obligation, then such
party shall not be in default of this Agreement and
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the Agreement shall not terminate as provided hereinabove if such party
commences performance within said sixty day period and diligently pursues said
obligation to completion.
5.2.1.2. In the event the performance by either
party hereto of any term, covenant, condition or provision of this Agreement
should be determined by a state or federal court or governmental agency or court
of law to be in violation of any statute, ordinance, or be otherwise deemed
illegal ("Jeopardy Event"), then the parties shall use their best efforts to
meet forthwith and attempt to negotiate an amendment to this Agreement to remove
or negate the effect of the Jeopardy Event. In the event the parties are unable
to negotiate such an amendment within thirty (30) days following written notice
by either party of the Jeopardy Event, then Manager may terminate this Agreement
immediately upon written notice.
5.2.2. GROUP may terminate this Agreement for cause at any
time during the Term immediately upon written notice (except as otherwise
provided below). For purposes of this Section 5.2.2 "cause" shall include,
without limitation, the following:
5.2.2.1. If Manager fails to materially perform
any obligation required hereunder which failure amounts to gross negligence,
fraud or an illegal act on the part of Manager, and such default shall continue
for sixty (60) calendar days after written notice from GROUP specifying the
nature and extent of failure to materially perform such obligation, this
Agreement shall terminate automatically and immediately upon the expiration of
said sixty (60) calendar day period; provided, however, that if the obligation
which Manager fails to perform is other than the failure to make payment of
money, and greater than sixty (60) calendar days are required to perform said
obligation, then such party shall not be in default of this Agreement and the
Agreement shall not terminate as provided hereinabove if such party commences
performance within said sixty day period and diligently pursues said obligation
to completion.
5.2.3. Either party may terminate this Agreement for cause at
any time during the Term immediately upon written notice. For purposes of this
Section 5.2.3 "cause" shall include, without limitation, the following:
5.2.3.1. If either party shall apply for or
consent to the appointment of a receiver, trustee or liquidator in bankruptcy,
make a general assignment for the benefit of creditors, file a petition or
answer seeking reorganization or arrangement with creditors, or take advantage
of any bankruptcy, insolvency, reorganization, moratorium or other law for the
benefit of creditors or if any order, judgment, or decree shall be entered by
any court of competent jurisdiction on the application of a creditor or
otherwise adjudicating either party bankrupt or approving a petition seeking
reorganization of either party or appointment of a receiver, trustee or
liquidator of either party of all or a substantial part of its assets, and such
order, judgment or decree shall continue stayed and in effect for sixty (60)
calendar days after its entry, termination shall be effective automatically and
immediately upon the occurrence of the foregoing.
5.3. JEOPARDY. In the event the performance by either party hereto
of any term, covenant, condition or provision of this Agreement should be
determined by a state or federal court or governmental agency to be in violation
of any statute or ordinance, or be otherwise
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deemed illegal ("Jeopardy Event"), then the parties shall use their best efforts
to meet forthwith and attempt to negotiate an amendment to this Agreement to
remove or negate the effect of the Jeopardy Event. In the event the parties are
unable to negotiate such an amendment within thirty (30) days following written
notice by either party of the Jeopardy Event, then either party may terminate
this Agreement immediately upon written notice.
6. RIGHTS OF MANAGER UPON TERMINATION.
6.1. In the event of the termination of this Agreement for any
reason, including without limitation the breach of this Agreement by either
party, Manager shall be entitled to recover (out of the Accounts (as defined in
Section 3.1.2.2 hereof) or otherwise) from GROUP all fees, and any and all
advances and other charges owed to Manager that had accrued but were unpaid as
of the date of termination.
6.2. In the event of termination of this Agreement for any reason,
Manager shall remain entitled to its Management Fee with respect to all Gross
Revenues (as defined in Exhibit "D" hereto) that have accrued on or before the
effective date of termination, which shall be payable, without limitation, out
of Net Revenues attributable thereto whether received before, on or after the
effective date of termination. Further, GROUP shall remain obligated to
reimburse Manager for any and all other unpaid Management Fees that have accrued
hereunder as of the date of termination.
7. REPRESENTATIONS AND WARRANTIES OF GROUP. The following
representations and warranties of GROUP are made to Manager for the purpose of
inducing Manager to enter into this Agreement. GROUP represents and warrants as
follows:
7.1. GROUP is a corporation duly organized, validly existing and in
good standing under the laws of the State of California and has all necessary
corporate powers to own its properties and to operate pursuant to its corporate
purposes.
7.2. GROUP's Board of Directors has all requisite power to execute,
deliver and perform this Agreement. Neither the execution and delivery of this
Agreement, nor the consummation and performance of the transactions contemplated
in this Agreement, shall constitute a default or an event that would constitute
a default under, or violation or breach of, GROUP's Articles of Incorporation,
Bylaws or any license, lease, franchise, mortgage, instrument, or other
agreement to which GROUP may be bound.
7.3. GROUP has furnished Manager full and complete copies of all
contracts and agreements affecting GROUP including, but not limited to, all
contracts to which GROUP is a party.
7.4. GROUP and any and all physicians providing services to the
Plans have each complied with, and are not in violation of, applicable federal,
state or local statutes, laws and regulations including, but not limited to,
statutes, laws and regulations regarding the practice of medicine and surgery in
California, participation in the Medicaid and Medicare programs or the
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operation of GROUP and all applicable standards of practice relating to the
provision of professional services hereunder.
7.5. GROUP and any and all Participating Providers providing
services for the GROUP have each obtained and currently maintain all necessary
licenses, permits, contracts, and approvals required by federal, state or local
statutes and regulations for the proper conduct of the business of the GROUP as
it is now being conducted and have been approved by the Board of Directors or
its properly designated committee, as documented by written committee minutes.
7.6. There is no action, suit, proceeding, investigation or
litigation outstanding, pending or, to the best of GROUP's knowledge,
threatened, affecting GROUP other than routine patient collection matters and
professional liability cases adequately covered by insurance.
7.7. GROUP represents and warrants that each GROUP Participating
Provider is as of the date hereof, and shall at all times during the term hereof
be and remain:
7.7.1. duly licensed to practice medicine within the State
of California and in possession of a federal DEA number, all without limitation,
restriction or condition whatsoever;
7.7.2. entitled to receive Medicare and Medicaid
reimbursement without limitation, restriction or condition whatsoever;
7.7.3. in compliance with the insurance requirements set
forth in Section 4.6 hereof.
7.8. GROUP represents and warrants that it and each GROUP
Participating Provider shall (i) comply with all applicable governmental laws,
regulations, ordinances, and directives and (ii) perform his or her work and
functions at all times in strict accordance with currently approved methods and
practices in his or her field.
8. REPRESENTATIONS AND WARRANTIES OF MANAGER. The following
representations and warranties of Manager are made to GROUP for the purpose of
inducing GROUP to enter into this Agreement. Manager represents and warrants as
follows:
8.1. Manager is a corporation duly organized, validly existing and
in good standing under the laws of the State of California and has all necessary
corporate powers to own its properties and to operate pursuant to its corporate
purposes.
8.2. Manager has all requisite power to execute, deliver and
perform this Agreement. Neither the execution and delivery of this Agreement,
nor the consummation and performance of the transactions contemplated in this
Agreement, shall constitute a default, or an event that would constitute a
default under, or violation or breach of, Manager's Certificate of
Incorporation, Bylaws or any license, lease, franchise, mortgage, instrument, or
other agreement to which Manager may be bound.
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8.3. There is no action, suit, proceeding, investigation or
litigation outstanding, pending or, to the best of Manager's knowledge,
threatened, affecting Manager.
9. MANAGER COMPENSATION.
9.1. As compensation for its services hereunder, Manager shall be
reimbursed its Costs (as defined in Exhibit D attached hereto) and paid a
management fee (the "Management Fee") in the amount set forth on Exhibit D
attached hereto and incorporated herein by reference.
9.2. After deduction of amounts which are reimbursed to Manager and
which are retained by Manager as Management Fee compensation, all remaining
Gross Revenues shall be remitted to GROUP. From such sums, Manager shall pay,
on GROUP's behalf, the Cost of Medical Services (as defined in Exhibit D
attached hereto), such other payments or disbursements which Manager may be
authorized or required to make pursuant to this Agreement and such payments or
disbursements which GROUP shall direct Manager to make. Should the funds in
GROUP's accounts not be sufficient at any time during the term of this Agreement
to make such disbursements and to meet the GROUP's financial obligations,
Manager shall have the right (but not the obligation) to loan to GROUP funds in
an amount sufficient to allow GROUP to meet its financial obligations. Such
loan shall bear interest at a rate that is at or above fair market value and
shall have such other terms as the parties may agree from time to time. Manager
shall not lend any funds to GROUP for such purposes without the prior approval
of GROUP's Board of Directors or the officer(s) of GROUP delegated such power of
approval by GROUP's Board of Directors.
10. RECORDS.
10.1. All medical records and documents, including reports, x-rays,
and other similar types of reports for patients of GROUP providers shall be the
property of GROUP's providers. GROUP agrees to require GROUP providers to allow
Manager and its duly authorized representatives to inspect, audit and duplicate
any data or records necessary for Manager to perform its duties pursuant to this
Agreement. GROUP and Manager shall comply with all applicable federal, state,
and local laws and regulations pertaining to the confidentiality of said medical
records.
10.2. All business records, information, software and systems of the
Manager relating to the provision of its services under this Agreement shall
remain the property of the Manager and may be removed by the Manager upon any
termination of this Agreement.
11. INDEMNIFICATION. Each party shall indemnify, defend and hold harmless
the other, its officers, directors, agents, contractors, representatives and
employees, and each of its affiliates from and against any and all liability,
loss, damages, claims, causes of action, and expenses associated therewith
(including, without limitation, attorneys' fees) caused or asserted to have been
caused, directly or indirectly, by or as a result of any acts, errors or
omissions hereunder of the other, its contractors, shareholders, employees or
agents during the term hereof. The provisions of this section shall survive the
expiration or earlier termination of this Agreement.
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12. PROPRIETARY INFORMATION.
12.1. At all times during the term hereof and following the
expiration or earlier termination of this Agreement, all trade secrets and
proprietary confidential information of Manager, including without limitation,
all forms of contracts and other business documents or information of Manager,
whether currently or in the future developed or maintained by Manager and
including any and all deletions, additions, modifications and amendments thereto
and further including the amount of compensation to be paid to Manager for its
services hereunder (collectively, "Manager's Proprietary Materials"), shall be
the exclusive, sole and absolute property of Manager. Both parties acknowledge
and agree that Manager has developed Manager's Proprietary Materials at
significant expense, and that said Proprietary Materials are not available for
review or use by members of the public. All of Manager's Proprietary Materials
are and shall at all times remain confidential and proprietary and constitute
valuable trade secrets of Manager. Except in the ordinary course of performing
its obligations under this Agreement and except upon Manager's prior written
consent, GROUP shall not disclose to anyone, use, copy, or take any of Manager's
Proprietary Materials for GROUP's benefit or gain either during the term of this
Agreement or at any time after the termination hereof. Upon any expiration or
earlier termination of this Agreement for any reason, GROUP shall not, without
the prior written consent of Manager, take or use any of Manager's Proprietary
Materials, and shall return to Manager all of Manager's Proprietary Materials in
GROUP's possession or control.
12.2. At all times during the term hereof and following the
termination of this Agreement, GROUP shall not, directly or indirectly,
interfere with, disrupt or attempt to disrupt the relationship, contractual or
otherwise, between Manager and any health care provider or supplier (including,
without limitation, any physician or osteopath), or any employee, independent
contractor, consultant or agent of Manager. GROUP further agrees not to hire,
engage or contract with, either as an independent contractor, employee or in any
other capacity, any personnel of Manager, other than personnel of Manager who
are GROUP's Former Employees, during the first twelve (12) months following the
effective expiration or termination date hereof without Manager's prior written
consent.
12.3. The provisions of this Section 12 shall survive the
termination of this Agreement.
13. INDEPENDENT CONTRACTORS. The parties hereto acknowledge and agree
that the relationship created between Manager and GROUP is strictly that of
independent contractors. Nothing contained herein shall be construed as
creating a partnership or joint venture relationship between the parties. Each
party hereto shall be responsible for all compensation, salaries, taxes,
withholdings, contributions, benefits, and workers' compensation insurance with
respect to all personnel employed or contracted by said party and shall
indemnify, defend and hold harmless the other party and its officers, directors,
agents, contractors, representatives and employees (and, in the case of GROUP's
indemnification of Manager, Manager's affiliates and subcontractors) from and
against any and all liability, loss, damages, claims, causes of action, and
expenses associated therewith (including, without limitation, attorneys' fees)
caused or asserted
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to have been caused, directly or indirectly, by or as a result of same. The
provisions of this Section shall survive the expiration or earlier termination
of this Agreement.
14. ASSIGNABLE OPTION AGREEMENT. The parties shall enter into an
Assignable Option Agreement in the form attached hereto as Exhibit E.
15. MISCELLANEOUS.
15.1. NO THIRD PARTY BENEFICIARIES. The parties intend that the
benefits of this Agreement shall inure only to Manager and GROUP and not to any
third person, except as expressly so stated herein. Notwithstanding anything
contained herein, or any conduct or course of conduct by any party hereto,
before or after signing this Agreement, this Agreement shall not be construed as
creating any right, claim or cause of action against either Manager or GROUP by
any other person or entity.
15.2. ENTIRE AGREEMENT. This Agreement, together with all exhibits
and schedules hereto, and all documents referred to herein, constitutes the
entire agreement between the parties with respect to the subject matter hereof,
supersedes all other and prior agreements on the same subject, whether written
or oral, and contains all of the covenants and agreements between the parties
with respect to the subject matter hereof. Each party to this Agreement
acknowledges that no representations, inducements, promises, or agreements,
orally or otherwise, have been made by the other party(ies), or by anyone acting
on behalf of any party, that are not embodied herein, and that no other
agreement, statement, or promise not contained in this Agreement shall be valid
or binding. This Agreement incorporates the Original Management Services
Agreement, together with all amendments previously made and to be made to the
date of execution hereof, and is deemed to have been effective as of the date of
the Original Management Services Agreement.
15.3. SUCCESSORS AND ASSIGNS. All of Manager's rights and duties
under this Agreement may be assigned or delegated by Manager, including but not
limited to, an assignment to Imperial Bank, a California banking corporation.
Notwithstanding any other provision of this Agreement, neither this Agreement
nor the rights and duties of this Agreement may be assigned or delegated by
GROUP. This Agreement binds the successors, heirs, and authorized assignees of
the parties.
15.4. COUNTERPARTS. This Agreement, and any amendments thereto, may
be executed in counterparts, each of which shall constitute an original
document, but which together shall constitute one and the same instrument.
15.5. HEADINGS. The section headings contained in this Agreement
are inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
15.6. NOTICES. Any notices required or permitted to be given
hereunder by either party to the other shall be in writing and shall be deemed
delivered upon personal delivery or
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delivery by electronic facsimile; twenty-four (24) hours following deposit with
a courier for overnight delivery; or seventy-two (72) hours following deposit in
the U.S. Mail, registered or certified mail, postage prepaid, return-receipt
requested, addressed to the parties at the following addresses or to such other
addresses as the parties may specify in writing:
If to GROUP: Pegasus Medical Group, Inc.
18200 Yorba Linda Boulevard, Suite 409
Yorba Linda, California 92886
Attention: President
If to Manager: Sierra Medical Management, Inc.
18200 Yorba Linda Boulevard, Suite 409
Yorba Linda, California 92886
Attention: President
15.7. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of California.
15.8. AMENDMENT. This Agreement may be amended at any time by
agreement of the parties, provided that any amendment shall be in writing and
executed by both parties.
15.9. SEVERABILITY. If any provision of this Agreement is held by a
court of competent jurisdiction to be invalid or unenforceable, the remaining
provisions will nevertheless continue in full force and effect, unless such
invalidity or unenforceability would defeat an essential business purpose of
this Agreement.
15.10. EXHIBITS AND SCHEDULES. All exhibits and schedules attached
to this Agreement are incorporated herein by this reference and all references
herein to "Agreement" shall mean this Agreement together with all such exhibits
and schedules.
15.11. TIME OF ESSENCE. Time is expressly made of the essence of
this Agreement and each and every provision hereof of which time of performance
is a factor.
15.12. DISPUTE RESOLUTION.
15.12.1. Subject to the terms of Section 15.12.2, in the event
the parties hereto are unable to resolve any and all disputes in connection with
this Agreement, either party may commence arbitration by sending a written
demand for arbitration to the other party, setting forth the nature of the
matter to be resolved by arbitration. Except as may be expressly provided to
the contrary herein, the arbitration procedure described in this Section shall
be the sole means of resolving any disputes hereunder.
15.12.2. Notwithstanding the foregoing, it is expressly
understood by the parties that the arbitration procedure described in this
Section shall not be applicable to any disputes between the parties as to
matters over which Manager has exclusive decision-making authority pursuant to
the terms hereof, including without limitation, the Manager's exclusive
decision-making
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authority with respect to the development of guidelines for the selection,
hiring and firing of health care professionals, compensation payable to health
care professionals, scope of services to be provided, patient acceptance
policies and procedures, pricing of services, negotiation and execution of
contracts, and approval of operating and capital budgets.
15.12.3. There shall be one arbitrator. If the parties shall
fail to select a mutually acceptable arbitrator within ten (10) days after the
demand for arbitration is mailed, then the parties stipulate to arbitration
before a retired judge sitting on the Los Angeles Judicial Arbitration Mediation
Services (JAMS) panel.
15.12.4. The parties shall share all costs of arbitration.
The prevailing party shall be entitled to reimbursement by the other party of
such party's attorneys' fees and costs and any arbitration fees and expenses
incurred in connection with the arbitration hereunder.
15.12.5. The substantive law of the State of California shall
be applied by the arbitrator. The parties shall have the rights of discovery as
provided for in Part 4 of the California Code of Civil Procedure and as provided
for in Section 1283.05 of said Code. The California Code of Evidence shall
apply to testimony and documents submitted to the arbitrator.
15.12.6. Arbitration shall take place in Los Angeles,
California unless the parties otherwise agree. As soon as reasonably
practicable, a hearing with respect to the dispute or matter to be resolved
shall be conducted by the arbitrator. As soon as reasonably practicable
thereafter, the arbitrator shall arrive at a final decision, which shall be
reduced to writing, signed by the arbitrator and mailed to each of the parties
and their legal counsel.
15.12.7. All decisions of the arbitrator shall be final,
binding and conclusive on the parties and shall constitute the only method of
resolving disputes or matters subject to arbitration pursuant to this Agreement.
The arbitrator or a court of appropriate jurisdiction may issue a writ of
execution to enforce the arbitrator's judgment. Judgment may be entered upon
such a decision in accordance with applicable law in any court having
jurisdiction thereof.
15.12.8. Notwithstanding the foregoing, because time is of
the essence of this Agreement, the parties specifically reserve the right to
seek a judicial temporary restraining order, preliminary injunction, or other
similar short term equitable relief, and grant the arbitrator the right to
make a final determination of the parties' rights, including whether to make
permanent or dissolve such court order.
15.12.9. Notwithstanding the foregoing, any and all
arbitration proceedings are conditional upon such proceedings being covered
under the parties' respective risk insurance policies.
15.13. ATTORNEYS' FEES. Should either party institute any action or
procedure to enforce this Agreement or any provision hereof, or for damages by
reason of any alleged breach
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of this Agreement or of any provision hereof, or for a declaration of rights
hereunder (including, without limitation, arbitration), the prevailing party in
any such action or proceeding shall be entitled to receive from the other party
all costs and expenses, including without limitation reasonable attorneys' fees,
incurred by the prevailing party in connection with such action or proceeding.
15.14. FURTHER ASSURANCES. The parties shall take such actions and
execute and deliver such further documentation as may reasonably be required in
order to give effect to the transactions contemplated by this Agreement and the
intentions of the parties hereto.
15.15. RIGHTS CUMULATIVE. The various rights and remedies herein
granted to Manager or GROUP shall be cumulative and in addition to any other
rights Manager or GROUP, respectively, may be entitled to under law. The
exercise of one or more rights or remedies shall not impair the right of Manager
or GROUP to exercise any other right or remedy, at law or equity.
15.16. FEDERAL SOCIAL SECURITY REQUIREMENTS. Pursuant to Section
1395x (V)(1)(I) of Title 42 of the United States Code, with respect to any
services furnished under the terms of this Agreement if the value or cost of
which is Ten Thousand Dollars ($10,000) or more over a twelve (12) month period,
until the expiration of four (4) years after the termination of this Agreement,
Manager shall make available upon written request to the Secretary of the United
States Department of Health and Human Services, or upon request by the
Comptroller General of the United States General Accounting Office, or any of
their duly authorized representatives, a copy of this Agreement and such books,
documents and records as are necessary to certify the nature and extent of the
costs of the services provided by Manager under this Agreement.
Manager further agrees that in the event Manager carries out any of
its duties under this Agreement through a subcontract, with a value or cost of
Ten Thousand Dollars ($10,000) or more over a twelve (12) month period, such
subcontract shall contain a clause to the effect that until the expiration of
four (4) years after the furnishing of such services pursuant to such
subcontract, the subcontractor shall make available, upon written request to the
Secretary of the United States Department of Health and Human Services, or upon
request to the Comptroller General of the United States General Accounting
Office, or any of their duly authorized representatives, the subcontract and
such books, documents and records of such organization as are necessary to
verify the nature and extent of such costs.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
"MANAGER" "GROUP"
SIERRA MEDICAL MANAGEMENT, INC. PEGASUS MEDICAL GROUP, INC.
By: By:
------------------------------- ------------------------------
Its: Its:
------------------------------- ------------------------------
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LIST OF EXHIBITS AND SCHEDULES
Exhibits
--------
A - Master Lease
B - Furniture, Fixtures & Equipment
C - Power of Agency
D - Management Fee
Schedule
--------
7.9.2 Practice Employee Liabilities
<PAGE>
EXHIBIT "A"
MASTER LEASE
Set forth below is a list of the leases which comprise the Master Lease and
are attached as Exhibit "A" to the Management Services Agreement, made and
entered into as of October 31, 1997, by and between Sierra Medical Management,
Inc. and Pegasus Medical Group, Inc.; these leases have been intentionally
omitted from this copy of said Management Services Agreement.
1. West Lancaster Plaza Lease commencing on November 1, 1997 by and
between The Prudential Insurance Company of America, Inc., a New Jersey
Corporation and Pegasus Medical Group, Inc., a California Corporation (for 2783
West Avenue L, Lancaster, California 93536).
2. Lease for 2151 East Palmdale Boulevard, Palmdale, California by and
between 22nd Street Plaza, a California Limited Partnership and Pegasus Medical
Group, Inc.
<PAGE>
EXHIBIT "B"
FURNITURE, FIXTURES & EQUIPMENT
<PAGE>
EXHIBIT "C"
POWER OF AGENCY
<PAGE>
EXHIBIT "C"
POWER OF AGENCY
This Power of Agency is made and entered into in connection with that
certain Management Services Agreement (the "Agreement") dated as of the 31st day
of October, 1997, between Sierra Medical Management, Inc., a Delaware
corporation ("Manager"), and Pegasus Medical Group, Inc., a professional
corporation ("GROUP"), as amended.
1. DEFINITIONS. Capitalized terms used herein and not otherwise defined
herein shall have the meaning assigned to them in the Agreement.
2. POWER OF MANAGER. GROUP hereby appoints the Manager or its designee
or successor, as GROUP's agent ("Agent") to act for GROUP and in GROUP's name,
place and stead for the purposes of: (a) communicating the terms and conditions
under which GROUP would accept a Contract with each Plan, as set forth in the
Agreement and Exhibit "C" thereto; (b) executing on behalf of GROUP each
Contract that contains said terms and conditions or that contains any other
terms and conditions that are not rejected by GROUP; (c) administering executed
Contracts, as set forth below; (d) performing all actions on behalf of GROUP
contemplated by the Agreement relating to Contracts, including, without
limitation, the evaluation, negotiation and renewal of Contracts; (e)
negotiating and executing all business agreements and leases on GROUP's behalf
in accordance with the Agreement; (f) endorsing all checks made payable to GROUP
for services provided to Members; (g) taking all steps required or desirable to
submit, process and collect all claims for payment to patients, Plans, Medicare,
Medicaid and all other third party payors; and (h) receiving and depositing
capitation and other payments received by GROUP.
3. ADMINISTRATION. Agent shall maintain in his/her files a copy of each
executed Contract and shall provide to GROUP a list of Plans contracting with
GROUP. Notwithstanding anything herein to the contrary, GROUP shall look solely
to Plans and/or enrollees or beneficiaries of Plans, as applicable, for payment
for medical services and supplies and neither Manager nor any officer, employee,
agent or affiliate of Manager shall be liable for such payment.
4. TERM. The term of this Power of Agency shall be coextensive with the
term of the Agreement.
5. FULL AUTHORITY. Agent is hereby granted full authority to act in any
manner proper, necessary or convenient to the exercise of the foregoing powers,
including substitution and revocation. GROUP hereby ratifies every act that
Agent may lawfully perform in exercising those powers.
<PAGE>
IN WITNESS WHEREOF, this Power of Agency is executed effective as of the
day and year first above written.
"MANAGER" "GROUP"
SIERRA MEDICAL MANAGEMENT, INC. PEGASUS MEDICAL GROUP, INC.
By: By:
------------------------------- ------------------------------
Its: Its:
------------------------------- ------------------------------
<PAGE>
EXHIBIT "D"
MANAGEMENT FEE
<PAGE>
EXHIBIT "D"
MANAGEMENT FEE
A. DEFINITIONS
COST OF MEDICAL SERVICES means with respect to the GROUP, the
aggregate compensation of GROUP's employed physicians and physician extenders
(e.g. physician assistants and nurse practitioners), charges incurred by the
GROUP for independent contractor physicians, the cost of services ordered by
GROUP through its physicians for managed care patients, the cost of GROUP's
employee benefits including, but not limited to, vacation pay, employer and
employee contributions to any 401(k) plan or other retirement plan for the
benefit of GROUP employees, sick pay, health care expenses, GROUP's share of
employment and payroll taxes, GROUP's employees' professional dues and all other
expenses and payments required to be made by GROUP to or for physicians pursuant
to physician employment and independent contractor agreements (including expense
reimbursements, discretionary bonuses, incentives based on profitability or
productivity, and payments paid and accrued or deferred).
MANAGER'S COSTS means all operating and non-operating expenses and
other costs directly or indirectly incurred by Manager, including but not
limited to direct labor costs (for all employees of Manager or its affiliates
and for any independent contractors or consultants to Manager), indirect labor
costs, supplies, all amounts paid by Manager or GROUP to satisfy any obligations
of GROUP to non-professional employees and third parties (other than for the
Cost of Medical Services), obligations under any lease or purchase agreement or
arrangement for which Manager has direct or indirect financial liability, and
direct and indirect overhead and other expenses relating to the operation of
GROUP's administrative and non-medical management affairs and relating to
GROUP's direct and indirect corporate overhead (including but not limited to all
interest expense and other expenses which are attributable generally to
Manager's business operations in accordance with Manager's corporate allocation
policies as such are in effect from time to time).
GROSS REVENUES means all sums which are (i) attributed to GROUP
(determined on an accrual basis) as compensation for the provision of medical
services by GROUP employed and independent contractor physicians and physician
extenders, including but not limited to all capitated income, all rights to
receive GROUP's portion of hospital and other shared risk pool payments, all
copayments, coordination of benefits, third party recovery, insured services,
enrollment protection (or other such revenue as is available to replenish
capitated services) and all rights to receive fee-for-service income for
medical, diagnostic and therapeutic services provided to GROUP patients; and
(ii) derived by GROUP or its employees other than from the provision of medical
services, including but not limited to consulting services, insurance and legal
recoveries, royalties and licensing payments, franchise payments, rents and
lease payments, and proceeds from the sale of assets or the merger or other
business combination of GROUP.
<PAGE>
NET-PRE-TAX INCOME means Gross Revenues less the sum of Manager's
Costs and the Cost of Medical Services after provision of related bonuses but
before provision for income taxes.
B. MANAGEMENT FEE
For its services hereunder, which shall include the providing of all
facilities and furniture, fixtures and equipment at the Premises and all
non-physician employees of Manager who perform services at or for the
Practice and all management services provided hereunder, Manager shall (i)
retain that portion of the Gross Revenues which is equal to Manager's Costs
plus (ii) [**] of Gross Revenues plus (iii) a fee for marketing and public
relations services of [**] per month plus (iv) [**] of Net Pre-tax Income in
excess of [**] of Gross Revenues; provided however, that if after the payment
of Manager's Costs as set forth in item (i) herein GROUP's working capital is
insufficient to meet GROUP's liabilities or other obligations, including but
not limited to the payment of $700,000 to Prospect Medical Group, Inc.
pursuant to the terms of a Secured Promissory Note, of even date herewith, by
and between GROUP and Prospect Medical Group, Inc., the amount of Gross
Revenues paid to Manager shall be deferred until GROUP is able to meet such
obligations.
2
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AMENDED AND RESTATED ASSIGNABLE OPTION AGREEMENT
THIS AMENDED AND RESTATED ASSIGNABLE OPTION AGREEMENT ("Agreement") is made
as of the 2nd day of September, 1998 and deemed to have been effective as of
October 31, 1997, by and among Sierra Medical Management, Inc., a Delaware
corporation ("Sierra Medical Management"), Pegasus Medical Group, Inc., a
California professional medical corporation ("Group"), and Prospect Medical
Group, Inc., a California professional corporation ("Prospect Medical Group"),
with reference to the following facts:
RECITALS
A. Group is a professional corporation that is organized and operated as
a medical practice (the "Practice").
B. Group, Marvin L. Ginsburg, M.D., Medical Corporation, d/b/a A.V.
Western Medical Group, Inc., a California corporation ("Seller") and J. Robert
West, M.D. entered into that certain Asset Purchase Agreement, dated as of
October 29, 1997 (the "Asset Purchase Agreement"), pursuant to which Seller is
selling certain assets to Group (the "Acquisition").
C. Subject to the conditions set forth herein, effective as of the
Closing of the Acquisition, Prospect Medical Group desires to grant to Sierra
Medical Management, and Sierra Medical Management desires to acquire from
Prospect Medical Group, (i) an assignable option to purchase all of the assets
of Group, and (ii) the right to designate the purchaser ("Successor Physician")
of all or part of the issued and outstanding stock in Group. When used in this
Agreement, the term "Assets" shall mean all of Group's and Prospect Medical
Group's right, title, interest and estate in and to all the assets of every kind
and description used in or pertaining to the Practice, including but not limited
to the assets set forth on Exhibit A. When used in this Agreement, the term
"Stock" shall mean all of Prospect Medical Group's right, title, interest and
estate in and to all of the issued and outstanding stock in Group, including any
rights to any additional stock, preemptive rights, warrants, and the like, as
set forth on Exhibit B.
D. Prospect Medical Group, Group and Sierra Medical Management desire to
enter into this Agreement to incorporate within the terms of one agreement all
of the amendments previously made and to be made as of the date of execution
hereof to an Assignable Option Agreement made as of October 31, 1997 (the
"Original Agreement").
NOW, THEREFORE, in consideration of the foregoing promises and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged by the parties, Group, Prospect Medical Group, and Sierra Medical
Management agree as follows:
<PAGE>
1. GRANT OF OPTION.
1.1 Prospect Medical Group hereby grants to Sierra Medical Management an
assignable option to purchase all or any part of the Assets (the "Assets
Option"), on the terms and subject to the conditions set forth in this
Agreement.
1.2 Group and Prospect Medical Group hereby grant to Sierra Medical
Management the assignable right to designate a Successor Physician or Successor
Physicians, which person or persons must be duly licensed physicians in the
State of California or otherwise permitted by law to be a shareholder in a
professional corporation, to purchase all or part of the Stock (the "Stock
Option"), on the terms and subject to the conditions set forth herein. In its
sole discretion, Sierra Medical Management may designate the amount of Stock
which is to be purchased. The Assets Option and the Stock Option are
collectively referred to herein as the "Option."
1.3 Group and Prospect Medical Group represent and warrant that as of the
day and year first above written and during the term of this Agreement, Exhibits
A and B are true and complete listings of the Assets and Stock, respectively, as
revised from time to time pursuant to this Agreement.
1.4 Other than in connection with that certain Amended and Restated Credit
Succession Agreement, dated as of July 14, 1997, by and among Prospect Medical
Holdings, Inc., a Delaware corporation ("Prospect Medical Holdings"), Prospect
Medical Group, Gregg DeNicola, M.D., Santa Ana/Tustin Physicians Group, Inc., a
California professional corporation ("Santa Ana"), Prospect Medical Systems,
Inc., a Delaware corporation ("Prospect Medical Systems"), and Imperial Bank, a
California banking corporation ("Imperial"), as amended, and as supplemented by
the Joinder Agreement, dated as of September 25, 1997, entered into by and among
Sierra Medical Management, Sierra Primary Care Medical Group, A Medical
Corporation ("Sierra Medical Group"), Gregg DeNicola, M.D., Prospect Medical
Holdings, Prospect Medical Systems, Prospect Medical Group, Santa Ana and
Imperial, and the Joinder Agreement, dated as of October 31, 1997, entered into
by and among Group, Sierra Medical Management, Sierra Medical Group, Gregg
DeNicola, M.D., Prospect Medical Holdings, Prospect Medical Systems, Prospect
Medical Group, Santa Ana and Imperial (as amended and supplemented, the "Amended
and Restated Credit Succession Agreement"), Group shall not recognize any share
transfer or other action not in compliance with the terms of this Agreement.
2. TERM OF AGREEMENT. The term of this Agreement commences as of the day and
year first above written and continues for thirty (30) years ("Term"). So long
as the term of the Management Services Agreement, made and entered into of even
date herewith, by and between Sierra Medical Management and Group, as amended
(the "Management Services Agreement"), is automatically extended pursuant
thereto, the term of this Agreement shall be automatically extended for
additional coextensive terms of ten (10) years each. In the event the
Management Services Agreement is terminated pursuant to its terms, this
Agreement shall terminate upon the effective date of termination of said
Management Services Agreement.
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3. OPTION PRICE. The purchase price for the Option (the "Option Price") is
One Hundred Dollars ($100) and Group and Prospect Medical Group acknowledge
receipt of such payment.
4. EXERCISE OF OPTION.
4.1 During the Term of this Agreement, Sierra Medical Management may elect
to exercise the Option at any time. In the event of an election by Sierra
Medical Management to exercise the Option, Sierra Medical Management may
exercise either the Assets Option or the Stock Option, or both, at Sierra
Medical Management's sole discretion.
4.2 Notwithstanding the provisions of Section 4.1, if the Management
Services Agreement is terminated by either party, for any reason, Sierra Medical
Management's right to exercise the Option is automatically and immediately
exercised as of the termination date of the Management Services Agreement such
that Sierra Medical Management may exercise either the Assets Option or the
Stock Option, or both, at such time.
4.3 To the extent that the Assets Option is exercised by Sierra Medical
Management, Sierra Medical Management will send Group a written notice (the
"Assets Exercise Notice") specifying the Assets to be purchased. Sierra Medical
Management may exercise the Assets Option as many times as Sierra Medical
Management elects in its sole discretion.
4.4 To the extent that the Stock Option is exercised by Sierra Medical
Management, Sierra Medical Management will send Group a written notice (the
"Stock Exercise Notice") specifying the Stock to be purchased. Sierra Medical
Management may designate the Successor Physician(s) who will exercise the Stock
Option as many times as Sierra Medical Management elects in its sole discretion.
4.5 The Assets Option and the Stock Option are independent of each other,
and can be exercised at different times during the Term.
4.6 Sierra Medical Management may cancel any Assets Exercise Notice or
Stock Exercise Notice at any time.
4.7 Group and Prospect Medical Group shall cooperate with Sierra Medical
Management in any due diligence.
5. ASSIGNMENT OF THE OPTION. Sierra Medical Management may elect to assign
either the Assets Option or the Stock Option or both to any person, by a written
assignment, signed by both Sierra Medical Management and the assignee, which
designates the Assets or Stock. The assignee shall agree as a condition of the
assignment to be bound by the terms of this Agreement. Thereafter, only the
assignee named in the assignment (or its nominee) shall have the right to
exercise the applicable Assets Option and/or the Stock Option as to the
designated Assets and/or Stock, and that assignee, rather than Sierra Medical
Management, shall enter into a purchase agreement upon exercise of the Assets
Option and/or the Stock Option, as applicable. Written
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notice of any such assignment shall be given by Sierra Medical Management to
Group and Prospect Medical Group within a reasonable time period following
execution of any assignment pursuant to this Agreement. When the context so
requires in this Agreement, the term "Sierra Medical Management" shall be
deemed to refer to an assignee holding an assignment of an Asset Option or
Stock Option, and the terms "party" and "parties" shall be deemed to include
that assignee. The parties further understand and agree that the Assets
Option and the Stock Option are concurrently herewith being collaterally
assigned to Imperial pursuant to that certain Collateral Assignment of
Transaction Documents, dated as of October 31, 1997.
6. PURCHASE PRICE OF THE ASSETS OR STOCK.
6.1 PURCHASE PRICE.
(a) ASSETS PURCHASE PRICE. The purchase price for the Assets to be
purchased pursuant to the exercise of the Assets Option shall be $1,000 ("Assets
Purchase Price"). The purchase price of any partial purchase of the Assets
shall be a pro-rata percentage of the full Assets Purchase Price.
(b) STOCK PURCHASE PRICE. The purchase price for the Stock to be
purchased pursuant to the exercise of the Stock Option shall be $1,000 ("Stock
Purchase Price"). The purchase price of less than all of the issued and
outstanding Stock is a pro-rata percentage of the full Stock Purchase Price.
6.2 PAYMENT. For the Assets, Sierra Medical Management shall pay Group
the Assets Purchase Price at Closing in the form of immediately available funds
transferred by wire to an account at a financial institution designated by
Group. For the Stock, Sierra Medical Management shall cause the Successor
Physician to pay Prospect Medical Group the Stock Purchase Price.
6.3 CLOSING. The transactions contemplated by this Agreement are to close
forty-five (45) days after the date of either the Assets Exercise Notice or the
Stock Exercise Notice, as the case may be ("Closing"), unless extended by Sierra
Medical Management.
7. ADDITIONAL OBLIGATIONS OF GROUP.
7.1 AFFIRMATIVE COVENANTS. To the extent that Group and Prospect Medical
Group participate in the Practice and own, control, or use the Assets, Group and
Prospect Medical Group shall:
(a) CONDUCT OF PRACTICE. Conduct Group's business efficiently and
without voluntary interruption and preserve all rights, privileges, and
franchises held by Group and Group's Practice, including the maintenance of all
contracts, copyrights, trademarks, licenses, registrations, etc.;
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(b) USE. Make use of the Assets with reasonable care to prevent
diminution in value of the Practice and the Assets, and keep the Assets in good
repair;
(c) VALUE. Perform all acts necessary to maintain, preserve, and
protect the Assets, and maintain fire and extended coverage insurance on the
Assets in the amounts and under policies acceptable to Sierra Medical
Management, and provide Sierra Medical Management with the original policies and
certificates at Sierra Medical Management's request;
(d) FINANCING STATEMENTS. Execute and deliver to Sierra Medical
Management all financing statements and other documents that Sierra Medical
Management requests, in order to put third parties on notice of this Agreement;
(e) ACCESS. Permit Sierra Medical Management, its representatives,
and its agents to inspect the Assets at any time, and to make copies of records
pertaining to the Assets, at reasonable times at Sierra Medical Management's
request;
(f) REPORTS. Furnish Sierra Medical Management any reports relating
to the Assets at Sierra Medical Management's request;
(g) DEFAULTS. Notify Sierra Medical Management promptly in writing
of any default, potential default, or any development that might have a material
adverse effect on the Assets, the Stock, or the Practice, or of any litigation
that may have a material adverse effect on the Practice;
(h) EXPENSES. Pay all expenses, including attorneys' fees, incurred
by Sierra Medical Management in the perfection, preservation, realization,
enforcement, and exercise of its rights under this Agreement, including but not
limited to accounting, correspondence, collection efforts, filing, recording,
and recordkeeping;
(i) INDEMNITY. Indemnify Sierra Medical Management against losses,
liabilities, or damages, costs and expenses of any kind, including reasonable
attorneys' fees, caused to Sierra Medical Management by reason of its interest
in the Assets and/or the Stock;
(j) TAXES. Pay promptly when due all taxes and assessments owed in
connection with the Assets and the Stock; and
(k) DELIVERY OF CERTIFICATES. Deliver to Sierra Medical Management
all certificates heretofore issued representing all of the shares of Group's
capital stock held of record or beneficially owned by Prospect Medical Group,
and each certificate hereafter issued representing any share of Group's capital
stock, with each certificate endorsed in blank for transfer. Notwithstanding the
foregoing, this Section 7.1(k) shall only apply in the event that the Amended
and Restated Credit Succession Agreement is no longer in effect.
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7.2 NEGATIVE COVENANTS. Except as required under the Amended and Restated
Credit Succession Agreement, without the prior written consent of Sierra Medical
Management, Group and Prospect Medical Group shall not:
(a) TRANSFER. Sell, lease, transfer, or otherwise dispose of the
Assets or Stock;
(b) DEBT. Incur, guarantee, assume or otherwise become liable for
any borrowing or increase any existing indebtedness; or discharge or cancel any
debt owed to Group;
(c) NO FURTHER HYPOTHECATION. Pledge, hypothecate, encumber, redeem
or dispose of the Assets, the Stock or any interest therein until all of Group's
obligations under this Agreement have been fully satisfied or the Assets or the
Stock has been released;
(d) LOCATION. Move the Assets from their present locations without
the prior written consent of Sierra Medical Management;
(e) USE. Use the Assets or the Stock for any unlawful purpose or in
any way that would void any effective insurance;
(f) NAME AND LOCATION CHANGES. Change the name or place of business
or use a fictitious business name without the prior express consent of Sierra
Medical Management; and
(g) ISSUANCE OF STOCK; CHANGE IN OWNERSHIP; MERGERS AND
CONSOLIDATION. Permit any issuance of Stock, other equity, or debt; permit any
change in the composition or respective percentage ownership of Group; permit
Group to be merged, consolidated or otherwise reorganized with or into any other
corporation, partnership, trade, business, or the like; amend or otherwise
modify its articles of incorporation and bylaws; dissolve; or enter into any
agreement with any person to do any of the foregoing.
8. CONFIDENTIALITY. The parties shall use all good faith efforts to keep the
contents of this Agreement and all other aspects of the negotiations preceding
execution of this Agreement confidential. Unless required by law, Group,
Prospect Medical Group, and Sierra Medical Management shall not disclose the
contents of this Agreement or the negotiations leading to this Agreement to
third parties other than Imperial without the prior written consent of the other
party. Sierra Medical Management shall ensure that all of the assignees
likewise comply with the obligations of confidentiality imposed by this Section,
except that Sierra Medical Management and the assignees may disclose the
contents of such to their respective agents, representatives, contractors, and
employees to the extent necessary to exercise their respective rights or perform
their respective obligations hereunder.
9. GENERAL.
9.1 COMPLIANCE WITH LAW. Group and Prospect Medical Group shall comply
with all applicable requirements of the Joint Commission on the Accreditation of
Healthcare
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Organizations, the Medicare and Medicaid programs, applicable state law and
regulations, and other licensing and accreditation authorities.
9.2 RELATIONSHIP OF PARTIES. In the exercise of their respective rights
and the performance of their respective obligations under this Agreement, Group
and Prospect Medical Group on the one hand and Sierra Medical Management (or any
assignee) on the other hand are acting in the capacity of the grantor and
grantee of an option to purchase all or a portion of the Assets and/or Stock,
and nothing in this Agreement is intended nor shall be construed to create
between the parties an employer/employee relationship, a partnership or joint
venture relationship or a landlord/tenant relationship.
9.3 ASSIGNMENT. All of Sierra Medical Management' rights and duties under
this Agreement may be assigned or delegated by Sierra Medical Management or
Prospect Medical Holdings, including but not limited to an assignment to
Imperial; provided, however, that Sierra Medical Management or Prospect Medical
Holdings, Inc., shall give written notice of any such assignment to the Group
and Prospect Medical Group within a reasonable time period. Notwithstanding any
other provision of this Agreement, neither this Agreement nor the rights and
duties of this Agreement may be assigned or delegated by Group or Prospect
Medical Group. This Agreement binds the successors, heirs, and authorized
assignees of the parties.
9.4 ENTIRE AGREEMENT. Except as expressly provided in this Agreement to
the contrary, this Agreement, including its incorporated exhibits, constitutes
the entire agreement between the parties with respect to the Option, and
supersedes all other and prior agreements on the same subject, whether written
or oral, and contains all of the covenants and agreements between the parties
with respect to the subject matter hereof. Except as expressly provided in this
Agreement to the contrary, each party to this Agreement acknowledges that no
representations, inducements, promises, or agreements, orally or otherwise, have
been made by any other party hereto, or by anyone acting on behalf of any party
hereto, that are not embodied herein, and that no agreement, statement, or
promise not contained in this Agreement shall be valid or binding. This
Agreement incorporates the Original Agreement, together with all amendments
previously made and to be made to the date of execution hereof, and is deemed to
have been effective as of the date of the Original Agreement.
9.5 COUNTERPARTS. This Agreement, and any amendments hereto, may be
executed in counterparts, each of which shall constitute an original document,
but which together shall constitute one and the same instrument.
9.6 HEADINGS. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
9.7 NOTICES. Any notices required or permitted to be given hereunder by
any party to another shall be in writing and shall be deemed delivered upon
personal delivery, twenty-four (24) hours following deposit with a courier for
overnight delivery or seventy two (72) hours
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following deposit in the U.S. Mail, registered or certified mail, postage
prepaid, return-receipt requested, addressed to the parties at the following
addresses or to such other addresses as the parties may specify in writing:
If to Group or Pegasus Medical Group, Inc.
Prospect Medical Group: c/o Prospect Medical Group, Inc.
18200 Yorba Linda Boulevard
Yorba Linda, California 92886
Attention: Jacob Y. Terner, M.D.
If to Sierra Medical Management: Sierra Medical Management, Inc.
c/o Prospect Medical Holdings
18200 Yorba Linda Boulevard
Yorba Linda, California 92886
Attention: Jacob Y. Terner, M.D.
9.8 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
9.9 AMENDMENT. This Agreement may be amended at any time by agreement of
the parties, provided that any amendment shall be in writing and executed by all
parties.
9.10 SEVERABILITY. If any provision of this Agreement is held by a court
of competent jurisdiction to be invalid or unenforceable, the remaining
provisions will nevertheless continue in full force and effect, unless such
invalidity or unenforceability would defeat an essential business purpose of
this Agreement.
9.11 FEES AND EXPENSES. Group, Prospect Medical Group, and Sierra Medical
Management each shall bear their own expenses, including, without limitation,
attorneys' and accountants' fees, incurred in connection with the preparation of
this Agreement and the transactions contemplated hereby.
9.12 EXHIBITS AND SCHEDULES. All exhibits and schedules attached to this
Agreement are incorporated herein by this reference and all references herein to
"Agreement" shall mean this Agreement together with all such exhibits and
schedules.
9.13 TIME OF ESSENCE. Time is expressly made of the essence of this
Agreement and each and every provision hereof of which time of performance is a
factor.
9.14 DISPUTE RESOLUTION. In the event the parties hereto are unable to
resolve any dispute in connection with this Agreement, the parties may mutually
agree to arbitrate as set forth below.
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(a) There shall be one arbitrator. If the parties shall fail to
select a mutually acceptable arbitrator within ten (10) days after the demand
for arbitration is mailed, then the parties stipulate to arbitration before a
retired judge sitting on the Los Angeles, California, Judicial Arbitration
Mediation Services (JAMS) panel.
(b) The substantive law of the State of California shall be applied
by the arbitrator.
(c) Arbitration shall take place in Los Angeles, California, unless
Group and a majority of the other parties otherwise agree. As soon as
reasonably practicable, a hearing with respect to the dispute or matter to be
resolved shall be conducted by the arbitrator. As soon as reasonably
practicable thereafter, the arbitrator shall arrive at a final decision, which
shall be reduced to writing, signed by the arbitrator and mailed to each of the
parties and their legal counsel.
(d) All decisions of the arbitrator shall be final, binding and
conclusive on the parties and shall constitute the only method of resolving
disputes or matters subject to arbitration pursuant to this Agreement. The
arbitrator or a court of appropriate jurisdiction may issue a writ of execution
to enforce the arbitrator's judgment. Judgment may be entered upon such a
decision in accordance with applicable law in any court having jurisdiction
thereof.
(e) Notwithstanding the foregoing, because time is of the essence of
this Agreement, the parties specifically reserve the right to seek a judicial
temporary restraining order, preliminary injunction, or other similar short term
equitable relief, and grant the arbitrator the right to make a final
determination of the parties' rights, including whether to make permanent or
dissolve such court order.
(f) Notwithstanding the foregoing, any and all arbitration
proceedings are conditional upon such proceedings being covered within the
parties' respective risk insurance policies.
9.15 ATTORNEYS' FEES. Should any of the parties hereto institute any
action or procedure to enforce this Agreement or any provision hereof (including
without limitation, arbitration), or for damages by reason of any alleged breach
of this Agreement or of any provision hereof, or for a declaration of rights
hereunder (including, without limitation, by means of arbitration), the
prevailing party in any such action or proceeding shall be entitled to receive
from the other party all costs and expenses, including without limitation
reasonable attorneys' fees, incurred by the prevailing party in connection with
such action or proceeding.
9.16 FURTHER ASSURANCES. The parties shall take such actions and execute
and deliver such further documentation as may reasonably be required in order to
give effect to the transactions contemplated by this Agreement and the
intentions of the parties hereto.
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9.17 RIGHTS CUMULATIVE. The various rights and remedies herein granted to
the respective parties hereto shall be cumulative and in addition to any other
rights any such party may be entitled to under law. The exercise of one or more
rights or remedies by a party shall not impair the right of such party to
exercise any other right or remedy, at law or equity.
9.18 CONFLICTS. In the event that any provision contained herein shall
conflict with the Amended and Restated Credit Succession Agreement, the
provision of the Amended and Restated Credit Succession Agreement shall control
and such conflicting provision herein shall be of no further force or effect.
IN WITNESS WHEREOF, Group, Prospect Medical Group, and Sierra Medical
Management execute this Agreement by their duly authorized representatives as
set forth below.
"SIERRA MEDICAL MANAGEMENT, INC." "GROUP"
SIERRA MEDICAL MANAGEMENT, INC., PEGASUS MEDICAL GROUP, INC.,
a Delaware corporation a California professional corporation
By: Jacob Y. Terner, M.D. By: Jacob Y. Terner, M.D.
--------------------------- --------------------------------
Jacob Y. Terner, M.D., Jacob Y. Terner, M.D.,
Chief Executive Officer President
"PROSPECT MEDICAL GROUP"
Prospect Medical Group, Inc.,
a California professional corporation
By: Jacob Y. Terner, M.D.
--------------------------------
Jacob Y. Terner, M.D.,
Vice President
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EXHIBIT "A"
ASSETS
1. All contracts and agreements, including all payor contracts, vendor
contracts, loan agreements, leases and subleases.
2. All risk pool or other incentive arrangement payments relating to the
Practice, including hospital incentive funds, and any capitation advances to
physicians.
3. All cash, bank balances, monies in possession of any bank, other cash
items, marketable securities of Group and prepaid deposits relating to the
Practice.
4. All accounts receivable of Group ("Accounts Receivable") relating to
the Practice. As used herein, "Accounts Receivable" shall include all rights to
payment for goods or services rendered, whether or not yet earned by
performance, all other obligations and receivables from others no matter how
evidenced relating to the Practice, including purchase orders, notes,
instruments, drafts and acceptances and all guarantees of the foregoing and
security therefor, relating to the Practice.
5. All supplies and inventory relating to the Practice.
6. All patient records, files and X-rays relating to the Practice.
7. All of Group's goodwill relating to the Practice, which may include
location goodwill, name recognition goodwill, patient allegiance, etc.
8. All business, financial and accounting records and books of account
relating to the Practice, exclusive of Group's Articles, Bylaws, corporate
minutes, stock shares and general ledger.
9. Group's right to reimbursement for all professional services provided
to managed care and fee-for-service patients relating to the Practice.
10. All of Group's furniture, fixtures, leasehold improvements, machinery,
equipment, inventories, supplies and other like tangible personal property used
in the Practice.
11. All trademarks, trade names, fictitious business names, copyrights,
logos, licenses, ownership interests in telephone numbers at the Practice, or
related items of Group that in any way pertain to the Practice.
<PAGE>
EXHIBIT "B"
STOCK
Stock has been pledged to Imperial Bank, a California banking corporation
("Bank") pursuant to the terms of that certain Joinder Agreement, dated as of
even date herewith, by and among Sierra Medical Management, Inc., a Delaware
corporation, Pegasus Medical Group, Inc., a California professional corporation,
Gregg DeNicola, M.D., Prospect Medical Holdings, Inc., a Delaware corporation
("Borrower"), Prospect Medical Systems, Inc., a Delaware corporation
("Systems"), Prospect Medical Group, Inc., a California professional corporation
("Group"), Santa Ana/Tustin Physicians Group, Inc., a California professional
corporation ("Santa Ana"), Pegasus Medical Group, Inc., a California
professional corporation and Bank relating to the Amended and Restated Credit
Succession Agreement, dated as of July 14, 1997, by and among Bank, Borrower,
Systems, Group, Santa Ana and Gregg DeNicola, M.D.
<PAGE>
ASSIGNMENT AND ASSUMPTION AGREEMENT
For value received, MARVIN L. GINSBURG, M.D., MEDICAL CORPORATION d/b/a
A.V. WESTERN MEDICAL GROUP, INC., a California corporation (hereinafter
"Assignor"), hereby assigns, transfers, sets over and delivers to Pegasus
Medical Group, Inc., a California professional corporation (hereinafter
"Assignee"), all right, title and interest Assignor may have in and to those
certain contracts, leases, liabilities and obligations (hereinafter
"Obligations") as described in that certain agreement between Assignor and
Assignee entitled "Asset Purchase Agreement" of even date herewith (hereinafter
"Purchase Agreement"). A copy of said Agreement is attached hereto and
incorporated herein by reference.
By this Assignment, which shall be effective as of 12:00 midnight on the
Closing Date under the Purchase Agreement, Assignor hereby delegates to Assignee
all of it duties and obligations of performance under each and every Obligation
set forth in said Contracts (as such term is defined in the Purchase Agreement)
and Assignee hereby agrees to perform any and all other Obligations required to
be performed by Assignor (other than the payment of indebtedness incurred prior
to the Closing Date) pursuant to the terms of each Obligation pursuant to such
Contracts, at the time and in the manner as required thereby and shall be bound
by all other terms, covenants and conditions contained therein, all with the
same force and effect as if Assignee were originally names as a party therein
prorated as of the Closing Date.
By accepting this Assignment, Assignee agrees to assume all of the
Obligations (other than the payment of indebtedness incurred prior to the
Closing Date) and to indemnify and hold Assignor and its employees, agents,
officers, directors, representatives and legal representatives, harmless from
and against any and all costs, expenses, losses, liabilities, damages or
claims, including attorneys' fees, resulting from non-performance of any of
the duties arising under the Obligations accrued after 12:00 midnight on the
Closing Date under the Purchase Agreement.
Assignor agrees to indemnify and hold Assignee and its employees, agents,
officers, directors, representatives and legal representatives, harmless from
and against any and all costs, expenses, losses, liabilities, damages or
claims, including attorneys' fees, resulting
<PAGE>
from non-performance of any of the duties arising under the Obligations
accrued before 12:00 midnight on the Closing Date under the Purchase Agreement.
ASSIGNOR:
MARVIN L. GINSBURG, M.D.,
MEDICAL CORPORATION d/b/a
A.V. WESTERN MEDICAL GROUP, INC.
By /s/ J. Robert West, Pres.
--------------------------
ASSIGNEE:
PEGASUS MEDICAL GROUP, INC.
By /s/ Jacob Y. Terner, M.D.
--------------------------
<PAGE>
COLLATERAL ASSIGNMENT OF TRANSACTION DOCUMENTS
THIS COLLATERAL ASSIGNMENT OF TRANSACTION DOCUMENTS (this
"ASSIGNMENT") has been executed and delivered as of October 31, 1997, by and
between SIERRA MEDICAL MANAGEMENT, INC., a Delaware corporation ("ASSIGNOR"),
and IMPERIAL BANK, a California banking corporation ("BANK"), with reference to
the following facts:
R E C I T A L S
A. Assignor is a party to certain transaction documents pursuant to
which, among other things, Assignor acquired or may acquire the non-medical
assets of Pegasus Medical Group, Inc., a California professional medical
corporation ("PHYSICIAN GROUP"), and provides management services to Physician
Group.
B. Assignor has previously executed that certain Continuing
Guaranty, dated as of September 25, 1997, in favor of Bank (as the same may be
amended, restated, supplemented or otherwise modified from time to time, the
"GUARANTY") pursuant to which Assignor guarantees the Guaranteed Obligations (as
defined in the Guaranty), including, without limitation, all obligations,
indebtedness and liabilities owed by Prospect Medical Holdings, Inc., a Delaware
corporation ("BORROWER") to Bank under that certain Revolving Credit Agreement,
dated as of July 3, 1997 (as the same may be amended, restated, supplemented or
otherwise modified from time to time, the "LOAN AGREEMENT").
C. Assignor has executed and delivered that certain Security
Agreement, dated as of even date with the Guaranty ("SECURITY AGREEMENT"), in
order to secure the Guaranteed Obligations.
D. Assignor has agreed to execute and deliver this Assignment to
Bank in order to supplement the terms of the Security Agreement with respect to
the Transaction Documents (as hereinafter defined).
E. Assignor is a wholly-owned subsidiary of Borrower which will
directly and materially benefit from the Loans made by Bank to Borrower under
the Loan Agreement, and Assignor acknowledges that Bank would not enter into the
Loan Agreement absent Assignor's agreements under the Guaranty, the Security
Agreement and hereunder.
A G R E E M E N T
In consideration of the premises and the mutual agreements herein set
forth, Assignor and Bank hereby agree as follows:
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1. DEFINED TERMS. All initially capitalized terms used but not
defined herein shall have the meanings assigned to such terms in the Guaranty.
2. ASSIGNMENT. As additional security for the Guaranteed
Obligations, Assignor hereby collaterally assigns and transfers to Bank, and
acknowledges that pursuant to the Security Agreement Assignor has granted to
Bank a security interest in:
2.1 TRANSACTION DOCUMENTS. All of Assignor's right, title and
interest in and to the following documents (collectively, the "TRANSACTION
DOCUMENTS"):
(a) Management Services Agreement, dated as of October 31,
1997, executed by and between Assignor and Physician Group;
(b) Assignable Option Agreement, dated as of October 31,
1997, by and among Assignor, Physician Group and Prospect Medical Group, Inc.;
and
(c) Security Agreement, dated as of even date herewith,
executed by and between Assignor and Physician Group, together with UCC-1
Financing Statements with respect thereto ("PHYSICIAN GROUP SECURITY
AGREEMENT").
2.2 RIGHTS AND REMEDIES. All of the rights, benefits, remedies,
privileges and claims of Assignor with respect to the Transaction Documents
(collectively, the "RIGHTS AND REMEDIES"), including, without limitation, (i)
all rights to monies or payments owing to Assignor under the Transaction
Documents, and any and all security therefor and for all other obligations owing
to Assignor thereunder, (ii) any right that Assignor may have to indemnification
under the Transaction Documents, (iii) all Rights and Remedies of Assignor with
respect to any breach of the representations, warranties and covenants set forth
in the Transaction Documents, and (iv) the proceeds thereof (the Transaction
Documents and the Rights and Remedies are collectively referred to herein as,
the "COLLATERAL").
3. RIGHT AND REMEDIES GENERALLY. Prior to the occurrence of a
breach or default of any of the agreements, covenants and obligations of
Assignor under the Guaranty (a "DEFAULT"), Assignor will enforce all of its
Rights and Remedies diligently and in good faith. Effective from and after the
occurrence of a Default, Assignor hereby irrevocably authorizes and empowers
Bank, in Bank's own discretion, to assert as Bank may deem proper, either
directly or on behalf of Assignor, any of the Rights and Remedies which Assignor
may from time to time have under the Transaction Documents, and to receive and
collect all damages, awards and other monies resulting therefrom and to apply
the same on account of any of the Guaranteed Obligations.
4. FURTHER ASSURANCES. Assignor shall execute and deliver to Bank
concurrently with Assignor's execution of this Assignment, and from time to time
at the request of Bank, all financing statements, continuation financing
statements, fixture filings,
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security agreements, chattel mortgages, assignments, and all other documents
that Bank may request, in form satisfactory to Bank, to perfect and maintain
perfected Bank's security interests in the Collateral and in order to consummate
fully all of the transactions contemplated by this Assignment.
5. TRANSACTION DOCUMENTS. Concurrent herewith, Assignor is
delivering to Bank possession of the original Transaction Documents, together
with any and all amendments thereto, as in effect on the date hereof, to hold in
accordance with the terms of the Security Agreement until the Security Agreement
is terminated in accordance with its terms.
6. ATTORNEY-IN-FACT. Assignor hereby irrevocably makes,
constitutes, and appoints Bank (and Bank's officers, employees, or agents) as
Assignor's true and lawful agent and attorney-in-fact for the purposes of
enabling Bank or its agent(s) after the occurrence of a Default to (a) assert
such Rights and Remedies and to collect such damages, awards and other monies
and to apply them in the manner set forth hereinabove, and (b) to sign the name
of Assignor on any documents which need to be executed, recorded, or filed, and
to do any and all things necessary in the name and on behalf of Assignor in
order to protect Bank's interests in the Transaction Documents. Assignor agrees
that neither Bank, nor any of its designees or attorneys-in-fact, will be liable
for any act of commission or omission, or for any error of judgment or mistake
of fact or law with respect to the exercise of the power of attorney granted
under this Section 6, other than as a result of its or their gross negligence or
wilful misconduct. The power of attorney granted under this Section 6 is
coupled with an interest and shall be irrevocable until all of the Guaranteed
Obligations have been paid in full, the Guaranty terminated, and Assignor's
duties under this Assignment have been discharged in full.
7. MODIFICATION OF RIGHTS AND REMEDIES. Assignor shall keep Bank
informed of all circumstances bearing upon the Rights and Remedies and shall
immediately provide Bank with copies of any notices delivered to Assignor in
connection with the Transaction Documents. Assignor shall also provide Bank
with a copy of any notice sent by Assignor in connection with the Transaction
Documents, concurrently with the sending of any such notice. Assignor shall not
waive, amend, alter or modify any of the Rights and Remedies in any material
respect without the prior written consent of Bank. Assignor shall not, without
Bank's prior written consent, amend, alter, modify or terminate any of the
Transaction Documents, or waive any of the provisions thereof, or do or permit
any act in contravention thereof.
8. ASSIGNOR TO REMAIN LIABLE. Notwithstanding the foregoing,
Assignor expressly acknowledges and agrees that it shall remain liable under the
Transaction Documents to observe and perform all of the conditions and
obligations in the Transaction Documents which Assignor is bound to observe and
perform, and that neither this Assignment, nor any action taken pursuant hereto,
shall cause Bank to be under any obligation or liability in any respect
whatsoever to observe or perform any of the
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representations, warranties, conditions, covenants, agreements or terms of the
Transaction Documents.
9. COUNTERPARTS; EFFECTIVENESS. This Assignment may be executed in
any number of counterparts, each of which, when executed and delivered, shall be
deemed to be an original. All of such counterparts, taken together, shall
constitute but one and the same agreement. This Assignment shall become
effective upon the execution of a counterpart of this Assignment by each of the
parties hereto.
10. NOTICES. All notices, requests and other communications to any
party hereunder shall be sent in accordance with Section 15 of the Guaranty.
11. MODIFICATIONS AND AMENDMENTS. This Assignment shall not be
changed orally but shall be changed only by agreement in writing signed by
Assignor and Bank. No course of dealing between the parties, no usage of trade
and no parole or extrinsic evidence of any nature shall be used to supplement or
modify any of the terms or provisions of this Assignment.
12. SEVERABILITY. If any provision of this Assignment is held to be
illegal, invalid or unenforceable under present or future laws, the legality,
validity and enforceability of the remaining provisions of this Assignment shall
not be affected thereby, and this Assignment shall be liberally construed so as
to carry out the intent of the parties to it.
13. GOVERNING LAW; SUCCESSORS AND ASSIGNS; ENTIRE AGREEMENT. This
Assignment (a) shall be governed and construed according to the laws of the
State of California, without regard to principles of conflicts of law; (b) shall
be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns; and (c) embodies the entire agreement and
understanding between the parties with respect to the subject matter hereof and
supersedes all prior agreements, consents and understandings relating to such
subject matter.
14. JUDICIAL REFERENCE.
14.1 REFERENCE PROCEEDING. Other than (i) nonjudicial
foreclosure and all matters in connection therewith regarding security interests
in real or personal property; or (ii) the appointment of a receiver, or the
exercise of other provisional remedies (any and all of which may be initiated
pursuant to applicable law), each controversy, dispute or claim between the
parties arising out of or relating to this Assignment, which controversy,
dispute or claim is not settled in writing within thirty (30) days after the
"CLAIM DATE" (defined as the date on which either Assignor or Bank gives written
notice to the other that a controversy, dispute or claim exists), will be
settled by a reference proceeding in California in accordance with the
provisions of Section 638 ET SEQ. of the California Code of Civil Procedure, or
their successor section ("CCP"), which shall
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constitute the exclusive remedy for the settlement of any controversy, dispute
or claim concerning this Assignment, including whether such controversy, dispute
or claim is subject to the reference proceeding and except as set forth above,
the parties waive their rights to initiate any legal proceedings against each
other in any court or jurisdiction other than the Superior Court in Los Angeles
County (the "COURT"). The referee shall be a retired Judge of the Court
selected by mutual agreement of the parties, and if they cannot so agree within
forty-five (45) days after the Claim Date, the referee shall be promptly
selected by the Presiding Judge of the Court (or his representative). The
referee shall be appointed to sit as a temporary judge, with all of the powers
for a temporary judge, as authorized by law, and upon selection should take and
subscribe to the oath of office as provided for in Rule 244 of the California
Rules of Court (or any subsequently enacted Rule). Each party shall have one
peremptory challenge pursuant to CCP Section 170.6. The referee shall (a) be
requested to set the matter for hearing within sixty (60) days after the date of
selection of the referee and (b) try any and all issues of law or fact and
report a statement of decision upon them, if possible, within ninety (90) days
of the Claim Date. Any decision rendered by the referee will be final, binding
and conclusive and judgment shall be entered pursuant to CCP Section 644 in any
court in the State of California having jurisdiction. Any party may apply for a
reference proceeding at any time after thirty (30) days following notice to any
other party of the nature of the controversy, dispute or claim, by filing a
petition for a hearing and/or trial. All discovery permitted by this Assignment
shall be completed no later than fifteen (15) days before the first hearing date
established by the referee. The referee may extend such period in the event of
a party's refusal to provide requested discovery for any reason whatsoever,
including, without limitation, legal objections raised to such discovery or
unavailability of a witness due to absence or illness. No party shall be
entitled to "priority" in conducting discovery. Depositions may be taken by
either party upon seven (7) days written notice, and request for production or
inspection of documents shall be responded to within ten (10) days after
service. All disputes relating to discovery which cannot be resolved by the
parties shall be submitted to the referee whose decision shall be final and
binding upon the parties. Pending appointment of the referee as provided
herein, the Court is empowered to issue temporary and/or provisional remedies,
as appropriate.
14.2 MANNER OF REFERENCE PROCEEDING. Except as expressly set
forth in this Assignment, the referee shall determine the manner in which the
reference proceeding is conducted including the time and place of all hearings,
the order of presentation of evidence, and all other questions that arise with
respect to the course of the reference proceeding. All proceedings and hearings
conducted before the referee, except for trial, shall be conducted without a
court reporter except that when any party so requests, a court reporter will be
used at any hearing conducted before the referee. The party making such a
request shall have the obligation to arrange for and pay for the court reporter.
The costs of the court reporter at the trial shall be borne equally by the
parties.
14.3 DUTIES OF REFEREE. The referee shall be required to
determine all issues in accordance with existing case law and the statutory laws
of the State of California. The rules of evidence applicable to proceedings at
law in the State of California
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will be applicable to the reference proceeding. The referee shall be empowered
to enter equitable as well as legal relief, to provide all temporary and/or
provisional remedies and to enter equitable orders that will be binding upon the
parties. The referee shall issue a single judgment at the close of the
reference proceeding which shall dispose of all of the claims of the parties
that are the subject of the reference. The parties hereto expressly reserve the
right to contest or appeal from the final judgment or any appealable order or
appealable judgment entered by the referee. The parties hereto expressly
reserve the right to findings of fact, conclusions of laws, a written statement
of decision, and the right to move for a new trial or a different judgment,
which new trial, if granted, is also to be a reference proceeding under this
provision.
14.4 ARBITRATION ALTERNATIVE. In the event that the enabling
legislation which provides for appointment of a referee is repealed (and no
successor statute is enacted), any dispute between the parties that would
otherwise be determined by the reference procedure herein described will be
resolved and determined by arbitration. The arbitration will be conducted by a
retired judge of the Court, in accordance with the California Arbitration Act,
Section 1280 through Section 1294.2 of the CCP as amended from time to time.
The limitations with respect to discovery as set forth hereinabove shall apply
to any such arbitration proceeding.
EXECUTED as of the date first above written.
"Assignor"
SIERRA MEDICAL MANAGEMENT, INC.,
a Delaware corporation
By: /s/ Jacob Y. Terner, M.D.
----------------------------------------
Title: CEO
-------------------------------------
"Bank"
IMPERIAL BANK,
a California banking corporation
By: /s/ Roc A. Caldarone
---------------------------------------
Title: SVP
------------------------------------
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CONSENT TO ASSIGNMENT
Each of the undersigned acknowledges the terms of the above
Assignment, consents to the assignment by Assignor to Bank of the transaction
documents identified in Section 2 of the Assignment (the "TRANSACTION
DOCUMENTS") to which it is a party, and agrees to recognize Bank as Assignor's
assignee under the Transaction Documents. Each of the undersigned hereby
represents and warrants to Bank that (i) it has no knowledge of any fact or
circumstance which would or could have a material adverse effect on the rights
granted to Bank in the Transaction Documents, (ii) each of the Transaction
Documents complies with all applicable laws and regulations, (iii) each of the
Transaction Documents is in full force and effect, and all signatures, names,
addresses, amounts and other statements and facts contained therein are true and
correct, and (iv) there are no defenses, offsets or counterclaims to enforcement
of the Transaction Documents.
ACKNOWLEDGED AND CONSENTED TO
THIS 31st DAY OF October, 1997:
PEGASUS MEDICAL GROUP, INC.,
a California professional medical corporation
By: /s/ Jacob Y. Terner, M.D.
------------------------------------------
Title: Pres.
---------------------------------------
PROSPECT MEDICAL GROUP, INC.,
a California professional medical corporation
By: /s/ Jacob Y. Terner, M.D.
-----------------------------------------
Title: VP
---------------------------------------
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SECURITY AGREEMENT
(PHYSICIAN GROUP)
This SECURITY AGREEMENT, dated as of October 31, 1997, is entered into
between PEGASUS MEDICAL GROUP, INC., a California professional medical
corporation ("PHYSICIAN GROUP"), and SIERRA MEDICAL MANAGEMENT, INC., a Delaware
corporation ("MANAGER"), with reference to the following facts:
R E C I T A L S
A. Manager and Physician Group have entered into that certain
Management Services Agreement, effective October 31, 1997 (the "MANAGEMENT
AGREEMENT"), pursuant to which Manager is providing certain management services
to Physician Group; and
B. Physician Group has agreed to enter into this Security Agreement
in order to grant Manager a first priority security interest in the Collateral
(as hereinafter defined) to secure prompt payment and performance of its
obligations under the Management Agreement.
A G R E E M E N T
NOW, THEREFORE, in consideration of the mutual promises, covenants,
conditions, representations, and warranties hereinafter set forth, and for other
good and valuable consideration, the parties hereto agree as follows:
1. DEFINITIONS. All initially capitalized terms used but not
defined herein shall have the meanings ascribed thereto in the Management
Agreement. In addition, as used herein, the following terms shall have the
following meanings:
"ACCOUNT DEBTOR" means any person or entity who is or who may
become obligated with respect to, or on account of, an Account.
"ACCOUNTS" means any and all of Physician Group's presently
existing and hereafter arising accounts and rights to payment arising out of the
sale or lease of goods or the rendition of services by Physician Group,
irrespective of whether earned by performance, and all Instruments evidencing
the same or arising in connection therewith.
"APPLICABLE LAW" means all applicable provisions of
constitutions, statutes, rules, regulations and orders of all government bodies
and all orders and decrees of all courts, tribunals and arbitrators.
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"BANKRUPTCY CODE" means The Bankruptcy Reform Act of 1978 (Pub.
L. No. 95-598; 11 U.S.C.), as amended or supplemented from time to time, or any
successor statute, and any and all rules and regulations issued or promulgated
in connection therewith.
"CODE" means the California Uniform Commercial Code. Any and all
terms used in this Security Agreement which are defined in the Code shall be
construed and defined in accordance with the meaning and definition ascribed to
such terms under the Code, unless otherwise defined herein.
"COLLATERAL" means any and all of the Accounts and Physician
Group's Books, in each case whether now existing or hereafter acquired or
created, and any Proceeds or products of any of the foregoing, or any portion
thereof, and any and all Accounts, money, or other tangible or intangible
property, resulting from the sale or other disposition of the Accounts, or any
portion thereof or interest therein, and the substitutions, replacements,
additions, accessions, products and Proceeds thereof.
"EXPENSES" means any and all costs or expenses required to be
paid by Physician Group under this Security Agreement which are paid or advanced
by Manager; all costs and expenses of Manager, including its attorneys' fees and
expenses (including attorneys' fees incurred pursuant to proceedings arising
under the Bankruptcy Code), incurred or expended to correct any default or
enforce any provision of this Security Agreement, or in gaining possession of,
maintaining, handling, preserving, storing, shipping, selling, preparing for
sale, or advertising to sell the Collateral, irrespective of whether a sale is
consummated; and all costs and expenses of suit incurred or expended by Manager,
including its attorneys' fees and expenses (including attorneys' fees incurred
pursuant to proceedings arising under the Bankruptcy Code) in enforcing or
defending this Security Agreement, irrespective of whether suit is brought.
"GOVERNMENTAL AUTHORITY" means any federal, state, local or other
governmental department, commission, board, bureau, agency, central bank, court,
tribunal or other instrumentality or authority or subdivision thereof, domestic
or foreign, exercising executive, legislative, judicial, regulatory or
administrative functions of or pertaining to government.
"HEALTH CARE LAW" means any Applicable Law regulating the
acquisition, construction, operation, maintenance or management of a healthcare
practice, facility, provider or payor.
"INSTRUMENTS" means any and all negotiable instruments,
certificated securities and every other writing which evidences a right to the
payment of money, in each case whether now existing or hereafter acquired.
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"LIEN" means any mortgage, deed of trust, pledge, security
interest, hypothecation, assignment, deposit arrangement or other preferential
arrangement, charge or encumbrance (including, any conditional sale or other
title retention agreement, or finance lease) of any kind.
"PHYSICIAN GROUP'S BOOKS" means any and all presently existing
and hereafter acquired or created books and records of Physician Group
(excluding patient medical records and peer review records), including all
records (including maintenance and warranty records), ledgers, computer
programs, disc or tape files, printouts, runs, and other computer prepared
information indicating, summarizing, or evidencing the Accounts.
"PROCEEDS" means whatever is receivable or received from or upon
the sale, lease, license, collection, use, exchange or other disposition,
whether voluntary or involuntary, of any Collateral or other assets of Physician
Group, including "proceeds" as defined in Section 9306 of the Code, any and all
proceeds of any insurance, indemnity, warranty or guaranty payable to or for the
account of Physician Group from time to time with respect to any of the
Collateral, any and all payments (in any form whatsoever) made or due and
payable to Physician Group from time to time in connection with any requisition,
confiscation, condemnation, seizure or forfeiture of all or any part of the
Collateral by any Governmental Authority (or any person or entity acting under
color of Governmental Authority), any and all other amounts from time to time
paid or payable under or in connection with any of the Collateral or for or on
account of any damage or injury to or conversion of any Collateral by any person
or entity, any and all other tangible or intangible property received upon the
sale or disposition of Collateral, and all proceeds of proceeds.
"SECURED OBLIGATIONS" shall mean any and all debts, liabilities,
obligations, or undertakings owing by Physician Group to Manager arising under,
advanced pursuant to, or evidenced by the Management Agreement and/or this
Security Agreement, whether direct or indirect, absolute or contingent, matured
or unmatured, due or to become due, voluntary or involuntary, whether now
existing or hereafter arising.
"SECURITY AGREEMENT" shall mean this Security Agreement, any
concurrent or subsequent riders, exhibits or schedules to this Security
Agreement, and any extensions, supplements, amendments, or modifications to or
in connection with this Security Agreement, or to any such riders, exhibits or
schedules.
2. CONSTRUCTION. Unless the context of this Security Agreement
clearly requires otherwise, references to the plural include the singular,
references to the singular include the plural, the part includes the whole,
"including" is not limiting, and "or" has the inclusive meaning represented by
the phrase "and/or." References in this Security Agreement to "determination"
by Manager include reasonable estimates (absent manifest error) by Manager, as
applicable (in the case of quantitative determinations) and reasonable beliefs
(absent manifest error) by Manager, as applicable (in the case of qualitative
determinations). The words "hereof," "herein," "hereby," "hereunder," and
similar terms in this
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Security Agreement refer to this Security Agreement as a whole and not to any
particular provision of this Security Agreement. Article, section, subsection,
exhibit, and schedule references are to this Security Agreement unless otherwise
specified.
3. CREATION OF SECURITY INTEREST. Physician Group hereby grants to
Manager a continuing security interest in all presently existing and hereafter
acquired or arising Collateral in order to secure the prompt payment and
performance of all of the Secured Obligations. Physician Group acknowledges and
affirms that such security interest in the Collateral has attached to all
Collateral without further act on the part of Manager or Physician Group.
4. FURTHER ASSURANCES.
4.1 FURTHER ASSURANCES. Physician Group shall execute and
deliver to Manager concurrently with Physician Group's execution of this
Security Agreement, and from time to time at the request of Manager, all
financing statements, continuation financing statements, fixture filings,
security agreements, chattel mortgages, assignments, and all other documents
that Manager may request, in form satisfactory to Manager, to perfect and
maintain perfected Manager's security interests in the Collateral and in order
to consummate fully all of the transactions contemplated by this Security
Agreement and the Management Agreement.
5. REPRESENTATIONS AND WARRANTIES. Physician Group represents and
warrants to Manager that:
5.1 TRADE NAMES AND TRADE STYLES Physician Group presently does
not conduct its business operations under any trade names or trade styles other
than A.V. Western Medical Group.
5.2 OWNERSHIP OF COLLATERAL. Physician Group is and shall
continue to be the sole and complete owner of the Collateral, free from any
Lien, other than the Lien granted to Manager hereunder.
5.3 ENFORCEABILITY; PRIORITY OF SECURITY INTEREST. This
Agreement (i) creates a security interest which is enforceable against the
Collateral in which Physician Group now has rights and will create a security
interest which is enforceable against the Collateral in which Physician Group
hereafter acquires rights at the time Physician Group acquires any such rights,
and (ii) Manager has a perfected security interest (to the fullest extent
perfection can be obtained by filing, notification to third parties or
possession) and a first priority security interest in the Collateral in which
Physician Group now has rights, and will have a perfected and first priority
security interest in the Collateral in which Physician Group hereafter acquires
rights at the time Physician Group acquires any such rights, in each case
securing the payment and performance of the Secured Obligations.
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5.4 OTHER FINANCING STATEMENTS. Other than financing statements
in favor of Manager, no effective financing statement naming Physician Group as
debtor, assignor, grantor, mortgagor, pledgor or the like and covering all or
any part of the Collateral is on file in any filing or recording office in any
jurisdiction.
6. COVENANTS. In addition to the covenants of Physician Group set
forth in the Management Agreement which are incorporated herein by this
reference, Physician Group agrees that from the date of this Security Agreement
and thereafter until the indefeasible payment, performance and satisfaction in
full of the Secured Obligations, and all of Manager's obligations under the
Management Agreement to Physician Group have been terminated:
6.1 DEFENSE OF COLLATERAL. Physician Group shall appear in and
defend any action, suit or proceeding which may affect its title to or right or
interest in, or Manager's right or interest in, the Collateral.
6.2 PRESERVATION OF COLLATERAL. Physician Group shall do and
perform all acts that may be necessary and appropriate to maintain, preserve and
protect the Collateral.
6.3 CHANGE IN NAME; ADOPTION OF TRADE NAME OR TRADE STYLE.
Physician Group shall give Manager at least 30 days' prior written notice of any
changes in its name, or of the adoption of any trade name or trade style.
6.4 MAINTENANCE OF RECORDS. Physician Group shall keep
separate, accurate and complete Physician Group's Books, disclosing Manager's
security interest hereunder.
6.5 DISPOSITION OF COLLATERAL. Physician Group shall not
surrender or lose possession of (other than to Manager), sell, lease, rent, or
otherwise dispose of or transfer any of the Collateral or any right or interest
therein.
6.6 LIENS. Physician Group shall keep the Collateral free of
all Liens, other than the Lien granted to Manager hereunder.
7. EVENTS OF DEFAULT. The occurrence of any of the following shall
constitute an event of default ("Event of Default") under this Security
Agreement:
7.1 BREACH OF MANAGEMENT AGREEMENT. Physician Group shall
breach, or be in default of, any of its agreements, covenants and obligations
under the Management Agreement;
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7.2 BREACH OF SECURITY AGREEMENT. Physician Group shall breach,
or be in default of, any of its agreements, covenants and obligations under this
Security Agreement; or
7.3 BREACH OF REPRESENTATIONS OR WARRANTIES. Any representation
or warranty made by Physician Group in this Security Agreement shall have been
untrue in any material respect when made.
8. RIGHTS AND REMEDIES, ETC.
8.1 RIGHTS AND REMEDIES. During the continuance of an Event of
Default, Manager, without notice or demand, may do any one or more of the
following, all of which are authorized by Physician Group:
(a) Make such payments and do such acts as it considers
necessary or reasonable to protect Manager's security interest in the
Collateral. Physician Group agrees to assemble and make available any or all of
the Collateral if Manager so requires. Physician Group authorizes Manager to
enter the premises where the Collateral is located, take and maintain possession
of the Collateral, or any part of it, and to pay, purchase, contest, or
compromise any encumbrance, charge, or lien which, in the opinion of the
Manager, appears to be prior or superior to Manager's security interest, and to
pay all costs and expenses incurred in connection therewith;
(b) Sell the Collateral, at either a public or private
sale, or both, by way of one or more contracts or transactions, for cash or on
terms, in such manner and at such places (including Physician Group's premises)
as is commercially reasonable, and apply any proceeds of any sale or other
disposition of the Collateral in the order provided in Section 9504 of the Code,
including the payment of Expenses. It is not necessary that the Collateral be
present at any such sale;
(c) Without constituting a retention of collateral in
satisfaction of indebtedness as provided for in Section 9505 of the Code, notify
account debtors and other obligors of Physician Group of Manager's security
interests in the Collateral, and proceed to collect the same and apply the net
cash proceeds therefrom to the Secured Obligations;
(d) Manager shall give notice of any disposition of the
Collateral as follows:
(i) Manager shall give Physician Group and each
holder of a security interest in the Collateral who has filed with Manager a
written request for notice, a written notice stating the time and place of a
public sale, or, if the disposition is to be either a private sale or some other
disposition that is not a public sale, the time on or after which the private
sale or other disposition is to be made;
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(ii) The notice described in the immediately
preceding paragraph shall be delivered to Physician Group as provided in Section
14.6 of the Management Agreement at least five (5) calendar days before the date
fixed for a sale. Notice to persons other than Physician Group claiming an
interest in the Collateral shall be sent to such addresses as such persons have
furnished to Manager prior to the date of such notice;
(iii) If the disposition is to be a public sale,
Manager shall also give notice of the time and place of said sale by publishing
a notice at least five (5) calendar days before the date of the sale in a
newspaper of general circulation, if one exists, in the county in which the sale
is to be held;
(e) Manager may, in its own name, or in the name of a
designee or nominee, credit bid and purchase at any public sale;
(f) Physician Group shall pay all Expenses; and
(g) Any portion of the Secured Obligations which remains
unpaid after disposition of the Collateral as provided above shall be paid
immediately by Physician Group. Any excess which exists after disposition of
the Collateral and payment in full of the Secured Obligations shall be returned
promptly, without interest and subject to the rights of third persons, to
Physician Group by Manager.
8.2 FURTHER DOCUMENTATION. Upon the exercise by Manager of any
power, right, privilege, or remedy pursuant to this Security Agreement which
requires any consent, approval, registration, qualification, or authorization of
any Governmental Authority, Physician Group agrees to execute and deliver, or
will cause the execution and delivery of, all applications, certificates,
instruments, assignments, and other documents and papers that Manager or any
purchaser of the Collateral may be required to obtain for such governmental
consent, approval, registration, qualification, or authorization.
8.3 CUMULATIVE REMEDIES; WAIVERS. The rights and remedies of
Manager under this Security Agreement, the Management Agreement, and all other
agreements contemplated hereby and thereby shall be cumulative. Manager shall
have all other rights and remedies not inconsistent herewith as provided under
the Code, by law, or in equity. No exercise by Manager of any one right or
remedy shall be deemed an election of remedies, and no waiver by Manager of any
default on Physician Group's part shall be deemed a continuing waiver of any
further defaults. No delay by Manager shall constitute a waiver, election or
acquiescence with respect to any right or remedy.
9. NOTICES. All notices or demands by any party hereto to the other
party and relating to this Security Agreement shall be made in the manner set
forth in Section 14.6 of the Management Agreement.
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10. GENERAL PROVISIONS.
10.1 SUCCESSORS AND ASSIGNS. This Security Agreement shall bind
and inure to the benefit of the respective successors and assigns of Physician
Group and Manager; PROVIDED, HOWEVER, that Physician Group may not assign this
Security Agreement nor delegate any of its duties hereunder without Manager's
prior written consent and any prohibited assignment or delegation shall be
absolutely void. No consent by Manager to an assignment by Physician Group
shall release Physician Group from the Secured Obligations. Manager may assign
this Security Agreement and delegate its duties hereunder, if any, from time to
time to its lender or lenders or to its parent's lender or lenders, without
prior notice to, or the consent of, Physician Group, and Physician Group agrees
to recognize such lender or lenders as Manager's assignee under this Security
Agreement.
10.2 NO PRESUMPTION AGAINST ANY PARTY. Neither this Security
Agreement nor any uncertainty or ambiguity herein shall be construed or resolved
against Manager or Physician Group, whether under any rule of construction or
otherwise. On the contrary, this Security Agreement has been reviewed by each
of the parties and their counsel and shall be construed and interpreted
according to the ordinary meaning of the words used so as to accomplish fairly
the purposes and intentions of all parties hereto.
10.3 AMENDMENTS AND WAIVERS. Any provision of this Security
Agreement may be amended or waived if, but only if, such amendment or waiver is
in writing and is signed by the party asserted to be bound thereby, and then
such amendment or waiver shall be effective only in the specific instance and
specific purpose for which given.
10.4 COUNTERPARTS; INTEGRATION; EFFECTIVENESS. This Security
Agreement may be signed in any number of counterparts, each of which shall be an
original, with the same effect as if the signatures thereto and hereto were upon
the same instrument. This Security Agreement constitutes the entire agreement
and understanding among the parties hereto and supersedes any and all prior
agreements and understandings, oral or written, relating to the subject matter
hereof. This Security Agreement shall become effective when executed by each of
the parties hereto and delivered to Manager.
11. GOVERNING LAW. This Security Agreement shall be deemed to have
been made in the State of California and the validity, construction,
interpretation, and enforcement hereof, and the rights of the parties hereto,
shall be determined under, governed by, and construed in accordance with the
internal laws of the State of California.
12. NO VIOLATION OF APPLICABLE LAW. To the extent that any lien or
security interest on any Asset(s) granted by Physician Group herein violates any
applicable Health Care Law, the grant of such lien or security interest on such
Asset(s) shall be automatically null and void; provided however, that to the
extent such lien or security interest at any time hereafter no longer violates
any applicable Health Care Law, then such
8
<PAGE>
lien or security interest shall automatically and without any further action
attach and become fully effective at that time (giving effect to any retroactive
effect to any change in applicable law or regulation); and, provided further,
that the liens or security interests on other Asset(s) granted by Physician
Group herein that do not violate any applicable Health Care Law shall remain at
all times in full force and effect.
[Remainder of this page intentionally left blank.]
9
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Security Agreement
as of the date first set forth above.
PEGASUS MEDICAL GROUP, INC.
a California professional corporation
By: /s/ Jacob Y. Terner, M.D.
----------------------------------
Title: PRES
--------------------------------
SIERRA MEDICAL MANAGEMENT, INC.
a Delaware corporation
By: /s/ Jacob Y. Terner, M.D.
----------------------------------
Title: CEO
--------------------------------
10
<PAGE>
SECURED PROMISSORY NOTE
(Prospect Medical Systems, Inc.)
$700,000 Los Angeles, California
October 31, 1997
1. FOR VALUE RECEIVED, PROSPECT MEDICAL SYSTEMS, INC., a Delaware
corporation ("MAKER"), promises to pay to the order of PROSPECT MEDICAL
HOLDINGS, INC., a Delaware corporation ("PAYEE"), on or before the Maturity Date
unless sooner accelerated in accordance with the terms hereof, the principal sum
of Seven Hundred Thousand Dollars ($700,000). As used herein the term "MATURITY
DATE" has the meaning given to such term in that certain Revolving Credit
Agreement, dated as of July 3, 1997, between Payee and Imperial Bank (as amended
or restated from time to time, the "CREDIT AGREEMENT").
2. This Secured Promissory Note shall bear interest at a per annum
rate equal to six percent (6%). All computations of interest shall be
calculated on the basis of a year of three hundred sixty-five (365) days for the
actual days elapsed. Interest shall accrue from the date of this Secured
Promissory Note to the date of repayment of this Secured Promissory Note in
accordance with the provisions hereof. Maker shall pay all accrued but unpaid
interest on the principal balance hereof, in arrears, on the first day of each
and every month.
3. Maker shall make all payments hereunder in lawful money of the
United States of America and in immediately available funds to the holder hereof
("HOLDER") at Holder's office or to such other address as Holder may from time
to time specify by notice to Maker.
4. In no event shall the interest rate and other charges hereunder
exceed the highest rate permissible under any law which a court of competent
jurisdiction shall, in a final determination, deem applicable hereto. In the
event that such a court determines that Holder has received interest and other
charges hereunder in excess of the highest rate applicable hereto, such excess
shall be deemed received on account of, and shall automatically be applied to
reduce, the principal balance hereof, and the provisions hereof shall be deemed
amended to provide for the highest permissible rate. If there is no principal
balance outstanding, Holder shall refund to Maker such excess.
5. The unpaid principal balance hereof together with all accrued but
unpaid interest thereon shall be all due and payable upon (i) failure by Maker
to pay any installment of principal or interest due hereunder when due,
(ii) commencement of any proceeding by or against Maker under any bankruptcy or
insolvency laws, or (iii) the occurrence of an "Event of Default" under the
Credit Agreement.
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<PAGE>
6. This Secured Promissory Note is secured by that certain
Inter-Company Security Agreement, dated as of July 14, 1997, as amended by that
certain Amendment Number One, dated as of September 25, 1997, as it may be
further amended from time to time, between Maker and Payee.
7. Maker hereby waives presentment for payment, notice of dishonor,
protest and notice of protest.
8. This Secured Promissory Note shall be governed by and construed
in accordance with the internal laws of the State of California without regard
to principles of conflicts of laws.
IN WITNESS WHEREOF, Maker has duly executed this Secured Promissory
Note as of the date first above written.
PROSPECT MEDICAL SYSTEMS, INC.,
a Delaware corporation
By /s/ Jacob Y. Terner, M.D.
---------------------------------
Title CEO
------------------------------
2
<PAGE>
ENDORSEMENT ALLONGE
Pay to the order of Imperial Bank, a California banking corporation, located at
9920 South La Cienega Blvd., Suite #628, Inglewood, California 90301 the
attached note dated October 31, 1997 made by Prospect Medical Systems, Inc.
Dated: October 31, 1997 PROSPECT MEDICAL HOLDINGS, INC.,
a Delaware corporation
By: /s/ Jacob Y. Terner, M.D.
--------------------------------
Print Name:
------------------------
Its: CEO
-------------------------------
<PAGE>
PROMISSORY NOTE
(Prospect Medical Group, Inc.)
$700,000 Los Angeles, California
October 31, 1997
1. FOR VALUE RECEIVED, PROSPECT MEDICAL GROUP, INC., a California
professional corporation ("MAKER"), promises to pay to the order of PROSPECT
MEDICAL SYSTEMS, INC., a Delaware corporation ("PAYEE"), on or before the
Maturity Date unless sooner accelerated in accordance with the terms hereof, the
principal sum of Seven Hundred Thousand Dollars ($700,000). As used herein the
term "MATURITY DATE" has the meaning given to such term in that certain
Revolving Credit Agreement, dated as of July 3, 1997, between Prospect Medical
Holdings, Inc., a Delaware corporation, and Imperial Bank (as amended or
restated from time to time, the "CREDIT AGREEMENT").
2. This Promissory Note shall bear interest at a per annum rate
equal to six percent (6%). All computations of interest shall be calculated on
the basis of a year of three hundred sixty-five (365) days for the actual days
elapsed. Interest shall accrue from the date of this Promissory Note to the
date of repayment of this Promissory Note in accordance with the provisions
hereof. Maker shall pay all accrued but unpaid interest on the principal
balance hereof, in arrears, on the first day of each and every month.
3. Maker shall make all payments hereunder in lawful money of the
United States of America and in immediately available funds to the holder hereof
("HOLDER") at Holder's office or to such other address as Holder may from time
to time specify by notice to Maker.
4. In no event shall the interest rate and other charges hereunder
exceed the highest rate permissible under any law which a court of competent
jurisdiction shall, in a final determination, deem applicable hereto. In the
event that such a court determines that Holder has received interest and other
charges hereunder in excess of the highest rate applicable hereto, such excess
shall be deemed received on account of, and shall automatically be applied to
reduce, the principal balance hereof, and the provisions hereof shall be deemed
amended to provide for the highest permissible rate. If there is no principal
balance outstanding, Holder shall refund to Maker such excess.
5. The unpaid principal balance hereof together with all accrued but
unpaid interest thereon shall be all due and payable upon (i) failure by Maker
to pay any installment of principal or interest due hereunder when due,
(ii) commencement of any
2
<PAGE>
proceeding by or against Maker under any bankruptcy or insolvency laws, or (iii)
the occurrence of an "Event of Default" under the Credit Agreement.
6. Maker hereby waives presentment for payment, notice of dishonor,
protest and notice of protest.
7. This Promissory Note shall be governed by and construed in
accordance with the internal laws of the State of California without regard to
principles of conflicts of laws.
IN WITNESS WHEREOF, Maker has duly executed this Promissory Note as of
the date first above written.
PROSPECT MEDICAL GROUP, INC.,
a California professional corporation
By /s/ Jacob Y. Terner, M.D.
-------------------------------------
Title VP
----------------------------------
3
<PAGE>
ENDORSEMENT ALLONGE
Pay to the order of Imperial Bank, a California banking corporation,
located at 9920 South La Cienega Blvd., Suite #628, Inglewood,
California 90301 the attached note dated October 31, 1997 made by
Prospect Medical Group, Inc., a California professional corporation.
Dated: October 31, 1997 PROSPECT MEDICAL SYSTEMS, INC.,
a Delaware corporation
By: /s/ Jacob Y. Terner, M.D.
-------------------------------------
Print Name:
-----------------------------
Its: CEO
------------------------------------
<PAGE>
PROMISSORY NOTE
(Pegasus Medical Group, Inc.)
$700,000 Los Angeles, California
October 31, 1997
1. FOR VALUE RECEIVED, PEGASUS MEDICAL GROUP, INC., a California
professional corporation ("MAKER"), promises to pay to the order of PROSPECT
MEDICAL GROUP, INC., a California professional corporation ("PAYEE"), on or
before the Maturity Date unless sooner accelerated in accordance with the terms
hereof, the principal sum of Seven Hundred Thousand Dollars ($700,000). As used
herein the term "MATURITY DATE" has the meaning given to such term in that
certain Revolving Credit Agreement, dated as of July 3, 1997, between Prospect
Medical Holdings, Inc., a Delaware corporation, and Imperial Bank (as amended or
restated from time to time, the "CREDIT AGREEMENT").
2. This Promissory Note shall bear interest at a per annum rate
equal to six percent (6%). All computations of interest shall be calculated on
the basis of a year of three hundred sixty-five (365) days for the actual days
elapsed. Interest shall accrue from the date of this Promissory Note to the
date of repayment of this Promissory Note in accordance with the provisions
hereof. Maker shall pay all accrued but unpaid interest on the principal
balance hereof, in arrears, on the first day of each and every month.
3. Maker shall make all payments hereunder in lawful money of the
United States of America and in immediately available funds to the holder hereof
("HOLDER") at Holder's office or to such other address as Holder may from time
to time specify by notice to Maker.
4. In no event shall the interest rate and other charges hereunder
exceed the highest rate permissible under any law which a court of competent
jurisdiction shall, in a final determination, deem applicable hereto. In the
event that such a court determines that Holder has received interest and other
charges hereunder in excess of the highest rate applicable hereto, such excess
shall be deemed received on account of, and shall automatically be applied to
reduce, the principal balance hereof, and the provisions hereof shall be deemed
amended to provide for the highest permissible rate. If there is no principal
balance outstanding, Holder shall refund to Maker such excess.
5. The unpaid principal balance hereof together with all accrued but
unpaid interest thereon shall be all due and payable upon (i) failure by Maker
to pay any installment of principal or interest due hereunder when due,
(ii) commencement of any
2
<PAGE>
proceeding by or against Maker under any bankruptcy or insolvency laws, or (iii)
the occurrence of an "Event of Default" under the Credit Agreement.
6. Maker hereby waives presentment for payment, notice of dishonor,
protest and notice of protest.
7. This Promissory Note shall be governed by and construed in
accordance with the internal laws of the State of California without regard to
principles of conflicts of laws.
IN WITNESS WHEREOF, Maker has duly executed this Promissory Note as of
the date first above written.
PEGASUS MEDICAL GROUP, INC.,
a California professional corporation
By /s/ Jacob Y. Terner, M.D.
----------------------------------------
Title Pres.
----------------------------------------
3
<PAGE>
ENDORSEMENT ALLONGE
Pay to the order of Imperial Bank, a California banking corporation,
located at 9920 South La Cienega Blvd., Suite #628, Inglewood,
California 90301 the attached note dated October 31, 1997 made by
Pegasus Medical Group, Inc., a California professional corporation, to
the order of Prospect Medical Group, Inc., a California professional
corporation, and endorsed to the undersigned.
Dated: October 31, 1997 PROSPECT MEDICAL SYSTEMS, INC.,
a Delaware corporation
By: /s/ Jacob Y. Terner, M.D.
----------------------------------------
Print Name:
---------------------------------
Its: VP
----------------------------------------
<PAGE>
ENDORSEMENT ALLONGE
Pay to the order of Prospect Medical Systems, Inc., a Delaware
corporation, the attached note dated October 31, 1997 made by Pegasus
Medical Group, Inc., a California professional corporation.
Dated: October 31, 1997 PROSPECT MEDICAL GROUP, INC.,
a California professional corporation
By: /s/ Jacob Y. Terner, M.D.
----------------------------------------
Print Name:
---------------------------------
Its: VP
----------------------------------------
<PAGE>
JOINDER AGREEMENT
This JOINDER AGREEMENT, dated as of October 31, 1997 (this "JOINDER
AGREEMENT"), is entered into by and among PEGASUS MEDICAL GROUP, INC., a
California professional medical corporation ("PEGASUS"), SIERRA MEDICAL
MANAGEMENT, INC., a Delaware corporation ("SIERRA MANAGEMENT"), SIERRA PRIMARY
CARE MEDICAL GROUP, INC., a California professional corporation ("SIERRA PRIMARY
CARE"), GREGG DENICOLA, M.D. ("DENICOLA"), PROSPECT MEDICAL HOLDINGS, INC., a
Delaware corporation ("HOLDINGS"), PROSPECT MEDICAL SYSTEMS, INC., a Delaware
corporation ("SYSTEMS"), PROSPECT MEDICAL GROUP, INC., a California professional
corporation ("GROUP"), SANTA ANA/TUSTIN PHYSICIANS GROUP, INC., a California
professional corporation ("SANTA ANA/TUSTIN"), and IMPERIAL BANK, a California
banking corporation ("BANK"), with reference to the following facts:
A. The parties hereto (other than Pegasus) are parties to that
certain Amended and Restated Credit Succession Agreement, dated as of July 14,
1997, as supplemented by a Joinder Agreement, dated as of September 25, 1997
(the "AGREEMENT").
B. Group formed Pegasus as a new wholly-owned subsidiary in order to
acquire the assets of Marvin L. Ginsburg, M.D., Medical Corporation d/b/a A.V.
Western Medical Group, Inc., a California professional corporation ("WESTERN"),
pursuant to that certain Asset Purchase Agreement, dated as of October 29, 1997,
among Pegasus, Western and J. Robert West.
C. Pursuant to the terms of the Agreement, Pegasus is required to
execute, among other documents, a joinder agreement in order to become party to
the Agreement.
NOW THEREFORE, in consideration of the premises and other good and
valuable consideration, the parties hereto hereby agree as follows:
1. JOINDER OF PEGASUS.
(a) JOINDER OF PEGASUS. Pursuant to Section 11(a) of the
Agreement, Pegasus hereby agrees that it is a Professional Corporation under the
Agreement as if a signatory thereof on the date of its execution, and Pegasus
shall comply with and be subject to and have the benefit of all of the terms,
conditions, covenants, agreements, obligations, and waivers set forth therein.
Pegasus hereby agrees that each reference to a "Professional Corporation" or
"Professional Corporations" in the Agreement shall include Pegasus. Pegasus
hereby acknowledges that it has received a copy of the Agreement and that it has
read and understands the terms thereof.
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<PAGE>
(b) SCHEDULES. Attached hereto are updated copies of each
Schedule referenced in the Agreement revised to include all information required
to be provided therein with respect to (and only with respect to) Pegasus.
2. EFFECTIVENESS. This Agreement shall become effective upon
receipt by Bank of (i) the original stock certificates evidencing all of the
issued and outstanding capital stock of Pegasus owned by Group, together with a
stock power with respect thereto, duly executed in blank, undated, by Group,
(ii) a counterpart hereof, duly executed by each of the parties hereto, and
(iii) any other agreement or document required to be delivered in accordance
with the terms and conditions of the Agreement.
3. GENERAL PROVISIONS.
(a) REPRESENTATIONS AND WARRANTIES. Each PC Shareholder and
each Professional Corporation hereby confirms that each representation and
warranty made by it under the Agreement is true and correct in all material
respects as of the date hereof and that no Succession Event has occurred or is
continuing under the Agreement. Each PC Shareholder and each Professional
Corporation hereby represents and warrants that as of the date hereof there are
no claims or offsets against, or defenses or counterclaims to, their respective
obligations under the Agreement.
(b) LIMITED EFFECT. Except as supplemented hereby, the Agreement
shall continue to be, and shall remain, in full force and effect. This Joinder
Agreement shall not be deemed (i) to be a waiver of, or consent to, or a
modification or amendment of, any other term or condition of the Agreement or
(ii) to prejudice any right or rights which Bank may now have or may have in the
future under or in connection with the Agreement or any of the instruments or
agreements referred to therein, as the same may be amended or modified from time
to time.
(c) COUNTERPARTS. This Joinder Agreement may be executed by one
or more of the parties hereto in any number of separate counterparts and all of
said counterparts taken together shall be deemed to constitute one and the same
instrument.
(d) DEFINITIONS. All initially capitalized terms used and not
defined herein shall have the meanings given thereto in the Agreement.
(e) GOVERNING LAW. THIS JOINDER AGREEMENT SHALL BE GOVERNED BY,
AND CONSTRUED AND INTERPRETED IN ACCORDANCE
2
<PAGE>
WITH, THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT REFERENCE TO THE CONFLICTS OR
CHOICE OF LAW PRINCIPLES THEREOF.
IN WITNESS WHEREOF the undersigned hereby causes this Joinder
Agreement to be executed and delivered as of the date first above written.
/s/ Gregg DeNicola
---------------------------------------------
GREGG DENICOLA
SANTA ANA/TUSTIN PHYSICIANS GROUP, INC.
By: /s/ Jacob Y. Terner, M.D.
------------------------------------------
Title: CEO
---------------------------------------
PROSPECT MEDICAL HOLDINGS, INC.
By: /s/ Jacob Y. Terner, M.D.
------------------------------------------
Title: CEO
---------------------------------------
PROSPECT MEDICAL SYSTEMS, INC.
By: /s/ Jacob Y. Terner, M.D.
------------------------------------------
Title: CEO
---------------------------------------
PROSPECT MEDICAL GROUP, INC.
By: /s/ Jacob Y. Terner, M.D.
------------------------------------------
Title: VP
---------------------------------------
SIERRA MEDICAL MANAGEMENT, INC.
By: /s/ Jacob Y. Terner, M.D.
------------------------------------------
Title: CEO
---------------------------------------
3
<PAGE>
SIERRA PRIMARY CARE MEDICAL GROUP, INC.
By: /s/ Jacob Y. Terner, M.D.
------------------------------------------
Title: CEO
---------------------------------------
PEGASUS MEDICAL GROUP, INC.
By: /s/ Jacob Y. Terner, M.D.
------------------------------------------
Title: PRES
---------------------------------------
IMPERIAL BANK
By: /s/ Roc A. Caldarone
------------------------------------------
Title: SVP
---------------------------------------
4
<PAGE>
AMENDED AND RESTATED AMENDMENT NUMBER THREE
TO REVOLVING CREDIT AGREEMENT
This AMENDED AND RESTATED AMENDMENT NUMBER THREE TO REVOLVING
CREDIT AGREEMENT (this "AMENDMENT"), dated as of February 6, 1998, is entered
into by and between PROSPECT MEDICAL HOLDINGS, INC., a Delaware corporation
("BORROWER"), and IMPERIAL BANK, a California banking corporation ("BANK"),
with reference to the following facts:
A. Borrower and Bank have previously entered into that certain
Revolving Credit Agreement, dated as of July 3, 1997, as amended by that
certain Amendment Number One, dated as of July 14, 1997, and that certain
Amendment Number Two, dated as of September 25, 1997 (the "AGREEMENT");
B. Borrower has requested that Bank (i) increase the line of
credit available to Borrower to up to Twelve Million Five Hundred Thousand
Dollars ($12,500,000), (ii) waive compliance with certain covenants in the
Agreement and in the Credit Succession Agreement, and (iii) make certain
changes to the financial covenants set forth in the Agreement, and Bank has
agreed with such requests upon the terms and conditions set forth in this
Amendment; and
C. Borrower and Bank have previously entered into that certain
Amendment Number Three to Revolving Credit Agreement, dated as of February 6,
1998 (the "PRIOR AMENDMENT"), and Borrower and Bank desire to amend and
restate the Prior Amendment in its entirety in accordance with the terms and
conditions hereof.
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. DEFINED TERMS. All initially capitalized terms used but not
defined herein shall have the meanings assigned to such terms in the
Agreement. In addition, Section 1.1 of the Agreement is hereby amended by
amending the definitions of "COVERAGE RATIO," "LOAN DOCUMENTS," "NOTE,"
"REVOLVING CREDIT COMMITMENT," "WARRANTS" and "WORKING CAPITAL SUBLIMIT" in
their entirety as follows:
"`COVERAGE RATIO' means, as of the date of determination for the
Applicable Period, the ratio of: (i) EBITDAR for such period TIMES
the Applicable Multiplier; to (ii) the sum of (x) [THE PRODUCT OF the
sum of (1) Consolidated Interest Expense for such period, and
(2) Consolidated Lease Expense for such period, TIMES the Applicable
Multiplier], (y) current maturities of Borrower's and the
Subsidiaries' consolidated long term Debt during such period (other
than the Obligations) and, commencing with Borrower's fiscal quarter
ending March 31, 1999, (z) 16.6667% of the sum of the principal amount
of the Loans plus the Letter of Credit Usage outstanding on such
date."
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<PAGE>
"`LOAN DOCUMENT(S)' means each of the following documents,
instruments, and agreements individually or collectively, as the
context requires:
(i) the Note;
(ii) the Security Agreement (Borrower);
(iii) the Guaranties;
(iv) the Security Agreements (Guarantor);
(v) the Stock Pledge Agreements (Borrower);
(vi) the Collateral Assignments of Transaction Documents;
(vii) the Credit Succession Agreement;
(viii) the Letter of Credit Applications;
(ix) the Warrants; and
(x) such other documents, instruments, and agreements
(including financing statements and fixture filings) as Bank may
reasonably request in connection with the transactions contemplated
hereunder or to perfect or protect the liens and security interests
granted to Bank in connection herewith."
"`NOTE' means that certain Replacement Secured Revolving Note in
the principal amount of Twelve Million Five Hundred Thousand Dollars
($12,500,000), dated as of February 6, 1998, executed by Borrower to
the order of Bank."
"`REVOLVING CREDIT COMMITMENT' means Twelve Million Five Hundred
Thousand Dollars ($12,500,000)."
"`WARRANTS' means (i) that certain Amended and Restated Warrant,
dated as of July 3, 1997, executed by Borrower in favor of Bank, and
(ii) that certain Warrant, dated as of February 6, 1998, executed by
Borrower in favor of Bank.
"`WORKING CAPITAL SUBLIMIT' means Two Million Dollars
($2,000,000)."
2
<PAGE>
2. WAIVER OF COMPLIANCE WITH CERTAIN COVENANTS. Bank hereby
waives: (i) compliance by Borrower of Sections 6.16(a), (c) and (d) of the
Agreement on September 30, 1997 and December 31, 1997, and (ii) Section 3(a)
of the Credit Succession Agreement insofar as such Section requires a board
of directors of three (3) members for Pegasus Medical Group, Inc, and Sierra
Primary Care Medical Group, Inc. The waivers set forth hereinabove shall be
limited precisely as written and shall not be deemed to (a) be a waiver or
modification of any other term or condition of the Agreement or any Loan
Document or (b) prejudice any right or remedy which Bank may now have or may
have in the future (except to the extent such right or remedy is based upon
the foregoing covenant waivers for the dates indicated) under or in
connection with the Agreement or any Loan Document. The waivers set forth in
this Section 2 shall be effective retroactive to September 1, 1997.
3. AMENDMENT TO SECTION 6.16. Sections 6.16(a), 6.16(c) and 6.16(d)
of the Agreement are hereby amended in their entirety as follows:
"(a) the Current Ratio at any time, on or after
March 31, 1998, to be less than 1.0:1.0."
"(c) the Leverage Ratio at any time to exceed the
ratio set forth in the table below during the periods indicated:
PERIOD MAXIMUM LEVERAGE RATIO
------ ----------------------
3/31/98 through 6/30/98 4.50:1.0
7/1/98 through 9/30/98 4.00:1.0
10/1/98 and thereafter 3.50:1.0"
"(d) the Coverage Ratio at any time, on or after
March 31, 1998, to be less than 1.25:1.0."
4. REPRESENTATIONS AND WARRANTIES. In order to induce Bank to
enter into this Amendment, Borrower hereby represents and warrants to Bank
that:
(a) as of the date hereof, after giving effect to this
Amendment, no Event of Default, Unmatured Event of Default or Material
Adverse Effect is continuing;
(b) all of the representations and warranties set forth in
the Agreement and the Loan Documents are true, complete and accurate in all
respects as of the date hereof (except for representations and warranties
which are expressly stated to be true and correct as of the Closing Date); and
(c) this Amendment and the Loan Documents executed in
connection herewith have been duly executed and delivered by Borrower, and
after giving effect to this Amendment, the Agreement and the Loan Documents
(including the Loan
3
<PAGE>
Documents executed in connection herewith) constitute the legal, valid and
binding agreements and obligations of Borrower, enforceable in accordance
with their terms, except as enforceability may be limited by bankruptcy,
insolvency, and similar laws and equitable principles affecting the
enforcement of creditors' rights generally.
5. CONDITIONS PRECEDENT TO EFFECTIVENESS OF AMENDMENT. The
effectiveness of this Amendment is subject to and contingent upon the
fulfillment of each and every one of the following conditions:
(a) Bank shall have received this Amendment, duly executed by
Borrower and Bank, and the Consent of Guarantors, duly executed by each
Guarantor;
(b) Bank shall have received the Replacement Secured Promissory
Note and the Warrants, all duly executed by Borrower and in form and substance
satisfactory to Bank;
(c) Bank shall have received a duly executed opinion of
Borrower's counsel, dated as of the date hereof, covering the matters set forth
in paragraphs 1, 4, 7, and 18 of EXHIBIT 3.1(b) to the Agreement and otherwise
in form and substance satisfactory to Bank in its sole and absolute discretion;
(d) Bank shall have received an amendment fee in the amount of
Twenty-Five Thousand Dollars ($25,000) in consideration of Bank's agreement to
enter into this Amendment upon the terms and conditions set forth herein;
(e) Bank shall have received all outstanding and unpaid Bank
Expenses, including but not limited to the legal fees of Buchalter, Nemer,
Fields & Younger relating to the negotiation, preparation and documentation of
the Loan Documents and this Amendment;
(f) After giving effect to this Amendment, no Event of Default,
Unmatured Event of Default or Material Adverse Effect shall have occurred; and
(g) All of the representations and warranties set forth herein,
in the Loan Documents and in the Agreement shall be true, complete and accurate
in all respects as of the date hereof (except for representations and warranties
which are expressly stated to be true and correct as of Closing Date).
6. CANCELLATION OF OLD NOTE AND WARRANT. Upon satisfaction of each
and every one of the conditions precedent described in Section 5 hereinabove,
Bank shall mark that certain Secured Revolving Note, dated as of July 3, 1997,
in the amount of Ten Million Dollars ($10,000,000), executed by Borrower to the
order of Bank, "Cancelled and Replaced", and deliver such note to Borrower, and
Bank shall mark that certain Warrant, dated as of July 3, 1997, executed by
Borrower in favor of Bank, "Cancelled and Replaced", and deliver such warrant to
Borrower.
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<PAGE>
7. COUNTERPARTS; TELEFACSIMILE EXECUTION. This Amendment may be
executed in any number of counterparts and by different parties on separate
counterparts, each of which, when executed and delivered, shall be deemed to be
an original, and all of which, when taken together, shall constitute but one and
the same Amendment. Delivery of an executed counterpart of this Amendment by
telefacsimile shall be equally as effective as delivery of a manually executed
counterpart of this Amendment. Any party delivering an executed counterpart of
this Amendment by telefacsimile also shall deliver a manually executed
counterpart of this Amendment but the failure to deliver a manually executed
counterpart shall not affect the validity, enforceability, and binding effect of
this Amendment.
8. REAFFIRMATION OF THE AGREEMENT. The Agreement as amended hereby
and the Loan Documents remain in full force and effect.
9. AMENDED AND RESTATED AMENDMENT. This Amendment shall amend and
restate in its entirety the Prior Amendment.
[Remainder of this page intentionally left blank.]
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Amendment as of the date first hereinabove written.
PROSPECT MEDICAL HOLDINGS, INC.,
a Delaware corporation
By: R. Stewart Kahn
--------------------------------------
Title: Executive Vice Pres.
IMPERIAL BANK,
a California banking corporation
By: Roc A. Caldarone
---------------------------------------
Title: Sr. Vice Pres.
6
<PAGE>
CONSENT OF GUARANTORS
Each of the undersigned, as a "Guarantor" under a Continuing Guaranty
("GUARANTY") executed in favor of IMPERIAL BANK, a California banking
corporation ("BANK"), with respect to the obligations of PROSPECT MEDICAL
HOLDINGS, INC., a Delaware corporation ("BORROWER"), owing to Bank, hereby
acknowledges receipt of a copy of the foregoing Amended and Restated Amendment
Number Three to Revolving Credit Agreement, dated as of February 6, 1998,
between Borrower and Bank, consents to the terms contained therein (including
without limitation, the increase in the line of credit available to Borrower to
up to Twelve Million Five Hundred Thousand Dollars ($12,500,000)), and agrees
that the Guaranty executed by each of the undersigned and all security therefor
shall remain in full force and effect.
Although Bank has informed us of the matters set forth above and we
have acknowledged same, we understand and agree that Bank has no duty under the
Agreement, the Guaranty executed by each of the undersigned, or any other
agreement between us to so notify us or to seek an acknowledgement, and nothing
herein is intended to or shall create such a duty as to any advances or
transactions hereafter.
PROSPECT MEDICAL SYSTEMS, INC.,
a Delaware corporation
By: R. Stewart Kahn
--------------------------------------
Title: Executive Vice Pres.
----------------------------
SIERRA MEDICAL MANAGEMENT, INC.,
a Delaware corporation
By: R. Stewart Kahn
--------------------------------------
Title: Vice Pres.
----------------------------
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<PAGE>
REPLACEMENT SECURED REVOLVING NOTE
$12,500,000 Los Angeles, California
February 6, 1998
1. FOR VALUE RECEIVED, PROSPECT MEDICAL HOLDINGS, INC., a Delaware
corporation, ("MAKER"), promises to pay to the order of IMPERIAL BANK, a
California banking corporation ("PAYEE"), on or before the Maturity Date, the
principal sum of Twelve Million Five Hundred Thousand Dollars ($12,500,000), or
such lesser sum as shall equal the aggregate outstanding principal amount of the
Revolving Loans made by Payee to Maker pursuant to the Agreement (as defined
below).
2. This Replacement Secured Revolving Note (this "NOTE") shall bear
interest at a per annum rate equal to the Prime Rate PLUS the Applicable Margin
(the "LENDING RATE"). As used herein "PRIME RATE" means the rate of interest
announced by Payee at its corporate headquarters as its prime rate and which
serves as the basis upon which effective rates of interest are calculated for
those loans making reference thereto. The Prime Rate is determined by Payee
from time to time as a means of pricing credit extensions to some customers and
is neither directly tied to some external rate of interest or index nor
necessarily the lowest rate of interest charged by Payee at any given time for
any particular class of customers or credit extensions. All computations of
interest shall be calculated on the basis of a year of three hundred sixty (360)
days for the actual days elapsed. In the event that the Prime Rate announced
is, from time to time, changed, adjustment in the rate of interest payable
hereunder shall be made as of 12:01 a.m. (California time) on the effective date
of the change in the Prime Rate. Interest shall accrue from the date of this
Note to the date of repayment of this Note in accordance with the provisions
hereof. Maker shall pay all accrued but unpaid interest on the Revolving Loans,
in arrears, on the first Business Day of each and every month. As used herein,
"BUSINESS DAY" means any day other than a Saturday, a Sunday, or a day on which
commercial banks in the City of Los Angeles, California are authorized or
required by law or executive order or decree to close.
3. Maker hereby authorizes Payee to record in its books and records
the date and amount of each Revolving Loan, and of each payment of principal
made by Maker, and Maker agrees that all such notations shall, in the absence of
manifest error, be conclusive as to the matters so noted; PROVIDED, HOWEVER, any
failure by Payee to make such notation with respect to any Revolving Loan or
payment thereof shall not limit or otherwise affect Maker's obligations under
the Agreement or this Note.
4. If any payment due hereunder or under the Agreement shall not be
paid when due (whether at the stated maturity, by acceleration or otherwise), in
addition to and not in substitution of any other rights and remedies which Payee
may have with respect to such nonpayment, the entire principal balance owing
hereunder shall bear interest at the Lending Rate PLUS five hundred (500) basis
points until such overdue payment is paid in full. In addition, interest, Bank
Expenses and Fees due hereunder or under the Agreement
<PAGE>
not paid when due shall bear interest at the Lending Rate PLUS five hundred
(500) basis points until such overdue payment is paid in full.
5. If any payment due hereunder, whether for principal, interest, or
otherwise, is not paid on or before the tenth day after the date such payment is
due, in addition to and not in substitution of any of Payee's other rights and
remedies with respect to such nonpayment, Maker shall pay to Payee, a late
payment fee ("LATE PAYMENT FEE") equal to five percent (5%) of the amount of
such overdue payment. The Late Payment Fee shall be due and payable on the
eleventh day after the due date of the overdue payment with respect thereto.
6. Maker shall make all payments hereunder in lawful money of the
United States of America and in immediately available funds to Payee at Payee's
office located at 9920 South La Cienega Boulevard, Suite 628, Inglewood, CA
90301, Attention Lending Services Department; or to such other address as Payee
may from time to time specify by notice to Maker in accordance with the terms of
the Agreement.
7. In no event shall the interest rate and other charges hereunder
exceed the highest rate permissible under any law which a court of competent
jurisdiction shall, in a final determination, deem applicable hereto. In the
event that such a court determines that Payee has received interest and other
charges hereunder in excess of the highest rate applicable hereto, such excess
shall be deemed received on account of, and shall automatically be applied to
reduce, the principal balance hereof, and the provisions hereof shall be deemed
amended to provide for the highest permissible rate. If there is no principal
balance outstanding, Payee shall refund to Maker such excess.
8. This Note is the "Note" referred to in that certain Revolving
Credit Agreement, dated as of July 3, 1997, as amended by that certain Amendment
Number One, dated as of July 14, 1997, that certain Amendment Number Two, dated
as of September 25, 1997, and that certain Amendment Number Three, dated as of
even date herewith (as may be at any time hereafter further amended,
supplemented, or otherwise modified or restated, the "AGREEMENT"), by and
between Maker, as Borrower, and Payee, as Bank, and is governed by the terms
thereof. Initially capitalized terms used but not defined herein shall have the
meanings assigned to such terms in the Agreement. The Agreement, among other
things, contains provisions for acceleration of the maturity of this Note upon
the happening of certain stated events and also for prepayments on account of
principal of this Note prior to the maturity hereof upon the terms and
conditions specified in the Agreement.
9. This Note is secured by the Liens granted to Payee under the Loan
Documents.
10. Maker hereby waives presentment for payment, notice of dishonor,
protest and notice of protest.
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<PAGE>
11. This Note shall be governed by and construed in accordance with
the internal laws of the State of California without regard to principles of
conflicts of laws.
12. (a) Other than (i) nonjudicial foreclosure and all matters in
connection therewith regarding security interests in real or personal property;
or (ii) the appointment of a receiver, or the exercise of other provisional
remedies (any and all of which may be initiated pursuant to applicable law),
each controversy, dispute or claim between Maker and Payee arising out of or
relating to this Note, which controversy, dispute or claim is not settled in
writing within thirty (30) days after the "CLAIM DATE" (defined as the date on
which either Maker or Payee gives written notice to the other that a
controversy, dispute or claim exists), will be settled by a reference proceeding
in California in accordance with the provisions of Section 638 ET SEQ. of the
California Code of Civil Procedure, or their successor section ("CCP"), which
shall constitute the exclusive remedy for the settlement of any controversy,
dispute or claim concerning this Note, including whether such controversy,
dispute or claim is subject to the reference proceeding and except as set forth
above, Maker and Payee waive their rights to initiate any legal proceedings
against each other in any court or jurisdiction other than the Superior Court in
the County where any real property collateral is located, or Los Angeles County,
if none (the "COURT"). The referee shall be a retired Judge of the Court
selected by mutual agreement of Maker and Payee, and if they cannot so agree
within forty-five (45) days after the Claim Date, the referee shall be promptly
selected by the Presiding Judge of the Court (or his or her representative).
The referee shall be appointed to sit as a temporary judge, with all of the
powers for a temporary judge, as authorized by law, and upon selection should
take and subscribe to the oath of office as provided for in Rule 244 of the
California Rules of Court (or any subsequently enacted Rule). Each party shall
have one peremptory challenge pursuant to CCP Section 170.6. The referee shall
(i) be requested to set the matter for hearing within sixty (60) days after the
Claim Date and (ii) try any and all issues of law or fact and report a statement
of decision upon them, if possible, within ninety (90) days of the Claim Date.
Any decision rendered by the referee will be final, binding and conclusive and
judgment shall be entered pursuant to CCP Section 644 in any court in the State
of California having jurisdiction. Any party may apply for a reference
proceeding at any time after thirty (30) days following notice to any other
party of the nature of the controversy, dispute or claim, by filing a petition
for a hearing and/or trial. All discovery permitted by herein shall be
completed no later than fifteen (15) days before the first hearing date
established by the referee. The referee may extend such period in the event of
a party's refusal to provide requested discovery for any reason whatsoever,
including, without limitation, legal objections raised to such discovery or
unavailability of a witness due to absence or illness. No party shall be
entitled to "priority" in conducting discovery. Depositions may be taken by
either party upon seven (7) days written notice, and request for production or
inspection of documents shall be responded to within ten (10) days after
service. All disputes relating to discovery which cannot be resolved by Maker
and Payee shall be submitted to the referee whose decision shall be final and
binding upon the parties. Pending appointment of the referee as provided
herein, the Superior Court is empowered to issue temporary and/or provisional
remedies, as appropriate.
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<PAGE>
(b) Except as expressly set forth herein, the referee shall
determine the manner in which the reference proceeding is conducted including
the time and place of all hearings, the order of presentation of evidence, and
all other questions that arise with respect to the course of the reference
proceeding. All proceedings and hearings conducted before the referee, except
for trial, shall be conducted without a court reporter except that when any
party so requests, a court reporter will be used at any hearing conducted before
the referee. The party making such a request shall have the obligation to
arrange for and pay for the court reporter. The costs of the court reporter at
the trial shall be borne equally by the parties.
(c) The referee shall be required to determine all issues in
accordance with existing case law and the statutory laws of the State of
California. The rules of evidence applicable to proceedings at law in the State
of California will be applicable to the reference proceeding. The referee shall
be empowered to enter equitable as well as legal relief, to provide all
temporary and/or provisional remedies and to enter equitable orders that will be
binding upon the parties. The referee shall issue a single judgment at the
close of the reference proceeding which shall dispose of all of the claims of
the parties that are the subject of the reference. Maker and Payee expressly
reserve the right to contest or appeal from the final judgment or any appealable
order or appealable judgment entered by the referee. Maker and Payee expressly
reserve the right to findings of fact, conclusions of laws, a written statement
of decision, and the right to move for a new trial or a different judgment,
which new trial, if granted, is also to be a reference proceeding under this
provision.
(d) In the event that the enabling legislation which provides
for appointment of a referee is repealed (and no successor statute is enacted),
any dispute between Maker and Payee that would otherwise be determined by the
reference procedure herein described will be resolved and determined by
arbitration. The arbitration will be conducted by a retired judge of the Court,
in accordance with the California Arbitration Act,
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<PAGE>
Section 1280 through Section 1294.2 of the CCP as amended from time to time.
The limitations with respect to discovery as set forth hereinabove shall apply
to any such arbitration proceeding.
13. This Note replaces that certain Secured Revolving Note, dated as
of July 3, 1997, in the amount of Ten Million Dollars ($10,000,000), executed by
Maker to the order of Payee, and continues the obligations of Maker incurred
thereunder.
IN WITNESS WHEREOF, Maker has duly executed this Note as of the date
first above written.
Maker: PROSPECT MEDICAL HOLDINGS, INC.,
a Delaware corporation
By /s/ Thomas A. Maloof
------------------------------------------
Title CFO
---------------------------------------
ACCEPTED AND AGREED:
IMPERIAL BANK,
a California banking corporation
By /s/ Roc A. Caldarone
------------------------------------------
Title: Sr. Vice President
--------------------------------------
5
<PAGE>
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE HEREUNDER HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
ANY APPLICABLE STATE SECURITIES LAWS AND MUST BE HELD INDEFINITELY
UNLESS SUBSEQUENTLY REGISTERED UNDER SAID ACT AND ANY APPLICABLE STATE
SECURITIES LAWS OR DISPOSED OF PURSUANT TO AN EXEMPTION FROM SUCH
REGISTRATION REQUIREMENTS.
AMENDED AND RESTATED WARRANT
Company: Prospect Medical Holdings, Inc., a Delaware
corporation
Number of Shares: Sixty Thousand Three Hundred and Fifty (60,350)
Class of Stock: Common Stock
Initial Exercise Price: $5.00 per share
Issued as of: February 6, 1998
Expiration Date: Seven (7) years after the date of this Warrant.
FOR VALUE RECEIVED, the adequacy and receipt of which is hereby
acknowledged, Prospect Medical Holdings, Inc., a Delaware corporation, hereby
certifies that IMPERIAL BANK, a California banking corporation, and its
successors and assigns, are entitled to purchase from the Company at any time
and from time to time on and after the date hereof until 12:00 midnight
California local time on the Expiration Date at an initial exercise price of
FIVE DOLLARS AND NO CENTS ($5.00) per share of Common Stock Sixty Thousand Three
Hundred and Fifty (60,350) fully paid and nonassessable shares of Common Stock
of the Company; on the terms and conditions hereinafter set forth.
The number of such shares of Common Stock and the Exercise Price are
subject to adjustment as provided in this Warrant. Anything contained in this
Warrant to the contrary notwithstanding, the number of shares of Common Stock
which may be issued upon exercise of this Warrant by any Regulated Warrantholder
shall never exceed such amount (the "Maximum Amount") as may be permitted under
the Bank Holding Company Act, or any successor statute, or under any other
federal or state banking laws or regulations to which such Regulated
Warrantholder may be subject at the time of such exercise. If the number
<PAGE>
of shares of Common Stock which may be issued upon exercise of this Warrant
exceeds the Maximum Amount, the number of shares of Common Stock into which this
Warrant may be exercised will be reduced to the Maximum Amount and the Company
will pay to the Bank by check or in cash such amount that equals (a) the
difference obtained by subtracting the Exercise Price from the Current Market
Price, multiplied by (b) the number of shares of Common Stock by which the
Warrant is reduced pursuant to this Paragraph.
This Amended and Restated Warrant executed March 13, 1998, supersedes and
replaces in all respects the Warrant previously issued by Company to Bank on
February 6, 1998 for 60,864 shares. All references herein to "the date hereof"
shall refer to the issue date set forth above (i.e. February 6, 1998).
1. Certain Definitions. As used in this Warrant, the following terms
have the following definitions:
"ACQUISITION ADJUSTMENT" has the meaning ascribed in Section 6(j).
"ADDITIONAL SHARES OF COMMON STOCK" means all shares of Common Stock issued
or issuable by the Company after the date of this Warrant including shares
issued pursuant to an Acquisition Adjustment.
"BANK" means IMPERIAL BANK, a California banking corporation, and its
successors and assigns.
"COMMON STOCK" means the Company's Common Stock, par value $.01 per share,
and includes any common stock of the Company of any class or classes resulting
from any reclassification or reclassifications thereof which is not limited to a
fixed sum or percentage of par value in respect of the rights of the holders
thereof to participate in dividends and in the distribution of assets upon the
voluntary or involuntary liquidation, dissolution or winding up of the Company.
"COMPANY" means Prospect Medical Holdings, Inc., a Delaware corporation.
"CONVERTIBLE SECURITIES" means evidence of indebtedness, shares of stock or
other securities which are at any time directly or indirectly convertible into
or exchangeable for Additional Shares of Common Stock.
"CURRENT MARKET PRICE" of a share of Common Stock or of any other security
as of a relevant date means: (i) the Fair Value thereof as determined in
accordance with clause (ii) of the definition of Fair Value with respect to
Common Stock or any other security that is not listed on a national securities
exchange or traded on the over-the-counter market or quoted on NASDAQ, and (ii)
the average of the daily closing prices for the ten (10) trading days before
such date (excluding any trades which are not bona fide arm's length
transactions) with respect to Common Stock or any other security that is listed
on a national securities exchange or traded on the over-the-counter market or
quoted on NASDAQ. The
2
<PAGE>
closing price for each day shall be (i) the last sale price of shares of Common
Stock or such other security, regular way, on such date or, if no such sale
takes place on such date, the average of the closing bid and asked prices
thereof on such date, in each case as officially reported on the principal
national securities exchange on which the same are then listed or admitted to
trading, or (ii) if no shares of Common Stock or if no securities of the same
class as such other security are then listed or admitted to trading on any
national securities exchange, the average of the reported closing bid and asked
prices thereof on such date in the over-the-counter market as shown by the
National Association of Securities Dealers automated quotation system or, if no
shares of Common Stock or if no securities of the same class as such other
security are then quoted in such system, as published by the National Quotation
Bureau, Incorporated or any similar successor organization, and in either case
as reported by any member firm of the New York Stock Exchange selected by the
Warrantholders.
"EXCHANGE ACT" means the Securities Exchange Act of 1934.
"EXERCISE PERIOD" means the period commencing on the date hereof and ending
at 12:00 midnight California local time on the Expiration Date.
"EXERCISE PRICE" means initially Five Dollars and No Cents ($5.00) per
share, subject to adjustment as provided in this Warrant.
"EXPIRATION DATE" means the date that is Seven (7) years after the date of
this Warrant.
"FAIR VALUE" means: (i) with respect to a share of Common Stock or any
other security, the Current Market Price thereof, and (ii) with respect to any
other property, assets, business or entity, an amount determined in accordance
with the following procedure: The Company and the holders of the Warrants and
Warrant Shares, as applicable, shall use their best efforts to mutually agree to
a determination of Fair Value within ten (10) days of the date of the event
requiring that such a determination be made. If the Company and such holders
are unable to reach agreement within said ten (10) day period, the Company and
such holders shall within ten (10) days of the expiration of the ten (10) day
period referred to above each retain a separate independent investment banking
firm (which firm shall not be the investment banking firm regularly retained by
the Company). If either the Company or such holders fails to retain such an
investment banking firm during such period, then the independent investment
banking firm retained by such holders or the Company, as the case may be, acting
alone, shall take the actions outlined below. Such firms shall determine
(within thirty (30) days of their being retained) the Fair Value of the
security, property, assets, business or entity, as the case may be, in question
and deliver their opinion in writing to the Company and to such holders. If
such firms cannot jointly make the determination, then, unless otherwise
directed by agreement of the Company and such holders, such firms, in their sole
discretion, shall choose another investment banking firm independent of the
Company and such holders, which firm shall make the determination and render an
opinion as promptly as practicable. In either case, the determination so made
shall be conclusive
3
<PAGE>
and binding on the Company and such holders. The fees and expenses of any such
determination made by any and all such independent investment banking firms
shall be paid by the Company. If there is more than one holder of Warrants,
and/or Warrant Shares entitled to a determination of Fair Value in any
particular instance, each action to be taken by the holders of such Warrants
and/or Warrant Shares under this Section shall be taken by a majority in
interest of such holders and the action taken by such majority (including as to
any mutual agreement with the Company with respect to Fair Value and as to any
selection of investment banking firms) shall be binding upon all such holders.
In the case of a determination of the Fair Value per share of Common Stock, the
Company and such holders shall not take into consideration, and shall instruct
all such investment banking firms not to take into consideration, any premium
for shares representing control of the Company, any discount for any minority
interest therein or any restrictions on transfer under applicable federal and
state securities laws or otherwise.
"INDEMNIFIED PARTY" and "INDEMNIFYING PARTY" have the meanings set forth in
Section 11(e)(iii).
"LOAN AGREEMENT" means that certain Revolving Credit Agreement, dated as of
July 3, 1997 between the Company and the Bank, as amended or restated from time
to time.
"PRIOR WARRANT" has the meaning ascribed to such term in
Paragraph 6(c)(iii)(A) hereof.
"PROTECTED PERIOD" means the period beginning on the date which is ten (10)
days prior to the anticipated effective date of a registration statement filed
pursuant to Sections 11(a) or 11(b) hereof in connection with an underwritten
offering, as set forth in a written notice given to the Company by the managing
underwriter in such offering, and ending on (a) the earlier of the ninetieth
(90th) day following the effective date of such registration statement,
(b) twenty (20) days following said anticipated effective date, if such
registration statement has not become effective by that time, and (c) the date
on which all of the securities to be sold pursuant thereto have been sold.
"REGISTRABLE STOCK" means: (i) all Warrant Shares which are issuable to the
Warrantholders pursuant to the Warrants, whether or not the Warrants have in
fact been exercised and whether or not such Warrant Shares have in fact been
issued, (ii) all Warrant Shares acquired by the Warrantholders pursuant to the
Warrants, (iii) any shares of Common Stock, whether or not such shares of Common
Stock have in fact been issued, and stock or other securities of the Company
issued upon conversion of, in a stock split or reclassification of, or a stock
dividend or other distribution on, or in substitution or exchange for, or
otherwise in connection with, such Warrant Shares. For purposes of Section 11,
a Warrantholder of record shall be treated as the record holder of the related
Warrant Shares and other securities issuable pursuant to the Warrants.
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<PAGE>
"REGULATED WARRANTHOLDER" means any Warrantholder which is, or the parent
of which is, subject to the Bank Holding Company Act, or any successor statute,
or any other federal or state banking laws and regulations.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"WARRANT(S)" means this Warrant and any warrants issued in exchange or
replacement of this Warrant or upon transfer hereof.
"WARRANTHOLDER(S)" means the Bank and its successors and assigns.
"WARRANT SHARES" means shares of Common Stock issuable to Warrantholders
pursuant to the Warrants.
2. EXERCISE OF WARRANT. This Warrant may be exercised, in whole or in
part, at any time and from time to time during the Exercise Period by written
notice to the Company and upon payment to the Company of the Exercise Price
(subject to adjustment as provided herein) for the shares of Common Stock in
respect of which the Warrant is exercised.
3. FORM OF PAYMENT OF EXERCISE PRICE. Anything contained herein to the
contrary notwithstanding, at the option of the Warrantholders, the Exercise
Price may be paid in any one or a combination of the following forms: (a) by
wire transfer to the Company, (b) by the Warrantholder's check to the Company,
(c) by the cancellation of any indebtedness owed by the Company and/or any
subsidiaries of the Company to the Warrantholder, and/or (d) by the surrender to
the Company of Warrants, Warrant Shares, Common Stock and/or other securities of
the Company and/or any subsidiaries of the Company having a Fair Value equal to
the Exercise Price.
4. CASHLESS EXERCISE/CONVERSION. In lieu of exercising this Warrant as
specified in Sections 2 and 3 above, the Warrantholders may from time to time at
the Warrantholders' option convert this Warrant, in whole or in part, into a
number of shares of Common Stock of the Company determined by dividing (A) the
aggregate Fair Value of such shares or other securities otherwise issuable upon
exercise of this Warrant minus the aggregate Exercise Price of such shares by
(B) the Fair Value of one such share.
5. CERTIFICATES FOR WARRANT SHARES; NEW WARRANT. The Company agrees that
the Warrant Shares shall be deemed to have been issued to the Warrantholders as
the record owner of such Warrant Shares as of the close of business on the date
on which payment for such Warrant Shares has been made (or deemed to be made by
conversion) in accordance with the terms of this Warrant. Certificates for the
Warrant Shares shall be delivered to the Warrantholders within a reasonable
time, not exceeding five (5) days, after this Warrant has been exercised or
converted. A new Warrant representing the number of shares, if any, with
respect to which this Warrant remains exercisable also shall be issued to the
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<PAGE>
Warrantholders within such time so long as this Warrant has been surrendered to
the Company at the time of exercise.
6. ADJUSTMENT OF EXERCISE PRICE, NUMBER OF SHARES AND NATURE OF
SECURITIES ISSUABLE UPON EXERCISE OF WARRANTS.
(a) EXERCISE PRICE: ADJUSTMENT OF NUMBER OF SHARES. The Exercise
Price shall be subject to adjustment from time to time as hereinafter provided.
Upon each adjustment of the Exercise Price, the Warrantholders shall thereafter
be entitled to purchase, at the Exercise Price resulting from such adjustment, a
number of shares determined by multiplying the Exercise Price in effect
immediately prior to such adjustment by the number of shares purchasable
pursuant hereto immediately prior to such adjustment and dividing the product
thereof by the Exercise Price resulting from such adjustment.
(b) ADJUSTMENT OF EXERCISE PRICE UPON ISSUANCE OF COMMON STOCK. If
and whenever after the date hereof the Company shall issue or sell Additional
Shares of Common Stock without consideration or for a consideration per share
less than the Exercise Price then in effect immediately prior to the issuance or
sale of such shares, then the Exercise Price in effect immediately prior to such
issuance or sale of such shares shall be reduced to the lesser of (a) the amount
of such consideration per share of Additional Shares so issued (with the
consideration being deemed to be $.01 per share for issuances for no
consideration), and (b) the Current Market Price of the Common Stock.
No adjustment of the Exercise Price, however, shall be made in an
amount less than $.01 per share, but any such lesser adjustment shall be carried
forward and shall be made at the time and together with the next subsequent
adjustment which, together with any adjustments so carried forward, shall amount
to $.01 per share or more.
The provisions of this Section 6(b) shall not apply to (x) any
Additional Shares of Common Stock which are distributed to holders of Common
Stock pursuant to a stock split for which an adjustment is provided for under
Section 6(f), or (y) the issuance of not to exceed 597,000 shares of Common
Stock which may hereafter be issued to employees, consultants or other vendors
of services pursuant to incentive plans or as compensation for their services.
(c) FURTHER PROVISIONS FOR ADJUSTMENT OF EXERCISE PRICE UPON ISSUANCE
OF ADDITIONAL SHARES OF COMMON STOCK AND CONVERTIBLE SECURITIES. For purposes
of Section 6(b), the following provisions shall also be applicable:
(i) In case at any time on or after the date hereof, the
Company shall declare any dividend, or authorize any other distribution, upon
any stock of the Company of any class, payable in Additional Shares of Common
Stock or by the issuance of Convertible Securities, such declaration or
distribution shall be deemed to have been issued or sold (as of the record date)
without consideration and shall thereby cause an adjustment in the Exercise
Price as required by Section 6(b).
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<PAGE>
(ii) (A) In case at any time on or after the date hereof,
the Company shall in any manner issue or sell any Convertible Securities,
whether or not the rights to exchange or convert thereunder are immediately
exercisable, there shall be determined the price per share for which Additional
Shares of Common Stock are issuable upon the conversion or exchange thereof,
such determination to be made by dividing (a) the total amount received or
receivable by the Company as consideration for the issue or sale of such
Convertible Securities, plus the minimum aggregate amount of additional
consideration, if any, payable to the Company upon the conversion or exchange
thereof by (b) the maximum aggregate number of Additional Shares of Common Stock
issuable upon conversion or exchange of all such Convertible Securities for such
minimum aggregate amount of additional consideration; and such issue or sale
shall be deemed to be an issue or sale for cash (as of the date of issue or sale
of such Convertible Securities) of such maximum number of Additional Shares of
Common Stock at the price per share so determined, and shall thereby cause an
adjustment in the Exercise Price, if such an adjustment is required by
Section 6(b) hereof.
(B) If such Convertible Securities shall by their
terms provide for an increase or increases, with the passage of time, in the
amount of additional consideration, if any, payable to the Company, or in the
rate of exchange upon the conversion or exchange thereof, the adjusted Exercise
Price shall, upon any such increase becoming effective, be increased to such
Exercise Price as would have been in effect had the adjustments made upon the
issuance of such Convertible Securities been made upon the basis of (and the
total consideration received therefor) (a) the issuance of the number of shares
of Common Stock theretofore actually delivered upon the exercise of such
Convertible Securities, (b) the issuance of all Common Stock, all Convertible
Securities and all rights and options to purchase Common Stock issued after the
issuance of such Convertible Securities, and (c) the original issuance at the
time of such change of any such Convertible Securities then still outstanding;
PROVIDED, HOWEVER, that any such increase or increases shall not exceed, in the
aggregate, the amount of the original reduction of the Exercise Price
attributable to the Convertible Securities.
(C) If any rights of conversion or exchange evidenced
by such Convertible Securities shall expire without having been exercised, the
adjusted Exercise Price shall forthwith be readjusted to such Exercise Price as
would have been in effect had an adjustment with respect to such Convertible
Securities been made on the basis that the only Additional Shares of Common
Stock issued or sold were those issued upon the conversion or exchange of such
Convertible Securities, and that they were issued or sold for the consideration
actually received by the Company upon such exercise, plus the consideration, if
any, actually received by the Company for the granting of such Convertible
Securities.
(iii) (A) In case at any time on or after the date hereof,
the Company shall in any manner grant or issue any rights or options to
subscribe for, purchase or otherwise acquire Additional Shares of Common Stock,
whether or not such rights or options are immediately exercisable, except the
granting of employee stock options to
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purchase one hundred thirty thousand (130,000) shares of the Company's Common
Stock per year, at an exercise price equal to the Current Market Price, and
except for: (x) four hundred seventy-seven thousand one hundred nineteen
(477,119) shares of Common Stock issuable upon exercise of those outstanding
employee stock options which are in existence as of the date hereof, (y) one
hundred and forty-seven thousand one hundred and forty-six (147,146) shares of
Common Stock issuable upon the exercise of warrants in existence as of the date
hereof, other than this Warrant, but including a warrant for 132,375 shares of
Common Stock issued to the Bank or its affiliate on July 3, 1997, as amended and
restated (the "Prior Warrant"), and issuable under certain other agreements of
the Company which agreements are in existence as of the date hereof and
(z) 35,000 shares of Common Stock reserved for issuance upon the exercise of
options granted by the Company in an acquisition permitted under the Loan
Agreement, as such shares of Common Stock are more fully set forth in Section
12(a) below, there shall be determined the price per share for which Additional
Shares of Common Stock are issuable upon the exercise of such rights or options,
such determination to be made by dividing (a) the total amount, if any, received
or receivable by the Company as consideration for the granting of such rights or
options, plus the minimum aggregate amount of additional consideration, if any,
payable to the Company upon the exercise of such rights or options if the
maximum number of Additional Shares were issued pursuant to such rights or
options for such minimum aggregate amount of additional consideration, by
(b) the maximum number of Additional Shares of Common Stock of the Company
issuable upon the exercise of all such rights or options for such minimum
aggregate amount of additional consideration; and the granting of such rights or
options shall be deemed to be an issue or sale for cash (as of the date of the
granting of such rights or options) of such maximum number of Additional Shares
of Common Stock at the price per share so determined, and shall thereby cause an
adjustment in the Exercise Price, if such an adjustment is required by
Section 6(b) hereof.
(B) If such rights or options shall by their terms
provide for an increase or increases, with passage of time, in the amount of
additional consideration payable to the Company upon the exercise thereof, the
adjusted Exercise Price shall, upon any such increases becoming effective, be
increased to such Exercise Price as would have been in effect had the
adjustments made upon the issuance of such rights or options been made upon the
basis of (and the total consideration received therefor) (a) the issuance of the
number of shares of Common Stock theretofore actually delivered upon the
exercise of such rights or options, (b) the issuance of all Common Stock, all
rights and options and all Convertible Securities issued after the issuance of
such rights and options, and (c) the original issuance at the time of such
change of any such rights or options then still outstanding; PROVIDED, HOWEVER,
that any such increase or increases in the Exercise Price shall not exceed, in
the aggregate, the amount of the original reduction of the Exercise Price
attributable to the grant of such rights or options.
(C) If any such rights or options shall expire without
having been exercised, the adjusted Exercise Price shall forthwith be readjusted
to such Exercise Price as would have been in effect had an adjustment with
respect to such rights or options been made on the basis that the only
Additional Shares of Common Stock so issued or sold
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were those issued or sold upon the exercise of such rights or options and that
they were issued or sold for the consideration actually received by the Company
upon such exercise, plus the consideration, if any, actually received by the
Company for the granting of such rights or options.
(iv) (A) In case at any time on or after the date hereof,
the Company shall grant any rights or options to subscribe for, purchase or
otherwise acquire Convertible Securities, there shall be determined the price
per share for which Additional Shares of Common Stock are issuable upon the
exchange or conversion of such Convertible Securities if such rights or options
were exercised, such determination to be made by dividing (a) the total amount,
if any, received or receivable by the Company as consideration for the issuance
of such rights or options, plus the minimum aggregate amount of additional
consideration, if any, payable to the Company upon the exercise of such rights
or options if the maximum number of Convertible Securities were issued pursuant
to such rights or options for such minimum aggregate amount of additional
consideration, plus the minimum aggregate amount of additional consideration, if
any, payable to the Company upon the exchange or conversion of such Convertible
Securities if the maximum number of Additional Shares were issued pursuant to
such Convertible Securities for such minimum aggregate amount of additional
consideration, by (b) the maximum aggregate number of Additional Shares of
Common Stock issuable upon the exchange or conversion of the Convertible
Securities for such minimum aggregate amount of additional consideration; and
the issue or sale of such rights or options shall be deemed to be an issue or
sale for cash (as of the date of the granting of such rights or options) of such
maximum number of Additional Shares of Common Stock at the price per share so
determined, and thereby shall cause an adjustment in the Exercise Price, if such
an adjustment is required by Section 6(b).
(B) If such rights or options to subscribe for or
otherwise acquire Convertible Securities shall by their terms provide for an
increase or increases, with the passage of time, in the amount of additional
consideration payable to the Company upon the exercise, exchange or conversion
thereof, the adjusted Exercise Price shall, forthwith upon any such increase
becoming effective, be increased to such Exercise Price as would have been in
effect had the adjustments made upon the issuances of such rights or options
been made upon the basis of (and the total consideration received therefor)
(a) the issuance of the number of shares of Common Stock theretofore actually
delivered upon the exchange or conversion of such Convertible Securities,
(b) the issuances of all Common Stock and all rights, options and Convertible
Securities issued after the issuance of such rights and options, and (c) the
original issuances at the time of such change of any such rights, options and
Convertible Securities issued upon exercise of such rights or options which are
then still outstanding; provided, however, that any such increase or increases
shall not exceed, in the aggregate, the amount of the original reduction of the
Exercise Price attributable to the grant of such rights or options.
(C) If any such rights, options or rights of
conversion or exchange of such Convertible Securities shall expire without
having been exercised, exchanged or converted, the adjusted Exercise Price shall
forthwith be readjusted to such
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Exercise Price as would have been in effect had an adjustment been made with
respect to such rights, options or rights of conversion or exchange of such
Convertible Securities on the basis that the only Additional Shares of Common
Stock so issued or sold were those issued or sold upon the exercise of such
rights or options and exchange or conversion of such Convertible Securities and
that they were issued or sold for the consideration actually received by the
Company upon exercise of such rights and options and exchange or conversion of
such Convertible Securities, plus the consideration, if any, actually received
by the Company for the granting of such rights, options or Convertible
Securities.
(v) In any case where an adjustment has been made in the
Exercise Price upon the issuance of Convertible Securities or any rights or
options to purchase Convertible Securities or Additional Shares of Common Stock
pursuant to this Section 6(c), no further adjustment shall be made at the time
of the conversion of any such Convertible Securities or at the time of the
exercise of any such rights or options.
(vi) In case at any time on or after the issuance of this
Warrant any shares of Common Stock or Convertible Securities shall be issued or
sold for a consideration other than cash, the amount of the consideration other
than cash payable to the Company shall be deemed to be the Fair Value of such
consideration. Whether or not the consideration so received is cash, the amount
thereof shall be determined after deducting therefrom any expenses incurred or
any underwriting commissions or concessions or discounts paid or allowed by the
Company in connection therewith.
(vii) In case at any time the Company shall fix a record date
of the holders of its Common Stock for the purpose of entitling them (a) to
receive a dividend or other distribution payable in Common Stock, Convertible
Securities or rights or options to purchase either thereof, or (b) to subscribe
for or purchase Common Stock, Convertible Securities or rights or options to
purchase either thereof, then such record date shall be deemed to be the date of
the issue or sale of the shares of Common Stock deemed, pursuant to this
Section 6(c), to have been issued or sold upon the declaration of such dividend
or the making of such other distribution or the date of the granting of such
right of subscription or purchase, as the case may be.
(viii) The number of shares of Common Stock outstanding at any
given time shall not include shares owned or held by or for the account of the
Company, and the disposition of any such shares shall be considered an issue or
sale of Common Stock for the purposes of this Section 6(c).
(d) REORGANIZATION, RECLASSIFICATION, CONSOLIDATION, MERGER OR SALE.
If any capital reorganization or reclassification of the capital stock of the
Company, or any consolidation or merger of the Company with another corporation,
or the sale of all or substantially all of its assets to another corporation
shall be effected in such a way that holders of Common Stock shall be entitled
to receive cash, stock, securities or assets with respect to or in exchange for
Common Stock, then, as a condition of such reorganization, reclassification,
consolidation, merger or sale, lawful and adequate provisions shall be made
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whereby the Warrantholders shall thereafter have the right to purchase and
receive upon the basis and upon the terms and conditions specified in this
Warrant upon exercise of this Warrant and in lieu of the shares of the Common
Stock of the Company immediately theretofore purchasable and receivable upon the
exercise of the rights represented hereby, such cash, shares of stock,
securities or assets as may be issued or payable with respect to or in exchange
for a number of outstanding shares of Common Stock equal to the number of shares
of such Common Stock immediately theretofore purchasable and receivable upon the
exercise of the rights represented hereby, and in any such case appropriate
provision shall be made with respect to the rights and interest of the
Warrantholders to the end that the provisions hereof (including, without
limitation, provisions for adjustments of the Exercise Price and of the number
of shares purchasable and receivable upon the exercise of this Warrant) shall
thereafter be applicable, as nearly as may be, in relation to any shares of
stock, securities or assets thereafter deliverable upon the exercise hereof.
The Company shall not effect any consolidation, merger or sale of all or
substantially all of the assets of the Company unless prior to or simultaneous
with the consummation thereof the successor corporation (if other than the
Company) resulting from such consolidation, merger or purchase of such assets
shall assume, by written instrument executed and mailed or delivered to the
Warrantholders, the obligation to deliver to such Warrantholders such cash (or
cash equivalent), shares of stock, securities or assets as, in accordance with
the foregoing provisions, the Warrantholders may be entitled to receive and
containing the express assumption of such successor corporation of the due and
punctual performance and observance of each provision of this Warrant to be
performed and observed by the Company and of all liabilities and obligations of
the Company hereunder; PROVIDED, HOWEVER, in the case of any consolidation or
merger of the Company with another corporation or the sale of all or
substantially all of its assets to another corporation effected in such a manner
that the holders of Common Stock shall be entitled to receive stock, securities
or assets with respect to or in exchange for Common Stock, then, at the election
of each Warrantholder, in lieu of receiving such stock, securities or assets,
such Warrantholder shall receive cash equal to the Fair Value of the Common
Stock issuable upon exercise of the Warrant, less the Exercise Price payable
upon exercise thereof.
In case any Additional Shares of Common Stock or Convertible
Securities or any rights or options to purchase any Additional Shares of Common
Stock or Convertible Securities shall be issued in connection with any merger of
another corporation into the Company, except for any acquisitions made by the
Company with the proceeds of the loan from the Bank, as set forth in the Loan
Agreement, of management service organizations which manage medical practices,
the amount of consideration therefor shall be deemed to be the Fair Value of
such portion of the assets of such merged corporation as the Board of Directors
of the Company shall in good faith determine to be attributable to such
Additional Shares of Common Stock, Convertible Securities or rights or options,
as the case may be, and the Exercise Price shall be adjusted in accordance with
this Section 6(d).
(e) COMPANY TO PREVENT DILUTION. In case at any time or from time to
time conditions arise by reason of action taken by the Company which are not
adequately covered by the provisions of this Section 6, and which might
materially and adversely affect
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the exercise rights of the Warrantholders under any provision of this Warrant,
unless the adjustment necessary shall be agreed upon by the Company and the
Warrantholders, the Board of Directors of the Company shall appoint a firm of
independent certified public accountants of recognized national standing (who
have not been employed by the Company within the last five years), acceptable to
the Warrantholders, who at the Company's expense shall give their opinion upon
the adjustment, if any, on a basis consistent with the standards established in
the other provisions of this Section 6, necessary with respect to the Exercise
Price and the number of shares purchasable upon exercise of the Warrants, so as
to preserve, without dilution, the exercise rights of the Warrantholders. Upon
receipt of such opinion, such Board of Directors shall forthwith make the
adjustments described therein.
(f) STOCK SPLITS AND REVERSE SPLITS. In case at any time the Company
shall subdivide its outstanding shares of Common Stock into a greater number of
shares, the Exercise Price in effect immediately prior to such subdivision shall
be proportionately reduced and the number of shares of Common Stock purchasable
pursuant to this Warrant immediately prior to such subdivision shall be
proportionately increased, and conversely, in case at any time the Company shall
combine its outstanding shares of Common Stock into a smaller number of shares,
the Exercise Price in effect immediately prior to such combination shall be
proportionately increased and the number of shares of Common Stock purchasable
upon the exercise of this Warrant immediately prior to such combination shall be
proportionately reduced.
(g) DISSOLUTION, LIQUIDATION AND WINDING-UP. In case the Company
shall, at any time prior to the expiration of this Warrant, dissolve, liquidate
or wind up its affairs, the Warrantholders shall be entitled, upon the exercise
of this Warrant, to receive, in lieu of the shares of Common Stock of the
Company which such Warrantholders would have been entitled to receive, the same
kind and amount of assets as would have been issued, distributed or paid to such
Warrantholders upon any such dissolution, liquidation or winding up with respect
to such shares of Common Stock of the Company, had such Warrantholders been the
holders of record of the Warrant Shares receivable upon the exercise of this
Warrant on the record date for the determination of those persons entitled to
receive any such liquidating distribution. After any such dissolution,
liquidation or winding up which shall result in any cash distribution in excess
of the Exercise Price provided for by this Warrant, the Warrantholders may, at
each such Warrantholder's option, exercise the same without making payment of
the Exercise Price, and in such case the Company shall, upon the distribution to
said Warrantholders, consider that said Exercise Price has been paid in full to
it and in making settlement to said Warrantholders, shall deduct from the amount
payable to such Warrantholders an amount equal to such Exercise Price.
(h) NONCASH CONSIDERATION. In case any Additional Shares of Common
Stock or Convertible Securities or any rights or options to purchase any
Additional Shares of Common Stock or Convertible Securities shall be issued for
a consideration in a form other than cash, the amount of such consideration
shall be deemed to be the Fair Value thereof.
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(i) ACCOUNTANTS' CERTIFICATE. In each case of an adjustment in the
number of shares of Common Stock or other stock, securities or property
receivable on the exercise of the Warrants, the Company at its expense shall
cause independent public accountants of recognized standing selected by the
Company and acceptable to the Warrantholders to compute such adjustment in
accordance with the terms of this Warrant and prepare a certificate setting
forth such adjustment and showing in detail the facts upon which such adjustment
is based, including a statement of (a) the consideration received or to be
received by the Company for any Additional Shares of Common Stock, rights,
options or Convertible Securities issued or sold or deemed to have been issued
or sold, (b) the number of shares of Common Stock of each class outstanding or
deemed to be outstanding, (c) the adjusted Exercise Price and (d) the number of
shares issuable upon exercise of this Warrant. The Company will forthwith mail
a copy of each such certificate to each Warrantholder.
(j) Notwithstanding anything contained herein to the contrary, if the
Company shall issue or sell Additional Shares of Common Stock or Convertible
Securities (whether for consideration per share less or in excess of the
Exercise Price in effect prior to such issuance) in connection with the
acquisition of assets, stock or management rights by the Company or any of its
subsidiaries or affiliates of Prime Care Medical Group of Antelope Valley, Inc.,
also known as Antelope Valley Medical Group (or of any other entity if such
acquisition occurs after the date hereof but on or before June 1, 1998), the
Warrantholders shall thereafter be entitled to purchase at the Exercise Price an
additional number of shares of Common Stock equal to the product of (i) 1%
times, (ii) the number of shares of Common Stock issued or number of shares of
Common Stock issuable upon conversion or exercise of the Convertible Securities,
whichever is the case ("Acquisition Adjustment"); provided, however, that if
without giving effect to this Section 6(j), the number of shares resulting from
the adjustment provided by Section 6(a), 6(b), 6(c) and/or 6(d) would exceed the
Acquisition Adjustment, then the result obtained by application of Section 6(a),
6(b), 6(c) and/or 6(d) shall supersede the Acquisition Adjustment amount.
7. SPECIAL AGREEMENTS OF THE COMPANY.
(a) RESERVATION OF SHARES. The Company covenants and agrees that all
Warrant Shares will, upon issuance, be validly issued, fully paid and
nonassessable and free from all preemptive rights of any stockholder, and from
all taxes, liens and charges with respect to the issue thereof. The Company
further covenants and agrees that during the period within which the rights
represented by this Warrant may be exercised, the Company will at all times have
authorized, and reserved, a sufficient number of shares of Common Stock to
provide for the exercise of the rights represented by this Warrant. The Company
hereby covenants and agrees to take all such action as may be necessary to
assure that the par value per share of the Common Stock is at all times equal to
or less than the Exercise Price.
(b) AVOIDANCE OF CERTAIN ACTIONS. The Company will not, by amendment
of its Articles or Certificate of Incorporation or through any reorganization,
transfer of assets, consolidation, merger, issue or sale of securities or
otherwise, avoid or take any
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action which would have the effect of avoiding the observance or performance of
any of the terms to be observed or performed hereunder by the Company, but will
at all times in good faith assist in carrying out all of the provisions of this
Warrant and in taking all of such action as may be necessary or appropriate in
order to protect the rights of the Warrantholders against dilution or other
impairment of their rights hereunder.
(c) SECURING GOVERNMENTAL APPROVALS. If any shares of Common Stock
required to be reserved for the purposes of exercise of this Warrant require
registration with or approval of any governmental authority under any federal
law (other than the Securities Act) or under any state law before such shares
may be issued upon exercise of this Warrant, the Company will, at its expense,
as expeditiously as possible, cause such shares to be duly registered or
approved, as the case may be.
(d) LISTING ON SECURITIES EXCHANGES; REGISTRATION. If, and so long
as, any class of the Company's Common Stock shall be listed on any national
securities exchange (as defined in the Exchange Act), the Company will, at its
expense, obtain and maintain the approval for listing upon official notice of
issuance of all Warrant Shares and maintain the listing of Warrant Shares after
their issuance; and the Company will so list on such national securities
exchange, will register under the Exchange Act (or any similar statute then in
effect), and will maintain such listing of, any other securities that at any
time are issuable upon exercise of this Warrant if and at the time any
securities of the same class shall be listed on such national securities
exchange by the Company.
(e) INFORMATION RIGHTS. So long as the Warrantholders hold this
Warrant and/or any of the Warrant Shares, the Company shall deliver to the
Warrantholders (i) promptly after mailing, copies of all communications to the
shareholders of the Company, (ii) within ninety (90) days after the end of each
fiscal year of the Company, the annual audited financial statements of the
Company certified by the independent public accountants of recognized standing,
and (iii) within forty-five (45) days after the end of each of the first three
quarters of each fiscal year, the Company's quarterly, unaudited financial
statements.
(f) RESTRICTIONS ON PUBLIC SALE BY THE COMPANY. The Company will not
effect any public or private sale or distribution of its convertible debt or
equity securities, including a sale pursuant to Regulation D under the
Securities Act, during the Protected Period of each underwritten offering by the
Company made pursuant to a registration statement filed pursuant to
Sections 11(a) or 11(b). In addition, the Company shall cause each holder of
its privately placed convertible debt or equity securities issued by it at any
time on or after the date of this Warrant to agree not to effect any public sale
or distribution of any such securities during such Period, including a sale
pursuant to Rule 144 or Rule 144A under the Securities Act; provided, however,
that no such agreement shall be required with respect to any such debt or equity
securities which are to be issued by the Company in a transaction which is
intended to be treated as a pooling of interests if the existence of such
agreement would cause the transaction to fail to qualify for such treatment.
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(g) PREEMPTIVE RIGHTS. In the event the Company offers to the
Company's shareholders the right to purchase any securities of the Company, then
all shares of Common Stock issuable pursuant to the Warrants shall be deemed to
be issued and outstanding and held by the Warrantholders and the Warrantholders
shall be entitled to participate in such rights offering.
(h) COMPLIANCE WITH LAW. The Company shall comply with all
applicable laws, rules and regulations of the United States and of all states,
municipalities and agencies and of any other jurisdiction applicable to the
Company and shall do all things necessary to preserve, renew and keep in full
force and effect and in good standing its corporate existence and authority
necessary to continue its business.
8. FRACTIONAL SHARES. No fractional shares or scrip representing
fractional shares shall be issued upon the exercise of this Warrant. With
respect to any fraction of a share called for upon exercise hereof, the Company
shall pay to the Warrantholder an amount in cash equal to such fraction
multiplied by the Current Market Value of one share of Common Stock.
9. NOTICES OF STOCK DIVIDENDS, SUBSCRIPTIONS, RECLASSIFICATIONS,
CONSOLIDATIONS, MERGERS, ETC. If at any time: (i) the Company shall declare a
cash dividend (or an increase in the then existing dividend rate), or declare a
dividend on Common Stock payable otherwise than in cash out of its net earnings
after taxes for the prior fiscal year; or (ii) the Company shall authorize the
granting to the holders of Common Stock of rights to subscribe for or purchase
any shares of capital stock of any class or of any other rights; or (iii) there
shall be any capital reorganization, or reclassification, or redemption of the
capital stock of the Company, or consolidation or merger of the Company with, or
sale of all or substantially all of its assets to, another corporation or firm;
or (iv) there shall be a voluntary or involuntary dissolution, liquidation or
winding up of the Company, then the Company shall give to the Warrantholders at
the addresses of such Warrantholders as shown on the books of the Company, at
least twenty (20) days prior to the applicable record date hereinafter
specified, a written notice summarizing such action or event and stating the
record date for any such dividend or rights (or, if a record date is not to be
selected, the date as of which the holders of Common Stock of record entitled to
such dividend or rights are to be determined), the date on which any such
reorganization, reclassification, consolidation, merger, sale of assets,
dissolution, liquidation or winding up is expected to become effective, and the
date as of which it is expected the holders of Common Stock of record shall be
entitled to effect any exchange of their shares of Common Stock for cash (or
cash equivalent), securities or other property deliverable upon any such
reorganization, reclassification, consolidation, merger, sale of assets,
dissolution, liquidation or winding up.
10. REGISTERED HOLDER; TRANSFER OF WARRANTS OR WARRANT SHARES.
(a) MAINTENANCE OF REGISTRATION BOOKS; OWNERSHIP OF THIS WARRANT.
The Company shall keep at its principal office a register in which the Company
shall provide for the registration, transfer and exchange of this Warrant. The
Company shall not at any time,
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except upon the dissolution, liquidation or winding-up of the Company, close
such register so as to result in preventing or delaying the exercise or transfer
of this Warrant.
(b) EXCHANGE AND REPLACEMENT. This Warrant is exchangeable upon
surrender hereof by the registered holder to the Company at its principal office
for new Warrants of like tenor and date representing in the aggregate the right
to purchase the number of shares purchasable hereunder, each of such new
Warrants to represent the right to purchase such number of shares as shall be
designated by said registered holder at the time of surrender. Subject to
compliance with all restrictions and provisions of this Warrant, this Warrant
and all rights hereunder are transferable in whole or in part upon the books of
the Company by the registered holder hereof in person or by duly authorized
attorney, and new Warrants shall be made and delivered by the Company, of the
same tenor and date as this Warrant but registered in the name of the
transferee(s), upon surrender of this Warrant, duly endorsed, to said office of
the Company. Upon receipt by the Company of evidence reasonably satisfactory to
it of the loss, theft, destruction or mutilation of this Warrant, and upon
surrender and cancellation of this Warrant, if mutilated, the Company will make
and deliver a new Warrant of like tenor, in lieu of this Warrant, without
requiring the posting of any bond or the giving of any other security. This
Warrant shall be promptly cancelled by the Company upon the surrender hereof in
connection with any exchange, transfer or replacement. The Company shall pay
all expenses, taxes and other charges payable in connection with the
preparation, execution and delivery of Warrants pursuant to this Section 10.
(c) WARRANTS AND WARRANT SHARES NOT REGISTERED. The holder of this
Warrant, by accepting this Warrant, represents and acknowledges that this
Warrant and the Warrant Shares are not being registered under the Securities Act
on the grounds that the issuance of this Warrant and the offering and sale of
such Warrant Shares are exempt from registration under Section 4(2) of the
Securities Act as not involving any public offering.
11. REGISTRATION.
(a) REQUIRED REGISTRATION. After three (3) years from the date of
this Warrant, whenever the Company shall receive a written request therefor from
any holder or holders of at least 10% of the Registrable Stock, the Company
shall promptly prepare and file a registration statement under the Securities
Act covering the Registrable Stock which is the subject of such request and
shall use its best efforts to cause such registration statement to become
effective as expeditiously as possible. Upon the receipt of such request, the
Company shall promptly give written notice to all holders of Registrable Stock
that such registration is to be effected. The Company shall include in such
registration statement such Registrable Stock for which it has received written
requests to register such shares by the holders thereof within thirty (30) days
after the effectiveness of the Company's written notice to such other holders.
The Registrable Stock owned by the Bank under this Warrant shall receive
priority over all other shares of stock included in a registration statement
under this Section 11(a). Notwithstanding the above, the Company is obligated
to effect only one (1) registration pursuant to this Section 11(a).
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(b) INCIDENTAL REGISTRATION. Each time the Company shall determine
to file a registration statement under the Securities Act (other than on
Form S-8 or Form S-4) in connection with the proposed offer and sale for money
of any of its securities by it or by any of its security holders, the Company
will give written notice of its determination to all holders of Registrable
Stock. Upon the written request of a holder of any Registrable Stock, the
Company will cause all such Registrable Stock, the holders of which have so
requested registration thereof, to be included in such registration statement,
all to the extent requisite to permit the sale or other disposition by the
prospective seller or sellers of the Registrable Stock to be so registered in
accordance with the terms of the proposed offering. If the registration
statement is to cover an underwritten distribution, the Company shall use its
best efforts to cause the Registrable Stock requested for inclusion pursuant to
this Section 11(b) to be included in the underwriting on the same terms and
conditions as the securities otherwise being sold through the underwriters. If,
in the good faith judgment of the managing underwriter of such public offering,
the inclusion of all of the Registrable Stock requested to be registered would
materially and adversely affect the successful marketing of the other shares
proposed to be offered, then the amount of the Registrable Stock to be included
in the offering shall be reduced and the Registrable Stock and the other shares
to be offered shall participate in such offering as follows: the shares to be
sold by the Company, the Registrable Stock to be included in such offering and
the other shares of Common Stock to be included in such offering shall each be
reduced pro rata in proportion to the number of shares of Common Stock proposed
to be included in such offering by each holder of such shares and by the
Company.
(c) REGISTRATION PROCEDURES. If and whenever the Company is required
by the provisions of Section 11(a) or 11(b) to effect the registration of
Registrable Stock under the Securities Act, the Company will, at its expense, as
expeditiously as possible:
(i) In accordance with the Securities Act and the rules and
regulations of the Commission, prepare and file with the Commission a
registration statement on the form of registration statement appropriate with
respect to such securities and use its best efforts to cause such registration
statement to become and remain effective until the earlier of (x) the date on
which the securities covered by such registration statement have been sold, or
(y) one hundred eighty (180) days after the effective date thereof, and prepare
and file with the Commission such amendments to such registration statement and
supplements to the prospectus contained therein as may be necessary to keep such
registration statement effective and such registration statement and prospectus
accurate and complete until the securities covered by such registration
statement have been sold;
(ii) If the offering is to be underwritten, in whole or in
part, enter into a written underwriting agreement with the holders of the
Registrable Stock participating in such offering and the underwriter in form and
substance reasonably satisfactory to the managing underwriter of the public
offering and the holders of the Registrable Stock participating in such
offering;
17
<PAGE>
(iii) Furnish to the holders of securities participating in
such registration and to the underwriters of the securities being registered
such reasonable number of copies of the registration statement, preliminary
prospectus, final prospectus and such other documents as such underwriters and
holders may reasonably request in order to facilitate the public offering of
such securities;
(iv) Use its best efforts to register or qualify the
securities covered by such registration statement under such state securities or
blue sky laws of such jurisdictions as such participating holders and
underwriters may reasonably request;
(v) Notify the holders participating in such registration,
promptly after it shall receive notice thereof, of the date and time when such
registration statement and each post-effective amendment thereto has become
effective or a supplement to any prospectus forming a part of such registration
statement has been filed;
(vi) Notify such holders promptly of any request by the
Commission for the amending or supplementing of such registration statement or
prospectus or for additional information;
(vii) Prepare and file with the Commission, promptly upon the
request of any such holders, any amendments or supplements to such registration
statement or prospectus which, in the opinion of counsel for such holders, is
required under the Securities Act or the rules and regulations thereunder in
connection with the distribution of the Registrable Stock by such holders;
(viii) Prepare and promptly file with the Commission, and
promptly notify such holders of the filing of, such amendments or supplements to
such registration statement or prospectus as may be necessary to correct any
statements or omissions if, at the time when a prospectus relating to such
securities is required to be delivered under the Securities Act, any event has
occurred as the result of which any such prospectus or any other prospectus as
then in effect may include 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;
(ix) In case any of such holders or any underwriter for any
such holders is required to deliver a prospectus at a time when the prospectus
then in circulation is not in compliance with the Securities Act or the rules
and regulations of the Commission, prepare promptly upon request such amendments
or supplements to such registration statement and such prospectus as may be
necessary in order for such prospectus to comply with the requirements of the
Securities Act and such rules and regulations;
(x) Advise such holders, promptly after it shall receive
notice or obtain knowledge thereof, of the issuance of any stop order by the
Commission suspending the effectiveness of such registration statement or the
initiation or threatening of any
18
<PAGE>
proceeding for that purpose and promptly use its best efforts to prevent the
issuance of any stop order or to obtain its withdrawal if such stop order should
be issued;
(xi) If requested by the managing underwriter or underwriters
or a holder of Registrable Stock being sold in connection with an underwritten
offering, immediately incorporate in a prospectus supplement or post-effective
amendment such information as the managing underwriters and the holders of a
majority of the Registrable Stock being sold agree should be included therein
relating to the plan of distribution with respect to such Registrable Stock,
including information with respect to the Registrable Stock being sold to such
underwriters, the purchase price being paid therefor by such underwriters and
with respect to any other terms of the underwritten (or best efforts
underwritten) offering of the Registrable Stock to be sold in such offering; and
make all required filings of such prospectus supplement or post-effective
amendment as soon as notified of the matters to be incorporated in such
prospectus supplement or post-effective amendment;
(xii) Cooperate with the selling holders of Registrable Stock
and the managing underwriters, if any, to facilitate the timely preparation and
delivery of certificates representing Registrable Stock to be sold and not
bearing any restrictive legends; and enable such Registrable Stock to be in such
denominations and registered in such names as the managing underwriters may
request at least two business days prior to any sale of Registrable Stock to the
underwriters;
(xiii) Prepare a prospectus supplement or post-effective
amendment to the registration statement or the related prospectus or any
document incorporated therein by reference or file any other required documents
so that, as thereafter delivered to the purchasers of the Registrable Stock, the
prospectus will not contain an untrue statement of material fact or omit to
state any material fact necessary to make the statements therein not misleading;
(xiv) Enter into such agreements (including an underwriting
agreement) and take all such other actions in connection therewith in order to
expedite or facilitate the disposition of such Registrable Stock and in such
connection, whether or not an underwriting agreement is entered into and whether
or not the registration is an underwritten registration:
(A) make such representations and warranties to the
holders of such Registrable Stock and the underwriters, if any, in form,
substance and scope as are customarily made by issuers to underwriters in
primary underwritten offerings;
(B) If an underwriting agreement is entered into, the
same shall set forth in full the indemnification provisions and procedures of
Section 11(e) hereof with respect to all parties to be indemnified pursuant to
said Section; and
(C) The Company shall deliver such documents and
certificates as may be requested by the holders of the majority of the
Registrable Stock being
19
<PAGE>
sold and the managing underwriters, if any, to evidence compliance with the
terms of this Section 11(c) and with any customary conditions contained in the
underwriting agreement or other agreement entered into by the Company.
The above shall be done at each closing under such
underwriting or similar agreement or as and to the extent required thereunder;
(xv) Make available for inspection by a representative of the
holders of a majority of the Registrable Stock, any underwriter participating in
any disposition pursuant to a registration statement, and any attorney or
accountant retained by the sellers or underwriter, all financial and other
records, pertinent corporate documents and properties of the Company, and cause
the Company's officers, directors and employees to supply all information
reasonably requested by any such representative, underwriter, attorney or
accountant in connection with the preparation of the registration statement;
provided, that any records, information or documents that are designated by the
Company in writing as confidential shall be kept confidential by such persons
unless disclosure of such records, information or documents is required by court
or administrative order;
(xvi) Otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make generally available
to the Company's security holders, earning statements satisfying the provisions
of Section 11(a) of the Securities Act, no later than forty-five (45) days after
the end of any twelve (12) month period (or ninety (90) days, if such a period
is a fiscal year) (i) commencing at the end of any fiscal quarter in which
Registrable Stock is sold to underwriters in an underwritten offering, or, if
not sold to underwriters in such an offering, (ii) beginning with the first
month of the Company's first fiscal quarter commencing after the effective date
of a registration statement;
(xvii) Not file any amendment or supplement to such registration
statement or prospectus to which a majority in interest of such holders has
objected on the grounds that such amendment or supplement does not comply in all
material respects with the requirements of the Securities Act or the rules and
regulations thereunder, after having been furnished with a copy thereof at least
five (5) business days prior to the filing thereof; provided, however, that the
failure of such holders or their counsel to review or object to any amendment or
supplement to such registration statement or prospectus shall not affect the
rights of such holders or any controlling person or persons thereof or any
underwriter or underwriters therefor under Section 11(e) hereof; and
(xviii)At the request of any such holder (i) furnish to
such holder on the effective date of the registration statement or, if such
registration includes an underwritten public offering, at the closing provided
for in the underwriting agreement, an opinion, dated such date, of the counsel
representing the Company for the purposes of such registration, addressed to the
underwriters, if any, and to the holder or holders making such request, covering
such matters with respect to the registration statement, the prospectus and each
amendment or supplement thereto, proceedings under state and federal securities
laws, other matters relating to the Company, the securities being registered and
the offer and sale
20
<PAGE>
of such securities as are customarily the subject of opinions of issuer's
counsel provided to underwriters in underwritten public offerings, and such
opinion of counsel shall additionally cover such legal and factual matters with
respect to the registration as such requesting holder or holders may reasonably
request, and (ii) use its best efforts to furnish to such holder letters dated
each such effective date and such closing date, from the independent certified
public accountants of the Company, addressed to the underwriters, if any, and to
the holder or holders making such request, stating that they are independent
certified public accountants within the meaning of the Securities Act and
dealing with such matters as the underwriters may request, or, if the offering
is not underwritten, that in the opinion of such accountants the financial
statements and other financial data of the Company included in the registration
statement or the prospectus or any amendment or supplement thereto comply in all
material respects with the applicable accounting requirements of the Securities
Act, and additionally covering such other financial matters, including
information as to the period ending immediately prior to the date of such letter
with respect to the registration statement and prospectus, as such requesting
holder or holders may reasonably request.
(d) EXPENSES OF REGISTRATION. All expenses incident to the Company's
performance of or compliance with this Warrant, including, without limitation,
the following shall be borne by the Company, regardless of whether the
registration statement becomes effective:
(i) All registration and filing fees (including those with
respect to filings required to be made with the National Association of
Securities Dealers, Inc.);
(ii) Fees and expenses of compliance with all securities or
blue sky laws (including fees and disbursements of counsel for the underwriters
or selling holders in connection with blue sky qualifications of the Registrable
Stock and in determination of their eligibility for investment under the laws of
such jurisdictions as the managing underwriters or holders of a majority of the
Registrable Stock being sold may designate);
(iii) Printing, messenger, telephone and delivery expenses;
(iv) Fees and disbursements of counsel for the Company, the
underwriters and for the sellers of the Registrable Stock as hereinafter
provided;
(v) Fees and disbursements of all independent certified
public accountants of the Company (including the expenses of any special audit
and "comfort" letters required by or incident to such performance);
(vi) Fees and disbursements of underwriters (excluding
discounts, commissions or fees of underwriters, selling brokers, dealer managers
or similar securities industry professionals relating to the distribution of the
Registrable Stock or legal expenses of any person other than the Company and the
selling holders); and
(vii) Fees and expenses of other persons retained by the
Company.
21
<PAGE>
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 similar
securities issued by the Company are then listed, rating agency fees and the
fees and expenses of any person, including special experts, retained by the
Company.
In connection with the registration statement required
hereunder, the Company will reimburse the holders of Registrable Stock being
registered pursuant to the registration statement for the reasonable fees and
disbursements of not more than one counsel (or more than one counsel if conflict
exists among such selling holders in the exercise of the reasonable judgment of
counsel for the selling holders and counsel for the Company) chosen by the
holders of a majority of such Registrable Stock.
(e) INDEMNIFICATION.
(i) The Company hereby agrees to indemnify each of the
holders of Registrable Stock against all claims, losses, damages and liabilities
(or actions in respect thereof) arising out of or based on any untrue statement
(or alleged untrue statement) of a material fact contained in any registration
statement, preliminary or final prospectus, or other document incident to any
such registration, qualification or compliance (or in any related registration
statement, notification or the like) or 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, or any violation by the Company of any
rule or regulation promulgated under the Securities Act applicable to the
Company and relating to action or inaction required of the Company in connection
with any such registration, qualification or compliance, and to reimburse the
holders of Registrable Stock (including officers and directors of the same and
controlling persons) for any legal and any other expenses reasonably incurred in
connection with investigating or defending any such claim, loss, damage,
liability or action, PROVIDED, HOWEVER, that the Company will not be liable in
any such case to the extent that any such claim, loss, damage or liability
arises out of or is based on any untrue statement or omission based upon written
information furnished to the Company by Warrantholders in an instrument duly
executed by Warrantholders and stated to be specifically for use therein.
(ii) The Warrantholders severally and not jointly agree to
indemnify the Company and its officers and directors and each person, if any,
who controls any thereof within the meaning of Section 15 of the Securities Act
and their respective successors against all claims, losses, damages and
liabilities (or actions in respect thereof) arising out of or based on any
untrue statement of a material fact contained in any prospectus, offering
circular or other document incident to any registration, qualification or
compliance relating to securities purchased pursuant to the Warrants (or in any
related registration statement, notification or the like) or 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 and
22
<PAGE>
will reimburse the Company and each other person indemnified pursuant to this
subsection (ii) for any legal and any other expenses reasonably incurred in
connection with investigating or defending any such claim, loss, damage,
liability or action; PROVIDED, HOWEVER, that this subsection (ii) shall apply
only if (and only to the extent that) such statement or omission was made in
reliance upon information (including, without limitation, written negative
responses to inquiries) furnished to the Company by an instrument duly executed
by Warrantholders and stated to be specifically for use in such prospectus, or
other document (or related registration statement, notification or the like) or
any amendment or supplement thereto.
(iii) Each party entitled to indemnification hereunder (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party (at such Indemnifying Party's expense) to assume
the defense of any claim or any litigation resulting therefrom, provided that
counsel for the Indemnifying Party, who shall conduct the defense of such claim
or litigation, shall be satisfactory to the Indemnified Party, and the
Indemnified Party may participate in such defense at such party's expense, and
provided, further, that the omission by any Indemnified Party to give notice as
provided herein shall not relieve the Indemnifying Party of its obligations
under this Section 11(e) except to the extent that the omission results in a
failure of actual notice to the Indemnifying Party and such Indemnifying Party
is materially damaged solely as a result of the failure to give notice. No
Indemnifying Party, in the defense of any such claim or litigation, shall,
except with the consent of each Indemnified Party, consent to entry of any
judgment or enter into any settlement which does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such Indemnified Party
of a release from all liability in respect to such claim or litigation.
(iv) If the indemnification provided for in this Section 11(e)
is unavailable or insufficient to hold harmless an Indemnified Party in respect
of any losses, claims, damages, liabilities, expenses or actions in respect
thereof referred to herein, then the Indemnifying Party shall contribute to the
amount paid or payable by such Indemnified Party as a result of such losses,
claims, damages, liabilities, expenses or actions in such proportion as is
appropriate to reflect the relative fault of the Indemnifying Party on the one
hand, and the Indemnified Party on the other, in connection with the statements
or omissions which resulted in such losses, claims, damages, liabilities,
expenses or actions as well as any other relevant equitable considerations,
including the failure to give the notice required hereunder. The relative fault
of the Indemnifying Party and the Indemnified Party shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact relates to information supplied by the Indemnifying Party or
the Indemnified Party and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company and the Warrantholders agree that it would not be just and
equitable if contributions pursuant to this Section 11(e) were determined by pro
rata allocation or by any other method of allocation which did not take account
of the equitable considerations referred to above. The amount
23
<PAGE>
paid or payable to an Indemnified Party as a result of the losses, claims,
damages, liabilities or actions in respect thereof, referred to above, shall be
deemed to include any legal or other expenses reasonably incurred by such
Indemnified Party in connection with investigating or defending any such action
or claim. Notwithstanding the contribution provisions of this Section 11(e), in
no event shall the amount contributed by any seller of Registrable Stock exceed
the aggregate net offering proceeds received by such seller from the sale of
Registrable Stock to which such contribution or indemnification claim relates.
No person guilty of fraudulent misrepresentations (within the meaning of
Section 11(f) of the Securities Act) shall be entitled to contribution from any
person who is not guilty of such fraudulent misrepresentation.
(v) The indemnification required by this Section 11(e) shall
be made by periodic payments during the course of the investigation or defense,
as and when bills are received or expenses incurred. Anything contained herein
to the contrary notwithstanding, the maximum aggregate liability of any holder
of Registrable Stock under this Section 11(e) shall not exceed the amount of the
net proceeds actually received by such holder from the sale of its Registrable
Stock pursuant to the registration, qualification, notification or compliance in
respect of which such liability arose.
(f) REPORTING REQUIREMENTS UNDER EXCHANGE ACT. From and after the
effective date of the first registration statement filed by the Company under
the Securities Act, the Company shall (whether or not it shall then be required
to do so) timely file such information, documents and reports as the Commission
may require or prescribe under Section 13 or 15(d) (whichever is applicable) of
the Exchange Act. Immediately upon becoming subject to the reporting
requirements of either Section 13 or 15(d) of the Exchange Act, the Company
shall forthwith upon request furnish any holder of Registrable Stock (i) a
written statement by the Company that it has complied with such reporting
requirements, (ii) a copy of the most recent annual or quarterly report of the
Company, and (iii) such other reports and documents filed by the Company with
the Commission as such holder may reasonably request in availing itself of an
exemption for the sale of Registrable Stock without registration under the
Securities Act. The Company acknowledges and agrees that the purpose of the
requirements contained in this Section 11(f) is to enable any such holder to
comply with the current public information requirement contained in Rule 144
under the Securities Act should such holder ever wish to dispose of any of the
securities of the Company acquired by it without registration under the
Securities Act in reliance upon Rule 144 (or any other similar exemptive
provision). In addition, the Company shall take such other measures and file
such other information, documents and reports as shall hereafter be required by
the Commission as a condition to the availability of Rule 144 and Rule 144A
under the Securities Act (or any similar exemptive provision hereafter in
effect).
(g) STOCKHOLDER INFORMATION. The Company may require each holder of
Registrable Stock as to which any registration is to be effected pursuant to
this Section 11 to furnish the Company such information with respect to such
holder and the distribution of such Registrable Stock as shall be required by
law or by the Commission in connection therewith.
24
<PAGE>
(h) TERMINATION OF REQUIREMENTS TO REGISTER. The obligations of the
Company under Sections 11(a) and 11(b) hereof shall terminate when all of the
Registrable Stock may be sold by all holders without restriction under the
Securities Act.
12. REPRESENTATION AND WARRANTIES. The Company hereby represents and
warrants to and covenants with the Bank, each Warrantholder, and each holder of
Warrant Shares that:
(a) ORGANIZATION AND CAPITALIZATION OF THE COMPANY. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware. As of the date hereof, the authorized capital of the
Company consists of forty million (40,000,000) shares of Common Stock and one
million (1,000,000) shares of Preferred Stock, of which five million three
hundred and seventy-five thousand seven hundred and eighteen (5,375,718) shares
of Common Stock and no shares of Preferred Stock are issued and outstanding.
The Company has, and at all times during the Exercise Period will have, reserved
for issuance pursuant to the Warrants that number of shares of Common Stock that
are issuable pursuant to the Warrants. No unissued shares of Common Stock are
reserved for any purpose other than: (i) for issuance upon the exercise of the
Warrants, (ii) four hundred and seventy-seven thousand one hundred nineteen
(477,119) shares of Common Stock reserved for issuance upon the exercise of
employee stock options, (iii) one hundred and forty-seven thousand one hundred
and forty-six (147,146) shares of Common Stock reserved for issuance upon the
exercise of warrants other than this Warrant (but including the Prior Warrant)
and under certain other agreements of the Company as in existence on the date
hereof and (iii) 35,000 shares of Common Stock reserved for issuance upon the
exercise of options granted by the Company in an acquisition permitted by the
Loan Agreement. Except under this Warrant and the Prior Warrant, there are no
preemptive rights in effect with respect to the issuance of any shares of Common
Stock. All the outstanding shares of Common Stock and Preferred Stock have been
validly issued without violation of any preemptive or similar rights, are fully
paid and nonassessable and have been issued in compliance with all federal and
applicable state securities laws.
(b) AUTHORITY. The Company has full corporate power and authority to
execute and deliver this Warrant, to issue the shares of Common Stock issuable
upon exercise of this Warrant, and to perform all of its obligations hereunder,
and the execution, delivery and performance hereof has been duly authorized by
all necessary corporate action on its part. This Warrant has been duly executed
on behalf of the Company and constitutes the legal, valid and binding obligation
of the Company enforceable in accordance with its terms.
(c) NO LEGAL BAR. Neither the execution, delivery or performance of
this Warrant nor the issuance of the shares of Common Stock issuable upon
exercise of this Warrant will (a) conflict with or result in a violation of the
Certificate of Incorporation or By-Laws of the Company, (b) conflict with or
result in a violation of any law, statute, regulation, order or decree
applicable to the Company or any affiliate, (c) require any consent or
authorization or filing with, or other act by or in respect of any governmental
25
<PAGE>
authority, or (d) result in a breach of, constitute a default under or
constitute an event creating rights of acceleration, termination or cancellation
under any mortgage, lease, contract, franchise, instrument or other agreement to
which the Company is a party or by which it is bound.
(d) VALIDITY OF SHARES. When issued upon the exercise of this
Warrant as contemplated herein, the shares of Common Stock so issued will have
been validly issued and will be fully paid and nonassessable. On the date
hereof, the par value of the Common Stock is less than the Exercise Price per
share of Common Stock.
13. CONTINUING VALIDITY. The Bank and each holder of Warrant Shares shall
continue to be entitled to all rights to which a Warrantholder is entitled
pursuant to the provisions of this Warrant except such rights as by their terms
apply solely to a Warrantholder, notwithstanding the fact that this Warrant has
been exercised or the period of exercisability has expired. The Company will,
at any time upon the request of the Bank or a holder of the Warrant Shares,
acknowledge in writing, in form reasonably satisfactory to the Bank or such
holder, the Company's continuing obligation to afford to the Bank or such holder
all rights to which the Bank or such holder shall continue to be entitled in
accordance with the provisions of this Warrant; PROVIDED, HOWEVER, that if the
Bank or such holder shall fail to make any such request, such failure shall not
affect the continuing obligation of the Company to afford to the Bank and such
holder all such rights.
14. MISCELLANEOUS PROVISIONS.
(a) NOTICE OF EXPIRATION. The Company shall give written notice to
the Warrantholders specifically advising them of the Expiration Date and of
their right to exercise the Warrants not more than one hundred eighty (180) days
and not less than ninety (90) days before the Expiration Date. If such written
notice is not so given, the Expiration Date shall automatically be extended
until ninety (90) days after the date that the Company gives the Warrantholders
such written notice.
(b) JUDICIAL REFERENCE.
(i) Other than the appointment of a receiver, or the exercise
of other provisional remedies (any and all of which may be initiated pursuant to
applicable law), each controversy, dispute or claim arising out of or relating
to this Warrant, which controversy, dispute or claim is not settled in writing
within thirty (30) days after the "CLAIM DATE" (defined as the date on which the
Company or a Warrantholder gives written notice to the other that a controversy,
dispute or claim exists), will be settled by a reference proceeding in
California in accordance with the provisions of Section 638 et seq. of the
California Code of Civil Procedure, or their successor section ("CCP"), which
shall constitute the exclusive remedy for the settlement of any controversy,
dispute or claim concerning this Warrant, including whether such controversy,
dispute or claim is subject to the reference proceeding and except as set forth
above, the parties waive their rights to initiate any legal proceedings against
each other in any court or jurisdiction other than the
26
<PAGE>
Superior Court in counties of Los Angeles or Orange, California (the "COURT").
The referee shall be a retired Judge of the Court selected by mutual agreement
of the parties, and if they cannot so agree within forty-five (45) days after
the Claim Date, the referee shall be promptly selected by the Presiding Judge of
the Court (or his or her representative). The referee shall be appointed to sit
as a temporary judge, with all of the powers for a temporary judge, as
authorized by law, and upon selection should take and subscribe to the oath of
office as provided for in Rule 244 of the California Rules of Court (or any
subsequently enacted Rule). Each party shall have one peremptory challenge
pursuant to CCP Section 170.6. The referee shall (i) be requested to set the
matter for hearing within sixty (60) days after the Claim Date and (ii) try any
and all issues of law or fact and report a statement of decision upon them, if
possible, within ninety (90) days of the Claim Date. Any decision rendered by
the referee will be final, binding and conclusive and judgment shall be entered
pursuant to CCP Section 644 in any court in the State of California having
jurisdiction. Any party may apply for a reference proceeding at any time after
thirty (30) days following notice to any other party of the nature of the
controversy, dispute or claim, by filing a petition for a hearing and/or trial.
All discovery permitted by this Warrant shall be completed no later than fifteen
(15) days before the first hearing date established by the referee. The referee
may extend such period in the event of a party's refusal to provide requested
discovery for any reason whatsoever, including, without limitation, legal
objections raised to such discovery or unavailability of a witness due to
absence or illness. No party shall be entitled to "priority" in conducting
discovery. Depositions may be taken by either party upon seven (7) days written
notice, and request for production or inspection of documents shall be responded
to within ten (10) days after service. All disputes relating to discovery which
cannot be resolved by the parties shall be submitted to the referee whose
decision shall be final and binding upon the parties. Pending appointment of
the referee as provided herein, the Court is empowered to issue temporary and/or
provisional remedies, as appropriate.
(ii) Except as expressly set forth in this Warrant, the
referee shall determine the manner in which the reference proceeding is
conducted including the time and place of all hearings, the order of
presentation of evidence, and all other questions that arise with respect to the
course of the reference proceeding. All proceedings and hearings conducted
before the referee, except for trial, shall be conducted without a court
reporter except that when any party so requests, a court reporter will be used
at any hearing conducted before the referee. The party making such a request
shall have the obligation to arrange for and pay for the court reporter. The
costs of the court reporter at the trial shall be borne equally by the parties.
(iii) The referee shall be required to determine all issues in
accordance with existing case law and the statutory laws of the State of
California. The rules of evidence applicable to proceedings at law in the State
of California will be applicable to the reference proceeding. The referee shall
be empowered to enter equitable as well as legal relief, to provide all
temporary and/or provisional remedies and to enter equitable orders that will be
binding upon the parties. The referee shall issue a single judgment at the
close of the reference proceeding which shall dispose of all of the claims of
the parties that are the subject of the reference. The parties hereto expressly
reserve the
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<PAGE>
right to contest or appeal from the final judgment or any appealable order or
appealable judgment entered by the referee. The parties hereto expressly
reserve the right to findings of fact, conclusions of laws, a written statement
of decision, and the right to move for a new trial or a different judgment,
which new trial, if granted, is also to be a reference proceeding under this
provision.
(iv) In the event that the enabling legislation which provides
for appointment of a referee is repealed (and no successor statute is enacted),
any dispute between the parties that would otherwise be determined by the
reference procedure herein described will be resolved and determined by
arbitration. The arbitration will be conducted by a retired judge of the Court,
in accordance with the California Arbitration Act, Section 1280 through Section
1294.2 of the CCP as amended from time to time. The limitations with respect to
discovery as set forth hereinabove shall apply to any such arbitration
proceeding.
(c) NOTICES. All notices hereunder shall be in writing and shall be
deemed to have been given five (5) days after being mailed by certified mail,
addressed to the address below stated of the party to which notice is given, or
to such changed address as such party may have fixed by notice:
To the Company: Prospect Medical Holdings, Inc.
18200 Yorba Linda Blvd.
Yorba Linda, CA 92886
Attention: Jacob Y. Terner, M.D., Chief Executive
Officer
With a copy (which
shall not constitute
notice) to: Dale S. Miller, Esq.
Miller & Holguin
1801 Century Park East, 7th Floor
Los Angeles, CA 90067
To the
Warrantholders
or holder of
Warrant Shares: Imperial Bank
201 North Figueroa Street
Los Angeles, California 90012
Attention: Roc A. Caldarone, Senior Vice President
28
<PAGE>
With a copy (which
shall not constitute
notice) to: Richard M. Baker, Esq.
Senior Vice President and General Counsel
IMPERIAL BANK
9920 South La Cienega Boulevard
Inglewood, CA 90301
provided, however, that any notice of change of address shall be effective only
upon receipt.
(d) SUCCESSORS AND ASSIGNS. This Warrant shall be binding upon and
inure to the benefit of the Company, the Bank, the Warrantholders and the
holders of Warrant Shares and the successors, assigns and transferees of the
Company, the Bank, the Warrantholders and the holders of Warrant Shares.
(e) ATTORNEYS' FEES. The Company agrees to pay, on demand, all
attorneys' fees (including attorneys' fees incurred pursuant to proceedings
arising under the Bankruptcy Code) and all other costs and expenses which may be
incurred by the Bank, the Warrantholders and the holders of Warrant Shares in
connection with any amendment to this Warrant and/or in connection with the
enforcement of this Warrant or in any way arising out of, or consequential to
the protection, assertion, or enforcement of the Obligations under the Loan
Agreement (or any security therefor), whether or not suit is brought.
(f) ENTIRE AGREEMENT; AMENDMENTS AND WAIVERS. This Warrant sets
forth the entire understanding of the parties with respect to the transactions
contemplated hereby. The failure of any party to seek redress for the violation
or to insist upon the strict performance of any term of this Warrant shall not
constitute a waiver of such term and such party shall be entitled to enforce
such term without regard to such forbearance. This Warrant may be amended, the
Company may take any action herein prohibited or omit to take action herein
required to be performed by it, and any breach of or compliance with any
covenant, agreement, warranty or representation may be waived, only if the
Company has obtained the written consent or written waiver of the majority in
interest of the Warrantholders, and then such consent or waiver shall be
effective only in the specific instance and for the specific purpose for which
given.
(g) SEVERABILITY. If any term of this Warrant as applied to any
person or to any circumstance is prohibited, void, invalid or unenforceable in
any jurisdiction, such term shall, as to such jurisdiction, be ineffective to
the extent of such prohibition or invalidity without in any way affecting any
other term of this Warrant or affecting the validity or enforceability of this
Warrant or of such provision in any other jurisdiction.
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(h) HEADINGS. The headings in this Warrant are inserted only for
convenience of reference and shall not be used in the construction of any of its
terms.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its
duly authorized officers effective as of the date first set forth above.
Prospect Medical Holdings, Inc.,
a Delaware corporation
By /s/ Jacob Y. Terner, M.D.
-----------------------------------------
Name: Jacob Y. Terner, M.D.
Title: CEO
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CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT (this "Agreement") is executed this 1st day of
March, 1998, by and among Sierra Primary Care Medical Group, A Medical
Corporation., a California professional corporation (hereinafter referred to as
"Sierra"), Sinnadurai E. Moorthy, M.D. (hereinafter referred to as "Physician"),
and S. E. Moorthy, M.D., Inc., a California professional corporation
(hereinafter referred to as the "Company").
R E C I T A L S
A. Sierra owns and operates a medical practice, under the name Sierra
Primary Care Medical Group, A Medical Corporation (the "Practice"), located at
1037 East Palmdale Blvd., Palmdale, California 93550; 44469 10th Street West,
Lancaster, California; and 44471 10th Street West, Lancaster, California.
B. Physician is the sole shareholder of Company.
C. Physician was formerly a shareholder of Sierra, but sold his shares to
Prospect Medical Group, Inc., a California professional corporation;
D. Following such sale, Sierra obtained the services of Physician, and
Physician was employed by Sierra, upon the terms and conditions set forth in an
Employment Agreement, executed on September 25, 1997, by and between Sierra and
Physician (the "Employment Agreement");
E. Prospect Medical Holdings, Inc., a Delaware corporation that is
affiliated with Sierra, has a vacancy on its Board of Directors and its
remaining Directors have proposed electing Physician to fill the vacancy for the
remaining term of office; and
F. Physician and Sierra desire to terminate the Employment Agreement and
in its stead Company desires to provide the services of Physician to Sierra
pursuant to this Agreement.
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the sufficiency of which is hereby acknowledged, the
parties agree as follows:
1. TERMS AND CONDITIONS OF CONSULTING ARRANGEMENT
1.1 CONSULTANT. Company hereby agrees to provide certain services of
Physician to Sierra as a consultant at the Practice subject to the terms and
conditions hereinafter set forth.
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1.2 SERVICES TO BE PROVIDED. Company shall cause Physician to render
such services as may be mutually agreed upon by Physician and Sierra as being
required for the administration and operation of the Practice. Company shall
also cause Physician to provide medical services at the Practice as mutually
agreed upon by Physician and Sierra. Physician shall provide covered services
on a readily available and accessible basis during normal business hours at
Physician's usual place of business and shall arrange for emergency services
twenty-four (24) hours per day, seven (7) days per week, three hundred
sixty-five (365) days per year.
1.3 FACILITIES. Sierra agrees to provide adequate office space for the
performance of the duties of Physician as contemplated in this Agreement
including, but not limited to, an appropriate examination room and waiting room
space at the Practice for conducting Physician's medical services in conformity
with the prevailing standard of care in the community.
1.4 NON-PHYSICIAN PERSONNEL. Through necessary arrangements, Sierra
will provide Physician with adequate non-physician personnel including, but not
limited to, nursing staff, reception and secretarial staff, to assist Physician
in the performance of his duties. Physician may recommend certain persons to
Sierra for any or all of the above positions, provided that all hiring and
firing decisions shall be made by Sierra in its sole discretion.
1.5 QUALIFICATIONS.
(a) Company and Physician hereby represent and warrant to Sierra
that except as set forth on Exhibit A attached hereto, Physician:
(i) Is currently duly licensed and qualified to engage in
the practice of medicine in the State of California pursuant to the requirements
of the Medical Board of California;
(ii) Has or will obtain such qualifications required to meet
the criteria necessary to provide professional services at the Practice;
(iii) Has all necessary narcotics and controlled substances
registration numbers and licenses for the performance of his duties hereunder;
(iv) In no state has Physician's license to practice
medicine ever been suspended, restricted, denied or revoked:
(v) Has never been reprimanded, sanctioned or disciplined
by a licensing board or state or local medical society or specialty board or any
healthcare facility;
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(vi) Has maintained, or there has been maintained on
Physician's behalf, professional liability insurance coverage in the amount of
$1,000,000 individually, and $3,000,000 in the aggregate;
(vii) No action based on an allegation of malpractice by
Physician has ever been settled by payment to the plaintiff of an aggregate
amount in excess of Thirty Thousand Dollars ($30,000); and
(viii) Has never resigned from or been denied membership or
reappointment of membership on the medical staff of any hospital, and no
hospital medical staff membership or clinical privileges of Physician have ever
been suspended, curtailed, denied or revoked.
(b) In the event any representation or warranty set forth above
becomes untrue or inaccurate in any material respect during the Term (as
hereinafter defined), Company or Physician shall send the Practice a notice (the
"Physician Warranty Notice") within ten (10) days thereafter setting forth with
reasonable particularity the reasons why such representation or warranty has
become untrue or inaccurate.
(c) In addition, Physician shall at all times during the Term of
this Agreement comply with applicable federal, state and municipal laws
including, without limitation, all licensing requirements, other applicable
statutes and ordinances, rules and regulations of governmental agencies
regulating Physician's profession, and applicable ethical standards.
1.6 FEES, BILLINGS AND COLLECTIONS. Sierra shall bill and collect all
fees for the services that are provided for the patients of Physician
("collected revenues"), and Physician and Company agree that neither Company nor
Physician shall take any actions whatsoever to bill (or cause to be billed,
other than by Sierra or its designee) any patient or other individual or entity
for any such services. The fees for services rendered by Physician shall be
established by Sierra. The fees for services may be changed from time to time by
Sierra to reflect charges that may have been agreed upon between Sierra and
third-party providers, including insurance companies, managed care plans, HMOs
and PPOs. Sierra (or its designee) shall bill Physician's charges and collect
payments for all Physician's services, and Company agrees that Physician shall
work with Sierra's office staff to ensure the prompt billing of all patients for
all services rendered and shall use his or her best efforts to help office staff
(or Sierra's designee) collect all patient accounts. The "Physician charges"
shall mean all billings for all of Physician's services provided hereunder. All
fees from billings generated by Physician shall be the sole and exclusive income
of Sierra, and Company and Physician expressly and irrevocably transfer, assign
or otherwise convey to Sierra all right, title and interest of Company or
Physician in and to any fees resulting from or incident to Physician's practice
of medicine under this Agreement.
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1.7 PHYSICIAN MEDICAL RECORDS. The medical records maintained by
Physician relating to patients seen by him during the term of this Agreement are
the property of Sierra, and Physician will comply with all applicable laws with
regard to maintaining them.
1.8 DUTIES. Except for services rendered at Physician's
gastroenterology practice, as provided herein below, Company agrees that
Physician shall devote his professional working time and attention to the
practice of medicine and the management of the Practice for the benefit of the
Practice under the terms of this Agreement. Company agrees that Physician shall
not engage in the practice of medicine, either directly or indirectly, alone or
in association with others, including covering calls for other physicians except
as a consultant to Sierra and for the benefit of Sierra and the Practice, except
as otherwise provided herein. Further, Company agrees that, except as otherwise
provided herein, Physician shall not become an employee of any other group,
hospital or institution wherein Physician provides direct or indirect services
to patients of such entities. Except for services rendered in Physician's
internal medicine and gastroenterology practice, as provided herein below, all
fees and billings produced by Physician for services to patients other than
patients of the Practice shall be income of the Practice. Company agrees that
Physician's duties shall include, but not be limited to the following:
(a) Providing professional medical services within Physician's
field of practice to any and all patients of the Practice in any office of the
Practice, regardless of whether the patients are covered by indemnity plans,
managed care plans, Medicaid (Medi-Cal) or Medicare plans;
(b) Keeping, preparing and maintaining appropriate records, claims
reports and correspondence (including, without limitation, patient charts)
relating to all services rendered by him under this Agreement in accordance with
all Practice, professional, and governmental record keeping and reporting
requirements, all of which records shall be and remain the property or in the
possession of Sierra;
(c) Attending professional conventions and medical education
seminars and generally performing all things necessary to maintain and improve
his medical practice and professional skills, provided that all absences from
the Practice for such purposes must be approved in advance by Sierra, in its
sole discretion; and
(d) Performing such other duties as Sierra shall from time to time
reasonably direct.
Nothing in this Agreement is intended nor shall be construed as
limiting or restricting Physician's right to engage in any activity unrelated to
the direct practice of medicine, provided that such activities do not interfere
with Physician's performance of his or her obligations hereunder.
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During the Term, Company agrees that Physician shall not, at any
time or place, either directly or indirectly, engage in the practice of medicine
or surgery to any extent whatsoever, except pursuant to and in accordance with
this Agreement. Except as otherwise expressly provided herein, Company agrees
that Physician shall comply with all policies and procedures applicable to
Practice employees generally. Notwithstanding the foregoing, Physician shall be
entitled to maintain an internal medicine and gastroenterology practice located
at 44725 10th Street West, Suite 250, Lancaster, CA 93534 provided that he shall
not perform medical services for any capitated primary care patient outside the
consulting arrangement between Company and Sierra pursuant to this Agreement.
Nothing herein shall be construed to prevent Physician from
receiving honoraria or other stipends for performing services outside the scope
of his consulting arrangement hereunder; provided however, that Physician shall
not perform any such services on behalf of any competitor of Sierra or its
affiliates.
2. COMPENSATION
2.1 FEES. Sierra shall pay Company Eighty-four Thousand Four Hundred
Dollars ($84,400) annually. Sierra shall pay Company on a monthly basis in
arrears in accordance with Sierra's policies in effect from time to time. Such
fees shall be increased at Sierra's sole discretion, based on performance
criteria established by Sierra. Such amount includes reimbursement for
automobile expenses, phone expenses and continuing education classes. Physician
shall not seek any other payment or surcharge from any enrollee for covered
services under any circumstances, including but not limited to the event of
Sierra's or any contracting health plan's insolvency, or Sierra's nonpayment of
Physician, except as may be expressly provided in the agreement between enrollee
and the contracting health plan. Sierra or a contracting health plan, upon
receiving notice of any such surcharge or other prohibited payment by Physician,
shall take appropriate action to assist the affected enrollee in obtaining
restitution and to prevent a recurrence by, for example, terminating this
Agreement for material breach, which shall be deemed not to be subject to cure
unless otherwise determined by Sierra, in its sole discretion. The term
"surcharge" shall have the meaning provided in regulations promulgated pursuant
to the Knox-Keene Health Care Service Plan Act of 1975.
2.2 BENEFITS. During the term of this Agreement, on Company's behalf
Sierra shall provide Physician and his or her beneficiaries with certain
benefits commensurate with those received by Sierra's and Prospect Medical
Holdings, Inc. senior management, including, but not limited to, the following:
(a) Physician shall be entitled to participate in Sierra's
retirement 401(k) and other benefit plans as offered from time to time at a
level commensurate with the retirement benefits offered to Sierra's employees;
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(b) Coverage under a policy of disability insurance;
(c) Participation in Sierra's Stock Option Plan;
(d) A policy of medical insurance for Physician and Physician's
immediate family;
(e) A policy of dental insurance for Physician and Physician's
immediate family; and
(f) A policy of vision insurance for Physician and Physician's
immediate family.
However, with respect to the foregoing benefits, Sierra's life insurance
company, if any, and/or disability insurer, if any, may require Physician to
satisfactorily pass a physical examination in order to issue a life insurance
policy to Physician, and Physician shall comply with all such reasonable
requirements. In addition, Sierra may elect to obtain key-man life insurance
coverage on Physician, and Physician agrees to submit to any required
examination therefor.
2.3 VACATION BENEFITS. Company shall be entitled to allow Physician
four weeks of paid vacation for each twelve month period ending on September 24,
commencing on the date hereof; provided, however, that for the twelve month
period ending on September 24, 1998, the amount of such paid vacation shall be
reduced by any such paid vacation taken by Physician under the Employment
Agreement. Additionally, Company shall be entitled to allow Physician to take
up to one week per year for continuing medical education classes.
2.4 MALPRACTICE INSURANCE. Sierra will purchase and maintain a
professional liability insurance policy for Physician on Company's behalf which
will cover acts or omissions commencing with the Effective Date through the
termination of this Agreement at a level commensurate with that paid by Sierra
for physician employees.
3. TERM AND TERMINATION OF AGREEMENT
3.1 CONTRACT TERM. The initial term of this Agreement shall commence
on March 1, 1998 (the "Effective Date"), and shall terminate on September
24, 2000, subject to earlier termination of this Agreement as provided herein.
3.2 TERMINATION WITHOUT CAUSE. No party may terminate this Agreement
or Physician's consulting arrangement hereunder, without cause.
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3.3 TERMINATION BY SIERRA. Sierra may terminate this Agreement
hereunder at any time for "cause" by giving notice of termination (the
"Termination Notice") to the Company. Cause includes the following:
(a) Upon material violation by Company or Physician of any
provisions of this Agreement or the rules, policies, and/or procedures of the
Practice.
(b) Upon repeated failure by Physician to meet utilization,
performance, or productivity standards established by Sierra for the Practice.
(c) Upon revocation, cancellation, suspension or limitation of
Physician's professional license, or disciplinary action in any state by an
appropriate licensing authority including, without limitation, the revocation,
suspension, limitation, or reduction of such license or of Physician's DEA
license.
(d) Upon cancellation of Company's or Physician's coverage, or his
uninsurability, under the terms and conditions of the professional liability
insurance provided by Sierra as set forth above.
(e) Upon the imposition of any restrictions or limitations on
Company or Physician by any governmental or professional authority having
jurisdiction over Physician to such an extent that Company or Physician cannot
engage in the practice of medicine as required hereunder.
(f) Upon Company's or Physician's conviction of a felony or crime
of moral turpitude.
(g) Upon repeated failure by Company or Physician to conform and
comply with Sierra's professional requirements concerning maintenance of medical
records.
(h) Upon the use of alcohol or a controlled substance which
materially impairs the ability of Physician to effectively perform Physician's
duties and obligations under this Agreement.
(i) If Sierra, in good faith, determines that Physician is not
providing adequate patient care or that the health, safety or welfare of
patients is jeopardized by continuing the consulting arrangement with the
Company for the services of Physician.
(j) In the event the performance by either party hereto of any
term, covenant, condition or provision of this Agreement should jeopardize (1)
the licensure of Sierra, any Affiliate of Sierra, or Physician, or (2) Sierra's
(or any Affiliate's) or Physician's participation in,
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or reimbursement from, Medicare, Medicaid (Medi-Cal) or other reimbursement
or payment programs; or if for any other reason said performance should be in
violation of any statute, ordinance, or be otherwise deemed illegal, by a
state or federal court or governmental agency (collectively, "Jeopardy
Event"), then the parties shall use their best efforts to meet forthwith and
attempt to negotiate an amendment to this Agreement to remove or negate the
effect of the Jeopardy Event. In the event the parties are unable to
negotiate such an amendment within fifteen (15) days following such notice,
then the provisions of this Agreement that give rise to the Jeopardy Event
shall be ineffective only to the extent that they are in contravention of
applicable law or otherwise give rise to the Jeopardy Event, without
invalidating the remaining provisions of this Agreement, unless the same
should defeat an essential business purpose of this Agreement.
3.4 TERMINATION BY COMPANY OR PHYSICIAN. Company or Physician may
terminate this Agreement at any time for "cause." Cause is limited to a material
breach by Sierra of a material term of this Agreement. In the event Company or
Physician terminates this Agreement for cause, termination shall be effective
upon two (2) weeks notification to Sierra by Company or Physician. In such
case, upon notification, Sierra shall have a two (2) week period in which to
cure such breach.
3.5 EFFECT OF TERMINATION. Unless otherwise set forth below, neither
Company nor Physician shall be entitled to any severance pay for the services
of Physician upon the termination this Agreement by Sierra for cause. Company
shall only be entitled to receive accrued but unpaid fees for the services of
Physician through the date of such termination. Upon and after termination of
this Agreement, Physician will be provided full access to copy Sierra patient
medical records in the event of a malpractice action or administrative
investigation or proceeding against Physician.
4. CONFIDENTIALITY/TRADE SECRETS. Company and Physician acknowledge that the
position of Physician with the Practice will be one of the highest trust and
confidence both by reason of his position and by reason of his access to and
contact with the trade secrets and confidential and proprietary business
information of Sierra and all of its Affiliates (as defined below), during the
term of this Agreement and thereafter. Company and Physician covenant and agree
as follows:
4.1 PROTECTION. That Company and Physician shall use their best
efforts and exercise utmost diligence to protect and safeguard the trade secrets
and confidential and proprietary information of Sierra and its "Affiliates"
(which term as used in this Agreement shall include any person, corporation,
partnership, general partner or other entity that (i) provides management or
other services to the Practice ("Manager"), or (ii) directly, or indirectly
through one or more intermediaries, controls or is controlled by or is under
common control with Sierra or Manager), including, without limitation, their
trade secrets, proprietary information, the identity of their
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customers and suppliers, their arrangements with their customers and
suppliers, and their technical data, records, compilations of information,
processes, computer software, and specifications relating to their customers,
suppliers, products and services (collectively, "Confidential Information").
4.2 NONDISCLOSURE. That neither Company nor Physician shall disclose
any Confidential Information, except as may be required in the course of
Physician's consulting arrangement or as may be required by law.
4.3 NON-USAGE. That neither Company nor Physician shall use, directly
or indirectly, for its or his own benefit or for the benefit of another, any
Confidential Information.
The covenants contained in this Section 4 shall not be applicable to any
information which is in the public domain other than as a result of action by
Company or Physician or which Company or Physician can establish was obtained
from sources other than Sierra or any of its Affiliates, who are not under a
duty of nondisclosure. All Confidential Information and all files, records,
documents, drawings, specifications, computer software, memorandums, notes, or
other documents relating thereto or otherwise relating to the business of Sierra
and its Affiliates or the Practice, whether prepared by Company or Physician or
otherwise coming into its or his possession, shall be the exclusive property of
Sierra (and/or its Affiliates, as applicable) and shall be delivered to Sierra
or its Affiliates as appropriate and not retained by (nor any copies thereof
retained by) Company or Physician upon termination of the consulting arrangement
hereunder for any reason whatsoever.
5. NON-SOLICITATION; NON-DIVERSION.
5.1 PLAN MEMBER CONTACT. Company and Physician acknowledge and agree
that Sierra has expended a great deal of time, effort and money in developing
its business and obtaining the patients enrolled in prepaid capitated health
plans (each a "Plan Member") that are enrolled with Sierra, and that all of the
patients to whom Physician renders professional medical services pursuant to
this Agreement are and will remain patients of Sierra ("Sierra Patients").
Because of this, Sierra considers, and Company and Physician acknowledge, that
the Sierra Patients constitute an important corporate asset and Sierra's Plan
Member lists constitute valuable proprietary information. In consideration of
Sierra providing current Sierra Patients (I.E. Plan Members), as well as future
Sierra Patients, to Physician, Company and Physician acknowledge and agree that
Sierra will suffer irreparable harm and injury if Company or Physician attempts
to, or does, communicate with Sierra Patients in any way concerning termination
of this Agreement or concerning any other Sierra business matter. As such,
Company and Physician expressly waive any rights (including those set forth in
California Business and Professions Code Section 651) to contact Sierra Patients
in any way about the termination of this Agreement or about any other Sierra
business matter. Company and Physician agree that, except to the extent
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that Sierra has provided written authorization, neither Company nor Physician
shall directly contact Sierra Patients, their employers or health plans in
regard to business related matters pertaining to Sierra contracted heath
plans including, but not limited to, (1) switching plans or similar entities
or contracting directly with Company or Physician (or some other provider
organization that Physician is a member of) instead of Sierra; (2) the
options Sierra Patients have to transfer to other plans (or to switch to
other providers) as a result of termination of this Agreement; or (3) the
fact that the Sierra Patient will no longer be able to obtain services from
Physician. Understanding and acknowledging the foregoing, Company and
Physician agree to cooperate fully with Sierra in any communications to
Sierra Patients concerning termination of this Agreement and other Sierra
business matters, and Company and Physician agree not to interfere in any way
with the relationship between Sierra and Sierra Patients. In the event that
either Company or Physician violates this provision, Sierra may seek a
temporary restraining order and/or injunction to preclude such activity, as
well as all appropriate damages resulting from Company's or Physician's
breach of this provision. Notwithstanding the foregoing, nothing contained
herein shall be construed to limit the Physician's opportunity to discuss
with any Sierra Patient information relevant to such Sierra Patient's medical
condition, including such Sierra Patient's treatment options, alternative
plans or other coverage arrangements.
5.2 NON-SOLICITATION OF PLAN MEMBERS. As part of the consideration for
Sierra to enter into this Agreement, during the initial and any succeeding term
of this Agreement and for a period of three (3) years following the date of
termination of this Agreement, neither Company nor Physician will directly or
indirectly, either individually or on behalf of or as a provider for any person
or entity other than Sierra whose business competes with the business of Sierra,
(i) advise any Sierra Plan Member or patient to disenroll from Sierra, or
(ii) solicit any Plan Member or patient or any Plan Member's or patient's
employer to become enrolled with any other health maintenance organization,
provider organization, or any other similar hospitalization or medical payment
plan or insurance program. Company and Physician shall use their best efforts
to ensure that no employee, agent or independent contractor of Company or
Physician makes any derogatory remarks regarding Sierra to any Plan Member, Plan
Member's employer, health plan or health maintenance organization.
5.3 OTHER AGREEMENTS FOLLOWING TERMINATION. Nothing contained herein
shall prevent Physician, following the termination of this Agreement, from:
(a) Entering into contracts or other agreements with any capitated
health plan that does not have an agreement or contract with Sierra as of the
date of this Agreement;
(b) Providing services to fee for service patients; or
(c) Joining or otherwise becoming a member of an independent
practice association or physician network.
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Notwithstanding the foregoing, in the event a Sierra Patient seeks, without
being solicited or otherwise contacted by Physician or any agent of Physician in
violation of the provisions of Sections 5.1 and 5.2 herein, to receive medical
services from Physician and Physician desires to provide medical services to
such former Sierra Patient, Physician shall only be entitled to provide such
services as an outside provider of Sierra under the terms of Sierra's standard
participating provider agreement then in effect, and pursuant to Sierra's
agreement with the respective health plan under which the capitation payments
for such former Sierra Patient are paid.
6. REMEDIES FOR BREACH OF COVENANTS OF PHYSICIAN. The covenants set forth in
Sections 4 and 5 of this Agreement shall continue to be binding upon Company and
Physician notwithstanding the termination of this Agreement for any reason
whatsoever. Such covenants shall be deemed and construed as separate agreements
independent of any other provision of this Agreement. The existence of any
claim or cause of action by Company or Physician against Sierra or any of its
Affiliates, whether predicated on this Agreement or otherwise, shall not
constitute a defense to the enforcement by Sierra or any of its Affiliates of
any or all of such covenants. It is expressly agreed that the remedy at law for
the breach of any such covenant is inadequate and that temporary and permanent
injunctive relief shall be available to prevent the breach or any threatened
breach thereof, without the necessity of proof of actual damages and without the
necessity of posting a bond, cash or otherwise. In this connection, Company and
Physician agree not to assert any defense that monetary damages would be
sufficient.
7. DEFAULT. Any default by Sierra in the payment when due of any amount owed
by Sierra to Physician under the Contingent Promissory Note, of even date
herewith, issued from Sierra to Physician, in the original principal amount of
$1,125,000, of which $1,068,750 principal amount is currently outstanding, which
default continues for a period of ten (10) days, shall constitute a default
under this Agreement. Upon written notice from Physician of such default,
Sierra shall have a thirty (30) day period in which to cure such default. In
the event Sierra fails to cure such default within thirty (30) days of such
notice, at Physician's or Company's option, except for the provisions continued
in Sections 4 and 5 herein above, which shall remain in full force and effect,
this Agreement shall terminate and neither Physician nor Company shall have any
further obligations hereunder.
8. ARBITRATION. The parties firmly desire to resolve all disputes arising
hereunder without resort to litigation in order to protect their respective
business reputations and the confidential nature of certain aspects of their
relationship. Accordingly, any controversy or claim arising out of or relating
to this Agreement, or the breach thereof, shall be settled by arbitration as set
forth below.
8.1 All disputes which in any manner arise out of or relate to this
Agreement or the subject matter thereof, shall be resolved exclusively by
arbitration in accordance with the
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provisions of this Section 8. Either party may commence arbitration by
sending a written demand for arbitration to the other party, setting forth
the nature of the controversy, the dollar amount involved, if any, and the
remedies sought, and attaching a copy of this Section to the demand.
8.2 There shall be one arbitrator. If the parties shall fail to
select a mutually acceptable arbitrator within ten (10) days after the demand
for arbitration is mailed, then the parties stipulate to arbitration before a
single arbitrator sitting on the Los Angeles, California Judicial Arbitration
Mediation Services (JAMS) panel, and selected in the sole discretion of the
JAMS administrator.
8.3 The parties shall share all costs of arbitration. The prevailing
party shall be entitled to reimbursement by the other party of such party's
attorneys' fees and costs and any arbitration fees and expenses incurred in
connection with the arbitration hereunder.
8.4 The substantive law of the State of California shall be applied
by the arbitrator.
8.5 Arbitration shall take place in Los Angeles, California unless
the parties otherwise agree. As soon as reasonably practicable, a hearing
with respect to the dispute or matter to be resolved shall be conducted by
the arbitrator. As soon as reasonably practicable thereafter, the arbitrator
shall arrive at a final decision, which shall be reduced to writing, signed
by the arbitrator and mailed to each of the parties and their legal counsel.
8.6 All decisions of the arbitrator shall be final, binding and
conclusive on the parties and shall constitute the only method of resolving
disputes or matters subject to arbitration pursuant to this Agreement. The
arbitrator or a court of appropriate jurisdiction may issue a writ of
execution to enforce the arbitrator's judgment. Judgment may be entered upon
such a decision in accordance with applicable law in any court having
jurisdiction thereof.
8.7 Notwithstanding the foregoing, because time is of the essence of
this Agreement, the parties specifically reserve the right to seek a judicial
temporary restraining order, preliminary injunction, or other similar short
term equitable relief, and grant the arbitrator the right to make a final
determination of the parties' rights, including whether to make permanent or
dissolve such court order.
8.8 The decision and award of the arbitrator shall be kept
confidential by the parties to the greatest extent possible. No disclosure
of such decision or award shall be made by the parties except as required by
law or as necessary or appropriate to effect the enforcement thereof.
9. CONTRACTS. Neither Company nor Physician shall have the right or authority
and each hereby expressly covenants not to, enter into a contract in the name of
Sierra or the Practice or otherwise bind Sierra or the Practice, in any way,
without the express written consent of Sierra.
12
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Company and Physician shall hold Sierra and the Practice harmless from any
loss attributable to a violation of this covenant.
10. USE OF PREMISES. Company and Physician covenant not to use, or permit any
other personnel under the control of Company or Physician to use, any part of
the premises of the Practice for any purpose other than the performance of
services hereunder.
11. MEDICAL RECORDS.
11.1 ENROLLEE RECORDS. Physician shall maintain the usual and customary
records, in accordance with all applicable federal and state statutory and
regulatory requirements, for each enrollee in the same manner as for other
patients of Physician. Each enrollee's medical record shall be opened upon the
enrollee's first visit to Physician, and all enrollees' medical records shall be
completed in a timely fashion, be legible, and fully document billed services.
11.2 ACCESS TO RECORDS. Subject to applicable federal and state law
regarding privacy and confidentiality requirements, Physician shall, upon
reasonable request, make an enrollee's medical records available to Sierra and
to any contracting health plans, and to each Sierra physician treating the
enrollee and to duly authorized representatives of federal, state and local
governments.
11.3 CONFIDENTIALITY. Except as otherwise required by applicable law,
Sierra and Physician agree to keep confidential, and to take the usual
precautions to prevent the unauthorized disclosure of, any and all records
required to be prepared or maintained by Physician hereunder.
12. MISCELLANEOUS.
12.1 NOTICES. Any notice, demand, or communication required, permitted
or desired to be given hereunder shall be deemed effectively given when
personally delivered or mailed by prepaid certified mail, return receipt
requested, addressed as follows:
Physician: Sinnadurai E. Moorthy, M.D.
44725 10th Street West, Suite 250
Lancaster, California 93534
Company: S. E. Moorthy, M.D., Inc.
c/o Sinnadurai E. Moorthy, M.D.
44725 10th Street West, Suite 250
Lancaster, California 93534
13
<PAGE>
Sierra: Sierra Primary Care Medical Group, Inc.
c/o Prospect Medical Group, Inc.
18200 Yorba Linda Blvd., Suite 409
Yorba Linda, California 92886
Attention: Gregg DeNicola, M.D.
with a copy to: Miller & Holguin
1801 Century Park East, 7th Floor
Los Angeles, California 90067
Attention: Dale S. Miller, Esq.
12.2 GOVERNING LAW. This Agreement has been executed and delivered and
shall be interpreted, construed, and enforced in accordance with the laws of the
State of California.
12.3 ENFORCEMENT. In the event that any party shall be required to
enforce the terms of this Agreement, whether with or without arbitration, the
prevailing party shall be entitled to recover the costs of such action,
including reasonable attorneys' fees.
12.4 NON-LIABILITY OF ENROLLEE . Company shall cause Physician to look
solely to Sierra and contracting health plans for payment for services rendered
to enrollees (excluding non-covered benefits and copayments). In the event that
Sierra or contracting health plans fail to pay for services as provided in this
Agreement, enrollees shall not be liable to Physician for any services owed to
Physician by Sierra or contracting health plans, and no claim or action of law
shall be maintained by Physician against enrollee for such services rendered to
enrollee.
12.5 STATUTORY AND REGULATORY REQUIREMENTS. The parties understand and
agree that they and contracting health plans are subject to the requirements of
Chapter 2.2 of Division 2 of the California Health and Safety Code and of
Subchapter 5.5 of Chapter 3 of Title 10 of the California Code of Regulations,
and that any provision required to be included in this Agreement by such
requirements shall be applicable to this Agreement, whether or not specifically
provided herein.
12.6 MAINTENANCE OF RECORDS. Physician agrees to maintain such records
and provide such information to Sierra, contracting health plans and the
Commissioner of Corporations of the State of California as may be necessary for
compliance with the provisions of the Knox-Keene Health Care Service Plan Act of
1975 and all rules and regulations adopted pursuant thereto; such records shall
be retained by Physician for at least two (2) years, and this obligation shall
continue after termination of this Agreement whether by rescission or otherwise.
12.7 ACCESS TO BOOKS, RECORDS AND PAPERS. To the extent required by the
Knox-Keene Health Care Service Plan Act of 1975 and all rules and regulations
adopted pursuant thereto,
14
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Sierra, any contracting health plan and the Commissioner of Corporations of
the State of California shall have access at reasonable times upon demand to
the books, records and papers of Physician relating to the services provided
by Physician to enrollees, to the cost thereof, to payments received by
Physician from enrollees and to the financial condition of the Physician.
12.8 QUALITY ASSURANCE AND PEER REVIEW. Physician shall participate in,
cooperate and comply with all applicable requirements of Sierra's and any
contracting health plan's Quality Assurance/Utilization Review Program, which
shall include a system for monitoring and evaluating quality and accessibility
of care including, but not limited to, waiting times and appointments. If
Physician fails to comply with such quality assurance/utilization review
requirements, Physician agrees that compensation otherwise due Physician
hereunder for the services in question may be subject to forfeiture, in whole or
in part, according to the policies of Sierra or any contracting health plan.
.
12.9 GRIEVANCE PROCEDURES. Physician shall identify and cooperate with
Sierra and any contracting health plans in identifying, processing and resolving
all enrollee complaints and grievances pursuant to the grievance procedures set
forth by Sierra or any contracting health plan.
12.10 ENTIRE AGREEMENT. This Agreement, together with the
Non-Competition Agreement executed on September 25, 1997, by and between Sierra
and Physician, shall constitute the entire agreement of the parties with respect
to the subject matter hereof and may not be amended except in writing signed by
both of the parties hereto. This Agreement shall supersede and replace the
Employment Agreement. No oral statements or prior written materials not
specifically incorporated herein, including but not limited to the Employment
Agreement, with respect to the subject matter hereof, shall be of any force or
effect.
12.11 SEVERABILITY. In the event any provision of this Agreement is held
to be unenforceable or void for any reason, the remainder of the Agreement shall
be unaffected and shall remain in full force and effect in accordance with its
terms, unless such unenforceability or svoidness defeats an essential business
term hereof.
12.12 NO ASSIGNMENT; BINDING EFFECT. Neither Company nor Physician shall
assign this Agreement to any other party or parties without the prior written
consent of Sierra. Except for an assignment to Imperial Bank, a California
banking corporation, pursuant to applicable law, Sierra shall not assign this
Agreement to any other party or parties without the prior written consent of
Company and Physician. This Agreement shall inure to the benefit of and be
binding upon the parties hereto and their respective successors and permitted
assigns.
12.13 HEADINGS. The headings used herein are for convenience only and do
not limit the contents of this Agreement.
15
<PAGE>
12.14 COUNTERPARTS. This Agreement may be executed in counterparts, each
of which will be deemed to be an original, but all of which together will
constitute one and the same agreement.
12.15 CHANGE OF CIRCUMSTANCES. In the event (i) Medicare, Medicaid
(Medi-Cal), any third-party payor or any federal, state or local legislative or
regulatory authority adopts any law, rule, regulation, policy, procedure or
interpretation thereof which establishes a material change in the method or
amount of reimbursement or payment for services under this Agreement, or (ii)
any or all of such payors/authorities impose requirements which require a
material change in the manner of any party's operations under this Agreement
and/or the costs related thereto, then, upon the request of any party materially
affected by any such change in circumstances, the parties shall enter into good
faith negotiations for the purpose of establishing such amendments or
modifications as may be appropriate in order to accommodate the new requirements
and change of circumstances while preserving the original intent of this
Agreement to the greatest extent possible. If, after thirty (30) days of such
negotiations, the parties are unable to reach an agreement as to how or whether
this Agreement shall continue, then any party may terminate this Agreement upon
thirty (30) days prior written notice.
12.16 COMPLIANCE WITH LAW. The parties recognize that this Agreement at
all times is to be subject to applicable state, local and federal law.
12.17 CONTINUING CARE OBLIGATION. As required by the Knox-Keene Act,
upon the termination of this Agreement, Physician shall continue to provide
covered services to enrollees who are eligible for covered services under any
contracting health plan's evidence of coverage, or by operation of law, and who
are receiving covered services rendered by Physician as of the date of such
termination until: (a) the covered services being rendered by the Physician are
completed; or (b) the contracting health plan or Physician makes reasonable and
medically appropriate provision for the assumption of such covered services by
another participating provider. Physician shall be compensated for such
services according to the terms of this Agreement.
12.18 WAIVERS. Waivers of any of the provisions hereof may be effective
only if signed by the party intending to be bound thereby.
12.19 JOINT AND SEVERAL LIABILITY. Each of the Company and Physician
shall have joint and several liability for any claims, losses, damages,
liabilities, costs or expenses (including reasonable attorneys' fees) arising or
resulting from a breach or default of any provision of this Agreement.
16
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed by the parties on the
day and year first above written.
SIERRA: COMPANY:
SIERRA PRIMARY CARE MEDICAL GROUP, S. E. MOORTHY, M.D., INC.
A MEDICAL CORPORATION
By: /s/ Jacob Y. Terner By: /s/ Sinnadurai E. Moorthy
------------------------------ -----------------------------
Jacob Y. Terner, M.D. Sinnadurai E. Moorthy, M.D.,
President
PHYSICIAN:
/s/ Sinnadurai E. Moorthy
--------------------------------
Sinnadurai E. Moorthy, M.D.
17
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NON-COMPETITION AGREEMENT
THIS NON-COMPETITION AGREEMENT ("Agreement") is made as of this 1st day
of June, 1998, by and between Sierra Primary Care Medical Group, A Medical
Corporation, A California professional corporation, and Prospect Medical
Holdings, Inc., a Delaware corporation, on the one hand ("Buyers"), and
PrimeCare Medical Group of Antelope Valley, Inc., a California professional
corporation, and PrimeCare International, Inc., a Delaware corporation, on
the other hand ("Sellers"). All capitalized terms used herein and not
otherwise expressly defined shall have the same meanings set forth in the
Agreement for the Purchase and Sale of Assets/Transfer of Member
Responsibility ("Asset Purchase Agreement"), made and entered into as of
May 13, 1998, by and among Buyers and Sellers.
RECITALS
A. Buyers are in the business of developing and operating
integrated health care delivery systems. Such systems include primary care
physicians, specialty care physicians, other outpatient and ancillary
services providers, and the furnishing of management and administrative
services to the systems' providers.
B. Through its integrated delivery systems, Buyers can contract
with payors, including capitated payors, to provide the full range of health
care services to those payors and thereby obtain additional business for
Buyers and Buyers' contracting providers.
C. A key component of the development of an integrated delivery
system is a strong network of physicians who can provide the necessary
professional medical services to payors in a designated geographic area.
D. To build the physician component of an integrated delivery
system, Buyers provide a range of alternative services to and have a range of
relationships with physicians including the recruitment of physicians to a
designated geographic area, the management of physician practices, the
acquisition of assets and/or physician practices, the consolidation of
physician practices, the formation of medical groups, the establishment of
outpatient clinics, etc.
E. Sellers are selling to Buyers and Buyers are buying from
sellers certain of Sellers' assets pursuant to the Asset Purchase Agreement.
1
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F. Buyers desire to purchase such Sellers' assets pursuant to
Buyers' goal developing and operating an integrated delivery system.
G. As a condition to the closing of the Asset Purchase Agreement,
Sellers shall enter into this Agreement and deliver it to Buyers at the
Closing, as defined in the Asset Purchase Agreement.
NOW, THEREFORE, in consideration of the foregoing premises and
other good and valuable consideration (including a portion of the Purchase
Price, as defined in the Purchase Agreement, allocated to the covenant not to
compete), the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows.
1 SELLERS' COVENANTS. During the term of this Agreement, Sellers (on
behalf of themselves and any entity or person directly or indirectly
controlled by Sellers) shall not:
a.(i) establish, own, or operate an office in the Service
Area, as described in Section 4, in which the practice of
medicine occurs, (ii) own an interest in any entity or person
that establishes, owns, or operates such an office, or (iii)
manage or provide management services to such an office;
b. solicit those physicians that prior to the Closing
contracted with Sellers and after the Closing will contract
with the Buyers to terminate their contract with Buyers;
c. solicit those persons that prior to the Closing were
employees of Sellers and after the Closing will become
employees of Buyers to leave the employ of Buyers;
d. solicit those persons that prior to the Closing were
members of HMOs receiving medical services from physicians who
prior to the Closing contracted with Sellers and after the
Closing will receive medical services from Buyers to terminate
their relationship with Buyers;
e. aid or assist any third-party, whether or not for
compensation, to do anything that Sellers are prevented from
doing as set forth herein;
f. "Solicit" shall not include general advertisements that do
not target specific individuals or general advertisements that
do not target those groups of persons that prior to the
2
<PAGE>
Closing were members of HMOs receiving medical services from
Sellers.
If any term or provision of this Section is determined to be
illegal, unenforceable or invalid in whole or in part for any reason, such
illegal, unenforceable or invalid provision or part thereof shall be stricken
from this Agreement, and such provision shall not affect the legality,
enforceability or validity of the remainder of this Agreement. If any
provision or part thereof of this Agreement is stricken from this Agreement,
in accordance with the provisions of this Section, then the stricken
provision shall automatically be replaced, to the extent possible, with a
legal, enforceable and valid provision which is a similar in tenor to the
stricken provision as is legally possible.
2 CONFIDENTIALITY. From and after the closing date, Sellers shall keep
secret and retain in strictest confidence, and shall not use for the benefit
of any third party (other than affiliates and successors-in-interest of
Sellers), except for Buyers or any of Buyers' affiliates, all confidential
matters and trade secrets known to Sellers relating to the assets that are
being transferred to Buyers pursuant to the Asset Purchase Agreement
(collectively, the "Confidential Information"). The Confidential Information
includes, without limitation, the names of or data relating to any current or
potential patients or clients, utilization data, provider contract terms,
provider manuals, pricing policies, operational methods, marketing plans or
strategies and related data, product development techniques or plans,
business acquisition plans, new personnel designs and design projects,
compensation paid to employees and other terms of employment, inventions and
research projects, and other confidential information of, about, or
concerning the business and operations of Buyers or any of their affiliates
learned by Sellers heretofore or hereafter. Sellers shall not disclose the
Confidential Information to third parties, other than Buyers and Buyers'
affiliates, the parties hereto stipulating that as between them the
Confidential Information consists of important, material and confidential
trade secrets and affects the successful conduct of the business of Buyers
and buyers' goodwill. This Section shall not apply to information in the
public domain or to information that is sought from Sellers pursuant to
subpoena or court order (but Sellers must provide notice to Buyers or Buyers'
affiliates in order for them to contest such subpoenas or court orders).
3 SELLERS' REPRESENTATION. Sellers specifically acknowledge, represent,
and warrant that (i) Sellers' covenants set forth in this Agreement are being
purchased in connection with the sale of the assets to Buyers, and (ii) such
covenants are reasonable and necessary to protect the legitimate interests of
Buyers. Sellers acknowledge that this Agreement is subject to all
3
<PAGE>
representations, warranties and covenants of Sellers contained in the Asset
Purchase Agreement.
4 SERVICE AREA. The Service Area to which Sellers' covenants in Section 1
apply is defined as the U.S. Postal Service ZIP codes set forth on Attachment
A hereto.
5 TERM. The term of this Agreement commences as of the day and year first
above written and continues for a period of three (3) years.
6 MISCELLANEOUS.
6.1 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
shall inure to the benefit of the parties and their respective heirs (as
applicable), legal representatives, and permitted successors and assigns. No
party may assign this Agreement of the rights, interests or obligations
hereunder. Any assignment or delegation in contravention of this Section
shall be null and void.
6.2 COUNTERPARTS. This Agreement, and any amendments thereto, may be
executed in counterparts, each of which shall constitute an original
document, but which together shall constitute one and the same instrument.
6.3 HEADINGS. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
6.4 AMENDMENT. This Agreement may not be amended except in writing and
as executed by all parties.
6.5 TIME OF ESSENCE. Time is expressly made of the essence of this
Agreement and each and every provision hereof of which time of performance is
a factor.
6.6 NOTICES. Any notices required or permitted to be given hereunder
by any party to the other shall be in writing and shall be deemed delivered
upon personal delivery; twenty-four (24) hours following deposit with a
courier for overnight delivery; or seventy-two (72) hours following deposit
in the U.S. Mail, registered or certified mail, postage prepaid,
return-receipt requested, addressed to the parties at the following addresses
or to such other addresses as the parties may specify in writing:
If to Sellers: PrimeCare International, Inc.
3281 E. Guasti Road, 7th Floor
Ontario, California 91761-7643
If to Buyers: Prospect Medical Holdings, Inc.
515 S. Flower Street, Suite 1640
Los Angeles, CA 90071
4
<PAGE>
Attention: Jacob Y. Terner, M.D.
with copy to: Miller & Holguin
1801 Century Park East, 7th Floor
Los Angeles, CA 90067
Attention: Dale S. Miller, Esq.
6.7 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
6.8 INJUNCTIVE RELIEF. The parties hereto acknowledge and agree that a
breach by Sellers of this Agreement will cause irreparable damage to Buyers,
the exact amount of which will be difficult to ascertain, and that remedies
at law for any such breach will be inadequate. Accordingly, Sellers agrees
that if Sellers breach this Agreement, then Buyers shall be entitled to
injunctive relief, and Sellers agree not to assert in any proceeding that
Buyers have an adequate remedy at law. Sellers shall pay the reasonable fees
and expense, including attorneys' fees, incurred by Buyers or any successor
or assign in enforcing this Agreement.
6.9 SEVERABILITY. If any provision or portion of this Agreement is
held by a court of competent jurisdiction to be invalid or unenforceable, the
remainder of this Agreement will nevertheless continue in full force and
effect and shall not be invalidated or rendered unenforceable or otherwise
adversely affected, unless such invalidity or unenforceability would defeat
an essential business purpose of this Agreement. Without limiting the
generality of the foregoing, if the provisions of this Agreement shall be
deemed to create a restriction which is unreasonable as to either duration or
geographical area, or both, the parties agree that the provisions of this
Agreement shall be enforced for such duration and in such geographical area
as any court of competent jurisdiction may determine to be reasonable.
6.10 ATTORNEYS' FEES. Should either Buyers or Sellers institute any
action or procedure to enforce this Agreement or any provisions hereof, or
for damages by reason of any alleged breach of this Agreement or of any
provision hereof, or for a declaration of rights hereunder (including without
limitation arbitration), the prevailing party in any such action or
proceeding shall be entitled to receive from the other party all costs and
expenses, including without limitation reasonable attorneys' fees, incurred
by the prevailing party in connection with such action or proceeding.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the day and year first written above.
Buyers: SIERRA PRIMARY CARE MEDICAL GROUP, A MEDICAL CORPORATION,
a California professional corporation
5
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By: Jacob Y. Terner, M.D.
----------------------------------------------------
PROSPECT MEDICAL HOLDINGS, INC., a Delaware corporation
By: Jacob Y. Terner, M.D.
----------------------------------------------------
Sellers: PRIMECARE MEDICAL GROUP OF ANTELOPE VALLEY, INC.
a California professional corporation
By: Prem Reddy, M.D.
----------------------------------------------------
PRIMECARE INTERNATIONAL, INC.,
a Delaware corporation
By: Steve Adams
----------------------------------------------------
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ATTACHMENT A
SERVICE AREA
CITY ZIP CODE
---------------- --------------------
Tehachapi 93561
Mojave 93501
California City 93505
Ridgecrest 93555
Cantil 93519
Rosamond 93560
Lake Hughes 93532
Lancaster 93534, 93535, 93536
Palmdale 93550, 93551
Acton 93510
Littlerock 93543
Pearblossom 93553
Llano 93544
Valyermo 93563
7
<PAGE>
"ALL SECTIONS MARKED WITH TWO ASTERISKS ("**") REFLECT PORTIONS WHICH HAVE
BEEN REDACTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION BY PROSPECT MEDICAL HOLDINGS, INC. AS PART OF A REQUEST FOR
CONFIDENTIAL TREATMENT."
IPA MEDICARE SHARED RISK SERVICES AGREEMENT BETWEEN
PACIFICARE OF CALIFORNIA
AND
SANTA ANA TUSTIN PHYSICIANS GROUP, INC.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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<S> <C>
1. DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.01 Agreement. . . . . . . . . . . . . . . . . . . . . . . . . 2
1.02 Capitation Payments. . . . . . . . . . . . . . . . . . . . 2
1.03 Catastrophic Case. . . . . . . . . . . . . . . . . . . . . 2
1.04 Conformance Request. . . . . . . . . . . . . . . . . . . . 2
1.05 Copayments . . . . . . . . . . . . . . . . . . . . . . . . 2
1.06 Cost of Care . . . . . . . . . . . . . . . . . . . . . . . 2
1.07 Eligibility List . . . . . . . . . . . . . . . . . . . . . 2
1.08 Emergency Services . . . . . . . . . . . . . . . . . . . . 2
1.09 HCFA . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.10 Hospital . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.11 Hospital Day . . . . . . . . . . . . . . . . . . . . . . . 2
1.12 Hospital Services. . . . . . . . . . . . . . . . . . . . . 2
1.13 IPA. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.14 IPA Facilities . . . . . . . . . . . . . . . . . . . . . . 3
1.15 IPA Service Area . . . . . . . . . . . . . . . . . . . . . 3
1.16 Medical Services . . . . . . . . . . . . . . . . . . . . . 3
1.17 Medically Necessary Services . . . . . . . . . . . . . . . 3
1.18 Member Physicians. . . . . . . . . . . . . . . . . . . . . 3
1.19 Monthly HFCA Payment . . . . . . . . . . . . . . . . . . . 3
1.20 Outside Providers. . . . . . . . . . . . . . . . . . . . . 3
1.21 Participating Medical Group. . . . . . . . . . . . . . . . 3
1.22 Pro Program. . . . . . . . . . . . . . . . . . . . . . . . 3
1.23 Quality Assurance Committee. . . . . . . . . . . . . . . . 3
1.24 Risk Reimbursement Plan. . . . . . . . . . . . . . . . . . 4
1.25 Secure Horizons Medical and Hospital Plan. . . . . . . . . 4
1.26 Specialist Physicians. . . . . . . . . . . . . . . . . . . 4
1.27 Subscriber . . . . . . . . . . . . . . . . . . . . . . . . 4
1.28 Subscriber Premiums. . . . . . . . . . . . . . . . . . . . 4
1.29 Surcharges . . . . . . . . . . . . . . . . . . . . . . . . 4
1.30 Urgently Needed Services . . . . . . . . . . . . . . . . . 4
1.31 Utilization Review Committee . . . . . . . . . . . . . . . 4
2. RELATIONSHIP OF PARTIES . . . . . . . . . . . . . . . . . . . . . 5
2.01 IPA Participation. . . . . . . . . . . . . . . . . . . . . 5
2.02 Liability for Obligations. . . . . . . . . . . . . . . . . 5
2.03 Independent Contractor . . . . . . . . . . . . . . . . . . 5
2.04 Duty to Defend and Indemnity . . . . . . . . . . . . . . . 5
3. DUTIES OF IPA. . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.01 IPA Responsibilities . . . . . . . . . . . . . . . . . . . 6
3.02 Standards. . . . . . . . . . . . . . . . . . . . . . . . . 6
3.03 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . 7
3.04 Referrals. . . . . . . . . . . . . . . . . . . . . . . . . 7
3.05 Hospital Admissions. . . . . . . . . . . . . . . . . . . . 7
i
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TABLE OF CONTENTS
<CAPTION>
Page
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<S> <C>
3.06 Eligibility List . . . . . . . . . . . . . . . . . . . . . 8
3.07 Collection of Charges from Subscribers . . . . . . . . . . 8
3.08 Collection of Charges from Third Parties When Medicare
Not the Primary Payor. . . . . . . . . . . . . . . . . . 8
3.09 Duties of IPA Upon Termination During Phase-Out Period . . 9
3.10 Continuing Care Responsibilities . . . . . . . . . . . . . 10
3.11 Staff Privileges . . . . . . . . . . . . . . . . . . . . . 10
3.12 Administrative Guidelines. . . . . . . . . . . . . . . . . 11
3.13 Utilization Review . . . . . . . . . . . . . . . . . . . . 11
3.14 Quality of Health Care . . . . . . . . . . . . . . . . . . 11
3.15 Quality Assurance and Remedial Procedures. . . . . . . . . 11
3.16 Compliance with Civil Rights Laws. . . . . . . . . . . . . 12
3.17 Reciprocity Agreements . . . . . . . . . . . . . . . . . . 12
3.18 Individual Stop-Loss Program . . . . . . . . . . . . . . . 12
3.19 Other Contractual Commitments. . . . . . . . . . . . . . . 12
3.20 Dissemination of Information . . . . . . . . . . . . . . . 12
3.21 Written Agreements . . . . . . . . . . . . . . . . . . . . 12
3.22 Medical Care Criteria. . . . . . . . . . . . . . . . . . . 13
3.23 Nondiscrimination. . . . . . . . . . . . . . . . . . . . . 13
3.24 Accounts Payable System. . . . . . . . . . . . . . . . . . 13
3.25 Catastrophic Case Management . . . . . . . . . . . . . . . 13
3.26 Capacity Reporting . . . . . . . . . . . . . . . . . . . . 13
3.27 Representation of IPA Member Physicians. . . . . . . . . . 13
3.28 Performance of Member Physicians . . . . . . . . . . . . . 14
3.29 Withdrawal Of An IPA Facility. . . . . . . . . . . . . . . 14
4. DUTIES OF PACIFICARE . . . . . . . . . . . . . . . . . . . . . . . 14
4.01 Administration . . . . . . . . . . . . . . . . . . . . . . 14
4.02 Benefit Information. . . . . . . . . . . . . . . . . . . . 14
4.03 Assist IPA . . . . . . . . . . . . . . . . . . . . . . . . 14
4.04 Administration of Payments . . . . . . . . . . . . . . . . 14
4.05 Statistical Information and Provision of Data. . . . . . . 14
4.06 Services Rendered to Ineligible Subscribers. . . . . . . . 14
4.07 Dissemination of Information . . . . . . . . . . . . . . . 15
5. COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
5.01 Capitation Payments. . . . . . . . . . . . . . . . . . . . 15
5.02 Medical Services Reserve . . . . . . . . . . . . . . . . . 15
5.03 Additional Payments. . . . . . . . . . . . . . . . . . . . 15
5.04 Adequacy of Compensation . . . . . . . . . . . . . . . . . 15
6. TERM OF AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . . 16
6.01 Term . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
ii
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TABLE OF CONTENTS
<CAPTION>
Page
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7. TERMINATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
7.01 Termination of Agreement with Material Cause . . . . . . . 16
7.01.01 Cause for Termination of Agreement by IPA . . . . 16
a. Non-Payment. . . . . . . . . . . . . . . . . 16
b. Revocation of Certification or License . . . 16
c. Breach of Material Term and Failure to
Cure . . . . . . . . . . . . . . . . . . . 16
7.01.02 Cause for Termination of Agreement by
PacifiCare. . . . . . . . . . . . . . . . . . . 17
a. Financial Failure of IPA . . . . . . . . . . 17
b. Failure to Provide Quality Medical
Services . . . . . . . . . . . . . . . . . 17
c. Failure to Provide Services. . . . . . . . . 17
d. Breach of Material and Failure to Cure . . . 17
7.02 Curing Period and Termination Date . . . . . . . . . . . . 17
7.03 Repayment Upon Termination . . . . . . . . . . . . . . . . 17
7.04 Termination Not An Exclusive Remedy. . . . . . . . . . . . 18
7.05 Return of Proprietary Information and Patient Files Upon
Termination . . . . . . . . . . . . . . . . . . . . . . . . . . 18
8. RECORDS, DATA COLLECTION, CITATIONS AND RIGHT TO INSPECT
RECORDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
8.01 Records. . . . . . . . . . . . . . . . . . . . . . . . . . 18
8.02 Confidentiality of Records . . . . . . . . . . . . . . . . 18
8.03 Data Collection. . . . . . . . . . . . . . . . . . . . . . 19
8.04 Right to Inspect . . . . . . . . . . . . . . . . . . . . . 19
8.05 Citations. . . . . . . . . . . . . . . . . . . . . . . . . 19
8.06 Financial Statements . . . . . . . . . . . . . . . . . . . 19
9. EXCLUSIVITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
9.01 Utilization by PacifiCare of IPA . . . . . . . . . . . . . 19
10. GOVERNING LAW AND DISPUTE RESOLUTION. . . . . . . . . . . . . . . 19
10.01 Governing Law. . . . . . . . . . . . . . . . . . . . . . . 19
10.02 Disputes Between IPA and Subscriber Not Governed by
Agreement. . . . . . . . . . . . . . . . . . . . . . . . 20
10.03 Payment Disputes Involving IPA . . . . . . . . . . . . . . 20
11. NOTICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
11.01 Notice . . . . . . . . . . . . . . . . . . . . . . . . . . 21
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TABLE OF CONTENTS
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12. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . 21
12.01 Protection of Subscriber . . . . . . . . . . . . . . . . . 21
12.02 Other Agreements . . . . . . . . . . . . . . . . . . . . . 21
12.03 Refusal by Physician . . . . . . . . . . . . . . . . . . . 21
12.04 Confidential and Proprietary Information . . . . . . . . . 22
12.04.01 Information Confidential and Proprietary to
PacifiCare. . . . . . . . . . . . . . . . . . . 22
12.04.02 Information Confidential and Proprietary to
IPA . . . . . . . . . . . . . . . . . . . . . . 22
12.04.03 Solicitation of PacifiCare Subscribers or
Employer Groups . . . . . . . . . . . . . . . . 22
12.05 Confidentiality of This Agreement. . . . . . . . . . . . . 23
12.06 Assignment . . . . . . . . . . . . . . . . . . . . . . . . 23
12.07 Invalidity of Sections of Agreement. . . . . . . . . . . . 23
12.08 Withdrawal of Subscribers by PacifiCare. . . . . . . . . . 23
12.09 Transfer of Subscribers. . . . . . . . . . . . . . . . . . 23
12.10 Captions . . . . . . . . . . . . . . . . . . . . . . . . . 23
12.11 Amendment. . . . . . . . . . . . . . . . . . . . . . . . . 23
12.12 Modifications of This Agreement and/or PacifiCare
Provider Policies and Procedures Manual and/or
PacifiCare Health Plan . . . . . . . . . . . . . . . . . 24
12.13 Terms; Sections. . . . . . . . . . . . . . . . . . . . . . 24
12.14 IPA's Authorized Representative. . . . . . . . . . . . . . 24
12.15 Attorneys' Fees and Costs. . . . . . . . . . . . . . . . . 24
SCHEDULE OF ATTACHMENTS. . . . . . . . . . . . . . . . . . . . . . . . 25
A1. Hospital Services. . . . . . . . . . . . . . . . . . . . . 26
A2. Medical Services . . . . . . . . . . . . . . . . . . . . . 29
A3. Individual Stop Loss Program . . . . . . . . . . . . . . . 31
A4. Cost of Care . . . . . . . . . . . . . . . . . . . . . . . 32
A5. Hospital Incentive Program . . . . . . . . . . . . . . . . 33
B. Secure Horizons Medical and Hospital Subscriber
Agreement. . . . . . . . . . . . . . . . . . . . . . . . 37
C. Capitation Payment Rates . . . . . . . . . . . . . . . . . 38
D. PacifiCare Provider Policies and Procedures Manual . . . . 40
E. Pharmacy Control Program . . . . . . . . . . . . . . . . . 41
F. IPA Facilities . . . . . . . . . . . . . . . . . . . . . . 42
G. Division of Financial Responsibility . . . . . . . . . . . 43
H. Medical Services Reserve Fund. . . . . . . . . . . . . . . 44
</TABLE>
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<PAGE>
PACIFICARE
IPA MEDICARE SHARED RISK SERVICES AGREEMENT
THIS IPA MEDICARE SHARED RISK SERVICES AGREEMENT is made and entered into
this first day of September, 1989, by and between PACIFICARE OF CALIFORNIA
("PacifiCare"), a California corporation, and Santa Ana Tustin Physicians Group,
Inc. ("IPA"), a California Medical Professional Corporation, with reference to
the following facts:
A. PacifiCare operates a prepaid health service plan which arranges for
certain Medical Services to be provided to persons eligible to receive benefits
who are enrolled as Subscribers in the Secure Horizons Medical and Hospital Plan
in a manner consistent with the laws of the United States and the State of
California.
B. PacifiCare desires to provide a quality direct service prepaid health
delivery system which maximizes the utilization of innovative methods to promote
the efficient, economical delivery of health care, and to develop and implement
programs of health education and health maintenance for its Subscriber.
C. PacifiCare has a contract with the Health Care Financing
Administration ("HCFA") of the United States Government to provide Medicare
benefits to eligible persons.
D. IPA has as its primary objective the delivery of health services
through agreements and active participation with medical groups and/or clinics
and their physicians, and other related health professionals and technicians,
all of which are licensed in the State of California.
E. IPA and its Member Physicians desire to participate in the Secure
Horizons Medical and Hospital Plan by arranging for or providing Medical
Services in coordination with PacifiCare, its Subscribers and Hospitals on a
prepaid basis.
F. PacifiCare and IPA, on behalf of IPA and its Member Physicians, deem
it in their best interests to enter into a renewable Agreement, whereby IPA
agrees to provide or arrange for ("provide") Medical Services to PacifiCare
Subscribers enrolled in the Secure Horizons Medical and Hospital Plan in the IPA
Service Area.
NOW, THEREFORE, it is as agreed as follows:
1. DEFINITIONS.
Whenever used in this Agreement, the following terms shall have the
definitions contained in this Section 1:
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1.01 AGREEMENT - is this PacifiCare IPA Medicare Partial Risk
Services Agreement, dated as stated above, and all attachments, addendum and
amendments hereto.
1.02 CAPITATION PAYMENTS - are payments made to IPA by PacifiCare on
a prepaid basis for the Medical Services to be provided under this Agreement.
1.03 CATASTROPHIC CASE - is any single medical condition,
including complications arising from such medical condition, where the total
cost of Medical Services, regardless of payment source, is expected to exceed
[ ** ] per Year per Subscriber.
1.04 CONFORMANCE REQUEST - is a written request made by PacifiCare to
IPA to correct the performance of an IPA Member Physician or Specialist
Physician to conform to the provisions of this Agreement.
1.05 COPAYMENTS - are charges pursuant to the Secure Horizons Medical
and Hospital Plan which may be charged to the Subscriber by IPA at the time of
the provision of Medical Services which are in addition to the Capitation
Payments made to IPA by PacifiCare.
1.06 COST OF CARE - is the value of Medical Services as defined in
this Agreement and as calculated pursuant to the formula set forth in Attachment
A4, incorporated in full herein by reference.
1.07 ELIGIBILITY LIST - is a list of Subscribers to whom IPA shall
provide Medical Services.
1.08 EMERGENCY SERVICES - are those Medical Services that are
provided for the treatment of acute injury or illness requiring immediate
medical attention and which threaten life or limb, or which involve
uncontrollable bleeding, or loss of consciousness, or which cannot be delayed
without possible serious effects on the health of the Subscriber.
1.09 HCFA - is the Health Care Financing Administration, an
administrative agency of the United States Government.
1.10 HOSPITAL - is an acute care facility (or facilities), located in
the IPA Service Area, licensed as an acute care hospital under the laws of the
State of California and which has entered into a written agreement with
PacifiCare to provide Hospital Services to Subscribers.
1.11 HOSPITAL DAY - is any period up to twenty-four (24) hours
commencing at 12:00 a.m. or 12 p.m., whichever is used by Hospital, during which
a Subscriber is eligible to receive Hospital Services and actually receives
Hospital Services from Hospital.
1.12 HOSPITAL SERVICES - are the Medical Services described in
Attachment A1, incorporated in full herein by reference, which Hospital and
other providers shall provide to Subscribers pursuant to the Secure Horizons
Medical and Hospital Plan.
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1.13 IPA - is the medical group or independent practice association
identified in the first paragraph of this Agreement and its Member Physicians,
all of whom are licensed to practice medicine or osteopathy in the State of
California at the IPA Facilities.
1.14 IPA FACILITIES - are those facilities whose locations are listed
in Attachment F, attached hereto and incorporated in full herein by reference,
where Medical Services shall be available to Subscribers pursuant to this
Agreement.
1.15 IPA SERVICE AREA - is the geographical area within a thirty (30)
mile radius of each IPA Facility. The thirty (30) mile radius commences with the
address of an IPA Facility and extends for thirty (30) miles over the shortest
route using public streets and highways.
1.16 MEDICAL SERVICES - are all authorized health care services to
which Subscribers are entitled under the Secure Horizons Medical and Hospital
Plan, some of which are summarized in Attachment A2, incorporated in full herein
by reference.
1.17 MEDICALLY NECESSARY SERVICES - are Medical Services which are
required by Subscriber as determined by IPA in accordance with accepted medical
and surgical practices and standards in the community and the professional
standards recommended by PacifiCare's Quality Assurance Committee and
Utilization Review Committee.
1.18 MEMBER PHYSICIANS - are physicians, surgeons and osteopaths,
licensed to practice medicine in the State of California, who have an ownership
interest in, are employed by, or contract with, IPA.
1.19 MONTHLY HCFA PAYMENT - is the revenue received by PacifiCare
each month from HCFA, as determined by HCFA, for the Medical Services each
Subscriber is to be provided.
1.20 OUTSIDE PROVIDERS - are licensed physicians, surgeons,
osteopaths, paramedical personnel, hospitals and other health care facilities
which provide Medical Services to Subscribers eligible to receive benefits under
the Secure Horizons Medical and Hospital Plan but which do not have written
agreements with IPA and which are not Specialist Physicians.
1.21 PARTICIPATING MEDICAL GROUP - includes IPA and its Member
Physicians and is any group of duly-licensed doctors of medicine or osteopathy
which has entered into a written agreement with PacifiCare to provide Medical
Services to Subscribers in conjunction with the Secure Horizons Medical and
Hospital Plan.
1.22 PRO PROGRAM - is the provider utilization review program
developed by HCFA for providers of Medical Services.
1.23 QUALITY ASSURANCE COMMITTEES - are committees separately
established by IPA and PacifiCare which shall separately establish, maintain and
perform quality assurance review of Medical Services provided to
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Subscribers as reasonably required by PacifiCare, the State of California, the
Department of Corporations or Health and Human Services, HCFA, the Office of
Qualification and Compliance, or any other governmental agencies with regulatory
or enforcement jurisdiction over PacifiCare or this Agreement.
1.24 RISK REIMBURSEMENT PLAN - is PacifiCare's Medicare Medical and
Hospital Services Plan under which PacifiCare contracts with Medicare to be
reimbursed on a per capita basis for each class of Medicare beneficiary enrolled
in the plan.
1.25 SECURE HORIZONS MEDICAL AND HOSPITAL PLAN - is the prepaid
health services plan offered by PacifiCare as described in the Secure Horizons
medical and Hospital Subscriber Agreement, and attachments, addendum and
amendments thereto, a copy of which is attached hereto as Attachment B and
incorporated in full herein by reference.
1.26 SPECIALIST PHYSICIANS - are physicians who have written
agreements with IPA to provide Medical Services to Subscribers on a referral
basis and who do provide such Medical Services at offices or facilities which
are not IPA Facilities.
1.27 SUBSCRIBER - is an individual who is enrolled in the Secure
Horizons Medical and Hospital Plan, who meets all the eligibility requirements
for membership in such plan and for whom all applicable Subscriber Premiums have
been paid and received by PacifiCare.
1.28 SUBSCRIBER PREMIUMS - are charges pursuant to the Secure
Horizons Medical and Hospital Plan which, if applicable, are required to be paid
by Subscribers to PacifiCare on a monthly basis in order for Subscribers to
receive Medical Services.
1.29 SURCHARGES - are additional fees not disclosed to the Subscriber
for Medical Services and which are not allowable Copayment charges.
1.30 URGENTLY NEEDED SERVICES - are Medical Services which are
required without delay, in order to prevent serious deterioration of Subscribers
health as the result of an unforeseen illness or injury while the Subscriber is
temporarily absent from the IPA Service Area.
1.31 UTILIZATION REVIEW COMMITTEE - is an IPA committee of at least
three (3) Member Physicians which is established and maintained, in accordance
with the provisions of Section 3.13 herein, to develop a utilization control
program outlining procedures for the efficient use of resources, consistent with
state and federal law, for the rendition of Medical Services. The Utilization
Review Committee shall review elective Referrals and hospital admissions on a
concurrent and prospective basis and Emergency Services, Urgently Needed
Services and hospital admissions on a retrospective basis.
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2. RELATIONSHIP OF PARTIES
2.01 IPA PARTICIPATION - The execution of this Agreement shall
qualify IPA to participate in the rendition of Medical Services to Subscribers
pursuant to the terms of the Secure Horizons Medical and Hospital Plan, as
amended from time to time. Subject to Section 12.11 herein, PacifiCare shall
notify IPA of any material amendments to the Secure Horizons Medical and
Hospital Plan, which amendments shall become effective upon thirty (30) days
written notice by PacifiCare to IPA, and IPA has not objected to PacifiCare in
writing within the thirty (30) day period to be bound by such amendments. IPA
approval of such amendments shall not be unreasonably withheld. If IPA does
provide PacifiCare reasonable written objection to be bound by such amendments
within the thirty (30) day period, such amendments to the Secure Horizons
Medical and Hospital Plan shall have no force or effect on IPA.
2.02 LIABILITY FOR OBLIGATION - Notwithstanding any other section or
provision of this Agreement, nothing contained herein shall cause either party
to be liable or responsible for any debt, liability, or obligation of the other
party or any third party, unless such liability or responsibility is expressly
assumed by the party sought to be charged therewith. Each party shall be solely
responsible for and shall indemnify and hold the other party harmless against
any obligation for the payment of wages, salaries or other compensation
(including all state, federal and local taxes and mandatory employee benefits),
insurance and voluntary employment-related or other contractual or fringe
benefits as may be due or payable by the party to or on behalf of such party's
employees, agents and representatives.
2.03 INDEPENDENT CONTRACTOR - The relationship between PacifiCare and
IPA is an independent contractor relationship. Neither IPA nor members,
partners, employees or agents of IPA are employees or agents of PacifiCare and
neither PacifiCare nor any employee or agent of PacifiCare is a member, partner,
employee or agent of IPA. As such, all medical decisions are rendered solely by
IPA and not by PacifiCare. IPA is solely responsible for all Medical Services
arranged by IPA and provided to Subscribers. None of the provisions of this
Agreement shall be construed to create a relationship of agency, representation,
joint venture, ownership, control of employment between the parties other than
that of independent parties contracting solely for the purpose of effectuating
this Agreement.
2.04 DUTY TO DEFEND AND INDEMNIFY - To the extent not covered by
insurance maintained by PacifiCare, whether because of liability in excess of
the policy limits or because of the occurrence of a non-insured event, IPA shall
defend, indemnify and hold harmless PacifiCare from and against any claim, loss,
damage, cost, expense or liability arising out of or related to the performance
or nonperformance by IPA, its Specialist Physicians or employees of any Medical
Services to be performed or arranged by IPA under this Agreement. It is
understood and agreed by PacifiCare that the foregoing
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<PAGE>
indemnification obligation is in no way whatsoever intended to reduce or
eliminate any insurance coverage maintained by IPA and that PacifiCare shall be
entitled to indemnification from IPA only for claims, losses, damages, costs,
expenses or liabilities in excess of the applicable insurance policy limits or
arising from uninsured events or occurrences.
To the extent not covered by insurance maintained by IPA, whether
because of liability in excess of the policy limits or because of the occurrence
of a non-insured event, PacifiCare shall defend, indemnify and hold harmless IPA
from and against any claims, loss damage, cost, expense or liability arising out
of or related to the performance or nonperformance of PacifiCare, its employees
or agents of any service to be performed or provided by PacifiCare under this
Agreement. It is understood and agreed by IPA that the foregoing indemnification
obligation is in no way whatsoever intended to reduce or eliminate any insurance
coverage maintained by PacifiCare and that IPA shall be entitled to
indemnification from PacifiCare only for claims, losses, damages, costs,
expenses or liabilities in excess of the applicable insurance policy limits or
arising from uninsured events or occurrences.
3. DUTIES OF IPA
3.01 IPA RESPONSIBILITIES - IPA agrees to arrange for or provide
Medical Services twenty-four (24) hours a day in coordination with PacifiCare
and with Hospital and other providers, as necessary, for each Subscriber who has
designated IPA as his or her Participating Medical Group. IPA shall be
financially responsible for all Medical Services specified in Attachment A2,
incorporated in full herein by reference, provided to Subscribers for whom IPA
is to receive a monthly Capitation Payment from PacifiCare based upon the
PacifiCare provided Eligibility List. IPA shall be responsible for determining
whether Subscribers are eligible for Medical Services on the basis of the most
current Eligibility List supplied to IPA by PacifiCare. Updated eligibility
information shall be available from PacifiCare as needed on the basis of the
most current information supplied PacifiCare by HCFA.
3.02 STANDARDS - All Medical Services for or provided by IPA and its
Member Physicians shall be provided by professional personnel and at physical
facilities according to generally-accepted standards of medical practice and
management in the community. IPA further agrees to provide or arrange for
referrals to consultants and Specialist Physicians as are necessary,
appropriate, and in accordance with generally-accepted standards of medical
practice in the community to maintain the quality of Medical Services provided
or arranged by IPA in accordance with standards developed by PacifiCare's
Quality Assurance Committee. IPA agrees to maintain and demonstrate to
PacifiCare upon request, throughout the term of this Agreement, compliance with
the following:
3.02.01 IPA shall assure that its Member Physicians and
Specialist Physicians maintain licensure under the laws of the State of
California. IPA shall immediately notify PacifiCare in writing should IPA learn
of the loss or suspension of licensure of any of its Member Physicians.
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3.02.02 IPA agrees to provide continuing education programs for
its Member Physicians and Specialist Physicians in accordance with the standards
established by the California Medical Association for continuing education. The
content and delivery of such continuing education programs shall be in the
discretion and judgement of IPA, in order to maintain high standards for the
delivery of Medical Services pursuant to this Agreement. IPA further agrees to
gather, correlate, and distribute to its Member Physicians, information
regarding professional medical activities and developments which IPA believes
may be of assistance in providing Medical Services pursuant to this Agreement.
3.02.03 Reasonable evidence that all nurses and other ancillary
and paramedical personnel who are employed by and contract with IPA are properly
credentialed to practice in the State of California.
3.03 INSURANCE - IPA shall maintain professional liability insurance
and general liability insurance in the minimum amounts of one million dollars
($1,000,000) per person, three million dollars ($3,000,000) per occurrence
coverage, and three million dollars ($3,000,000) combined single limits
coverage, for its agents and employees, as applicable. In the event IPA procures
a claims made policy as distinguished from an occurrence policy, IPA shall
procure and maintain prior to termination of such insurance continuing "tail"
coverage, unless successor policy coverage provides such "tail" protection.
IPA shall provide PacifiCare with evidence of such insurance coverage upon
PacifiCare's request. IPA shall immediately notify PacifiCare of any material
changes in insurance coverage and shall provide a certificate of such insurance
coverage to PacifiCare upon PacifiCare's reasonable request. In the event IPA
contracts with independent contractor physicians to provide Medical Services
under this Agreement, IPA will require such independent contractor physicians
and their agents to maintain professional liability insurance and general
liability insurance in the minimum amounts as is usual and customary in the
community.
3.04 REFERRALS - IPA shall refer Subscribers in need of specialty care
services only with the approval of the IPA Utilization Review Committee.
However, in the event that Emergency Services are required, IPA shall comply
with Section 3.05 below.
3.05 HOSPITAL ADMISSIONS - Whenever IPA determines that a Subscriber
on IPA's eligibility list requires Hospital Services which are not Emergency
Services, IPA shall arrange for such Hospital admissions and outpatient
surgeries through the IPA's Utilization Review Committee and its developed
utilization review program. IPA and its Member Physicians shall not serve as
admitting physicians for any Subscriber without such prior approval except in
the event that Emergency Services are required. If IPA or a Member Physician
admits a Subscriber to a Hospital for Emergency Services, IPA shall notify
PacifiCare of such admission within the time frames as required in the
PacifiCare Provider Policies and Procedures Manual, attached hereto as
Attachment D and incorporated in full herein by reference. Admissions for
Emergency Services or Urgently Needed Services shall be made to hospitals
contracting with PacifiCare, if possible.
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3.06 ELIGIBILITY LIST - IPA shall accept as patients those Subscribers
who are on IPA's eligibility list provided by PacifiCare to IPA. Member
Physicians and IPA shall be entitled to rely on the most current provided list
until a new list has been provided to IPA. IPA understands that in order to
update the eligibility list, PacifiCare is dependent on the receipt of
information from HCPA.
3.07 COLLECTION OF CHARGES FROM SUBSCRIBERS - IPA shall collect
applicable Copayments from Subscribers upon the rendition of Medical Services to
Subscribers pursuant to the Secure Horizons Medical and Hospital Plan. With the
exception of Copayments and charges for non-covered services delivered on a
fee-for-service basis to Subscribers, IPA shall in no event, including, without
limitation, to non-payment by PacifiCare, insolvency of PacifiCare, or breach of
the Agreement, bill, charge, collect and deposit, or attempt to bill, charge,
collect or receive any form of payment, from any Subscriber for Medical Services
provided pursuant to this Agreement and for which Subscriber is entitled under
the Secure Horizons Medical and Hospital Plan in effect for such Subscriber.
IPA shall not maintain any action at law or equity against a
Subscriber to collect sums owed by PacifiCare to IPA. Upon notice of any such
charge, PacifiCare may terminate this Agreement consistent with the provisions
contained in Section 7.01.02 and take all other appropriate action consistent
with the terms of this Agreement to eliminate such charges, including, without
limitation, requiring IPA and Specialist Physicians to return all sums collected
as Surcharges from Subscribers or their representatives. Nothing in this
Agreement, however, shall be construed to prevent IPA from providing non-covered
Medical Services on a usual and customary fee-for-service basis to Subscribers.
IPA'S obligations regarding the collection of charges from Subscribers
shall survive the termination of this Agreement with respect to Medical Services
provided during the term of the Agreement without regard to the cause of
termination of this Agreement.
3.08 COLLECTION OF CHARGES FROM THIRD PARTIES WHEN MEDICARE NOT THE
PRIMARY PAYOR - IPA and Member Physicians accept payment from PacifiCare (plus
applicable Copayments) for Medical Services as provided herein as full payment
for such Medical Services from PacifiCare except as provided herein; provided
however, when Medicare is not the primary payor for Medical Services, such as
when the Subscriber is entitled to payment from another third party or for
payment for a Workers' Compensation claim, or from other primary insurance
coverage maintained by Subscriber, IPA and Member Physicians shall make no
demand upon PacifiCare for reimbursement under the Individual Subscriber Stop
Loss Program as specified in Attachment A3 hereto until all primary sources of
payment have been pursued and it is determined that full payment cannot be
obtained within the (10) months from the date of the provision of Medical
Services.
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For purposes of accomplishing the intent of this Section 3.08,
PacifiCare hereby assigns to IPA for collection, any claims or demands against
third parties for amounts due for Medical Services provided by IPA pursuant to
this Agreement, subject to the following conditions:
3.08.01 IPA shall not commence any legal or equitable action
against a third party without obtaining the prior written consent of PacifiCare.
It is agreed that collection or demand letters consistent with the PacifiCare
Provider Policies and Procedures Manual shall not constitute the commencement of
legal or equitable action.
3.08.02 IPA shall defend, indemnify and hold PacifiCare harmless
for all actions by IPA which relate to collections of an account pursuant to
this Section 3.08.
3.08.03 IPA shall perform such collection activities consistent
with the procedures set forth in the PacifiCare Provider Policies and Procedures
Manual.
3.08.04 PacifiCare may immediately rescind such assignment on a
claim-by-claim basis for any reason by providing written notice of recision to
IPA.
In the event IPA receives payment from a third party after
receipt of payment from PacifiCare, IPA shall reimburse PacifiCare to the extent
that the combined amounts received from all payors exceeds one hundred percent
(100%) of IPA's usual and customary fee-for-service charges.
3.09 DUTIES OF IPA UPON TERMINATION DURING PHASE-OUT PERIOD - Should
this Agreement be terminated by IPA pursuant to Section 7.01.01(a) or Section
7.01.01(b), IPA shall be released of its obligation to continue to provide or
arrange for Medical Services to Subscribers during the phase-out period as
stated in this Section 3.09. If this Agreement is terminated for any other
reason by either party or if this Agreement terminates at the end of the Initial
Term or any renewal term, IPA shall not be released of its obligation to
continue to provide or arrange for Medical Services to Subscribers during the
phase-out period, which phase-out period shall end on the earlier of:
3.09.01 Three (3) months from the effective date of termination
of this Agreement, or
3.09.02 The date PacifiCare has secured the transfer of
Subscribers to another medical group, individual practice association, or
physician for further treatment, and has notified IPA of such transfer in
writing.
Compensation during the phase-out period shall be at the
Capitation Rates set forth in Attachment C hereto.
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3.10 CONTINUING CARE RESPONSIBILITIES - IPA and Member Physicians
shall provide or arrange for Medical Services to Subscribers for the term of
this Agreement in accordance with Section 3.01 hereof. In the event of
termination of this Agreement and the expiration of IPA's duty to provide or
arrange for Medical Services during the phase-out period pursuant to Section
3.09, if applicable, IPA and Member Physicians shall continue to provide or
arrange for Medical Services to Subscribers until the effective date of
transfer of such Subscribers to another Participating Medical Group for
further treatment and written notice of such transfer has been provided by
PacifiCare to IPA. If a Subscriber's care cannot be transferred for the
reason of hospitalization of Subscriber, continuity of care, or other legally
required medical treatment reasons, IPA shall continue to provide or arrange
for Medical Services for such Subscriber until PacifiCare, through
consultation with the Subscriber's attending participating physician, has
made provision for the transfer of such Subscriber to another participating
provider for further Medical Services and has notified IPA of such transfer
in writing. The payment provisions for any continued Medical Services after
expiration of the phase-out period shall be the lesser of [ ** ] of the
usual and customary fees of the Member Physician or Specialist Physician or
the Cost of Care as set forth in Attachment A4.
Notwithstanding the above or any other provisions of this Agreement to
the contrary, IPA agrees that in the event PacifiCare ceases operations for any
reason, including insolvency, IPA shall provide Medical Services and shall not
bill, charge, collect or receive any form of payment from any Subscriber or have
any recourse against a Subscriber for Medical Services provided after PacifiCare
ceases operation. This continuation of Medical Services obligation shall be for
the period for which Subscriber Premiums have been paid, but shall not exceed a
period of thirty (30) days, except for those Subscribers who are hospitalized on
an inpatient basis as provided below.
In the event PacifiCare ceases operations or IPA terminates this
Agreement on the basis of PacifiCare's failure to make timely Capitation
Payments, IPA shall continue to arrange for Medical Services to those
Subscribers who are hospitalized on an inpatient basis at the time PacifiCare
ceases operations or IPA terminates the Agreement until such Subscribers are
discharged from the hospital. IPA may file a claim with PacifiCare for such
Medical Services at [ ** ] of IPA's usual and customary fee for service
charges then in effect.
IPA agrees that the provisions of this Section 3.10 and IPA's
obligations herein shall survive the termination of this Agreement without
regard to the cause of termination of the Agreement, and shall be construed to
be for the benefit of the Subscribers.
3.11 STAFF PRIVILEGES - IPA agrees to have its Member Physicians seek
and obtain (and provide evidence of) staff privileges or other appropriate
access to Hospital.
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3.12 ADMINISTRATIVE GUIDELINES - IPA agrees to perform its duties
under this Agreement in a manner consistent with the reasonable administrative
guidelines provided by PacifiCare, in its Provider Policies and Procedures
Manual, attached hereto as Attachment D and incorporated in full herein by
reference. Subject to Section 12.11 herein, PacifiCare shall notify IPA of any
material amendments to the administrative guidelines, which amendments shall
become effective upon thirty (30) days written notice by PacifiCare to IPA if
IPA has not objected to PacifiCare in writing within the thirty (30) day period
to be bound by such amendments. IPA approval of such amendments shall not be
unreasonably withheld. If IPA does provide PacifiCare reasonable written
objection to be bound by such amendments within the thirty (30) day period, such
amendments to the PacifiCare Health Plan shall have no force or effect on IPA.
3.13 UTILIZATION REVIEW - IPA agrees to participate with PacifiCare in
an ongoing utilization review program to promote efficient use of resources.
The IPA's Utilization Review Committee shall meet as frequently as necessary but
at least weekly. The Utilization Review Committee shall keep minutes of the
committee meetings, a copy of which shall be made available to PacifiCare upon
ten (10) days written notice by PacifiCare to IPA. IPA and PacifiCare shall
jointly implement a utilization review system whereby IPA shall notify
PacifiCare of any hospital or skilled nursing facility admissions. A member of
the PacifiCare medical services staff may participate in IPA's Utilization
Review Committee meetings.
3.14 QUALITY OF HEALTH CARE - IPA agrees to assure quality of Medical
Services by:
3.14.01 Assigning PacifiCare Subscribers only to Member
Physicians or Outside Providers meeting quality health care standards;
3.14.02 Inspecting the premises and facilities of its Member
Physicians on a regular basis and allowing PacifiCare to participate in such
inspections upon ten (10) days written notice.
3.15 QUALITY ASSURANCE AND REMEDIAL PROCEDURES - IPA shall cooperate
with PacifiCare in the operation of PacifiCare's quality assurance program and
IPA shall perform quality assurance review of Medical Services as brought before
IPA internally or from PacifiCare's Quality Assurance Committee, the Department
of Corporations, the Department of Health and Human Services, HCFA and any other
governmental agencies with regulatory or enforcement jurisdiction over this
Agreement. IPA shall establish and maintain a Quality Assurance Committee which
shall meet at least quarterly. A member of the PacifiCare medical services staff
may participate in IPA's Quality Assurance Committee meetings. The IPA Quality
Assurance Committee shall keep minutes of the committee meetings, a copy of
which shall be made available to PacifiCare upon ten (10) days written notice by
PacifiCare to IPA. The task of the Quality Assurance Committee may be assumed by
the Utilization Review Committee described in Section 3.13; however, in such
event, the Utilization Review and Quality Assurance Committees must hold
separately convened meetings and the minutes of each meeting must be separately
maintained.
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IPA shall, at the written request of PacifiCare, make available one
(1) Member Physician from IPA to attend the PacifiCare Quality Assurance
Committee meetings. The intent of this Section is to have at least one Member
Physician from IPA serve for six (6) months on the PacifiCare Quality Assurance
Committee during a three (3) year period. IPA shall develop written procedures
for remedial action whenever it is determined by PacifiCare's Quality Assurance
Committee that inappropriate or substandard Medical Services have been furnished
or Medical Services that should have been furnished have not been furnished.
Upon request, PacifiCare shall assist IPA in the formulation of such remedial
procedures.
3.16 COMPLIANCE WITH CIVIL RIGHTS LAWS - IPA shall comply with Title
VI of the Civil Rights Act of 1964, Section 504 of the Rehabilitation Act of
1973 and the Age Discrimination Act of 1975.
3.17 RECIPROCITY AGREEMENTS - IPA agrees to develop and implement
agreements with PacifiCare's Participating Medical Groups to assure
reciprocity of health care for PacifiCare Subscribers. IPA shall accept
non-Emergency or specialty referrals from such other Participating Medical
Groups and such other Participating Medical Groups shall be required to
accept non-Emergency or specialty referrals from IPA. Payment for the
foregoing referrals shall be no greater than [ ** ] of IPA's usual and
customary fee-for-service rates then in effect as long as claims for
authorized Medical Services are paid within forty-five (45) days of the date
of initial billing.
3.18 INDIVIDUAL STOP-LOSS PROGRAM - IPA agrees to participate in and
assume the rights and responsibilities of the PacifiCare Stop-Loss Program as
defined in Attachment A3, attached hereto and incorporated in full herein by
reference.
3.19 OTHER CONTRACTUAL COMMITMENTS - IPA represents and assures
PacifiCare that contractual commitments with other HMOs, competitive medical
plans and health related entities do not restrict or impair IPA from performing
its duties under this Agreement.
3.20 DISSEMINATION OF INFORMATION - IPA agrees that PacifiCare may use
IPA's name, address, telephone number, and a listing of IPA's Member Physicians
in any informational material routinely distributed to Subscribers and for other
purposes related to the administration of the Secure Horizons Medical and
Hospital Plan as an indication of IPA's willingness to provide Medical Services
to Subscribers.
Prior to listing or otherwise referencing PacifiCare in any
promotional or advertising brochures, media announcements or other advertising
or marketing material, IPA shall first obtain the prior consent of PacifiCare,
such consent not to be unreasonably withheld.
3.21 WRITTEN AGREEMENTS - IPA shall secure written agreements,
consistent with the terms of this Agreement and in compliance with all state and
federal law, with all specialist Physicians regularly utilized as a part of
IPA's referral system.
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3.22 MEDICAL CARE CRITERIA - IPA shall utilize the criteria for
medical care that is established or approved by PacifiCare's Quality Assurance
Committee as a standard reference in determining appropriate lengths of stay for
hospitalized Subscribers or appropriate utilization patterns for referral to
specialty services.
3.23 NONDISCRIMINATION - IPA represents and assures that Medical
Services are rendered to Subscribers in the same manner as such services are
provided to IPA's other patients, except as required pursuant to this Agreement.
Subscribers shall not be subject to any discrimination whatsoever by IPA in
regards to access to Medical Services.
3.24 ACCOUNTS PAYABLE SYSTEM - IPA agrees to operate its accounts
payable system in a manner which assures that providers of authorized Medical
Services who are Member Physicians and non-Member Physicians receive payment for
Medical Services rendered to Subscribers within forty-five (45) working days of
IPA's receipt of an uncontested claim from such Member Physicians and non-Member
Physicians. IPA's accounts payable system shall be subject to the ongoing
approval of PacifiCare.
3.25 CATASTROPHIC CASE MANAGEMENT - IPA agrees that PacifiCare's
medical director may be involved in the management and coordination of
Catastrophic Cases. IPA will fully assist PacifiCare in providing information
that may be required in determining the need for a transfer of a Subscriber into
PacifiCare's regional centers for the care of Catastrophic Cases including, but
not limited to, prompt notification of known or suspected Catastrophic Cases.
Detailed procedures for Catastrophic Case management will be mutually agreed
upon by the parties based upon IPA's and PacifiCare's determination of the
Subscriber's transferability. Except in unusual circumstances, regional centers
for care of Catastrophic Cases shall be sought within the IPA Service Area and
surrounding area.
3.26 CAPACITY REPORTING - IPA will provide to PacifiCare, at the
earliest possible time, notice of any significant changes in the capacity of IPA
to provide or arrange for the Medical Services contemplated by this Agreement
(E.G., addition or deletion of Member Physicians or Specialist Physicians),
including a ninety (90) day written notice in the event IPA is unable to
properly service additional Subscribers. IPA shall still be obligated to provide
or arrange for Medical Services to Subscribers who are with employer groups whom
PacifiCare had agreed to enroll prior to ninety (90) days from the effective
date of the written notice. PacifiCare shall provide IPA, upon IPA's request,
current marketing information within a reasonable period for purposes of
determining IPA capacity.
3.27 REPRESENTATION OF IPA MEMBER PHYSICIANS - IPA agrees to represent
its Member Physicians in matters pertaining to the provision of Medical Services
under this Agreement, and that it has obtained written consent to such
representation from its Member Physicians.
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3.28 PERFORMANCE OF MEMBER PHYSICIANS - IPA agrees: (i) to develop
methods for discussion of performance with its Member Physicians, (ii) to assure
correction of performance of its Member Physicians consistent with the
provisions of this Agreement and state and federal law applicable to the Secure
Horizons Medical and Hospital Plan, and (iii) to resolve Conformance Requests.
3.29 WITHDRAWAL OF AN IPA FACILITY - In the event IPA seeks to
withdraw one or more of the IPA Facilities listed in Attachment F from providing
or arranging for Medical Services to Subscribers under this Agreement, IPA must
notify PacifiCare of such withdrawal in writing at least one hundred and eighty
(180) days prior to the effective withdrawal date; after the effective date of
withdrawal, IPA shall still be responsible to provide or arrange for Medical
Services to the affected Subscribers at the other IPA Facilities.
4. DUTIES OF PACIFICARE
4.01 ADMINISTRATION - PacifiCare agrees to perform all necessary
administrative, accounting, enrollment and other functions consistent with the
administration of the Secure Horizons Medical and Hospital Plan and this
Agreement.
4.02 BENEFIT INFORMATION - PacifiCare agrees to apprise all
Subscribers concerning the type, scope and duration of benefits and services to
which such person is entitled under the Secure Horizons Medical and Hospital
Plan.
4.03 ASSIST IPA - PacifiCare agrees to assist and cooperate with IPA
in the development and initial implementation of procedures necessary to carry
out the intent of this Agreement.
4.04 ADMINISTRATION OF PAYMENTS - PacifiCare agrees to transmit
Capitation Payments and other payments to IPA in accordance with the terms and
procedures set forth in this Agreement.
4.05 STATISTICAL INFORMATION AND PROVISION OF DATA -PacifiCare
agrees to provide IPA with management information and data reasonably
necessary to carry out the terms and conditions of this Agreement and for the
operation of the Secure Horizons Medical and Hospital Plan, including
semi-monthly Eligibility Lists and monthly capitation worksheets.
Furthermore, PacifiCare shall provide, upon request, quarterly reports
reflecting the utilization of Medical Services rendered by IPA.
4.06 SERVICES RENDERED TO INELIGIBLE SUBSCRIBERS - PacifiCare
agrees to reimburse IPA for those Medical Services set forth in Attachment A2
provided to an ineligible Subscriber if the Subscriber was listed as eligible
on the most current eligibility list provided to IPA by PacifiCare. If
PacifiCare is in receipt of a billing to such ineligible Subscriber from IPA
and proof of having sent the Subscriber or the Subscriber's legal guardian
two (2) bills no less than thirty (30) days apart, PacifiCare will reimburse
IPA [ ** ] of IPA's ordinary and customary fee-for-service
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rates then in effect for those Medical Services rendered but no greater than
[ ** ] of the still uncollected balance. If subsequent to payment by
PacifiCare, IPA receives any payment from another source for the services,
then IPA shall reimburse PacifiCare up to the amount previously received from
PacifiCare. If a Subscriber becomes ineligible for benefits under the Secure
Horizons Medical and Hospital Plan after IPA or Member Physicians have begun
treatment of the Subscriber (provided the Subscriber is not hospitalized at
the time of becoming ineligible), IPA shall be entitled to make all
subsequent charges for its services directly to the Subscriber. If the
Subscriber is hospitalized at the time of becoming ineligible, IPA shall be
entitled to make charges directly to the Subscriber for future medical
services, only for services provided after the Subscriber is discharged from
such hospital treatment.
4.07 DISSEMINATION OF INFORMATION - Except as provided above in
Section 3.20, prior to listing or otherwise referencing IPA in any promotional
or advertising brochures, media announcements or other advertising or marketing
material, PacifiCare shall first obtain the prior consent of IPA, such consent
not to be unreasonably withheld.
5. COMPENSATION
5.01 CAPITATION PAYMENTS - PacifiCare shall make monthly Capitation
Payments to IPA as outlined in Attachment C, attached hereto and incorporated in
full herein by reference, due and payable on the tenth (10th) day of the month
for the current month's Medical Services.
5.02 MEDICAL SERVICES RESERVE - PacifiCare will establish a reserve
fund in the amount of [ ** ] for payment of Medical Services as specified
in Attachment H, attached hereto and incorporated in full herein by this
reference.
5.03 ADDITIONAL PAYMENTS - PacifiCare and IPA agree to provide
payments to each other, if applicable, in accordance with the terms of the
Hospital Incentive Program, Individual Stop-Loss Program and Pharmacy Control
program, as specified in Attachments A5, A3, and E, respectively, incorporated
in full herein by reference.
5.04 ADEQUACY OF COMPENSATION - Except as otherwise provided herein,
IPA shall accept the payments specified in this Agreement as payment in full for
all Medical Services provided Subscribers during each month for which such
payments are to be received by IPA from PacifiCare. In the event PacifiCare
fails to make any payments to IPA as provided herein, whether from PacifiCare's
insolvency or otherwise, Subscribers shall not be liable to IPA or its Member
Physicians under any circumstances for Medical Services. Surcharges for Medical
Services provided or arranged by IPA or Member Physicians are prohibited; upon
notice of the existence of any Surcharge, PacifiCare will take appropriate
action consistent with the terms of this Agreement to eliminate such Surcharges.
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6. TERM OF AGREEMENT
6.01 TERM - The initial term of this Agreement shall be for twelve
(12) months ("Initial Term") and the Commencement Date shall be January 1, 1990.
A "Year" under this Agreement shall begin on January 1st and end on December
31st. The Term of this Agreement shall be automatically extended for one (1)
year on each successive January 1st thereafter unless either party provides the
other with written notice of such party's intention not to extend the term no
less than one hundred eighty (180) days prior to such anniversary or until this
Agreement is appropriately terminated by either party as provided in Section 7
herein. The parties acknowledge and understand that a one (1) year term will be
in effect on each anniversary of the Commencement Date unless either party
provides the other party with written notice of such party's intention not to
extend the term prior to such anniversary of the Commencement Date or until this
Agreement is appropriately terminated by either party as provided in Section 7
herein. Upon renewal of the Initial term and any subsequent term, the then
applicable rates of compensation specified in this Agreement shall apply unless
otherwise agreed upon by the parties in writing.
7. TERMINATION
7.01 TERMINATION OF AGREEMENT WITH MATERIAL CAUSE - Either party, as
appropriate, may terminate this Agreement for material cause as set forth in
Sections 7.01.01 or 7.01.02 hereof subject to the notice and cure periods set
out in Section 7.02 hereof, if applicable. In the event either party seeks to so
terminate this Agreement, the terminating party shall give written notice of
termination stating the actions of the other party constituting material cause
for termination.
7.01.01 CAUSE FOR TERMINATION OF AGREEMENT BY IPA - The
following shall constitute cause for termination of this Agreement by IPA:
a. NON-PAYMENT - Failure by PacifiCare to pay
Capitation Payments due to IPA hereunder within fifteen (15) days of the
Capitation Payment due date or failure by PacifiCare to make any other payments
due to IPA hereunder within forty-five (45) days of any such payment's due date.
b. REVOCATION OF CERTIFICATION OR LICENSE -
Revocation by the State of California or the United States Government of any
certification or license of PacifiCare necessary for the performance of this
Agreement.
c. BREACH OF MATERIAL TERM AND FAILURE TO CURE -
PacifiCare's breach of any material term, covenant, or condition and subsequent
failure to cure said breach as provided in Section 7.02 hereof. The written
notice of termination shall contain specific reference as to the breaches which
have caused such failure.
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7.01.02 CAUSE FOR TERMINATION OF AGREEMENT BY PACIFICARE - The
following shall constitute cause for termination of this Agreement by
PacifiCare:
a. FINANCIAL FAILURE OF IPA - PacifiCare's reasonable
determination of IPA's anticipated inability to provide or arrange for Medical
Services as described herein due to the likelihood of IPA's lack of financial
resources, other than due to PacifiCare's non-payment of amounts due IPA
hereunder. IPA shall have the opportunity to dispute such determination by
PacifiCare by providing reasonable evidence and assurances of financial
stability and capacity to perform under this Agreement.
b. FAILURE TO PROVIDE QUALITY MEDICAL SERVICES -
Failure to maintain the standards set forth in Section 3.02 of this Agreement
and such failure is not corrected consistent with the provisions of Section
7.02. The written notice of termination shall contain specific reference to the
breaches which have caused such failure. PacifiCare reserves the right to
withdraw from IPA all or part of its Subscribers if the Medical Services are not
being properly provided or arranged for pursuant to this Agreement and such
deficiencies are not corrected consistent with the provisions of Section 7.02 of
this Agreement.
c. FAILURE TO PROVIDE SERVICES - Failure to provide
Medical Services to Subscribers as provided herein. The written notice of
termination shall contain specific reference as to the breaches which have
caused such failure.
d. BREACH OF MATERIAL TERM AND FAILURE TO CURE -
IPA's breach of any material term, covenant or condition of the Agreement and
subsequent failure to cure said breach as provided in Section 7.02 of this
Agreement. The written notice of termination shall contain specific reference
to the breaches which have caused such failure.
7.02 CURING PERIOD AND TERMINATION DATE - The party receiving the
written notice of termination shall have thirty (30) days from the receipt of
said notice to cure or otherwise eliminate the circumstances constituting cause
for termination. If said party fails to cure or eliminate the circumstances
constituting cause for termination within a thirty (30) day period, this
Agreement shall terminate thirty (30) days from the date of expiration of the
curing period, said expiration date being sometimes called herein the "effective
date of termination."
7.03 REPAYMENT UPON TERMINATION - Within one hundred and eighty
(180) days of the effective date of termination of this Agreement as provided
herein, an accounting shall be made by PacifiCare of monies due and owing either
party and payment shall be forthcoming by the appropriate party to settle such
balance within thirty (30) days of such accounting. Either party may request an
independent audit of such PacifiCare accounting by a mutually acceptable
independent certified public accountant and such audit shall be equally paid for
by both parties. The parties agree to abide by the findings of such independent
audit and appropriate payment by the appropriate party, if any, shall be made
within thirty (30) days of such independent audit.
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7.04 TERMINATION NOT AN EXCLUSIVE REMEDY - Any termination by either
party pursuant to this Section 7 is not meant as an exclusive remedy and such
terminating party may seek whatever action in law or equity as may be necessary
to enforce its rights under this Agreement.
7.05. RETURN OF PROPRIETARY INFORMATION AND PATIENT FILES UPON
TERMINATION - Upon the effective date of termination of this Agreement and
upon the expiration of the phase-out period set forth in Section 3.09, if
applicable, IPA shall provide and return to PacifiCare all confidential and
proprietary information and trade secrets in its possession in a reasonable
manner to be specified by PacifiCare. Additionally, IPA shall copy all
active PacifiCare Subscriber patient medical files in IPA's possession and
forward such files to another provider of Medical Services designated by
PacifiCare, provided such copying and forwarding is not otherwise objected to
by Subscribers. The copies of such medical files may be in summary form. The
cost of copying the patient medical files shall be borne by IPA up to [ ** ].
Any copying costs in excess of [ ** ] shall be paid by PacifiCare. IPA
shall cooperate with PacifiCare in maintaining the confidentiality of such
confidential and proprietary information and trade secrets at all times.
8. RECORDS, DATA COLLECTION, CITATIONS AND RIGHT TO INSPECT RECORDS
8.01 RECORDS - IPA shall maintain and provide such records and
information as reasonably necessary for PacifiCare to properly administer the
Secure Horizons Medical and Hospital Plan and consistent with state and federal
law. Among the reports which IPA shall provide to PacifiCare are completed
reports within fifteen (15) days following the end of each month containing an
itemized list of all Medical Services, other than Hospital Services, provided to
or arranged for Subscribers during such month. This report shall be as described
in the PacifiCare Provider Policies and Procedures Manual. The duties imposed
by this Section 8.01 shall not terminate upon termination of this Agreement,
whether by rescission or otherwise, and shall be in effect until the completion
of the phase-out period pursuant to Section 3.09. The cost for preparation and
submission of this data shall be borne solely by IPA.
IPA shall maintain records and provide such information to PacifiCare
or the California Commissioner of Corporations as may be necessary for the
compliance by PacifiCare with the provisions of state and federal law and
regulations promulgated thereto, and such records shall be retained by IPA for
at least two (2) years following the provision of Medical Services. This
obligation is not terminated upon termination of this Agreement, whether by
rescission or otherwise.
8.02 CONFIDENTIALITY OF RECORDS - IPA shall safeguard the
confidentiality of Subscriber health records and treatment in accordance with
all state and federal laws, including, without limitation, the Privacy Act, as
implemented by 45 Code of Federal Regulations 5(b) and the regulations
promulgated thereunder.
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8.03 DATA COLLECTION - IPA shall maintain and provide to PacifiCare,
on a timely basis, the utilization data more particularly described in the
PacifiCare Provider Policies and Procedures Manual for the effective management
of PacifiCare's health care delivery system.
8.04 RIGHT TO INSPECT - IPA shall provide access at reasonable times
upon demand by PacifiCare, or any governmental regulatory agency responsible for
the administration of health care service plans, to inspect facilities,
equipment, books and records relating to the performance of this Agreement,
including, without limitation, Subscriber patient records, financial records
pertaining to the cost of operations and income received by IPA for Medical
Services rendered to Subscribers. Unless otherwise required by law, PacifiCare
shall provide IPA with a seventy-two (72) hour prior written notice of any such
inspection.
8.05 CITATIONS - IPA shall notify PacifiCare in writing of each and
every report of any governmental or quasi-governmental agency with jurisdiction
over IPA which contains any citation of IPA for failure to meet any governmental
or quasi-governmental standard on or after the Commencement Date of this
Agreement.
8.06 FINANCIAL STATEMENTS - IPA shall provide to PacifiCare within
forty five (45) days of the end of each calendar quarter copies of its quarterly
financial statements, which shall include a balance sheet, statement of income
and a statement of cash flow (the "financial statements") prepared in accordance
with generally-accepted accounting principles. Such quarterly statements shall
be certified by the chief financial officer of IPA as accurately reflecting the
financial condition of IPA for the period indicated. In addition, IPA shall
provide to PacifiCare, within forty five (45) days of the end of each calendar
year, copies of its audited annual financial statements.
9. EXCLUSIVITY
9.01 UTILIZATION OF IPA BY PACIFICARE - Nothing in this Agreement
shall be construed to require PacifiCare to assign any minimum or maximum number
of Subscribers to IPA, nor to require PacifiCare to utilize the Medical Services
of IPA for any or all Subscribers in the IPA Service Area.
10. GOVERNING LAW AND DISPUTE RESOLUTION
10.01 GOVERNING LAW - This Agreement and the rights and obligations of
the parties hereunder shall be construed, interpreted, and enforced in
accordance with, and governed by, the laws of the State of California, and the
United States and all regulations promulgated pursuant thereto.
Any provisions required to be in this Agreement by any of the above
Acts and regulations shall bind PacifiCare and IPA whether or not expressly
provided in this Agreement.
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10.02 DISPUTES BETWEEN IPA AND SUBSCRIBER NOT GOVERNED BY AGREEMENT -
Any controversies or claims between IPA and Subscriber arising out of IPA's
performance of this Agreement are not governed by this Agreement. IPA and
Subscriber may seek any appropriate legal action to resolve such controversy or
claim deemed necessary.
In the event of a dispute between IPA and a Subscriber and upon mutual
agreement between IPA and such Subscriber, PacifiCare agrees to make available
the Subscriber Grievance Resolution Process described in the Secure Horizons
Medical and Hospital Plan Agreement for resolution of such dispute. In such
instance, the decision of the PacifiCare Subscriber Satisfaction Committee and
Board of Directors shall not be binding upon the parties except upon agreement
between IPA and the Subscriber. Nor shall such grievance be subject to binding
arbitration except upon agreement between the parties. Should IPA and Subscriber
fail to resolve the grievance, IPA and Subscriber may seek any appropriate legal
action deemed necessary by such party.
10.03 PAYMENT DISPUTES INVOLVING IPA - In the event IPA fails to make
a payment to a Specialist Physician within sixty (60) days of the submission of
the bill by Specialist Physician to IPA and the validity and the amount of the
submitted bill are undisputed, PacifiCare may, in its sole and absolute
discretion, elect to pay the Specialist Physician on behalf of IPA and deduct
such payment from IPA's next monthly Capitation Payment.
Should a dispute concerning a claim for payment for Medical Services
rendered to Subscribers arise between IPA and a Specialist Physician who is a
Participating Medical Provider, IPA or the Specialist Physician may submit a
written complaint to PacifiCare. The complaint shall describe the disputed
claims and the basis for the amounts claimed and include the applicable written
agreement between IPA and the Specialist Physician. PacifiCare shall investigate
the complaint and make a determination of whether or not the claim is valid and
should be paid. In the event PacifiCare determines that IPA owes any amount to
Specialist Physician, IPA shall make such payment within thirty (30) days of
PacifiCare's termination. If IPA fails to pay the amount due within this thirty
(30) day period, PacifiCare may deduct the amount owed from IPA's next monthly
capitation payment. This amount will temporarily be placed in an account (the
"Claims Dispute Account") which shall be established by PacifiCare. If IPA or
Specialist Physician wishes to contest PacifiCare's determination, either may do
so by initiating an action for binding arbitration and notifying PacifiCare of
such initiation within thirty (30) days of PacifiCare's determination. If IPA or
Specialist Physician fails to request arbitration within thirty (30) days or if
the arbitration affirms PacifiCare's decision that amounts are owing from IPA to
Specialist Physician, PacifiCare shall release from the Claims Dispute Account
the amount owing to Specialist. If the arbitration results in a decision that no
money or a lesser amount than was determined by PacifiCare is owing to
Specialist Physician, PacifiCare shall release to IPA the amounts which were
erroneously withheld from IPA's Capitation Payment.
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In the event this Agreement has been terminated prior to PacifiCare's
investigation and written determination and PacifiCare's investigation results
in a determination that IPA owes money to Specialist Physician, PacifiCare may,
in its sole and absolute discretion, elect to pay Specialist Physician on behalf
of IPA and seek reimbursement from IPA.
11. NOTICE
11.01 NOTICE - Any notice required to be given hereunder shall be in
writing and either delivered personally or sent by registered or certified mail,
return receipt requested, to either PacifiCare or IPA at the addresses listed
below, or at such other addresses as either PacifiCare or IPA may hereafter
designate to the other:
TO: PacifiCare of California
P.O. Box 6006
Cypress, California 90630-0006
TO IPA: Santa Ana Tustin Physicians Group, Inc.
14642 Newport Avenue, Suite 410
Tustin, CA 92680
Attention: Administrator
All notices shall be deemed given on the date of delivery if delivered
personally or on the day three (3) business days after such notice is deposited
in the United States mails, addressed and sent as provided above.
12. MISCELLANEOUS
12.01 PROTECTION OF SUBSCRIBER - IPA may not impose any limitations
on the acceptance of Subscribers for care or treatment that it does not impose
on other patients of the IPA. Neither PacifiCare, IPA nor Hospital may request,
demand, require or seek directly or indirectly the transfer, discharge, or
removal of any Subscriber for reasons of Subscriber's need for, or utilization
of, Medically Necessary Medical or Hospital Services, except in accordance with
the procedures established for such action. IPA shall not refuse or fail to
provide Medically Necessary Medical Services to any Subscriber. Procedures for
removal, discharge or transfer of Subscribers shall be mutually agreed upon
between IPA and PacifiCare consistent with the Secure Horizons Medical and
Hospital Plan.
12.02 OTHER AGREEMENTS - Nothing in this Agreement shall prevent
PacifiCare and IPA from contracting with each other for provision of services
not covered by this Agreement.
12.03 REFUSAL BY PHYSICIAN - If IPA or any of its Member Physicians
refuses Medical Services to a Subscribed assigned to IPA for any reason
whatsoever, it shall remain the responsibility of IPA to assure that such
Subscriber receives Medical Services consistent with the terms of this
Agreement.
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12.04 CONFIDENTIAL AND PROPRIETARY INFORMATION
12.04.01 INFORMATION CONFIDENTIAL AND PROPRIETARY TO
PACIFICARE - IPA acknowledges that all PacifiCare Subscribers participating in a
Secure Horizons Medical and Hospital Plan individually or through an employer
group and receiving Medical Services shall be Subscribers of PacifiCare.
Subscriber and employer group information shall include, without limitation, the
names, addresses and telephone number of all Subscribers; member, employer and
administrative service manuals and all forms related thereto; and records, files
(other than patient medical files) and lists contained in IPA and PacifiCare
files.
IPA acknowledges that all such information is confidential and
proprietary to PacifiCare and that such Subscriber and employer group
information contains valuable trade secrets of PacifiCare.
All PacifiCare Subscriber agreements and the information
contained therein regarding PacifiCare, IPA, employer groups, Subscribers or the
financial arrangements between a hospital, IPA and PacifiCare is confidential
and proprietary to PacifiCare.
IPA shall maintain all Subscriber information and other
PacifiCare trade secret information confidential. IPA shall not disclose or use
any confidential and proprietary information for its own benefit or gain either
during the term of this Agreement or after the date of termination of this
Agreement; provided, however, that IPA may use the name, address and telephone
number or other medical information of a PacifiCare Subscriber if Medically
Necessary for the proper treatment of such Subscriber or upon express prior
written permission of PacifiCare or the Subscriber.
12.04.02 INFORMATION CONFIDENTIAL AND PROPRIETARY TO IPA - IPA
shall provide PacifiCare with a written description of all information
proprietary to IPA which is confidential and contains trade secrets of IPA ("IPA
Information"). PacifiCare shall maintain IPA Information confidential.
PacifiCare shall not disclose or use any IPA Information for its own benefit
either during the term of this Agreement or after the effective date of
termination of this Agreement. Upon termination of this Agreement, PacifiCare
shall provide and return to IPA all IPA Information in its possession in a
manner to be specified by IPA. PacifiCare shall cooperate with IPA in
maintaining the confidentiality of IPA Information at all times.
12.04.03 SOLICITATION OF PACIFICARE SUBSCRIBERS OR EMPLOYER
GROUPS - IPA shall not directly or indirectly engage in the practice of
solicitation or the patronage of PacifiCare's Subscribers or employer groups
without PacifiCare's prior written consent. Solicitation shall mean conduct by
an officer, agent, employee or Member Physician of IPA or its assignee or
successor during the Initial Term or any subsequent term of this Agreement and
continuing for a period of one (1) year after the effective date of termination
of this Agreement which may be reasonably interpreted as designed to persuade
PacifiCare Subscribers to discontinue their Subscriber agreements with
PacifiCare or to continue to receive health care from IPA on a fee-for-service
basis or to encourage PacifiCare Subscribers to participate
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in the prepaid health service plan offered by IPA, or any other prepaid health
service plan (the "Solicitation"). The breach of this Section 12.O4.03 during
any term of this Agreement shall be grounds for termination of this Agreement
pursuant to Section 7.01.02 of this Agreement.
12.05 CONFIDENTIALITY OF THIS AGREEMENT - To the extent reasonably
possible, each party agrees to maintain this Agreement as a confidential
document and not to disclose the Agreement or any of its terms without the
approval of the other party.
12.06 ASSIGNMENT - This Agreement and the rights, interests, and
benefits hereunder shall not be assigned, transferred, pledged, or hypothecated
in any way by IPA or PacifiCare and shall not be subject to execution,
attachment or similar process, nor shall the duties imposed herein be
subcontracted or delegated without the written consent of the other party.
Notwithstanding, PacifiCare may assign, transfer, pledge or hypothecate this
Agreement and its rights, interests and benefits hereunder to any entity which
has at least majority control of PacifiCare or to any entity of which PacifiCare
has at least majority control.
12.07 INVALIDITY OF SECTIONS OF AGREEMENT - The unenforceability or
invalidity of any paragraph or subparagraph of any section or subsection of this
Agreement shall not affect the enforceability and validity of the balance of
this Agreement.
12.08 WITHDRAWAL OF SUBSCRIBERS BY PACIFICARE - PacifiCare reserves
the right to withdraw from IPA all or part of the Subscribers from IPA whose
Medical Services are not being properly provided pursuant to this Agreement.
PacifiCare shall provide written notice to IPA of such withdrawal and the
reasons therefore. PacifiCare shall then allow IPA thirty (30) days from the
date of such notice to correct deficiencies. If such deficiencies are not
corrected to PacifiCare's satisfaction within said period, PacifiCare may
withdraw its Subscribers as provided in this Section 12.08 and remove IPA's name
from PacifiCare's marketing materials.
12.09 TRANSFER OF SUBSCRIBERS - PacifiCare and IPA shall exercise
reasonable efforts in discouraging Subscriber transfers except at reenrollment
periods, or when a Subscriber can show just cause for such transfer and
PacifiCare agrees to such transfer. Nevertheless, PacifiCare may require
transfer of Subscribers assigned to IPA for any reason; or, IPA may request
transfer of Subscribers assigned to it by PacifiCare to other IPAs for cause or
if the capacity of IPA is overburdened so that the provision of Medical Services
as required by this Agreement is affected; all such transfers shall be
consistent with the PacifiCare Provider Policies and Procedures Manual.
12.10 CAPTIONS - Captions in this Agreement are descriptive only and
do not affect the intent or interpretation of the Agreement.
12.11 AMENDMENT - This Agreement may be amended or modified only by
mutual written consent of the parties. Notwithstanding the foregoing sentence,
PacifiCare may amend this Agreement upon sixty (60) days written
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notice to IPA in order to maintain compliance with applicable federal and state
laws; provided, however, any such amendment which affects a material duty or
responsibility of IPA and has a material adverse economic effect upon IPA as
reasonably demonstrated by IPA to PacifiCare, shall be subject to the provisions
of Section 12.12 below.
12.12 MODIFICATIONS OF THIS AGREEMENT AND/OR PACIFICARE PROVIDER
POLICIES AND PROCEDURES MANUAL AND/OR PACIFICARE HEALTH PLAN - Anything to the
contrary herein notwithstanding, in the event of any material modification of
this Agreement and/or the PacifiCare Provider Policies and Procedures Manual
and/or the Secure Horizons Medical and Hospital Plan that (i) affects a material
duty or responsibility of IPA, and (ii) causes a material adverse economic
effect to IPA, IPA and PacifiCare shall seek to agree to an amendment to this
Agreement which satisfactorily addresses the effect on IPA's material duty or
responsibility and reimburses the material economic detriment caused to IPA. In
the event such an agreement cannot be reached within sixty (60) days after the
date PacifiCare gives IPA written notice of such modification, such modification
shall not be effective.
12.13 TERMS; SECTIONS - Unless otherwise indicated, all terms in any
appropriate attachments, addendum and amendments hereto shall have the same
meaning attributed to such terms in the body of this Agreement and references to
section numbers are to the appropriate sections of this Agreement.
12.14 IPA'S AUTHORIZED REPRESENTATIVE - Unless otherwise indicated in
writing to PacifiCare, IPA warrants and authorizes its administrator to act as
its fully authorized representative to represent IPA and Member Physicians in
this Agreement and to receive any and all communications and notices hereunder.
12.15 ATTORNEYS' FEES AND COSTS - If any action at law or suit in
equity is brought to enforce or interpret the provisions of this Agreement or
to collect any monies due hereunder, the prevailing party shall be entitled
to reasonable attorneys' fees and reasonable costs, together with interest
thereon at the highest rate provided by law, in addition to any and all other
relief to which it may otherwise be entitled.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement in
Tustin, California, on December 18, 1989.
PACIFICARE OF CALIFORNIA
By: /s/ Richard Lipeles
-------------------------------
Title: President
----------------------------
SANTA ANA TUSTIN PHYSICIANS GROUP, INC.
By: /s/ Melvin L. Reich
-------------------------------
Title: President
----------------------------
Tax ID #: 95-3532036
-------------------------
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PACIFICARE
SCHEDULE OF ATTACHMENTS
A. A1. Hospital Services
A2. Medical Services
A3. Individual Stop-Loss Program
A4. Cost of Care
A5. Hospital Incentive Program
B. Secure Horizons Medical and Hospital Subscriber Agreement
C. Capitation Payment Rates and Methodology
D. PacifiCare Provider Policies and Procedures Manual
E. Pharmacy Control Program
F. IPA Facilities
G. Division of Financial Responsibility
H. Medical Services Reserve Fund
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ATTACHMENT A1
HOSPITAL SERVICES
Hospital Services are the financial responsibility of Hospital. A summary of
most Hospital Services includes the following:
1. INPATIENT HOSPITAL CARE - Medically Necessary inpatient hospital care,
as defined by Medicare, but limited to a total of one hundred fifty
(150) days per Subscriber per Year. Unlimited days of inpatient
hospital care shall be provided to Subscribers, but PacifiCare shall
be financially responsible for days in excess of one hundred fifty
(150) days. Subscriber shall be assigned semi-private units, unless
medical necessity dictates private accommodations. Where the
Subscriber requests private accommodations, not required for medical
purposes, the incremental difference in fee-for-service rates shall be
the responsibility of the Subscriber. A summary of inpatient care
includes:
a. Medical/Surgical Care, Intensive Care, Cardiac Care and other
special care units (including Hospital Services associated with
non-experimental transplants as defined by Medicare);
b. Inpatient psychiatric;
c. Nursing Services, meals, drugs, medications (excluding
take-home medications), blood transfusions;
d. Medical and Surgical supplies and appliances;
e. Inpatient rehabilitation services, such as: inpatient physical,
occupational and speech therapy;
f. Inpatient alcohol and drug treatment and rehabilitation.
2. SKILLED NURSING - Medically Necessary Skilled Nursing Facility care,
as defined by Medicare, but limited to one hundred (100) days per
Subscriber per calendar year AND ALSO LIMITED TO SUBSCRIBER ADMISSIONS
IMMEDIATELY FOLLOWING THREE (3) OR MORE DAYS OF HOSPITALIZATION.
Subscribers are entitled to receive one hundred fifty (150) days of
Skilled Nursing Care per calendar year, but PacifiCare SHALL BE
FINANCIALLY RESPONSIBLE for days one hundred one (101) through one
hundred fifty (150). IN ADDITION, PACIFICARE SHALL BE FINANCIALLY
RESPONSIBLE FOR SKILLED NURSING FACILITY CARE FOR SUBSCRIBERS WHO ARE
ADMITTED DIRECTLY FROM HOME, FROM A HOSPITAL EMERGENCY ROOM OR FROM
THE HOSPITAL IF SUBSCRIBER WAS HOSPITALIZED FOR LESS THAN THREE (3)
DAYS. REFER TO POLICY AND PROCEDURES MANUAL FOR ADMIT NOTIFICATION
PROCEDURES. Patients shall be assigned semi-private units, unless
medical necessity dictates private accommodations. Where the
Subscriber requests private accommodations, not required for medical
purposes, the incremental difference in the fee-for-service rates
shall be the responsibility of the Subscriber. Skilled nursing
facilities must be Medicare licensed and approved.
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<PAGE>
3. HOSPITAL BASED PHYSICIAN SERVICE - All hospital based physician
services where the physician provides the professional component of an
inpatient hospital based service, the hospital outpatient surgery
center service, or a free-standing surgery center service. The charges
of an anesthesiologist are not included as a Hospital Service. (See
paragraph 8 below in this Attachment A1).
4. TRANSPORTATION EXPENSES - Medicare approved ambulance services
provided within the IPA Service Area for Subscribers. When a transfer
of Subscriber from one facility to another is authorized by IPA or
PacifiCare, the cost of such transfer shall be a Hospital service. The
method of transfer shall be determined by IPA, but IPA shall
coordinate all Subscriber transfers to or from Hospital with
designated Hospital personnel. Also included are paramedic services in
emergency cases in the IPA Service Area.
5. EMERGENCY SERVICES IN THE IPA SERVICE AREA - IPA Service Area
Emergency Services include emergency room charges and associated
emergency room physician and ancillary charges, inpatient medical and
other Medical Services which may not be delayed until facilities or
physicians of the Hospital or IPA (or alternatives authorized by IPA)
can be used without possible serious effects to the health of the
Subscriber. Such services must be Medically Necessary Emergency
Services.
6. HOME HEALTH CARE - As determined to be Medically Necessary, as defined
by Medicare and provided in lieu of hospitalization, as mutually
agreed to by IPA, Hospital and PacifiCare, including any required DME
and IV Therapy Services.
7. HOSPICE CARE - Should be coordinated with Medicare for special
reimbursement provisions.
8. OUTPATIENT SURGERY - Facility, supply charges and the professional
component of a hospital based physician service (as noted in paragraph
3 above) for outpatient surgery done either at Hospital or a
free-standing surgery center.
9. END STAGE RENAL DISEASE - Facility and professional charges for
inpatient and outpatient dialysis services for Subscribers who are
medically determined to have End Stage Renal Disease after enrollment
in one of PacifiCare's health plans.
10. OTHER HOSPITAL SERVICES
a. Devices surgically implanted during a hospital confinement or
during an outpatient surgery performed at the Hospital
outpatient surgery center or a free-standing surgery center.
b. Treatment programs for outpatient substance abuse as defined by
Medicare.
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c. Appealed Services - Hospital Services denied by IPA and
PacifiCare which are found on appeal or arbitration through the
Subscriber grievance resolution process to be Hospital Services
which the Subscriber was entitled to have furnished under the
PacifiCare Secure Horizons health care delivery system.
d. Chemotherapy Drugs (inpatient and outpatient).
11. HOSPITAL SERVICES EXCLUDE THE FOLLOWING:
a. Durable Medical Equipment, except as provided in paragraphs 6
and 10(a) above.
b. Medical Services in the IPA Service Area as defined by
Attachment A2 hereto.
c. Outpatient prescription drugs.
d. All out-of-IPA Service Area expenses, except those elective
referrals as authorized by IPA. PacifiCare, in conjunction with
IPA, shall make all decisions regarding the duration of a
Subscriber's care at the out-of-IPA Service Area facility and
transfer of the Subscriber to an IPA Service Area facility.
e. Vision materials (lenses and frames) except for those
surgically implanted during cataract surgery.
f. Anesthesiology services (inpatient and outpatient).
g. Experimental procedures, including any type of procedure not
generally recognized as of value by the medical community and
its societies, as determined by PacifiCare and IPA, in
conformance with state and federal law.
h. Cosmetic Surgery, except when performed to correct or repair
the physical functioning of a body part as a result of a
functional disorder or accidental injury.
i. Inpatient hospital care in excess of one hundred fifty (150)
days per Subscriber per Year.
j. Skilled nursing care in excess of one hundred (100) days per
Subscriber per Year.
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<PAGE>
ATTACHMENT A2
MEDICAL SERVICES
I. Medical Services, other than Hospital Services, provided in the IPA Service
Area are the financial responsibility of IPA. A summary of most Medical Services
includes the following:
1. PHYSICIAN SERVICES - Subscribers shall be entitled to Medically
Necessary covered inpatient and outpatient physician services included
in the PacifiCare's Secure Horizons Medical and Hospital Plan. A
summary of some physician services includes the following:
a. IPA Service Area inpatient services (including anesthesiology
services and physician services associated with
non-experimental transplants, as defined by Medicare) and
outpatient physician care.
b. Professional component of inpatient mental health.
c. Outside referrals to consultants including Emergency Room
consultants (not including emergency room charges).
d. Out-of-IPA Service Area physician services when such Medical
Services are rendered on an elective basis and upon approval of
IPA.
2. OUTPATIENT SERVICES - Such services include, among others:
a. Outpatient pathology and radiology.
b. Outpatient mental health (professional services only).
c. Short term, Medically Necessary rehabilitation (speech,
physical and occupational) therapy.
d. Health education and social services.
e. Immunizations when determined Medically Necessary by an IPA
Member Physician as recommended by the California Department of
Health Services Adult Immunization Recommendations.
f. Periodic health evaluations.
g. Hearing screening, including audiogram.
h. Allergy testing and treatment, including allergy serum.
i. Home health care, except when provided in lieu of
hospitalization.
j. Lenses and frames required after cataract surgery, except
lenses surgically implanted during an outpatient surgery
performed at Hospital or at a free-standing surgery center.
k. Anesthesiology services.
l. Mammography screening, as defined by state and federal law.
3. DURABLE MEDICAL EQUIPMENT, PROSTHETIC DEVICES AND MEDICAL SUPPLIES
a. Durable Medical Equipment ("DME") as defined by Medicare. IPA
agrees to provide such devices and aids on an outpatient basis,
determined Medically Necessary.
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<PAGE>
b. Prosthetic devices, as defined by Medicare, except devices
surgically implanted during a Hospital confinement or
outpatient surgery performed at Hospital or free-standing
surgery center.
c. Medical Supplies - Supplies used in connection with treatment
or to aid in the recovery of a medical condition when
considered a covered expense by Medicare.
4. OTHER SERVICES - Medical Services denied by the Participating Medical
Group and PacifiCare which are found on appeal or arbitration through
the Subscriber grievance resolution process to be Medical Services
which Subscriber was entitled to have furnished through the Secure
Horizons Medical and Hospital Plan.
II. Medical Services exclude the following:
a. Professional components on all hospital based physicians for inpatient
procedures and outpatient surgeries, except anesthesiology as noted in
paragraphs I(1)(a) and I(2)(k) above.
b. Outpatient mental health visits in excess of twenty (20) visits per
Subscriber Year.
c. Outpatient prescription drugs.
d. Chemotherapy drugs.
e. Out-of-IPA Service Area expenses, except pursuant to paragraph I(1)(d)
above. PacifiCare, in consultation with IPA, shall make all decisions
regarding the duration of a Subscriber's care at the out-of-IPA
Service Area facility and transfer of the Subscriber to an IPA Service
Area facility consistent with state and federal law.
f. Vision materials (lenses and frames), except following cataract
surgery.
g. Immunizations for foreign travel and unexpected mass immunizations.
h. Experimental procedures, including any type of procedure not generally
recognized as of value by the medical community and its societies, as
determined by PacifiCare in accordance with state and federal law and
in connection with IPA.
i. Cosmetic Surgery, except when performed to correct or repair the
physical functioning of a body part as a result of a functional
disorder or an accidental injury.
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ATTACHMENT A3
INDIVIDUAL STOP-LOSS PROGRAM
1. The Individual Stop-Loss ("ISL") Program is designed to limit the IPA's
costs per Subscriber per Year to a specified amount (the "deductible").
PacifiCare will assume all financial responsibility for the Subscriber in
excess of the deductible by paying IPA, based on the payment procedure as
outlined below, [ ** ] in excess of the deductible of the Cost of Care, as
defined in Attachment A4, included in full herein by reference.
2. Deductible: [ ** ] per Subscriber per Year.
3. Payment Procedures:
a. IPA must submit a claim in accordance with the procedures specified in
the PacifiCare Provider Policies and Procedures Manual.
b. Costs incurred by IPA for Medical Services provided during the last
thirty-one (31) days of the Year for which no benefits were payable
under the ISL Program because such costs were applicable to the
deductible may be carried forward for inclusion in the ISL
calculations for the next succeeding Year.
c. Medical Services rendered in connection with Worker's Compensation
cases or where payments for Medical Services provided under Section
3.01 of this Agreement are receivable through the coordination of
benefits, third party liability, or any other source of income,
including copayments, shall not be included in the Cost of Care
provided in calculating stop-loss liability.
d. PacifiCare will determine and pay all ISL Program claims within sixty
(60) days of receipt of a complete claim.
e. For continuing ISL cases (i.e., cases where more than one payment is
made during the Year), PacifiCare will reimburse the IPA quarterly
based on the submittal of a continuing ISL claim.
f. If the Subscriber transfers in the middle of the Year to another
Participating Medical Group and then exceeds the ISL, the payment for
all Medical Services in excess of the ISL will be shared
proportionately among the Participating Medical Groups who provided
Medical Services to the Subscriber during the Year.
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ATTACHMENT A4
COST OF CARE
For purposes of this Agreement, the Cost of Care for Medical Services
rendered by IPA to Subscriber shall equal:
a) [ ** ] of the fees charged by IPA to IPA's fee-for-service patient
for the same or similar services, if the same or similar services are
rendered by IPA; or
b) [ ** ] of the fees actually paid, if the services are rendered by
providers other than IPA.
IPA shall provide PacifiCare with a copy of IPA's fee-for-service fee
schedule and shall notify PacifiCare thirty (30) days prior to the effective
date of any changes in such fee schedule. The amount of increase of IPA's
fees shall be limited to [ ** ] per Year for purposes of any calculations
pursuant to this Agreement, regardless of the actual percentage increase in
IPA's fees each Year.
IPA shall notify PacifiCare of the existence and payment or discount
provisions of any agreements between IPA and other providers who render Medical
Services to Subscribers.
General guidelines and special situations:
1. Services provided by IPA which are not a benefit, as specified in the
Subscriber's Secure Horizons Medical and Hospital Agreement, will not
be considered a part of the Cost of Care.
2. For Individual Stop-Loss Program use, the Cost of Care of Medical
Services rendered through an outside referral or reciprocity referral
shall be set at [ ** ], or the [ ** ], whichever is higher.
3. The Cost of Care of Anesthesia Professional Services rendered by IPA
shall be set at [ ** ] of usual and customary charges. The Cost of
Care for anesthesia Professional Services rendered through an outside
referral or reciprocity referral shall be set at the [ ** ] or
[ ** ] of usual and customary charges, whichever is higher.
4. Any Medical Services provided where payment is considered collectible
through the coordination of benefits, third-party liability, Worker's
Compensation, or any other source including Copayments, shall not be
included in the Cost of Care. If, at a later date, these claims are
not collectible, or only partially collectible, then these services
will be included in the relevant programs, based on the Cost of Care
calculation cited above.
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ATTACHMENT A5
HOSPITAL INCENTIVE PROGRAM
HOSPITAL INCENTIVE PROGRAM - As an incentive for the provision of Hospital
Services to Subscribers in a cost-effective manner, PacifiCare and IPA shall
establish a Hospital Incentive Program. The Incentive Program shall utilize a
Withhold Amount, as defined below, and shall be calculated by comparing the
Hospital Services Budget to the Hospital Services Expense, as such terms are
defined below. The amount of payments under the Hospital Incentive Program shall
be calculated pursuant to the provisions herein.
a. WITHHOLD AMOUNT - PacifiCare shall withhold from IPA's monthly
Capitation Payment an amount equal to [ ** ] of the amount received by
PacifiCare each month from HCFA for each Subscriber enrolled with IPA for
application to the Hospital Incentive Program. PacifiCare may adjust the
Withhold Amount on a quarterly basis based upon the results of the Hospital
Incentive Program calculation. If the Agreement is terminated pursuant to
Section 7 of the Agreement, PacifiCare may choose to adjust the Withhold
Amount at the time that the notice of termination is served.
b. HOSPITAL SERVICES BUDGET - The Hospital Services Budget shall equal
[ ** ] of the Monthly HCFA Payment for those Subscribers designating IPA as
their Participating Medical Group minus [ ** ] of such HCFA Payment in
consideration of the Reinsurance program as set forth in subsection (c)(4)
herein.
c. HOSPITAL SERVICES EXPENSE - Hospital Services Expense shall be valued
as the total of the following:
1. INPATIENT EXPENSE AT HOSPITAL - Inpatient costs for Hospital
Services rendered at Hospital valued at the amount paid to Hospital by
PacifiCare; PLUS
2. NON-INPATIENT EXPENSES AT HOSPITAL - Other Hospital Services
provided by Hospital other than inpatient services valued at the amount paid to
Hospital by PacifiCare; PLUS
3. HOSPITAL SERVICES NOT PROVIDED AT HOSPITAL - The actual amount paid
by PacifiCare for Hospital Services not provided by Hospital; MINUS
4. REINSURANCE LIMIT - Any amount of Hospital Services Expense, as
defined in subsection (c)(1)-(3) above, in excess of [ ** ] per Subscriber
per Year. The [ ** ] deductible shall be effective during the Initial
Term. If less than seven hundred fifty (750) Subscribers have designated IPA
as their Participating Medical Group as of the anniversary of the
Commencement Date, the deductible shall remain at [ ** ] for the succeeding
term. If greater than seven hundred fifty (750) Subscribers have designated
IPA as their Participating Medical Group as of the anniversary of the
Commencement Date, the IPA will be offered the standard reinsurance
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package as is offered to the other Participating Medical Groups during that
particular contract term.
5. COORDINATION OF BENEFITS - Any amount received by PacifiCare
from third parties as described in Section 3.08 of this Agreement.
d. PAYMENTS TO IPA UNDER HOSPITAL INCENTIVE PROGRAM
1. HOSPITAL SERVICES BUDGET EXCEEDS HOSPITAL SERVICES EXPENSE -
In the event the annual Hospital Services Budget exceeds the annual Hospital
Services Expense, PacifiCare shall pay IPA the Withhold Amount, if any, plus
an amount equal to [ ** ] of the amount by which the annual Hospital
Services Budget exceeds the annual Hospital Services Expense, up to a limit
of [ ** ] of the annual Hospital Services Budget.
2. HOSPITAL SERVICES EXPENSE EXCEEDS HOSPITAL SERVICES BUDGET -
In the event that the annual Hospital Services Expense exceeds the annual
Hospital Services Budget, PacifiCare shall pay IPA the Withhold Amount, if
any, minus an amount equal to [ ** ] of the amount by which the Hospital
Services Expense exceeds the Hospital Services Budget, up to a limit of
[ ** ] of the annual Hospital Services Budget.
To the extent that the portion of the calculated deficit for which IPA
is responsible exceeds the Withhold Amount, IPA shall not be entitled to any of
the Withhold Amount. After the Withhold Amount has been exceeded, any remaining
portion of the deficit for which IPA is responsible shall be carried forward
into the succeeding term. An amount equal to this remaining portion of the
deficit will be withheld from IPA's monthly Capitation Payment, using a mutually
agreed upon payment schedule, not to exceed one (1) year.
Should this Agreement terminate leaving no successive term to carry
forward an existing deficit amount, such deficit amount shall be due and payable
by IPA to PacifiCare within one hundred fifty (150) days of the effective date
of termination of this Agreement.
e. SETTLEMENT OF HOSPITAL INCENTIVE PROGRAM PAYMENTS
PacifiCare shall make interim Hospital Incentive Program
calculations and payments, if any, on a [ ** ] within sixty (60) days after
the end of each [ ** ] from the Effective Date. The Hospital Services
Expense figure used in [ ** ] incentive program calculations shall also
include an "Incurred But Not Reported" factor in order to account for
outstanding Medical Services claims. PacifiCare shall make an annual Hospital
Incentive Program payment to IPA within one hundred and fifty (150) days of
the end of each Year.
f. MEDICAL SERVICES RESERVE FUND REPAYMENT
If the medical group borrows against the Medical Services Reserve Fund, the
monies borrowed will be subtracted from the final surplus of the Hospital
Incentive Program. If the Hospital Incentive Program results in a
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deficit, the amount owed to PacifiCare from the Medical Services Reserve Fund
will be carried forward to the next year's Hospital Incentive Program in
addition to the deficit.
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ATTACHMENT B
SECURE HORIZONS MEDICAL AND HOSPITAL SUBSCRIBER AGREEMENT
Provided to IPA by PacifiCare concurrent with the execution of this Agreement.
IPA
Received this day of , 1989
-------------------- ----------
By:
------------------------------------
Title:
---------------------------------
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ATTACHMENT C
CAPITATION PAYMENT RATES
The monthly Capitation Payment which PacifiCare shall pay IPA shall equal:
[ ** ] of both the Monthly HCFA Payment and any applicable Subscriber
Premiums, less [ ** ] of the Monthly HCFA Payment as payment for the
premium for Individual Stop-Loss coverage specified in Attachment "A3"
hereto, and also less [ ** ] for the Pharmacy Control Program as
specified in Attachment E hereto. The payment per Subscriber per month by
PacifiCare to IPA shall be increased or decreased by PacifiCare to reflect
increases or decreases made by HCFA in the Monthly HCFA Payment. PacifiCare
shall make monthly retroactive adjustments in IPA's succeeding Capitation
Payment to reflect the retroactive adjustments made by HCFA in the HCFA
Payment, if any.
PacifiCare shall provide IPA appropriate documentation in support of the
actual Capitation Payment made. Should IPA desire additional billing
information, PacifiCare shall make available for inspection other mutually
agreed upon documents, upon thirty (30) days prior written notice from IPA. IPA
shall have the right to reasonably audit PacifiCare's books and records directly
relating only to IPA's Capitation Payment determinations upon thirty (30) days
prior written notice at IPA's sole expense.
MAMMOGRAPHY SERVICES
IPA shall receive [ ** ] for each screening and diagnostic mammography
study performed above the 1987 PacifiCare wide baseline, specific to the
Secure Horizons Medical and Hospital Plan, for such studies. This baseline
equals two hundred sixty-seven (267) studies per one thousand (1,000) adult
females per Year. The amount due to IPA shall be calculated based upon
utilization data submitted by IPA and shall be paid within one hundred fifty
(150) days of the end of the Year.
INSTITUTION-TO-INSTITUTION TRANSFERS
IPA shall bill PacifiCare and PacifiCare shall pay for Medical Services
provided to Subscribers who designate IPA as their Participating Medical
Group through a transfer from another PacifiCare Participating Medical Group
and who are in a skilled nursing facility, acute care hospital, or are
receiving any other type of acute institutional care at time of designating
IPA as their Participating Medical Group. Medical Services provided by IPA to
such Subscribers shall be reimbursed under this special program, until the
Subscriber is discharged from such institution, at [ ** ] of IPA's ordinary
and customary fee-for-service rates then in effect but no greater than the
ISL deductible (as specified in Attachment A3) per Subscriber during the
Initial Term or any subsequent term of this Agreement.
- 37 -
<PAGE>
IPA shall batch these bills together and identify the bills as
institution-to-institution prior to submitting bills to PacifiCare. Bills must
be submitted to PacifiCare no later than sixty (60) days from the provision of
Medical Services. Expenses for Medical Services identified as
institution-to-institution and rendered from January 1, 1990 through December
31, 1990 only will be included in the institution-to-institution program. A
final claim must be filed for such Medical Services by March 31, 1991 to be
reimbursed under this institution-to-institution program.
- 38 -
<PAGE>
ATTACHMENT D
PACIFICARE PROVIDER POLICIES AND PROCEDURES MANUAL
Provided to IPA by PacifiCare concurrent with the execution of this Agreement.
- ----------------------------------------
Received this 18 day of Dec, 1989,
By: /s/ Melvin L. Reich
------------------------------------
Title: Pres.
---------------------------------
- 39 -
<PAGE>
ATTACHMENT E
PHARMACY CONTROL PROGRAM
The purpose of the Pharmacy Control Program (PCP) is to provide an
incentive to the IPA to foster the efficient utilization of prescription
services. The PCP gives the IPA the ability to share in any savings when
comparing actual utilization against an established budget.
The budget will be set at ______________ ($ ) on a per Subscriber per
month (pmpm) basis and will be calculated based on the number of Subscribers who
have designated IPA as their Participating Medical Group and who are eligible to
receive the prescription benefit.
Debited against this budget will be the actual expenses paid by
PacifiCare for pharmacy services of those Subscribers who have designated IPA
as their Participating Medical Group for the applicable month. The IPA will
share [ ** ] of any savings in comparing the budget and actual expenses.
PacifiCare shall provide, on a quarterly basis, utilization reports
pertaining to the cost of prescriptions written on a physician specific
basis. A final calculation and final payment will be made within one hundred
fifty (150) days of the end of each Year.
IPA agrees to participate in a generic drug substitution program and
formulary program established by PacifiCare's Quality Assurance Committee.
- 40 -
<PAGE>
ATTACHMENT F
IPA FACILITIES
Santa Ana Tustin Physicians Group, Inc.
14642 Newport Avenue, Suite 410
Tustin, CA 92680
- 41 -
<PAGE>
ATTACHMENT G
DIVISION OF FINANCIAL RESPONSIBILITY
The attached template outlines the division of financial responsibility
between IPA, Hospital and PacifiCare, the intent being to clarify Medical
Services and Medical Service categories in order to provide for accurate
administration. As it is impossible to include every Medical Service available,
the template serves as a model under which broad Medical Service categories
suggest the appropriate financial responsibility for Medical Services or items
not specifically listed.
- 42 -
<PAGE>
DIVISION OF FINANCIAL RESPONSIBILITY
CALIFORNIA
Secure Horizons Shared Risk Agreement
(IPA Capitated, Hospital Incentive Program w/PacifiCare)
IPA Hospital
----------------------------------- -----------------------------
<TABLE>
<CAPTION>
Responsible Party
-------------------------------------------------------
<S> <C> <C> <C>
List of Benefits - (In area) IPA PacifiCare PacifiCare
- ---------------------------- HIP 100%
AIDS - Professional Component
- Facility Component
Allergy
- Testing
- Serum
Ambulance, Air or Ground - In Area
- Out of Area
Amniocentesis
Anesthetics, Administration of
(Anesthesiology)
Artificial Insemination
Artificial Limbs (DME)
Biofeedback
Blood & Blood Products (Including
Professional Component)
- From Blood Bank [ ** ](1)
- Autologous Blood Donation
Chemical Dependency Rehabilitation
- Inpatient Facility Component
- Inpatient Professional Component
- Outpatient Professional Component
- Outpatient Facility Component
Chemotherapy
- Drugs
- Professional Component
Chiropractic (Medicare Approved Only)
Colostomy Supplies
- Outpatient
- Inpatient
Contact Lenses
- Intraocular lens (surgically
implanted)
- Incident to Cataract Surgery
(not surgically implanted)
Cosmetic Surgery (Medically Necessary)
- Facility Component
- Professional Component
Dental Services (for repair of
accident/injury only)
- Facility Component
- Professional Component
Detox
- Facility Component
- Professional Component
Durable Medical Equipment (DME)
(Medicare Approved Only)
- Surgically Implanted
- Inpatient or S.N.F.
- In Lieu of Hospitalization
- Outpatient
- Hearing Aids
</TABLE>
(1) All references to division of responsibility have been deleted.
- 43 -
<PAGE>
DIVISION OF FINANCIAL RESPONSIBILITY
CALIFORNIA
Secure Horizons Shared Risk Agreement
(IPA Capitated, Hospital Incentive Program w/PacifiCare)
IPA Hospital
----------------------------------- -----------------------------
<TABLE>
<CAPTION>
Responsible Party
-------------------------------------------------------
<S> <C> <C> <C>
List of Benefits - (In area) IPA PacifiCare PacifiCare
- ---------------------------- HIP 100%
Emergency Admissions
- In Area: - Facility Component
- Professional Component
- Out of Area: - Facility Component
- Professional
Component
Emergency Room Facility Component
- In Area
- Out of Area
Emergency Room Physicians - In Area
- Initial Treatment
- Consults
- Out of Area
Endoscopic Studies
- With Biopsy [ ** ](1)
- Without Biopsy
Experimental Procedures
Family Planning (Medicare Approved
Only) (e.g.: Amniocentesis)
- Professional Component
- Facility Component
Fetal Monitoring
- Outpatient
- Inpatient
Genetic Testing
Health Education
Health Evaluation (Physical)
Hearing Aids
Hearing Screening
Hemodialysis
- Inpatient
- Outpatient
Home Health Care
- In Lieu of Hospitalization
(includes IV or injectables)
- Other
Hospice Services (Special Medicare
Reimbursement Program)
- Inpatient
- Professional Component
Hospital Based Physicians (Inpatient)
- Anesthesiology
- Audiology
- Cardiology
- Emergency Room
- Diagnostic Services
- Neonatology
- Neurology
- Nephrology
</TABLE>
(1) All references to division of responsibility have been deleted.
- 44 -
<PAGE>
DIVISION OF FINANCIAL RESPONSIBILITY
CALIFORNIA
Secure Horizons Shared Risk Agreement
(IPA Capitated, Hospital Incentive Program w/PacifiCare)
IPA Hospital
----------------------------------- -----------------------------
<TABLE>
<CAPTION>
Responsible Party
-------------------------------------------------------
<S> <C> <C> <C>
List of Benefits - (In area) IPA PacifiCare PacifiCare
- ---------------------------- HIP 100%
Hospital Based Physicians (continued)
- Pathology
- Physical Medicine
- Pulmonary
- Radiology
- Radiation Oncology
- Surgeon
Hospitalization, Inpatient Services
Supplies, Testing
- In Area
- Out of Area
Immunization and Inoculations
- As Medically Indicated
- For Work/Travel
Infertility (Diagnosis and Treatment)
- Professional Component
- Facility Component [ ** ](1)
Injections and Injected Substances
(outpatient)
Insulin & Syringes
Laboratory Services
- Outpatient
- Inpatient
Lithotripsy
- Professional Component
- Facility Component
Mammography
Marriage Counseling
Medication -
- In Lieu of Hospitalization
(Intravenous)
- Inpatient
- Outpatient Covered Injectables
- Outpatient Non-injectables-if
member has benefit
Mental Health
- Inpatient Facility Component
- Inpatient Professional
Component
- Outpatient Professional
Component
Nuclear Medicine Diagnostics
Nuclear Medicine Treatment/Therapy
- Facility Component (Inpatient)
- Facility Component
(Outpatient)
- Professional Component
Nutritional/Dietetic Counseling
Office Visit Supplies, Splints,
Bandages, etc.
Organ Transplants (non-experimental)
- Facility component
- Professional component
</TABLE>
(1) All references to division of responsibility have been deleted.
- 45 -
<PAGE>
DIVISION OF FINANCIAL RESPONSIBILITY
CALIFORNIA
Secure Horizons Shared Risk Agreement
(IPA Capitated, Hospital Incentive Program w/PacifiCare)
IPA Hospital
----------------------------------- -----------------------------
<TABLE>
<CAPTION>
Responsible Party
-------------------------------------------------------
<S> <C> <C> <C>
List of Benefits - (In area) IPA PacifiCare PacifiCare
- ---------------------------- HIP 100%
O.P. Surgery
- Facility Component
- Professional Component
(Facility Based MDs)
- Professional Component - other
- Anesthesiology
Outpatient Surgery/Facility/
Based Physicians
- Anesthesiology
- Audiology
- Cardiology
- Emergency Room
- Diagnostic Services
- Neonatology [ ** ](1)
- Neurology
- Nephrology
- Pathology
- Physical Medicine
- Pulmonary
- Radiology
- Radiation Oncology
- Surgeon
Outpatient Diagnostic Services-
Facility and Professional
(including, but not limited to,
those listed below)
- Angiograms
- Cat Scan
- 2 D Echo
- EEG
- EKG
- EMG
- ENG
- MRI
- Treadmills
- Ultrasound
Physical Therapy
- Inpatient
- Outpatient
Physician Visits
- To Hospital
- To S.N.F.
- To Patients Home
Physician Office Visits/
Consultations
Podiatry Services (requires P.M.G.
referral)
Pregnancy
- Professional Component
- Facility Component
Prosthetic Devices
- Surgically Implanted
- Outpatient
</TABLE>
(1) All references to division of responsibility have been deleted.
- 46 -
<PAGE>
DIVISION OF FINANCIAL RESPONSIBILITY
CALIFORNIA
Secure Horizons Shared Risk Agreement
(IPA Capitated, Hospital Incentive Program w/PacifiCare)
IPA Hospital
----------------------------------- -----------------------------
<TABLE>
<CAPTION>
Responsible Party
-------------------------------------------------------
<S> <C> <C> <C>
List of Benefits - (In area) IPA PacifiCare PacifiCare
- ---------------------------- HIP 100%
Radiation Therapy
- Facility Component (Inpatient)
- Facility Component (Outpatient)
- Professional Component
Radiology Services
- Outpatient
- Inpatient
- O.P. Surgery
Reconstructive Surgery
- Facility Component
- Professional Component
- Prosthetics
Refractions
Rehabilitation (Short Term) (e.g.:
P.T., O.T., Speech, Cardiac Therapy)
- Inpatient Facility Component [ ** ](1)
- Inpatient Professional
Component
- Outpatient Facility Component
- Outpatient Professional
Component
Skilled Nursing Facility
Social Services - Medical
Specialist Consultations
Surgical Supplies
- Inpatient
- Outpatient Facility
- Outpatient IPA
TMJ
- Dental Treatment
- Diagnosis and Medically
Necessary Correction
- Inpatient Facility Component
Transfusions
- From Blood Bank
- Autologous Blood Donation
Tissue Plasminogen Activator (TPA)
Vision Screening
Vision Care
- Implanted Lenses (cataract
surgery)
- Lenses and Frames incident to
cataract surgery
- Non-cataract Related Lenses
and Frames
- Medically necessary care
- Refractions
</TABLE>
(1) All references to division of responsibility have been deleted.
- 47 -
<PAGE>
ATTACHMENT H
MEDICAL SERVICES RESERVE FUND
PacifiCare will establish a reserve fund in the amount of [ ** ].
This reserve is to be used to pay for medical services listed in Attachment
A2 and that are the financial responsibility of the Medical Group. The
reserve may only be borrowed against when the Medical Group's expenses exceed
the capitation paid to the Group.
The Group may borrow against the reserve by notifying PACIFICARE OF
CALIFORNIA CFO in writing. Upon notification, PacifiCare will issue a check in
the amount requested to the Group.
Monies borrowed from the reserve fund will be repaid to PacifiCare from any
surplus due the Medical Group at the final year end settlement of the Hospital
Incentive Program. If repayment of the reserve is due, and there is a deficit on
the Hospital Incentive Program, the reserve owed will be carried forward to be
repaid from the following year's Hospital Incentive Program.
- 48 -
<PAGE>
"ALL SECTIONS MARKED WITH TWO ASTERISKS ("**") REFLECT PORTIONS WHICH HAVE
BEEN REDACTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION BY PROSPECT MEDICAL HOLDINGS, INC. AS PART OF A REQUEST FOR
CONFIDENTIAL TREATMENT."
POINT-OF-SERVICE AMENDMENT
TO IPA MEDICARE SHARED RISK SERVICES AGREEMENT
The undersigned parties to the IPA Medicare Shared Risk Services Agreement
(the "Agreement") by and between PacifiCare of California ("PacifiCare") and
Santa Ana Tustin Physicians Group, Inc.("IPA") do hereby amend the Agreement
with reference to the following facts:
WHEREAS, PacifiCare intends to introduce the Secure Horizons
Point-of-Service Plan, as defined below, beginning in 1996;
WHEREAS, IPA shall provide or arrange Health Care Services to Secure
Horizons Point-of-Service Plan Subscribers under the same terms and conditions
as other Secure Horizons Health Plan Subscribers;
WHEREAS, IPA shall have no financial responsibility for Out-of-Network
Services; and
WHEREAS, PacifiCare and IPA desire to establish a Secure Horizons
Point-Of-Service Control Program for the purpose of providing a financial
incentive for the control of Out-of-Network Services.
NOW THEREFORE, the Agreement shall be amended as follows:
1. The following definitions shall be added to Section One of the
Agreement.
SECURE HORIZONS POINT-OF-SERVICE PLAN - is a Secure Horizons Health
Plan under which Subscribers are entitled to coverage for both In-Network
Services and Out-of-Network Services.
CONVENTIONAL PLAN - is the Secure Horizons Health Plan which does not
provide coverage for Out-of-Network Services.
IN-NETWORK SERVICES - are [Health Care Services] which are (a)
provided or arranged by IPA under the provisions set forth in the Agreement
for coverage of Conventional Plan Subscribers; or (b) received from an
Outside Provider following an authorization from IPA; or (c) Emergency
Services.
IN-NETWORK HOSPITAL SERVICES - are In-Network Services which are also
Hospital Services and which are provided to a Secure Horizons
Point-of-Service Plan Member.
1
<PAGE>
OUT-OF-NETWORK MEDICAL SERVICES - are the Health Care Services
summarized in Attachment A2 obtained by Secure Horizons Point-Of-Service
Plan Subscribers which are not provided, arranged or authorized by IPA in
accordance with the procedures for the Conventional Secure Plan and which
do not qualify as Emergency Services.
OUT-OF-NETWORK HOSPITAL SERVICES - are the Health Care Services
summarized in Attachment A1 obtained by Secure Horizons Point-Of-Service
Plan Subscribers which are not provided, arranged or authorized by IPA in
accordance with the procedures for the Conventional Plan, and which do not
qualify as Emergency Services.
OUT-OF-NETWORK SERVICES - are Out-of-Network Medical Services and
Out-of-Network Hospital Services. IPA shall have no financial
responsibility for Out-of-Network Services.
2. Section 3.07.01 shall be added to read as follows:
3.07.01 COLLECTION OF CHARGES FOR OUT-OF-NETWORK SERVICES -
Notwithstanding anything to the contrary in Section 3.07 or elsewhere in
the Agreement, if an IPA Member Physician or Specialist Physician provides
Out-of-Network Services to a Secure Horizons Point-Of-Service Plan
Subscriber, IPA shall bill PacifiCare or PacifiCare's designee for payment
for such services and agrees to accept full reimbursement at [ ** ]
of the Medicare Locality Fee Schedule for Participating Providers as
published by the Part B carrier. Neither IPA nor its Member Physicians
shall encourage Subscribers to receive Medically Necessary Services from
Outside Providers. Breach of this Section 3.07.01 shall constitute cause
for termination of this Agreement.
3. Paragraph 3.31 shall be added to read as follows:
3.31 SECURE HORIZONS POINT-OF-SERVICE PLAN CONTROL PROGRAM-IPA
agrees to participate in the Secure Horizons Point-Of-Service Plan Control
Program as set forth in Attachment A6, attached hereto and incorporated
herein.
4. Attachment A6 SECURE HORIZONS POINT-OF-SERVICE PLAN CONTROL PROGRAM shall
be added to read as follows:
See Exhibit 1 attached hereto and incorporated herein by this
reference.
2
<PAGE>
5. The following shall be added to Attachment C, COMPENSATION,
Section B, MONTHLY HCFA PAYMENT:
SECURE HORIZONS POINT-OF-SERVICE PLAN CAPITATION PAYMENTS
Capitation Payments for Secure Horizons Point-Of-Service Plan Subscribers
will be determined in the same manner as for Conventional Plan Subscribers,
except as provided in this paragraph. IPA's Capitation Payment for Secure
Horizons Point-Of-Service Plan Subscribers shall equal the Percent of the
Monthly HCFA Payment specified in this Attachment C, multiplied by
[ ** ], less [ ** ] of the ISL Premium Rate specified for the
Individual Stop Loss Program noted in Attachment A3.
SECURE HORIZONS POINT-OF-SERVICE PLAN COVENANT NOT TO COMPETE
IPA will receive an additional [ ** ] of the Monthly HCFA Payment
in recognition of IPA's agreement not to enter into any contractual
arrangements, other then the contractual arrangement set forth in this
amendment, to provide or arrange Medical Services to Medicare beneficiaries
who are Subscribers or enrollees of a Point-Of-Service Plan under a health
maintenance organization, competitive medical plan or other similar entity
that contracts with HCFA on a risk basis. This additional [ ** ]
capitation is not included in the amount stated above and is not subject to
any withhold or deductions. If IPA enters into a contractual relationship
with any other Medicare Risk Reimbursement Plan to provide or arrange
Medical Services under a Point-Of-Service Plan, PacifiCare will decrease
the monthly capitation payment by this [ ** ] commencing the
month in which this breach occurs.
The effective date of this Amendment shall be January 1, 1996.
By signing below, both parties hereto have executed and agreed to this
Amendment.
PACIFICARE OF CALIFORNIA IPA
By: /s/ Chris Wing By /s/ Melvin L. Reich
------------------------- ----------------------------
Date: Date: 4/23/96
------------------------- ----------------------------
3
<PAGE>
ATTACHMENT A6
SECURE HORIZONS POINT-OF-SERVICE PLAN CONTROL PROGRAM
1. INTRODUCTION
The Secure Horizons Point-of-Service Plan Control Program is designed to provide
a financial incentive for the control of In-Network Hospital Services and
Out-of-Network Services provided to Secure Horizons Point-of-Service Plan
Members.
Secure Horizons Point-of-Service Plan Subscriber months and related In-Network
Hospital Service expenses shall not be included in calculating the Conventional
Utilization Control Program described in Attachment A5.
2. DEFINITIONS
The following terms shall have the meanings set forth below when utilized in
this Attachment A6.
a. SECURE HORIZONS POINT-OF-SERVICE PLAN BUDGET - shall equal [ ** ] of the
Monthly HCFA Payment, less [ ** ] of the Reinsurance Premium specified in
Paragraph 5.05 of this Agreement for In-Network Hospital Services
reinsurance.
b. ACTUAL COSTS consist of:
i. In-Network Hospital Services costs incurred during the period of
calculation for which PacifiCare has received a claim and paid net of
discounts; In-Network Hospital Services incurred prior to the period
of calculation and paid during the current period; and for quarterly
interim calculations, In-Network Hospital Services incurred during the
period for which PacifiCare has received a claim but has not paid,
less an average aggregate discount factor (for year-end calculations,
only paid claims will be included); LESS Subscriber claim costs in
excess of the reinsurance deductible specified above; PLUS
ii. Claims paid charges for Out-of-Network Services incurred during the
current period; and claims paid charges for Out-of-Network Services
incurred but not included in prior period Secure Horizons
Point-of-Service Plan Control Program calculations; LESS
4
<PAGE>
iii. Third party liability and coordination of benefit recoveries for
In-Network Hospital Services and Out-of-Network Services that are
received during the period of calculation.
c. BUDGET SAVINGS - is the difference between the Secure Horizons
Point-of-Service Plan Budget and Actual Costs, to the extent
Actual Costs are less than the Secure Horizons Point-of-
Service Budget.
3. SAVINGS DISTRIBUTION
To the extent Budget Savings are available, such savings shall be shared between
IPA and PacifiCare as follows:
IPA shall receive [ ** ] between actual Capitation Payments for Secure
Horizons Point-of-Service Plan Subscribers for the period and the amount of
Capitation Payments the IPA would have received if the Secure Horizons
Point-of-Service Plan Subscribers were enrolled in the Conventional Plan. The
above distribution to IPA shall be limited to the Budget Savings available
pursuant to the Secure Horizons Point-of-Service Plan Control Program
calculation. Additionally, IPA shall receive [ ** ] of any remaining Budget
Savings after reimbursing IPA up to the [ ** ] amount.
4. BUDGET DEFICITS. IPA shall have [ ** ] financial responsibility in the
event that Actual Costs exceed the Secure Horizons Point-Of-Service Plan Budget.
5. PERIODIC CALCULATIONS - The Secure Horizons Point-Of-Service Plan Control
Program shall be administered on an IPA-specific basis. For IPAs with multiple
IPA Facilities, the program shall be calculated for each IPA Facility. However,
Budget Savings and payment distributions shall be based on IPA's consolidated
results.
Cumulative calculations of the Secure Horizons Point-Of-Service Plan Control
Program results will be based on calendar quarters and shall be calculated
within one hundred and twenty (120) days of the end of each calendar quarter,
except for the fourth quarter for which no calculation or payment will be
made in anticipation of the year-end settlement. Interim distribution
payments will be made within one hundred and twenty (120) days following the
end of each quarter, except for the fourth quarter, and will be limited to
[ ** ] of calculated Budget Savings to account for incurred but not received
claims. Year-end calculations and payments of the Secure Horizons
Point-of-Service Plan Control Program shall be made within one hundred eighty
(180) days of the end of each calendar year.
5
<PAGE>
"ALL SECTIONS MARKED WITH TWO ASTERISKS ("**") REFLECT PORTIONS WHICH HAVE
BEEN REDACTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION BY PROSPECT MEDICAL HOLDINGS, INC. AS PART OF A REQUEST FOR
CONFIDENTIAL TREATMENT."
AMENDMENT TO
IPA MEDICARE SHARED RISK SERVICES AGREEMENT
The undersigned parties to the PacifiCare IPA Medicare Shared Risk Services
Agreement ("Agreement") between PacifiCare of California ("PacifiCare") and
Santa Ana Tustin Physicians Group, Inc. ("IPA") do hereby amend the
Agreement as set forth herein. Except as otherwise specifically provided,
terms utilized herein shall have the meanings set forth in the Agreement.
Except as specifically amended herein, the Agreement shall remain unchanged
and in full effect.
1. Paragraph 6.01, TERM, is amended in full to read as follows:
6.01 TERM - The term of this Agreement shall be for thirty-six (36)
months and shall begin on January 1, 1996 (the "Commencement Date") and
end on December 31, 1998 ("Initial Term"). A "Year" under this Agreement
shall begin on January 1 and end on December 31. After the expiration of
the Initial Term, the Agreement shall be automatically extended for one
(1) year terms upon the expiration of the prior term unless either party
provides the other with written notice of such party's intention not to
extend the term no less than three hundred and sixty-five (365) days prior
to the end of the initial term or one hundred and eighty (180) days prior
to the end of each subsequent term thereafter or until this Agreement is
appropriately terminated by either party as provided in Section 7 herein.
Notwithstanding the above, should IPA breach the covenant not to compete
as stated in Paragraph 9.02, this Agreement shall be automatically
extended for one (1) year terms on each successive January 1 upon the
expiration of the calendar year during which the breach occurs. In
addition, Pacificare may terminate this Agreement by providing IPA at least
sixty (60) days prior written notice within ninety (90) days of receiving
notification of IPA's breach of the covenant not to compete as stated in
Paragraph 9.02. At least for the first year of the Initial Term, IPA may
continue to use Tustin Hospital, Chapman General Hospital and Western
Medical Centers as well as St. Joseph's Hospital.
2. Section 9, EXCLUSIVITY, is amended in full to read as follows:
9.01 UTILIZATION OF IPA BY PACIFICARE - Nothing in this Agreement
shall be construed to require PacifiCare to assign any minimum or maximum
number of Subscribers to IPA, nor to require PacifiCare to utilize the
Medical Services of IPA for any or all Subscribers in the IPA Service
Area.
9.02 IPA COVENANTS NOT TO COMPETE - In recognition of PacifiCare's
desire to enhance the quality of care provided to its Subscribers by
ensuring continuity of care, better control
1
<PAGE>
and standardization in procedures and full-time availability of services,
IPA agrees that it shall not enter into any agreements, other than those
currently in effect, to provide or arrange Health Care Services to
Medicare beneficiaries who are Subscribers or enrollees of a health
maintenance organization, competitive medical plan or other similar
entity that contracts with HCFA on a risk basis. IPA recognized that the
consideration for this covenant not to compete is PacifiCare's financial
commitment to the development of its Secure Horizons Medical and Hospital
Plan and this Agreement, and PacifiCare's commitment to arrange for
cost-effective Health Care Services to its Subscribers while maintaining
continuity and quality of care.
9.02.01 MATERIALITY OF COVENANT NOT TO COMPETE - IPA agrees that its
obligations under this Section 9.02 are material terms for purposes of
the termination provision of this Agreement.
9.02.02 VALUE OF COVENANT NOT TO COMPETE - In recognition of IPA's
covenant not to compete, PacifiCare agrees to increase the monthly
capitation payment as noted in Attachment C.
3. Paragraph 12.07, ASSIGNMENT, is amended in full to read as follows:
12.07 ASSIGNMENT - This Agreement and the rights, interests and
benefits hereunder shall not be assigned, transferred, pledged, or
hypothecated in any way by IPA or PacifiCare and shall not be subject to
execution, attachment or similar process, nor shall the duties imposed
herein be subcontracted or delegated without the written consent of the
other party. Notwithstanding, PacifiCare may assign, transfer, pledge or
hypothecate this Agreement and its rights, interests and benefits
hereunder to any entity of which PacifiCare has at least majority control.
4. Attachment C, COMPENSATION, Section B, MONTHLY HCFA PAYMENT is amended in
part as follows:
B. MONTHLY HCFA PAYMENT
PacifiCare shall pay IPA [ ** ] of the Monthly HCFA Payment, LESS the
applicable ISL Premium identified in Attachment A3 as payment for
Individual Stop Loss coverage. The percent of monthly HCFA Payment stated
above includes [ ** ] which is the value of IPA's covenant not to
compete as outlined in Section 9 of this Agreement. Should IPA breach the
covenant not to compete, PacifiCare shall reduce the percent of monthly
HCFA Payment by this [ ** ] commencing the month in
2
<PAGE>
which the breach occurs and the term of this Agreement shall be amended
as stated in Paragraph 6.01 and the term of the IPA Commercial Services
Agreement shall be amended as stated in Paragraph 6.01 of that Agreement.
It is understood that any existing Medicare Risk arrangements that the IPA
currently has in effect does not constitute a breach for this purpose.
The payment per Subscriber per month by PacifiCare to IPA shall be
increased or decreased to reflect increases or decreases made by HCFA in
the Monthly HCFA Payment. PacifiCare shall make monthly retroactive
adjustments to reflect adjustments made by HCFA, if any.
THE EFFECTIVE DATE OF THIS AMENDMENT IS JANUARY 1, 1996
By signing below, both parties hereto have executed and agreed to this
Amendment.
PACIFICARE, INC IPA
By: /s/ Chris Wing By: /s/ Melvin L. Reich
---------------------------------- -------------------------------
Chris Wing, Vice President
Vice President/General Manager
Date: Date: 12/5/95
-------------------------------- -----------------------------
3
<PAGE>
"ALL SECTIONS MARKED WITH TWO ASTERISKS ("**") REFLECT PORTIONS WHICH HAVE
BEEN REDACTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION BY PROSPECT MEDICAL HOLDINGS, INC. AS PART OF A REQUEST FOR
CONFIDENTIAL TREATMENT."
1995 AMENDMENT TO
IPA MEDICARE SHARED RISK SERVICES AGREEMENT
The undersigned parties to the PacifiCare IPA Medicare Shared Risk Services
Agreement ("Agreement") between PacifiCare of California ("PacifiCare") and
Santa Ana Tustin Physicians Group, Inc. ("IPA") do hereby amend the Agreement
as set forth herein. Except as otherwise specifically provided, terms
utilized herein shall have the meanings set forth in the Agreement. Except as
specifically amended herein, the Agreement shall remain unchanged and in full
effect.
1. Paragraph 3.17, RECIPROCITY AGREEMENTS, is amended in full to read as
follows:
3.17 RECIPROCITY AGREEMENTS - IPA agrees to develop agreements among
PacifiCare's Participating Medical Groups to assure reciprocity of health
care among the Participating Medical Groups for PacifiCare Subscribers.
IPA shall accept non-emergency or specialty Referrals from such other
Participating Medical Groups and such other Participating Medical Groups
shall be required to accept non-emergency or specialty Referrals from IPA.
Payment for the foregoing Referrals shall be no greater than the Cost of
Care Rates described in Attachment A4.
2. Paragraph 5.05, REINSURANCE, is added to read as follows:
5.05 REINSURANCE - The purpose of the reinsurance program described
herein is to limit IPA's risk for Hospital Services under the Hospital
Control Program to a specified amount per Subscriber per Year (the
"Reinsurance Deductible") in return for a payment of a Reinsurance
Premium. For the 1995 calendar year, the Reinsurance Deductible shall be
[ ** ] per Subscriber per Year and the Reinsurance Premium shall equal
[ ** ] of the Monthly HCFA Payment per Subscriber per month.
Notwithstanding Section 12.12, PacifiCare may amend the Reinsurance
Premium and Reinsurance Deductible on an annual basis effective each
January 1 by providing sixty (60) days prior written notice to IPA.
Reinsurance claims shall be calculated at the Cost of Care values as set
forth in Attachment A5, Sections c.1, c.2, and c.3 of this Agreement.
-1-
<PAGE>
3. Paragraph 5.06, MOST FAVORED PLAN, is added to read as follows:
5.06 MOST FAVORED PLAN - IPA represents that, during the term of this
Agreement, the compensation rates payable under this Agreement are and
shall continue to be equal to or less than the rates charged under other
IPA agreements for the provision of services to enrollees of health care
service plans ("Competing Plan Agreements"), when such rates are adjusted
to reflect different risk levels and programs under the Competing Plan
Agreements (the "Adjusted Rates"). If at any time IPA agrees or has
agreed to accept lower Adjusted Rates under a Competing Plan Agreement than
the rates set forth in this Agreement, or any amendment hereto, IPA shall
immediately notify PacifiCare in writing of such agreement and the
applicable lower Adjusted Rates. Within thirty (30) days thereafter,
PacifiCare and IPA shall meet to discuss implementation of new
compensation rates under this Agreement which shall be equal to or less
than the Adjusted Rates accepted under the Competing Plan Agreement. If the
parties fail to agree to implementation procedures for the new rates
within thirty (30) days of the effective date of the Competing Plan
Agreement, the compensation rates under this Agreement will be lowered
upon notice to IPA from PacifiCare to equal the lower Adjusted Rate. The
new compensation rates shall be effective the date the lower Adjusted
Rates become effective under the Competing Plan Agreement. IPA's failure
to notify PacifiCare of the acceptance of lower Adjusted Rates from a
Competing Plan shall be grounds for termination of this Agreement by
PacifiCare pursuant to Section 7.01.01(d).
4. Attachment A1, HOSPITAL SERVICES, Paragraph 10.d., OTHER HOSPITAL
SERVICES, is added to read as follows:
e. Self injectable medications.
5. Attachment A3, INDIVIDUAL STOP LOSS PROGRAM, is amended in part as follows:
2. Deductible and Premium: For the 1995 calendar year, the ISL
Deductible shall equal [ ** ] per Subscriber per year and the ISL
Premium shall equal [ ** ] of the Net Premium per Subscriber per
month. Notwithstanding Section 12.12, PacifiCare may amend the ISL
Premium and ISL Deductible on an annual basis effective each January
1 by providing sixty (60) days prior written notice to IPA.
-2-
<PAGE>
6. Attachment A5, HOSPITAL INCENTIVE PROGRAM, is amended in full as follows:
Please refer see Exhibit 1 attached hereto and incorporated herein by
this reference.
7. Attachment C, COMPENSATION, is amended in part as follows:
A. BENEFIT WITHHOLD
PacifiCare shall retain [ ** ] of the revenue received each month
from HCFA to fund the following Subscriber benefits. These benefits are
outlined more specifically in the Secure Horizons Medical and Hospital
Subscriber Agreement.
1) Outpatient prescription drugs
2) Acute hospital days greater than 150 per year
3) Respite Care
4) Immunosuppressive Drugs
5) Mammography (see Section E below)
IPA shall be given the opportunity to share in any savings which
may be present in the Utilization Control Program as described in
Attachment A5.
In addition, upon implementation of the Secure Horizons preventative
dental benefit, PacifiCare shall retain an additional [ ** ] of the
revenue received each month from HCFA to fund the preventative dental
benefit.
B. MONTHLY HCFA PAYMENT
PacifiCare shall pay IPA [ ** ] of the Monthly HCFA Payment, less the
applicable ISL Premium identified in Attachment A3 as payment for
Individual Stop Loss coverage. The percent of monthly HCFA Payment
stated above includes [ ** ] which is the value of IPA's covenant not
to compete as outlined in Section 9 of this Agreement. Should IPA breach
the covenant not to compete, PacifiCare shall reduce the percent of
monthly HCFA Payment by this [ ** ] commencing the month in which the
breach occurs. It is understood that any existing Medicare Risk
arrangements that the IPA currently has in effect does not constitute a
breach for this purpose. The payment per Subscriber per month by
PacifiCare to IPA shall be increased or decreased to reflect increases
or decreases made by HCFA in the Monthly HCFA Payment. PacifiCare shall
make monthly retroactive adjustments to reflect adjustments made by
HCFA, if any.
-3-
<PAGE>
PacifiCare shall provide IPA appropriate documentation in support of the
actual Capitation Payment made. Should IPA desire additional billing
information, PacifiCare shall make available for inspection other mutually
agreed upon documents, upon thirty (30) days prior written notice from
IPA. IPA shall have the right to reasonably audit PacifiCare's books and
records directly relating only to IPA's Capitation Payment determinations
upon thirty (30) days prior written notice at IPA's sole expense.
THE EFFECTIVE DATE OF THIS AMENDMENT IS JANUARY 1, 1995
By signing below, both parties hereto have executed and agreed to this
Amendment.
PACIFICARE, INC. IPA
By: /s/ Chris Wing By: /s/ Melvin L. Reich
---------------------------------- ---------------------------------
Chris Wing, SENIOR VICE PRESIDENT,
GENERAL MANAGER
Date: 1-29-95 Date: 1/19/95
----------------------------- -------------------------------
-4-
<PAGE>
EXHIBIT 1
ATTACHMENT A5
UTILIZATION CONTROL PROGRAM
---------------------------
As an incentive for the cost effective provision of Hospital Services,
In-Area Emergency Services and other selected services, PacifiCare and IPA
shall establish a Utilization Control Program. The Utilization Control
Program shall utilize a Withhold Amount, as defined below, and shall be
calculated by comparing the Budget to the Expenses, as such terms are defined
below.
A. WITHHOLD AMOUNT - PacifiCare shall withhold from IPA's monthly Capitation
Payment an amount equal to [ ** ] of the Monthly HCFA Payment to apply to
IPA's share of Budget Deficits, if any. PacifiCare may prospectively adjust
the Withhold Amount on a quarterly basis based upon the results of the
Utilization Control Program calculation. If the Agreement is terminated or
non-renewed pursuant to Section 6 or Section 7 of the Agreement, PacifiCare
may choose to adjust the Withhold Amount at the time that the notice of
termination or non-renewal is served.
B. BUDGET - The Budget shall equal the sum of 1. and 2. below:
1. For Hospital Services, [ ** ] of the Monthly HCFA Payment for those
Subscribers designating IPA as their Participating Medical Group ("IPA
Subscribers"), MINUS [ ** ] of the Monthly HCFA Payment in
consideration of the Reinsurance Program as set forth in subsection (c)
(4) herein.
2. For outpatient prescription drugs and other Benefit Withhold Services,
[ ** ] of the monthly revenue received from HCFA for Subscribers who
have designated IPA as their Participating Medical Group, plus [ ** ]
per member per month rebate for drugs ("Drug Rebate") ordered through
Prescription Solutions during calendar year 1995. Notwithstanding
Section 12.12, PacifiCare may amend the Drug Rebate on an annual basis
effective each January 1 by providing sixty (60) days prior written
notice to IPA.
C. EXPENSES - Expenses shall be valued as the total of the following:
- 5 -
<PAGE>
1. INPATIENT EXPENSE AT HOSPITAL - Inpatient costs for Hospital Services
rendered at Hospital, valued at the amount paid to Hospital by
PacifiCare; plus,
2. NON-INPATIENT EXPENSES AT HOSPITAL - Other Hospital Services provided
by Hospital other than inpatient services, valued at the amount paid
to Hospital by PacifiCare; plus,
3. HOSPITAL SERVICES NOT PROVIDED AT HOSPITAL - The actual amount paid
by PacifiCare for Hospital Services not provided by Hospital; MINUS
4. REINSURANCE LIMIT - Any amount of Hospital Services Expense, as
defined in subsection (c)(1) through (3) above, in excess of the
Reinsurance Deductible specified in Paragraph 5.04 of this
Agreement; MINUS,
5. COORDINATION OF BENEFITS - Any amount received by PacifiCare from
third parties as the result of coordination of benefits and
third party recoveries for Hospital Services; plus,
6. Outpatient prescription drugs; plus
7. Acute hospital days greater than [150] per year; plus
8. Respite Care; plus,
9. Immunosuppressive drugs; plus,
10. Mammography (see Section E of Attachment C)
D. PAYMENTS TO IPA UNDER UTILIZATION CONTROL PROGRAM
1. BUDGET EXCEEDS EXPENSES - In the event the annual Budget exceeds
annual Expenses, PacifiCare shall pay IPA the Withhold Amount, if
any, plus an amount equal to [ ** ] of the amount by which the
annual Budget exceeds annual Expenses [ ** ].
2. EXPENSES EXCEED BUDGET - In the event that annual Expenses exceed
annual Budget, PacifiCare shall pay IPA the Withhold Amount, if any,
minus an amount equal to [ ** ] of the amount by which Expenses
exceed the Budget [ ** ].
- 6 -
<PAGE>
To the extent that the portion of the calculated deficit for which
IPA is responsible exceeds the Withhold Amount, IPA shall not be
entitled to any of the Withhold Amount. After the Withhold Amount has
been exceeded, any remaining portion of the deficit for which IPA is
responsible shall be carried forward into the succeeding term. An
amount equal to this remaining portion of the deficit will be withheld
from IPA's monthly Capitation Payment, using a mutually agreed upon
payment schedule, not to exceed [ ** ].
Should this Agreement terminate leaving no successive term to carry
forward an existing deficit amount, such deficit amount shall be due
and payable by IPA to PacifiCare within [ ** ] days of the effective
date of termination of this Agreement.
E. SETTLEMENT OF UTILIZATION CONTROL PROGRAM PAYMENTS
PacifiCare shall make interim Utilization Control Program calculations and
payments, if any, on a quarterly basis within sixty (60) days after the
end of each calendar quarter from the Effective Date. Quarterly payments
will be made to IPA based on the calculations specified in subsection (D)
above. The Expense figure used in quarterly incentive program
calculations shall also include an "Incurred But Not Reported" factor in
order to account for outstanding Medical Services claims. PacifiCare
shall make an annual Utilization Control Program payment to IPA within
one hundred and fifty (150) days of the end of each Year.
- 7 -
<PAGE>
"ALL SECTIONS MARKED WITH TWO ASTERISKS ("**") REFLECT PORTIONS WHICH HAVE
BEEN REDACTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION BY PROSPECT MEDICAL HOLDINGS, INC. AS PART OF A REQUEST FOR
CONFIDENTIAL TREATMENT."
1994 AMENDMENT TO
IPA MEDICARE SHARED RISK SERVICES AGREEMENT
The Undersigned parties to the PacifiCare IPA Medicare Shared Risk Services
Agreement between PacifiCare of California ("PacifiCare") and SANTA ANA-TUSTIN
PHYSICIANS GROUP, INC. ("IPA") do hereby amend said Agreement as follows:
1. Section 3.24 is amended in full to read as follows:
"3.24 ACCOUNTS PAYABLE SYSTEM - IPA agrees to operate its accounts
payable system in a manner which assures that providers of authorized Medical
Services who are Member Physicians and non-Member Physicians receive payment
for Medical Services rendered to Subscribers within the timeframe specified
by Federal regulation. For a claim which is contested or is not "clean",
either payment must be made to the Member Physician or non-Member Physician,
or an initial determination notice must be sent to the Subscriber within
sixty (60) calendar days of IPA's receipt of such claim from Member
Physicians and non-Member Physicians. Any denied claim which is afterwards
determined by HCFA as payable and which falls under IPA financial
responsibility, must be paid by IPA upon notice and/or receipt of claim. In
the event IPA fails to meet the payment timeliness discussed in this Section
3.24, in addition to exercising any other remedies it may have under this
Agreement, PacifiCare may take actions to assist IPA in operating its
accounts payable system including, but not limited to, paying IPA's Member
Physicians and Non-Member Physicians and charging the claim amount paid
against IPA capitation in addition to an administrative fee for performing
such services."
2. Section 3.30, WITHDRAWAL OF A MEMBER PHYSICIAN, shall be added as follows:
"3.30 WITHDRAWAL OF A MEMBER PHYSICIAN - In the event IPA seeks to
withdraw one or more Member Physicians from providing or arranging Health
Care Services to Subscribers under this Agreement, IPA must notify PacifiCare
of such withdrawal in writing at least sixty (60) days prior to the effective
withdrawal date. After the effective date of such withdrawal, IPA shall still
be responsible to provide or arrange Medical Services to the affected
Subscribers with the other Member Physicians."
3. Attachment A5 "HOSPITAL INCENTIVE PROGRAM", Section (b) and
subsection (c)(4) under HOSPITAL SERVICES BUDGET shall be amended in full to
read as follows:
"b. HOSPITAL SERVICE BUDGET - The Hospital Services Budget shall equal
[ ** ] of the Monthly HCFA Payment for those Subscribers designating IPA as
their Participating Medical Group, MINUS [ ** ]
1
<PAGE>
[ ** ] of such HCFA Payment in consideration of the Reinsurance program as
set forth in subsection (c) (4) herein."
"c. 4. REINSURANCE LIMIT - any amount of hospital services expenses as
defined in subsection (c) (1) through (3) above, in excess of [ ** ] per
Subscriber per Year; MINUS."
4. Paragraph 5.01, Section A, BENEFIT WITHHOLD; and Section B, paragraph 1,
only, MONTHLY HCFA PAYMENT, is amended as follows:
" A. BENEFIT WITHHOLD
PacifiCare shall retain [ ** ] of the revenue received each month from
HCFA to fund the following Subscriber benefits. These benefits are outlined
more specifically in the Secure Horizons Medical and Hospital Subscriber
Agreement (see Attachment C).
1) Outpatient prescription drugs
2) Acute hospital days greater than 150/year
3) Respite Care
4) Immunosuppressive drugs
5) Mammography (see Section E below)
IPA shall be given the opportunity to share in any savings which may be
present in the Benefit Withhold fund through the Benefit Withhold Incentive
Program as outline in Attachment E.
In addition, upon implementation of the Secure Horizons preventative
dental benefit, PacifiCare shall retain an additional [ ** ] of the revenue
received each month from HCFA to fund the preventative dental benefit.
B. MONTHLY HCFA PAYMENT (first paragraph only amended)
[ ** ] of the Monthly HCFA Payment and LESS [ ** ] of the
Monthly HCFA Payment as payment for the premium for Individual Stop Loss
coverage. The payment per Subscriber per month by PacifiCare to IPA shall be
increased or decreased to reflect increases or decreases made by HCFA in the
Monthly HCFA Payment. PacifiCare shall make monthly retroactive adjustments
to reflect adjustments made by HCFA, if any."
5. Attachment E, "BENEFIT WITHHOLD INCENTIVE PROGRAM" is amended in full as
follows:
See Exhibit 1, attached hereto and incorporated herein by this reference.
2
<PAGE>
6. Attachment G, DIVISION OF FINANCIAL RESPONSIBILITY, is amended in full to
read as follows:
See Exhibit 2 attached hereto and incorporated herein by this reference.
The effective date of this Amendment is January 1, 1994
By signing below, both parties hereto have executed and agreed to this
Amendment.
PACIFICARE OF CALIFORNIA SANTA ANA-TUSTIN PHYSICIANS GROUP, INC.
By: By: /s/ Melvin L. Reich
------------------------------- ----------------------------------
Nancy Freeman, Vice President
Print Name: MELVIN L. REICH
--------------------------
Title: Pres.
-------------------------------
Date: Date: 12/22/93
----------------------------- -------------------------------
Tax I.D.: 95-353 2036
----------------------------
3
<PAGE>
EXHIBIT 1
ATTACHMENT E
BENEFIT WITHHOLD INCENTIVE PROGRAM
----------------------------------
The purpose of the Benefit Withhold Incentive Program (BWIP) is to
provide an incentive to the IPA to foster the efficient utilization of the
following Subscriber benefits:
1) Outpatient prescription drugs
2) Acute hospital days greater than 150/year
3) Respite Care
4) Immunosuppressive drugs
5) Mammography (see Section E of Attachment C)
The BWIP gives the IPA the ability to share in any savings when
comparing actual utilization against the budgeted withhold amount.
The budget will be set at [ ** ] of the monthly revenue received from
HCFA for Subscribers who have designated IPA as their Participating Medical
Group.
Debited against this budget will be the actual expenses paid by
PacifiCare for the earmarked benefits list above in this Attachment for
Subscribers who have designated IPA as their Participating Medical Group for
the applicable month. The IPA will share [ ** ] of any savings in comparing
the budget and actual expenses. PacifiCare shall provide, on a quarterly
basis, utilization reports pertaining to the cost of prescriptions written on
a physician specific basis. A final calculation and final payment will be
made within one hundred fifty (150) days of the end of each Year.
IPA agrees to participate in a generic drug substitution program and
formulary program established by PacifiCare's Quality Assurance Committee.
4
<PAGE>
EXHIBIT 2
DIVISION OF FINANCIAL RESPONSIBILITY
The attached template outlines the division of financial responsibility
between IPA, the Hospital Incentive Program (HIP), and PacifiCare (PC), the
intent being to clarify Medical Service and Hospital Service categories in
order to provide for accurate administration. As it is impossible to include
every service available, the template serves as a model under which broad
Medical Service and Hospital Service categories suggest the appropriate
financial responsibility for services or items not specifically listed.
5 SANTA ANA-TUSTIN PHYSICIANS
MEDICAL GROUP, INC.
<PAGE>
EXHIBIT 2
DIVISION OF FINANCIAL RESPONSIBILITY
CALIFORNIA
Secure Horizons Shared Risk Agreement
(IPA Capitated, Hospital Incentive Program w/PacifiCare)
A Santa Ana-Tustin Physicians Medical Group, Inc.
<TABLE>
<CAPTION>
Responsible Party
------------------------------------
List of Benefits - (In area)
- ----------------- --------- IPA PacifiCare PacifiCare
HIP 100%
<S> <C> <C> <C>
AIDS - Professional Component
- Facility Component
Allergy
- Testing
- Serum
Ambulance, Air or Ground - In Area
- Out of Area
Amniocentesis
Anesthetics, Administration of
(Anesthesiology)
Artificial Insemination
Artificial Limbs (DME)
Biofeedback
Blood & Blood Products
(Including Professional Component)
- From Blood Bank [ ** ](1)
- Autologous Blood Donation
Chemical Dependency Rehabilitation
- Inpatient Facility Component
- Inpatient Professional Component
- Outpatient Professional Component
- Outpatient Facility Component
Chemotherapy
- Drugs
- Professional Component
Chiropractic (Medicare Approved Only)
Colostomy Supplies
- Outpatient
- Inpatient
Contact Lenses
- Intraocular lens (surgically
implanted)
- Incident to Cataract Surgery
(not surgically implanted)
Cosmetic Surgery (Medically Necessary)
- Facility Component
- Professional Component
Dental Services (for repair of
accident/injury only)
- Facility Component
- Professional Component
Detox
- Facility Component
- Professional Component
Durable Medical Equipment (DME)
(Medicare Approved Only)
- Surgically Implanted
- Inpatient or S.N.F.
- Outpatient
- Hearing Aids
</TABLE>
(1) All references to division of responsibility have been deleted.
6 SANTA ANA-TUSTIN PHYSICIANS
MEDICAL GROUP, INC.
<PAGE>
EXHIBIT 2
DIVISION OF FINANCIAL RESPONSIBILITY
CALIFORNIA
Secure Horizons Shared Risk Agreement
(IPA Capitated, Hospital Incentive Program w/PacifiCare)
IPA Santa Ana-Tustin Physicians Medical Group, Inc.
<TABLE>
<CAPTION>
Responsible Party
------------------------------------
List of Benefits - (In area) IPA PacifiCare PacifiCare
- --------------- --------- HIP 100%
<S> <C> <C> <C>
Emergency Admissions
- In Area: - Facility Component
- - Professional Component
- Out of Area; - Facility Component
- Professional Component
Emergency Room Facility Component
- In Area
- Out of Area
Emergency Room Physicians - In Area
- Initial Treatment and Hospital
Based MDs (interpretation)
- Consults
- Out of Area
Employment Physicial
Endoscopic Studies
- With Biopsy [ ** ](1)
- Without Biopsy
Experimental Procedures
Family Planning (Medicare Approved Only)
(e.g.; Amniocentesis)
- Professional Component
- Facility Component
Fetal Monitoring
- Outpatient (diagnostic)
- Inpatient
Genetic Testing
Health Education
Health Evaluation (Physical)
Hearing Aids
Hearing Screening
Hemodialysis
- Inpatient
- Outpatient
Home Health Care
(includes IV or injectables)
Hospice Services (Special Medicare
Reimbursement Program)
- Inpatient
- Professional Component
Hospital Based Physicians (Inpatient)
- Anesthesiology
- Audiology
- Cardiology
- Emergency Room
- Diagnostic Services
- Neonatology
- Neurology
- Nephrology
</TABLE>
(1) All references to division of responsibility have been deleted.
7 SANTA ANA-TUSTIN PHYSICIANS
MEDICAL GROUP, INC.
<PAGE>
DIVISION OF FINANCIAL RESPONSIBILITY EXHIBIT 2
CALIFORNIA
Secure Horizons Shared Risk Agreement
(IPA Capitated, Hospital Incentive Program w/PacifiCare)
IPA SANTA ANA-TUSTIN PHYSICIANS MEDICAL GROUP, INC.
<TABLE>
<CAPTION>
Responsible Party
-------------------------------
List of Benefits - (In area) IPA PacifiCare PacifiCare
- ---------------- --------- HIP 100%
<S> <C> <C> <C>
Hospital Based Physicians (continued)
- Pathology
- Physical Medicine
- Pulmonary
- Radiology
- Radiation Oncology
- Surgeon
Hospitalization, Inpatient Services, Supplies,
Testing
- In Area
- Out of Area
Immunization and Inoculations
- As Medically Indicated
Medicare Approved
- For Work/Travel
Infertility (Diagnosis and Treatment)
- Professional Component
- Facility Component [ ** ](1)
Injections and Injected Substances
(outpatient)
Insulin & Syringes
Laboratory Services
- Outpatient
- Inpatient
Lithotripsy
- Professional Component
- Facility Component
Mammography
Marriage Counseling
Medication
- Inpatient
- Outpatient Covered Injectables
- Outpatient Non-injectables
Mental Health
- Inpatient Facility Component
- Inpatient Professional Component
- Outpatient Professional Component
Nuclear Medicine Diagnostics
Nuclear Medicine Treatment/Therapy
- Facility Component
- Professional Component
Nutritional/Dietetic Counseling
Office Visit Supplies, Splints,
Bandages, etc.
Organ Transplants (non-experimental)
- Facility component
- Professional component
(1) All references to division of responsibility have been deleted.
8
<PAGE>
DIVISION OF FINANCIAL RESPONSIBILITY EXHIBIT 2
CALIFORNIA
Secure Horizons Shared Risk Agreement
(IPA Capitated, Hospital Incentive Program w/PacifiCare)
IPA SANTA ANA-TUSTIN PHYSICIANS MEDICAL GROUP, INC.
<CAPTION>
Responsible Party
-------------------------------
List of Benefits - (In area) IPA PacifiCare PacifiCare
- ---------------- --------- HIP 100%
<S> <C> <C> <C>
O.P. Surgery
- Facility component
- Professional Component
(Interpretive MDs)
- Professional Component - other
- Anesthesiology
Outpatient Surgery/Facility/Based Physicians
- Anesthesiology
- Audiology
- Cardiology
- Emergency Room
- Diagnostic Services
- Neonatology
- Neurology
- Nephrology
- Pathology [ ** ](1)
- Physical Medicine
- Pulmonary
- Radiology
- Radiation Oncology
- Surgeon
Outpatient Diagnostic Services
(including, but not limited to, those
listed below)
- Angiograms
- Cat Scan
- 2 D Echo
- EEG
- EKG
- EMG
- ENG
- MRI
- Treadmills
- Ultrasound
Physical Therapy
- Inpatient
- Outpatient
Physician Visits
- To Hospital
- To S.N.F.
- To Patients Home
Physician Office Visits/Consultations
Podiatry Services (requires P.M.G. referral)
Pregnancy
- Professional Component
- Facility Component
Prosthetic Devices
- Inpatient
- Outpatient
(1) All references to division of responsibility have been deleted.
9
<PAGE>
DIVISION OF FINANCIAL RESPONSIBILITY EXHIBIT 2
CALIFORNIA
Secure Horizons Shared Risk Agreement
(IPA Capitated, Hospital Incentive Program w/PacifiCare)
IPA SANTA ANA-TUSTIN PHYSICIANS MEDICAL GROUP, INC.
<CAPTION>
Responsible Party
-------------------------------
List of Benefits - (In area) IPA PacifiCare PacifiCare
- ---------------- --------- HIP 100%
<S> <C> <C> <C>
Radiation Therapy
- Facility Component (Inpatient)
- Facility Component (Outpatient)
- Professional Component
Radiology Services
- Outpatient
- Inpatient
- O.P. Surgery
Reconstructive Surgery
- Facility Component
- Professional Component
- Prosthetics
Refractions
Rehabilitation (Short Term)
(e.g.: P.T., O.T., Speech, Cardiac Therapy)
- Inpatient Facility Component [ ** ](1)
- Inpatient Professional Component
- Outpatient Facility Component
- Outpatient Professional Component
Skilled Nursing Facility
Special Services - Medical
Specialist Consultations
Surgical Supplies
- Inpatient
- Outpatient Facility
- Outpatient IPA
TMJ
- Dental Treatment
- Diagnosis and Medically Necessary
Correction
- Inpatient Facility Component
Transfusions
- From Blood Bank
- Autologous Blood Donation
Tissue Plasminogen Activator (TPA)
Vision Screening
Vision Care
- Implanted Lenses (cataract surgery)
- Lenses and Frames incident to
cataract surgery
- Non-cataract Related Lenses and Frames
- Medically necessary care
- Refractions
</TABLE>
(1) All references to division of responsibility have been deleted.
10
<PAGE>
"ALL SECTIONS MARKED WITH TWO ASTERISKS ("**") REFLECT PORTIONS WHICH HAVE
BEEN REDACTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION BY PROSPECT MEDICAL HOLDINGS, INC. AS PART OF A REQUEST FOR
CONFIDENTIAL TREATMENT."
1993 AMENDMENT TO
IPA MEDICARE SHARED RISK SERVICES AGREEMENT
The Undersigned parties to the PacifiCare IPA Medicare Shared Risk Services
Agreement between PacifiCare of California ("PacifiCare") and Santa
Ana-Tustin Physician's Group, Inc. ("IPA") do hereby amend said Agreement as
follows:
1. Attachment A4 COST OF CARE - is amended in part to read as follows:
See Exhibit 1, attached hereto and incorporated herein by this reference.
THE EFFECTIVE DATE OF THIS AMENDMENT IS JANUARY 1, 1993
By signing below, both parties hereto have executed and agreed to this
Amendment.
PACIFICARE, INC IPA Santa Ana-Tustin Physician's
Group, Inc.
By: Nancy Freeman By: Melvin L. Reich
----------------------------- ----------------------------
Nancy Freeman, Vice President
Date: 1/15/93 Date: 12/23/92
--------------------------- --------------------------
<PAGE>
EXHIBIT 1
ATTACHMENT A4
COST OF CARE
For purposes of this Agreement, the Cost of Care for Medical Services
provided or arranged by IPA to Subscribers shall equal:
a) For services provided to Subscribers by Member Physicians who
practice at IPA Facilities, [ ** ] of the Medicare Locality
Fee Schedule for Participating Providers as published by the
Part B carrier.
b) For services provided to Subscribers by Specialist Physicians or
Outside Providers, [ ** ] of the fees actually paid by IPA.
General guidelines and special situations:
1. Services provided by IPA which are not a benefit, as specified in
the Subscriber's Secure Horizons Medical and Hospital Agreement, will
not be considered a part of Cost of Care.
2. The Cost of Care of Anesthesia Professional Services rendered by IPA
shall be set at [ ** ] of usual and customary charges. The Cost of
Care for Anesthesia Professional Services rendered through an outside
referral or reciprocity referral shall be set at [ ** ] or [ ** ]
of usual and customary charges, whichever is higher.
3. Any Medical Services provided where payment is considered
collectible through the coordination of benefits, third-party
liability, Worker's Compensation, or any other source including
Copayments, shall not be included in the Cost of Care. If, at a
later date, these claims are not collectible, or only partially
collectible, then these services will be included in the relevant
programs, based on the Cost of Care calculation cited above.
<PAGE>
"ALL SECTIONS MARKED WITH TWO ASTERISKS ("**") REFLECT PORTIONS WHICH HAVE
BEEN REDACTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION BY PROSPECT MEDICAL HOLDINGS, INC. AS PART OF A REQUEST FOR
CONFIDENTIAL TREATMENT."
1992 AMENDMENT TO
IPA MEDICARE SHARED RISK SERVICES AGREEMENT
The Undersigned parties to the PacifiCare IPA Medicare Partial Risk Services
Agreement between PacifiCare of California ("PacifiCare") and Santa
Ana-Tustin Physician's Group, Inc. ("IPA") do hereby amend said Agreement as
follows:
1. Paragraph 1.03 is amended to read as follows:
1.03 CATASTROPHIC CASE - is any single medical condition, including
complications arising from such medical condition, where the total cost of
Health Care Services to treat such condition is expected to exceed [ ** ]
per condition, regardless of payment source.
2. Paragraph 3.02 is amended in full to read as follows:
3.02 STANDARDS - All Medical Services arranged for or provided by IPA
and its Member Physicians shall be provided by professional personnel and at
physical facilities according to generally accepted standards of medical
practice and management in the community. IPA further agrees to provide or
arrange for Referrals to Specialist Physicians and facilities as are
necessary, appropriate, and in accordance with generally accepted standards of
medical practice in the community in compliance with the standards developed
by PacifiCare's Quality Assurance Committee. If IPA contracts with Specialist
Physicians to provide Medical Services under this Agreement, IPA shall
require such Specialist Physicians to provide IPA with the credentialing
information set forth herein. IPA shall obtain and maintain information
concerning each Member Physician's and Specialist Physician's education,
training, references, malpractice liability insurance, hospital staff status,
hospital clinical privileges, and hospital staff reappointment dates. Such
information shall be kept in a form prescribed by or acceptable to
PacifiCare. Upon request, the credentialing information shall be made
available to PacifiCare for review or copying.
IPA acknowledges and agrees that it shall report Member Physicians or
Specialist Physicians as required by the California Business and Professions
Code Section 805 ("Section 805"). IPA further agrees to maintain and
demonstrate to PacifiCare upon request compliance with the following:
3.02.01 IPA shall use best efforts to ensure that its Member Physicians
and Specialist Physicians are licensed by the State of California and have
current Drug Enforcement Agency ("DEA") registration. IPA shall immediately
notify PacifiCare in writing of any of the following actions taken by or
against a Member
1
<PAGE>
Physician or Specialist Physician: (i) the surrendering, revocation, or
suspension of a license; (ii) the surrendering, revocations, or suspension of
current DEA registration; (iii) any filing pursuant to Section 805; (iv) any
filing pursuant to the National Practitioner Data Bank; (v) the filing of
any malpractice claim of more than ten thousand dollars ($10,000); and (vi)
a change in hospital staff status or hospital clinical privileges, including
any restrictions or limitations.
3.02.02 In the event that it is determined by PacifiCare that IPA does
not obtain and maintain the information set forth in paragraph 3.02, IPA
agrees to assist PacifiCare in obtaining credentialing information concerning
each Member Physician's and Specialist Physician's education, training,
references, malpractice liability insurance, hospital staff status, hospital
clinical privileges, and hospital staff reappointment dates. IPA shall
obtain from each Member Physician and Specialist Physician a signed waiver,
acceptable to PacifiCare, allowing PacifiCare access to such credentialing
information at any acute care hospital or health care facility. If IPA is
unable to obtain a signed waiver from a Member Physician or Specialist
Physician, IPA shall obtain the credentialing information directly from the
acute care hospital or health care facility and make such information
available to PacifiCare upon request for review and copying.
3.02.03 IPA agrees to provide access to continuing education programs
for its Member Physicians and Specialist Physicians in accordance with the
standards established by the California Medical Association for continuing
education. The content and delivery of such continuing education programs
shall be in the discretion and judgement of IPA, in order to maintain high
standards for the delivery of Medical Services pursuant to this Agreement.
IPA further agrees to gather, correlate, and distribute to its Member
Physicians and Specialist Physicians, information regarding professional
medical activities and developments which IPA believes may be of assistance
in providing Medical Services pursuant to this Agreement.
3.02.04 IPA agrees to provide reasonable evidence that all nurses and
other ancillary and paramedical personnel who are employed by and contract
with IPA or Specialist Physicians are properly licensed by the State of
California.
3. Paragraph 5.02 is amended to read as follows:
5.02 ADDITIONAL PAYMENTS - Pacificare and IPA agree to provide
payments to each other in accordance with the terms of the following
programs, if applicable: Hospital Incentive Program, Individual Stop-Loss
Program, Benefit Withhold Incentive Program and Mammography Reimbursement
Program as specified in Attachments A5, A3, E and C respectively,
incorporated in full herein by
2
<PAGE>
reference.
To the extent that each party owes an amount to the other party in the risk
programs noted above, IPA agrees that PacifiCare shall combine the results of
all applicable risk programs such that one aggregate payment is payable to or
receivable from IPA. A fully detailed accounting of the results of each
program shall accompany the aggregate payment or notice of amount due.
4. Attachment A4 COST OF CARE - is amended in part to read as follows:
For purposes of this Agreement, the Cost of Care for Medical Services
rendered by IPA to Subscriber shall equal:
a) [ ** ] of the fees charged by IPA to IPA's fee-for-service patients
for the same or similar services, if the same or similar services are
rendered by Member Physicians who practice at IPA Facilities; or
b) [ ** ] of the fees actually paid, if the services are rendered by
Specialist Physicians or Outside Providers.
5. Attachment A5 HOSPITAL INCENTIVE PROGRAM is amended in part to read as
follows:
b. HOSPITAL SERVICES BUDGET - The Hospital Services Budget shall equal
[ ** ] of the Monthly HCFA Payment for those Subscribers designating IPA as
their Participating Medical Group, minus [ ** ] of such HCFA Payment in
consideration of the Reinsurance Program as set forth in subsection (c)(4)
herein.
3
<PAGE>
The effective date of this Amendment is January 1, 1992
By signing below, both parties hereto have executed and agreed to this
Amendment.
PACIFICARE, INC IPA
By: /s/ Nancy Freeman BY: /s/ Melvin Reich
-------------------------------- ----------------------------
Nancy Freeman, Vice President
Date: 7/18/93 Date: 6/28/93
------------------------------- ---------------------------
4
<PAGE>
EXHIBIT A
ATTACHMENT A
Payment Rates
Tustin Hospital Medical Center
For Santa Ana Tustin Physicians Medical Group
Hospital and Emergency Services provided pursuant to this Agreement shall be
reimbursed at the rates described below effective 9-1-92:
<TABLE>
<CAPTION>
LEVEL OF SERVICE PER DIEM RATES
<S> <C>
A. Acute Medical/Surgical $ [ ** ]
ICU/CCU $ [ ** ]
Detox Adult and Adolescent $ [ ** ]
Rehab Adult and Adolescent $ [ ** ]
Sub Acute (includes 2 Hours rehab) $ [ ** ]
Day Treatment $ [ ** ]
</TABLE>
STOPLOSS: If total billed charges for a patient's stay equals or exceeds
[ ** ], reimbursement shall be at the above per diems up to stop loss limit
and [ ** ] of billed charges for those charges in excess of the stop loss
limit.
B. In the case of authorized emergency room or outpatient
Hospital Services, or services not listed above utilized by
PacifiCare Subscribers, Hospital agrees to accept [ ** ]
of Hospital's usual and customary rates, less any Copayments
collected.
- 2 -
<PAGE>
PAYMENT RATES
Tustin Hospital Medical Center
For all Secure Horizons And Pacificare Members
A. In the case of Hospital Services, Emergency Services and
Outpatient Hospital Services utilized by PacifiCare Subscribers,
Hospital agrees to accept [ ** ] of Hospital's usual and
customary rates, less any Copayments collected.
B. In the case of Hospital Services utilized by Secure Horizons
Subscribers, Hospital agrees to accept [ ** ] for the stay
and [ ** ] of Hospital's usual and customary rates, less any
Copayments collected, for Emergency and Outpatient Services.
- 4 -
<PAGE>
"ALL SECTIONS MARKED WITH TWO ASTERISKS ("**") REFLECT PORTIONS WHICH HAVE
BEEN REDACTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION BY PROSPECT MEDICAL HOLDINGS, INC. AS PART OF A REQUEST FOR
CONFIDENTIAL TREATMENT."
AMENDMENT TO
IPA MEDICARE SHARED RISK SERVICES AGREEMENT
The undersigned parties to the PacifiCare IPA Medicare Shared Risk
Services Agreement between PacifiCare of California ("PacifiCare") and Santa
Ana - Tustin Physicians' Group ("IPA") do hereby amend said Agreement as
follows:
1. Paragraph 1.19 "MONTHLY HCFA PAYMENT" is amended in full to read as
follows:
1.19 MONTHLY HCFA PAYMENT - is the revenue received by PacifiCare
each month from HCFA, as determined by HCFA, for the Medical and hospital
Services each Subscriber is to be provided minus any Benefit Withhold.
2. Paragraph 1.34 "BENEFIT WITHHOLD" is added to read as follows:
1.34 BENEFIT WITHHOLD - is the portion of the HCFA revenue received and
retained by PacifiCare each month as outlined in Paragraph 5.01, which is
earmarked for provision of benefits to Subscribers which are offered in
addition to Medical Services and Hospital Services.
3. Paragraph 5.01 is amended in full to read as follows:
5.01 COMPENSATION
A. BENEFIT WITHHOLD
PacifiCare shall retain [ ** ] of the revenue received each
month from HCFA to fund the following Subscriber benefits. These benefits
are outlined more specifically in the Secure Horizons Medical and Hospital
Subscriber Agreement (see Attachment C).
1) Outpatient prescription drugs
2) Acute hospital days greater than 150/year
3) Respite Care
4) Immunosuppressive drugs
5) Mammography (see Section E below)
IPA shall be given the opportunity to share in any savings
which may be present in the Benefit Withhold fund through the Benefit
Withhold Incentive Program as outline in Attachment E.
1
<PAGE>
B. MONTHLY HCFA PAYMENT
[ ** ] of the Monthly HCFA Payment and LESS [ ** ] of the
Monthly HCFA Payment as payment for the premium for Individual Stop Loss
coverage. The payment per Subscriber per month by PacifiCare to IPA shall be
increased or decreased to reflect increases or decreases made by HCFA in the
Monthly HCFA Payment. PacifiCare shall make monthly retroactive adjustments
to reflect adjustments made by HCFA, if any.
PacifiCare shall provide IPA appropriate documentation in support of the
actual Capitation Payment made. Should IPA desire additional billing
information, PacifiCare shall make available for inspection other mutually
agreed upon documents, upon thirty (30) days prior written notice from IPA.
IPA shall have the right to reasonably audit PacifiCare's books and records
directly relating only to IPA's Capitation Payment determinations upon thirty
(30) days prior written notice at IPA's sole expense.
C. SUBSCRIBER PREMIUM (if applicable)
IPA shall receive [ ** ] per Subscriber per month as payment of
the IPA's portion of the Member Premium.
D. RETIREE SUBSCRIBER COMPENSATION
IPA shall receive an additional per month payment from PacifiCare
for certain Retiree Subscribers whose benefit plans permit a lesser
Copayment. This additional amount shall be determined by PacifiCare based on
the number of Retiree Subscribers enrolled each month in each of the
Copayment categories set forth below.
<TABLE>
<CAPTION>
Copayment Paid Monthly Payment
By Retiree Subscriber Per Retiree Subscriber
--------------------- ----------------------
<S> <C>
$ 0 $ [ ** ]
$ 1 $ [ ** ]
$ 2 $ [ ** ]
$ 3 $ [ ** ]
$ 4 $ [ ** ]
$ 5 [ ** ]
</TABLE>
E. MAMMOGRAPHY
IPA shall receive [ ** ] for each screening and diagnostic
mammography study performed above the 1987 PacifiCare-wide baseline, specific
to the Secure Horizons program, for such studies. (This baseline equals 267
studies per 1,000 adult females.) The amount due to IPA shall be calculated
based upon utilization data submitted by IPA and shall be paid within one
hundred and fifty (150) days of the end of the current calendar year.
2
<PAGE>
F. INSTITUTION-TO-INSTITUTION TRANSFERS
IPA shall bill PacifiCare and PacifiCare shall pay for Medical
Services provided to Subscribers who enroll with IPA through a transfer from
another PacifiCare contracted-IPA and who are in a skilled nursing facility,
acute care hospital, or are receiving any other type of acute institutional
care at time of enrollment with IPA. Medical Services provided to such
Subscribers shall be reimbursed under this special program until the
Subscriber is discharged from the institutions noted above. If Subscriber is
discharged from such institution to home with home health services being
provided in-lieu of hospitalization, such home health services will be
covered under this program as well. Reimbursement to IPA for these Medical
Services shall be at the Cost of Care rates included in Attachment A4, but no
greater than the ISL deductible per Subscriber during the Initial Term or any
subsequent term of this Agreement.
IPA shall batch these bills together and identify the bills as
institution-to-institution prior to submitting bills to PacifiCare. Bills
must be submitted to PacifiCare no later than sixty (60) days from the
provision of Medical Services. Expenses for Medical Services identified as
institution-to-institution and rendered from January 1, 1991 through December
31, 1991 only will be included in the institution-to-institution program. A
final claim must be filed for such Medical Services by March 31, 1992 to be
reimbursed under this institution-to-institution program.
4. Attachment A "HOSPITAL SERVICES" is amended in full to read as follows:
See Exhibit 1, attached hereto and incorporated herein by this reference.
5. Attachment B "MEDICAL SERVICES", Section II (Medical Services
Exclusions), item (b) which read as noted below SHALL BE DELETED.
b. Outpatient mental health visits in excess of twenty (20) visits per
Subscriber year.
6. Attachment A5 "HOSPITAL INCENTIVE PROGRAM", Section (b) HOSPITAL
SERVICES BUDGET shall be amended in full to read as follows:
b. HOSPITAL SERVICE BUDGET - The Hospital Services Budget shall equal
[ ** ] of the Monthly HCFA Payment for those Subscribers designating IPA as
their Participating Medical Group, MINUS [ ** ] of such HCFA Payment in
consideration of the Reinsurance program as set forth in subsection (c) (4)
herein.
7. Attachment C "SECURE HORIZONS MEDICAL AND HOSPITAL SUBSCRIBER AGREEMENT"
is amended in full as follows:
See Exhibit 2, attached hereto and incorporated herein by this reference.
3
<PAGE>
8. Attachment E "PHARMACY CONTROL PROGRAM" is deleted in full and shall be
replaced with "BENEFIT WITHHOLD INCENTIVE PROGRAM" as follows:
See Exhibit 4, attached hereto and incorporated herein by this reference.
The effective date of this Amendment shall be January 1, 1991.
By signing below, both parties hereto have executed and agreed to this
Amendment.
PACIFICARE OF CALIFORNIA IPA
SANTA ANA-TUSTIN PHYSICIANS
GROUP, INC.
By: /s/ Kevin R. Mowll By: /s/ Melvin L. Reich
---------------------------------- -------------------------------
Kevin R. Mowll, Vice President Title: Pres.
----------------------------
Date: 10/19/90 Date: 10/28/90
-------------------------------- -----------------------------
4
<PAGE>
EXHIBIT 1
ATTACHMENT A
HOSPITAL SERVICES
Hospital Services are authorized by IPA, are initially paid by PacifiCare
and, except as otherwise indicated, are the financial responsibility of
PacifiCare and IPA. A summary of most Hospital Services includes the
following:
1. INPATIENT HOSPITAL CARE - Medically Necessary inpatient
hospital care, as defined by Medicare, but limited to a total
of one hundred fifty (150) days per Subscriber per Year.
Unlimited days of inpatient hospital care shall be provided to
Subscribers, but PacifiCare shall be financially responsible
for days in excess of one hundred fifty (150) days. Subscriber
shall be assigned semi-private units, unless medical necessity
dictates private accommodations. Where the Subscriber requests
private accommodations, not required for medical purposes, the
incremental difference in fee-for-service rates shall be the
responsibility of the Subscriber. A summary of inpatient care
includes:
a. Medical/Surgical Care, Intensive Care, Cardiac Care and
other special care units (including Hospital Services
associated with non-experimental transplants as defined
by Medicare);
b. Inpatient psychiatric;
c. Nursing Services, meals, drugs, medications (excluding take-
home medications), blood transfusions;
d. Medical and Surgical supplies and appliances;
e. Inpatient rehabilitation services, such as: inpatient
physical, occupational and speech therapy;
f. Inpatient alcohol and drug treatment and rehabilitation.
2. SKILLED NURSING - Medically Necessary Skilled Nursing Facility
care, as defined by Medicare. Patients shall be assigned
semi-private units, unless medical necessity dictates private
accommodations. Where the Subscriber requests private
accommodations, not required for medical purposes, the
incremental difference in the fee-for-service rates shall be
the responsibility of the Subscriber. Skilled nursing
facilities must be Medicare licensed and approved.
5
<PAGE>
3. HOSPITAL BASED PHYSICIAN SERVICE - All hospital based physician
services where the physician provides the professional
component of an inpatient hospital based service, the hospital
outpatient surgery center service, or a free-standing surgery
center service. The charges of an anesthesiologist are not
included as a Hospital Service. (See paragraph 8 below in this
Attachment A).
4. TRANSPORTATION EXPENSES - Medicare approved ambulance services
provided within the IPA Service Area for Subscribers. When a
transfer of Subscriber from one facility to another is authorized
by IPA or PacifiCare, the cost of such transfer shall be a
Hospital service. The method of transfer shall be determined by
IPA, but IPA shall coordinate all Subscriber transfers to or
from Hospital with designated Hospital personnel. Also included
are paramedic services in emergency cases in the IPA Service
Area.
5. EMERGENCY SERVICES IN THE IPA SERVICE AREA - IPA Service Area
Emergency Services include emergency room charges and
associated emergency room physician and ancillary charges,
inpatient medical and other Medical Services which may not be
delayed until facilities or physicians of the Hospital or IPA
(or alternatives authorized by IPA) can be used without possible
serious effects to the health of the Subscriber. Such services
must be Medically Necessary Emergency Services.
6. HOME HEALTH CARE - As determined to be Medically Necessary, as
defined by Medicare and provided in lieu of hospitalization, as
mutually agreed to by IPA, Hospital and PacifiCare, including
any required DME and IV Therapy Services.
7. HOSPICE CARE - Should be coordinated with Medicare for special
reimbursement provisions.
8. OUTPATIENT SURGERY - Facility, supply charges and the
professional component of a hospital based physician service
(as noted in paragraph 3 above) for outpatient surgery done
either at Hospital or a free-standing surgery center.
9. END STAGE RENAL DISEASE - Facility and professional charges for
inpatient and outpatient dialysis services for Subscribers who
are medically determined to have End Stage Renal Disease
after enrollment in one of PacifiCare's health plans.
10. OTHER HOSPITAL SERVICES
a. Devices surgically implanted during a hospital confinement
or during an outpatient surgery performed at the Hospital
outpatient surgery center or a free-standing surgery center.
b. Treatment programs for outpatient substance abuse as defined
by Medicare.
6
<PAGE>
c. Appealed Services - Hospital Services denied by IPA and
PacifiCare which are found on appeal or arbitration
through the Subscriber grievance resolution process to
be Hospital Services which the Subscriber was entitled
to have furnished under the PacifiCare Secure Horizons
health care delivery system.
d. Chemotherapy Drugs (inpatient and outpatient).
11. HOSPITAL SERVICES EXCLUDE THE FOLLOWING:
a. Durable Medical Equipment, except as provided in paragraphs
6 and 10(a) above.
b. Medical Services in the IPA Service Area as defined by
Attachment B hereto.
c. Outpatient prescription drugs, including immunosuppressive
drugs.
d. All out-of-IPA Service Area expenses, except those elective
referrals as authorized by IPA. PacifiCare, in conjunction
with IPA, shall make all decisions regarding the duration
of a Subscriber's care at the out-of-IPA Service Area
facility and transfer of the Subscriber to an IPA Service
Area facility.
e. Vision materials (lenses and frames) except for those
surgically implanted during cataract surgery.
f. Anesthesiology services (inpatient and outpatient).
g. Experimental procedures, including any type of procedure
not generally recognized as of value by the medical
community and its societies, as determined by PacifiCare
and IPA, in conformance with state and federal law.
h. Cosmetic Surgery, except when performed to correct or
repair the physical functioning of a body part as a result
of a functional disorder or accidental injury.
i. Inpatient hospital care in excess of one hundred fifty
(150) days per Subscriber per Year except as provided in
Paragraph 1 of this Attachment A.
j. Skilled nursing care in excess of one hundred (100) days
per Subscriber per Year.
k. Respite Care
7
<PAGE>
EXHIBIT 2
AMENDMENT C
SECURE HORIZONS MEDICAL AND HOSPITAL SUBSCRIBERS AGREEMENT
Secure Horizons Medical and Hospital Subscriber Agreement is available
upon request. A summary of the Schedule of Benefits is attached.
8
<PAGE>
EXHIBIT 4
ATTACHMENT E
BENEFIT WITHHOLD INCENTIVE PROGRAM
The purpose of the Benefit Withhold Incentive Program (BWIP) is to
provide an incentive to the IPA to foster the efficient utilization of the
Subscriber benefits outline in Attachment C, Section A "BENEFIT WITHHOLD",
most particularly prescription drugs. The BWIP gives the IPA the ability to
share in any savings when comparing actual utilization against the budgeted
withhold amount.
The budget will be set at [ ** ] of the monthly revenue received from
HCFA for Subscribers who have designated IPA as their Participating Medical
Group.
Debited against this budget will be the actual expenses paid by
PacifiCare for the earmarked benefits as outlined in Attachment C of those
Subscribers who have designated IPA as their Participating Medical Group for
the applicable month. The IPA will share [ ** ] of any savings in comparing
the budget and actual expenses. PacifiCare shall provide, on a quarterly
basis, utilization reports pertaining to the cost of prescriptions written on
a physician specific basis. A final calculation and final payment will be
made within one hundred fifty (150) days of the end of each Year.
IPA agrees to participate in a generic drug substitution program and
formulary program established by Pacificare's Quality Assurance Committee.
9
<PAGE>
"ALL SECTIONS MARKED WITH TWO ASTERISKS ("**") REFLECT PORTIONS WHICH HAVE
BEEN REDACTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION BY PROSPECT MEDICAL HOLDINGS, INC. AS PART OF A REQUEST FOR
CONFIDENTIAL TREATMENT."
AMENDMENT TO
PACIFICARE IPA MEDICARE SHARED RISK SERVICES
AGREEMENT
The undersigned parties to the PacifiCare IPA Medicare Shared Risk Services
Agreement between PacifiCare of California ("PacifiCare") and Santa Ana
Tustin Physicians Group ("IPA") do hereby amend said Agreement as follows:
1. Paragraph 1.32 is added to read as follows:
1.32 RETIREE SUBSCRIBER - is a Subscriber enrolled in the Secure
Horizons Retiree Health Plan, who meets all the eligibility requirements for
membership in such plan and for whom all applicable premiums have been paid
and received by PacifiCare.
2. Paragraph 1.25 is amended in full to read as follows:
1.25 SECURE HORIZONS MEDICAL AND HOSPITAL PLAN - is the prepaid
health services plan offered by PacifiCare as described in the Secure
Horizons Medical and Hospital Subscriber Agreement, and attachments,
addendums and amendments thereto, a copy of which is attached hereto as
Attachment C, incorporated herein by reference. For purposes of this
Agreement, the Secure Horizons Medical and Hospital Plan shall include the
Secure Horizons Retiree Health Plan.
3. Paragraph 1.33 is added to read as follows:
1.33 SECURE HORIZONS RETIREE HEALTH PLAN - is the health benefits
plan available for Retiree Subscribers. The benefits of the Secure Horizons
Retiree Health Plan are attached hereto as Attachment C and incorporated
herein by reference.
4. Paragraph 1.27 is amended in full to read as follows:
1.27 SUBSCRIBER - is an individual who is enrolled in the
Secure Horizons Medical and Hospital Plan, who meets all the eligibility
requirements for membership in such plan and for whom all applicable Member
Premiums have been paid and received by PacifiCare. For purposes of this
Agreement, Subscribers shall include Retiree Subscribers.
5. Paragraph 5.01 is amended in full to read as follows:
5.01 CAPITATION PAYMENTS - PacifiCare shall make monthly Capitation
Payments to IPA based on the number of Subscribers eligible to receive
Medical Services from IPA.
-1-
<PAGE>
A. MONTHLY HCFA PAYMENT
[ ** ] of the Monthly HCFA Payment and LESS [ ** ] of the
Monthly HCFA Payment as payment for the premium for Individual Stop Loss
coverage specified in Attachment E of this Agreement less [ ** ] for the
Pharmacy Control program as specified in Attachment E. The payment per
Subscriber per month by PacifiCare to IPA shall be increased or decreased to
reflect increases of decreases made by HCFA in the Monthly HCFA Payment.
PacifiCare shall make monthly retroactive adjustments to reflect adjustments
made by HCFA, if any.
B. RETIREE SUBSCRIBER COMPENSATION
IPA shall receive an additional per month payment from PacifiCare
for certain Retiree Subscribers whose benefit plans permit a lesser
Copayment. This additional amount shall be determined by PacifiCare based on
the number of Retiree Subscribers enrolled each month in each of the
Copayment categories set forth below.
For Retiree Subscribers residing in Los Angeles, Orange, San
Bernardino, or Riverside Counties (standard Copayment = [ ** ])
<TABLE>
<CAPTION>
Copayment Paid Monthly Payment
By Retiree Subscriber Per Retiree Subscriber
--------------------- ----------------------
<S> <C>
$ 0 $ [ ** ]
$ 1 $ [ ** ]
$ 2 $ [ ** ]
$ 3 $ [ ** ]
$ 4 $ [ ** ]
$ 5 $ [ ** ]
</TABLE>
For Retiree Subscribers residing in San Diego and Ventura
Counties (standard Copayment = $5.00):
<TABLE>
<CAPTION>
Copayment Paid Monthly Payment
By Retiree Subscriber Per Retiree Subscriber
--------------------- ----------------------
<S> <C>
$ 0 $ [ ** ]
$ 1 $ [ ** ]
$ 2 $ [ ** ]
$ 3 $ [ ** ]
$ 4 $ [ ** ]
$ 5 $ [ ** ]
</TABLE>
-2-
<PAGE>
C. MAMMOGRAPHY
IPA shall receive [ ** ] for each screening and diagnostic
mammography study performed above the 1987 PacifiCare-wide baseline, specific
to the Secure Horizons program, for such studies. (This baseline equals 267
studies per 1,000 adult females.) The amount due to IPA shall be calculated
based upon utilization data submitted by IPA and shall be paid within one
hundred and fifty (150) days of the end of the current calendar year.
D. INSTITUTION-TO-INSTITUTION TRANSFERS
IPA shall bill PacifiCare and PacifiCare shall pay for Medical
Services Provided to Subscribers who enroll with IPA through a transfer from
another PacifiCare contracted-IPA and who are in a skilled nursing facility,
acute care hospital, or are receiving any other type of acute institutional
care at time of enrollment with IPA. Medical Services provided to such
Subscribers shall be reimbursed under this special program until the
Subscriber is discharged from the institutions noted above. If Subscriber is
discharged from such institution to home with home health services being
provided in-lieu of hospitalization, such home health services will be
covered under this program as well. Reimbursement to IPA for these Medical
Services shall be at the Cost-of-Care rates included in Attachment F. See
Policy and Procedure Manual for billing instructions.
6. ATTACHMENT A "HOSPITAL SERVICES" is amended in full to read as follows:
See Exhibit 1, attached hereto and incorporated herein by this reference.
7. ATTACHMENT B "MEDICAL SERVICES" is amended in full to read as follows:
See Exhibit 2, attached hereto and incorporated herein by this reference.
8. ATTACHMENT C "SECURE HORIZONS MEDICAL AND HOSPITAL SUBSCRIBER AGREEMENT"
is amended in full to read as follows:
See Exhibit 3, attached hereto and incorporated herein by this reference.
-3-
<PAGE>
The effective date of this Amendment is January 1, 1990.
By signing below, both parties hereto have executed and agreed to this
Amendment.
PACIFICARE OF CALIFORNIA IPA Santa Ana- Tustin
Physicians Group, Inc.
By: /s/ Richard Lipeles By: /s/ Melvin L. Reich
--------------------------- ---------------------------
Richard Lipeles, President Title: President
-------------------------
Date: 2-12-90 Date: 3/10/90
------------------------- -------------------------
-4-
<PAGE>
Exhibit 1
ATTACHMENT A
HOSPITAL SERVICES
Hospital Services are authorized by IPA, are initially paid by PacifiCare
and, except as otherwise indicated, are the financial responsibility of
PacifiCare and IPA. A summary of most Hospital Services includes the
following:
1. INPATIENT HOSPITAL CARE - Medically Necessary inpatient hospital
care, as defined by Medicare, but limited to a total of one hundred
fifty (150) days per Subscriber per Year. Unlimited days of
inpatient hospital care shall be provided to Subscribers, but
PacifiCare shall be financially responsible for days in excess of
one hundred fifty (150) days. Subscriber shall be assigned
semi-private units, unless medical necessity dictates private
accommodations. Where the Subscriber requests private accommodations,
not required for medical purposes, the incremental difference in
fee-for-service rates shall be the responsibility of the Subscriber.
A summary of inpatient care includes:
a. Medical/Surgical Care, Intensive Care, Cardiac Care and other
special care units (including Hospital Services associated with
non-experimental transplants as defined by Medicare);
b. Inpatient psychiatric;
c. Nursing Services, meals, drugs, medications (excluding
take-home medications), blood transfusions;
d. Medical and Surgical supplies and appliances;
e. Inpatient rehabilitation services, such as: inpatient physical,
occupational and speech therapy;
f. Inpatient alcohol and drug treatment and rehabilitation.
2. SKILLED NURSING - Medically Necessary Skilled Nursing Facility care,
as defined by Medicare, but limited to one hundred (100) days per Subscriber
per calendar year and also limited to Subscriber admissions immediately
following three (3) or more days of hospitalization. Subscribers are entitled
to receive one hundred fifty (150) days of Skilled Nursing Care per calendar
year, but PacifiCare shall be financially responsible for days one hundred
one (101) through one hundred fifty (150). In addition, PacifiCare shall be
financially responsible for skilled nursing facility care for Subscribers who
are admitted from home, from a hospital emergency room or from the Hospital
if Subscriber was hospitalized for less than three (3) days. Refer to Policy
and Procedures Manual for admit notification procedures. Patients shall be
assigned semi-private units, unless medical necessity dictates private
accommodations. Where the Subscriber requests private accommodations, not
required for medical purposes, the incremental difference in the fee-for-
service rates shall be the
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responsibility of the Subscriber. Skilled nursing facilities must be
Medicare licensed and approved.
3. HOSPITAL BASED PHYSICIAN SERVICE - All hospital based physician
services where the physician provides the professional component of an
inpatient hospital based service, the hospital outpatient surgery
center service, or a free-standing surgery center service. The charges
of an anesthesiologist are not included as a Hospital Service. (See
paragraph 8 below in this Attachment A1).
4. TRANSPORTATION EXPENSES - Medicare approved ambulance services
provided within the IPA Service Area for Subscribers. When a transfer
of Subscriber from one facility to another is authorized by IPA or
PacifiCare, the cost of such transfer shall be a Hospital service.
The method of transfer shall be determined by IPA, but IPA shall
coordinate all Subscriber transfers to or from Hospital with
designated Hospital personnel. Also included are paramedic services
in emergency cases in the IPA Service Area.
5. EMERGENCY SERVICES IN THE IPA SERVICE AREA - IPA Service Area
Emergency Services include emergency room charges and associated
emergency room physician and ancillary charges, inpatient medical
and other Medical Services which may not be delayed until facilities
or physicians of the Hospital or IPA (or alternatives authorized by
IPA) can be used without possible serious effects to the health of
the Subscriber. Such services must be Medically Necessary Emergency
Services.
6. HOME HEALTH CARE - As determined to be Medically Necessary, as
defined by Medicare and provided in lieu of hospitalization, as
mutually agreed to by IPA, Hospital and PacifiCare, including any
required DME and IV Therapy Services.
7. HOSPICE CARE - Should be coordinated with Medicare for special
reimbursement provisions.
8. OUTPATIENT SURGERY - Facility, supply charges and the professional
component of a hospital based physician service (as noted in
paragraph 3 above) for outpatient surgery done either at Hospital
or a free-standing surgery center.
9. END STAGE RENAL DISEASE - Facility and professional charges for
inpatient and outpatient dialysis services for Subscribers who are
medically determined to have End Stage Renal Disease after enrollment
in one of PacifiCare's health plans.
10. OTHER HOSPITAL SERVICES
a. Devices surgically implanted during a hospital confinement or
during an outpatient surgery performed at the Hospital outpatient
surgery center or a free-standing surgery center.
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b. Treatment programs for outpatient substance abuse as defined by
Medicare.
c. Appealed Services - Hospital Services denied by IPA and PacifiCare
which are found on appeal or arbitration through the Subscriber
grievance resolution process to be Hospital Services which the
Subscriber was entitled to have furnished under the PacifiCare
Secure Horizons health care delivery system.
d. Chemotherapy Drugs (inpatient and outpatient).
11. HOSPITAL SERVICES EXCLUDE THE FOLLOWING:
a. Durable Medical Equipment, except as provided in paragraphs 6
and 10(a) above.
b. Medical Services in the IPA Service Area as defined by Attachment
A2 hereto.
c. Outpatient prescription drugs, including immunosuppressive drugs.
d. All out-of-IPA Service Area expenses, except those elective
referrals as authorized by IPA. PacifiCare, in conjunction with
IPA, shall make all decisions regarding the duration of a
Subscriber's care at the out-of-IPA Service Area facility and
transfer of the Subscriber to an IPA Service Area facility.
e. Vision materials (lenses and frames) except for those surgically
implanted during cataract surgery.
f. Anesthesiology services (inpatient and outpatient).
g. Experimental procedures, including any type of procedure not
generally recognized as of value by the medical community and its
societies, as determined by PacifiCare and IPA, in conformance
with state and federal law.
h. Cosmetic Surgery, except when performed to correct or repair the
physical functioning of a body part as a result of a functional
disorder or accidental injury.
i. Inpatient hospital care in excess of one hundred fifty (150) days
per Subscriber per Year, except as provided in Paragraph 1 of this
Attachment A1.
j. Skilled nursing care in excess of one hundred (100) days per
Subscriber per Year, except as provided in Paragraph 2 of this
Attachment A1.
k. Respite Care
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EXHIBIT 2
ATTACHMENT B
MEDICAL SERVICES
I. Medical Services, other than Hospital Services, provided in the IPA
Service Area are the financial responsibility of IPA. A summary of most
Medical Services includes the following:
1. PHYSICIAN SERVICES - Subscribers shall be entitled to Medically
Necessary covered inpatient and outpatient physician services
included in the PacifiCare's Secure Horizons Medical and Hospital
Plan. A summary of some physician services includes the following:
a. IPA Service Area inpatient services (including anesthesiology
services and physician services associated with non-
experimental transplants, as defined by Medicare) and
outpatient physician care.
b. Professional component of inpatient mental health.
c. Outside referrals to consultants including Emergency Room
consultants (not including emergency room charges).
d. Out-of-IPA Service Area physician services when such
Medical Services are rendered on an elective basis and upon
approval of IPA.
2. OUTPATIENT SERVICES - Such services include, among others:
a. Outpatient pathology and radiology.
b. Outpatient mental health (professional services only).
c. Short term, Medically Necessary rehabilitation (speech,
physical and occupational) therapy.
d. Health education and social services.
e. Immunizations when determined Medically Necessary by an IPA
Member Physician as recommended by the California Department
of Health Services Adult Immunization Recommendations.
f. Periodic health evaluations.
g. Hearing screening, including audiogram.
h. Allergy testing and treatment, including allergy serum.
i. Home health care, except when provided in lieu of
hospitalization.
j. Lenses and frames required after cataract surgery, except
lenses surgically implanted during an outpatient surgery
performed at Hospital or at a free-standing surgery center.
k. Anesthesiology services.
l. Mammography screening, as defined by state and federal law.
3. DURABLE MEDICAL EQUIPMENT, PROSTHETIC DEVICES AND MEDICAL SUPPLIES
a. Durable Medical Equipment ("DME") as defined by Medicare. IPA
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agrees to provide such devices and aids on an outpatient
basis, determined Medically Necessary.
b. Prosthetic devices, as defined by Medicare, except devices
surgically implanted during a Hospital confinement or
outpatient surgery performed at Hospital or free-standing
surgery center.
c. Medical Supplies - Supplies used in connection with
treatment or to aid in the recovery of a medical condition
when considered a covered expense by Medicare.
4. OTHER SERVICES - Medical Services denied by the Participating
Medical Group and PacifiCare which are found on appeal or
arbitration through the Subscriber grievance resolution process
to be Medical Services which Subscriber was entitled to have
furnished through the Secure Horizons Medical and Hospital Plan.
II. Medical Services exclude the following:
a. Professional components on all hospital based physicians for
inpatient procedures and outpatient surgeries, except anesthesiology
as noted in paragraphs I(1)(a) and I(2)(k) above.
b. Outpatient mental health visits in excess of twenty (20) visits per
Subscriber Year.
c. Outpatient prescription drugs, including immunosuppressive drugs.
d. Chemotherapy drugs.
e. Out-of-IPA Service Area expenses, except pursuant to paragraph
I(1)(d) above. PacifiCare, in consultation with IPA, shall make all
decisions regarding the duration of a Subscriber's care at the
out-of-IPA Service Area facility and transfer of the Subscriber to
an IPA Service Area facility consistent with state and federal law.
f. Vision materials (lenses and frames), except following cataract
surgery.
g. Immunizations for foreign travel and unexpected mass immunizations.
h. Experimental procedures, including any type of procedure not generally
recognized as of value by the medical community and its societies,
as determined by PacifiCare in accordance with state and federal law
and in connection with IPA.
i. Cosmetic Surgery, except when performed to correct or repair the
physical functioning of a body part as a result of a functional
disorder or an accidental injury.
j. Respite Care.
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EXHIBIT 3
ATTACHMENT C
SECURE HORIZONS MEDICAL AND HOSPITAL SUBSCRIBER AGREEMENT
Secure Horizons Medical and Hospital Subscriber Agreement is available upon
request. A summary of the Schedule of Benefits is attached.
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AMENDMENT TO
PACIFICARE IPA MEDICARE
SHARED RISK SERVICES AGREEMENT
WHEREAS, PacifiCare, Inc. ("PacifiCare") and Santa Ana-Tustin Physicians
Group ("IPA") have entered into a PacifiCare IPA Medicare Shared Risk
Services Agreement, (the "Agreement"), pursuant to which IPA has agreed to
provide Medical Services to Subscribers of PacifiCare's Secure Horizons
Health Plan.
WHEREAS, because of uncertainties created by a delay in reporting of
medicare financing for the 1991 contract year and because of a change in law
affecting Medicare reimbursement to the Secure Horizons Health Plan beginning
January 1, 1991, the parties desire to allow for a special termination
period, to be effective during the 1990 contract year only, which would allow
either party to terminate the Agreement effective January 1, 1991 by
providing notice on or before October 31, 1990;
NOW THEREFORE, the parties agree to amend the Agreement as set forth
below.
Section 6.01 "Term" shall be amended to add the following sentence:
"Notwithstanding the above, either party may terminate this Agreement
effective January 1, 1991 by providing the other party written notice of
termination on or before October 31, 1990."
The definitions found in the Agreement shall apply to the terms utilized
in this Amendment, including the recitals to this Amendment.
The undersigned parties hereby agree to this Amendment effective August
31, 1990.
IPA PACIFICARE
By: /s/ Melvin L. Reich By: /s/ Kevin R. Mowll
------------------------------- -------------------------------
Kevin R. Mowll
Title: Pres. Title: Vice President
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"ALL SECTIONS MARKED WITH TWO ASTERISKS ("**") REFLECT PORTIONS WHICH HAVE
BEEN REDACTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION BY PROSPECT MEDICAL HOLDINGS, INC. AS PART OF A REQUEST FOR
CONFIDENTIAL TREATMENT."
PACIFICARE
IPA COMMERCIAL SERVICES AGREEMENT
This IPA COMMERCIAL SERVICES AGREEMENT (the "Agreement") is made and
entered into this 1st day of January, 1990 by and between PACIFICARE OF
CALIFORNIA ("PacifiCare"), a California corporation, and Santa Ana/Tustin
Physicians Group, a California corporation, ("IPA") with reference to the
following facts:
A. PacifiCare operates a prepaid health care service plan which arranges for
certain Health Care Services to be provided to persons who are enrolled in the
PacifiCare Health Plan in a manner consistent with the laws of the United States
and the State of California.
B. PacifiCare desires to provide a quality direct service prepaid health
delivery system which maximizes the utilization of innovative methods to promote
the efficient, economical delivery of health care, and to develop and implement
programs of health education and health maintenance for its Subscribers.
C. IPA has as its primary objective the delivery of Health Care Services
through agreements and active participation with individual physicians, medical
groups and/or clinics, their physicians and other related health professionals
and technicians, all of which are appropriately licensed in the State of
California.
D. IPA desires to participate in PacifiCare's prepaid health service delivery
system by arranging or providing Health Care Services in coordination with
PacifiCare, its Subscribers and participating hospitals on a prepaid basis.
E. PacifiCare and IPA deem it in their best interests to enter into a
renewable agreement whereby IPA agrees to provide or arrange Health Care
Services to persons who are enrolled as Subscribers in the PacifiCare Health
Plan.
NOW THEREFORE, it is agreed as follows:
1. DEFINITIONS
Whenever used in this Agreement, the following terms shall have the
definitions contained in this Section 1:
1.01 AGREEMENT - is this PacifiCare IPA Commercial Services
Agreement, dated as hereinabove stated, including all attachments, addenda and
amendments hereto.
1.02 CAPITATION PAYMENTS - are payments made to IPA by PacifiCare on
a prepaid basis, as set forth in Attachment C, incorporated in full herein by
reference, for the Medical Services to be provided under this Agreement.
1.03 CATASTROPHIC CASE - is any single medical condition, including
complications arising from such medical condition, where the total cost of
Health Care Services to treat such condition and/or complications is
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expected to exceed [ ** ] per year per Subscriber, regardless of payment
source.
1.04 CONFORMANCE REQUEST - is a written request made by PacifiCare
to IPA to correct the performance of an IPA physician or Specialist Physician to
conform to the provisions of this Agreement.
1.05 COPAYMENTS - are charges pursuant to the PacifiCare Health Plan
which may be charged to the Subscriber by the IPA at the time of provision of
Medical Services which are in addition to the Capitation Payments paid to IPA by
PacifiCare.
1.06 COST OF CARE - is the value of Medical Services as defined in
this Agreement and as calculated pursuant to the formula set forth in Attachment
A4, incorporated in full herein by reference.
1.07 ELIGIBILITY LIST - is a list of Subscribers to whom IPA shall
provide or arrange Health Care Services.
1.08 EMERGENCY SERVICES - are those Health Care Services furnished
to a Subscriber for the treatment of acute injury or illness requiring immediate
medical attention and which threaten life or limb, or which involve
uncontrollable bleeding, or loss of consciousness, or which cannot be delayed
without possible serious effects on the health of the Subscriber.
1.09 HEALTH CARE SERVICES - are all authorized services to which
Subscribers are entitled under the PacifiCare Health Plan, including Medical
Services, Hospital Services, and Emergency Services.
1.10 HOSPITALS - are acute care facilities located in the IPA
Service Area, licensed as acute care hospitals under the laws of the State of
California and which have a written agreement with PacifiCare to provide
Hospital Services to Subscribers.
1.11 HOSPITAL DAY - is any twenty-four (24) hour period commencing
at 12:00 a.m., or 12:00 p.m., whichever is used by a Hospital to determine a
Hospital Day, during which a Subscriber receives Hospital Services at a
Hospital.
1.12 HOSPITAL SERVICES - are the Health Care Services described in
Attachment A1, incorporated in full herein by reference, which Hospitals and
other PacifiCare contracting providers shall provide to Subscribers and which
IPA shall arrange or coordinate for Subscribers pursuant to the PacifiCare
Health Plan.
1.13 IPA - is the medical group or independent practice association
identified in the first paragraph of this Agreement and its Member Physicians,
all of whom are licensed to practice medicine or osteopathy in the State of
California at the IPA Facilities.
1.14 IPA FACILITIES - are those facilities whose locations are
listed in Attachment H, attached hereto and incorporated in full herein by
reference, where Medical Services shall be available to Subscribers pursuant to
this Agreement.
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1.15 IPA SERVICE AREA - is the geographical area within a thirty
(30) mile radius of each IPA Facility. Such radius commences with the address of
an IPA Facility and extends for thirty (30) miles over the shortest route using
public streets and highways.
1.16 MEDICAL SERVICES - are the Health Care services summarized in
Attachment A2, incorporated in full herein by reference, which IPA shall arrange
or provide pursuant to the PacifiCare Health Plan.
1.17 MEDICALLY NECESSARY SERVICES - are Health Care Services which
are required by Subscriber as determined by IPA in accordance with accepted
medical and surgical practices and standards in the community and the
professional standards recommended by PacifiCare's Quality Assurance Committee
and Utilization Review Committee.
1.18 MEMBER PHYSICIANS - are physicians, surgeons and osteopaths
licensed to practice medicine in the State of California and who have an
ownership interest in, are employed by, or contract with, IPA.
1.19 OUTSIDE PROVIDERS - are licensed physicians, surgeons,
osteopaths, paramedics, hospitals and other licensed health care facilities
which provide Health Care Services to Subscribers, but which do not have written
agreements with IPA or PacifiCare and which are not Specialist Physicians.
1.20 PACIFICARE HEALTH PLAN - is any one of various prepaid health
services plans operated by PacifiCare as described in the PacifiCare Medical
and Hospital Group Subscriber Agreement and the PacifiCare Medical and
Hospital Individual Conversion Member Agreement and attachments, addenda,
supplements and periodic amendments thereto, copies of which are attached
hereto as Attachment B, incorporated in full herein by reference. For
purposes of this Agreement, the PacifiCare Health Plan shall not include
PacifiCare's Secure Horizons Plan.
1.21 PARTICIPATING MEDICAL GROUP - includes IPA and its Members
Physicians and is any duly licensed doctor of medicine or osteopathy (who may or
may not be a Specialist Physician) that has directly, or as a member of a group
or association of licensed doctors of medicine or osteopathy, entered into a
written agreement with PacifiCare to provide Health Care Services in conjunction
with the PacifiCare Health Plan.
1.22 QUALITY ASSURANCE COMMITTEES - are committees separately
established by IPA and PacifiCare which shall establish, maintain and perform
quality assurance review of Health Care Services provided to Subscribers as
reasonably required by PacifiCare, the California Department of Corporations,
the Office of Qualification and Compliance, the United States Department of
Health and Human Services or any other governmental agencies with regulatory or
enforcement jurisdiction over PacifiCare or this Agreement.
1.23 REFERRALS - are recommended directions of Subscribers from IPA
to physicians, including Specialist Physicians, Outside Providers who are
physicians and/or consultant physicians, or providers of ancillary services such
as lab, x-ray and physical therapy, EKG, EEG, health education, medical social
service, home health care, mental health and acute alcohol and drug abuse
services, for the purpose of obtaining Health Care Services.
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1.24 SPECIALIST PHYSICIANS - are physicians who have written
agreements with IPA to provide Health Care Services to Subscribers on a Referral
basis and who do provide such Health Care Services at offices or facilities
which are not IPA Facilities.
1.25 SUBSCRIBER - is an individual who is enrolled in a PacifiCare
Health Plan, who meets all the eligibility requirements for membership in such
plan, who has designated IPA as his or her primary care coordinator and for whom
all applicable Subscriber Premiums billed by PacifiCare. For the purpose of this
Agreement, Subscriber shall include all eligible dependents of the individual
named by PacifiCare for coverage under a PacifiCare Health Plan.
1.26 SURCHARGES - are additional fees which are not disclosed to
Subscriber for Health Care Services and which are not allowable Copayments.
1.27 UTILIZATION REVIEW COMMITTEE - is an IPA committee of at least
three (3) Member Physicians which is established and maintained, in accordance
with the provisions of Section 3.13 herein, to develop a utilization control
program outlining procedures for the efficient use of resources, consistent with
state and federal law, for the rendition of Health Care Services. The
Utilization Review Committee shall review elective Referrals and hospital
admissions on a concurrent and prospective basis and Emergency Services and
hospital admissions on a retrospective basis.
2. RELATIONSHIP OF PARTIES
2.01 IPA PARTICIPATION - The execution of this Agreement shall
qualify IPA to participate in the provision or arrangement of Health Care
Services to Subscribers pursuant to the terms of the PacifiCare Health Plan, as
amended from time to time. PacifiCare shall notify IPA of any material
amendments to the PacifiCare Health Plan, which amendments shall become
effective upon thirty (30) days written notice by PacifiCare to IPA provided IPA
has not given written objection to be bound by such amendments to PacifiCare
within the thirty (30) day period after notice is given. IPA's approval shall
not be unreasonably withheld. If IPA does provide PacifiCare written objection
to be bound by such amendments within the thirty (30) day period, such
amendments to the PacifiCare Health Plan shall have no force or effect on IPA.
2.02 LIABILITY FOR OBLIGATIONS - Notwithstanding any other section
or provision of this Agreement, nothing contained herein shall cause either
party to be liable or responsible for any debt, liability, or obligation of the
other party or any third party, unless such liability or responsibility is
expressly assumed by the party sought to be charged therewith. Each party shall
be solely responsible for and shall indemnify and hold the other party harmless
against any obligation for the payment of wages, salaries or other compensation
(including all state, federal and local taxes and mandatory employee benefits),
insurance and voluntary employment-related or other contractual or fringe
benefits as may be due or payable by the party to or on behalf of such party's
employees, agents and representatives.
2.03 INDEPENDENT CONTRACTOR - The relationship between PacifiCare
and IPA is an independent contractor relationship. Neither IPA nor its employees
or agents are employees or agents of PacifiCare and neither
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PacifiCare nor any employee or agent of PacifiCare is a member, partner,
employee or agent of IPA. All medical decisions are rendered solely by IPA and
not by PacifiCare. IPA is solely responsible for all Health Care Services
provided or arranged by IPA for Subscribers. None of the provisions of this
Agreement shall be construed to create a relationship of agency, representation,
joint venture, ownership, control or employment between the parties other than
that of independent parties contracting for the purposes of effectuating this
Agreement.
2.04 DUTY TO DEFEND AND INDEMNIFY - To the extent not covered by
insurance maintained by PacifiCare, whether because of liability in excess of
the policy limits or because of the occurrence of a non-insured event, IPA shall
defend, indemnify and hold harmless PacifiCare from and against any claim, loss,
damage, cost, expense or liability arising out of or related to the performance
or nonperformance by IPA, its Specialist Physicians or employees of any Medical
Services to be performed or arranged by IPA under this Agreement. It is
understood and agreed by PacifiCare that the foregoing indemnification
obligation is in no way whatsoever intended to reduce or eliminate any insurance
coverage maintained by IPA and that PacifiCare shall be entitled to
indemnification from IPA only for claims, losses, damages, costs, expenses or
liabilities in excess of the applicable insurance policy limits or arising from
uninsured events or occurrences.
To the extent not covered by insurance maintained by IPA, whether
because of liability in excess of the policy limits or because of the occurrence
of a non-insured event, PacifiCare shall defend, indemnify and hold harmless IPA
from and against any claim, loss, damage, cost, expense or liability arising out
of or related to the performance or nonperformance of PacifiCare, its employees
or agents of any service to be performed or provided by PacifiCare under this
Agreement. It is understood and agreed by IPA that the foregoing indemnification
obligation is in no way whatsoever intended to reduce or eliminate any insurance
coverage maintained by PacifiCare and that IPA shall be entitled to
indemnification from PacifiCare only for claims, losses, damages, costs,
expenses or liabilities in excess of the applicable insurance policy limits or
arising from uninsured events or occurrences.
3. DUTIES OF IPA
3.01 IPA RESPONSIBILITIES - IPA agrees to arrange for or provide
Health Care Services twenty-four (24) hours a day in coordination with
PacifiCare for each Subscriber who has designated IPA as his or her
Participating Medical Group. IPA shall be financially responsible for all
Medical Services provided to Subscribers for whom IPA should receive a monthly
Capitation Payment from PacifiCare based upon the PacifiCare provided
Eligibility List. IPA shall be responsible for determining whether Subscribers
are eligible for Health Care Services on the basis of the most current
Eligibility List supplied to IPA by PacifiCare.
3.02 STANDARDS - All Health Care Services arranged for or provided
by IPA and its Member Physicians shall be provided by professional personnel and
at physical facilities according to generally accepted standards of medical
practice and management in the community. IPA further agrees to provide or
arrange for Referrals to consultants and Specialist Physicians as are necessary,
appropriate, and in accordance with generally accepted standards of medical
practice in the community in compliance with the
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standards developed by PacifiCare's Quality Assurance Committee. IPA agrees to
maintain and demonstrate to PacifiCare upon request, throughout the term of this
Agreement, compliance with the following:
3.02.01 IPA shall ensure that its Member Physicians and
Specialist Physicians maintain licensure under the laws of the State of
California. IPA shall immediately notify PacifiCare in writing should IPA learn
of the loss or suspension of licensure of any of its Member Physicians.
3.02.02 IPA agrees to provide continuing education programs
for its Member Physicians and Specialist Physicians in accordance with the
standards established by the California Medical Association for continuing
education. The content and delivery of such continuing education programs shall
be in the discretion and judgment of IPA, in order to maintain high standards
for the delivery of Health Care Services pursuant to this Agreement. IPA further
agrees to gather, correlate, and distribute to its Member Physicians and
Specialist Physicians, information regarding professional medical activities and
developments which IPA believes may be of assistance in providing Health Care
Services pursuant to this Agreement.
3.02.03 Reasonable evidence that all nurses and other
ancillary and paramedical personnel who are employed by and contract with IPA or
Specialist Physicians are properly credentialed to practice in the State of
California.
3.03 INSURANCE - IPA shall maintain professional liability insurance
and general liability insurance in the minimum amounts of One Million Dollars
($1,000,000) per person, Three Million Dollars ($3,000,000) per occurrence
coverage, and Three Million Dollars ($3,000,000) combined single limits
coverage, for its Member Physicians providing Health Care Services to
Subscribers on behalf of IPA. In the event IPA procures a claims made policy as
distinguished from an occurrence policy, IPA shall procure and maintain prior to
termination of such insurance, continuing "tail" coverage, unless successor
policy coverage provides such "tail" protection. IPA shall immediately notify
PacifiCare of any material changes in insurance coverage and shall provide a
certificate of such insurance coverage to PacifiCare. In the event IPA contracts
with independent contractor physicians and Specialist Physicians to provide
Health Care Services under this Agreement, IPA will require such independent
contractor physicians and Specialist Physicians and their agents to maintain
professional liability insurance and general liability insurance in the minimum
amounts as is usual and customary in the community.
3.04 REFERRALS - IPA shall refer Subscribers in need of specialty
care services only with the approval of the IPA Utilization Review Committee.
However, in the event that Emergency Services are required, IPA shall comply
with Section 3.05 below.
3.05 HOSPITAL ADMISSIONS - Whenever IPA determines that a Subscriber
on IPA's Eligibility List requires Hospital Services that are not Emergency
Services, IPA shall arrange for such Hospital admissions and outpatient
surgeries through the IPA's Utilization Review Committee and its developed
utilization review program. IPA and its Member Physicians shall not serve as
admitting physicians for any Subscriber without such prior approval except in
the event that Emergency Services are required. If IPA or a Member Physician
admits a Subscriber to a Hospital for Emergency Services,
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IPA shall notify PacifiCare of such admission within the time frames as required
in the PacifiCare Provider Policies and Procedures Manual, attached hereto as
Attachment D and incorporated in full herein by reference. Admissions for
Emergency Services shall be made to hospitals contracting with PacifiCare, if
possible.
3.06 ELIGIBILITY LIST - IPA shall accept as patients those
Subscribers who are on IPA's Eligibility List provided by PacifiCare to IPA.
Member Physicians and IPA shall be entitled to rely on the most current provided
list until a new list has been provided to IPA.
3.07 COLLECTION OF CHARGES FROM SUBSCRIBERS - IPA shall collect
applicable Copayments from Subscribers upon the rendition of Medical Services to
Subscribers pursuant to the PacifiCare Health Plan. With the exception of
Copayments and charges for non-covered services delivered on a fee-for-service
basis to Subscribers, IPA shall in no event, including, without limitation,
non-payment by PacifiCare, insolvency of PacifiCare, or breach of the Agreement,
bill, charge, collect and deposit, or attempt to bill, charge, collect or
receive any form of payment, from any Subscriber for Medical Services provided
pursuant to this Agreement and for which Subscriber is entitled under the
PacifiCare Health Plan in effect for such Subscriber.
IPA shall not maintain any action at law or equity against a
Subscriber to collect sums owed by PacifiCare to IPA. Upon notice of any such
charge, PacifiCare may terminate this Agreement consistent with the provisions
contained in Section 7.01.02 and take all other appropriate action consistent
with the terms of this Agreement to eliminate such charges, including, without
limitation, requiring IPA and Specialist Physicians to return all sums collected
as Surcharges from Subscribers or their representatives. Nothing in this
Agreement, however, shall be construed to prevent IPA from providing non-covered
Medical Services on a usual and customary fee-for-service basis to Subscribers.
IPA's obligations regarding the collection of charges from Subscribers
shall survive the termination of this Agreement with respect to Health Care
Services provided during the term of the Agreement without regard to cause of
termination of this Agreement. Except as provided elsewhere herein, these
obligations shall not apply to services provided after the Agreement has been
terminated and the phase-out period has expired pursuant to Section 3.09, if
applicable.
3.08 COLLECTION OF CHARGES FROM THIRD PARTIES - IPA and Member
Physicians accept payment from PacifiCare (plus applicable Copayments) for
Medical Services as provided herein as full payment for such Medical Services;
provided however, in the event the Subscriber is entitled to payment from
another third party or for payment for a Workers' Compensation claim, or from
other primary insurance coverage maintained by Subscriber, IPA and Member
Physicians shall make no demand upon PacifiCare for reimbursement under the
Individual Subscriber Stop Loss Program as specified in Attachment A3 hereto
until all primary sources of payment have been pursued and it is determined that
full payment cannot be obtained within ten (10) months from the date of the
provision of Medical Services.
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For purposes of accomplishing the intent of this subsection,
PacifiCare hereby assigns to IPA for collection, any claims or demands against
third parties for amounts due for Medical Services provided by IPA pursuant to
this Agreement, subject to the following conditions:
3.08.01 IPA shall utilize lien forms which are provided by
PacifiCare in the PacifiCare Policies and Procedures Manual or which have been
approved in advance by PacifiCare. IPA shall notify PacifiCare each time it
pursues and each time it obtains a signed lien from a Subscriber.
3.08.02 IPA shall not commence any legal or equitable action
against a third party without obtaining the prior written consent of PacifiCare.
It is agreed that collection or demand letters consistent with the PacifiCare
Provider Policies and Procedures Manual shall not constitute the commencement of
legal or equitable action. Under no circumstances shall IPA commence any legal
action against a Subscriber to obtain payment for Health Care Services.
3.08.03 IPA shall defend, indemnify and hold PacifiCare
harmless for all actions by IPA pursuant to this Section 3.08.
3.08.04 IPA shall perform such collection activities
consistent with the procedures set forth in the PacifiCare Provider Policies and
Procedures Manual.
3.08.05 PacifiCare may rescind such assignment in total or on
a claim-by-claim basis by providing written notice of rescission to IPA.
In the event IPA receives payment from a third party, a
workers' compensation carrier or a primary insurer after receipt of payment
from PacifiCare, IPA shall reimburse PacifiCare to the extent that the
combined amounts received from all payors exceeds [ ** ] of IPA's usual and
customary fee-for-service charges.
3.09 DUTIES OF IPA UPON TERMINATION DURING PHASE-OUT PERIOD - Should
this Agreement be terminated by IPA pursuant to Section 7.01.01(a) or Section
7.01.01(b), IPA shall be released of its obligation to continue to provide or
arrange for Health Care Services to Subscribers during the phase-out period as
stated in this Section 3.09. If this Agreement is terminated for any other
reason by either party or if this Agreement terminates at the end of the Initial
Term or any renewal term, IPA shall not be released of its obligation to
continue to provide or arrange for Health Care Services to Subscribers during
the phase-out period, which phase-out period shall end on the earlier of:
3.09.01 Twelve (12) months from the effective date of
termination of this Agreement, or
3.09.02 The date PacifiCare has secured the transfer of
Subscribers to another medical group, individual practice association, or
physician for further treatment, and has notified IPA of such transfer in
writing.
Compensation during the phase-out period shall be as otherwise
specified in this Agreement for the provision of Medical Services until such a
time that IPA's enrollment falls below [ ** ] of the
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enrollment on the effective date of termination, or [ ** ], whichever is
greater. Effective the first day of the month in which enrollment falls
below the above mentioned levels, the payment provisions shall convert to
[ ** ] of fee-for-service rates and all elective admissions and outpatient
surgeries shall be coordinated with PacifiCare on a prior authorization basis.
3.10 CONTINUING CARE RESPONSIBILITIES - In the event of
termination of this Agreement and the expiration of IPA's duty to provide or
arrange Health Care Services during the phase-out period pursuant to Section
3.09, if applicable, IPA and Member Physicians shall continue to provide or
arrange for Health Care Services to Subscribers until the effective date of
transfer of such Subscribers to another Participating Medical Provider for
further treatment and written notice of such transfer has been provided by
PacifiCare to IPA. If a Subscriber's care cannot be transferred for the
reason of Subscriber hospitalization, continuity of care, or other legally
required medical treatment reasons, IPA shall continue to provide or arrange
for treatment for the Subscriber until PacifiCare has made provision for the
transfer of such Subscriber to another Participating Medical Provider for
further treatment and has notified IPA of such transfer in writing. The
payment provisions for any continued treatment after expiration of the
phase-out period shall be the lesser [ ** ] of the usual and customary fees
of the treating physician or the Cost of Care as set out in Attachment A4,
attached hereto and incorporated in full herein by reference.
Notwithstanding the above or any other provisions to the
contrary, IPA agrees that in the event PacifiCare ceases operations for any
reason, including insolvency, IPA shall provide or arrange Health Care Services
and shall not bill, charge, collect or receive any form of payment from any
Subscriber or have any recourse against a Subscriber for Health Care Services
provided after PacifiCare ceases operations. This continuation of Health Care
Services obligation shall be for the period for which premium has been paid, but
shall not exceed a period of thirty (30) days, except for those Subscribers who
are hospitalized on an inpatient basis as provided below.
In the event PacifiCare ceases operations or IPA terminates
this Agreement on the basis of PacifiCare's failure to make timely Capitation
Payments, IPA shall continue to arrange for Health Care Services to those
Subscribers who are hospitalized on an inpatient basis at the time PacifiCare
ceases operations or IPA terminates this Agreement until such Subscribers are
discharged from the hospital. IPA may file a claim with PacifiCare for such
services as previously specified in this Section 3.10.
IPA agrees that the provisions of this Section and IPA's and
Member Physicians' obligations herein shall survive the termination of this
Agreement without regard to the cause of termination of the Agreement, and shall
be construed to be for the benefit of the Subscribers.
3.11 STAFF PRIVILEGES - IPA agrees to have its Member Physicians
seek and obtain (and provide evidence of) staff privileges or other appropriate
access to Hospitals where Health Care Services shall be provided to Subscriber
by IPA's Member Physicians.
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3.12 ADMINISTRATIVE GUIDELINES - IPA agrees to perform its duties
under this Agreement in a manner consistent with the reasonable administrative
guidelines provided by PacifiCare, in its Provider Policies and Procedures
Manual, attached hereto as Attachment D and incorporated in full herein by
reference. Subject to Section 12.11 herein, PacifiCare shall notify IPA of any
material amendments to the administrative guidelines, which amendments shall
become effective upon thirty (30) days written notice by PacifiCare to IPA if
IPA has not objected to PacifiCare in writing within the thirty (30) day period
to be bound by such amendments. IPA approval of such amendments shall not be
unreasonably withheld. If IPA does provide PacifiCare reasonable written
objection to be bound by such amendments within the thirty (30) day period, such
amendments to the PacifiCare Health Plan shall have no force or effect on IPA.
3.13 UTILIZATION REVIEW - IPA agrees to participate with
PacifiCare in an ongoing utilization review program to promote efficient use
of resources. The IPA's Utilization Review Committee shall meet as
frequently as necessary but at least weekly. The Utilization Review
Committee shall keep minutes of the committee meetings, a copy of which shall
be made available to PacifiCare upon ten (10) days written notice by
PacifiCare to IPA. IPA and PacifiCare shall jointly implement a utilization
review system whereby IPA shall notify PacifiCare of any hospital admissions.
A member of the PacifiCare medical services staff may participate in IPA's
Utilization Review Committee meetings.
3.14 QUALITY OF HEALTH CARE SERVICES - IPA agrees to assure quality
of Health Care Services by:
3.14.01 Assigning PacifiCare Subscribers only to Member
Physicians or Outside Providers meeting quality health care standards;
3.14.02 Inspecting the premises and facilities of its Member
Physicians on a regular basis and allowing PacifiCare to participate in such
inspections upon ten (10) days written notice.
3.15 QUALITY ASSURANCE AND REMEDIAL PROCEDURES -- IPA shall
cooperate with PacifiCare in the operation of PacifiCare's quality assurance
program and IPA shall perform quality assurance review of Health Care
Services as brought before IPA internally or from PacifiCare's Quality
Assurance Committee. IPA shall establish and maintain a Quality Assurance
Committee which shall meet at least monthly. A member of the PacifiCare
medical services staff may participate in IPA's Quality Assurance Committee
meetings. The IPA Quality Assurance Committee shall keep minutes of the
committee meetings, a copy of which shall be made available to PacifiCare
upon ten (10) days written notice by PacifiCare to IPA. The task of the
Quality Assurance Committee may be assumed by the Utilization Review
Committee described in Section 3.13; however, in such event, the Utilization
Review and Quality Assurance Committees must hold separately convened
meetings and the minutes of each meeting must be separately maintained.
IPA shall, at the written request of PacifiCare, make available
one (1) Member Physician from IPA to attend the PacifiCare Quality Assurance
Committee meetings. The intent of this Section is to have at least one Member
Physician from IPA serve for six (6) months on the PacifiCare Quality Assurance
Committee during a three (3) year period. IPA shall develop written procedures
for remedial action whenever, it is determined by
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PacifiCare's Quality Assurance Committee, inappropriate or substandard Health
Care Services have been furnished or Health Care Services that should have been
furnished have not been furnished. Upon request, PacifiCare shall assist IPA in
the formulation of such remedial procedures.
3.16 RECIPROCITY AGREEMENTS - IPA agrees to develop agreements
among PacifiCare's Participating Medical Groups to assure reciprocity of
health care among the Participating Medical Groups for PacifiCare
Subscribers. IPA shall accept non-emergency or specialty Referrals from such
other Participating Medical Groups and such other Participating Medical
Groups shall be required to accept non-emergency or specialty Referrals from
IPA. Payment for the foregoing Referrals shall be no greater than [ ** ] of
IPA's usual and customary fee-for-service rates then in effect as long as
claims for authorized Health Care Services are paid within forty-five (45)
days of the date of initial billing.
3.17 INDIVIDUAL STOP-LOSS PROGRAM - IPA agrees to participate in and
assume the rights and responsibilities of the PacifiCare Stop-Loss Program as
defined in Attachment A3, attached hereto and incorporated in full herein by
reference.
3.18 OTHER CONTRACTUAL COMMITMENTS - IPA represents and assures
PacifiCare that contractual commitments with other HMOs, competitive medical
plans and health related entities do not restrict or impair IPA from performing
its duties under this Agreement.
3.19 DISSEMINATION OF INFORMATION - IPA agrees that PacifiCare may
use IPA's name, address, telephone number, and a listing of IPA's Member
Physicians and Specialist Physicians in any informational material routinely
distributed to Subscribers and for other purposes related to the administration
of the PacifiCare Health Plan as an indication of IPA's willingness to provide
Health Care Services to Subscribers.
Prior to listing or otherwise referencing PacifiCare in any
promotional or advertising brochures, media announcements or other advertising
or marketing material, IPA shall first obtain the prior subjective consent of
PacifiCare.
3.20 WRITTEN AGREEMENTS - IPA shall secure written agreements,
consistent with the terms of this Agreement and in compliance with all state and
federal law, with all Specialist Physicians regularly utilized as a part of
IPA's referral system.
3.21 MEDICAL CARE CRITERIA - IPA shall utilize the criteria for
medical care that is established or approved by PacifiCare's Quality Assurance
Committee as a standard reference in determining appropriate lengths of stay for
hospitalized Subscribers or appropriate utilization patterns for referral to
specialty services.
3.22 NONDISCRIMINATION - IPA represents and assures that Health Care
Services are rendered to Subscribers in the same manner as such services are
provided to IPA's other patients, except as required pursuant to this Agreement.
Subscribers shall not be subject to any discrimination whatsoever by IPA in
regards to access to Health Care Services.
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3.23 ACCOUNTS PAYABLE SYSTEM - IPA agrees to operate its accounts
payable system in a manner which assures that providers of authorized Medical
Services who are Member Physicians and non-Member Physicians receive payment for
Medical Services rendered to Subscribers within forty-five (45) working days of
IPA's receipt of an uncontested claim from such Member Physicians and non-Member
Physicians. IPA shall permit PacifiCare to review that portion of their accounts
payable system which pertains to claims payment for services delivered to
PacifiCare Subscribers. In the event IPA fails to meet the payment timeliness
discussed in this Section 3.23, in additional to exercising any other remedies
it may have under this Agreement, PacifiCare may take actions to assist IPA in
operating its accounts payable system including, but not limited to, assuming
the obligation of paying IPA's Member Physicians and Non-Member Physicians and
charging IPA as administrative fee for performing such services.
3.24 CATASTROPHIC CASE MANAGEMENT - IPA agrees that PacifiCare's
medical director may be involved in the management and coordination of
Catastrophic Cases. IPA will fully assist PacifiCare in providing information
that may be required in determining the need for a transfer of a Subscriber into
PacifiCare's regional centers for the care of Catastrophic Cases including, but
not limited to, prompt notification of known or suspected Catastrophic Cases.
Detailed procedures for Catastrophic Case management will be mutually agreed
upon by the parties based upon IPA's and PacifiCare's determination of the
Subscriber's transferability. Except in unusual circumstances, regional centers
for care of Catastrophic Cases shall be sought within the IPA Service Area and
surrounding area.
3.25 CAPACITY REPORTING - IPA will provide to PacifiCare, at the
earliest possible time, notice of any significant changes in the capacity of IPA
to provide or arrange for the Health Care Services contemplated by this
Agreement (E.G., addition or deletion of Member Physicians or Specialist
Physicians), including a ninety (90) day written notice in the event IPA is
unable to properly service additional Subscribers. IPA shall still be obligated
to provide or arrange for Health Care Services to Subscribers who are with
employer groups whom PacifiCare had agreed to enroll prior to ninety (90) days
from the effective date of the written notice. PacifiCare shall provide IPA,
upon IPA's request, current marketing information within a reasonable period for
purposes of determining IPA capacity.
3.26 REPRESENTATION OF IPA MEMBER PHYSICIANS - IPA agrees to
represent its Member Physicians in matters pertaining to the provision of Health
Care Services under this Agreement, and that it has obtained written consent to
such representation from its Member Physicians.
3.27 PERFORMANCE OF MEMBER PHYSICIANS - IPA agrees: (i) to develop
methods for discussion of performance with its Member Physicians, (ii) to
assure correction of performance of its Member Physicians consistent with the
provisions of this Agreement and state and federal law applicable to the
PacifiCare Health Plan, and (iii) to resolve Conformance Requests.
3.28 WITHDRAWAL OF AN IPA FACILITY - In the event IPA seeks to
withdraw one or more of the IPA Facilities listed in Attachment H from providing
or arranging for Health Care Services to Subscribers under this Agreement, IPA
must notify PacifiCare of such withdrawal in writing at least one hundred and
eighty (180) days prior to the effective withdrawal date; after the effective
date of withdrawal, IPA shall still be responsible to
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provide or arrange for Medical Services to the affected Subscribers at the other
IPA Facilities.
4. DUTIES OF PACIFICARE
4.01 ADMINISTRATION - PacifiCare agrees to perform all necessary
administrative, accounting, enrollment and other functions consistent with the
administration of the PacifiCare Health Plan and this Agreement.
4.02 BENEFIT INFORMATION - PacifiCare agrees to apprise all
Subscribers concerning the type, scope and duration of benefits and services to
which such person is entitled under the PacifiCare Health Plan.
4.03 ASSIST IPA - PacifiCare agrees to assist and cooperate with IPA
in the development and initial implementation of procedures necessary to carry
out the intent of this Agreement.
4.04 ADMINISTRATION OF PAYMENTS - PacifiCare agrees to transmit
Capitation Payments and other payments to IPA in accordance with the terms and
procedures set forth in this Agreement.
4.05 STATISTICAL INFORMATION AND PROVISION OF DATA - PacifiCare
agrees to provide IPA with management information and data reasonably necessary
to carry out the terms and conditions of this Agreement and for the operation of
the PacifiCare Health Plan including semi-monthly Eligibility Lists and monthly
capitation worksheets. Furthermore, PacifiCare shall provide, upon request,
quarterly reports reflecting the utilization of Health Care Services authorized
by IPA.
4.06 SERVICES RENDERED TO INELIGIBLE SUBSCRIBERS - PacifiCare
agrees to reimburse IPA for those Medical Services set forth in Attachment A2
which were provided to an ineligible Subscriber if the Subscriber was listed
as eligible on the most current Eligibility List provided to IPA by
PacifiCare. If PacifiCare is in receipt of a billing to such ineligible
Subscriber from IPA and proof of having sent the Subscriber or the
Subscriber's legal guardian two (2) bills no less than thirty (30) days
apart, PacifiCare will reimburse IPA [ ** ] of IPA's ordinary and customary
fee-for-service rates then in effect for those Medical Services rendered but
no greater than [ ** ] of the still uncollected balance. If subsequent to
payment by PacifiCare, IPA receives any payment from another source for the
services, then IPA shall reimburse PacifiCare up to the amount previously
received from PacifiCare. If a Subscriber becomes ineligible for benefits
under the PacifiCare Health Plan after IPA or Member Physicians have begun
treatment of the Subscriber (provided the Subscriber is not hospitalized at
the time of becoming ineligible), IPA shall be entitled to make all
subsequent charges for its services directly to the Subscriber. If the
Subscriber is hospitalized at the time of becoming ineligible, IPA shall be
entitled to make charges directly to the Subscriber only for services
provided after the Subscriber is discharged from such hospital treatment.
4.07 DISSEMINATION OF INFORMATION - Except as provided above in
Section 3.19, prior to listing or otherwise referencing IPA in any promotional
or advertising brochures, media announcements or other advertising marketing
material, PacifiCare shall first obtain the prior consent of IPA, such consent
not to be unreasonably withheld.
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5. COMPENSATION
5.01 CAPITATION PAYMENTS - PacifiCare shall make monthly Capitation
Payments to IPA as outlined in Attachment C, due and payable on the tenth (10th)
day of the month for the current month's Medical Services.
5.02 ADDITIONAL PAYMENTS - PacifiCare and IPA agree to provide
payments to each other, if applicable, in accordance with the terms of the
Hospital Control Program, Individual Stop-Loss Program, Pharmacy Control Program
and AIDS Stop-Loss Program, as specified in Attachments A5, A3, E and F,
respectively, incorporated in full herein by reference.
5.03 ADEQUACY OF COMPENSATION - IPA shall accept the payments
specified in this Agreement as payment in full for all Medical Services provided
Subscribers during each month for which such payments are to be received by IPA.
In the event PacifiCare fails to make any payments to IPA as provided herein,
whether from PacifiCare's insolvency or otherwise, Subscribers shall not be
liable to IPA or its Member Physicians under any circumstances for Health Care
Services. Surcharges for Health Care Services provided or arranged by IPA or
Member Physicians are prohibited; upon notice of the existence of any such
Surcharge, PacifiCare will take appropriate action consistent with the terms of
this Agreement to eliminate such Surcharges.
6. TERM OF AGREEMENT
6.01 TERM - The term of this Agreement shall be three (3) years
commencing January 1. 1990, and shall automatically renew on each successive
January 1st thereafter until terminated by either party. The parties
acknowledge and understand that a three (3) year term will be in effect on
each anniversary of the date of commencement of this agreement unless
terminated pursuant to Section 7. Either party may terminate this Agreement
without cause by providing written notice of termination to the other party
by registered or certified mail at lease one hundred twenty (120) days before
the expiration of the term then in effect. If notice of termination has been
served, then the effective date of termination of this Agreement shall be
midnight on the last day of the term then in effect. Subject to Paragraph
3.09 hereunder, in no case shall this Agreement terminate before the annual
renewal date of employers under contract with PacifiCare, whose PacifiCare
Subscribers receive their Medical Services through IPA.
7. TERMINATION
7.01 TERMINATION OF AGREEMENT WITH MATERIAL CAUSE - Either party, as
appropriate, may terminate this Agreement for material cause as set forth in
Sections 7.01.01 or 7.01.02 hereof subject to the notice and cure periods set
out in Section 7.02 hereof. In the event either party shall desire to so
terminate this Agreement, the terminating party shall give written notice of
termination stating the actions of the other party constituting material cause
for termination.
7.01.01 CAUSE FOR TERMINATION OF AGREEMENT BY IPA - The
following shall constitute cause for termination of this Agreement by IPA:
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a. NON-PAYMENT - Failure by PacifiCare to pay Capitation
Payments due to IPA hereunder within fifteen (15) days of the Capitation Payment
due date or failure by PacifiCare to make any other payments due to IPA
hereunder within forty-five (45) days of any such payment's due date.
b. REVOCATION OF CERTIFICATION OR LICENSE - Revocation by
the State of California or the United States Government of any certification or
license of PacifiCare necessary for the performance of this Agreement.
c. BREACH OF MATERIAL TERM AND FAILURE TO CURE -
PacifiCare's breach of any material term, covenant, or condition and subsequent
failure to cure said breach as provided in Section 7.02 hereof. The written
notice of termination shall contain specific reference as to the breaches which
have caused such failure.
7.01.02 CAUSE FOR TERMINATION OF AGREEMENT BY PACIFICARE -
The following shall constitute cause for termination of this Agreement by
PacifiCare:
a. FINANCIAL FAILURE OF IPA - PacifiCare's reasonable
determination of IPA's anticipated inability to provide or arrange for Health
Care Services as described herein due to the likelihood of IPA's lack of
financial resources, other than due to PacifiCare's non-payment of amounts due
IPA hereunder. IPA shall have the opportunity to dispute such determination by
PacifiCare by providing reasonable evidence and assurances of financial
stability and capacity to perform under this Agreement.
b. FAILURE TO PROVIDE QUALITY MEDICAL SERVICES - Failure to
maintain the standards set forth in Section 3.02 of this Agreement and such
failure is not corrected consistent with the provisions of Section 7.02. The
written notice of termination shall contain specific reference to the breaches
which have caused such failure. PacifiCare reserves the right to withdraw from
IPA all or part of its Subscribers if the Health Care Services are not being
properly provided or arranged for pursuant to this Agreement and such
deficiencies are not corrected consistent with the provisions of Section 7.02 of
this Agreement.
c. FAILURE TO RENDER SERVICES - Failure to provide or
arrange Health Care Services to Subscribers as provided herein. The written
notice of termination shall contain specific reference as to the breaches which
have caused such failure.
d. BREACH OF MATERIAL TERM AND FAILURE TO CURE - IPA's
breach of any material term, covenant or condition of the Agreement and
subsequent failure to cure said breach as provided in Section 7.02 of this
Agreement. The written notice of termination shall contain specific reference
to the breaches which have caused such failure.
7.02 CURING PERIOD AND TERMINATION DATE - A party receiving written
notice of termination shall have thirty (30) days from the receipt of such
notice to cure or otherwise eliminate the circumstances constituting cause for
termination. If such party fails to cure or eliminate the circumstances
constituting cause for termination within a thirty (30) day period, this
Agreement shall terminate at the end of the 30 day period, such expiration date
being sometimes called herein the "effective date of termination."
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7.03 REPAYMENT UPON TERMINATION - Within one hundred eighty (180)
days of the effective date of termination of this Agreement as provided herein,
an accounting shall be made by PacifiCare of monies due and owing either party
and payment shall be forthcoming by the appropriate party to settle such balance
within thirty (30) days of such accounting. Either party may request an
independent audit of such PacifiCare accounting by a mutually acceptable
certified public accountant and such audit shall be equally paid for by both
parties. The parties agree to abide by the findings of such independent audit
and appropriate payment by the appropriate party, if any, shall be made within
thirty (30) days of such independent audit.
7.04 TERMINATION NOT AN EXCLUSIVE REMEDY - Any termination by either
party pursuant to this Section 7 is not meant as an exclusive remedy and such
terminating party may seek whatever action in law or equity as may be necessary
to enforce its rights under this Agreement.
8. RECORDS, DATA COLLECTION, CITATIONS AND RIGHT TO INSPECT RECORDS.
8.01 RECORDS - IPA shall maintain and provide such records and
information as reasonably necessary for PacifiCare to properly administer the
PacifiCare Health Plan consistent with state and federal law. Among the reports
which IPA shall provide to PacifiCare are completed reports within fifteen (15)
days following the end of each month containing an itemized list of all Medical
Services, other than Hospital Services, provided to or arranged for Subscribers
during such month. This report shall be as described in the PacifiCare
Provider Policies and Procedures Manual. The duties imposed by this section 8.01
shall not terminate upon termination of this Agreement, whether by rescission or
otherwise and shall be in effect until the completion of the phase-out period.
The cost for preparation and submission of this data shall be borne solely by
IPA.
8.02 CONFIDENTIALITY OF RECORDS - IPA shall safeguard the
confidentiality of Subscriber health records and treatment in accordance with
all state and federal laws, including, without limitation, the Privacy Act, as
implemented by 45 Code of Federal Regulations 5(b) and the regulations
promulgated thereunder.
8.03 DATA COLLECTION - IPA shall maintain and provide to PacifiCare,
on a timely basis, the utilization data more particularly described in the
PacifiCare Provider Policies and Procedures Manual for the effective management
of PacifiCare's health care delivery system.
8.04 RIGHT TO INSPECT - IPA shall provide access at reasonable times
upon demand by PacifiCare, or any governmental regulatory agency responsible for
the administration of health care service plans, to inspect facilities,
equipment, books and records relating to the performance of this Agreement,
including, without limitation, Subscriber patient records, financial records
pertaining to the cost of operations and income received by IPA for Health Care
Services rendered to Subscribers.
8.05 FINANCIAL STATEMENTS - IPA shall provide to PacifiCare within
forty five (45) days of the end of each calendar quarter copies of its quarterly
financial statements, which shall include a balance sheet, statement of income
and a statement of cash flow (the "financial statements") prepared in accordance
with generally-accepted accounting principles. Such
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quarterly statements shall be certified by the chief financial officer of IPA as
accurately reflecting the financial condition of IPA for the period indicated.
In addition, IPA shall provide to PacifiCare, within forty five (45) days of the
end of each calendar year, copies of its audited annual financial statements.
8.06 TRANSFER OF MEDICAL RECORDS UPON TERMINATION - Upon the
effective date of termination of this Agreement and, if applicable, upon the
expiration of the phase-out period set forth in Section 3.09, at PacifiCare's
request, IPA shall copy all active PacifiCare Subscriber patient medical files
in IPA's possession and forward such files to another provider of Health Care
Services designated by PacifiCare, provided such copying and forwarding is not
otherwise objected to by Subscribers. The copies of such medical files may be in
summary form. The cost of copying the patient medical files shall be borne by
IPA. IPA shall cooperate with PacifiCare in maintaining the confidentiality of
such confidential and proprietary information and trade secrets at all times.
9. UTILIZATION OF IPA
9.01 UTILIZATION OF IPA BY PACIFICARE - Nothing in this Agreement
shall be construed to require PacifiCare to assign any minimum or maximum number
of Subscribers to IPA, nor to require PacifiCare to utilize the Health Care
Services of IPA for any or all Subscribers in the IPA Service Area.
10. APPLICABLE LAW AND DISPUTE RESOLUTION
10.01 APPLICABLE LAW - This Agreement and the rights and obligations
of the parties hereunder shall be construed, interpreted, and enforced in
accordance with, and governed by, the laws of the State of California and the
United States and all the regulations promulgated pursuant thereto. Any
provisions required to be in this Agreement by any federal or state law or
regulations shall bind PacifiCare and IPA whether or not expressly provided in
this Agreement.
10.02 DISPUTES BETWEEN IPA AND SUBSCRIBER NOT GOVERNED BY AGREEMENT -
Any controversies or claims between IPA and Subscriber arising out of IPA's
performance of this Agreement are not governed by this Agreement. IPA and
Subscriber may seek any appropriate legal action to resolve such controversy or
claim deemed necessary.
In the event of dispute between IPA and a Subscriber and upon mutual
agreement between IPA and such Subscriber, PacifiCare agrees to make available
the Subscriber Grievance Resolution Process described in the PacifiCare Health
Plan Agreement for resolution of such dispute. In such instance, the decision of
the PacifiCare Subscriber Satisfaction Committee and Board of Directors shall
not be binding upon the parties except upon agreement between IPA and the
Subscriber. Nor shall such grievance be subject to binding arbitration except
upon agreement between the parties. Should IPA and Subscriber fail to resolve
the grievance, IPA and Subscriber may seek any appropriate legal action deemed
necessary by such party.
10.03 PAYMENT DISPUTES INVOLVING IPA - In the event IPA fails to make
a payment to a Specialist Physician within sixty (60) days of the submission of
the bill by Specialist Physician to IPA and the validity and
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the amount of the submitted bill are undisputed, PacifiCare may, in its sole and
absolute discretion, elect to pay the Specialist Physician on behalf of IPA and
deduct such payment from IPA's next monthly Capitation Payment.
Should a dispute concerning a claim for payment for Medical Services
rendered to Subscribers arise between IPA and a Specialist Physician who is a
Participating Medical Provider, IPA or the Specialist Physician, may submit a
written complaint to PacifiCare. The complaint shall describe the disputed claim
and the basis for the amounts claimed and include the applicable written
agreement between IPA and the Specialist Physician. PacifiCare shall investigate
the complaint and make a determination of the whether or not the claim is valid
and should be paid. In the event PacifiCare determines that IPA owes any amount
to Specialist Physician, IPA shall make such payment within thirty (30) days of
PacifiCare's determination. If IPA fails to pay the amount due within this
thirty (30) day period, PacifiCare may deduct the amount owed from IPA's next
monthly capitation payment. This amount will temporarily be placed in an
account (the "Claims Dispute Account") which shall be established by PacifiCare.
If IPA or Specialist Physician wishes to contest PacifiCare's determination,
either may do so by initiating an action for binding arbitration and notifying
PacifiCare of such initiation within thirty (30) days of PacifiCare's
determination. If IPA or Specialist Physician fails to request arbitration
within thirty (30) days or if the arbitration affirms PacifiCare's decision that
amounts are owing from IPA to Specialist Physician, PacifiCare shall release
from the Claims Dispute Account the amount owing to Specialist. If the
arbitration results in a decision that no money or a lesser amount than was
determined by PacifiCare is owing to Specialist Physician, PacifiCare shall
release to IPA the amounts which were erroneously withheld from IPA's Capitation
Payment.
In the event this Agreement has been terminated prior to PacifiCare's
investigation and written determination and PacifiCare's investigation results
in a determination that IPA owes money to Specialist Physician, PacifiCare may,
in its sole and absolute discretion, elect to pay Specialist Physician on behalf
of IPA and seek reimbursement from IPA through arbitration as described in
Section 10.01.
11. NOTICE
11.01 NOTICE - Any notice required to be given hereunder shall be in
writing and either delivered personally or sent by registered or certified mail,
return receipt requested, to either PacifiCare or IPA at the addresses listed
below, or at such other addresses as either PacifiCare or IPA may hereafter
designate to the other:
To PacifiCare: PacifiCare of California
P.O. Box 6006
Cypress, California 90630-0006
Attention: President
To IPA: Santa Ana/Tustin Physicians Group
14642 Newport Avenue, #410
Tustin, CA 92680
Attention: Administration
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<PAGE>
All notices shall be deemed given on the date of delivery if delivered
personally or on the day three (3) business days after such notice is deposited
in the United States mails, addressed and sent as provided above.
12. MISCELLANEOUS
12.01 PROTECTION OF SUBSCRIBER - IPA may not impose any limitations
on the acceptance of Subscribers for care or treatment that it does not impose
on other patients of the IPA. Neither PacifiCare, IPA nor Hospitals may request,
demand, require or seek directly or indirectly the transfer, discharge, or
removal of any Subscriber for reasons of Subscriber's need for, or utilization
of, Medically Necessary Medical or Hospital Services, except in accordance with
the procedures established for such action. IPA shall not refuse or fail to
provide Medically Necessary Health Care Services to any Subscriber.
Procedures for removal, discharge or transfer of Subscribers shall be mutually
agreed upon between IPA and PacifiCare consistent with the PacifiCare Health
Plan.
12.02 OTHER AGREEMENTS - Nothing in this Agreement shall prevent
PacifiCare and IPA from contracting with each other for provision of services
not covered by this Agreement.
12.03 GOVERNING LAW - PacifiCare, IPA and this Agreement are subject
to the laws of the State of California and the United States of America,
specifically: the California Knox-Keene Act and the regulations promulgated
thereunder by the California Department of Corporations, and the Health
Maintenance Organization Act of 1973 and the regulations promulgated thereunder
by the United States Department of Health and Human Services.
IPA shall maintain such records and provide such information to
PacifiCare or the California Commissioner of Corporations as may be necessary
for the compliance by PacifiCare with the provisions of the above Acts and
regulations, and such records shall be retained by IPA for at least two (2)
years following the provision of Health Care Services. This obligation is not
terminated upon termination of this Agreement, whether by rescission or
otherwise.
Any provisions required to be in this Agreement by any of the above
Acts and regulations shall bind PacifiCare and IPA whether or not expressly
provided in this Agreement.
12.04 REFUSAL BY PHYSICIAN - If IPA or any of its Member Physicians
refuses to provide or arrange Health Care Services to a Subscriber assigned to
IPA for any reason whatsoever, it shall remain the responsibility of IPA to
assure that such Subscriber receives Health Care Services consistent with the
terms of this Agreement.
12.05 CONFIDENTIAL AND PROPRIETARY INFORMATION
12.05.01 INFORMATION CONFIDENTIAL AND PROPRIETARY TO
PACIFICARE - IPA acknowledges that all PacifiCare Subscribers participating in a
PacifiCare Health Plan individually or through an employer group and receiving
Health Care Services shall be Subscribers of PacifiCare. Subscriber and employer
group information shall include, without limitation, the names, addresses and
telephone numbers of all Subscribers, the names,
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<PAGE>
addresses and telephone numbers of employer group employees responsible for
health benefits and the officers and directors of such employer groups; member,
employer and administrative service manuals and all forms related thereto; and
records, files (other than patient medical files) and lists contained in IPA and
PacifiCare files.
IPA acknowledges that all such information is confidential and
proprietary to PacifiCare and that such Subscriber and employer group
information contains valuable trade secrets of PacifiCare.
All PacifiCare Subscriber agreements and the information
contained therein regarding PacifiCare, IPA, employer groups, Subscribers or the
financial arrangements between a hospital, IPA and PacifiCare is confidential
and proprietary to PacifiCare.
IPA shall maintain all Subscriber information and other
PacifiCare trade secret information confidential. IPA shall not disclose or use
any confidential and proprietary information for its own benefit or gain either
during the term of this Agreement or after the date of termination of this
Agreement; provided, however, that IPA may use the name, address and telephone
number or other medical information of a PacifiCare Subscriber if Medically
Necessary for the proper treatment of such Subscriber or upon express prior
written permission of PacifiCare.
Upon the effective date of termination of this Agreement and,
if applicable, upon the expiration of the phase-out period set forth in Section
3.09, IPA shall provide and return to PacifiCare all confidential and
proprietary information and trade secrets in its possession in a reasonable
manner to be specified by PacifiCare.
12.05.02 INFORMATION CONFIDENTIAL AND PROPRIETARY TO IPA -
IPA shall provide PacifiCare with a written description of all information
proprietary to IPA which is confidential and contains trade secrets of IPA ("IPA
Information"). PacifiCare shall maintain IPA Information confidential.
PacifiCare shall not disclose or use any IPA Information for its own benefit
either during the term of this Agreement or after the effective date of
termination of his Agreement. Upon termination of this Agreement, PacifiCare
shall provide and return to IPA all IPA Information in its possession in a
manner to be specified by IPA. PacifiCare shall cooperate with IPA in
maintaining the confidentiality of IPA Information at all times.
12.05.03 SOLICITATION OF PACIFICARE SUBSCRIBERS OR EMPLOYER
GROUPS - IPA shall not directly or indirectly engage in the practice of
solicitation or the patronage of PacifiCare's Subscribers or employer groups
without PacifiCare's prior written consent. Solicitation shall mean conduct by
an officer, agent, employee or Member Physician of IPA or its assignee or
successor during the Initial Term or any subsequent term of this Agreement and
continuing for a period of one (1) year after the effective date of termination
of this Agreement which may be reasonably interpreted as designed to persuade
PacifiCare Subscribers or employer groups to discontinue their Subscriber or
group agreements with PacifiCare or to continue to receive health care services
from IPA on a fee-for-service basis or to encourage PacifiCare Subscribers or
employer groups to participate in the prepaid health service plan offered by
IPA, or any other prepaid health service plan (the "Solicitation"). The breach
of this Section 12.05.03 during any term of this Agreement shall be grounds for
termination of this Agreement pursuant to
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<PAGE>
Section 7.01.02 of this Agreement. IPA's provision of executive physicals and
provision of Health Care Services pursuant to industrial medicine contracts
shall not be in violation of this Section 12.05.03.
12.06 CONFIDENTIALITY OF THIS AGREEMENT - To the extent reasonably
possible, each party agrees to maintain this Agreement as a confidential
document and not to disclose the Agreement or any of its terms without the
approval of the other party.
12.07 ASSIGNMENT - This Agreement and the rights, interests, and
benefits hereunder shall not be assigned, transferred, pledged, or hypothecated
in any way by IPA or PacifiCare and shall not be subject to execution,
attachment or similar process, nor shall the duties imposed herein be
subcontracted or delegated without the written consent of the other party.
Notwithstanding, PacifiCare may assign, transfer, pledge or hypothecate this
Agreement and its rights, interests and benefits hereunder to any entity which
has at least majority control of PacifiCare or to any entity of which PacifiCare
has at least majority control.
12.08 INVALIDITY OF SECTIONS OF AGREEMENT - The unenforceability or
invalidity of any paragraph or subparagraph of any section or subsection of this
Agreement shall not affect the enforceability and validity of the balance of
this Agreement.
12.09 WITHDRAWAL OF SUBSCRIBERS BY PACIFICARE - PacifiCare reserves
the right to withdraw from IPA all or part of the Subscribers from IPA whose
Health Care Services are not being properly provided or arranged pursuant to
this Agreement. PacifiCare shall provide written notice to IPA of such
withdrawal and the reasons therefore. PacifiCare shall then allow IPA thirty
(30) days from the date of such notice to correct deficiencies. If such
deficiencies are not corrected to PacifiCare's satisfaction within said period,
PacifiCare may withdraw its Subscribers as provided in this Section 12.09 and
remove IPA's name from PacifiCare's marketing materials.
12.10 TRANSFER OF SUBSCRIBERS - PacifiCare and IPA shall exercise
reasonable efforts in discouraging Subscriber transfers except at re-enrollment
periods, or when a Subscriber can show just cause for such transfer and
PacifiCare agrees to such transfer. Nevertheless, PacifiCare may require
transfer of Subscribers assigned to IPA for any reason; or, IPA may request
transfer of Subscribers assigned to it by PacifiCare to other IPAs for cause or
if the capacity of IPA is overburdened so that the provision of Health Care
Services as required by this Agreement is affected.
12.11 CAPTIONS - Captions in this Agreement are descriptive only and
do not affect the intent or interpretation of the Agreement.
12.12 AMENDMENT - This Agreement may be amended or modified only by
mutual written consent of the parties. Notwithstanding the foregoing sentence,
PacifiCare may amend this Agreement upon sixty (60) days written notice to IPA
in order to maintain compliance with applicable federal and state laws. Any such
amendment which affects a legally required duty or responsibility of IPA and has
a material adverse economic effect upon IPA as reasonably demonstrated by IPA to
PacifiCare, shall be subject to the provisions of Section 12.13 below.
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<PAGE>
12.13 MODIFICATIONS OF THIS AGREEMENT AND/OR PACIFICARE PROVIDER
AND PROCEDURES MANUAL AND/OR PACIFICARE HEALTH PLAN - Anything to the contrary
herein notwithstanding, in the event of any material modification of this
Agreement and/or the PacifiCare Provider and Procedures Manual and/or the
PacifiCare Health Plan that (i) affects a material duty or responsibility of
IPA, and (ii) causes a material economic detriment to IPA. IPA and PacifiCare
shall seek to agree to an amendment to this Agreement which satisfactorily
addresses the effect on IPA's material duty or responsibility and reimburses the
material economic detriment caused to IPA. In the event such an agreement cannot
be reached within sixty (60) days after the date PacifiCare gives IPA written
notice of such modification, such modification shall not be effective.
12.15 TERMS; SECTIONS - Unless otherwise indicated, all terms in any
appropriate attachments, addenda and amendments hereto shall have the same
meaning attributed to such terms in the body of this Agreement and references to
section numbers are to the appropriate sections of this Agreement.
12.16 IPA'S AUTHORIZED REPRESENTATIVE - Unless otherwise indicated in
writing to PacifiCare, IPA warrants and authorizes its administrator to act as
its fully authorized representative to represent IPA and Member Physicians in
this Agreement and to receive any and all communications and notices hereunder.
12.17 ATTORNEYS' FEES AND COSTS - If any action at law or suit in
equity is brought to enforce or interpret the provisions of this Agreement or to
collect any monies due hereunder, the prevailing party shall be entitled to
reasonable attorneys' fees and reasonable costs, together with interest thereon
at the highest rate provided by law, in addition to any and all other relief to
which it may otherwise be entitled.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement in
Tustin, California, on 2/14, 1990.
PACIFICARE OF CALIFORNIA
By: /s/ Richard Lipeles
--------------------------------
Title: President
IPA Santa Ana - Tustin
Physicians Group, Inc.
By: /s/ Melvin L. Reich
--------------------------------
Title: President
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<PAGE>
PACIFICARE
SCHEDULE OF ATTACHMENTS
A. A1. Hospital Services
A2. Medical Services
A3. Individual Subscriber Stop Loss Program
A4. Cost of Care
A5. Hospital Control Program
B. PacifiCare Health Plan Subscriber Agreement
C. Capitation Payment Rates and Methodology
D. PacifiCare Provider Policies and Procedures Manual
E. Pharmacy Control Program
F. AIDS Stop Loss Program
G. IPA Facilities
H. Division of Financial Responsibility
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<PAGE>
ATTACHMENT A1
HOSPITAL SERVICES
Hospital Services are initially paid by PacifiCare. The financial
responsibility for Hospital Services is shared between PacifiCare and IPA
pursuant to the Hospital Control Program as set forth in Attachment A5. A
summary of some Hospital Services includes the following:
1. INPATIENT HOSPITAL CARE - Inpatient hospital care, as determined to be
Medically Necessary. Subscriber shall be assigned semi-private units,
unless medical necessity dictates private accommodations. Where the
Subscriber requests private accommodations, not required for medical
purposes, the incremental difference in fee-for-service rates shall be
the responsibility of the Subscriber. A summary of inpatient care
includes:
a. Medical/Surgical Care, Intensive Care, Cardiac Care and other
special care units (including hospital services associated with
non-experimental transplants as defined by the federal Office
of Prepaid Healthcare guidelines);
b. Nursing Services, meals, drugs, medications (excluding
take-home medications), blood transfusions;
c. Medical and Surgical supplies and appliances;
d. Rehabilitation services, such as: inpatient physical,
occupational and speech therapy.
e. Detoxification
2. SKILLED NURSING - Skilled nursing facility care, as determined to be
Medically Necessary. Patients shall be assigned semi-private units,
unless medical necessity dictates private accommodations. Where the
Subscriber requests private accommodations, not required for medical
purposes, the incremental difference in the fee-for-service rates
shall be the responsibility of the Subscriber.
3. HOSPITAL BASED PHYSICIAN SERVICE - All hospital based physician
services where the physician provides the professional component of an
inpatient hospital based service, the hospital outpatient surgery
center service, or a free-standing surgery center service. The charges
of an anesthesiologist are not included as a Hospital Service. (See
paragraph 7 below in this Attachment A1.)
4. TRANSPORTATION EXPENSES - Approved ambulance services provided within
the IPA Service Area for Subscribers. When transfer of a Subscriber
from one facility to another is authorized by IPA or PacifiCare, the
cost of such transfer shall be a Hospital service. The method of
transfer shall be determined by IPA, but IPA shall coordinate all
Subscriber transfers to or from Hospital with designated Hospital
personnel. Also included are paramedic services in emergency cases
in the IPA Service Area.
5. EMERGENCY SERVICES IN THE IPA SERVICE AREA - IPA Service Area
Emergency Services include emergency room charges and associated
emergency room physician and ancillary charges, inpatient medical and
other Health Care Services provided which cannot be delayed until
facilities or physicians of the Hospital or IPA (or
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<PAGE>
alternatives authorized by IPA) can be used without possible serious
effects to the health of the Subscriber. Such services must be
Medically Necessary Emergency Services.
6. HOME HEALTH CARE - As determined to be Medically Necessary, as
mutually agreed to by IPA and PacifiCare, including any required DME
and IV Therapy Services.
7. OUTPATIENT SURGERY - Facility, supply charges and the professional
component of lab and x-ray services normally included with impatient
procedures for outpatient surgery done either at the Hospital or a
free-standing surgery center. Charges for anesthesiology services
rendered during an outpatient surgery are excluded as a Hospital
Service.
8. OTHER HOSPITAL SERVICES
a. Devices surgically implanted during a hospital confinement or
during an outpatient surgery performed at the Hospital
outpatient surgery center or a free-standing surgery center.
b. Appealed Services - Hospital Services denied by a Participating
Medical Group and PacifiCare which are found on appeal or
arbitration through the Subscriber grievance resolution process
to be Hospital Services which the Subscriber was entitled to
have furnished under the Pacificare Health Plan.
c. Chemotherapy Drugs (impatient and outpatient)
d. Inpatient and outpatient dialysis (including professional fees)
e. Other Health Care Services that must be performed in a hospital
or surgicenter (e.g. angiograms)
9. HOSPITAL SERVICES EXCLUDE THE FOLLOWING:
a. Durable Medical Equipment, except as provided in paragraphs 6
and 8(a) above.
b. Medical Services in the IPA Service Area as defined by
Attachment A2 hereto.
c. Outpatient prescription drugs.
d. All out-of-IPA Service Area expenses, except those elective
Referrals as authorized by IPA. PacifiCare, in conjunction with
IPA, shall make all decisions regarding the duration of a
Subscriber's care at the out-of-IPA Service Area facility and
transfer of the Subscriber to an IPA Service area facility.
e. Impatient and outpatient psychiatric care.
f. Chemical dependency rehabilitation.
g. Vision materials (lenses and frames) except for those
surgically implanted as provided in paragraph 8(a) above.
h. Anesthesiology services (inpatient and outpatient).
i. Experimental procedures, including any type of procedure not
generally recognized as of value by the medical community and
its societies, as determined by PacifiCare in the reasonable
exercise of its discretion and consultation with IPA.
j. Cosmetic Surgery, except when performed to correct or repair
the physical functioning of a body part as a result of a
functional disorder or accidental injury.
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<PAGE>
ATTACHMENT A2
MEDICAL SERVICES
I. Medical Services provided in the IPA Service Area are the financial
responsibility of IPA. A summary of some Medical Services includes the
following:
1. PHYSICIAN SERVICES - Subscribers shall be entitled to Medically
Necessary covered inpatient and outpatient physician services included
in the PacifiCare Health Plan, attached hereto as Attachment B and
included in full herein by reference. A summary of some physician
services includes the following:
a. IPA Service Area inpatient services (including anesthesiology
services and physician services associated with non-experimental
transplants as determined by Pacificare) and outpatient
physician care.
b. Outside Referrals to consultants including emergency room
consultations (not including emergency room physician charges).
c. Referrals by IPA to emergency room for non-emergency
conditions.
d. Out-of-IPA Service Area physician services when such Medical
Services are rendered on an elective basis and upon approval of
IPA.
2. OUTPATIENT SERVICES - Such services include, among others:
a. Outpatient pathology and radiology.
b. Outpatient mental health (professional services only).
c. Refractions.
d. Short term, Medically Necessary rehabilitation (speech,
physical and occupational) therapy.
e. Health education and social services.
f. Immunizations when determined Medically Necessary by an IPA
Member Physician as recommended by the U.S. Public Health
Services and American Academy of Pediatrics.
g. Periodic health evaluations.
h. Hearing screening, including audiogram.
i. Allergy testing and treatment.
j. Lenses and frames required after cataract surgery, except
lenses surgically implanted during an outpatient surgery
performed at Hospital or at a free-standing surgery center.
k. Anesthesiology services.
l. Mammography screening as required by state and federal law.
m. Durable medical equipment, corrective appliances, artificial
aids, and prosthetics. (If Applicable)
3. OTHER SERVICES - Medical Services denied by IPA and PacifiCare which
are found on appeal or arbitration through the Subscriber grievance
resolution process to be Medical Services which Subscriber was
entitled to have furnished through the PacifiCare Health Plan.
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<PAGE>
II. Medical Services exclude the following:
a. Professional components on all hospital based physicians for
inpatient procedures and outpatient surgeries, except
anesthesiology as noted in paragraphs I(1)(a) and I(2)(a)
above.
b. Outpatient mental health visits in excess of twenty (20) visits
per Subscriber Year.
c. Outpatient prescription drugs.
d. Chemotherapy drugs.
e. Out-of-IPA Service Area expenses, except pursuant to paragraph
I(1)(d) above. PacifiCare, in consultation with IPA, shall make
all decisions regarding the duration of a Subscriber's care at
the out-of-IPA Service Area facility and transfer of the
Subscriber to an IPA Service Area facility.
f. Vision materials, except as noted in paragraph I(2)(k) above.
g. Durable medical equipment.
h. Immunizations for foreign travel and unexpected mass
immunizations.
i. Experimental procedures, including any type of procedure not
generally recognized as of value by the medical community and
its societies, as determined by PacifiCare in accordance with
state and federal law and in consultation with IPA.
j. Cosmetic Surgery, except when performed to correct or repair
the physical functioning of a body part as a result of a
functional disorder or an accidental injury.
k. Home Health Care.
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<PAGE>
ATTACHMENT A3
INDIVIDUAL STOP-LOSS PROGRAM
1. The Individual Stop-Loss ("ISL") Program is designed to limit the IPA's
costs per Subscriber per year to a specified amount (the "deductible").
PacifiCare will assume all financial responsibility for the Subscriber in
excess of the deductible by paying IPA, based on the payment procedure as
outlined below, [ ** ] in excess of the deductible of the Cost of Care, as
defined in Attachment A4, included in full herein by reference.
2. Deductible: [ ** ] per Subscriber per calendar year.
3. Payment Procedures:
a. IPA must submit claims data in accordance with the procedures
specified in the PacifiCare Provider Policies and Procedures Manual;
such claims must be submitted no later than ninety (90) days from the
end of the calendar year in order to be credited to the stop-loss
program.
b. Costs incurred by IPA for Medical Services provided during the last
thirty-one (31) days of the Year for which no benefits were payable
under the ISL Program because such costs were applicable to the
deductible may be carried forward for inclusion in the ISL
calculations for the next succeeding Year;
c. Medical Services rendered in connection with Worker's Compensation
cases or where payments for Medical Services provided under Section
3.01 of this Agreement are receivable through the coordination of
benefits, third party liability, or any other source of income,
including copayments, shall not be included in the Cost of Care
provided in calculating stop-loss liability;
d. PacifiCare will determine and pay all ISL Program claims within sixty
(60) days of receipt of a complete claim;
e. For continuing ISL cases (i.e., cases where more than one payment is
made during the Year), PacifiCare will reimburse the IPA quarterly
based on the submittal of a continuing ISL claim.
f. If the Subscriber transfers in the middle of the Year to another
Participating Medical Group and then exceeds the ISL, the payment for
all Medical Services in excess of the ISL will be shared
proportionately among the Participating Medical Groups who provided
Medical Services to the Subscriber during the Year.
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<PAGE>
ATTACHMENT A4
COST OF CARE
For purposes of this Agreement, the Cost of Care for Medical Services
rendered by IPA to Subscribers shall equal:
a) [ ** ] of the fees charged by IPA to IPA's fee-for-service
patients for the same or similar services, if the same or similar services
are rendered by IPA; or
b) [ ** ] of the fees actually paid, if the services are
rendered by providers other than IPA.
IPA shall provide PacifiCare with a copy of IPA's fee-for-service fee
schedule and shall notify PacifiCare thirty (30) days prior to the effective
date of any changes in such fee schedule. The amount of increase of IPA's
fees shall be limited to [ ** ] per Year for purposes of any calculations
pursuant to this Agreement, regardless of the actual percentage increase in
IPA's fees each Year.
IPA shall notify PacifiCare of the existence and payment or discount
provisions of any agreements between IPA and other providers who render Medical
Services to Subscribers.
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<PAGE>
ATTACHMENT A5
HOSPITAL CONTROL PROGRAM (HCP)
1. INTRODUCTION
The Hospital Control Program is designed to provide a financial incentive for
the control of inpatient, in-area emergency services and selected other
outpatient services. When actual incurred costs, when compared to a
predetermined budget, are favorable then the savings are shared with the IPA.
Conversely, when actual incurred costs exceed the budget, then the IPA also
shares the additional costs. Limitations are included at both the individual
member level (through the payment of a reinsurance premium for specific stop
loss) and at the aggregate level (through a percentage limitation on overall
shared savings or losses) to mitigate extraordinary performance fluctuations.
<TABLE>
<CAPTION>
2. BUDGET DOLLARS PMPM
------------
<S> <C>
Inpatient Hospital $[ ** ]
Utilization Rate 230 days PTMPY
Per Diems, net of discounts, etc.
Regular Plans $1,159 per day
880 Plan $ 927 per day
(including the fees of Hospital Based Physicians)
Emergency Services
Emergency Room & Ambulance $[ ** ]
(See Special Conditions below)
Outpatient Services $[ ** ]
Outpatient Surgery & other hospital
outpatient services as approved by
PacifiCare (i.e., facility fees for outpatient dialysis)
Selected Outpatient Services from Capitation $[ ** ]
Chemotherapy Drugs
Professional Charges for Dialysis
Home health services expenses as approved
by PacifiCare in advance
Hospital Control Program Payout Pool $[ ** ]
---------
SUB-TOTAL $[ ** ]
Reinsurance Premium
Deductible PMPY $20,000 (30% co-insurance applies $[ ** ]
up to $100,000) ---------
TOTAL BUDGET PMPM $[ ** ]
</TABLE>
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<PAGE>
ATTACHMENT A5 continued
3. ACTUAL COSTS
Actual costs are defined for purposes of this Program as HCP - included
services, incurred during the calendar year that are:
a. Paid, at net paid by PacifiCare
b. Received and unpaid as of the run date of the HCP settlement
calculation at gross amount billed.
c. IPA authorized services from the immediate prior calendar year which,
due to their late submission to PacifiCare, were not included in the
prior year cost calculation.
LESS:
d. member costs in excess of the reinsurance deductible specified above.
e. Third party recoveries received during the period that are associated
with current or prior year's settlements.
f. An estimated amount to account for discounts and Copayments expected
to be received on the unpaid claims included as actual costs.
4. CALCULATION OF SAVINGS AND LOSSES
The earned budget detailed on the previous page will be adjusted to reflect
the actual number of members who are enrolled in the 880 Plan. The inpatient
hospital component of the budget is stated assuming [ ** ] of the members
enrolled in the 880 Plan and [ ** ] of the members in all other plans.
In the event that actual costs are less than the earned budget, then the IPA
shall receive the share of savings relative to the bed days per thousand members
per year indicated in the following sliding scale schedule:
<TABLE>
<CAPTION>
Bed Days/Outpt. Surgery
Per Thousand Mbrs/Year IPA % Sharing
- ------------------------ --------------
<S> <C>
[ ** ] [ ** ]
[ ** ] [ ** ]
[ ** ] [ ** ]
[ ** ] [ ** ]
</TABLE>
For the purposes of this calculation, "Bed Days/Outpt. Surgery" shall be
defined as acute inpatient days plus outpatient surgeries, net of any acute
inpatient days or outpatient surgeries which are covered under reinsurance or
are paid through a third party recovery or through coordination of benefits.
If actual costs are greater than the earned budget, then the IPA will be liable
for [ ** ] of the amount lost up to the maximum payment specified below.
[ ** ]
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<PAGE>
ATTACHMENT A5 continued
On a quarterly basis, cumulative calculations of the Hospital Control Program
results will be made and interim payments will be made based on these
results. Calculations will be made in accordance with the contractual terms
above and the amount of PacifiCare's payment will be [ ** ] of the amount
due to the IPA based on the above referenced calculation. The reduced payment
amount is to adjust for the incurred, but not reported, claims.
In the event that the interim calculation reflects a cumulative loss for the
IPA, no interim payment will be made to or due from the IPA in the first
quarter a loss results. If a cumulative loss is reflected for two
consecutive quarters, the IPA will make an interim payment of [ ** ] of the
cumulative amount due to PacifiCare.
The calculations will be made based on calendar quarters and the interim
payments made within sixty (60) days thereof. No interim calculation will be
made in the fourth calendar quarter. If the IPA reflects a loss for two
consecutive quarters and, therefore, is required to make a payment to
PacifiCare, such payment will be due within fifteen (15) days of the IPA's
receipt of such notice form PacifiCare. A calendar year-end calculation of
the Hospital Control Program shall be made by PacifiCare and payment to the
appropriate party shall be made within 120 days of the end of the calendar
year.
5. MONTHLY REPORTING
PacifiCare will distribute a report monthly, on or before the 15th, that lists
the payments made during the previous month for services included in the HCP.
6. SPECIAL CONDITIONS FOR EMERGENCY SERVICES
If the IPA and/or its participating physicians direct a PacifiCare member to use
the emergency services of a hospital, and PacifiCare determines that the use of
those services was inappropriate, PacifiCare reserves the right to deduct the
professional component of the PacifiCare payment from the IPA's capitation as a
penalty for improper referral. When an inappropriate referral for emergency
services has been determined by PacifiCare, a written conformance request will
be forwarded to the IPA. The conformance request Will serve as notice that all
subsequent inappropriate referrals may have the penalty applied. IPA will be
notified and given the opportunity to respond to a pending claim of improper
referral prior to the implementation of any penalty deduction.
7. Any hospital or emergency expenses that are considered third party
liability, Worker's Compensation claims, etc., shall not be included in the
calculations. If, at a later date, these claims are not collectible, then an
adjustment will be made in the calculations.
8. Calculations shall not include unauthorized admissions whereby a Member is
admitted by a non-participating or non-referring physician in a non-emergency
status or out-of-area hospitalization.
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<PAGE>
ATTACHMENT B
MEDICAL AND HOSPITAL INDIVIDUAL CONVERSION AND GROUP
SUBSCRIBER AGREEMENTS
Provided to IPA by PacifiCare concurrent with the execution of this Agreement.
Received this day of , 1989
----------- --------------
By:
-----------------------------------------
Title:
--------------------------------------
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<PAGE>
ATTACHMENT C
CAPITATION PAYMENT RATES
The monthly Capitation Payment which PacifiCare shall pay IPA shall
equal IPA's cumulative shares of the Percent of Premium. The Percent of
Premium designated by PacifiCare for payment for Medical Services shall equal
[ ** ] of the gross premiums billed by PacifiCare each month for coverage
of Subscribers designating IPA as their Participating Medical Group pursuant
to the PacifiCare Health Plan, not including the Supplemental Benefit
Premium, less [ ** ] in consideration of the Individual Stop Loss Program
noted in Attachment A3 hereto, and also less necessary consideration as
determined by PacifiCare for supplemental benefits for which IPA assumes no
financial responsibility. IPA's portion of the Percent of Premium shall equal
IPA's cumulative share per employer group, based upon the number of men,
women and children Subscribers of such employer group designating IPA as
their Participating Medical Group for the month of Capitation Payment. The
Capitation Payment shall be subject to retroactive adjustment by PacifiCare
based upon subsequent eligibility determinations of Subscribers designating
IPA as their Participating Medical Group. Such retroactive adjustments shall
be made within one hundred eighty (180) days after the end of the month for
which the applicable Capitation Payment applies. The methodology for
determining IPA's Capitation Payment is more fully set forth in the
PacifiCare Provider Policies and Procedures Manual in Attachment D hereto.
PacifiCare shall provide IPA appropriate documentation in support of the
actual Capitation Payment made. Should IPA desire additional billing
information; PacifiCare shall make available for inspection other mutually
agreed upon documents, upon thirty (30) days prior written notice from IPA. IPA
shall have the right to reasonably audit PacifiCare's books and records directly
relating only to IPA's Capitation Payment determinations upon thirty (30) days
prior written notice at IPA's sole expense.
URGENT CARE (Not Applicable)
If IPA elects to and qualifies under PacifiCare UCC criteria to participate
in the UCC program during the contract term, IPA must give PacifiCare sixty (60)
days written notice of intent to participate in UCC program.
DME PAYMENT (Not Applicable)
If IPA elects to provide DME during the contract term, IPA must give
PacifiCare sixty (60) days written notice of intent to provide DME.
MATERNITY PAYMENTS
For term pregnancies within nine (9) months of a Subscriber's initial
enrollment with PacifiCare or assignment to IPA, the following amount shall be
payable at the time of processing the inpatient obstetrical claim: [ ** ].
- 34 -
<PAGE>
Attachment C continued
MAMMOGRAPHY SERVICES
IPA shall receive [ ** ] for each screening and diagnostic mammography
study performed above the 1987 PacifiCare wide baseline, specific to the
PacifiCare commercial program, for such studies. (This baseline equals
[ ** ] studies per [ ** ] adult females per Year.)
The amount due to IPA shall be calculated based upon utilization date submitted
by IPA and shall be paid within one hundred fifty (150) days of the end of the
Year.
1990 CAPITATION GUARANTEE
For 1990, PacifiCare guarantees that IPA will receive a minimum increase
in the average capitation paid to IPA, for the twelve month period, on the
basis of the dollars received by IPA per Subscriber, using the same
demographic and plan mix provided by PacifiCare during 1989. Such increase
shall be guaranteed to be no less that [ ** ] average per member per month
capitation payment for 1989.
The comparison calculation performed by PacifiCare shall take into account
the net capitation paid (after Individual Stop Loss premiums are deducted). In
order to guarantee the effect of rate increases generated by the percent of
premium payment method, calculations will use the same demographic (male,
female, child) and plan (e.g. Preferred, Standard, 880) mix present during 1989.
Any applicable Urgent Care or Durable Medical Equipment payments shall not be
factored into the guarantee calculations.
For the purposes of this calculation, the average 1989 capitation
payment to IPA equalled [ ** ] per Subscriber per month and the 1990
[ ** ] figure shall equal [ ** ] per Subscriber per month. Should the
average 1990 capitation payment (calculated as described in the above
paragraph), fall below the guaranteed amount, PacifiCare shall owe IPA a
payment which represents the difference. The payment amount shall be
calculated by multiplying the difference, as stated on a per Subscriber per
month basis, times the total number of member months for 1990. Should the
average 1990 capitation payment equal or exceed the guaranteed dollar amount,
no additional payment will be due IPA. IPA shall receive the 1990 guarantee
calculation and any applicable payments no later than February 28, 1991.
- 35 -
<PAGE>
ATTACHMENT D
PACIFICARE PROVIDER
POLICIES AND PROCEDURES MANUAL
Provided to IPA by PacifiCare concurrent with the execution of this Agreement.
Received this day of , 1989.
----------------- ----------------
By:
-------------------------------------
Title:
-----------------------------------
- 36 -
<PAGE>
ATTACHMENT E
PHARMACY CONTROL PROGRAM
The purpose of the Pharmacy Control Program (PCP) is to provide an
incentive to the IPA to foster the efficient utilization of prescription
services. The PCP gives the IPA the ability to share in any savings when
comparing actual utilization against an established budget.
The budget will be set at the following amounts on a per Subscriber per
month (pmpm) basis and will be calculated based on the mix of copay plans of
Subscribers who have designated IPA as their Participating Medical Group:
<TABLE>
<CAPTION>
Plan Type Budget Amount
--------- -------------
<S> <C>
$1 copay $[ ** ]
$2 copay $[ ** ]
$3 copay $[ ** ]
$4 copay $[ ** ]
$5 copay $[ ** ]
$6 copay $[ ** ]
</TABLE>
Debited against this budget will be the actual expenses paid by
PacifiCare for pharmacy services of those Subscribers which designated IPA as
their Participating Medical Group for the applicable month. The IPA will
share [ ** ] of any savings in comparing the budget and actual expenses.
PacifiCare shall provide, on a quarterly basis, utilization reports
pertaining to the cost of prescriptions written on a physician specific
basis. A final calculation and final payment will be made within one hundred
fifty (150) days of the end of each Year.
IPA agrees to participate in a generic drug substitution program and
formulary program established by PacifiCare's Quality Assurance Committee.
- 37 -
<PAGE>
ATTACHMENT F
AIDS STOP LOSS PROGRAM
PacifiCare agrees to provide additional financial protection to IPA for the
cost of Medical Services rendered to Subscribers who have AIDS. Subscribers who
are eligible for this program are as follows:
Subscribers who are admitted to a hospital for the treatment of an
opportunistic infection and have been diagnosed with clinical AIDS.
Once PacifiCare's medical services department has verified that a
Subscriber meets the definition above, further expenses for Medical Services
associated with the Subscriber's AIDS care will be paid by PacifiCare as defined
by Cost of Care in Attachment A4 hereto. To receive reimbursement, IPA must
submit a stop loss claim to PacifiCare indicating the date the Subscriber became
eligible for the AIDS Stop Loss Program and the expenses incurred on behalf of
the Subscriber after the effective date. (IPA may include claims under the AIDS
Stop Loss Program commencing on the date the Subscriber was admitted to the
hospital, or on the date home health care was provided the Subscriber in-lieu of
hospitalization, pursuant to the eligibility criteria noted above.) Expenses for
Medical Services pertaining to AIDS care rendered from January 1, 1990 through
December 31, 1990 only will be included in the Aids Stop Loss Program. A final
claim must be filed for such Medical Services by March 31, 1991 to be included
in this AIDS Stop Loss Program.
All claims submitted for consideration under the AIDS Stop Loss Program
must be processed and coordinated in a confidential manner. Inquiries for
determining such procedures should be directed to PacifiCare's medical director.
- 38 -
<PAGE>
ATTACHMENT G
IPA FACILITIES
Santa Ana/Tustin Physicians Group
14642 Newport Avenue, #410
Tustin, CA 92680
- 39 -
<PAGE>
ATTACHMENT H
DIVISION OF FINANCIAL RESPONSIBILITY
The attached template outlines the division of financial responsibility
between IPA, Hospital and PacifiCare, the intent being to clarify Medical
Services and Medical Service categories in order to provide for accurate
administration. As it is impossible to include every Health Care Service
available, the template serves as a model under which broad Health Care Service
categories suggest the appropriate financial responsibility for Health Care
Services or items not specifically listed.
- 40 -
<PAGE>
DIVISION OF FINANCIAL RESPONSIBILITY
CALIFORNIA
Commercial Services Agreement
(IPA Capitated, Hospital Control Program with PacifiCare)
IPA Santa Ana/Tustin Phys. Grp.
---------------------------
<TABLE>
<CAPTION>
Responsible Party
------------------------------------------------
PacifiCare PacifiCare
List of Benefits IPA HCP 100%
- ----------------
<S> <C> <C> <C>
AIDS - Professional Component
- Facility Component
Allergy
- Testing
- Serum (is not covered by all plans; those
with coverage are noted in back of
eligibility list)
Ambulance, Air or Ground - In Area
Out of Area
Amniocentesis
Anesthetics, Administration of (Anesthesiology)
Apnea Monitor (DME)
Artificial Insemination
Artificial Limbs (DME)
Biofeedback [ ** ](1)
Blood & Blood Products (Including Professional Component)
- From Blood Bank
- Autologous Blood Donation
Chemical Dependency Rehabilitation
- Inpatient Facility Component
- Inpatient Professional Component
- Outpatient Professional Component
- Outpatient Facility Component
Chemotherapy
- Drugs
- Professional Component
Chiropractic (requires P.M.G. referral)
Circumcision
Colostomy Supplies
- Outpatient
- Inpatient
Contact Lenses
- Intraocular lens (surgically implanted)
- Incident to Cataract Surgery
Corrective Appliances
Cosmetic Surgery (Medically Necessary)
- Facility Component
- Professional Component
Dental Services (for repair of accident/injury only)
- Facility Component
- Professional Component
Detox
- Facility Component
- Professional Component
</TABLE>
(1) All references to division of responsibility have been deleted.
- 41 -
<PAGE>
DIVISION OF FINANCIAL RESPONSIBILITY
CALIFORNIA
Commercial Services Agreement
(IPA Capitated, Hospital Control Program with PacifiCare)
IPA Santa Ana/Tustin Phys. Grp.
---------------------------
<TABLE>
<CAPTION>
Responsible Party
------------------------------------------------
PacifiCare PacifiCare
List of Benefits IPA HCP 100%
- ----------------
<S> <C> <C> <C>
Durable Medical Equipment (DME)
- Surgically Implanted
- Inpatient
- Outpatient
- Hearing Aids
Emergency Admissions (In Area)
- Facility Component
- Professional Component
- (Out of Area)
- Facility Component
- Professional Component
Emergency Room Physicians - In Area
- Initial Treatment
- Consults.
- Out of Area
Employment Physical
Endoscopic Procedures
- With Biopsy [ ** ](1)
- Without Biopsy
Experimental Procedures
Family Planning (e.g.: Abortions, Amniocentesis,
Artificial Insemination, Contraceptive
Devices, Genetic Testing, Infertility
Treatment, Tubal Ligation, Vasectomy)
- Professional Component
- Facility Component
- Diaphrams
- Oral Contraceptives
- Invitro Fertilization
- Reversal of Sterilization
Fetal Monitoring
- Outpatient
- Inpatient
Genetic Testing
Health Education
Health Evaluation (Physical)
Hearing Aids
Hearing Screening
Hemodialysis
- Inpatient
- Outpatient
</TABLE>
(1) All references to division of responsibility have been deleted.
- 42 -
<PAGE>
DIVISION OF FINANCIAL RESPONSIBILITY
CALIFORNIA
Commercial Services Agreement
(IPA Capitated, Hospital Control Program with PacifiCare)
IPA Santa Ana/Tustin Phys. Grp.
---------------------------
<TABLE>
<CAPTION>
Responsible Party
------------------------------------------------
PacifiCare PacifiCare
List of Benefits IPA HCP 100%
- ----------------
<S> <C> <C> <C>
Home Health Care
- In Lieu of Hospitalization
(includes IV or injectables)
- Other
Hospice Services
- Inpatient
- Professional Component
Hospital Based Physicians (Inpatient)
- Anesthesiology
- Audiology
- Cardiology
- Emergency Room
- Diagnostic Services
- Neonatology
- Neurology [ ** ](1)
- Nephrology
- Pathology
- Physical Medicine
- Pulmonary
- Radiology
- Radiation Oncology
- Surgeon
Hospitalization, Inpatient Services
Supplies and Testing
- In Area
- Out of Area
Immunization and Inoculations
- As Medically indicated
- For work/travel
Infertility (diagnosis and treatment)
- Professional Component
- Facility Component
Injections and Injected Substances (outpatient)
Insulin & Syringes
Laboratory Services
- Outpatient
- Inpatient
Lithotripsy
- Professional Component
- Facility Component
Mammography
Marriage Counseling
</TABLE>
(1) All references to division of responsibility have been deleted.
- 43 -
<PAGE>
DIVISION OF FINANCIAL RESPONSIBILITY
CALIFORNIA
Commercial Services Agreement
(IPA Capitated, Hospital Control Program with PacifiCare)
IPA Santa Ana/Tustin Phys. Grp.
---------------------------
<TABLE>
<CAPTION>
Responsible Party
------------------------------------------------
PacifiCare PacifiCare
List of Benefits IPA HCP 100%
- ----------------
<S> <C> <C> <C>
Medication
- In Lieu of Hospitalization (intravenous)
- Inpatient
- O.P. covered injectables
- O.P. non-injectables
Mental Health
- Inpatient Facility Component
- Inpatient Professional Component
- Outpatient Professional Component
Nuclear Medicine Diagnostics
Nuclear Medicine Treatment/Therapy
- Facility Component (inpatient)
- Facility Component (outpatient)
- Professional Component
Nutritional/Dietetic Counseling
O.B. Complications (In Area)
- Outpatient Diagnostic Services
- Inpatient Facility Component [ ** ](1)
- Inpatient Professional Component
PMG Referred
- Emergent Diagnostics (OB Unit)
- ER Treatment
Office Visit Supplies, Splints, Bandages, etc.
Organ Transplants (non-experimental)
- Facility component
- Professional component
O.P. Surgery
- Facility Component
- Professional Component (Facility Based MD's)
- Professional Component - other
- Anesthesiology
Outpatient Surgery/Facility Based Physicians
- Anesthesiology
- Audiology
- Cardiology
- Emergency Room
- Diagnostic Services
- Neonatology
- Neurology
- Nephrology
- Pathology
- Physical Medicine
- Pulmonary
- Radiology
- Radiation Oncology
- Surgeon
</TABLE>
(1) All references to division of responsibility have been deleted.
- 44 -
<PAGE>
DIVISION OF FINANCIAL RESPONSIBILITY
CALIFORNIA
Commercial Services Agreement
(IPA Capitated, Hospital Control Program with PacifiCare)
IPA Santa Ana/Tustin Phys. Grp.
---------------------------
<TABLE>
<CAPTION>
Responsible Party
------------------------------------------------
PacifiCare PacifiCare
List of Benefits IPA HCP 100%
- ----------------
<S> <C> <C> <C>
Outpatient Diagnostic Services - Facility and Professional
(including but not limited to those listed below)
- Angiograms
- Cat Scan
- 2 D Echo
- EEG
- EKG
- EMG
- ENG
- MRI
- Treadmills
- Ultrasound
Pediatric Services (newborn)
Physical Therapy
- Inpatient [ ** ](1)
- Outpatient
Physician Visits
- To Hospital
- To S.N.P.
- To Patients Home
Physician Office Visits/Consultants
Podiatry Services (requires P.M.G. referral)
Pregnancy
- Professional Component
- Facility Component
Prosthetic Devices
- Surgically Implanted
- Outpatient
Radiation Therapy
- Professional Component
- Facility Component (inpatient)
- Facility Component (outpatient)
Radiology Services
- Outpatient
- Inpatient
- O.P. Surgery
Reconstructive Surgery
- Facility Component
- Professional Component
- Prosthetics
Refractions
</TABLE>
(1) All references to division of responsibility have been deleted.
- 45 -
<PAGE>
DIVISION OF FINANCIAL RESPONSIBILITY
CALIFORNIA
Commercial Services Agreement
(IPA Capitated, Hospital Control Program with PacifiCare)
IPA Santa Ana/Tustin Phys. Grp.
---------------------------
<TABLE>
<CAPTION>
Responsible Party
------------------------------------------------
PacifiCare PacifiCare
List of Benefits IPA HCP 100%
- ----------------
<S> <C> <C> <C>
Rehabilitation (Short Term, i.e.: P.T., O.T., Speech,
Cardiac Therapy)
- Inpatient Facility Component
- Inpatient Professional Component
- Outpatient Facility Component
- Outpatient Professional Component
Skilled Nursing Facility
Social Services - Medical
Specialist Consultations
Surgical Supplies
- Inpatient
- Outpatient Facility [ ** ](1)
- Outpatient IPA
TMJ
- Dental Treatment
- Diagnosis and Medically Necessary Correction
- Inpatient Facility Component
Transfusions
- From Blood Bank
- Autologous Blood Donation
Tissue Plasminogen Activator (TPA)
Vision Screening
Vision Care
- Implanted lenses (cataract surgery)
- Lenses and Frames incident to cataract surgery
- Non-cataract related lenses and frames
- Medically necessary care
- Refractions
</TABLE>
(1) All references to division of responsibility have been deleted.
- 46 -
<PAGE>
"ALL SECTIONS MARKED WITH TWO ASTERISKS ("**") REFLECT PORTIONS WHICH HAVE
BEEN REDACTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION BY PROSPECT MEDICAL HOLDINGS, INC. AS PART OF A REQUEST FOR
CONFIDENTIAL TREATMENT."
AMENDMENT TO
IPA COMMERCIAL SERVICES AGREEMENT
The undersigned parties to the PacifiCare IPA Commercial Services Agreement
("Agreement") between PacifiCare of California ("PacifiCare") and Santa Ana
Tustin Physicians Group, Inc. ("IPA") do hereby amend the Agreement as set
forth herein. Except as otherwise specifically provided, terms utilized
herein shall have the meanings set forth in the Agreement. Except as
specifically amended herein, the Agreement shall remain unchanged and in full
effect.
1. Paragraph 6.01, TERM, is amended in full to read as follows:
6.01 TERM - The term of this Agreement shall be for thirty-six (36)
months and shall begin on January 1, 1996 (the "Commencement Date") and
end on December 31, 1998 ("Initial Term"). A "Year" under this Agreement
shall begin on January 1 and end on December 31. After the expiration of
the Initial Term, the Agreement shall be automatically extended for
one (1) year terms upon the expiration of the prior term unless either
party provides the other with written notice of such party's intention
not to extend the term no less than three hundred and sixty-five (365)
days prior to the end of the initial term or one hundred and eighty (180)
days prior to the end of each subsequent term thereafter or until this
Agreement is appropriately terminated by either party as provided in
Section 7 herein. Notwithstanding the above, should IPA breach the
covenant not to compete as stated in Paragraph 9.02 of the IPA Medicare
Shared Risk Services Agreement, this Agreement shall be automatically
extended for one (1) year terms on each successive January 1 upon the
expiration of the calendar year during which the breach occurs. In
addition, PacifiCare may terminate this Agreement by providing IPA at
least sixty (60) days prior written notice within ninety (90) days of
receiving notification of IPA's breach of the covenant not to compete
as stated in Paragraph 9.02 of the IPA Medicare Shared Risk Services
Agreement. For the Initial Term and any additional one-year terms, IPA
may continue to use any hospital, including but not limited to Tustin
Hospital, Western Medical Centers and Chapman General Hospital.
2. Paragraph 12.07, ASSIGNMENT, is amended in full to read as follows:
12.07 ASSIGNMENT - This Agreement and the rights, interests and
benefits hereunder shall not be assigned, transferred, pledged, or
hypothecated in any way by IPA or PacifiCare and shall not be subject
to execution, attachment or similar process, nor shall the duties
imposed herein be subcontracted or delegated without the written
consent of the other party.
1
<PAGE>
Notwithstanding, PacifiCare may assign, transfer, pledge or hypothecate
this Agreement and its rights, interests and benefits hereunder to any
entity of which PacifiCare has at least majority control.
The effective date of this Amendment is January 1, 1996.
By signing below, both parties hereto have executed and agreed to this
Amendment.
PACIFICARE, INC IPA
By: /s/ Chris Wing By: /s/ Melvin L. Reich
--------------------------------- ------------------------------------
Chris Wing, Vice President
Vice President/General Manager
Date: Date: 12/5/95
------------------------------- ----------------------------------
2
<PAGE>
"ALL SECTIONS MARKED WITH TWO ASTERISKS ("**") REFLECT PORTIONS WHICH HAVE
BEEN REDACTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION BY PROSPECT MEDICAL HOLDINGS, INC. AS PART OF A REQUEST FOR
CONFIDENTIAL TREATMENT."
1995 AMENDMENT TO
IPA COMMERCIAL SERVICES AGREEMENT
"The undersigned parties to the PacifiCare IPA Commercial Services
Agreement ("Agreement") between PacifiCare of California ("PacifiCare") and
Santa Ana Tustin Physicians Group, Inc. ("IPA") do hereby amend the Agreement
as set forth herein. Except as otherwise specifically provided, terms
utilized herein shall have the meanings set forth in the Agreement. Except as
specifically amended herein, the Agreement shall remain unchanged and in full
effect."
1. Paragraph 1, DEFINITIONS, PACIFICARE CHOICE is redefined to read as
follows. All references to PacifiCare Choice in this Agreement, as may be
amended, shall refer to PacifiCare Point of Service.
PACIFICARE POINT OF SERVICE - is a health plan consisting of the
PacifiCare Health Plan, plus the Out-of-Network Indemnity Plan.
2. Paragraph 1, DEFINITIONS, PACIFICARE HEALTH PLAN is redefined to read as
follows.
PACIFICARE HEALTH PLANS - is any one of various prepaid health service
plans operated by PacifiCare as described in the PacifiCare Medical and
Hospital Group Subscriber Agreement, the PacifiCare Medical And Hospital
Individual Conversion Member Agreement and PacifiCare Medical and Hospital
Individual Subscriber Agreement, and attachments, addenda, supplements and
periodic amendment thereto, copies of which are attached hereto and
Attachment B, incorporated in full herein by reference. For purposes of
this Agreement, the PacifiCare Health Plan shall not include PacifiCare's
Secure Horizons Plan.
3. Paragraph 1, DEFINITIONS, is amended in part to add the following
definitions:
NET PREMIUM - is the amount of gross premiums billed by PacifiCare
each month for coverage of Subscribers designating IPA as their
Participating Medical Group, excluding amounts billed by PacifiCare to
cover broker commissions and optional supplemental benefits.
- 1 -
<PAGE>
PHARMACY PREMIUM - is the gross premiums billed by PacifiCare each
month for coverage of Subscribers for the outpatient prescription drug
benefit.
4. Paragraph 3.07.01, COLLECTION OF CHARGES FOR OUT-OF-NETWORK SERVICES, is
amended in full to read as follows:
3.07.01 COLLECTION OF CHARGES FOR OUT-OF-NETWORK SERVICES - Notwithstanding
anything to the contrary in Section 3.07 or elsewhere in the Agreement, if
an IPA Member Physician or Specialist Physician provides Out-of-Network
Services to a PacifiCare Choice Subscriber, IPA shall bill the
Out-of-Network Indemnity Plan carrier for such services and agrees to
accept full reimbursement at the Cost of Care rates described in
Attachment A4 of this Agreement.
5. Paragraph 3.16, RECIPROCITY AGREEMENTS, is amended in full to read as
follows:
3.16 RECIPROCITY AGREEMENTS - IPA agrees to develop agreements among
PacifiCare's Participating Medical Groups to assure reciprocity of health
care among the Participating Medical Groups for PacifiCare Subscribers. IPA
shall accept non-emergency or specialty Referrals from such other
Participating Medical Groups and such other Participating Medical Groups
shall be required to accept non-emergency or specialty Referrals from IPA.
Payment for the foregoing Referrals shall be no greater than the Cost of
Care Rates described in Attachment A4.
6. Paragraph 5.04, MOST FAVORED PLAN is added to read as follows:
5.04 MOST FAVORED PLAN - IPA represents that, during the term of this
Agreement, the compensation rates payable under this Agreement are and
shall continue to be equal to or less than the rates charged under other
IPA agreements for the provision of services to enrollees of health care
service plans ("Competing Plan Agreements"), when such rates are adjusted
to reflect different risk levels and programs under the Competing Plan
Agreements (the "Adjusted Rates"). If at any time IPA agrees or has agreed
to accept lower Adjusted Rates under a Competing Plan Agreement than the
rates set forth in this Agreement, or any amendment hereto, IPA shall
immediately notify PacifiCare in writing of such agreement and the
applicable lower Adjusted Rates. Within thirty (30) days thereafter,
PacifiCare and IPA shall meet to discuss implementation of new compensation
rates under this Agreement which shall be equal to or less than the
Adjusted Rates accepted under the Competing Plan Agreement. If the
- 2 -
<PAGE>
parties fail to agree to implementation procedures for the new
rates within thirty (30) days of the effective date of the Competing
Plan Agreement, the compensation rates under this Agreement will be
lowered upon notice to IPA from PacifiCare to equal the lower Adjusted
Rate. The new compensation rates shall be effective the date the lower
Adjusted Rates become effective under the Competing Plan Agreement.
IPA's failure to notify PacifiCare of the acceptance of lower Adjusted
Rates from a Competing Plan shall be grounds for termination of this
Agreement by PacifiCare pursuant to Section 7.01.02(d).
7. Attachment A1, HOSPITAL SERVICES, is amended in part to read as follows:
Paragraph 1.f. (Covered Inpatient Hospital Care) is added to read as
follows:
f. Inpatient mental health (when covered pursuant to the PacifiCare
Health Plan)
Paragraph 8.f. (Covered Other Hospital Services) is added to read as
follows:
f. Self injectable medications.
Paragraph 9.e. (Excluded Hospital Services) is amended to read as follows:
e. Inpatient and outpatient psychiatric care (except when
specifically covered pursuant to a PacifiCare Health Plan)
8. Attachment A3, Paragraph 2 of the INDIVIDUAL STOP LOSS PROGRAM is amended
to read as follows:
2. Deductible and Premium: For the 1995 calendar year, the ISL
Deductible shall equal [ ** ] per Subscriber per year and the ISL
Premium shall equal [ ** ] of the Net Premium per Subscriber per
month. Notwithstanding Section 12.12, PacifiCare may amend the ISL
Premium and ISL Deductible on an annual basis effective each January 1
by providing sixty (60) days prior written notice to IPA."
9. Attachment A4, COST OF CARE, is amended in full to read as follows:
Please see Exhibit 1 attached hereto and incorporated herein by this
reference.
- 3 -
<PAGE>
10. Attachment A5, HOSPITAL CONTROL PROGRAM, is amended in full to read as
follows:
Please see Exhibit 2 attached hereto and incorporated herein by this
reference.
11. Attachment A6, PACIFICARE CHOICE CONTROL PROGRAM, is amended in full to
read as follows:
Please see Exhibit 3 attached hereto and incorporated herein by this
reference.
12. Attachment C, CAPITATION PAYMENT RATES, is amended in full to read as
follows:
Please see Exhibit 4 attached hereto and incorporated herein by this
reference.
13. Attachment E, PHARMACY CONTROL PROGRAM, is deleted in its entirety.
14. Attachment F, AIDS STOP LOSS PROGRAM, is amended in full to read as
follows:
Please see Exhibit 5 attached hereto and incorporated herein by this
reference.
The effective date of this Amendment is January 1, 1995
By signing below, both parties hereto have executed and agreed to
this Amendment.
PACIFICARE, INC IPA
By: /s/ Chris Wing By: /s/ Melvin L. Reich
--------------------------------- ------------------------------------
Chris Wing, Senior Vice President,
General Mgr.
Date: 1-29-95 Date: 1/19/95
------------------------------- ----------------------------------
- 4 -
<PAGE>
EXHIBIT 1
ATTACHMENT A4
COST OF CARE
For purposes of this Agreement, the Cost of Care for Medical Services rendered
by IPA to Subscribers shall equal:
A. For service rendered by Member Physicians who practice at
IPA Facilities:
<TABLE>
<CAPTION>
<S> <C>
Medicine [ ** ]
Surgery [ ** ]
Pathology (Anatomical) [ ** ]
Radiology [ ** ]
Anesthesia [ ** ]
</TABLE>
Payment shall be at the lesser of the rates set forth above or billed
charges.
Payment will be based on CPT coding using the Medicare Resource-Based
Relative Value Scale (RBRVS) units. An allowable fee schedule will apply to
those services without RBRVS units. Anesthesia services will be based on
the American Society of Anesthesiologists (ASA) units.
Payment to non-physicians (eg. marriage family counselors, psychologists)
for psychiatric services will be paid at [ ** ] of the above fee
schedule.
PacifiCare claims adjudication shall be based on CPT coding ground rules
and Medicare guidelines. PacifiCare may change such adjudication rules upon
30 days notice.
PacifiCare reserves the right to audit claims and to make adjustments based
on the medical records. Provider shall cooperate with PacifiCare's audits,
by providing access to requested claims information and other supporting
records. Audits may also be performed at Provider's facilities upon
reasonable notice to Provider.
B. For services rendered by Specialist Physicians or Outside Providers,
[ ** ] of the fees actually paid.
IPA shall notify PacifiCare of the existence and payment or discount provisions
of any agreements between IPA and Specialist Physicians and Outside Providers
who render Medical Services to Subscribers.
- 5 -
<PAGE>
EXHIBIT 2
ATTACHMENT A5
1995 UTILIZATION CONTROL PROGRAM
1. INTRODUCTION
The Utilization Control Program is designed to provide a financial incentive for
the control of Hospital Services, in-area Emergency Services and selected other
services. The Utilization Control Program utilizes a Withhold Amount as defined
below. Risk limitations are included at both the individual Subscriber claim
level, through the payment of a reinsurance premium for specific stop loss (the
deductible, premium and coinsurance rates are specified in the Budget below);
and at the aggregate level, through a percentage limitation on overall shared
savings or losses. Calculations are based on Budgets in effect for each month.
a. WITHHOLD AMOUNT - PacifiCare shall withhold from IPA's monthly Capitation
Payment an amount equal to [ ** ] to apply to IPA's share of Budget
Deficits, if any. PacifiCare may prospectively adjust the Withhold Amount on
a quarterly basis based upon the results of Utilization Control Program
calculations. If the Agreement is terminated or non-renewed pursuant to
Section 6 or Section 7 of the Agreement, Pacificare may choose to adjust
the Withhold Amount at the time that the notice of termination or
non-renewal is served.
2. UTILIZATION CONTROL PROGRAM BUDGET ("Budget") shall equal the sum of A
and B below:
A. For Hospital Services, [ ** ] and minus the applicable
reinsurance premium as set forth in Section 9 to this Attachment A5.
B. For Pharmacy Services, [ ** ] of the Pharmacy Premium
per Subscriber per month, plus [ ** ] per member per
month rebate for drugs ("Drug Rebate") ordered through Prescription
Solutions during calendar year 1995. Notwithstanding Section 12.12,
PacifiCare may amend the Drug Rebate on an annual basis effective each
January 1 by providing sixty (60) days prior written notice to IPA.
3. ACTUAL COSTS are defined for purposes of the Utilization Control Program
as the sum of the following:
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<PAGE>
a. Hospital Services incurred during the period of calculation for
which PacifiCare has received a claim and paid, valued at the amount
paid by PacifiCare;
b. For quarterly interim calculations, Hospital Services incurred
during the period of calculation for which PacifiCare has received a
claim but has not paid, less an average aggregate discount factor (for
year-end calculations, only paid claims will be included);
c. Hospital Services incurred prior to the period of calculation, and
paid during the current period;
d. Prescription drug expenses arranged on behalf of Subscribers
assigned to IPA.
LESS:
e. Subscriber claim costs for Hospital Services in excess of the
Reinsurance Deductible, as set forth in Section 9 to this Attachment A5.
f. Third party recoveries and coordination of benefits recoveries
received during the period of calculation that are associated with
current or prior calculation periods.
4. BUDGET DEFICIT
If the Actual Costs exceed the Budget during any Year, the amount of this
excess will be referred to as the Budget Deficit. IPA's share of the Budget
Deficit shall be [ ** ] of the Budget Deficit, but not to exceed [ ** ]
of the Budget. In the event of a Budget Deficit, PacifiCare shall pay IPA the
Withhold Amount, less IPA's share of the Budget Deficit. If IPA's share of
the Budget Deficit is greater than the Withhold Amount for the Initial Term,
the difference between these amounts (the "Additional Payable Amount") shall
be payable by IPA to PacifiCare within thirty (30) days from receipt of the
calculation.
5. BUDGET SURPLUS
In the event that Actual Costs are less than the Budget for any year, this
shall be referred to as a Budget Surplus. In the event of a Budget Surplus,
PacifiCare shall pay IPA the Withhold Amount, plus the share of savings
relative to the bed days per [ ** ] indicated in the following sliding
scale schedule:
- 7 -
<PAGE>
<TABLE>
<CAPTION>
Bed Days; Outpt. Surgery IPA % SHARE OF SAVINGS
PTMPY Limited to [ ** ] of Budget
------------------------ -----------------------------
<S> <C>
Over 269 [ ** ]
245 - 269 [ ** ]
220 - 244 [ ** ]
under 220 [ ** ]
</TABLE>
For the purpose of this calculation, "Bed Days; Outpt. Surgery" shall be
defined as acute inpatient days plus outpatient surgeries, minus any acute
inpatient days or outpatient surgeries which are covered under the
reinsurance program, or are paid through a third party recovery, or through
coordination of benefits.
6. PERIODIC CALCULATIONS
Cumulative calculations of the Utilization Control Program results will be
based on calendar quarters. Interim calculations and payments will be made
within sixty (60) days of the end of each calendar quarter except for the
fourth quarter for which no calculation or payment will be made in
anticipation of the final year end settlement. Calculations will be made in
accordance with the contractual terms above and the amount of PacifiCare's
quarterly payments to or from IPA will be sixty percent (60%) of the amount
due in order to adjust for incurred Hospital Service claims not yet received
by PacifiCare.
A calendar year-end calculation of the Utilization Control Program shall be made
by PacifiCare and payment, if required, shall be made within one hundred twenty
(120) days of the end of the calendar year. If an additional amount is payable
by IPA to PacifiCare, such payment is due within thirty (30) days of receipt of
calculation.
7. MONTHLY REPORTING
PacifiCare will distribute a report monthly, on or before the 15th day of the
month, that lists the payments made during the previous month for Hospital
Services included in the Utilization Control Program.
8. Any hospital or emergency expenses that are considered third party
liability, workers compensation claims, or coordination of benefits claims,
shall be included in the Utilization Control Program calculations. If, at a
later date, these claims are collected from any third party, then an adjustment
will be made in the calculations.
- 8 -
<PAGE>
9. REINSURANCE.
The purpose of the reinsurance program described herein is to limit IPA's
risk for Hospital Services under the Utilization Control Program to a
specified amount per Subscriber per Year (the "Reinsurance Deductible") in
return for a payment of a Reinsurance Premium. For the 1995 calendar year,
the Reinsurance Deductible shall be [ ** ] and the Reinsurance Premium shall
equal [ ** ] of the Net Premium per Subscriber per month. Notwithstanding
Section 12.12, PacifiCare may amend the Reinsurance Premium and Reinsurance
Deductible on an annual basis effective each January l by providing sixty
(60) days prior written notice to IPA.
- 9 -
<PAGE>
EXHIBIT 3
ATTACHMENT A6
PACIFICARE POINT OF SERVICE CONTROL PROGRAM
1. INTRODUCTION
The PacifiCare Point of Service Control Program is designed to provide a
financial incentive for the control of In-Network Hospital Services and
Out-of-Network Services.
PacifiCare Point of Service Subscriber member months and related In-Network
Hospital Service expenses shall not be included in calculating the
Conventional Utilization Control Program described in Attachment A5.
2. POINT OF SERVICE BUDGET - shall equal [ ** ] of the Net Premiums
billed, [ ** ] specified in Attachment A5, Paragraph 9 in this Agreement
for the Reinsurance Deductible specified in Attachment A5, Paragraph 9 of
this Agreement for In-Network Hospital Services reinsurance.
3. ACTUAL COSTS applied against the Point of Service Budget will consist
of:
a. In-Network Hospital Services costs incurred during the period of
calculation for which PacifiCare has received a claim and paid net of
discounts; In-Network Hospital Services incurred prior to the period of
calculation and paid during the current period; and for quarterly
interim calculations, In-Network Hospital Services incurred during the
period for which PacifiCare has received a claim but has not paid, less
an average aggregate discount factor (for year end calculations, only
paid claims will be included); LESS Subscriber claim costs in excess of
the In-Network Hospital Services reinsurance deductible specified above;
b. Claims paid charges for Out-of-Network Services incurred during the
current period; and paid claim charges for Out-of-Network Services
incurred but not included in prior period Point of Service Control
Program calculations; LESS
c. Third party liability and coordination of benefit recoveries for
In-Network and Out-of-Network Services that are received during the
period of calculation
- 10 -
<PAGE>
3. SAVINGS DISTRIBUTION - In the event that total charges are less than
the earned Point of Service Budget, IPA shall be entitled to participate in a
capitation restoration program, whereby IPA shall receive the difference
between actual capitation paid for PacifiCare Point of Service Subscribers
for the period and the amount IPA would have received had IPA's capitation
payments been based on [ ** ] of the rates as defined in Attachment C.
Distribution to IPA under this capitation restoration program shall be
limited to the savings available pursuant to the Point of Service Control
Program calculation. Additionally, IPA shall receive [ ** ] of any remaining
savings, if any, after the IPA capitation restoration distribution.
IPA is not at financial risk in the event that total charges exceed the earned
Point of Service Budget.
4. PERIODIC CALCULATIONS - The PacifiCare Point of Service Control Program
shall be administered on an IPA specific basis. For IPAs with multiple IPA
Facilities, the program shall be calculated for each IPA Facility, however
savings and payment distributions shall be based on IPA's consolidated results.
Cumulative calculations of the PacifiCare Point of Service Control Program
results will be based on calendar quarters in conjunction with Conventional
Plan Hospital Control Program calculations, which are within sixty (60) days
of the end of each calendar quarter except for the forth quarter for which no
calculation or payment will be made in anticipation of the year end
settlement. Interim distribution payments will be limited to sixty percent
(60%) of calculated savings to account for incurred but not received claims.
Year end calculations and payments of the PacifiCare Point of Service Control
Program shall be made within one hundred twenty (120) days of the end of each
calendar year.
- 11 -
<PAGE>
EXHIBIT 4
ATTACHMENT C
CAPITATION PAYMENT RATES
The monthly Capitation Payment which PacifiCare shall pay IPA shall equal
IPA's cumulative shares of the Percent of Premium. The Percent of Premium
designated by PacifiCare for payment for Medical Services shall equal
[ ** ] of the Net Premiums per Subscriber per month, minus the applicable
ISL premium as identified in Attachment A3. IPA's portion of the Percent of
Net Premium shall equal IPA's cumulative share per employer group based upon
the number of men, women and children Subscribers of such employer group
designating IPA as their Participating Medical Group for the month of
Capitation Payment."
An Experience-Rated Plan is a non-federally qualified plan in which the
employers' premium is partially deferred and/or adjusted to reflect the
actual medical costs incurred by the employers' Subscribers. For
Experience-Rated Plans, the percent of premium for Capitation Payment
purposes shall be calculated as a percent of the Actuarial Experience Rate,
rather than of gross premiums billed. The Actuarial Experience Rate is
calculated by the same method used to determine the premium for federally
qualified plans, except that trended claims/utilization data may be
considered to determine expected medical costs, and PacifiCare's
administrative retention may be adjusted to reflect actuarial risk taken by
the employer instead of PacifiCare. The Actuarial Experience will also be
higher than billed premiums where employer premiums are partially deferred.
IPA acknowledges that [ ** ] of the above gross Capitation Payment rate is
designated as the value for providing the utilization data described in
Paragraph 8.03. Should IPA fail to submit such data, which was reasonably
within the control of IPA to submit, within ninety (90) days of the date of
service, PacifiCare shall permanently withhold [ ** ] of the IPA's
Capitation Payment rate for each month IPA fails to submit such data. The
Capitation Payment shall be subject to retroactive adjustment by PacifiCare
based upon subsequent eligibility determinations of Subscribers designating
IPA as their Participating Medical Group. Such retroactive adjustments shall
be made within one hundred eighty (180) days after the end of the month for
which the applicable Capitation Payment applies. The methodology for
determining IPA's Capitation Payment is more fully set forth in the
PacifiCare Provider Policies and Procedures Manual in Attachment D hereto.
- 12 -
<PAGE>
PACIFICARE POINT OF SERVICE CAPITATION PAYMENTS
Capitation Payments for PacifiCare Point of Service Plan Subscribers will be
determined in the same manner as for Conventional Plan Subscribers, except as
provided in this paragraph. IPA's Capitation Payment for PacifiCare Point of
Service Plan Subscribers shall equal the Percent of Premium specified in this
Attachment C multiplied by [ ** ] of the Premium billed by PacifiCare each
month for coverage of Subscribers designating IPA as their Participating
Medical Group, less [ ** ] the ISL Premium Rate specified for the
Individual Stop Loss Program noted in Attachment A3.
PacifiCare shall provide IPA appropriate documentation in support of the actual
Capitation Payment made. Should IPA desire additional billing information,
PacifiCare shall make available for inspection other mutually agreed upon
documents, upon thirty (30) days prior written notice from IPA. IPA shall have
the right to reasonably audit PacifiCare's books and records directly relating
only to IPA's Capitation Payment determinations upon thirty (30) days prior
written notice at IPA's sole expense.
URGENT CARE
In consideration of IPA's operation of an approved Urgent Care Center,
PacifiCare shall pay to IPA an additional [ ** ] per member per month. It
is understood that the Urgent Care Center meets approved criteria, as
referenced in Attachment I, on an ongoing basis in order to qualify for this
adjustment.
DURABLE MEDICAL EQUIPMENT (DME)
In consideration of IPA providing durable medical equipment pursuant to the
PacifiCare Health Plan, PacifiCare shall pay IPA an additional [ ** ] per
member per month. DME includes but is not limited to corrective appliances,
artificial aids, and prosthetics.
MATERNITY PAYMENTS
For term pregnancies delivered within nine (9) months of a Subscriber's
initial assignment to IPA, PacifiCare shall pay IPA [ ** ] at the time of
processing the inpatient obstetrical claim.
MAMMOGRAPHY SERVICES
IPA shall receive [ ** ] for each screening and diagnostic mammography
study performed above the 1987 PacifiCare wide baseline, specific to the
PacifiCare commercial program, for
- 13 -
<PAGE>
such studies. (This baseline equals [ ** ] studies per [ ** ] adult
females per Year.)
The amount due to IPA shall be calculated based upon utilization date submitted
by IPA and shall be paid within one hundred fifty (150) days of the end of the
Year. Such utilization data must be received by PacifiCare within ninety (90)
days of calendar year end to be included in this reimbursement program.
- 14 -
<PAGE>
EXHIBIT 5
ATTACHMENT F
AIDS STOP LOSS PROGRAM
PacifiCare agrees to provide additional financial protection to IPA for the cost
of Medical Services rendered to Subscribers who have "Acquired Immunodeficiency
Syndrome" (AIDS). Subscribers who are eligible for this program are as follows:
Subscribers who are admitted to a hospital or referred to home health care
for the treatment of an opportunistic infection and have been diagnosed
with clinical AIDS according to the current Case Definition of AIDS used by
the Center for Disease Control (CDC) for National Reporting (CDC-reportable
AIDS).
Once PacifiCare's Medical Services Department has verified that a Subscriber
meets the definition above, further expenses for Medical Services associated
with the Subscriber's AIDS care will be paid by PacifiCare as defined by Cost of
Care in Attachment A4 hereto. THE CONDITION FOR WHICH TREATMENT IS RENDERED
MUST BE DIRECTLY RELATED TO AIDS. EXPERIMENTAL TREATMENT IS NOT COVERED. To
receive reimbursement, IPA must submit a Stop Loss claim to PacifiCare
indicating the date the Subscriber became eligible for the AIDS Stop Loss
Program and the expenses incurred on behalf of the Subscriber after the
effective date. IPA may include claims under the AIDS Stop Loss Program
commencing on the date the Subscriber was admitted to the hospital, or on the
date home health care was provided the Subscriber, pursuant to the eligibility
criteria noted above. Expenses for Medical Services pertaining to AIDS care
rendered from January 1, through December 31 of each calendar year, will be
included in the AIDS Stop Loss Program. A final claim must be filed for such
Medical Services by each March 31 to be included in this AIDS Stop Loss Program.
All claims submitted for consideration under the AIDS Stop Loss Program must be
processed and coordinated in a confidential manner. Inquiries for determining
such procedures should be directed to PacifiCare's Medical Director.
- 15 -
<PAGE>
"ALL SECTIONS MARKED WITH TWO ASTERISKS ("**") REFLECT PORTIONS WHICH HAVE
BEEN REDACTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION BY PROSPECT MEDICAL HOLDINGS, INC. AS PART OF A REQUEST FOR
CONFIDENTIAL TREATMENT."
1994 AMENDMENT TO
IPA COMMERCIAL SERVICES AGREEMENT
The undersigned parties to the PacifiCare IPA Commercial Services Agreement
between PacifiCare of California ("PacifiCare") and Santa Ana-Tustin Physicians
Group, Inc. ("IPA") do hereby amend said Agreement as follows:
1. Section 3.29, WITHDRAWAL OF A MEMBER PHYSICIAN, shall be added as follows:
"3.29 WITHDRAWAL OF A MEMBER PHYSICIAN - In the event IPA seeks to
withdraw one or more of the Member Physicians from providing or arranging Health
Care Services to Subscribers under this Agreement, IPA must notify PacifiCare of
such withdrawal in writing at least sixty (60) days prior to the effective
withdrawal date. After the effective date of withdrawal, IPA shall still be
responsible to provide or arrange for Medical Services to such Subscribers."
2. Attachment A5, HOSPITAL CONTROL PROGRAM, is amended as follows:
See Exhibit 1, attached hereto and incorporated herein by this reference.
3. Attachment C, CAPITATION PAYMENT RATES, shall be amended as follows:
The first paragraph shall be amended as follows: "The monthly Capitation
Payment which PacifiCare shall pay IPA shall equal IPA's cumulative shares of
the Percent of Premium. The Percent of Premium designated by PacifiCare for
payment for Medical Services shall equal [ ** ] of the gross premiums
billed by PacifiCare each month for coverage of Subscribers designating IPA
as their Participating Medical Group pursuant to the PacifiCare Health Plan,
not including the Supplemental Benefit Premiums less [ ** ] in
consideration of the Individual Stop Loss Program noted in Attachment A3
hereto, and also less necessary consideration as determined by PacifiCare for
supplemental benefits for which IPA assumes no financial responsibility. In
instances where billed premiums reflect an additional charge to account for
broker's fees that exceed PacifiCare's standard broker commission schedule
("Broker Fee Adjustment"), such Broker Fee Adjustment shall not be included
in the calculation of the IPA's Monthly Capitation Payment. IPA's portion of
the Percent of Premium shall equal IPA's cumulative share per employer group,
based upon the number of men, women and children Subscribers of such employer
group designating IPA as their Participating Medical Group for the month of
Capitation Payment."
1
<PAGE>
A second paragraph shall be inserted in Attachment C as follows: "An
Experience-Rated Plan is a non-federally qualified plan in which the
employers' premium is partially deferred and/or adjusted to reflect the
actual medical costs incurred by the employers' Subscribers. For
Experience-Rated Plans, the percent of premium for Capitation Payment
purposes shall be calculated as a percent of the Actuarial Experience Rate,
rather than of gross premiums billed. The Actuarial Experience Rate is
calculated by the same method used to determine the premium for federally
qualified plans, except that trended claims/utilization data may be
considered to determine expected medical costs, and PacifiCare's
administrative retention may be adjusted to reflect actuarial risk taken by
the employer instead of PacifiCare. The Actuarial Experience will also be
higher than billed premiums where employer premiums are partially deferred."
4. Attachment E, PHARMACY CONTROL PROGRAM, is amended in full as follows:
See Exhibit 2, attached hereto and incorporated herein by this reference.
5. Attachment F, AIDS STOP LOSS PROGRAM, is amended in full as follows:
See Exhibit 3, attached hereto and incorporated herein by this reference.
6. Attachment H, DIVISION OF FINANCIAL RESPONSIBILITY, is amended in full as
follows:
See Exhibit 4, attached hereto and incorporated herein by this reference.
The effective date of this Amendment is January 1, 1994.
By signing below, both parties hereto have executed and agreed to this
Amendment.
PACIFICARE OF CALIFORNIA SANTA ANA-TUSTIN MEDICAL PHYSICIANS
GROUP, INC.
By: By: /s/ Melvin L. Reich
---------------------------------- -----------------------------------
Nancy Freeman, Vice President
Print name: Melvin L. Reich
---------------------------
Title: President
--------------------------------
Date: Date: 12/22/93
-------------------------------- ---------------------------------
Tax I.D.: 95-3532036
-----------------------------
2
<PAGE>
EXHIBIT 1
ATTACHMENT A5
1994 - HOSPITAL CONTROL PROGRAM
1. INTRODUCTION
The Hospital Control Program is designed to provide a financial incentive for
the control of Hospital Services, in-area Emergency Services and selected other
outpatient services. The Hospital Control Program utilizes a Withhold Amount as
defined below. Risk limitations are included at both the individual Subscriber
claim level, through the payment of a reinsurance premium for specific stop loss
(the deductible, premium and coinsurance rates are specified in the Budget
below); and at the aggregate level, through a percentage limitation on overall
shared savings or losses. HCP calculations are based on Budgets in effect for
each month.
a. WITHHOLD AMOUNT - PacifiCare shall withhold from IPA's monthly
Capitation Payment an amount equal to [ ** ] to apply to IPA's share
of Budget Deficits, if any. PacifiCare may prospectively adjust the
Withhold Amount on a quarterly basis based upon the results of Hospital
Control Program calculations. If the Agreement is terminated or
non-renewed pursuant to Section 6 or Section 7 of the Agreement,
PacifiCare may choose to adjust the Withhold Amount at the time that
the notice of termination or non-renewal is served.
<TABLE>
<CAPTION>
2. BUDGET DOLLARS $PMPM
-------------
<S> <C>
Inpatient Hospital [ ** ]
Utilization Rate 207 days PTMPY
Per diems, net of discounts:
Regular Plans [**]
Co-Pay Plans [**]
[**]
Emergency Room and Ambulance Services [ ** ]
Outpatient Surgery and other Services [ ** ]
Selected OP Services from Capitation [ ** ]
(Chemotherapy, Dialysis, home health etc)
Urgent Care Center Agreement [ ** ]
Hospital Control Program Payout Pool [ ** ]
SUB-TOTAL [ ** ]
Reinsurance Program Deductible [ ** ] [ ** ]
TOTAL BUDGET PMPM [ ** ]
</TABLE>
3
<PAGE>
Attachment A5 Continued
The Total Budget per Subscriber per month ("PMPM") to be used for settlement
purposes shall be calculated by applying the IPA's specific composite age/sex
factor to the budgeted amounts for Inpatient Hospital, Emergency Room and
Ambulance Services, Outpatient Surgery Services, and Selected Outpatient
Services. The composite age/sex factor will be calculated by multiplying the
IPA's member months within each age/sex category listed below and dividing the
sum of these numbers by IPA's total member months. The age/sex adjusted dollar
figure will be added to the other Hospital Control Program budget components.
<TABLE>
<CAPTION>
AGE/SEX AGE/SEX
CATEGORY FACTOR
-------- ------
<S> <C>
Child, age 0-1 [ ** ]
Child, age 2-9 [ ** ]
Child, age 10-17 [ ** ]
Female, age 18-29 [ ** ]
Female, age 30-44 [ ** ]
Female, age 45-64 [ ** ]
Female, age 65+ [ ** ]
Male, age 18-29 [ ** ]
Male, age 30-44 [ ** ]
Male, age 45-64 [ ** ]
Male, age 65+ [ ** ]
</TABLE>
3. ACTUAL COSTS
Actual costs are defined for purposes of the Hospital Control Program as
the sum of the following:
a. Hospital Services incurred during the period of calculation for
which PacifiCare has received a claim and paid, valued at the amount
paid by PacifiCare;
b. For quarterly interim calculations, Hospital Services incurred
during the period of calculation for which PacifiCare has received a
claim but has not paid, less an average aggregate discount factor (for
year-end calculations, only paid claims will be included);
c. Hospital Services incurred prior to the period of calculation,
and paid during the current period;
LESS:
d. Subscriber claim costs in excess of the reinsurance deductible
and coinsurance specified in the Budget;
e. Third party recoveries and coordination of benefits
recoveries received during the period of calculation that are
associated with current or prior calculation periods.
4
<PAGE>
Attachment A5 Continued
4. CALCULATION OF SAVINGS AND LOSSES
The inpatient hospital component of the budget is stated assuming [ ** ] of
Subscribers enroll in benefit plans with hospital service copayments,
coinsurance and deductible obligations ("Co-Pay Plans"). It is also assumed
that [ ** ] of Subscribers enroll in non-Co-Pay Plans ("Regular Plans").
The Budget will be adjusted to reflect the actual number of Subscribers who
enroll in the Co-Pay Plans and Regular Plans based upon PacifiCare's Member
Month Moving Analysis Report for the period (MB0530). The MB0530 Report is a
report that reflects actual eligible Subscribers by benefit plan for the
period, as adjusted for retroactive eligibility terminations and additions
reported during the period as of the report's run date. The Budget, when
adjusted as described above, shall be referred to as the Earned Budget. The
Earned Budget may be greater or less than the Total Budget PMPM indicated in
Section 2 above.
5. BUDGET DEFICIT
If the Actual Costs exceed the Earned Budget during any Year, the amount of
this excess will be referred to as the Budget Deficit. IPA's share of the
Budget Deficit shall be [ ** ] of the Budget Deficit, [ ** ] of the
Earned Budget. In the event of a Budget Deficit, PacifiCare shall pay IPA
the Withhold Amount, less IPA's share of the Budget Deficit. If IPA's share
of the Budget Deficit is greater than the Withhold Amount for the Initial
Term, the difference between these amounts (the "Additional Payable Amount")
shall be payable by IPA to PacifiCare within thirty (30) days from receipt of
the calculation.
6. BUDGET SURPLUS
In the event that Actual Costs are less than the Earned Budget for any year,
this shall be referred to as a Budget Surplus. In the event of a Budget
Surplus, PacifiCare shall pay IPA the Withhold Amount, plus the share of savings
relative to the bed days per thousand Subscribers per year (PTMPY) indicated in
the following sliding scale schedule:
<TABLE>
<CAPTION>
Bed Days; Outpt. Surgery IPA % SHARE OF SAVINGS
PTMPY Limited to [ ** ] of Earned Budget
- ------------------------ -------------------------------------
<S> <C>
Over 269 [ ** ]
245 - 269 [ ** ]
220 - 244 [ ** ]
under 220 [ ** ]
</TABLE>
5
<PAGE>
Attachment A5 Continued
For the purpose of this calculation, "Bed Days; Outpt. Surgery" shall be
defined as acute inpatient days plus outpatient surgeries, minus any acute
inpatient days or outpatient surgeries which are covered under the reinsurance
program, or are paid through a third party recovery, or through coordination of
benefits.
7. PERIODIC CALCULATIONS
Cumulative calculations of the Hospital Control Program results will be based on
calendar quarters. Interim calculations and payments will be made within sixty
(60) days of the end of each calendar quarter except for the fourth quarter for
which no calculation or payment will be made in anticipation of the final year
end settlement. Calculations will be made in accordance with the contractual
terms above and the amount of PacifiCare's quarterly payments to or from IPA
will be sixty percent (60%) of the amount due in order to adjust for incurred
Hospital Service claims not yet received by PacifiCare.
A calendar year-end calculation of the Hospital Control Program shall be made by
PacifiCare and payment, if required, shall be made within one hundred twenty
(120) days of the end of the calendar year. If an additional amount is payable
by IPA to PacifiCare, such payment is due within thirty (30) days of receipt of
calculation.
8. MONTHLY REPORTING
PacifiCare will distribute a report monthly, on or before the 15th day of the
month, that lists the payments made during the previous month for services
included in the Hospital Control Program.
9. SPECIAL CONDITIONS FOR EMERGENCY SERVICES
If the IPA and/or its participating physicians direct a PacifiCare Subscriber to
use the emergency room of a hospital, and PacifiCare determines that the use of
those services were not Emergency Services as defined in this Agreement,
PacifiCare reserves the right to deduct the emergency room professional
component from the IPA's Capitation Payment as a penalty for improper referral.
When an inappropriate referral for emergency care has been determined by
PacifiCare, a written Conformance Request will be forwarded to the IPA. The
Conformance Request will serve as notice that all subsequent inappropriate
referrals will have the penalty applied.
10. Any hospital or emergency expenses that are considered third party
liability, workers compensation claims, or coordination of benefits claims,
shall be included in the Hospital Control Program calculations. If, at a later
date, these claims are collected from any third party, then an adjustment will
be made in the calculations.
6
<PAGE>
EXHIBIT 2
ATTACHMENT E
1994 PHARMACY CONTROL PROGRAM
The purpose of the Pharmacy Control Program (PCP) is to provide incentive to the
IPA to foster the efficient utilization of prescription services. IF PHARMACY
COSTS PMPM FOR 1994 ARE AT OR BELOW THE IPA'S "AGE, SEX AND COPAYMENT ADJUSTED"
BUDGET, the IPA is given the opportunity to share in savings realized by IPA
maintaining or improving specific utilization goals as outlined below.
TOTAL BUDGET PMPM - The actual budget to be used for settlement purposes will be
calculated by applying the age/sex factor for each Subscriber to the budgeted
Copay Plan for each subscriber. The total budget will be based on the mix of
age, sex, and copayment plans of Subscribers who have designated IPA as their
Participating Medical Group:
AGE/SEX FACTORS
<TABLE>
<CAPTION>
AGE/SEX CATEGORY AGE/SEX FACTOR
<S> <C>
Child, Under 1 [ ** ]
Child, Age 1 [ ** ]
Child, Age 2-9 [ ** ]
Child, Age 10-17 [ ** ]
Female, Age 18-19 [ ** ]
Female, Age 20-24 [ ** ]
Female, Age 25-29 [ ** ]
Female, Age 30-34 [ ** ]
Female, Age 35-44 [ ** ]
Female, Age 45-59 [ ** ]
Female, Age 50-54 [ ** ]
Female, Age 55-59 [ ** ]
Female, Age 60-64 [ ** ]
Female, Age 65+ [ ** ]
Male, Age 18-19 [ ** ]
Male, Age 20-24 [ ** ]
Male, Age 25-29 [ ** ]
Male, Age 30-34 [ ** ]
Male, Age 35-44 [ ** ]
Male, Age 45-49 [ ** ]
Male, Age 50-54 [ ** ]
Male, Age 55-59 [ ** ]
Male, Age 60-64 [ ** ]
Male, Age 65+ [ ** ]
</TABLE>
7
<PAGE>
PLAN FACTORS
<TABLE>
<CAPTION>
COPAY PLAN TYPE 1994 BUDGET
<S> <C>
$0 Copay [ ** ]
$1 Copay [ ** ]
$2 Copay [ ** ]
$3 Copay [ ** ]
$4 Copay [ ** ]
$5 Copay [ ** ]
$6 Copay [ ** ]
$7 Copay [ ** ]
$8 Copay [ ** ]
$9 Copay [ ** ]
$10 Copay [ ** ]
$5/$10 Copay[*] [ ** ]
$5/$15 Copay[*] [ ** ]
$5/$5 + 30% Copay[*] [ ** ]
$5 MFP[**] [ ** ]
$7 MFP[**] [ ** ]
$5/$10 MFP[**] [ ** ]
</TABLE>
* Tiered copay plans. A $5/$10 copay plan has a $5 copay for generic scripts
and a $10 copay for brand name scripts.
** Modified family planning (MFP) plans exclude [ ** ].
Debited against this budget will be the actual expenses paid by PacifiCare for
pharmacy services of those Subscribers which designated IPA as their
Participating Medical Group for the applicable month. If pharmacy costs pmpm
for 1994 are at or below budget, the IPA will be able to participate in the
incentive programs described below.
GENERIC PERCENTAGE INCENTIVE - The Pharmacy Control Program shall be indexed
to PacifiCare's [ ** ], which shall be adjusted to reflect brand name drugs
going off-patent in [ ** ]. For every percentage point IPA exceeds
PacifiCare's [ ** ] PacifiCare shall pay IPA an amount per member per month
in accordance with the following prescription utilization rate scale:
8
<PAGE>
<TABLE>
<CAPTION>
PRESCRIPTION UTILIZATION RATE
(RX/MEM/YR) *
GREATER THAN
PAYOUT FACTOR PMPM OR EQUAL TO LESS THAN
- ------------------ ----------- ---------
<S> <C> <C> <C>
[ ** ] [ ** ] [ ** ] [ ** ]
[ ** ] [ ** ] [ ** ] [ ** ]
[ ** ] [ ** ] [ ** ] [ ** ]
[ ** ] [ ** ] [ ** ] [ ** ]
[ ** ] [ ** ] [ ** ] [ ** ]
[ ** ] [ ** ] [ ** ]
</TABLE>
[ ** ]
FORMULARY BONUS - If IPA qualifies for a generic percentage rate payment as
outlined above, a bonus payment of [ ** ] shall be paid for every [ ** ]
IPA's formulary utilization percentage rate exceeds [ ** ] up to a maximum
of [ ** ].
IPA agrees to participate in a generic substitution and formulary program
established by PacifiCare's Formulary Advisory Committee.
UTILIZATION AND CALCULATION REPORTS
PacifiCare shall provide quarterly utilization reports showing IPA's generic
percentage, prescription rate, formulary percentage, and year to date
pharmacy budget along with a comparison to [ ** ]. PacifiCare shall
provide semi-annual Pharmacy Control Program calculations and incentive
payments. The first payment shall be for the six months ending June 30, 1994
and shall be paid within sixty days of this date. The final calculation and
incentive payment shall be cumulative for the twelve months ending December
31, 1994 and shall be paid within one hundred twenty days of year end.
In the event that IPA receives a semi-annual incentive payment that is greater
than the cumulative twelve month calculated amount, PacifiCare shall be due a
refund of the difference.
9
<PAGE>
EXHIBIT 3
ATTACHMENT F
1994 AIDS STOP LOSS PROGRAM
PacifiCare agrees to provide additional financial protection to IPA for the cost
of Medical Services rendered to Subscribers who have "Acquired Immunodeficiency
Syndrome" (AIDS). Subscribers who are eligible for this program are as follows:
Subscribers who are admitted to a hospital or referred to home health care
for the treatment of an opportunistic infection and have been diagnosed
with clinical AIDS according to the current Case Definition of AIDS used by
the Center for Disease Control (CDC) for National Reporting (CDC-reportable
AIDS).
Once PacifiCare's Medical Services Department has verified that a Subscriber
meets the definition above, further expenses for Medical Services associated
with the Subscriber's AIDS care will be paid by PacifiCare as defined by Cost of
Care in Attachment A4 hereto. THE CONDITION FOR WHICH TREATMENT IS RENDERED
MUST BE DIRECTLY RELATED TO AIDS. EXPERIMENTAL TREATMENT IS NOT COVERED. To
receive reimbursement, IPA must submit a Stop Loss claim to PacifiCare
indicating the date the Subscriber became eligible for the AIDS Stop Loss
Program and the expenses incurred on behalf of the Subscriber after the
effective date. IPA may include claims under the AIDS Stop Loss Program
commencing on the date the Subscriber was admitted to the hospital, or on the
date home health care was provided the Subscriber, pursuant to the eligibility
criteria noted above. Expenses for Medical Services pertaining to AIDS care
rendered from January 1, 1994 through December 31, 1994 only will be included in
the AIDS Stop Loss Program. A final claim must be filed for such Medical
Services by March 31, 1995 to be included in this AIDS Stop Loss Program.
All claims submitted for consideration under the AIDS Stop Loss Program must be
processed and coordinated in a confidential manner. Inquiries for determining
such procedures should be directed to PacifiCare's Medical Director.
10
<PAGE>
EXHIBIT 4
ATTACHMENT G
DIVISION OF FINANCIAL RESPONSIBILITY
The attached template outlines the division of financial responsibility
between IPA, the Hospital Control Program (HCP), and PacifiCare (PC), the intent
being to clarify Medical Service and Hospital Service categories in order to
provide for accurate administration. As it is impossible to include every
service available, the template serves as a model under which broad Medical
Service and Hospital Service categories suggest the appropriate financial
responsibility for services or items not specifically listed.
11
<PAGE>
DIVISION OF FINANCIAL RESPONSIBILITY
CALIFORNIA
Commercial Services Agreement
(IPA Capitated, Hospital Control Program with PacifiCare)
IPA SANTA ANA-TUSTIN PHYSICIANS GROUP, INC.
<TABLE>
<CAPTION>
Responsible Party
-------------------------------------------------------
<S> <C> <C> <C>
List of Benefits IPA PacifiCare PacifiCare
- ---------------- HCP 100%
AIDS - Professional Component
- Facility Component
Allergy
- Testing
- Serum (is not covered by all plans;
those with coverage are noted
in back of in back of
eligibility list)
Ambulance, Air or Ground - In Area
- Out of Area
Amniocentesis
Anesthetics, Administration of
(Anesthesiology)
Apnea Monitor (DME)
Artificial Insemination [ ** ](1)
Artificial Limbs (DME)
Biofeedback
Blood & Blood Products (Including
Professional Component)
- From Blood Bank
- Autologous Blood Donation
Chemical Dependency Rehabilitation
Chemotherapy
- Drugs
- Professional Component
Chiropractic (requires P.M.G. referral)
Circumcision
Colostomy Supplies
- Outpatient
- Inpatient
Contact Lenses
- Intraocular lens (surgically
implanted)
- Incident to Cataract Surgery
Cosmetic Surgery (Medically Necessary)
- Facility Component
- Professional Component
Dental Services (for repair of
accident/injury only)
- Facility Component
- Professional Component
Detox
- Facility Component
- Professional Component
</TABLE>
(1) All references to division of responsibility have been deleted.
12
<PAGE>
DIVISION OF FINANCIAL RESPONSIBILITY
CALIFORNIA
Commercial Services Agreement
(IPA Capitated, Hospital Control Program with PacifiCare)
IPA SANTA ANA-TUSTIN PHYSICIANS GROUP, INC.
<TABLE>
<CAPTION>
Responsible Party
-------------------------------------------------------
<S> <C> <C> <C>
List of Benefits IPA PacifiCare PacifiCare
- ----------------
Durable Medical Equipment (DME)
- Surgically Implanted
- Inpatient
- Outpatient
- Hearing Aids
- Custom made
- Custom fitted
Emergency Room Facility Component
- In Area
- Out of Area
Emergency Room Physicians - In Area
- Initial Treatment [ ** ](1)
- Consults
- Out of Area
Employment Physical
Endoscopic Studies
- With Biopsy
- Without Biopsy
Experimental Procedures
Family Planning (e.g.: Abortions,
Amniocentesis, Artificial Insemination,
Contraceptive Devices, Genetic Testing,
Infertility Treatment, Tubal
Ligation, Vasectomy)
- Professional Component
- Facility Component
- Diaphragms
- Oral Contraceptives
- Invitro Fertilization
- Reversal of Sterilization
Fetal Monitoring
- Outpatient (diagnostic)
- Inpatient
Genetic Testing
Health Education
Health Evaluation (Physical)
Hearing Aids
Hearing Screening
Hemodialysis
- Inpatient
- Outpatient
</TABLE>
(1) All references to division of responsibility have been deleted.
13
<PAGE>
DIVISION OF FINANCIAL RESPONSIBILITY
CALIFORNIA
Commercial Services Agreement
(IPA Capitated, Hospital Control Program with PacifiCare)
IPA SANTA ANA-TUSTIN PHYSICIANS GROUP, INC.
<TABLE>
<CAPTION>
Responsible Party
-------------------------------------------------------
<S> <C> <C> <C>
List of Benefits IPA PacifiCare PacifiCare
- ---------------- 100%
Home Health Care
(includes IV)
Hospice Services
- Inpatient
- Professional Component
Hospital Based Physicians (Inpatient)
- Anesthesiology
- Audiology
- Cardiology
- Diagnostic Services
- Neonatology
- Neurology [ ** ](1)
- Nephrology
- Pathology
- Physical Medicine
- Pulmonary
- Radiology
- Radiation Oncology
- Surgeon
Hospitalization, Inpatient Services
Supplies and Testing
- In Area
- Out of Area
Immunization and Inoculations
- As Medically indicated
- For work/travel
Infertility (diagnosis and treatment)
- Professional Component
- Facility Component
Injections and Injected Substances
(outpatient)
Insulin & Syringes
Laboratory Services
- Outpatient
- Inpatient
Lithotripsy
- Professional Component
- Facility Component
Mammography
Marriage Counseling
</TABLE>
(1) All references to division of responsibility have been deleted.
14
<PAGE>
DIVISION OF FINANCIAL RESPONSIBILITY
CALIFORNIA
Commercial Services Agreement
(IPA Capitated, Hospital Control Program with PacifiCare)
IPA SANTA ANA-TUSTIN PHYSICIANS GROUP, INC.
<TABLE>
<CAPTION>
Responsible Party
-------------------------------------------------------
<S> <C> <C> <C>
List of Benefits IPA PacifiCare PacifiCare
- ---------------- 100%
Medication
- Intravenous (as outpatient or
home health)
- Inpatient
- O.P. covered injectables
- O.P. non-injectables
Mental Health
- Inpatient Facility Component
- Inpatient Professional Component
- Outpatient Professional Component
Nuclear Medicine Diagnostics
Nuclear Medicine Treatment/Therapy
- Facility Component (inpatient)
- Facility Component (outpatient)
- Professional Component
Nutritional/Dietetic Counseling
O.B. Complications (In Area)
- Outpatient Diagnostic Services
- Inpatient Facility Component [ ** ](1)
- Inpatient Professional Component
PMG Referred
- Emergent Diagnostics (OB Unit)
- ER Treatment
Office Visit Supplies, Splints,
Bandages, custom fitted appliances,
etc.
Organ Transplants (non-experimental)
- Facility component
- Professional component
O.P. Surgery
- Facility Component
- Professional Component
(Interpretative MD's)
- Professional Component - other
(i.e., Surgeon, Assistant Surgeon,
etc.)
- Anesthesiology
Outpatient Surgery/Facility Based
Physicians
- Anesthesiology
- Audiology
- Cardiology
- Emergency Room
- Diagnostic Services
- Neonatology
- Neurology
- Nephrology
- Pathology
- Physical Medicine
- Pulmonary
- Radiology
- Radiation Oncology
- Surgeon
</TABLE>
(1) All references to division of responsibility have been deleted.
15
<PAGE>
DIVISION OF FINANCIAL RESPONSIBILITY
CALIFORNIA
Commercial Services Agreement
(IPA Capitated, Hospital Control Program with PacifiCare)
IPA SANTA ANA-TUSTIN PHYSICIANS GROUP, INC.
<TABLE>
<CAPTION>
Responsible Party
-------------------------------------------------------
<S> <C> <C> <C>
List of Benefits IPA PacifiCare PacifiCare
- ---------------- HCP 100%
Outpatient Diagnostic Services -
Facility and Professional (including
but not limited to those listed below)
- Angiograms
- Cat Scan
- 2 D Echo
- EEG
- EKG
- EMG
- ENG
- MRI
- Treadmills
- Ultrasound
Pediatric Services (newborn)
Physical Therapy
- Inpatient [ ** ](1)
- Outpatient
Physician visits
- To Hospital
- To S.N.F.
- To Patients Home
Physician Office Visits/Consultations
Podiatry Services (requires P.M.G.
referral)
Pregnancy
- Professional Component
- Facility Component
Prosthetic Devices
- Surgically Implanted
- Outpatient
Radiation Therapy
- Professional Component
- Facility Component (inpatient)
- Facility Component (outpatient)
Radiology Services
- Outpatient
- Inpatient
- O.P. Surgery
Reconstructive Surgery
- Facility Component
- Professional Component
- Prosthetics
Refractions
</TABLE>
(1) All references to division of responsibility have been deleted.
16
<PAGE>
DIVISION OF FINANCIAL RESPONSIBILITY
CALIFORNIA
Commercial Services Agreement
(IPA Capitated, Hospital Control Program with PacifiCare)
IPA SANTA ANA-TUSTIN PHYSICIANS GROUP, INC.
<TABLE>
<CAPTION>
Responsible Party
-------------------------------------------------------
<S> <C> <C> <C>
List of Benefits IPA PacifiCare PacifiCare
- ---------------- HCP 100%
Rehabilitation (Short Term, i.e.: P.T.,
O.T., Speech, Cardiac Therapy)
- Inpatient Facility Component
- Inpatient Professional Component
- Outpatient Facility Component
- Outpatient Professional Component
Skilled Nursing Facility
Social Services - Medical
Specialist Consultations
Surgical Supplies
- Inpatient
- Outpatient Facility [ ** ](1)
- Outpatient IPA
TMJ
- Dental Treatment
- Diagnosis and Medically Necessary
Correction
- Inpatient Facility Component
Transfusions
- From Blood Bank
- Autologous Blood Donation
Tissue Plasminogen Activator (TPA)
Vision Screening
Vision Care
- Implanted lenses (cataract surgery)
- Lenses and Frames incident to
cataract surgery
- Non-cataract related lenses and
frames
- Medically necessary care
- Refractions
</TABLE>
(1) All references to division of responsibility have been deleted.
17
<PAGE>
"ALL SECTIONS MARKED WITH TWO ASTERISKS ("**") REFLECT PORTIONS WHICH HAVE
BEEN REDACTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION BY PROSPECT MEDICAL HOLDINGS, INC. AS PART OF A REQUEST FOR
CONFIDENTIAL TREATMENT."
1993 AMENDMENT TO
IPA COMMERCIAL SERVICES AGREEMENT
The undersigned parties to the PacifiCare IPA Commercial Services Agreement
between PacifiCare of California ("PacifiCare") and Santa Ana-Tustin Physicians
Group, Inc. ("IPA") do hereby amend said Agreement as follows:
1. Attachment A5, HOSPITAL CONTROL PROGRAM, is amended as follows:
Section 2, BUDGET, is amended in part as follows pursuant to Exhibit 1,
attached hereto and incorporated herein by this reference.
Section 4, CALCULATION OF SAVINGS AND LOSSES, is amended in full pursuant
to Exhibit 2, attached hereto and incorporated herein by this reference.
2. Amend Attachment C, to add the following paragraph:
URGENT CARE
In consideration of IPA's use of an approved Urgent Care Center, PacifiCare
shall pay to IPA [ ** ] per member per month. It is understood that the
Urgent Care Center meets approved criteria, as referenced in Attachment I,
on an ongoing basis in order to qualify for this adjustment.
3. Attachment E, PHARMACY CONTROL PROGRAM, is amended in full as follows:
See Exhibit 3, attached hereto and incorporated herein by this reference.
4. Attachment F, AIDS STOP LOSS PROGRAM, is amended in full as follows:
See Exhibit 4, attached hereto and incorporated herein by this reference.
5. Attachment I, URGENT CARE CENTER, is amended in full as follows:
See Exhibit 5, attached hereto and incorporated herein by this reference.
1
<PAGE>
The effective date of this Amendment is January 1, 1993.
By signing below, both parties hereto have executed and agreed to
this Amendment.
PACIFICARE, INC IPA
By: /s/ Nancy Freeman By: /s/ Melvin L. Reich
------------------------------ -----------------------------
Nancy Freeman, Vice President
Date: 7/8/93 Date: 6/28/93
---------------------------- ---------------------------
2
<PAGE>
EXHIBIT 1
ATTACHMENT A5
HOSPITAL CONTROL PROGRAM
2. BUDGET
<TABLE>
<CAPTION>
DOLLARS $PMPM
-------------
<S> <C>
Inpatient Hospital [ ** ]
Utilization Rate 215 days PTMPY
Perdiems, net of discounts:
Regular Plans [ ** ]
Co-Pay Plans [ ** ]
Emergency Room and Ambulance Services [ ** ]
Outpatient Surgery and other Services [ ** ]
Selected OP Services from Capitation [ ** ]
(Chemotherapy, Dialysis, home health etc)
Urgent Care Center Agreement (if applicable) [ ** ]
Hospital Control Program Payout Pool [ ** ]
-------
SUB-TOTAL [ ** ]
Reinsurance Program Deductible [ ** ] [ ** ]
Coinsurance [ ** ]
-------
TOTAL BUDGET PMPM [ ** ]
-------
-------
</TABLE>
3
<PAGE>
EXHIBIT 2
ATTACHMENT A5
1993-HOSPITAL CONTROL PROGRAM
4. CALCULATION OF SAVINGS AND LOSSES
The inpatient hospital component of the budget is stated assuming [ ** ]of
Subscribers enroll in benefit plans with hospital copayment/coinsurance/
deductible obligations for inpatient services ("Co-Pay Plans"). It is also
assumed that [ ** ] of Subscribers enroll in non-Co-Pay Plans ("Regular
Plans"). The earned budget will be adjusted to reflect the actual number of
Subscribers who enroll in the Co-Pay Plans and Regular Plans based upon
PacifiCare's Member Month Moving Analysis Report for the period (MB0530).
The MB0530 Report is a report that reflects actual eligible Subscribers by
benefit plan for the period, as adjusted for retroactive eligibility
terminations and additions reported during the period as of the report's run
date. Therefore, the actual earned budget may be greater or less than the
net budget indicated in this Attachment A-5.
4
<PAGE>
EXHIBIT 3
ATTACHMENT E
1993 PHARMACY CONTROL PROGRAM
The purpose of the Pharmacy Control Program (PCP) is to provide incentive to the
IPA to foster the efficient utilization of prescription services. The IPA is
given the opportunity to share in savings realized by IPA maintaining or
improving specific utilization goals outlined below.
GENERIC PERCENTAGE INCENTIVE - The Pharmacy Control Program shall be indexed
to PacifiCare's 1992 calendar year network baseline generic drug utilization
percentage, which shall be adjusted to reflect brand name drugs going
off-patent in 1993. For every percentage point IPA exceeds PacifiCare's
[ ** ] PacifiCare shall pay IPA an amount per member per month in
accordance with the following prescription utilization rate scale:
PRESCRIPTION UTILIZATION RATE
(RX/MEM/YR)*
<TABLE>
<CAPTION>
GREATER THAN
PAYOUT FACTOR PMPM OR EQUAL TO LESS THAN
- ------------------ ----------- ---------
<S> <C> <C>
$[ ** ] [ ** ] - [ ** ]
[ ** ] [ ** ] - [ ** ]
[ ** ] [ ** ] - [ ** ]
[ ** ] [ ** ] - [ ** ]
[ ** ] [ ** ] - [ ** ]
[ ** ] [ ** ] -
</TABLE>
(*) [ ** ]
[ ** ]
FORMULARY BONUS - If IPA qualifies for a generic percentage rate payment as
outlined above, a bonus payment of $[ ** ] shall be paid for every [ ** ]
IPA's formulary utilization percentage rate exceeds [ ** ] up to a maximum
of [ ** ]. [ ** ].
5
<PAGE>
(1993 PHARMACY CONTROL PROGRAM CONTINUED)
IPA agrees to participate in a generic substitution and formulary program
established by PacifiCare's Formulary Advisory Committee.
UTILIZATION AND CALCULATION REPORTS
PacifiCare shall provide quarterly utilization reports showing IPA's generic
percentage, prescription rate and formulary percentage along with a
comparison to [ ** ]. PacifiCare shall provide semi-annual Pharmacy
Control Program calculations and incentive payments. The first payment shall
be for the six months ending June 30, 1993 and shall be paid within sixty
days of this date. The final calculation and incentive payment shall be
cumulative for the twelve months ending December 31, 1993 and shall be paid
within one hundred twenty days of year end.
In the event that IPA receives a semi-annual incentive payment that is greater
than the cumulative twelve month calculated amount, PacifiCare shall be due a
refund of the difference.
6
<PAGE>
EXHIBIT 4
ATTACHMENT F
1993 AIDS STOP LOSS PROGRAM
PacifiCare agrees to provide additional financial protection to IPA for the cost
of Medical Services rendered to Subscribers who have AIDS. Subscribers who are
eligible for this program are as follows:
Subscribers who are admitted to a hospital or referred to home health care
for the treatment of an opportunistic infection and have been diagnosed
with clinical AIDS.
Once PacifiCare's Medical Services Department has verified that a Subscriber
meets the definition above, further expenses for Medical Services associated
with the Subscriber's AIDS care will be paid by PacifiCare as defined by Cost of
Care in Attachment A4 hereto. To receive reimbursement, IPA must submit a Stop
Loss claim to PacifiCare indicating the date the Subscriber became eligible for
the AIDS Stop Loss Program and the expenses incurred on behalf of the Subscriber
after the effective date. IPA may include claims under the AIDS Stop Loss
Program commencing on the date the Subscriber was admitted to the hospital, or
on the date home health care was provided the Subscriber, pursuant to the
eligibility criteria noted above. Expenses for Medical Services pertaining to
AIDS care rendered from January 1, 1993 through December 31, 1993 only will be
included in the AIDS Stop Loss Program. A final claim must be filed for such
Medical Services by March 31, 1994 to be included in this AIDS Stop Loss
Program.
All claims submitted for consideration under the AIDS Stop Loss Program must be
processed and coordinated in a confidential manner. Inquiries for determining
such procedures should be directed to PacifiCare's Medical Director.
7
<PAGE>
ATTACHMENT I EXHIBIT 5
URGENT CARE CENTER (UCC)/IMMEDIATE CARE CENTER CRITERIA
1. The UCC must be open seven (7) days a week, with the hours to include
evening hours. A working guideline would be hours extending to 10:00 P.M.
2. Procedures must be established to discourage abuse by the member. For
example, the UCC should not become a substitute for the HMO member being
seen by the PCP during normal business hours.
3. The UCC must be organized for those urgent type needs that will
theoretically reduce ER costs. The UCC must be equipped to take care of
any walk-in emergency such as lacerations, possible fracture, abdominal or
chest pain. The UCC must also have the capability to fully assess the
member in order to determine what level of treatment is warranted.
Equipment must include: an EKG, heart monitor, defibrillator, lab
facilities (ie, Coulter counter, glucometer), airway equipment, manual
ventilating equipment, oxygen, suction equipment, IV fluids, emergency
drugs, X-ray facilities and casting supplies. This equipment must be
available on-site on the UCC. The UCC must have a physician physically
present within the UCC. There must also be a licensed nurse on-site at all
times.
4. The UCC must have an established QA program to include written policies and
procedures on crash cart maintenance, controlled drug safety and record
keeping, Code Blue, infection control, Triage with emergency procedures and
plans for transfer and notification of UCC visit and reporting of lab and
x-ray reports to the Primary Care Physician. The UCC must also have plans
for maintenance and calibration of laboratory equipment, x-ray equipment,
oxygen and suction equipment.
5. There must be a method for notifying the PCP of the visit and pertinent lab
and x-ray findings. Also a procedure must be in place to notify the
patient of abnormal lab findings.
6. Patient encounter data should be submitted in similar format as being done
for other patient visits.
8
<PAGE>
7. Brochures and materials need to be developed and mailed to members to
adequately explain the UCC to members. If the group provides services to
Spanish-speaking members, brochures and other materials should be available
in both English and Spanish. Also, if the UCC serves a large population of
non-English speaking members, the UCC should have an interpreter available.
8. The Medical Group/IPA shall maintain a contract for the provision of ground
transportation via ambulance for patients who may require more acute care
in a hospital setting.
9
<PAGE>
"ALL SECTIONS MARKED WITH TWO ASTERISKS ("**") REFLECT PORTIONS WHICH HAVE
BEEN REDACTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION BY PROSPECT MEDICAL HOLDINGS, INC. AS PART OF A REQUEST FOR
CONFIDENTIAL TREATMENT."
1993 AMENDMENT TO
IPA COMMERCIAL SERVICES AGREEMENT
The undersigned parties to the PacifiCare IPA Commercial Services Agreement
between PacifiCare of California ("PacifiCare") and Santa Ana-Tustin Physicians
Group, Inc. ("IPA") do hereby amend said Agreement as follows:
1. Attachment A5, HOSPITAL CONTROL PROGRAM, is amended as follows:
Section 2, BUDGET, is amended in part as follows pursuant to Exhibit 1,
attached hereto and incorporated herein by this reference.
Section 4, CALCULATION OF SAVINGS AND LOSSES, is amended in full pursuant
to Exhibit 2, attached hereto and incorporated herein by this reference.
2. Attachment E, PHARMACY CONTROL PROGRAM, is amended in full as follows:
See Exhibit 3, attached hereto and incorporated herein by this reference.
3. Attachment F, AIDS STOP LOSS PROGRAM, is amended in full as follows:
See Exhibit 4, attached hereto and incorporated herein by this reference.
The effective date of this Amendment is January 1, 1993.
By signing below, both parties hereto have executed and agreed to this
Amendment.
PACIFICARE, INC. IPA Santa Ana-Tustin
Physician's Grp. Inc.
By: /s/ Nancy Freeman By: /s/ Melvin L. Reich
------------------------------ --------------------------
Nancy Freeman
Vice President
DATE: 1/14/93 DATE: 12/23/92
---------------------------- --------------------------
1
<PAGE>
EXHIBIT 1
ATTACHMENT A5
HOSPITAL CONTROL PROGRAM
2. BUDGET
<TABLE>
<CAPTION>
DOLLARS $PMPM
-------------
<S> <C>
Inpatient Hospital $[ ** ]
Utilization Rate 215 days PTMPY
Perdiems, net of discounts:
Regular Plans [ ** ]
Co-Pay Plans [ ** ]
[ ** ]
Emergency Room and Ambulance Services [ ** ]
Outpatient Surgery and other Services [ ** ]
Selected OP Services from Capitation [ ** ]
(Chemotherapy, Dialysis, home health etc)
Urgent Care Center Agreement (if applicable) [ ** ]
Hospital Control Program Payout Pool [ ** ]
-------
SUB-TOTAL [ ** ]
Reinsurance Program Deductible [ ** ] [ ** ]
Coinsurance [ ** ]
-------
TOTAL BUDGET PMPM [ ** ]
-------
-------
</TABLE>
2
<PAGE>
EXHIBIT 2
ATTACHMENT A5
1993-HOSPITAL CONTROL PROGRAM
4. CALCULATION OF SAVINGS AND LOSSES
The inpatient hospital component of the budget is stated assuming [ ** ] of
Subscribers enroll in benefit plans with hospital copayment/coinsurance/
deductible obligations for inpatient services ("Co-Pay Plans"). It is also
assumed that [ ** ] of Subscribers enroll in non-Co-Pay Plans ("Regular
Plans"). The earned budget will be adjusted to reflect the actual number of
Subscribers who enroll in the Co-Pay Plans and Regular Plans based upon
PacifiCare's Member Month Moving Analysis Report for the period (MB0530). The
MB0530 Report is a report that reflects actual eligible Subscribers by
benefit plan for the period, as adjusted for retroactive eligibility
terminations and additions reported during the period as of the report's run
date. Therefore, the actual earned budget may be greater or less than the net
budget indicated in this Attachment A-5.
3
<PAGE>
EXHIBIT 3
ATTACHMENT E
1993 PHARMACY CONTROL PROGRAM
The purpose of the Pharmacy Control Program (PCP) is to provide incentive to the
IPA to foster the efficient utilization of prescription services. The IPA is
given the opportunity to share in savings realized by IPA maintaining or
improving specific utilization goals outlined below.
GENERIC PERCENTAGE INCENTIVE - The Pharmacy Control Program shall be indexed
to PacifiCare's 1992 calendar year network baseline generic drug utilization
percentage, which shall be adjusted to reflect brand name drugs going
off-patent in 1993. For every percentage point IPA exceeds PacifiCare's
[ ** ] PacifiCare shall pay IPA an amount per member per month in
accordance with the following prescription utilization rate scale:
<TABLE>
<CAPTION>
PRESCRIPTION UTILIZATION RATE
(RX/MEM/YR) *
GREATER THAN
PAYOUT FACTOR PMPM OR EQUAL TO LESS THAN
- -------------------- -------------- ----------
<S> <C> <C> <C>
[ ** ] [ ** ] - [ ** ]
[ ** ] [ ** ] - [ ** ]
[ ** ] [ ** ] - [ ** ]
[ ** ] [ ** ] - [ ** ]
[ ** ] [ ** ] - [ ** ]
[ ** ] [ ** ] -
</TABLE>
(*) [ ** ]
[ ** ]
FORMULARY BONUS - If IPA qualifies for a generic percentage rate payment as
outlined above, a bonus payment of [ ** ] shall be paid for every [ ** ]
IPA's formulary utilization percentage rate exceeds [ ** ] up to a maximum
of [ ** ]. [ ** ].
4
<PAGE>
(1993 PHARMACY CONTROL PROGRAM CONTINUED)
IPA agrees to participate in a generic substitution and formulary program
established by PacifiCare's Formulary Advisory Committee.
UTILIZATION AND CALCULATION REPORTS
PacifiCare shall provide quarterly utilization reports showing IPA's generic
percentage, prescription rate and formulary percentage along with a
comparison to [ ** ]. PacifiCare shall provide semi-annual Pharmacy Control
Program calculations and incentive payments. The first payment shall be for
the six months ending June 30, 1993 and shall be paid within sixty days of
this date. The final calculation and incentive payment shall be cumulative
for the twelve months ending December 31, 1993 and shall be paid within one
hundred twenty days of year end.
In the event that IPA receives a semi-annual incentive payment that is greater
than the cumulative twelve month calculated amount, PacifiCare shall be due a
refund of the difference.
5
<PAGE>
EXHIBIT 4
ATTACHMENT F
1993 AIDS STOP LOSS PROGRAM
PacifiCare agrees to provide additional financial protection to IPA for the cost
of Medical Services rendered to Subscribers who have AIDS. Subscribers who are
eligible for this program are as follows:
Subscribers who are admitted to a hospital or referred to home health care
for the treatment of an opportunistic infection and have been diagnosed
with clinical AIDS.
Once PacifiCare's Medical Services Department has verified that a Subscriber
meets the definition above, further expenses for Medical Services associated
with the Subscriber's AIDS care will be paid by PacifiCare as defined by Cost of
Care in Attachment A4 hereto. To receive reimbursement, IPA must submit a Stop
Loss claim to PacifiCare indicating the date the Subscriber became eligible for
the AIDS Stop Loss Program and the expenses incurred on behalf of the Subscriber
after the effective date. IPA may include claims under the AIDS Stop Loss
Program commencing on the date the Subscriber was admitted to the hospital, or
on the date home health care was provided the Subscriber, pursuant to the
eligibility criteria noted above. Expenses for Medical Services pertaining to
AIDS care rendered from January 1, 1993 through December 31, 1993 only will be
included in the AIDS Stop Loss Program. A final claim must be filed for such
Medical Services by March 31, 1994 to be included in this AIDS Stop Loss
Program.
All claims submitted for consideration under the AIDS Stop Loss Program must be
processed and coordinated in a confidential manner. Inquiries for determining
such procedures should be directed to PacifiCare's Medical Director.
6
<PAGE>
"ALL SECTIONS MARKED WITH TWO ASTERISKS ("**") REFLECT PORTIONS WHICH HAVE
BEEN REDACTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION BY PROSPECT MEDICAL HOLDINGS, INC. AS PART OF A REQUEST FOR
CONFIDENTIAL TREATMENT."
PACIFICARE CHOICE AMENDMENT TO
PACIFICARE IPA COMMERCIAL SERVICES AGREEMENT
The undersigned parties to the PacifiCare IPA Commercial Services Agreement
(the "Agreement") by and between PacifiCare, Inc. ("PacifiCare") and Santa
Ana-Tustin Physician's Group, Inc. ("IPA") do hereby amend the Agreement with
reference to the following facts:
WHEREAS, PacifiCare intends to introduce a point-of-service benefit plan
known as "PacifiCare Choice" for certain select employer groups beginning in
1993;
WHEREAS, PacifiCare Choice will consist of the PacifiCare Health Plan, plus
a separate supplemental indemnity plan offered through an insurance company or
through self-insured employers to cover Out-of-Network Services, as defined
below;
WHEREAS, IPA shall provide or arrange Health Care Services to PacifiCare
Choice Subscribers under the same terms and conditions as other PacifiCare
Health Plan Subscribers;
WHEREAS, IPA shall have no financial responsibility for Out-of-Network
Services; and
WHEREAS, PacifiCare and IPA desire to allow IPA to participate
in savings realized from Out-of-Network Services through
implementation of a Pacificare Choice Control Program.
NOW THEREFORE, the Agreement shall be amended as follows:
1. The following definitions shall be added to Section One of the Agreement.
PACIFICARE CHOICE - is a health plan consisting of the PacifiCare
Health Plan, plus the Out-of-Network Indemnity Plan.
OUT-OF-NETWORK INDEMNITY PLAN - is a supplemental health plan offered
as part of the PacifiCare Choice by an insurance company or a self-insured
employer which provides limited coverage for Out-of-Network Services.
PACIFICARE IN-NETWORK PLAN - is the PacifiCare Health Plan that is
sold in conjunction with the Out-of-Network Indemnity Plan as part of
PacifiCare Choice.
CONVENTIONAL PLAN - is the PacifiCare Health Plan which is NOT sold as
part of the PacifiCare Choice.
1
<PAGE>
IN-NETWORK SERVICES - are Health Care Services which are provided or
arranged by IPA to PacifiCare Choice Subscribers pursuant to the PacifiCare
Health Plan.
OUT-OF-NETWORK MEDICAL SERVICES - are the Health Care Services
summarized in Attachment A2 obtained by PacifiCare Choice Subscribers which
are not provided or authorized by IPA in accordance with the PacifiCare
Health Plan.
OUT-OF-NETWORK HOSPITAL SERVICES - are the Health Care Services
summarized in Attachment A1 obtained by PacifiCare Choice Subscribers which
are not arranged or coordinated by IPA in accordance with the PacifiCare
Health Plan, and which do not qualify as Emergency Services.
OUT-OF-NETWORK SERVICES - are Out-of-Network Medical Services and
Out-of-Network Hospital Services. Out-of-Network Services are covered
in part under the Out-of-Network Indemnity Plan, but are not covered under
the PacifiCare Health Plan. IPA shall have no financial responsibility for
Out-of-Network Services.
2. Section 3.07.01 shall be added to read as follows:
3.07.01 COLLECTION OF CHARGES FOR OUT-OF-NETWORK SERVICES
Notwithstanding anything to the contrary in Section 3.07 or elsewhere in
the Agreement, if an IPA Member Physician or Specialist Physician provides
Out-of-Network Services to a PacifiCare Choice Subscriber, IPA shall
bill the Out-of-Network Indemnity Plan carrier for such services and agrees
to accept full reimbursement at the following [ ** ] to be utilized
with the [ ** ]:
<TABLE>
<CAPTION>
<S> <C>
Medicine [ ** ]
Surgery [ ** ]
Radiology [ ** ]
Pathology [ ** ]
Anesthesia [ ** ]
</TABLE>
For services provided which are not included in the [ ** ], or are not
listed above, IPA agrees to accept reimbursement at [ ** ] of the
provider's [ ** ].
2
<PAGE>
If an IPA Member Physician or Specialist Physician provides Out-of-Network
Services to a PacifiCare Choice Subscriber who has selected or has been
assigned to IPA as his or her Participating Medical Group, prior to
providing Out-of-Network Services, IPA shall obtain written authorization
from the PacifiCare Choice Subscriber in the form attached hereto as
Exhibit 1. IPA shall not encourage Subscribers to receive Medically
Necessary Services from Outside Providers. Breach of this Section 3.07.01
shall constitute cause for termination of this Agreement.
3. Paragraph 3.29 shall be added to read as follows:
3.29 PACIFICARE CHOICE CONTROL PROGRAM - IPA agrees to participate in
and have the rights and responsibilities applicable to the PacifiCare
Choice Control Program as set forth in Attachment A6, attached hereto and
incorporated herein.
4. The following shall be added to Attachment C: CAPITATION PAYMENT RATES:
PACIFICARE CHOICE CAPITATION PAYMENTS
Capitation Payments for PacifiCare Choice Plan Subscribers will be
determined in the same manner as for Conventional Plan Subscribers, except
as provided in this paragraph. IPA's Capitation Payment for PacifiCare
Choice Plan Subscribers shall equal the Percent of Premium specified in
this Attachment C multiplied by [ ** ] of the Normal Community Premium
billed by PacifiCare each month for coverage of Subscribers designating
IPA as their Participating Medical Group, less the percent specified for
the Individual Stop Loss Program noted in Attachment A3. The Normal
Community Premium is a prospectively determined community rate established
in accordance with federal regulations for each PacifiCare Health Plan.
3
<PAGE>
5. Attachment A6 PACIFICARE CHOICE CONTROL PROGRAM shall be added
to read as follows:
See Exhibit 2 attached hereto and incorporated herein by
this reference.
The effective date of this Amendment shall be January 1, 1993.
By signing below, both parties hereto have executed and agreed to
this Amendment.
PACIFICARE, INC IPA Santa Ana-Tustin Physicians
Grp., Inc.
By: /s/ Nancy Freeman By: /s/ Dr. Melvin L. Reich
------------------------------ -----------------------------
Date: 1/14/93 Date: 12/23/92
---------------------------- ---------------------------
4
<PAGE>
EXHIBIT 1
ACKNOWLEDGMENT FOR OUT-OF-NETWORK SERVICES
FOR PACIFICARE CHOICE SUBSCRIBERS
My signature below represents my acknowledgment and recognition that the
services I am requesting from (DOCTOR'S NAME) are not covered by under my
PacifiCare Health Plan. The requested services are not covered because (1) the
services are not emergency services and they have not been authorized by my
participating medical group physician or (2) the services are specifically
excluded under my PacifiCare Health Plan.
I further understand that if coverage for the requested services is available
under my Out-of-Network supplemental coverage, this coverage may be subject to
substantial deductibles and copayments.
--------------------------------
(patient's name)
5
<PAGE>
EXHIBIT 2
ATTACHMENT A6
PACIFICARE CHOICE CONTROL PROGRAM
The PacifiCare Choice Control Program is designed to provide a financial
incentive for the control of In-Network Hospital Services and Out-of-Network
Services.
PacifiCare Choice Subscriber member months and related In-Network Hospital
Service expenses shall not be included in calculating the Conventional Hospital
Control Program described in Attachment A5.
CHOICE BUDGET
THE CHOICE BUDGET - The Choice Budget shall consist of two components: When a
Conventional Plan is sold in conjunction with the PacifiCare Choice Plan, the
Choice Budget for such PacifiCare Choice Subscribers shall be established as
[ ** ]; when a Conventional Plan is NOT sold in conjunction with the
PacifiCare Choice Plan, the Choice Budget for such PacifiCare Choice
Subscribers shall be established as [ ** ]. The Choice Budget assumes the
PacifiCare Choice Plan sold requires a deductible no greater than [ ** ], a
[ ** ] coinsurance for all Out-of-Network services, and In-Network Hospital
Services do not require Subscriber copayments (i.e. 880, 1500 plans). IPA'S
EARNED CHOICE BUDGET will be determined by adjusting each of the above two
budget components to reflect the Choice Budget values for the actual plan mix
of Pacificare Choice Subscribers assigned to IPA, and calculating the average
in accordance the following table:
CHOICE BUDGET VALUES FOR
PACIFICARE CHOICE PLAN SOLD IN CONJUNCTION WITH CONVENTIONAL PLAN
<TABLE>
<CAPTION>
O-O-N O-O-N IN NETWORK HOSPITAL SERVICES
DEDUCTIBLE COINSURANCE NO COPAY WITH COPAY
- ----------- ----------- -------- ----------
<S> <C> <C> <C>
[ ** ] [ ** ] [ ** ] [ ** ]
[ ** ] [ ** ] [ ** ] [ ** ]
[ ** ] [ ** ] [ ** ] [ ** ]
[ ** ] [ ** ] [ ** ] [ ** ]
</TABLE>
6
<PAGE>
CHOICE BUDGET VALUES FOR
PACIFICARE CHOICE PLAN SOLD WITHOUT CONVENTIONAL PLAN
<TABLE>
<CAPTION>
O-O-N O-O-N IN NETWORK HOSPITAL SERVICES
DEDUCTIBLE COINSURANCE NO COPAY WITH COPAY
- ----------- ----------- -------- ----------
<S> <C> <C> <C>
[ ** ] [ ** ] [ ** ] [ ** ]
[ ** ] [ ** ] [ ** ] [ ** ]
[ ** ] [ ** ] [ ** ] [ ** ]
[ ** ] [ ** ] [ ** ] [ ** ]
</TABLE>
Charges applied against the Choice Budget will consist of:
- In-Network Hospital Services costs incurred during the period of
calculation for which PacifiCare has received a claim and paid net of
discounts; In-Network Hospital Services incurred prior to the period
of calculation and paid during the current period; and for quarterly
interim calculations, In-Network Hospital Services incurred during the
period for which PacifiCare has received a claim but has not paid,
less an average aggregate discount factor (for year end calculations,
only paid claims will be included); LESS Subscriber claim costs in
excess of the In-Network Hospital Services reinsurance deductible
specified above;
- Claims paid charges for Out-of-Network Services incurred during the
current period; and paid claim charges for Out-of-Network Services
incurred but not included in prior period Choice Control Program
calculations; LESS
- Third party liability and coordination of benefit recoveries for
In-Network and Out-of-Network Services that are received during the
period of calculation
SAVINGS DISTRIBUTION
In the event that total charges are less than the earned Choice Budget, IPA
shall be entitled to participate in a capitation restoration program, whereby
IPA shall receive [ ** ]. Distribution to IPA under this capitation
restoration program shall be limited to the savings available pursuant to the
Choice Control Program calculation. Additionally, IPA shall receive [ ** ]
of any remaining savings, if any, after the IPA capitation restoration
distribution.
IPA is not at financial risk in the event that total charges exceed the earned
Choice Budget.
7
<PAGE>
PERIODIC CALCULATIONS
The PacifiCare Choice Control Program shall be administered on an IPA specific
basis. For IPAs with multiple IPA Facilities, the program shall be calculated
for each IPA Facility, however savings and payment distributions shall be based
on IPA's consolidated results.
Cumulative calculations of the PacifiCare Choice Control Program results will be
based on calendar quarters in conjunction with Conventional Plan Hospital
Control Program calculations, which are within sixty (60) days of the end of
each calendar quarter except for the fourth quarter for which no calculation or
payment will be made in anticipation of the year end settlement. Interim
distribution payments will be limited to sixty percent (60%) of calculated
savings to account for incurred but not received claims.
Year end calculations and payments of the PacifiCare Choice Control Program
shall be made within one hundred fifty (150) days of the end of each calendar
year.
8
<PAGE>
"ALL SECTIONS MARKED WITH TWO ASTERISKS ("**") REFLECT PORTIONS WHICH HAVE
BEEN REDACTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION BY PROSPECT MEDICAL HOLDINGS, INC. AS PART OF A REQUEST FOR
CONFIDENTIAL TREATMENT."
1992 AMENDMENT TO
IPA COMMERCIAL SERVICES AGREEMENT
The Undersigned parties to the PacifiCare IPA Commercial Services Agreement
between PacifiCare of California ("PacifiCare") and Santa Ana-Tustin Physicians
Group, Inc. ("IPA") do hereby amend said Agreement as follows:
1. Paragraph 1.03 is amended in full to read as follows:
1.03 CATASTROPHIC CASE - is any single medical condition, including
complications arising from such medical condition, where the total cost of
Health Care Services to treat such condition is expected to exceed [ ** ]
per condition, regardless of payment source.
2. Paragraph 3.02 is amended in full to read as follows:
3.02 STANDARDS - All Medical Services arranged for or provided by IPA and
its Member Physicians shall be provided by professional personnel and at
physical facilities according to generally accepted standards of medical
practice and management in the community. IPA further agrees to provide or
arrange for Referrals to Specialist Physicians and facilities as are necessary,
appropriate, and in accordance with generally accepted standards of medical
practice in the community in compliance with the standards developed by
PacifiCare's Quality Assurance Committee. If IPA contracts with Specialist
Physicians to provide Medical Services under this Agreement, IPA shall require
such Specialist Physicians to provide IPA with the credentialing information set
forth herein. IPA shall obtain and maintain information concerning each Member
Physician's and Specialist Physician's education, training, references,
malpractice liability insurance, hospital staff status, hospital clinical
privileges, and hospital staff reappointment dates. Such information shall be
kept in a form prescribed by or acceptable to PacifiCare. Upon request, the
credentialing information shall be made available to PacifiCare for review or
copying.
IPA acknowledges and agrees that it shall report Member Physicians or
Specialist Physicians as required by the California Business and Professions
Code Section 805 ("Section 805"). IPA further agrees to maintain and demonstrate
to PacifiCare upon request compliance with the following:
3.02.01 IPA shall use best efforts to ensure that its Member Physicians
and Specialist Physicians are licensed by the State of California and have
current Drug Enforcement Agency ("DEA") registration. IPA shall immediately
notify PacifiCare in writing of any of the following actions taken by or against
a Member
1
<PAGE>
Physician or Specialist Physician: (i) the surrendering, revocation, or
suspension of a license; (ii) the surrendering, revocations, or suspension of
current DEA registration; (iii) any filing pursuant to Section 805; (iv) any
filing pursuant to the National Practitioner Data Bank; (v) the filing of any
malpractice claim of more than ten thousand dollars ($10,000) and (vi) a
change in hospital staff status or hospital clinical privileges, including
any restrictions or limitations.
3.02.02 In the event that it is determined by PacifiCare that IPA does
not obtain and maintain the information set forth in paragraph 3.02, IPA agrees
to assist PacifiCare in obtaining credentialing information concerning each
Member Physician's and Specialist Physician's education, training, references,
malpractice liability insurance, hospital staff status, hospital clinical
privileges, and hospital staff reappointment dates. IPA shall obtain from each
Member Physician and Specialist Physician a signed waiver, acceptable to
PacifiCare, allowing PacifiCare access to such credentialing information at any
acute care hospital or health care facility. If IPA is unable to obtain a signed
waiver from a Member Physician or Specialist Physician, IPA shall obtain the
credentialing information directly from the acute care hospital or health care
facility and make such information available to PacifiCare upon request for
review and copying.
3.02.03 IPA agrees to provide access to continuing education programs
for its Member Physicians and Specialist Physicians in accordance with the
standards established by the California Medical Association for continuing
education. The content and delivery of such continuing education programs shall
be in the discretion and judgement of IPA, in order to maintain high standards
for the delivery of Medical Services pursuant to this Agreement. IPA further
agrees to gather, correlate, and distribute to its Member Physicians and
Specialist Physicians, information regarding professional medical activities and
developments which IPA believes may be of assistance in providing Medical
Services pursuant to this Agreement.
3.02.04 IPA agrees to provide reasonable evidence that all nurses and
other ancillary and paramedical personnel who are employed by and contract with
IPA or Specialist Physicians are properly licensed by the State of California.
3. Paragraph 5.02 is amended in full to read as follows:
5.02 ADDITIONAL PAYMENTS - Pacificare and IPA agree to provide payments to
each other in accordance with the terms of the following programs, if
applicable: Hospital Control Program, Individual Stop-Loss Program, Pharmacy
Control Program, Mammography Reimbursement Program, AIDs Stop-Loss Program and
Adverse Selection Program as specified in Attachments A5, A3, E, C, F and H
2
<PAGE>
respectively, incorporated in full herein by reference.
To the extent that each party owes an amount to the other party in the risk
programs noted above, IPA agrees that PacifiCare shall combine the results of
all applicable risk programs such that one aggregate payment is payable to or
receivable from IPA. A fully detailed accounting of the results of each program
shall accompany the aggregate payment or notice of amount due.
4. Paragraph 12.10 is amended to read as follows:
12.10 TRANSFER OF SUBSCRIBERS - Subscribers requests for transfer from IPA
shall be in writing and subject to approval by PacifiCare based on the criteria
set forth in the PacifiCare Policy and Procedures Manual. PacifiCare reserves
the right to transfer a Subscriber for any reason.
IPA may request transfer of Subscribers for cause, or if the capacity of IPA is
over burdened such that the provision of Medical Services as required pursuant
to this Agreement adversely is affected.
5. Attachment A4 COST OF CARE - is amended in full as follows:
See Exhibit 1, attached hereto and incorporated herein by the reference.
6. Attachment A5 HOSPITAL CONTROL PROGRAM is amended in full as follows:
See Exhibit 2, attached hereto and incorporated herein by this reference.
7. Attachment B MEDICAL AND HOSPITAL GROUP AND INDIVIDUAL SUBSCRIBER
AGREEMENTS is amended to add the new Group Subscriber Agreement as Attachment
B-1 as follows:
See Exhibit 5, attached hereto and incorporated herein by this reference.
It is understood and agreed that the new Group Subscriber Agreement attached as
Attachment B-1 will replace the current Attachment B as each employer group
executes the new Subscriber Agreement approximate to the employers' annual
renewal date.
8. Attachment C CAPITATION PAYMENT RATES regarding Durable Medical Equipment
and Maternity Payments is amended to read as follows:
MATERNITY PAYMENTS
For term pregnancies delivered within nine (9) months of a
3
<PAGE>
Subscriber's initial assignment to IPA, PacifiCare shall pay IPA [ ** ] at
the time of processing the inpatient obstetrical claim.
9. Attachment E PHARMACY CONTROL PROGRAM is amended in full as
follows:
See Exhibit 3, attached hereto and incorporated herein by this
reference.
10. Attachment F, AIDS STOP LOSS PROGRAM is amended in full as
follows:
See Exhibit 4, attached hereto and incorporated herein by this
reference.
11. Attachment G, DIVISION OF FINANCIAL RESPONSIBILITY
to be amended if required
The effective date of this Amendment is January 1, 1992
By signing below, both parties hereto have executed and agreed to
this Amendment.
PACIFICARE, INC IPA Santa Ana-Tustin Physicians
Gr. Inc.
By: /s/ Nancy Freeman By: /s/ Dr. Melvin L. Reich
------------------------------ -----------------------------
Kevin R. Mowll, Vice President
Date: 1/14/93 Date: 12/23/92
---------------------------- ---------------------------
4
<PAGE>
EXHIBIT 1
ATTACHMENT A4
COST OF CARE
(medical group version)
For purposes of this Agreement, the Cost of Care for Medical Services
rendered by IPA to Subscribers shall equal:
a) [ ** ] of the fees charged by IPA to IPA's fee-for-service
patients for the same or similar services, if the same or similar services
are rendered by Member Physicians who practice at IPA Facilities; or
b) [ ** ] of the fees actually paid, if the services are rendered by
Specialist Physicians or Outside Providers.
IPA shall provide PacifiCare with a copy of IPA's fee-for-service fee
schedule and shall notify PacifiCare thirty (30) days prior to the effective
date of any changes in such fee schedule. The amount of increase of IPA's
fees shall be limited to [ ** ] per year for purposes of any calculations
pursuant to this Agreement, regardless of the actual percentage increase in
IPA's fees each year.
IPA shall notify PacifiCare of the existence and payment or discount
provisions of any agreements between IPA and Specialist Physicians and Outside
Providers who render Medical Services to Subscribers.
5
<PAGE>
LA/OR/SD EXHIBIT 2
ATTACHMENT A5
1992-HOSPITAL CONTROL PROGRAM
1. INTRODUCTION
The Hospital Control Program is designed to provide a financial incentive for
the control of inpatient, in-area Emergency Services and selected other
outpatient services. When actual incurred costs, when compared to a
predetermined budget, are favorable, the savings are shared with the IPA.
Conversely, when actual incurred costs exceed the budget, the IPA shares the
additional costs. Risk limitations are included at both the individual
Subscriber claim level (through the payment of a reinsurance premium for
specific stop loss) and at the aggregate level (through a percentage
limitation on overall shared savings or losses) to mitigate extraordinary
performance fluctuations.
2. BUDGET
<TABLE>
<CAPTION>
DOLLARS $PMPM
-------------
<S> <C>
Inpatient Hospital [ ** ]
Utilization Rate 215 days PTMPY
Perdiems, net of discounts:
Regular Plans [ ** ]
880 Plan [ ** ]
[ ** ]
Emergency Room and Ambulance Services [ ** ]
Outpatient Surgery and other Services [ ** ]
Selected OP Services from Capitation [ ** ]
(Chemotherapy, Dialysis, home health etc)
Urgent Care Center Agreement (if applicable) [ ** ]
Hospital Control Program Payout Pool [ ** ]
-------
SUB-TOTAL [ ** ]
Reinsurance Program Deductible [ ** ] [ ** ]
Coinsurance [ ** ]
-------
TOTAL BUDGET PMPM [ ** ]
-------
-------
</TABLE>
6
<PAGE>
The total budget PMPM to be used for settlement purposes shall be calculated by
applying the IPA's specific composite age/sex factor to the budgeted amounts for
Inpatient Hospital, Emergency and Ambulance Services, Outpatient Surgery
Services, and Selected Outpatient Services. The composite age/sex factor will be
calculated by multiplying the IPA's member months within each age/sex category
listed below and dividing the sum of these numbers by IPA's total member months.
The age/sex adjusted dollar figure will be added to the other Hospital Control
Program budget components.
<TABLE>
<CAPTION>
AGE/SEX AGE/SEX
CATEGORY FACTOR
-------- ------
<S> <C>
[ ** ] [ ** ]
[ ** ] [ ** ]
[ ** ] [ ** ]
[ ** ] [ ** ]
[ ** ] [ ** ]
[ ** ] [ ** ]
[ ** ] [ ** ]
[ ** ] [ ** ]
[ ** ] [ ** ]
[ ** ] [ ** ]
[ ** ] [ ** ]
</TABLE>
3. ACTUAL COSTS
Actual costs are defined for purposes of this Program as:
a. Hospital Services incurred during the period of calculation for
which PaciflCare has received a claim and paid net of discounts,
b. For quarterly interim calculations, Hospital Services incurred
during the period of calculation for which PacifiCare has received a
claim but has not paid, less an average aggregate discount factor (for
year end calculations only paid claims will be included),
c. Hospital Services incurred prior to the period of calculation,
and paid during the current period,
LESS;
d. Subscriber claim costs in excess of the reinsurance deductible
specified in the budget above,
e. Third party recoveries received during the period of calculation
that are associated with current or prior period calculation periods.
7
<PAGE>
4. CALCULATION OF SAVINGS AND LOSSES
The inpatient hospital component of the budget is stated assuming [ ** ] of
the Subscribers enrolled in the 880 Plan and [ ** ] of the Subscribers in
all other plans. The earned budget will be adjusted to reflect the actual
number of Subscribers who enrolled in the 880 and non-880 plans based upon
PacifiCare's Member Month Moving Analysis Report for the period (MB0530). The
MB0530 Report is a report that reflects actual eligible Subscribers by
benefit plan for the period as adjusted for retroactive eligibility
terminations and additions reported during the period as of the report's run
date. Therefore, the actual earned budget may be greater or less than the net
budget indicated in this Attachment.
5. DISTRIBUTION OF SAVINGS - In the event that actual costs are less than
the earned budget, then the IPA shall receive the share of savings relative
to the bed days per thousand Subscribers per year (PTMPY) indicated in the
following sliding scale schedule:
<TABLE>
<CAPTION>
Bed Days/Outpt. Surgery IPA % SHARE OF SAVINGS
PTMPY Limited to 15 % of Earned Budget
- ----------------------- --------------------------------
<S> <C>
[ ** ] [ ** ]
[ ** ] [ ** ]
[ ** ] [ ** ]
[ ** ] [ ** ]
</TABLE>
For the purpose of this calculation, "Bed Days/Outpt. Surgery" shall be defined
as acute inpatient days plus outpatient surgeries, net of any acute inpatient
days or outpatient surgeries which are covered under the reinsurance program, or
are paid through a third party recovery, or through coordination of benefits.
6. DISTRIBUTION OF DEFICIT - If actual costs are greater than the earned
budget, then the IPA will be liable for [ ** ] of the amount lost up to the
maximum payment specified below;
MAXIMUM DEFICIT PAYMENT: [ ** ]
7. PERIODIC CALCULATIONS - Cumulative calculations of the Hospital Control
Program results will be based on calendar quarters. Interim calculations and
payments will be made within sixty (60) days of the end of each calendar quarter
except for the fourth quarter for which no calculation or payment will be made
in anticipation of the final year end settlement. Calculations will
8
<PAGE>
be made in accordance with the contractual terms above and the amount of
PacifiCare's quarterly payments to IPA will be sixty percent (60%) of the amount
due in order to adjust for incurred Hospital Service claims not yet received by
PacifiCare.
In the event that the interim calculation reflects a cumulative loss for the
IPA, no interim payment will be due from IPA in the first quarter that a loss
results. However, if a cumulative loss is reflected for two consecutive
quarters, the IPA will make an interim payment of sixty percent (60%) of the
cumulative amount due to PacifiCare. Such payment to PacifiCare shall be due
within fifteen (15) days of the IPA's receipt of such notice from PacifiCare.
A calendar year-end calculation of the Hospital Control Program shall be made by
PacifiCare and payment to the appropriate party shall be made within one hundred
twenty (120) days of the end of the calendar year.
8. MONTHLY REPORTING - PacifiCare will distribute a report monthly , on or
before the 15th, that lists the payments made during the previous month for
services included in the Hospital Control Program.
9. SPECIAL CONDITIONS FOR EMERGENCY SERVICES - If the IPA and/or its
participating physicians direct a PacifiCare Subscriber to use the
emergency room of a hospital, and PacifiCare determines that the use of those
services were not Emergency Services as defined in this Agreement, PacifiCare
reserves the right to deduct the professional component of the PacifiCare
payment from the IPA's capitation as a penalty for improper referral. When an
inappropriate referral for emergency care has been determined by PacifiCare, a
written Conformance Request will be forwarded to the IPA. The Conformance
Request will serve as notice that all subsequent inappropriate referrals will
have the penalty applied.
10. Any hospital or emergency expenses that are considered third party
liability, Workers Compensation claim, or coordination of benefits claims, shall
be included in the calculations. If, at a later date, these claims are collected
then an adjustment will be made in the calculations.
11. Calculations shall not include hospital admissions which are not authorized
by IPA and which are not Emergency Services.
9
<PAGE>
EXHIBIT 3
ATTACHMENT E
1992 PHARMACY CONTROL PROGRAM
The purpose of the Pharmacy Control Program (PCP) is to provide an incentive to
the IPA to foster the efficient utilization of prescription services. The IPA is
given the opportunity to share in savings realized by IPA maintaining or
improving specific utilization goals outlined below.
STANDARD INCENTIVE PROGRAM
GENERIC PERCENTAGE INCENTIVE - The Pharmacy Control Program shall be indexed
to PacifiCare's [ ** ]. For every percentage point IPA exceeds PacifiCare's
[ ** ] PacifiCare shall pay IPA an amount per member per month in
accordance with the following scale:
<TABLE>
<CAPTION>
Payout Factor Prescription Rate (1)
------------- --------------------
<S> <C>
[ ** ] [ ** ]
[ ** ] [ ** ]
[ ** ] [ ** ]
[ ** ] [ ** ]
</TABLE>
(*) [ ** ]
Formulary Bonus - If IPA qualifies for a generic percentage rate payment as
outlined above, a bonus payment of [ ** ] shall be paid for every [ ** ]
IPA's formulary utilization percentage rate exceeds [ ** ] up to a maximum
of [ ** ]. [ ** ]
10
<PAGE>
(1992 Pharmacy Control Program continued)
IPA agrees to participate in a generic substitution and formulary program
established by PacifiCare's Formulary Advisory Committee.
UTILIZATION AND CALCULATION REPORTS
PacifiCare shall provide quarterly utilization reports showing IPA's generic
percentage, prescription rate and formulary percentage along with a
comparison to [ ** ]. PacifiCare shall provide semi-annual Pharmacy Control
Program calculations and incentive payments. The first payment shall be for
the six months ending June 30, 1992 and shall be paid within sixty days of
this date. The final calculation and incentive payment shall be cumulative
for the twelve months ending December 31, 1992 and shall be paid within one
hundred twenty days of year end.
In the event that IPA receives a semi-annual incentive payment that is greater
than the cumulative twelve month calculated amount, PacifiCare shall be due a
refund of the difference.
11
<PAGE>
EXHIBIT 4
ATTACHMENT F
AIDS STOP LOSS PROGRAM
PacifiCare agrees to provide additional financial protection to IPA for the cost
of Medical Services rendered to Subscribers who have AIDS. Subscribers who are
eligible for this program are as follows:
Subscribers who are admitted to a hospital for the treatment of an
opportunistic infection and have been diagnosed with clinical AIDS.
Once PacifiCare's Medical Services Department has verified that a Subscriber
meets the definition above, further expenses for Medical Services associated
with the Subscriber's AIDS care will be paid by PacifiCare as defined by Cost of
Care in Attachment A4 hereto. To receive reimbursement, IPA must submit a Stop
Loss claim to PacifiCare indicating the date the Subscriber became eligible for
the AIDS Stop Loss Program and the expenses incurred on behalf of the Subscriber
after the effective date. IPA may include claims under the AIDS Stop Loss
Program commencing on the date the Subscriber was admitted to the hospital, or
on the date home health care was provided the Subscriber in-lieu of
hospitalization, pursuant to the eligibility criteria noted above. Expense for
Medical Service pertaining to AIDS care rendered from January 1 1992, through
December 31, 1992 only will be included in the AIDS Stop Loss Program. A final
claim must be filed for such Medical Services by March 31, 1993 to be included
in this AIDS Stop Loss Program.
All claims submitted for consideration under the AIDS Stop Loss Program must be
processed and coordinated in a confidential manner. Inquiries for determining
such procedures should be directed to PacifiCare's Medical Director.
12
<PAGE>
"ALL SECTIONS MARKED WITH TWO ASTERISKS ("**") REFLECT PORTIONS WHICH HAVE
BEEN REDACTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION BY PROSPECT MEDICAL HOLDINGS, INC. AS PART OF A REQUEST FOR
CONFIDENTIAL TREATMENT."
AMENDMENT TO
IPA COMMERCIAL SERVICES AGREEMENT
The undersigned parties to the PacifiCare IPA Commercial Services Agreement
between PacifiCare of California ("PacifiCare") and Santa Ana-Tustin
Physicians' Group, Inc. ("IPA") do hereby amend said Agreement as follows:
1. Paragraph 3.02 is amended to read as follows: (3.02.01 and 3.02.02 shall
remain as written):
3.02 STANDARDS - All Health Care Services arranged for or provided by
IPA and its Member Physicians shall be provided by professional personnel and
at physical facilities according to generally accepted standards of medical
practice and management in the community. IPA further agrees to provide or
arrange for referrals to consultants and Specialist Physicians and facilities
as are necessary, appropriate, and in accordance with generally accepted
standards of medical practice in the community and in compliance with the
standards developed by PacifiCare's Quality Assurance Committee. IPA agrees
to maintain and demonstrate to PacifiCare upon request, throughout the term
of this Agreement, compliance with the following:
2. Paragraph 3.14 is amended in full to read as follows:
3.14 QUALITY OF HEALTH CARE SERVICES - IPA agrees to assure quality of
Health Care Services by:
3.14.01 Assigning PacifiCare Subscribers only to Member Physicians
or Outside Providers meeting quality health care standards;
3.14.02 Inspecting the premises and facilities of its Member
Physicians on a regular basis and allowing PacifiCare to participate in such
inspections upon ten (10) days written notice.
3.14.03 Utilizing the PacifiCare Quality Assurance Committee's
guidelines for physician credentialling.
3. Attachment A3 "INDIVIDUAL STOP LOSS" shall be amended to add Section (4)
which will read as follows:
4.00 AUDIT - Upon request by PacifiCare, IPA shall provide PacifiCare
with claims information and other supporting records, including medical
records, contracts with Specialist Physicians, and payment documentation for
claims paid to Specialist Physicians or other providers, related to specific
Individual Stop Loss claims. Such information may be requested by PacifiCare
on a retrospective basis after the Individual Stop Loss payment has been made
to IPA.
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<PAGE>
4. Attachment A5 "HOSPITAL CONTROL PROGRAM" Section (2) "BUDGET" shall be
amended in full as follows:
See Exhibit 1, attached here to and incorporated herein by this
reference.
5. Attachment A5 "HOSPITAL CONTROL PROGRAM" sliding scale risk sharing
schedule (as contained in Section 4 "CALCULATION OF SAVINGS AND LOSSES")
shall be amended in full as follows:
See Exhibit 2, attached hereto and incorporated herein by this
reference.
6. Attachment C "CAPITATION PAYMENT RATES" shall be amended as follows:
The percentage of premium value for Individual Stop Loss (as noted in
the second sentence of the first paragraph) shall be equal to:
[ ** ]
7. Attachment E "PHARMACY CONTROL PROGRAM" shall be amended in full to read
as follows:
See Exhibit 3, attached hereto and incorporated herein by this reference.
8. Attachment F "AIDS STOP LOSS PROGRAM" will apply during 1991. IPA
acknowledges that final claims must be filed for such services by March 31,
1992 to be included in the AIDS Stop Loss Program.
9. Attachment H "DIVISION OF FINANCIAL RESPONSIBILITY" shall be amended as
follows:
[ ** ]
[ ** ]
2
<PAGE>
The effective date of this Amendment shall be January 1, 1991.
By signing below, both parties hereto have executed and agreed to this
Amendment.
PACIFICARE OF CALIFORNIA IPA Santa Ana-Tustin
Physicians' Gr. Inc
By: /s/ Kevin R. Mowll By: /s/ Melvin L. Reich
------------------------------ ------------------------------
Kevin R. Mowll, Vice President Title: President
-----------------------------
Date: 02/01/91 Date: 1/20/91
---------------------------- ------------------------------
3
<PAGE>
EXHIBIT 1
HOSPITAL, CONTROL PROGRAM BUDGET
<TABLE>
<CAPTION>
DOLLARS PMPM
<S> <C>
Inpatient Hospital [ ** ]
Utilization Rate 215 days PTMPY
Per Diems, net of discounts, etc.
Regular Plans [ ** ]
880 Plan [ ** ]
[ ** ]
Emergency Services [ ** ]
Emergency Room & Ambulance
(See Special Conditions below)
Outpatient Services [ ** ]
Outpatient Surgery and other hospital
outpatient services as approved by
Pacificare (i.e., facility fees for
outpatient dialysis)
Selected Outpatient Services from Capitation [ ** ]
Chemotherapy Administration (including drugs)
Professional Charges for Dialysis
Home health services expenses as approved
by Pacificare in advance
Hospital Control Program Payout Pool [ ** ]
--------
SUB-TOTAL [ ** ]
Reinsurance Premium
Deductible PMPY [ ** ] [ ** ]
TOTAL BUDGET PMPM [ ** ]
</TABLE>
4
<PAGE>
The TOTAL BUDGET PMPM to be used for settlement purposes shall be calculated
by applying the IPA's specific composite age/sex factor to the budgeted
amounts for Inpatient Hospital, Emergency Services, Outpatient Services, and
Selected Outpatient Services. (The composite age/sex factor will be
calculated by multiplying the IPA's member months within each age/sex
category and dividing the sum of these numbers by IPA's total member months.
The age/sex categories and factors are listed below.) The age/sex adjusted
dollar figure will be added to the Hospital Control Program Payout Pool
dollar figure. The Reinsurance premium will be netted against this figure.
<TABLE>
<CAPTION>
AGE/SEX AGE/SEX
CATEGORY FACTOR
-------- ------
<S> <C>
Child, Age 0-1 [ ** ]
Child, Age 2-9 [ ** ]
Child, Age 10-17 [ ** ]
Female, Age 18-29 [ ** ]
Female, Age 30-44 [ ** ]
Female, Age 45-64 [ ** ]
Female, Age 65+ [ ** ]
Male, Age 18-29 [ ** ]
Male, Age 30-44 [ ** ]
Male, Age 45-64 [ ** ]
Male, Age 65+ [ ** ]
</TABLE>
5
<PAGE>
EXHIBIT 2
HOSPITAL CONTROL PROGRAM SLIDING SCALE SCHEDULE
<TABLE>
<CAPTION>
Bed Days/Outpt. Surgery
Per Thousand Mbrs/Year IPA % Sharing
- ---------------------- -------------
<S> <C>
Over 269 [ ** ]
245-269 [ ** ]
220-244 [ ** ]
under 220 [ ** ]
</TABLE>
(Payment to remain as stated in Agreement.)
6
<PAGE>
EXHIBIT 3
ATTACHMENT E
PHARMACY CONTROL PROGRAM
The purpose of the Pharmacy Control Program (PCP) is to provide an
incentive to the IPA to foster the efficient utilization of prescription
services. The IPA is given the opportunity to share in [ ** ] of any savings
when per member per month expenses are compared to budget, with a limited
amount of commensurate downside risk.
I. BUDGET
The budget will be set at the following amounts on a per Subscriber per month
(pmpm) basis and will be calculated based on the mix of copay plans of
Subscribers who have designated IPA as their Participating Medical Group:
<TABLE>
<CAPTION>
Plan Type Budget Amount
--------- -------------
<S> <C>
$0 copay [ ** ]
$1 copay [ ** ]
$2 copay [ ** ]
$2.50 copay [ ** ]
$3 copay [ ** ]
$4 copay [ ** ]
$5 copay [ ** ]
$6 copay [ ** ]
$7 copay [ ** ]
</TABLE>
Debited against this budget will be the actual expenses paid by PacifiCare
for pharmacy services of those Subscribers which designated IPA as their
Participating Medical Group for the applicable month.
II. RISK SHARING FORMULA
The IPA will share [ ** ] of any savings in comparing the budget
and actual expenses.
The IPA will be responsible for [ ** ] of any dollar amounts
more than [ ** ] over the composite per member per month budget
figure.
PacifiCare shall provide, on a quarterly basis, utilization reports
pertaining to the cost of prescriptions written on a physician specific basis
and a year-to-date comparison of performance to budget. A final calculation
and final payment will be made within one hundred fifty (150) days of the end
of each year.
IPA agrees to participate in a generic drug substitution program and
formulary program established by PacifiCare's Quality Assurance Committee.
7
<PAGE>
"ALL SECTIONS MARKED WITH TWO ASTERISKS ("**") REFLECT PORTIONS WHICH HAVE
BEEN REDACTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION BY PROSPECT MEDICAL HOLDINGS, INC. AS PART OF A REQUEST FOR
CONFIDENTIAL TREATMENT."
IPA MEDICARE PARTIAL RISK SERVICES AGREEMENT
BETWEEN
PACIFICARE OF CALIFORNIA
AND
PROSPECT MEDICAL GROUP, INC.
<PAGE>
PACIFICARE
IPA MEDICARE PARTIAL RISK SERVICES AGREEMENT
THIS IPA MEDICARE PARTIAL RISK SERVICES AGREEMENT is made and entered into
this 1 day of August, 1993, by and between PACIFICARE OF CALIFORNIA
("PacifiCare"), a California corporation, and Prospect Medical Group, Inc.,
("IPA"), a California corporation, with reference to the following facts:
A. PacifiCare operates a prepaid health service plan which arranges for
certain Medical Services to be provided to persons eligible to receive benefits
who are enrolled as Subscribers in the Secure Horizons Medical and Hospital Plan
in a manner consistent with the laws of the United States and the State of
California.
B. PacifiCare desires to provide a quality direct service prepaid health
delivery system which maximizes the utilization of innovative methods to promote
the efficient, economical delivery of health care, and to develop and implement
programs of health education and health maintenance for its Subscribers.
C. PacifiCare has a contract with the Health Care Financing
Administration ("HCFA") of the United States Government to provide Medicare
benefits to eligible persons.
D. IPA has as its primary objective the delivery of health services
through agreements and active participation with medical groups and/or clinics
and their physicians, and other related health professionals and technicians,
all of which are licensed in the State of California.
E. IPA and its Member Physicians desire to participate in the Secure
Horizons Medical and Hospital Plan by arranging for or providing Medical
Services in coordination with PacifiCare, its Subscribers and participating
hospitals on a prepaid basis.
F. PacifiCare and IPA, on behalf of IPA and its Member Physicians, deem
it in their best interests to enter into a renewable Agreement, whereby IPA
agrees to provide or arrange for ("provide") Medical Services to PacifiCare
Subscribers enrolled in the Secure Horizons Medical and Hospital Plan in the IPA
Service Area.
NOW THEREFORE, it is agreed as follows:
1. DEFINITIONS
Whenever used in this Agreement, the following terms shall have the
definitions contained in this Section 1:
1
<PAGE>
1.01 AGREEMENT - is this PacifiCare IPA Medicare Partial Risk Services
Agreement, dated as stated above, and all attachments, addendums and amendments
hereto.
1.02 CAPITATION PAYMENTS - are payments made to IPA by PacifiCare on a
prepaid basis for the Medical Services to be provided under this Agreement.
1.03 CATASTROPHIC CASE - is any single medical condition, including
complications arising from such medical condition, where the total cost of
Health Care Services to treat such condition is expected to exceed
[ ** ] per condition, regardless of payment source.
1.04 CONFORMANCE REQUEST - is a written request made by PacifCare to IPA to
correct the performance of an IPA Member Physician or Specialist Physician
to conform to the provisions of this Agreement.
1.05 COPAYMENTS - are charges pursuant to the Secure Horizons Medical and
Hospital Plan which may be charged to the Subscriber by IPA at the time of the
provision of Medical Services which are in addition to the Capitation Payments
made to IPA by PacifiCare.
1.06 COST OF CARE - is the value of Medical Services as defined in this
Agreement and as calculated pursuant to the formula set forth in Attachment A4,
incorporated in full herein by reference.
1.07 ELIGIBILITY LIST - is a list of Subscribers to whom IPA shall provide
Medical Services.
1.08 EMERGENCY SERVICES - are those Medical Services that are provided for
the treatment of acute injury or illness requiring immediate medical attention
and which threaten life or limb, or which involve uncontrollable bleeding, or
loss of consciousness, or which cannot be delayed without possible serious
effects on the health of the Subscriber.
1.09 HCFA - is the Health Care Financing Administration, an administrative
agency of the United States Government.
1.10 HOSPITAL - is an acute care facility located in the IPA Service Area
licensed as an acute care hospital under the laws of the State of California and
which has entered into a written agreement with PacifiCare to provide Hospital
Services to Subscribers. For the purpose of this Agreement, Hospital shall
initially include St. Jude Medical Center, an acute care licensed hospital
located at 101 East Valencia Mesa Drive, Fullerton, California 92634. IPA shall
coordinate the provision of Hospital Services to Subscribers with Hospital
pursuant to the terms of this Agreement.
2
<PAGE>
1.11 HOSPITAL DAY - is any period up to twenty-four (24) hours
commencing at 12:00 a.m. or 12 p.m., whichever is used by Hospital, during
which a Subscriber is eligible to receive Hospital Services and actually
receives Hospital Services from Hospital.
1.12 HOSPITAL SERVICES - are the Medical Services described in Attachment
A1, incorporated in full herein by reference, which Hospital and other providers
shall provide to Subscribers pursuant to the Secure Horizons Medical and
Hospital Plan.
1.13 IPA - is the medical group or independent practice association
identified in the first paragraph of this Agreement and its Member Physicians,
all of whom are licensed to practice medicine or osteopathy in the State of
California at the IPA Facilities.
1.14 IPA FACILITIES - are those facilities whose locations are listed in
Attachment F, attached hereto and incorporated in full herein by reference,
where Medical Services shall be available to Subscribers pursuant to this
Agreement.
1.15 IPA SERVICE AREA - is the geographical area within a thirty (30)
mile radius of Hospital. The thirty (30) mile radius commences with the
address of Hospital and extends for thirty (30) miles over the shortest route
using public streets and highways.
1.16 MEDICAL SERVICES - are all authorized health care services to which
Subscribers are entitled under the Secure Horizons Medical and Hospital Plan,
some of which, excluding Hospital Services, are summarized in Attachment A2,
incorporated in full herein by reference.
1.17 MEDICALLY NECESSARY SERVICES - are Medical Services which are required
by Subscriber as determined by IPA in accordance with accepted medical and
surgical practices and standards in the community and the professional standards
recommended by PacifiCare's Quality Assurance Committee and IPA's Utilization
Review Committee.
1.18 MEMBER PHYSICIANS - are physicians, surgeons and osteopaths, licensed
to practice medicine in the State of California, who have an ownership interest
in, are employed by, or contract with, IPA.
1.19 MONTHLY HCFA PAYMENT - is the revenue received by PacifiCare each
month from HCFA, as determined by HCFA, for the Medical and Hospital Services
each Subscriber is to be provided minus any Benefit Withhold.
1.20 OUTSIDE PROVIDERS - are licensed physicians, surgeons, osteopaths,
paramedical personnel, hospitals and other health care facilities which provide
Medical Services to Subscribers eligible
3
<PAGE>
to receive benefits under the Secure Horizons Medical and Hospital Plan but
which do not have written agreements with IPA or Hospital and which are not
Specialist Physicians.
1.21 PARTICIPATING MEDICAL GROUP - includes IPA and its Member Physicians
and is any group of duly-licensed doctors of medicine or osteopathy which has
entered into a written agreement with PacifiCare to provide Medical Services to
Subscribers in conjunction with the Secure Horizons Medical and Hospital Plan.
1.22 PRO PROGRAM - is the provider utilization review program developed by
HCFA for providers of Medical Services.
1.23 QUALITY ASSURANCE COMMITTEES - are committees separately established
by IPA and PacifiCare which shall separately establish, maintain and perform
quality assurance review of Medical Services provided to Subscribers as
reasonably required by PacifiCare, the State of California, the Department of
Corporations or Health and Human Services, HCFA, the Office of Qualification and
Compliance, or any other governmental agencies with regulatory or enforcement
jurisdiction over PacifiCare or this Agreement.
1.24 RISK REIMBURSEMENT PLAN - is PacifiCare's Medicare Medical and
Hospital Services Plan under which PacifiCare contracts with Medicare to be
reimbursed on a per capita basis for each class of Medicare beneficiary enrolled
in the plan.
1.25 SECURE HORIZONS MEDICAL AND HOSPITAL PLAN - is the prepaid health
services plan offered by PacifiCare as described in the Secure Horizons Medical
and Hospital Subscriber Agreement, and attachments, addendums and amendments
thereto, a copy of which is attached hereto as Attachment B and incorporated in
full herein by reference.
1.26 SPECIALIST PHYSICIANS - are physicians who have written agreements
with IPA to provide Medical Services to Subscribers on a referral basis and who
do provide such Medical Services at offices or facilities which are not IPA
Facilities.
1.27 SUBSCRIBER - is an individual who is enrolled in the Secure Horizons
Medical and Hospital Plan, who meets all the eligibility requirements for
membership in such plan and for whom all applicable Subscriber Premiums have
been paid and received by PacifiCare.
1.28 SUBSCRIBER PREMIUMS - are charges pursuant to the Secure Horizons
Medical and Hospital Plan which, if applicable, are required to be paid by
Subscribers to PacifiCare on a monthly basis in order for Subscribers to receive
Medical Services.
4
<PAGE>
1.29 SURCHARGES - are additional fees not disclosed to the Subscriber for
Medical Services and which are not allowable Copayment charges.
1.30 URGENTLY NEEDED SERVICES - are Medical Services which are required
without delay, in order to prevent serious deterioration of Subscriber's health
as the result of an unforseen illness or injury while the Subscriber is
temporarily absent from the IPA Service Area.
1.31 UTILIZATION REVIEW COMMITTEE - is an IPA committee of at least three
(3) Member Physicians which is established and maintained, in accordance with
the provisions of Section 3.13 herein, to develop a utilization control program
outlining procedures for the efficient use of resources, consistent with state
and federal law, for the rendition of Medical Services. The Utilization Review
Committee shall review elective Referrals and hospital admissions on a
concurrent and prospective basis and Emergency Services, Urgently Needed
Services and hospital admissions on a retrospective basis.
1.32 BENEFIT WITHHOLD - is the portion of the HCFA revenue received and
retained by PacifiCare each month as outlined in Paragraph 5, which is earmarked
for provision of benefits to Subscribers which are offered in addition to
Medical Services and Hospital Services.
2. RELATIONSHIP OF PARTIES
2.01 IPA PARTICIPATION - The execution of this Agreement shall qualify IPA
to participate in the rendition of Medical Services to Subscribers pursuant to
the terms of the Secure Horizons Medical and Hospital Plan, as amended from time
to time. Subject to Section 12.11 herein, PacifiCare shall notify IPA of any
material amendments to the Secure Horizons Medical and Hospital Plan, which
amendments shall become effective upon thirty (30) days written notice by
PacifiCare to IPA, and IPA has not objected to PacifiCare in writing within the
thirty (30) day period to be bound by such amendments. IPA approval of such
amendments shall not be unreasonably withheld. If IPA does provide PacifiCare
reasonable written objection to be bound by such amendments within the thirty
(30) day period, such amendments to the Secure Horizons Medical and Hospital
Plan shall have no force or effect on IPA.
2.02 LIABILITY FOR OBLIGATIONS - Notwithstanding any other section or
provision of this Agreement, nothing contained herein shall cause either party
to be liable or responsible for any debt, liability, or obligation of the other
party or any third party, unless such liability or responsibility is expressly
assumed by the party sought to be charged therewith. Each party shall be solely
responsible for and shall indemnify and hold the other party harmless against
any obligation for the payment of wages,
5
<PAGE>
salaries or other compensation (including all state, federal and local taxes and
mandatory employee benefits), insurance and voluntary employment-related or
other contractual or fringe benefits as may be due or payable by the party to or
on behalf of such party's employees, agents and representatives.
2.03 INDEPENDENT CONTRACTOR - The relationship between PacifiCare and IPA
is an independent contractor relationship. Neither IPA nor members, partners,
employees or agents of IPA are employees or agents or PacifiCare and neither
PacifiCare nor any employee or agent of PacifiCare is a member, partner,
employee or agent of IPA. As such, all medical decisions are rendered solely by
IPA and not by PacifiCare. IPA is solely responsible for all Medical Services
arranged by IPA and provided to Subscribers. None of the provisions of this
Agreement shall be construed to create a relationship of agency, representation,
joint venture, ownership, control of employment between the parties other than
that of independent parties contracting solely for the purposes of effectuating
this Agreement.
2.04 DUTY TO DEFEND AND INDEMNIFY - To the extent not covered by
insurance maintained by PacifiCare, whether because of liability in excess of
the policy limits or because of the occurrence of a non-insured event, IPA
shall defend, indemnify and hold harmless PacifiCare from and against any
claim, loss, damage, cost, expense or liability arising out of or related to
the performance or nonperformance by IPA, its Specialist Physicians or
employees of any Medical Services to be performed or arranged by IPA under
this Agreement. It is understood and agreed by PacifiCare that the foregoing
indemnification obligation is in no way whatsoever intended to reduce or
eliminate any insurance coverage maintained by IPA and that PacifiCare shall
be entitled to indemnification from IPA only for claims, losses, damages,
costs, expenses or liabilities in excess of the applicable insurance policy
limits or arising from uninsured events or occurrences.
To the extent not covered by insurance maintained by IPA, whether because
of liability in excess of the policy limits or because of the occurrence of a
non-insured event, PacifiCare shall defend, indemnify and hold harmless IPA from
and against any claim, loss, damage, cost, expense or liability arising out of
or related to the performance or nonperformance of PacifiCare, its employees or
agents of any service to be performed or provided by PacifiCare under this
Agreement. It is understood and agreed by IPA that the foregoing indemnification
obligation is in no way whatsoever intended to reduce or eliminate any insurance
coverage maintained by PacifiCare and that IPA shall be entitled to
indemnification from PacifiCare only for claims, losses, damages, costs,
expenses or liabilities in excess of the applicable insurance policy limits or
arising from uninsured events or occurrences.
6
<PAGE>
3. DUTIES OF IPA
3.01 IPA RESPONSIBILITIES - IPA agrees to arrange for or provide Medical
Services twenty-four (24) hours a day in coordination with PacifiCare and with
Hospital and other providers, as necessary, for each Subscriber who has
designated IPA as his or her Participating Medical Group. IPA shall be
financially responsible for all Medical Services specified in Attachment A2,
incorporated in full herein by reference, provided to Subscribers for whom IPA
is to receive monthly Capitation Payment from PacifiCare based upon the
PacifiCare provided Eligibility List. IPA shall be responsible for determining
whether Subscribers are eligible for Medical Services on the basis of the most
current Eligibility List supplied to IPA by PacifiCare. Updated eligibility
information shall be available from PacifiCare as needed on the basis of the
most current information supplied PacifiCare by HCPA.
3.02 STANDARDS - All Medical Services arranged for or provided by IPA
and its Member Physicians shall be provided by professional personnel and at
physical facilities according to generally accepted standards of medical
practice and management in the community. IPA further agrees to provide or
arrange for Referrals to Specialist Physicians and facilities as are
necessary, appropriate, and in accordance with generally accepted standards
of medical practice in the community in compliance with the standards
developed by PacifiCare's Quality Assurance Committee. If IPA contracts with
Specialist Physicians to provide Medical Services under this Agreement, IPA
shall require such Specialist Physicians to provide IPA with the
credentialing information set forth herein. IPA shall obtain and maintain
information concerning each Member Physician's and Specialist Physician's
education, training, references, malpractice liability insurance, hospital
staff status, hospital clinical privileges, and hospital staff reappointment
dates. Such information shall be kept in a form prescribed by or acceptable
to PacifiCare. Upon request, the credentialing information shall be made
available to PacifiCare for review or copying.
IPA acknowledges and agrees that it shall report Member Physicians or
Specialist Physicians as required by the California Business and Professions
Code Section 805 ("Section 805"). IPA further agrees to maintain and demonstrate
to PacifiCare upon request compliance with the following:
3.02.01 IPA shall insure that its Member Physicians and
Specialist Physicians are licensed by the State of California and have
current Drug Enforcement Agency ("DEA") registration. IPA shall immediately
notify PacifiCare in writing of any of the following actions taken by or
against a Member Physician or Specialist Physician: (i) the surrendering,
revocation, or suspension of a license; (ii) the surrendering, revocations,
or suspension of current DEA registration; (iii) any filing pursuant
7
<PAGE>
to Section 805; (iv) any filing pursuant to the National Practitioner Data
Bank; (v) the filing of any malpractice claim of more than ten thousand
dollars ($10,000); and (vi) a change in hospital staff status or hospital
clinical privileges, including any restrictions or limitations.
If IPA fails to obtain and maintain the information set forth in
Paragraph 3.02 or fails to immediately notify PacifiCare as set forth in this
Paragraph 3.02.01, IPA shall indemnify and hold harmless PacifiCare from and
against any claim, loss, damage, cost, expense or liability arising out of or
related to such nonperformance by IPA, its Member Physicians, Specialist
Physicians or employees.
3.02.02 In the event that it is determined by PacifiCare
that IPA does not obtain and maintain the information set forth in paragraph
3.02, IPA agrees to assist PacifiCare in obtaining credentialing information
concerning each Member Physician's and Specialist Physician's education,
training, references, malpractice liability insurance, hospital staff status,
hospital clinical privileges, and hospital staff reappointment dates. IPA
shall obtain from each Member Physician and Specialist Physician a signed
waiver, acceptable to PacifiCare, allowing PacifiCare access to such
credentialing information at any acute care hospital or health care facility.
If IPA is unable to obtain a signed waiver from a Member Physician or
Specialist Physician, IPA shall obtain the credentialing information directly
from the acute care hospital or health care facility and make such
information available to PacifiCare upon request for review and copying.
3.02.03 IPA agrees to provide access to continuing education
programs for its Member Physicians and Specialist Physicians in accordance
with the standards established by the California Medical Association for
continuing education. The content and delivery of such continuing education
programs shall be in the discretion and judgement of IPA, in order to
maintain high standards for the delivery of Medical Services pursuant to this
Agreement. IPA further agrees to gather, correlate, and distribute to its
Member Physicians and Specialist Physicians, information regarding
professional medical activities and developments which IPA believes may be of
assistance in providing Medical Services pursuant to this Agreement.
3.02.04 IPA agrees to provide reasonable evidence that all
nurses and other ancillary and paramedical personnel who are employed by and
contract with IPA or Specialist Physicians are properly licensed by the State of
California.
3.03 INSURANCE - IPA shall maintain professional liability insurance and
general liability insurance in the minimum amounts of one million dollars
($1,000,000) per person, three million dollars ($3,000,000) per occurrence
coverage, and three million dollars ($3,000,000) combined single limits
coverage, for its
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agents and employees, as applicable. In the event IPA procures a claims made
policy as distinguished from an occurrence policy, IPA shall procure and
maintain prior to termination of such insurance, continuing "tail" coverage,
unless successor policy coverage provides such "tail" protection. IPA shall
provide PacifiCare with evidence of such insurance coverage upon PacifiCare's
request. IPA shall immediately notify PacifiCare of any material changes in
insurance coverage and shall provide a certificate of such insurance coverage
to PacifiCare upon PacifiCare's reasonable request. In the event IPA
contracts with independent contractor physicians to provide Medical Services
under this Agreement, IPA will require such independent contractor physicians
and their agents to maintain professional liability insurance and general
liability insurance in the minimum amounts as is usual and customary in the
community.
3.04 REFERRALS - IPA shall refer Subscribers in need of specialty care
services only with the approval of the IPA Utilization Review Committee.
However, in the event that Emergency Services are required, IPA shall comply
with Section 3.05 below.
3.05 HOSPITAL ADMISSIONS - Whenever IPA determines that a Subscriber on
IPA's eligibility list requires Hospital Services which are not Emergency
Services, IPA shall arrange for such Hospital admissions and outpatient
surgeries through the IPA's Utilization Review Committee and its developed
utilization review program. IPA and its Member Physicians shall not serve as
admitting physicians for any Subscriber without such prior approval except in
the event that Emergency Services are required. If IPA or a Member Physician
admits a Subscriber to a Hospital for Emergency Services, IPA shall notify
PacifiCare of such admission within the time frames as required in the
PacifiCare Provider Policies and Procedures Manual, attached hereto as
Attachment D and incorporated in full herein by reference. Admissions for
Emergency Services or Urgently Needed Services shall be made to hospitals
contracting with PacifiCare, if possible.
3.06 ELIGIBILITY LIST - IPA shall accept as patients those Subscribers who
are on IPA's eligibility list provided by PacifiCare to IPA. Member
Physicians and IPA shall be entitled to rely on the most current provided list
until a new list has been approved to IPA. IPA understands that in order to
update the eligibility list, PacifiCare is dependent on the receipt of
information from HCFA.
3.07 COLLECTION OF CHARGES FROM SUBSCRIBERS - IPA shall collect
applicable Copayments from Subscribers upon the rendition of Medical Services
to Subscribers pursuant to the Secure Horizons Medical and Hospital Plan.
With the exception of Copayments and charges for non-covered services
delivered on a fee-for-service basis to Subscribers, IPA shall in no event,
including, without limitation, to non-payment by PacifiCare, insolvency of
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PacifiCare, or breach of the Agreement, bill, charge, collect and deposit, or
attempt to bill, charge, collect or receive any form of payment, from any
Subscriber for Medical Services provided pursuant to this Agreement and for
which Subscriber is entitled under the Secure Horizons Medical and Hospital Plan
in effect for such Subscriber.
IPA shall not maintain any action at law or equity against a
Subscriber to collect sums owed by PacifiCare to IPA. Upon notice of any
such charge, PacifiCare may terminate this Agreement consistent with the
provisions contained in Section 7.01.02 and take all other appropriate action
consistent with the terms of this Agreement to eliminate such charges,
including, without limitation, requiring IPA and Specialist Physicians to
return all sums collected as Surcharges from Subscribers or their
representatives. Nothing in this Agreement, however, shall be construed to
prevent IPA from providing non-covered Medical Services on a usual and
customary fee-for-service basis to subscribers.
IPA's obligations regarding the collection of charges from Subscribers
shall survive the termination of this Agreement with respect to Medical Services
provided during the term of the Agreement without regard to the cause of
termination of this Agreement.
3.08 COLLECTION OF CHARGES FROM THIRD PARTIES WHEN MEDICARE NOT THE
PRIMARY PAYOR - IPA and Member Physicians accept payment from PacifiCare
(plus applicable Copayments) for Medical Services as provided herein as full
payment for such Medical Services from PacifiCare except as provided herein;
provided however, when Medicare is not the primary payor for Medical
Services, such as when the Subscriber is entitled to payment from another
third party or for payment for a Workers' Compensation claim, or from another
primary insurance coverage maintained by Subscriber, IPA and Member
Physicians shall make no demand upon PacifiCare for reimbursement under the
Individual Subscriber Stop Loss Program as specified in Attachment A3 hereto
until all primary sources of payment have been pursued and it is determined
that full payment cannot be obtained within ten (10) months from the date of
the provision of Medical Services.
For purposes of accomplishing the intent of the Section 3.08, PacifiCare
hereby assigns to IPA for collection, any claims or demands against third
parties for amounts due for Medical Services provided by IPA pursuant to this
Agreement, subject to the following conditions:
3.08.01 IPA shall utilize lien forms which are provided by
PacifiCare in the PacifiCare Policies and Procedures Manual or which have been
approved in advance by PacifiCare. IPA shall notify PacifiCare each time it
pursues and each time it obtains a signed lien from a Subscriber.
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3.08.02 IPA shall not commence any legal or equitable action
against a third party without obtaining the prior written consent of PacifiCare.
It is agreed that collection or demand letters consistent with the PacifiCare
Provider Policies and Procedures Manual shall not constitute the commencement of
legal or equitable action. Under no circumstances, shall IPA commence any legal
action against a Subscriber.
3.08.03 IPA shall defend, indemnify and hold PacifiCare
harmless for all actions by IPA which relate to collections of an account
pursuant to this Section 3.08.
3.08.04 IPA shall perform such collection activities consistent
with the procedures set forth in the PacifiCare Provider Policies and Procedures
Manual.
3.08.05 PacifiCare may immediately rescind such assignment on a
claim-by-claim basis for any reason by providing written notice of rescission to
IPA.
In the event IPA receives payment from a third party after
receipt of payment from PacifiCare, IPA shall reimburse PacifiCare to the
extent that the combined amounts received from all payors exceeds [ ** ] of
IPA's usual and customary fee-for-service charges.
3.09 DUTIES OF IPA UPON TERMINATION DURING PHASE-OUT PERIOD - Should this
Agreement be terminated by IPA pursuant to Section 7.01.01(a) or Section
7.01.01(b), IPA shall be released of its obligation to continue to provide or
arrange for Medical Services to Subscribers during the phase-out period as
stated in this Section 3.09. If this Agreement is terminated for any other
reason by either party or if this Agreement terminates at the end of the Initial
Term or any renewal term, IPA shall not be released of its obligation to
continue to provide or arrange for Medical Services to Subscribers during the
phase-out period, which phase-out period shall end on the earlier of:
3.09.01 Three (3) months from the effective date of termination
of this Agreement, or
3.09.02 The date PacifiCare has secured the transfer of
Subscribers to another medical group, individual practice association, or
physician for further treatment, and has notified IPA of such transfer in
writing.
Compensation during the phase-out period shall be at the
Capitation Rates set forth in the Attachment C hereto.
3.10 CONTINUING CARE RESPONSIBILITIES - IPA and Member Physicians
shall provide or arrange for Medical Services to Subscribers for the term of
this Agreement in accordance with Section 3.01 hereof. In the event of
termination of this Agreement and the expiration of IPA's duty to provide or
arrange
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for Medical Services during the phase-out period pursuant to Section 3.09, if
applicable, IPA and Member Physicians shall continue to provide or arrange
for Medical Services to Subscribers until the effective date of transfer of
such Subscribers to another Participating Medical Group for further treatment
and written notice of such transfer has been provided by Pacificare to IPA.
If a Subscriber's care cannot be transferred for the reason of
hospitalization of Subscriber, continuity of care, or other legally-required
medical treatment reasons, IPA shall continue to provide or arrange for
Medical Services for such Subscriber until Pacificare, through consultation
with the Subscriber's attending participating physician, has made provision
for the transfer of such Subscriber to another participating provider for
further Medical Services and has notified IPA of such transfer in writing.
The payment provisions for any continued Medical services after expiration of
the phase-out period shall be the lesser of [ ** ] of usual and customary
fees of the Member Physician or Specialist Physician or the Cost of Care as
set forth in Attachment A4.
Notwithstanding the above or any other provisions of this Agreement to the
contrary, IPA agrees that in the event PacifiCare ceases operations for any
reason, including insolvency, IPA shall provide Medical Services and shall not
bill, charge, collect or receive any form of payment from any Subscriber or have
any recourse against a Subscriber for Medical Services provided after PacifiCare
ceases operation. This continuation of Medical Services obligation shall be for
the period for which Subscriber Premiums have been paid, but shall not exceed a
period of thirty (30) days, except for those Subscribers who are hospitalized on
an inpatient basis as provided below.
In the event PacifiCare ceases operations or IPA terminates this
Agreement on the basis of PacifiCare's failure to make timely Capitation
Payments, IPA shall continue to arrange for Medical Services to those
Subscribers who are hospitalized on an inpatient basis at the time PacifiCare
ceases operation or IPA terminates this Agreement until such Subscribers are
discharged from the hospital. IPA may file a claim with PacifiCare for such
Medical Services at [ ** ] of IPA's usual and customary fee for service
charges then in effect.
IPA agrees that the provisions of this Section 3.10 and IPA's obligations
herein shall survive the termination of this Agreement without regard to the
cause of termination of the Agreement, and shall be construed to be for the
benefit of the Subscribers.
3.11 STAFF PRIVILEGES - IPA agrees to have its Member Physicians seek and
obtain (and provide evidence of) staff privileges or other appropriate access to
Hospital and other hospitals under contract with PacifiCare where Medical
Services shall be provided to Subscriber by IPA's Member Physicians.
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3.12 ADMINISTRATIVE GUIDELINES - IPA agrees to perform its duties under
this Agreement in a manner consistent with the reasonable administrative
guidelines provided by PacifiCare, in its Provider Polices and Procedures
Manual, attached hereto as Attachment D and incorporated in full herein by
reference. Subject to Section 12.11 herein, PacifiCare shall notify IPA of any
material amendments to the administrative guidelines, which amendments shall
become effective upon thirty (30) days written notice by PacifiCare to IPA if
IPA has not objected to PacifiCare in writing within the thirty (30) day period
to be bound by such amendments. IPA approval of such amendments shall not be
unreasonably withheld. If IPA does provide PacifiCare reasonable written
objection to be bound by such amendments within the thirty (30) day period,
such amendments to the PacifiCare Health Plan shall have no force or effect on
IPA.
3.13 UTILIZATION REVIEW - IPA agrees to participate with PacifiCare in an
ongoing utilization review program to promote efficient use of resources. The
IPA's Utilization Review Committee shall meet as frequently as necessary but at
least weekly. The Utilization Review Committee shall keep minutes of the
committee meetings, a copy of which shall be made available to PacifiCare upon
ten (10) days written notice by PacifiCare to IPA. IPA and PacifiCare shall
jointly implement a utilization review system whereby IPA shall notify
PacifiCare of any hospital or skilled nursing facility admissions. A member of
the PacifiCare Medical Services staff may participate in IPA's Utilization
Review Committee meetings.
3.14 QUALITY OF HEALTH CARE - IPA agrees to assure quality of Medical
Services by:
3.14.01 Assigning PacifiCare Subscribers only to Member Physicians
or Outside Providers meeting quality health care standards;
3.14.02 Inspecting the premises and facilities of its Member
Physicians on a regular basis and allowing PacifiCare to participate in such
inspections upon ten (10) days written notice.
3.15 QUALITY ASSURANCE AND REMEDIAL PROCEDURES - IPA shall cooperate with
PacifiCare in the operation of PacifiCare's quality assurance program and IPA
shall perform quality assurance review of Medical Services as brought before IPA
internally or from PacifiCare's Quality Assurance Committee, the Department of
Corporations, the Department of Health and Human Services, HCFA and any other
governmental agencies with regulatory or enforcement jurisdiction over this
Agreement. Further, IPA agrees to comply with the recommendations presented
hereto in Attachment G. Failure to comply with these recommendations within the
specified time frames may result in the "freezing" of additional new enrollment
activity. IPA shall establish and maintain a Quality Assurance Committee which
shall meet as least quarterly. A member of the
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PacifiCare Medical Services staff may participate in IPA's Quality Assurance
Committee meetings. The IPA Quality Assurance Committee shall keep minutes of
the committee meetings, a copy of which shall be made available to PacifiCare
upon ten (10) days written notice by PacifiCare to IPA. The task of the Quality
Assurance Committee may be assumed by the Utilization Review Committee described
in Section 3.13; however, in such event, the Utilization Review and Quality
Assurance Committees must hold separately convened meetings and the minutes of
each meeting must be separately maintained.
IPA shall, at the written request of PacifiCare, make available one (1)
Member Physician from IPA to attend the PacifiCare Quality Assurance Committee
meetings. The intent of this Section is to have at least one Member Physician
from IPA serve for six (6) months on the PacifiCare Quality Assurance Committee
during a three (3) year period. IPA shall develop written procedures for
remedial action whenever it is determined by PacifiCare's Quality Assurance
Committee that inappropriate or substandard Medical Services have been furnished
or Medical Services that should have been furnished or Medical Services that
should have been furnished have not been furnished. Upon request, PacifiCare
shall assist IPA in the formulation of such remedial procedures.
3.16 COMPLIANCE WITH CIVIL RIGHTS LAWS - IPA shall comply with Title VI of
the Civil Rights Act of 1964, Section 504 of the Rehabilitation Act of 1973 and
the Age Discrimination Act of 1975.
3.17 RECIPROCITY AGREEMENTS - IPA agrees to develop and implement
agreements with PacifiCare's Participating Medical Groups to assure
reciprocity of health care for PacifiCare Subscribers. IPA shall accept
non-Emergency or specialty referrals from such other Participating Medical
Groups and such other Participating Medical Groups shall be required to
accept non-Emergency or specialty referrals from IPA. Payment for the
foregoing referrals shall be no greater that [ ** ] of IPA's usual and
customary fee-for-service rates then in effect as long as claims for
authorized Medical Services are paid within forty-five (45) days of the date
of initial billing.
3.18 INDIVIDUAL STOP-LOSS PROGRAM - IPA agrees to participate in and assume
the rights and responsibilities of the Pacificare Stop-Loss Program as defined
in Attachment A3, attached hereto and incorporated in full herein by reference.
3.19 OTHER CONTRACTUAL COMMITMENTS - IPA represents and assures
PacifiCare that contractual commitments with other HMOs, competitive medical
plans and health related entities do not restrict or impair IPA from
performing its duties under this Agreement.
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3.20 DISSEMINATION OF INFORMATION - IPA agrees that PacifiCare may use
IPA's name, address, telephone number, and a listing of IPA's Member Physicians
in any informational material routinely distributed to Subscribers and for other
purposes related to the administration of the Secure Horizons Medical and
Hospital Plan as an indication of IPA's willingness to provide Medical Services
to Subscribers.
Prior to listing or otherwise referencing PacifiCare in any promotional or
advertising brochures, media announcements or other advertising or marketing
material, IPA shall first obtain the prior subjective consent of PacifiCare.
3.21 WRITTEN AGREEMENTS - IPA shall secure written agreements, consistent
with the terms of this Agreement and in compliance with all state and federal
law, with all Specialist Physicians regularly utilized as a part of IPA's
referral system.
3.22 MEDICAL CARE CRITERIA - IPA shall utilize the criteria for medical
care that is established or approved by PacifiCare's Quality Assurance Committee
as a standard reference in determining appropriate lengths of stay for
hospitalized Subscribers or appropriate utilization patterns for referral to
specialty services.
3.23 NONDISCRIMINATION - IPA represents and assures that Medical Services
are rendered to Subscribers in the same manner as such services are provided to
IPA's other patients, except as required pursuant to this Agreement.
Subscribers shall not be subject to any discrimination whatsoever by IPA in
regards to access to Medical Services.
3.24 ACCOUNTS PAYABLE SYSTEM - IPA agrees to operate its accounts payable
system in a manner which assures that providers of authorized Medical Services
who are Member Physicians and non-Member Physicians receive payment for Medical
Services rendered to Subscribers within twenty-seven (27) calendar days of IPA's
receipt of an uncontested claim from such Member Physicians and non-Member
Physicians. In the event IPA fails to meet the payment timelines discussed in
this Section 3.24, in addition to exercising any other remedies it may have
under this Agreement, PacifiCare may take actions to assist IPA in operating its
accounts payable system including, but not limited to, assuming the obligation
of paying IPA's Member Physicians and Non-Member Physicians and charging IPA an
administrative fee for performing such services.
3.25 CATASTROPHIC CASE MANAGEMENT - IPA agrees that PacifiCare's medical
director may be involved in the management and coordination of Catastrophic
Cases. IPA will fully assist PacifiCare in providing information that may be
required in determining the need for a transfer of a Subscriber into
PacifiCare's regional centers for the care of Catastrophic Cases
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including, but not limited to, prompt notification of known or suspected
Catastrophic Cases. Detailed procedures for Catastrophic Case management will
be mutually agreed upon by the parties based upon IPA's and PacifiCare's
determination of the Subscriber's transferability. Except in unusual
circumstances, based on Medical Necessity or the inability of Hospital to
provide services with acceptable results, regional centers for care of
Catastrophic Cases shall be sought within the IPA Service Area and surrounding
area.
3.26 CAPACITY REPORTING - IPA will provide to PacifiCare, at the earliest
possible time, notice of any significant changes in the capacity of IPA to
provide or arrange for the Medical Services contemplated by this Agreement
(e.g., addition or deletion of Member Physicians or Specialist Physicians),
including a ninety (90) day written notice in the event IPA is unable to
properly service additional Subscribers. IPA shall still be obligated to
provide or arrange for Medical Services to Subscribers who are with employer
groups whom PacifiCare had agreed to enroll prior to ninety (90) days
from the effective date of the written notice. PacifiCare shall provide IPA,
upon IPA's request, current marketing information within a reasonable period for
purposes of determining IPA capacity.
3.27 REPRESENTATION OF IPA MEMBER PHYSICIANS - IPA agrees to represent its
Member Physicians in matters pertaining to the provision of Medical Services
under this Agreement, and that it has obtained written consent to such
representation from its Member Physicians.
3.28 PERFORMANCE OF MEMBER PHYSICIANS - IPA agrees: (i) to develop methods
for discussion of performance with its Member Physicians, (ii) to assure
correction of performance of its Member Physicians consistent with the
provisions of this Agreement and state and federal law applicable to the Secure
Horizons Medical and Hospital Plan, and (iii) to resolve Conformance Requests.
3.29 WITHDRAWAL OF AN IPA FACILITY - In the event IPA seeks to withdraw one
or more of the IPA Facilities listed in Attachment F from providing or arranging
for Medical Services to Subscribers under this Agreement, IPA must notify
PacifiCare of such withdrawal in writing at least one hundred and eighty (180)
days prior to the effective withdrawal date; after the effective date of
withdrawal, IPA shall still be responsible to provide or arrange for Medical
Services to the affected Subscribers at the other IPA Facilities.
4. DUTIES OF PACIFICARE
4.01 ADMINISTRATION - PacifiCare agrees to perform all necessary
administrative, accounting, enrollment, and other functions consistent with the
administration of the Secure Horizons Medical and Hospital Plan and this
Agreement.
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4.02 BENEFIT INFORMATION - PacifiCare agrees to apprise all Subscribers
concerning the type, scope and duration of benefits and services to which such
person is entitled under the Secure Horizons Medical and Hospital Plan.
4.03 ASSIST IPA - PacifiCare agrees to assist and cooperate with IPA in the
development and initial implementation of procedures necessary to carry out the
intent of this Agreement.
4.04 ADMINISTRATION OF PAYMENTS - PacifiCare agrees to transmit Capitation
Payments and other payments to IPA in accordance with the terms and procedures
set forth in this Agreement.
4.05 STATISTICAL INFORMATION AND PROVISION OF DATA - PacifiCare agrees
to provide IPA with management information and data reasonably necessary to
carry out the terms and conditions of this Agreement and for the operation of
the Secure Horizons Medical and Hospital Plan, including monthly Eligibility
Lists and monthly capitation worksheets. Furthermore, PacifiCare shall
provide quarterly reports reflecting Hospital Services authorized by IPA.
4.06 SERVICES RENDERED TO INELIGIBLE SUBSCRIBERS - PacifiCare agrees to
reimburse IPA for those Medical Services set forth in Attachment A2 provided
to an ineligible Subscriber if the Subscriber was listed as eligible on the
most current eligibility list provided to IPA by PacifiCare. If PacifiCare
is in receipt of a billing to such ineligible Subscriber from IPA and proof
of having sent the Subscriber or the Subscriber's legal guardian two (2)
bills no less than thirty (30) days apart, PacifiCare will reimburse IPA
[ ** ] of IPA's ordinary and customary fee-for-service rates then in effect
for those Medical Services rendered but no greater than [ ** ] of the still
uncollected balance. If subsequent to payment by PacifiCare, IPA receives
any payment from another source for the services, then IPA shall reimburse
PacifiCare up to the amount previously received from PacifiCare. If a
Subscriber becomes ineligible for benefits under the Secure Horizons Medical
and Hospital Plan after IPA or Member Physicians have begun treatment of the
Subscriber (provided the Subscriber is not hospitalized at the time of
becoming ineligible), IPA shall be entitled to make all subsequent charges
for its services directly to the Subscriber. If the Subscriber is
hospitalized at the time of becoming ineligible, IPA shall be entitled to
make charges directly to the Subscriber only for services provided after the
Subscriber is discharged from such hospital treatment.
4.07 DISSEMINATION OF INFORMATION - Except as provided above in Section
3.20, prior to listing or otherwise referencing IPA in any promotional or
advertising brochures, media announcements or
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other advertising or marketing material, PacifiCare shall first obtain the prior
consent of IPA, such consent not to be unreasonably withheld.
4.08 NOTIFICATION OF EMERGENCY ADMISSIONS - In the event PacifiCare is
notified of a Subscriber's emergency admission to another facility within the
service area of Hospital, PacifiCare shall use its best efforts to notify IPA
and/or Hospital within twenty four (24) hours of such emergency admission.
5. COMPENSATION
5.01 CAPITATION PAYMENTS - PacifiCare shall make monthly Capitation
Payments to IPA as outlined in Attachment C, due and payable on the tenth (10th)
day of the month for the current month's Medical Services.
5.02 ADDITIONAL PAYMENTS - PacifiCare and IPA agree to provide payments to
each other in accordance with the terms of the following programs, if
applicable: Hospital Incentive Program, Individual Stop-Loss Program, Benefit
Withhold Incentive Program and Mammography Reimbursement Program as specified in
Attachments A5, A3, E and C respectively, incorporated in full herein by
reference.
To the extent that one or both parties owes an amount to the other party in
the risk programs noted above, IPA agrees that PacifiCare shall combine the
results of all applicable risk programs such that one aggregate payment is
payable to or receivable from IPA. A fully detailed accounting of the results
of each program shall accompany the aggregate payment or notice of amount due.
5.03 ADEQUACY OF COMPENSATION - Except as otherwise provided herein, IPA
shall accept the payments specified in this Agreement as payment in full for all
Medical Services provided Subscribers during each month for which such payments
are to be received by IPA from PacifiCare. In the event PacifiCare fails to
make any payments to IPA as provided herein, whether from PacifiCare's
insolvency or otherwise, Subscribers shall not be liable to IPA or its Member
Physicians under any circumstances for Medical Services. Surcharges for Medical
Services provided or arranged by IPA or Member Physicians are prohibited; upon
notice of the existence of any such Surcharge, PacifiCare will take appropriate
action consistent with the terms of this Agreement to eliminate such Surcharges.
6. TERM OF AGREEMENT
6.01 TERM - The initial term of this Agreement shall begin on August 1,
1993 (the "Commencement Date") and end on December 31, 1994. After the Initial
Term, a "Year" under this Agreement shall begin on January 1 and end on December
31. The term of this
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Agreement shall be automatically extended for one (1) year on each successive
January 1 thereafter unless either party provides the other with written notice
of such party's intention not to extend the term no less than one hundred twenty
(120) days prior to the January 1 renewal date or until this Agreement is
appropriately terminated by either party as provided in Section 7 herein. Upon
renewal of the Initial Term and any subsequent term, the then applicable rates
of compensation specified in this Agreement shall apply unless otherwise agreed
upon by the parties in writing.
7. TERMINATION
7.01 TERMINATION OF AGREEMENT WITH MATERIAL CAUSE - Either party, as
appropriate, may terminate this Agreement for material cause as set forth in
Sections 7.01.01 or 7.01.02, hereof subject to the notice and cure periods set
out in Section 7.02 hereof, if applicable. In the event either party seeks to so
terminate this Agreement, the terminating party shall give written notice of
termination stating the actions of the other party constituting material cause
for termination.
7.01.01 CAUSE FOR TERMINATION OF AGREEMENT BY IPA - The following
shall constitute cause for termination of this Agreement by IPA:
a. NON-PAYMENT - Failure by PacifiCare to pay Capitation
Payments due to IPA hereunder within twenty (20) days of the Capitation Payment
due date or failure by PacifiCare to make any other payments due to IPA
hereunder within forty-five (45) days of any such payment's due date.
b. REVOCATION OF CERTIFICATION OR LICENSE - Revocation by
the State of California or the United States Government of any certification or
license of PacifiCare necessary for the performance of this Agreement.
c. BREACH OF MATERIAL TERM AND FAILURE TO CURE -
PacifiCare's breach of any material term, covenant, or condition and subsequent
failure to cure said breach as provided in Section 7.02 hereof. The written
notice of termination shall contain specific reference as to the breaches which
have caused such failure.
7.01.02 CAUSE FOR TERMINATION OF AGREEMENT BY PACIFICARE - The
following shall constitute cause for termination of this Agreement by
PacifiCare:
a. FINANCIAL FAILURE OF IPA - PacifiCare's reasonable
determination of IPA's anticipated inability to provide or arrange for
Medical Services as described herein due to the likelihood of IPA's lack of
financial resources, other than due to PacifiCare's non-payment of amounts
due IPA hereunder. IPA shall
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have the opportunity to dispute such determination by PacifiCare by providing
reasonable evidence and assurances of financial stability and capacity to
perform under this Agreement.
b. FAILURE TO PROVIDE QUALITY MEDICAL SERVICES - Failure
to maintain the standards set forth in Section 3.02 of this Agreement and such
failure is not corrected consistent with the provisions of Section 7.02. The
written notice of termination shall contain specific reference to the breaches
which have caused such failure. PacifiCare reserves the right to withdraw from
IPA all or part of its Subscribers if the Medical Services are not being
properly provided or arranged for pursuant to this Agreement and such
deficiencies are not corrected consistent with the provisions of Section 7.02 of
this Agreement.
c. FAILURE TO PROVIDE SERVICES - Failure to provide
Medical Services to Subscribers as provided herein. The written notice of
termination shall contain specific reference as to the breaches which have
caused such failure.
d. BREACH OF MATERIAL TERM AND FAILURE TO CURE - IPA's
breach of any material term, covenant or condition of the Agreement and
subsequent failure to cure said breach as provided in Section 7.02 of this
Agreement. The written notice of termination shall contain specific reference as
to the breaches which have caused such failure.
7.02 CURING PERIOD AND TERMINATION DATE - The party receiving the
written notice of termination shall have thirty (30) days from the receipt of
said notice to cure or otherwise eliminate the circumstances constituting
cause for termination. If such party fails to cure or eliminate the
circumstances constituting cause for termination within a (30) day period,
this Agreement shall terminate thirty (30) days from the date of expiration
of the curing period, said expiration date being sometimes called herein the
"effective date of termination".
7.03 REPAYMENT UPON TERMINATION - Within one hundred and eighty (180) days
of the effective date of termination of this Agreement as provided herein, an
accounting shall be made by PacifiCare of monies due and owing either party and
payment shall be forthcoming by the appropriate party to settle such balance
within thirty (30) days of such accounting. Either party may request an
independent audit of such PacifiCare accounting by a mutually acceptable
independent certified public accountant and such audit shall be equally paid for
by both parties. The parties agree to abide by the findings of such independent
audit and appropriate payment by the appropriate party, if any, shall be made
within thirty (30) days of such independent audit.
7.04 TERMINATION NOT AN EXCLUSIVE REMEDY - Any termination by either party
pursuant to this Section 7 is not meant as an exclusive remedy and such
terminating party may seek whatever
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action in law or equity as may be necessary to enforce its rights under this
Agreement.
8. RECORDS, DATA COLLECTION, CITATIONS AND RIGHT TO INSPECT RECORDS
8.01 RECORDS - IPA shall maintain and provide such records and information
as reasonably necessary for PacifiCare to properly administer the Secure
Horizons Medical and Hospital Plan and consistent with state and federal law.
The duties imposed by this Section 8.01 shall not terminate upon termination of
this Agreement, whether by rescission or otherwise, and shall be in effect
until the completion of the phase-out period pursuant to Section 3.09. The cost
for preparation and submission of this data shall be borne solely by IPA.
IPA shall maintain records and provide such information to PacifiCare or
the California Commissioner of Corporations as may be necessary for the
compliance by PacifiCare with the provisions of state and federal law and
regulations promulgated thereto, and such records shall be retained by IPA
for at least two (2) years following the provision of Medical Services. This
obligation is not terminated upon termination of this Agreement, whether by
rescission or otherwise.
8.02 CONFIDENTIALITY OF RECORDS - IPA shall safeguard the confidentiality
of Subscriber health records and treatment in accordance with all state and
federal laws, including, without limitation, the Privacy Act, as implemented by
45 Code of Federal Regulations 5(b) and the regulations promulgated thereunder.
8.03 DATA COLLECTION - IPA shall maintain and provide to PacifiCare, on a
timely basis, the utilization data more particularly described in the PacifiCare
Provider Policies and Procedures Manual for the effective management of
PacifiCare's health care delivery system. Among the reports which IPS shall
provide to PacifiCare are completed reports within thirty (30) days following
the end of each month containing an itemized list of all Medical Services, other
than Hospital Services, provided to or arranged for Subscriber during such
month. This report shall be as described in the PacifiCare Provider Policies and
Procedures Manual.
8.04 RIGHT TO INSPECT - IPA shall provide access at reasonable times upon
demand by PacifiCare, or any governmental regulatory agency responsible for the
administration of health care service plans, to inspect facilities, equipment,
books and records relating to the performance of this Agreement, including,
without limitation, Subscriber patient records, financial records pertaining to
the cost of operations and income received by IPA for Medical Services rendered
to Subscribers. Unless otherwise required by law, PacifiCare shall provide IPA
with a seventy-two (72) hour prior written notice of any such inspection.
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8.05 CITATIONS - IPA shall notify PacifiCare in writing of each and
every report of any government and or quasi-governmental agency with
jurisdiction over IPA which contains any citation of IPA for failure to meet
any governmental or quasi-governmental standard on or after the Commencement
Date of this Agreement.
8.06 FINANCIAL STATEMENTS - IPA shall provide PacifiCare within forty-five
(45) days of the end of each calendar quarter copies of its quarterly financial
statements, which shall including a balance sheet, statement of income and a
statement of cash flow (the "financial statements") prepared in accordance with
generally-accepted accounting principles. Such quarterly statements shall be
certified by the chief financial officer of IPA as accurately reflecting the
financial condition of IPA for the period indicated. In addition, IPA shall
provide to PacifiCare, within forty-five (45) days of the end of each calendar
year, copies of its audited annual financial statements.
8.07 TRANSFER OF MEDICAL RECORDS UPON TERMINATION - Upon the effective
date of termination of this Agreement and, if applicable, upon the expiration
of the phase-out period set forth in Section 3.09, at PacifiCare's request,
IPA shall copy all active PacifiCare Subscriber patient medical files in
IPA's possession and forward such files to another provider of Medical
Services designated by PacifiCare, provided such copying and forwarding is
not otherwise objected to by Subscribers. The copies of such medical files
shall may be in summary form. The cost of copying the patient medical files
shall be borne by IPA, unless termination is due to non-payment by
PacifiCare. In the event of such an occurrence, PacifiCare shall bear all
copying costs associated with termination. IPA shall cooperate with
PacifiCare in maintaining the confidentiality of such confidential and
proprietary information and trade secrets at all times.
9. EXCLUSIVITY
9.01 EXCLUSIVE USE OF HOSPITAL FOR HOSPITAL SERVICES - In recognition
of the need for centralized coordination of Medical Services to PacifiCare
Subscribers to ensure continuity and quality of care, IPA agrees, subject to the
limitations stated below, to utilize Hospital as its exclusive provider of
Hospital Services for all Subscribers in the IPA Service Area. This exclusivity
provision is subject to the following exceptions:
9.01.01 EMERGENCY SERVICES AND URGENTLY NEEDED SERVICES -
Subscribers admitted for Emergency Services or Urgently Needed Services through
other hospitals, whether in or out of the IPA Service Area;
9.01.02 UNAVAILABLE HOSPITAL SERVICES - Subscribers requiring
Hospital Services not available at Hospital, including specialty Hospital
Services and those which cannot be provided due to ethical principles of
Hospital;
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9.01.03 UNAUTHORIZED ADMISSIONS - Unauthorized Subscriber
admissions to facilities within the IPA Service Area for Hospital Services.
9.01.04 SUBSCRIBER REQUESTS FOR TREATMENT AT OTHER FACILITIES -
PacifiCare, IPA and Hospital upon mutual consent, reserve the right to grant
Subscriber requests for treatment at another facility due to Medical Necessity
for services in which are not available at Hospital. Request for treatment or
transfer to another facility based on the impairment of Hospital/Subscriber
relationship shall only be granted if Subscriber can show just cause for such a
request. PacifiCare and IPA shall exercise reasonable efforts in discouraging
Subscriber transfers at Subscriber's request unless Subscriber can show just
cause for such transfer and IPA deems the transfer medically safe.
9.01.05 BREACH OF AGREEMENT - IPA shall not be obligated to
continue to refer Subscribers to Hospital upon written notice to IPA by
PacifiCare of Hospital's breach of any material term of its contract with
PacifiCare.
9.02 UTILIZATION OF IPA BY PACIFICARE - Nothing in this Agreement shall
be construed to require PacifiCare to assign any minimum or maximum number of
Subscribers to IPA, nor require PacifiCare to utilize the Medical Services of
IPA for any or all Subscribers in the IPA Service Area.
10. GOVERNING LAW AND DISPUTE RESOLUTION
10.01 GOVERNING LAW - This Agreement and the rights and obligations of the
parties hereunder shall be construed, interpreted, and enforced in accordance
with, and governed by, the laws of the State of California, and the United
States and all regulations promulgated pursuant thereto.
Any provisions required to be in this Agreement by any of the above Acts
and regulations shall bind PacifiCare and IPA whether or not expressly
provided in this Agreement.
10.02 DISPUTE BETWEEN IPA AND SUBSCRIBER NOT GOVERNED BY AGREEMENT - Any
controversies or claims between IPA and Subscriber arising out of IPA's
performance of this Agreement are not governed by this Agreement. IPA and
Subscriber may seek any appropriate legal action to resolve such controversy or
claim deemed necessary.
In the event of a dispute between IPA and a Subscriber and upon mutual
Agreement between IPA and such Subscriber, PacifiCare agrees to make available
the Subscriber Grievance Resolution Process described in the Secure Horizons
Medical and Hospital Plan Agreement for resolution of such dispute. In such
instance, the decision of the PacifiCare Subscriber Satisfaction Committee and
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Board of Directors shall not be binding upon the parties except upon agreement
between IPA and the Subscriber. Nor shall such grievance be subject to binding
arbitration except upon agreement between the parties. Should IPA and
Subscriber fail to resolve the grievance, IPA and Subscriber may seek any
appropriate legal action deemed necessary by such party.
10.03 PAYMENT DISPUTES BETWEEN IPA AND SPECIALIST PHYSICIANS - In the event
IPA fails to make a payment to a Specialist Physician within sixty (60) days of
the submission of the bill by Specialist Physician to IPA and the validity and
the amount of the submitted bill are undisputed, PacifiCare may, in its sole and
absolute discretion, elect to pay the Specialist Physician on behalf of IPA and
deduct such payment from IPA's next monthly Capitation Payment.
Should a dispute concerning a claim for payment for Medical Services
rendered to Subscribers arise between IPA and a Specialist Physician who is a
Participating Medical Provider, IPA or the Specialist Physician may submit a
written complaint to PacifiCare. The complaint shall describe the disputed
claim and the basis for the amounts claimed and include the applicable written
agreement between IPA and the Specialist Physician. PacifiCare shall
investigate the complaint and make a determination of whether or not the claim
is valid and should be paid. In the event PacifiCare determines that IPA owes
any amount to Specialist Physician, IPA shall make such payment within thirty
(30) days of PacifiCare's determination. If IPA fails to pay the amount due
within this thirty (30) day period, PacifiCare may deduct the amount owed from
IPA's next monthly capitation payment. This amount will temporarily be placed
in an account (the "Claims Dispute Account") which shall be established by
PacifiCare. If IPA or Specialist Physician wishes to contest PacifiCare's
determination, either may do so by initiating an action for binding arbitration
and notifying PacifiCare of such initiation within thirty (30) days of
PacifiCare's determination. If IPA or Specialist Physician fails to request
arbitration within thirty (30) days or if the arbitration affirms
PacifiCare's decision that amounts are owing from IPA to Specialist Physician,
PacifiCare shall release from the Claims Dispute Account the amount owing to
Specialist. If the arbitration results in a decision that no money or a lesser
amount than was determined by PacifiCare is owing to Specialist Physician,
PacifiCare shall release to IPA the amounts which were erroneously withheld from
IPA's Capitation Payment.
In the event this Agreement has been terminated prior to PacifiCare's
investigation and written determination and PacifiCare's investigation results
in a determination that IPA owes money to Specialist Physician, PacifiCare may,
in its sole and absolute discretion, elect to pay Specialist Physician on
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behalf of IPA and seek reimbursement from IPA. All costs associated with this
arbitration proceeding shall be shared equally between Hospital and IPA.
10.4 PAYMENT DISPUTES BETWEEN HOSPITAL AND IPA - In the event of a dispute
between Hospital and IPA concerning amounts due or owing under the Hospital
Control Program or as the result of an alleged breach of the exclusive referral
arrangement set forth in Section 9 above, Hospital or IPA may submit a written
complaint to PacifiCare. The complaint shall describe the disputed claim and the
basis for the amounts claimed. PacifiCare shall investigate the complaint and
make a written determination of whether or not the claim is valid and should be
paid. IPA and Hospital shall cooperate with PacifiCare's investigation by
providing in a timely manner all information reasonably requested by PacifiCare.
In the event PacifiCare determines that IPA owes any amount to Hospital
or Hospital owes any amount to IPA, the owing party shall make the
appropriate payment within thirty (30) days of PacifiCare's written
determination. If the owing party fails to pay the amount due within this
thirty (30) day period, PacifiCare may deduct the amount owed from the owing
party's next monthly Capitation Payment. This amount will temporarily be
placed in an account (the "Claims Dispute Account") which shall be
established by PacifiCare. If IPA or Hospital wish to contest PacifiCare's
written determination, either may do so by initiating an action for binding
arbitration and notifying PacifiCare of such initiation within thirty (30)
days of PacifiCare's determination. If IPA or Hospital fails to request
arbitration within thirty (30) days or if the arbitration affirms
PacifiCare's decision, PacifiCare shall release from the Claims Dispute
Account the amount owing to the appropriate party as initially determined by
PacifiCare. If the arbitration results in a decision that no money or a
lesser amount than was determined by PacifiCare is owing to either Hospital
or IPA, PacifiCare shall release to IPA and/or Hospital the amounts owing
each party as determined by the arbitration.
11. NOTICE
11.01 NOTICE - Any notice required to be given hereunder shall be in
writing and either delivered personally or sent by registered or certified mail,
return receipt requested, to either PacifiCare or IPA at the addresses listed
below, or at such other addresses as either PacifiCare or IPA may hereafter
designate to the other:
To: PacifiCare of California
P.O. Box 6006
Cypress, California 90630-0006
ATTENTION: President
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To IPA: Prospect Medical Group, Inc.
18200 Yorba Linda Blvd. #401
Yorba Linda, Calif. 92686
ATTENTION: Administration
All notice shall be deemed given on the date of delivery if delivered
personally or on the day three (3) business days after such notice is deposited
in the United States mails, addressed and sent as provided above.
12. MISCELLANEOUS
12.01 PROTECTION OF SUBSCRIBER - IPA may not impose any limitations
on the acceptance of Subscribers for care or treatment that it does not
impose on other patients of the IPA. Neither PacifiCare, IPA nor Hospital may
request, demand, require or seek directly or indirectly the transfer,
discharge or removal of any Subscriber for reasons of Subscriber's need for,
or utilization of, Medially Necessary Medical or Hospital Services, except in
accordance with the procedures established for such action. IPA shall not
refuse or fail to provide Medically Necessary Medical Services to any
Subscriber. Procedures for removal, discharge or transfer of Subscribers
shall be mutually agreed upon between IPA and PacifiCare consistent with the
Secure Horizons Medical and Hospital Plan.
12.02 OTHER AGREEMENTS - Nothing in this Agreement shall prevent
PacifiCare and IPA from contracting with each other for provision of services
not covered by this Agreement.
12.03 REFUSAL BY PHYSICIAN - If IPA or any of its Member Physicians
refuses Medical Services to a Subscriber assigned to IPA for any reason
whatsoever, it shall remain the responsibility of IPA to assure that such
Subscriber receives Medical Services consistent with the terms of this
Agreement.
12.04 CONFIDENTIAL AND PROPRIETARY INFORMATION
12.04.01 INFORMATION CONFIDENTIAL AND PROPRIETARY TO PACIFICARE
- - IPA acknowledges that all PacifiCare Subscribers participating in a Secure
Horizons Medical and Hospital Plan individually or through an employer group and
receiving Medical Services shall be Subscribers of PacifiCare. Subscriber and
employer group information shall include, without limitation, the names,
addresses and telephone numbers of all Subscribers; member, employer and
administrative service manuals and all forms related thereto; and records, files
(other than patient medical files) and lists contained in IPA and PacifiCare
files.
IPA acknowledges that all such information is confidential and
proprietary to PacifiCare and that such Subscriber and employer group
information contains valuable trade secrets of PacifiCare.
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All PacifiCare Subscriber agreements and the information contained
therein regarding PacifiCare, IPA, employer groups, Subscribers or the financial
arrangements between a hospital, IPA and PacifiCare is confidential and
proprietary to PacifiCare.
IPA shall maintain all Subscriber information and other PacifiCare
trade secret information confidential. IPA shall not disclose or use any
confidential and proprietary information for its own benefit or gain either
during the term of this Agreement or after the date of termination of this
Agreement; provided, however, that IPA may use the name, address and telephone
number or other medical information of a PacifiCare Subscriber if Medically
Necessary for the proper treatment of such Subscriber or upon express prior
written permission of PacifiCare or the Subscriber.
12.04.02 INFORMATION CONFIDENTIAL AND PROPRIETARY TO IPA - IPA
shall provide PacifiCare with a written description of all information
proprietary to IPA which is confidential and contains trade secrets of IPA
("IPA Information"). PacifiCare shall maintain IPA Information confidential.
PacifiCare shall not disclose or use any IPA Information for its own benefit
either during the term of this Agreement or after the effective date of
termination of this Agreement. Upon termination of this Agreement, PacifiCare
shall provide and return to IPA all IPA Information in its possession in a
manner to be specified by IPA. PacifiCare shall cooperate with IPA in
maintaining the confidentiality of IPA Information at all times.
12.04.03 SOLICITATION OF PACIFICARE SUBSCRIBERS OR EMPLOYER GROUPS -
IPA shall not directly or indirectly engage in the practice of solicitation or
the patronage of PacifiCare's Subscribers or employer groups without
PacifiCare's prior written consent. Solicitation shall mean conduct by an
officer, agent, employee or Member Physician of IPA or its assignee or successor
during the Initial Term or any subsequent term of this Agreement and continuing
for a period of one (1) year after the effective date of termination of this
Agreement which may be reasonably interpreted as designed to persuade PacifiCare
Subscribers to discontinue their Subscriber agreements with PacifiCare or to
continue to receive health care services from IPA on a fee-for-service basis or
to encourage PacifiCare Subscribers to participate in the prepaid health service
plan offered by IPA, or any other prepaid health service plan (the
"Solicitation"). The breach of this Section 12.04.03 during any term of this
Agreement shall be grounds for termination of this Agreement pursuant to Section
7.01.02 of this Agreement.
12.05 CONFIDENTIALITY OF THIS AGREEMENT - To the extent reasonably
possible, each party agrees to maintain this Agreement as a confidential
document and not to disclose the Agreement or any of its terms without the
approval of the other party.
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12.06 ASSIGNMENT - This Agreement and the rights, interests, and benefits
hereunder shall not be assigned, transferred, pledged, or hypothecated in any
way by IPA or PacifiCare and shall not be subject to execution, attachment or
similar process, nor shall the duties imposed herein be subcontracted or
delegated without the written consent of the other party. Notwithstanding,
PacifiCare may assign, transfer, pledge or hypothecate this Agreement and its
rights, interests and benefits hereunder to any entity which has at least
majority control of PacifiCare or to any entity of which PacifiCare has at
least majority control.
12.07 INVALIDITY OF SECTIONS OF AGREEMENT - The unenforceability or
invalidity of any paragraph or subparagraph of any section or subsection of this
Agreement shall not affect the enforceability and validity of the balance of
this Agreement.
12.08 WITHDRAWAL OF SUBSCRIBERS BY PACIFICARE - PacifiCare reserves the
right to withdraw from IPA all or part of the Subscribers from IPA whose
Medical Services are not being properly provided pursuant to this Agreement.
PacifiCare shall provide written notice to IPA of such withdrawal and the
reasons therefore. PacifiCare shall then allow IPA thirty (30) days from the
date of such notice to correct deficiencies. If such deficiencies are not
corrected to PacifiCare's satisfaction within said period, PacifiCare may
withdraw its Subscribers as provided in this Section 12.08 and remove IPA's
name from PacifiCare's marketing materials.
12.09 TRANSFER OF SUBSCRIBERS - PacifiCare may require transfer of
Subscribers assigned to IPA for any reason; or, IPA may request transfer of
Subscribers assigned to it by PacifiCare to other IPAs for cause or if the
capacity of IPA is overburdened so that the provision of Medical Services as
required by this Agreement is affected; all such transfers shall be consistent
with the PacifiCare Provider Policies and Procedures Manual.
12.10 CAPTIONS - Captions in this Agreement are descriptive only and do not
affect the intent or interpretation of the Agreement.
12.11 AMENDMENT - This Agreement may be amended or modified only by
mutual written consent of the parties. Notwithstanding the foregoing
sentence, PacifiCare may amend this Agreement upon thirty (30) days written
notice to IPA in order to maintain compliance with applicable federal and
state laws; provided, however, any such amendment which affects a material
duty or responsibility of IPA and has a material adverse economic effect upon
IPA as reasonably demonstrated by IPA to PacifiCare, shall be subject to the
provisions of Section 12.12 below.
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12.12 MODIFICATIONS OF THIS AGREEMENT AND/OR PACIFICARE PROVIDER POLICIES
AND PROCEDURES MANUAL AND/OR PACIFICARE HEALTH PLAN - Anything to the
contrary herein notwithstanding, in the event of any material modification of
this Agreement and/or the PacifiCare Provider Policies and Procedures Manual
and/or the Secure Horizons Medical and Hospital Plan that (i) affects a
material duty or responsibility of IPA, and (ii) causes a material adverse
economic effect to IPA, IPA and PacifiCare shall seek to agree to an
amendment to this Agreement which satisfactorily addresses the effect on
IPA's material duty or responsibility and reimburses the material economic
detriment caused to IPA. In the event such an agreement cannot be reached
within sixty (60) days after the date PacifiCare gives IPA written notice of
such modification, such modification shall not be effective.
12.13 TERMS; SECTIONS - Unless otherwise indicated, all terms in any
appropriate attachments, addendums and amendments hereto shall have the same
meaning attributed to such terms in the body of this Agreement and references to
section numbers are to the appropriate sections of this Agreement.
12.14 IPA'S AUTHORIZED REPRESENTATIVE - Unless otherwise indicated in
writing to PacifiCare, IPA warrants and authorizes its administrator to act as
its fully authorized representative to represent IPA and Member Physicians in
this Agreement and to receive any and all communications and notices hereunder.
12.15 ATTORNEYS' FEES AND COSTS - If any action at law or suit in equity is
brought to enforce or interpret the provisions of this Agreement or to collect
any monies due hereunder, the prevailing party shall be entitled to reasonable
attorneys' fees and reasonable costs, together with interest thereon at the
highest rate provided by law, in addition to any and all other relief to which
it may otherwise be entitled.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement in
____________________, California, on _______________, 19__.
PACIFICARE OF CALIFORNIA
By: /s/ Nancy Freeman
-----------------------------------
Title: Vice President
IPA
By: /s/ Gregg DeNicola
-----------------------------------
Title: CEO
--------------------------------
Tax ID #:
-----------------------------
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SCHEDULE OF ATTACHMENTS
A. A1. Hospital Services
A2. Medical Services
A3. Individual Stop Loss Program
A4. Hospital Control Program
1. Hospital Services Valuation Schedule
B. Secure Horizons Medical and Hospital Subscriber Agreement
C. Capitation Payment Rates and Methodology
D. Division of Financial Responsibility
E. PacifiCare Policies and Procedures Manual
F. IPA Facilities
G. Operational and Quality Assurance Requirements
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ATTACHMENT A1
HOSPITAL SERVICES
Hospital Services are the financial responsibility of the Hospital. A summary of
most Hospital Services includes the following:
1. INPATIENT HOSPITAL CARE - Medically Necessary inpatient hospital care,
as defined by Medicare, but limited to a total of one hundred fifty
(150) days per Subscriber per Year. Unlimited days of inpatient
hospital care shall be provided to Subscribers, but PacifiCare shall
be financially responsible for days in excess of one hundred fifty
(150) days. Subscriber shall be assigned semi-private units, unless
medical necessity dictates private accommodations. Where the
Subscriber requests private accommodations, not required for medical
purposes, the incremental difference in fee-for-service rates shall
be the responsibility of the Subscriber. A summary of inpatient care
includes:
a. Medical/Surgical Care, Intensive Care, Cardiac Care and other
special care units (including Hospital Services associated with
non-experimental transplants as defined by Medicare);
b. Inpatient psychiatric;
c. Nursing Services, meals, drugs, medications (excluding take-home
medications), blood transfusions;
d. Medical and Surgical supplies and appliances;
e. Inpatient rehabilitation services, such as: inpatient physical,
occupational and speech therapy;
f. Inpatient alcohol and drug treatment and rehabilitation.
2. SKILLED NURSING - Medically Necessary Skilled Nursing Facility care,
as defined by Medicare. Patients shall be assigned semi-private units,
unless medical necessity dictates private accommodations. Where the
Subscriber requests private accommodations, not required for medical
purposes, the incremental difference in the fee-for-service rates
shall be the responsibility of the Subscriber. Skilled nursing
facilities must be Medicare licensed and approved.
3. TRANSPORTATION EXPENSES - Medicare approved ambulance services
provided within the IPA Service Area for Subscribers. When a transfer
of Subscriber from one facility to another is authorized by IPA or
PacifiCare, the cost of such transfer shall be a Hospital service. The
method of transfer shall be determined by IPA, but IPA shall
coordinate all Subscriber transfers to or from
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Hospital with designated Hospital personnel. Also included are
paramedic services in emergency cases in the IPA Service Area.
4. HOME HEALTH CARE - As determined to be Medically Necessary, as defined
by Medicare and provided in lieu of hospitalization, as mutually
agreed to by IPA, Hospital and PacifiCare, including any required DME
and IV Therapy Services.
5. HOSPICE CARE - Should be coordinated with Medicare for special
reimbursement provisions.
6. OUTPATIENT SURGERY - Facility and supply charges for outpatient
surgery done either at Hospital or a free-standing surgery center.
7. END STAGE RENAL DISEASE - Facility charges for inpatient and
outpatient dialysis services for Subscribers who are medically
determined to have End Stage Renal Disease after enrollment in one of
PacifiCare's health plans.
8. OTHER HOSPITAL SERVICES
a. Devices surgically implanted during a hospital confinement or
during an outpatient surgery performed at the Hospital outpatient
surgery center or a free-standing surgery center.
b. Treatment programs for outpatient substance abuse as defined by
Medicare.
c. Appealed Services - Hospital Services denied by IPA and
PacifiCare which are found on appeal or arbitration through the
Subscriber grievance resolution process to be Hospital Services
which the Subscriber was entitled to have furnished under the
PacifiCare Secure Horizons health care delivery system.
d. Chemotherapy Drugs (inpatient and outpatient).
9. HOSPITAL SERVICES EXCLUDE THE FOLLOWING:
a. Durable Medical Equipment, except as provided in paragraph 4 above.
b. Medical Services in the IPA Service Area as defined by Attachment
A2 hereto.
c. Outpatient prescription drugs, including immunosuppressive drugs.
d. All out-of-IPA Service Area expenses, except those elective referrals
as authorized by IPA. PacifiCare, in conjunction with IPA, shall make
all decisions regarding the duration of a Subscriber's care at the
out-of-IPA Service Area facility and transfer of the Subscriber to an
IPA Service Area facility.
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e. Vision materials (lenses and frames) except for those surgically
implanted during cataract surgery.
f. Anesthesiology services (inpatient and outpatient).
g. Experimental procedures, including any type of procedure not generally
recognized as of value by the medical community and its societies, as
determined by PacifiCare and IPA, in conformance with state and
federal law.
h. Cosmetic Surgery, except when performed to correct or repair the
physical functioning of a body part as a result of a functional
disorder or accidental injury.
i. Inpatient hospital care in excess of one hundred fifty (150) days per
Subscriber per Year except as provided in Paragraph 1 of this
Attachment A1.
j. Skilled nursing care in excess of one hundred (100) days per
Subscriber per Year.
k. Respite Care.
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ATTACHMENT A2
MEDICAL SERVICES OTHER THAN HOSPITAL SERVICES
I. Medical Services, other than Hospital Services, provided in the IPA
Service Area are the financial responsibility of IPA. A summary of most
Medical Services includes the following:
1. PHYSICIAN SERVICES - Subscribers shall be entitled to Medically
Necessary covered inpatient and outpatient physician services included
in the PacifiCare's Secure Horizons Medical and Hospital Plan. A
summary of some physician services includes the following:
a. IPA Service Area inpatient services (including anesthesiology
services and physician services associated with non-experimental
transplants, as defined by Medicare) and outpatient physician
care.
b. Professional component of inpatient mental health.
c. Outside referrals to consultants including Emergency Room
consultations and also including emergency room charges.
d. Out-of-IPA Service Area physician services when such Medical
Services are rendered on an elective basis and upon approval of
IPA.
2. OUTPATIENT SERVICES - Such services include, among others:
a. Outpatient pathology and radiology, including MRI and CT scans.
b. Outpatient mental health (professional services only).
c. Short term, Medically Necessary rehabilitation (speech, physical
and occupational) therapy.
d. Health education and social services.
e. Immunizations when determined Medically Necessary by an IPA
Member Physician as recommended by the California Department of
Health Services. Adult Immunization Recommendations.
f. Periodic health evaluations.
g. Hearing screening, including audiogram.
h. Allergy testing and treatment, including allergy serum.
i. Lenses and frames required after cataract surgery, except lenses
surgically implanted during an outpatient surgery performed at
Hospital or at a free-standing surgery center.
j. Anesthesiology services.
k. Mammography screening, as defined by state and federal law.
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3. DURABLE MEDICAL EQUIPMENT, PROSTHETIC DEVICES AND MEDICAL SUPPLIES
a. Durable Medical Equipment ("DME") as defined by Medicare. IPA
agrees to provide such devices and aids on an outpatient basis,
determined Medically Necessary.
b. Prosthetic devices, as defined by Medicare, except devices
surgically implanted during a Hospital confinement or outpatient
surgery performed at Hospital or free-standing surgery center.
c. Medical Supplies - Supplies used in connection with treatment or
to aid in the recovery of a medical condition when considered a
covered expense by Medicare.
4. HOSPITAL BASED PHYSICIAN SERVICE - All hospital based physician
services where the physician provides the professional component of an
inpatient hospital based service, the hospital outpatient surgery
center service, a free standing surgery center service or the
emergency room professional service. The charges of an
anesthesiologist are included as a Medical Services expense.
5. EMERGENCY SERVICES IN THE IPA SERVICE AREA - IPA ServiceArea Emergency
Services include emergency room charges and associated emergency room
physician and ancillary charges, inpatient medical and other Medical
Services which may not be delayed until facilities or physicians of
the Hospital or IPA (or alternatives authorized by IPA) can be used
without possible serious effects to the health of the Subscriber.
Such services must be Medically Necessary Emergency Services.
6. OTHER SERVICES - Medical Services denied by the Participating Medical
Group and PacifiCare which are found on appeal or arbitration through
the Subscriber grievance resolution process to be Medical Services
which Subscriber was entitled to have furnished through the Secure
Horizons Medical and Hospital Plan.
II. Medical Services exclude the following:
a. Outpatient prescription drugs.
b. Chemotherapy drugs.
c. Out-of-IPA Service Area expenses, except pursuant to paragraph I(1)(d)
above. PacifiCare, in consultation with IPA, shall make all decisions
regarding the duration of a Subscriber's care at the out-of-IPA
Service Area facility and transfer of the Subscriber to an IPA Service
Area facility consistent with state and federal law.
d. Vision materials (lenses and frames), except following cataract
surgery.
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e. Immunizations for foreign travel and unexpected mass immunizations.
f. Experimental procedures, including any type of procedure not generally
recognized as of value by the medical community and its societies, as
determined by PacifiCare in accordance with state and federal law and
in connection with IPA.
g. Cosmetic Surgery, except when performed to correct or repair the
physical functioning of a body part as a result of a functional
disorder or an accidental injury.
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ATTACHMENT A3
INDIVIDUAL STOP-LOSS PROGRAM
1. The Individual Stop-Loss ("ISL") Program is designed to limit the IPA's
costs per Subscriber per Year to a specified amount (the "deductible").
PacifiCare will assume all financial responsibility for the Subscriber in
excess of the deductible by paying IPA, based on the payment procedure as
outlined below, [ ** ] in excess of the deductible of the Cost of Care,
as defined in Attachment A4, included in full herein by reference.
2. Deductible: [ ** ] per Subscriber per Year.
3. Payment Procedures:
a. IPA must submit paid claims data in accordance with the procedures
specified in the PacifiCare Provider Policies and Procedures Manual;
b. Cost incurred by IPA for Medical Services provided during the last
thirty-one (31) days of the Year for which no benefits were payable
under the ISL Program because such costs were applicable to the
deductible may be carried forward for inclusion in the ISL
calculations for the next succeeding Year;
c. Medical Services rendered in connection with Worker's Compensation
cases or where payments of Medical Services provided under Section
3.01 of this Agreement are receivable through the coordination of
benefits, third party liability, or any other source of income,
including copayments, shall not be included in the Cost of Care
provided in calculating Stop-Loss liability;
d. PacifiCare will determine and pay all ISL Program claims within
sixty (60) days of receipt of a complete claim;
e. For continuing ISL cases (i.e., cases where more than one payment is
made during the calendar Year), PacifiCare will reimburse IPA
quarterly based on the submittal of a continuing ISL claim.
f. If the Subscriber transfers in the middle of the Year to another
Participating Medical Group and then exceeds the ISL, the payment for
all Medical Services in excess of the ISL will be shared
proportionately among the Participating Medical Groups who provided
Medical Services to the Subscriber during the Year.
37
<PAGE>
ATTACHMENT A4
HOSPITAL CONTROL PROGRAM
As an incentive for the provision of Hospital Services to Subscribers in a cost
efficient manner, Hospital and IPA shall participate in the PacifiCare Hospital
Control Program. The Hospital Control Program shall utilize a Claims Fund
Withhold Amount and shall be calculated by comparing the Hospital Services
Budget to the Hospital Services Expense, as such terms are defined below.
1. HOSPITAL CLAIMS FUND - PacifiCare shall withhold [ ** ] from
Hospital's monthly capitation payment to create a claims fund (the "Hospital
Claims Fund") for the payment of claims for Hospital Services provided by
Outside Providers to Subscribers ("Outside Provider Claims"). If the claims
paid by PacifiCare behalf of the Hospital during any month exceed the total
of the Claims Fund, the amount of the deficit shall be withheld by PacifiCare
from Hospital's next months Capitation Payment in addition to Hospital's
monthly Claims fund withholding. Monthly withholding from Hospital's
Capitation Payment shall accrue until the balance in the Claims Fund equals
[ ** ] of the Hospital's current monthly Capitation Payment rate.
Subsequent monthly withholdings shall be recalculated and reduced to the
amount which, when added to the Claims Fund balance, maintains the Claims
Fund balance at [ ** ] of the Hospital's current monthly Capitation Payment
Rate.
Hospital shall have the right to review records of all disbursements from the
Claims Fund for compliance with this Agreement and the agreed-upon procedures.
Upon termination of this Agreement, any amounts owed by PacifiCare to Hospital
because of a remaining balance in the Claims Fund, or any amounts owed by
Hospital to PacifiCare because of a deficit in the Claims Fund, will be repaid
as set forth in Section 7.03.
2. HOSPITAL SERVICES BUDGET - the Hospital Services Budget shall equal the sum
of all Capitation Payments Hospital receives from PacifiCare during the Year,
plus the amount withheld from Capitation as the Claims Fund Withhold Amount.
3. HOSPITAL SERVICES EXPENSE - Hospital Services Expense shall be equal to the
sum of the following:
a. INPATIENT EXPENSES AT HOSPITAL - Inpatient costs for services rendered at
Hospital shall be valued as outlined in Hospital Services Valuation Schedule
(Attachment A4); PLUS,
b. NON-INPATIENT EXPENSES AT HOSPITAL - Other Hospital Services provided by
Hospital other than inpatient services shall be valued as outlined in Hospital
Services Valuation Schedule (Attachment A4) plus,
38
<PAGE>
c. HOSPITAL SERVICES NOT PROVIDED AT HOSPITAL - The actual amount paid (1) out
of the Claims Fund Withhold Amount for Outside Providers or to PacifiCare
contracting hospitals other than Hospital; and (2) to providers who render
covered Hospital Services outside the Service Area, provided that such services
must be non-Emergency services authorized in writing by IPA, including
admissions for services which are not available within the Service Area; MINUS,
d. REINSURANCE LIMIT - Any amount of Hospital Services Expense, as defined in
3(a) through (c) above, in excess of [ ** ] per Subscriber per Year; MINUS,
e. COORDINATION OF BENEFITS - Any amount Hospital receives from third parties
pursuant to Section 3.08 of the Hospital Partial Risk Services Agreement between
PacifiCare and Hospital.
4a. BUDGET DEFICIT - If the annual Hospital Services Expense is greater than
the Hospital Services Budget upon completion of the annual calculation, the
amount of this excess will be referred to as the Budget Deficit. In the
event of a Budget Deficit, PacifiCare shall pay the Hospital [ ** ] of the
Budget Deficit up to [ ** ] per Year. PacifiCare shall adjust IPA's
Capitation Payment by retaining [ ** ] of the IPA's subsequent Capitation
Payment each month until the Budget Deficit amount is paid in full by
PacifiCare, on behalf of IPA, to Hospital.
In the event of termination of this Agreement, PacifiCare, on behalf of IPA,
shall reimburse Hospital any surplus amounts owed to Hospital within sixty (60)
days of receipt of the final audited annual calculation.
4b. BUDGET SURPLUS - If the annual Hospital Services Expense is less than
the Hospital Services Budget for any Year, the amount of this excess shall be
referred to as a Budget Surplus. In the event of a Budget Surplus,
PacifiCare shall pay IPA [ ** ] of the Budget Surplus plus a
per-member-per-month ("PMPM") bonus as outlined in Attachment A4. PacifiCare
will adjust Hospital's Capitation Payment by retaining [ ** ] of Hospital's
Capitation Payment from the subsequent month and pay this amount to IPA.
Should Hospital's next month's Capitation Payment not be large enough to
cover the settlement amount in full, PacifiCare shall continue to adjust
Hospital's Capitation Payment by retaining [ ** ] from Hospital's
Capitation Payment for subsequent month(s) until the settlement amount is
paid in full to IPA, by PacifiCare on behalf of Hospital.
In the event of termination of this Agreement, PacifiCare, on behalf of
Hospital, shall reimburse IPA any surplus amounts owed to IPA within sixty (60)
days of receipt of the final audited annual calculation.
39
<PAGE>
In the event of termination of this Agreement, Hospital shall reimburse IPA any
surplus amounts owed to IPA within thirty (30) days of receipt of the final
audited annual calculation.
5. YEAR-END SETTLEMENT - Within one hundred and fifty (150) days following the
annual renewal date of this Agreement, PacifiCare shall provide written notice
to Hospital and IPA of comparing the Hospital Services Expense to the Hospital
Services Budget. Both IPA and Hospital shall have thirty (30) days from the
date of written notice to audit this comparison and submit any revisions to the
comparison to PacifiCare. Any submitted revisions must represent authorized
Hospital Services and must be approved by both IPA and Hospital in order for the
revisions to be included in any recalculation. Such approval shall not be
unreasonably withheld. PacifiCare shall then have thirty (30) days to make any
necessary adjustment to the calculation and return the itemized calculation to
IPA and Hospital. Such calculation shall be considered the final calculation
unless Hospital, IPA and PacifiCare agree to extend the calculation process.
Any amounts owing shall be paid to the appropriate party, as provided in
Sections 4a and 4b above.
In the event that Hospital Services Expense claims were incurred during the
calendar year in question but were not paid until after the final calculation,
such Hospital Services Expenses shall be carried forward and applied to the
subsequent calendar year's Hospital Control Program as a Hospital Service
Expense for that Year.
40
<PAGE>
ATTACHMENT A4-1
HOSPITAL SERVICES VALUATION SCHEDULE
ST JUDE MEDICAL CENTER
SECURE HORIZONS
PROSPECT MEDICAL GROUP
HOSPITAL RISK POOL
<TABLE>
<CAPTION>
Inpatient Services:
- -------------------
<S> <C>
Med/Surgical(Per Diem) $[ ** ]
ICU/CCU/Telemetry(Per Diem) $[ ** ]
CardioVascular Surgery(Per Case) $[ ** ]
(DRG's 104-110)
Angioplasty (Per Case) $[ ** ]
(DRG 112)
Cardiac Cath (Per Case) $[ ** ]
(DRG 124)
Orthopaedic Surgery (Per Case) $[ ** ]
(DRG's 209,210,214)
Outpatient Services: [ ** ]
Outpatient Surgery: Case Rates
-------------------
Arthroscopies $[ ** ]
Laparoscopic Procedures $[ ** ]
Lithotripsy $[ ** ]
Fractures of Hips and Pelvis $[ ** ]
Cardiac Pacemaker Device Replacement $[ ** ]
Inguinal Hernia $[ ** ]
Breast Biopsy w/ or w/o Localization $[ ** ]
Cataract w/IOI $[ ** ]
Cataract w/Lens $[ ** ]
Bunionectomy $[ ** ]
Other Outpatient Surgical Procedures [ ** ]
</TABLE>
41
<PAGE>
ATTACHMENT A4-1
HOSPITAL SERVICES VALUATION SCHEDULE
ST JUDE MEDICAL CENTER
PROSPECT MEDICAL GROUP
PAGE 2
<TABLE>
<CAPTION>
Exclusions: (Reimbursed Separately)
---------------------------------
Excluded from Case Rates and/or per diems
<S> <C>
Prosthesis/Implants/DME/Chole-K/ [ ** ]
Pacemakers/Valves/Balloon Catheters/
DCA cutting Devices/Imaging Catheters
Emergency Room:
$0-$300 in Gross Charges [ ** ]
$301 and greater [ ** ]
Risk Pool Distribution:
St. Jude Medical Center [ ** ]
Prospect Medical Group [ ** ]
Limited Downside Risk-Prospect Med Group [ ** ]
St. Jude Medical Center Stop Loss Reinsurance [ ** ]
</TABLE>
BED DAYS BONUS SCHEDULE
<TABLE>
<CAPTION>
Bed Days/Thousand: Total member months Bonus
------------------ ------
<S> <C>
1,200 or greater [ ** ]
1,000 to 1,199 [ ** ]
951 to 999 [ ** ]
900 to 950 [ ** ]
850 to 899 [ ** ]
800 to 849 [ ** ]
700 to 799 [ ** ]
600 to 699 [ ** ]
Under 600 [ ** ]
</TABLE>
41a
<PAGE>
ATTACHMENT B
SECURE HORIZONS MEDICAL AND HOSPITAL SUBSCRIBERS AGREEMENT
Secure Horizons Medical and Hospital Subscriber Agreement is available
upon request. A summary of the Schedule of Benefits is attached.
42
<PAGE>
ATTACHMENT C
COMPENSATION
CAPITATION PAYMENTS - PacifiCare shall make monthly Capitation Payments
to IPA based on the number of Subscribers eligible to receive Medical
Services from IPA.
A. BENEFIT WITHHOLD
PacifiCare shall retain [ ** ] of the revenue received each month from
HCFA to fund the following Subscriber benefits. These benefits are outlined
more specifically in the Secure Horizons Medical and Hospital Subscriber
Agreement (see Attachment B).
1) Outpatient prescription drugs
2) Acute hospital days greater than 150/year
3) Respite Care
4) Immunosuppressive drugs
5) Mammography (see Section E below)
IPA shall be given the opportunity to share in any savings which may be
present in the Benefit Withhold fund through the Benefit Withhold Incentive
Program as outlined in Attachment E.
B. MONTHLY HCFA PAYMENT
[ ** ] of the Monthly HCFA Payment and LESS [ ** ] of the Monthly
HCFA Payment as payment for the premium for Individual Stop Loss coverage.
The payment per Subscriber per month by PacifiCare to IPA shall be increased
or decreased to reflect increases or decreases made by HCFA in the Monthly
HCFA Payment. PacifiCare shall make monthly retroactive adjustments to
reflect adjustments made by HCFA, if any.
PacifiCare shall provide IPA appropriate documentation in support of the
actual Capitation Payment made. Should IPA desire additional billing
information, PacifiCare shall make available for inspection other mutually
agreed upon documents, upon thirty (30) days prior written notice from IPA.
IPA shall have the right to reasonably audit PacifiCare's books and records
directly relating only to IPA's Capitation Payment determinations upon
thirty (30) days prior written notice at IPA's sole expense.
C. SUBSCRIBER PREMIUM (if applicable)
IPA shall receive [ ** ] per Subscriber per month as payment of the
IPA's portion of the Member Premium.
43
<PAGE>
D. RETIREE SUBSCRIBER COMPENSATION
IPA shall receive an additional per month payment from PacifiCare for
certain Retiree Subscribers whose benefit plans permit a lesser Copayment.
This additional amount shall be determined by PacifiCare based on the number
of Retiree Subscribers enrolled each month in each of the Copayment
categories set forth below.
<TABLE>
<CAPTION>
Copayment Paid Monthly Payment
By Retiree Subscriber Per Retiree Subscriber
--------------------- ----------------------
<S> <C>
$ 0 $[ ** ]
$ 1 $[ ** ]
$ 2 $[ ** ]
$ 3 $[ ** ]
$ 4 $[ ** ]
$ 5 [ ** ]
</TABLE>
E. MAMMOGRAPHY
IPA shall receive [ ** ] for each screening and diagnostic mammography
study performed above the 1987 PacifiCare-wide baseline, specific to the
Secure Horizons program, for such studies. (This baseline equals 267 studies
per 1,000 adult females.) The amount due to IPA shall be calculated based
upon utilization data submitted by IPA and shall be paid within one hundred
and fifty (150) days of the end of the current calendar year.
F. INSTITUTION-TO-INSTITUTION TRANSFERS
IPA shall bill PacifiCare and PacifiCare shall pay for Medical Services
provided to Subscribers who enroll with IPA through a transfer from another
PacifiCare contracted-IPA and who are in a skilled nursing facility, acute
care hospital, or are receiving any other type of acute institutional care at
time of enrollment with IPA. Medical Services provided to such Subscribers
shall be reimbursed under this special program until the Subscriber is
discharged from the institutions noted above. If Subscriber is discharged from
such institution to home with home health services being provided in-lieu of
hospitalization, such home health services will be covered under this
program as well. Reimbursement to IPA for these Medical Services shall be at
the Cost of Care rates included in Attachment A4, but no greater than the ISL
deductible per Subscriber during the Initial Term or any subsequent term of
this Agreement.
IPA shall batch these bills together and identify the bills as
institution-to-institution prior to submitting bill to PacifiCare. Bills
must be submitted to PacifiCare no later than sixty (60) days from the
provision of Medical Services. Expenses for Medical Services identified as
institution-to-institution and rendered from
44
<PAGE>
August 1, 1993 through December 31, 1994 only will be included in the
institution-to-institution program. A final claim must be filed for such
Medical Services by March 31, 1995 to be reimbursed under this
institution-to-institution program.
45
<PAGE>
ATTACHMENT D
DIVISION OF FINANCIAL RESPONSIBILITY
The attached template outlines the contractual division of financial
responsibility among IPA, Hospital and PacifiCare, the intent being to
clarify services and service categories in order to provide for accurate
administration of this Agreement. As it is impossible to include every
Medical Service available, this Attachment D serves as a model under which
broad service categories suggest the appropriate financial responsibility for
Medical Services, or items not specifically listed. Should an item or service
not be listed or fit into a broad category, the intent is for an agreement to
be reached among IPA, Hospital and PacifiCare concerning financial
responsibilty. The template is based upon coverage/financial responsibility
within the IPA Service Area ("In Area") unless otherwise specified.
46
<PAGE>
DIVISION OF FINANCIAL RESPONSIBILITY
CALIFORNIA
Secure Horizons Partial Risk Agreement
(IPA & Hospital Capitated)
IPA Prospect Medical Group Hospital St. Jude Medical Center
-------------------------- ---------------------------
<TABLE>
<CAPTION>
Responsible Party List of Benefits
- --------------------- ------------------------------
IPA Hospital Pacificare
<S> <C> <C> <C>
AIDS - Professional Component
- Facility Component
Allergy
- Testing
- Serum
Ambulance, Air or Ground - In Area
Out of Area
Amniocentesis
Anesthetics, Administration of
(Anesthesiology)
Artificial Insemination
Artificial Limbs (DME)
Biofeedback
Blood & Blood Products (Including Professional
Component)
- From Blood Bank [ ** ](1)
- Autologous Blood Donation
Chemical Dependency Rehabilitation
- Inpatient Facility Component
- Inpatient Professional Component
- Outpatient Professional Component
- Outpatient Facility Component
Chemotherapy
- Drugs
- Professional Component
Chiropractic (Medicare approved only)
Colostomy Supplies
- Outpatient
- Inpatient
Contact Lenses
- Intraocular lens (surgically
implanted)
- Incident to Cataract Surgery
(not surgically implanted)
Cosmetic Surgery (Medically Necessary)
- Facility Component
- Professional Component
Dental Services (for repair of
accident/injury only)
- Facility Component
- Professional Component
Detox
- Facility Component
- Professional Component
</TABLE>
(1) All references to division of responsibility have been deleted.
47
<PAGE>
DIVISION OF FINANCIAL RESPONSIBILITY
CALIFORNIA
Secure Horizons Partial Risk Agreement
(IPA & Hospital Capitated)
IPA Prospect Medical Group Hospital St. Jude Medical Center
-------------------------- ---------------------------
<TABLE>
<CAPTION>
Responsible Party List of Benefits
- --------------------- ------------------------------
IPA Hospital Pacificare
<S> <C> <C> <C>
Durable Medical Equipment (DME)
(Medicare approved only)
- Surgically Implanted
- Inpatient of SNF
- In Lieu of Hospitalization
- Outpatient
- Hearing Aids
Emergency Admissions - (In Area)
- Facility Component
- Professional Component
(Out of Area)
- Facility Component
- Professional Component
Emergency Room Facility Component
- In Area
- Out of Area
Emergency Room Physicians - In Area
- Initial Treatment and Hospital Based MDs
(interpretation)
- Consults
- Out of Area
Employment Physical
Endoscopic Studies
- With Biopsy [ ** ](1)
- Without Biopsy
Experimental Procedures
Family Planning (Medicare approved only)
- Professional Component
- Facility Component
Fetal Monitoring
- Outpatient
- Impatient
Genetic Testing
Health Education
Health Evaluation (Physical)
Hearing Aids
Hearing Screening
Hemodialysis
- Inpatient
- Outpatient
</TABLE>
(1) All references to division of responsibility have been deleted.
48
<PAGE>
DIVISION OF FINANCIAL RESPONSIBILITY
CALIFORNIA
Secure Horizons Partial Risk Agreement
(IPA & Hospital Capitated)
IPA Prospect Medical Group Hospital St. Jude Medical Center
-------------------------- ---------------------------
<TABLE>
<CAPTION>
Responsible Party List of Benefits
- --------------------- ------------------------------
IPA Hospital Pacificare
<S> <C> <C> <C>
Home Health Care
- In Lieu of Hospitalization
(includes IV or /injectables)
- Other
Hospital Services (Special Medicare
Reimbursement Program)
- Inpatient
- Professional Component
Hospital Based Physicians
- Anesthesiology
- Audiology
- Cardiology
- Emergency Room
- Diagnostic Services
- Neonatology
- Neurology
- Nephrology
- Pathology
- Physical Medicine
- Pulmonary [ ** ](1)
- Radiology
- Radiation Oncology
- Surgeon
Hospitalization, Inpatient Services
Supplies, Testing
- In Area
- Out of Area
Immunization and Inoculations
- As Medically indicated -
Medically approved
- For work/travel
Infertility (diagnosis and Treatment)
- Professional Component
- Facility Component
Injections and Injected Substances
(outpatients)
Insulin & Syringes
Laboratory Services
- Outpatient
- Inpatient
Lithotripsy
- Professional Component
- Facility Component
</TABLE>
(1) All references to division of responsibility have been deleted.
49
<PAGE>
DIVISION OF FINANCIAL RESPONSIBILITY
CALIFORNIA
Secure Horizons Partial Risk Agreement
(IPA & Hospital Capitated)
IPA Prospect Medical Group Hospital St. Jude Medical Center
--------------------------------- -----------------------------
<TABLE>
<CAPTION>
Responsible Party List of Benefits
- ----------------- -----------------------------
IPA Hospital PacifiCare
<S> <C> <C> <C>
Mammography
Marriage Counseling
Medication
- In Lieu of hospitalization (intravenous)
- Inpatient
- O.P. covered /injectables
- O.P. non-injectables
Mental Health
- Inpatient Facility Component
- Inpatient Professional Component
- Outpatient Professional Component
Nuclear Medicine Diagnostic
Nuclear Medicine Therapy/Treatment
- Facility Component--Inpatient
- Professional Component
- Facility Component--Outpatient
Nutritional/Dietetic Counseling
Office Visit Supplies, Splints, Bandages-etc.
Organ Transplants (non-experimental)
- Facility component
- Professional component
O.P. Surgery
- Facility Component [ ** ](1)
- Professional Component
(Facility Based MD's)
- Professional Component - other
- Anesthesiology
Outpatient Surgery/Facility Based Physicians
- Anesthesiology
- Audiology
- Cardiology
- Emergency Room
- Diagnostic Services
- Neonatology
- Neurology
- Nephrology
- Pathology
- Physical Medicine
- Pulmonary
- Radiology
- Radiation Oncology
- Surgeon
</TABLE>
(1) All references to division of responsibility have been deleted.
50
<PAGE>
DIVISION OF FINANCIAL RESPONSIBILITY
CALIFORNIA
Secure Horizons Partial Risk Agreement
(IPA & Hospital Capitated)
IPA Prospect Medical Group Hospital St. Jude Medical Center
--------------------------------- -----------------------------
<TABLE>
<CAPTION>
Responsible Party List of Benefits
- ----------------- -----------------------------
IPA Hospital PacifiCare
<S> <C> <C> <C>
Outpatient Diagnostic Services (Including
but not limited to those listed below)
- Angiograms
- Cat Scan
- 2 D Echo
- EEG
- EKG
- EMG
- ENG
- MRI
- Treadmills
- Ultrasound
Physical Therapy
- Inpatient
- Outpatient
Physician visits
- To Hospital
- To S.N.F.
- To Patients Home
Physician Office Visits/Consultations
Podiatry Services (requires P.M.G. referral)
Pregnancy
- Professional Component [ ** ](1)
- Facility Component
Prosthetic Devices
- Inpatient
- Outpatient
Radiation Therapy
- Facility Component (Inpatient)
- Facility Component (Outpatient)
- Professional Component
Radiology Services
- Outpatient
- Inpatient
- O.P. Surgery
Reconstructive Surgery
- Facility Component
- Professional Component
- Prosthetics
Refractions
Rehabilitation (Short Term eq: P.T., O.T.,
Speech, Cardiac Therapy)
- Inpatient Facility Component
- Inpatient Professional Component
- Outpatient Facility Component
- Outpatient Professional Component
</TABLE>
(1) All references to division of responsibility have been deleted.
51
<PAGE>
DIVISION OF FINANCIAL RESPONSIBILITY
CALIFORNIA
Secure Horizons Partial Risk Agreement
(IPA & Hospital Capitated)
IPA Prospect Medical Group Hospital St. Jude Medical Center
--------------------------------- -----------------------------
<TABLE>
<CAPTION>
Responsible Party List of Benefits
- ----------------- -----------------------------
IPA Hospital PacifiCare
<S> <C> <C> <C>
Skilled Nursing Facility
Social Services - Medical
Specialist Consultations
Surgical Supplies
- Inpatient
- Outpatient Facility
- Outpatient IPA
TMJ
- Dental Treatment
- Diagnosis and Medically Necessary
Correction [ ** ](1)
- Inpatient Facility Component
Transfusions
- From Blood Bank
- Autologous Blood Donation
Tissue Plasminogen Activator (TPA)
Vision Screening
Vision Care
- Implanted lenses (cataract surgery)
- Lenses and Frames incident to
cataract surgery
- Non-cataract related lenses and frames
- Medically necessary care
- Refractions
</TABLE>
(1) All references to division of responsibility have been deleted.
52
<PAGE>
ATTACHMENT E
PACIFICARE POLICIES AND PROCEDURES MANUAL
The PacifiCare Policies and Procedures Manual shall be provided to Hospital
by PacifiCare concurrent with the execution of this Agreement.
HOSPITAL
Received this_____________day of ___________________________, 199__.
By:_______________________________
Title:____________________________
53
<PAGE>
ATTACHMENT F
IPA FACILITIES
Page 1
PROSPECT MEDICAL GROUP PROVIDED LISTING
PRIMARY CARE PHYSICIANS
FAMILY PRACTICE
Thomas Barker, M.D. 4900 Prospect Ave 579-6865
Gregg DeNicola, M.D. Yorba Linda, CA 92686 579-6850
Michael Hall, M.D. 579-6870
R. Scott Hall, M.D. 579-6840
Fred Hurst, M.D. 579-6860
Paul Jordan, M.D.
Richard Kenfield, M.D. 579-6820
James Leonard, M.D. 579-6845
Daniel May, M.D. 579-6885
Ray McGinty, M.D. 579-6855
Dean Okimoto, M.D. 579-6825
Dennis Ponzio, M.D. 579-9911
John Schmidt, M.D. 579-6835
Lytton Smith, M.D. 579-6875
Joanna Tan, M.D. 579-6815
Kenneth Tan, M.D. 579-6830
Jerome Blum, D.O. 215 N. St. College #A 776-0920
Anaheim, CA 92806
Russell Ewing, M.D. 603 S. Valencia Ave. #204 524-9200
Brea, CA 92621
John Fonmin, M.D. 2707 S. Diamond Bar Blvd. #104 594-8331
Diamond Bar, CA 91765
Robert Maurer, D.O. 1501 N. Placentia Ave 524-7333
Placentia, CA 92670
Alex Go, M.D. 9581 Ball Rd 635-2833
S. Clarke Smith, M.D. Anaheim, CA 92804 9am-6pm
Hoong F. Tang, M.D. 635-3381
after 6pm
Douglas Starr, M.D. Family Medical Group of 860-1144
David Rhodes, M.D. Diamond Bar
Susan Taylor, M.D. 750 N. Diamond Bar Blvd.
Brian Koffman, M.D. Diamond Bar, CA 91765
Diane Combs, M.D.
Richard Manzo, M.D. 721 W. Whittier #C (310) 694-6431
La Hebra, CA 90631
<PAGE>
ATTACHMENT F
IPA FACILITIES
Page 2
INTERNAL MEDICINE
Edward Campagna, M.D. 1041 E. Yorba Linda Blvd. #5 996-3700
Carl Buckhorn, M.D. Placentia, CA 92670
Audrey Konow, M.D. 16960 E. Bastanchury #B 961-8500
Yorba Linda, CA 92686
22603 La Palma Ave. #308 692-8282
Yorba Linda, CA 92686
James Leonard, M.D. 4900 Prospect Ave. 579-6845
Yorba Linda, CA 92686
<PAGE>
ATTACHMENT G
PAGE 1
CONTINUOUS QUALITY IMPROVEMENT FORM
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
DATE: JULY 14, 1993
---------------------
QMS NAME: Judy Arntson RN, MSN, CPHO
-----------------------------------------------
MEDICAL GROUP/IPA: Prospect Medical Group Precontractual Follow Up Action Plan
-----------------------------------------------------------
REPORTING TIME FRAME: MONTHLY QUARTERLY SEMI-ANNUALLY ANNUALLY
---- ---- ----- -----
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
TOPIC FINDINGS/DISCUSSION CORRECTIVE ACTION FOLLOW-UP MONITORING
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
1. 1992 Complaint Complaints consistently Implement system to Complete self
PTMPY Score for related to delay/denial monitor/track complete study on all
Commercial 3.82 of referral, service and processing of referral referrals for
above Network treatment. requests by PCP's using August, September
Average (2.77). following criteria: and October 1993
1992 Complaint a. Emergency referrals to determine
Severity Score require immediate compliance with
7.64 above Network determination. referral criteria.
Average (4.78). b. Emergent/urgent Submit results of
1993 YTD referrals requires Self Study to
Complaints=8. determination within Group QAC and
one working day. Pacificare by
c. All other referrals November 1993.
require determination
within 10 working days.
2. 1992 IPA QA No evidence of structured Annual QA Plan submitted to Submit copies of
Assessment Score QA Program. QAC for review/approval. minutes to
1.45 (below Yearly QA Work Plan submitted PacifiCare by
Network Average of to QAC for review/approval. October 1993.
3.27) Monthly QAC meetings with
agenda and minutes.
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
<PAGE>
ATTACHMENT G
PAGE 2
CONTINUOUS QUALITY IMPROVEMENT FORM
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
Prospect Medical Group page 2
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
TOPIC FINDINGS/DISCUSSION CORRECTIVE ACTION FOLLOW-UP MONITORING
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
3. Clinical Peer No evidence of clinical Implement Clinical Peer Submit Peer Review
Review peer review. Need to Review for all PCP's by Criteria to group
begin structured clinical reviewing 10-15 ambulatory QAC for approval
peer review. care records using pre- by September 1993.
determined clinical record Begin Clinical
review criteria. Peer Review using
approved criteria
by October 1993.
Report results of
Peer Review to
group QAC by
November 1993.
4. Health Maintenance Achieve compliance with Implement mechanism for Report initial
Screening Criteria age appropriate CPE's; tracking and monitoring PCP results of
not met during PAP's; Mammography; stool compliance with all health monitoring to QAC
Precontractual for occult blood; rectal maintenance screening. October 1993.
Chart Review. exam/prostate exam.
5. Physician Precontractual chart As above under Clinical Peer As above under
documentation in review demonstrated PCP's Review. Clinical Peer
ambulatory care non-compliance with Review.
records. documentation standards.
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
<PAGE>
ATTACHMENT G
PAGE 3
CONTINUOUS QUALITY IMPROVEMENT FORM
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
Prospect Medical Group page 3
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
TOPIC FINDINGS/DISCUSSION CORRECTIVE ACTION FOLLOW-UP MONITORING
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
6. Physician Physician Credentialling Continue progress in Demonstrate
Credentialling baseline study showed low compliance with appointment documented
compliance with physician criteria. Implement a evidence of
credentialling standards. reappointment process to progress
In excess of 6 month include timely follow up of made/compliance
response time by Medical 805 reports. Develop with standards by
Director to query from mechanism to insure timely October 1993.
PacifiCare Physician response by group Medical
Credentialling Unit Director to PacifiCare
regarding follow up on Medical Director concerns.
805 reports on 2 Establish Clinical Profile
physicians. records for each
practitioner.
7. Access Studies Access Studies due from Submit October 1993 Access 1993 October
group March and October Studies by November 1, 1993. Access Studies
each calender year. received by
Failed to submit October PacifiCare by
1992 Access Studies. 1993 November 1, 1993.
Access Study submitted
4.28.9]
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
"ALL SECTIONS MARKED WITH TWO ASTERISKS ("**") REFLECT PORTIONS WHICH HAVE
BEEN REDACTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION BY PROSPECT MEDICAL HOLDINGS, INC. AS PART OF A REQUEST FOR
CONFIDENTIAL TREATMENT."
AMENDMENT TO
IPA MEDICARE PARTIAL RISK SERVICES AGREEMENT
The undersigned parties to the IPA Medicare Partial Risk Services
Agreement (the "Agreement") by and between PacifiCare of California ("Plan")
and Prospect Medical Group, Inc. ("IPA") do hereby amend the Agreement as
follows:
Attachment C, COMPENSATION, sub-Section B, MONTHLY HCFA PAYMENT, first
sentence is amended to read as follows:
[ ** ] of the Monthly HCFA Payment."
Attachment A3, INDIVIDUAL STOP LOSS PROGRAM, is deleted in its entirety.
The effective date of this Amendment shall be November 1, 1993.
By signing below, both parties hereto have executed and agreed to this
Amendment.
PACIFICARE OF CALIFORNIA IPA
By: /s/ Nancy Freeman By: /s/ Gregg De Nicola
------------------------------- -------------------------------
Nancy Freeman, Vice President
Date: 11/11/93 Date: 11-1-93
----------------------------- -----------------------------
<PAGE>
"ALL SECTIONS MARKED WITH TWO ASTERISKS ("**") REFLECT PORTIONS WHICH HAVE
BEEN REDACTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION BY PROSPECT MEDICAL HOLDINGS, INC. AS PART OF A REQUEST FOR
CONFIDENTIAL TREATMENT."
IPA MEDICARE SHARED RISK SERVICES AGREEMENT
BETWEEN
PACIFiCARE OF CALIFORNIA
AND
PROSPECT MEDICAL GROUP, INC.
<PAGE>
PACIFICARE
IPA MEDICARE SHARED RISK SERVICES AGREEMENT
THIS IPA MEDICARE SHARED RISK SERVICES AGREEMENT is made and entered
into this first day of July 1, 1996, by and between PACIFICARE, INC.
("PacifiCare"), a California corporation, and Prospect Medical Group, Inc.
("IPA"), with reference to the following facts:
A. PacifiCare operates a prepaid medical service plan which
arranges for certain Health Care Services to be provided to persons eligible to
receive benefits who are enrolled as Subscribers in the Secure Horizons Medical
and Hospital Plan in a manner consistent with the laws of the United States and
the State of California.
B. PacifiCare desires to provide a quality direct service prepaid
health delivery system which maximizes the utilization of innovative methods to
promote the efficient, economical delivery of health care, and to develop and
implement programs of health education and health maintenance for its
Subscribers.
C. PacifiCare has a contract with the Health Care Financing
Administration ("HCFA") of the United States Government to provide Medicare
benefits to eligible persons.
D. IPA has as its primary objective the delivery of health
services through agreements and active participation with individual physicians,
medical groups and/or clinics and their physicians, and other related health
professionals and technicians, all of which are licensed in the State of
California.
E. IPA and its Member Physicians desire to participate in
PacifiCare's prepaid health service delivery system by providing or arranging
Health Care Services in coordination with PacifiCare, its Subscribers and
Hospitals on a prepaid basis.
F. PacifiCare and IPA, on behalf of IPA and its Member Physicians,
deem it in their best interests to enter into a renewable Agreement, whereby IPA
agrees to provide or arrange for ("provide") Health Care Services to PacifiCare
Subscribers enrolled in the Secure Horizons Medical and Hospital Plan.
NOW, THEREFORE, it is as agreed as follows:
1. DEFINITIONS
Whenever used in this Agreement, the following terms shall have the
definitions contained in this Section 1:
<PAGE>
1.01 AGREEMENT - is this PacifiCare IPA Medicare Shared Risk Services
Agreement, dated as stated above, and all attachments, addendums and amendments
hereto.
1.02 CAPITATION PAYMENTS - are payments made to IPA by PacifiCare on a
prepaid basis for the Medical Services to be provided under this Agreement.
1.03 CATASTROPHIC CASE - is any single medical condition, including
complications arising from such medical condition, where the total cost of
Health Care Services to treat such condition is expected to exceed [ ** ]
per condition, regardless of payment source.
1.04 CONFORMANCE REQUEST - is a written request made by PacifiCare to
IPA to correct the performance of an IPA Member Physician or Specialist
Physician to conform to the provisions of this Agreement.
1.05 COPAYMENTS - are charges pursuant to the Secure Horizons Medical
and Hospital Plan which may be charged to the Subscriber by IPA at the time of
the provision of Medical Services which are in addition to the Capitation
Payments made to IPA by PacifiCare.
1.06 COST OF CARE - is the value of Medical Services as defined in this
Agreement and as calculated pursuant to the formula set forth in Attachment A4,
incorporated in full herein by reference.
1.07 ELIGIBILITY LIST - is a list of Subscribers to whom IPA shall
provide Medical Services.
1.08 EMERGENCY SERVICES - are those Health Care Services that are
provided for the treatment of acute injury or illness requiring immediate
medical attention and which threaten life or limb, or which involve
uncontrollable bleeding, or loss of consciousness, or which cannot be delayed
without possible serious effects on the health of the Subscriber.
1.09 HCFA - is the Health Care Financing Administration, an
administrative agency of the United States Government.
1.10 HEALTH CARE SERVICES - are all authorized services to which
Subscribers are entitled under the Secure Horizons Medical and Hospital Plan,
including Medical Services, Hospital Services and Emergency Services.
1.11 HOSPITAL - is an acute care facility (or facilities), located in
the IPA Service Area, licensed as an acute care hospital under the laws of the
State of California and which has entered into a written agreement with
PacifiCare to provide Hospital Services to Subscribers.
2
<PAGE>
1.12 HOSPITAL DAY - is any period up to twenty-four (24) hours
commencing at 12:00 a.m. or 12 p.m., whichever is used by Hospital, during which
a Subscriber is eligible to receive Hospital Services and actually receives
Hospital Services from Hospital.
1.13 HOSPITAL SERVICES - are the Health Care Services described in
Attachment A1, incorporated in full herein by reference, which Hospital and
other providers shall provide to Subscribers pursuant to the Secure Horizons
Medical and Hospital Plan.
1.14 IPA - is the medical group or independent practice association
identified in the first paragraph of this Agreement and its Member Physicians,
all of whom are licensed to practice medicine or osteopathy in the State of
California at the IPA Facilities.
1.15 IPA FACILITIES - are those facilities whose locations are listed
in Attachment F, attached hereto and incorporated in full herein by reference,
where Medical Services shall be available to Subscribers pursuant to this
Agreement.
1.16 IPA SERVICE AREA - is the geographical area within a thirty (30)
mile radius of each IPA Facility. The thirty (30) mile radius commences with the
address of an IPA Facility and extends for thirty (30) miles over the shortest
route using public streets and highways.
1.17 MEDICAL SERVICES - are all authorized Health Care Services to
which Subscribers are entitled under the Secure Horizons Medical and Hospital
Plan, some of which are summarized in Attachment A2, incorporated in full herein
by reference.
1.18 MEDICALLY NECESSARY SERVICES - are Health Care Services which are
required by Subscriber as determined by IPA in accordance with accepted medical
and surgical practices and standards in the community and the professional
standards recommended by PacifiCare's Quality Assurance Committee and
Utilization Review Committee.
1.19 MEMBER PHYSICIANS - are physicians, surgeons and osteopaths,
licensed to practice medicine in the State of California, who have an ownership
interest in, are employed by, or contract with, IPA.
1.20 MONTHLY HCFA PAYMENT - is the revenue received by PacifiCare each
month from HCFA, as determined by HCFA, for the Health Care Services each
Subscriber is to be provided minus any Benefit Withhold.
1.21 OUTSIDE PROVIDERS - are licensed physicians, surgeons, osteopaths,
paramedical personnel, hospitals and other health care
3
<PAGE>
facilities which provide or arrange Health Care Services to Subscribers eligible
to receive benefits under the Secure Horizons Medical and Hospital Plan but
which do not have written agreements with IPA and which are not Specialist
Physicians.
1.22 PARTICIPATING MEDICAL GROUP - includes IPA and its Member
Physicians and is any group of duly-licensed doctors of medicine or osteopathy
which has entered into a written agreement with PacifiCare to provide Medical
Services to Subscribers in conjunction with the Secure Horizons Medical and
Hospital Plan.
1.23 PRO PROGRAM - is the provider utilization review program developed
by HCFA for providers of Medical Services.
1.24 QUALITY ASSURANCE COMMITTEES - are committees separately
established by IPA and PacifiCare which shall separately establish, maintain and
perform quality assurance review of Health Care Services provided to Subscribers
as reasonably required by PacifiCare, the State of California, the Department of
Corporations or Health and Human Services, HCFA, the Office of Qualification and
Compliance, or any other governmental agencies with regulatory or enforcement
jurisdiction over PacifiCare or this Agreement.
1.25 RETIREE SUBSCRIBER - is a Subscriber enrolled in the Secure
Horizons Retiree Health Plan, who meets all the eligibility requirements for
membership in such plan and for whom all applicable premiums have been paid and
received by PacifiCare.
1.26 RISK REIMBURSEMENT PLAN - is PacifiCare's Medicare Medical and
Hospital Services Plan under which PacifiCare contracts with Medicare to be
reimbursed on a per capita basis for each class of Medicare beneficiary enrolled
in the plan.
1.27 SECURE HORIZONS MEDICAL AND HOSPITAL PLAN - is the prepaid health
services plan offered by PacifiCare as described in the Secure Horizons medical
and Hospital Subscriber Agreement, and attachments, addendums and amendments
thereto, a copy of which is attached hereto as Attachment B and incorporated in
full herein by reference. For purposes of this Agreement, the Secure Horizons
Medical and Hospital Plan shall include the Secure Horizons Retiree Health Plan.
1.28 SECURE HORIZONS RETIREE HEALTH PLAN - is the health benefits plan
available for Retiree Subscribers. The benefits of the Secure Horizons Retiree
Health Plan are attached hereto as Attachment B and incorporated herein by
reference.
1.29 SPECIALIST PHYSICIANS - are physicians who have written agreements
with IPA to provide Medical Services to Subscribers on a referral basis and who
do provide such Medical Services at offices or facilities which are not IPA
Facilities.
4
<PAGE>
1.30 SUBSCRIBER - is an individual who is enrolled in the Secure
Horizons Medical and Hospital Plan, who meets all the eligibility requirements
for membership in such plan and for whom all applicable Member Premiums have
been paid and received by PacifiCare. For purposes of this Agreement,
Subscribers shall include Retiree Subscribers.
1.31 SUBSCRIBER PREMIUMS - are charges pursuant to the Secure Horizons
Medical and Hospital Plan which, if applicable, are required to be paid by
Subscribers to PacifiCare on a monthly basis in order for Subscribers to receive
Health Care Services.
1.32 SURCHARGES - are additional fees not disclosed to the Subscriber
for Health Care Services and which are not allowable Copayment charges.
1.33 URGENTLY NEEDED SERVICES - are Health Care Services which are
required without delay, in order to prevent serious deterioration of Subscribers
health as the result of an unforeseen illness or injury while the Subscriber is
temporarily absent from the IPA Service Area.
1.34 UTILIZATION REVIEW COMMITTEE - is an IPA committee of at least
three (3) Member Physicians which is established and maintained, in accordance
with the provisions of Section 3.13 herein, to develop a utilization control
program outlining procedures for the efficient use of resources, consistent with
state and federal law, for the rendition of Health Care Services. The
Utilization Review Committee shall review elective Referrals and hospital
admissions on a concurrent and prospective basis and Emergency Services,
Urgently Needed Services and hospital admissions on a retrospective basis.
1.35 BENEFIT WITHHOLD - is the portion of the HCFA revenue received and
retained by PacifiCare each month as outlined in Attachment C, which is
earmarked for provision of benefits to Subscribers which are offered in addition
to Health Care Services.
1.36 PACIFICARE GROUP COMMERCIAL PLAN - is the PacifiCare Health Plan
sold to employer groups, associations with employer group participation and
unions.
1.37 PACIFICARE INDIVIDUAL PLAN - is the PacifiCare Health Plan sold to
individuals.
1.38 PACIFICARE LIMITED NETWORK COMMERCIAL PLAN - is a PacifiCare
Group Commercial Plan under development which will rely primarily upon
Participating Medical Groups designated as Strategic Allies for the delivery of
Medical Services to Subscribers.
1.39 PACIFICARE WORKERS' COMPENSATION PLAN - is the PacifiCare plan
which arranges health care services on a non-
5
<PAGE>
capitated basis to covered employees who incur a work-related injury or illness
utilizing managed care principles. For purposes of this Agreement, the
PacifiCare Workers' Compensation Plan does not include PacifiCare's capitated
workers' compensation plan known as COMPREMIER.
1.40 PROSPECT MEDICAL GROUP, INC. NETWORKS - are those networks of
Member Physicians listed in Attachment F.
1.41 SECURE HORIZONS HEALTH PLAN - is the Medicare-risk plan sold by
PacifiCare to Medicare-eligible individuals.
1.42 STRATEGIC ALLIANCE EFFECTIVE DATE - July 1, 1996
1.43 ST. JUDE NETWORK - defined as consisting of North Orange County
St. Jude Medical Group IPA, St. Jude Heritage Medical Group and St. Jude Medical
Center.
2. RELATIONSHIP OF PARTIES
2.01 IPA PARTICIPATION - The execution of this Agreement shall qualify
IPA to participate in the providing and arranging of Health Care Services to
Subscribers pursuant to the terms of the Secure Horizons Medical and Hospital
Plan, as amended from time to time. Subject to Section 12.11 herein, PacifiCare
shall notify IPA of any material amendments to the Secure Horizons Medical and
Hospital Plan, which amendments shall become effective upon thirty (30) days
written notice by PacifiCare to IPA, and IPA has not objected to PacifiCare in
writing within the thirty (30) day period to be bound by such amendments. IPA
approval of such amendments shall not be unreasonably withheld. If IPA does
provide PacifiCare reasonable written objection to be bound by such amendments
within the thirty (30) day period, such amendments to the Secure Horizons
Medical and Hospital Plan shall have no force or effect on IPA.
2.02 LIABILITY FOR OBLIGATION - Notwithstanding any other section or
provision of this Agreement, nothing contained herein shall cause either party
to be liable or responsible for any debt, liability, or obligation of the other
party or any third party, unless such liability or responsibility is expressly
assumed by the party sought to be charged therewith. Each party shall be solely
responsible for and shall indemnify and hold the other party harmless against
any obligation for the payment of wages, salaries or other compensation
(including all state, federal and local taxes and mandatory employee benefits),
insurance and voluntary employment-related or other contractual or fringe
benefits as may be due or payable by the party to or on behalf of such party's
employees, agents and representatives.
2.03 INDEPENDENT CONTRACTOR - The relationship between PacifiCare and
IPA is an independent contractor relationship. Neither IPA nor members,
partners, employees or agents of IPA are
6
<PAGE>
employees or agents of PacifiCare and neither PacifiCare nor any employee or
agent of PacifiCare is a member, partner, employee or agent of IPA. As such, all
medical decisions are rendered solely by IPA and not by PacifiCare. IPA is
solely responsible for all Medical Services arranged by IPA and provided to
Subscribers. None of the provisions of this Agreement shall be construed to
create a relationship of agency, representation, joint venture, ownership,
control of employment between the parties other than that of independent parties
contracting solely for the purpose of effectuating this Agreement.
2.04 DUTY TO DEFEND AND INDEMNIFY - To the extent not covered by
insurance maintained by PacifiCare, whether because of liability in excess of
the policy limits or because of the occurrence of a non-insured event, IPA shall
defend, indemnify and hold harmless PacifiCare from and against any claim, loss,
damage, cost, expense or liability arising out of or related to the performance
or nonperformance by IPA, its Specialist Physicians or employees of any Health
Care Services to be performed or arranged by IPA under this Agreement. It is
understood and agreed by PacifiCare that the foregoing indemnification
obligation is in no way whatsoever intended to reduce or eliminate any insurance
coverage maintained by IPA and that PacifiCare shall be entitled to
indemnification from IPA only for claims, losses, damages, costs, expenses or
liabilities in excess of the applicable insurance policy limits or arising from
uninsured events or occurrences.
To the extent not covered by insurance maintained by IPA, whether
because of liability in excess of the policy limits or because of the occurrence
of a non-insured event, PacifiCare shall defend, indemnify and hold harmless IPA
from and against any claims, loss damage, cost, expense or liability arising out
of or related to the performance or nonperformance of PacifiCare, its employees
or agents of any service to be performed or provided by PacifiCare under this
Agreement. It is understood and agreed by IPA that the foregoing indemnification
obligation is in no way whatsoever intended to reduce or eliminate any insurance
coverage maintained by PacifiCare and that IPA shall be entitled to
indemnification from PacifiCare only for claims, losses, damages, costs,
expenses or liabilities in excess of the applicable insurance policy limits or
arising from uninsured events or occurrences.
3. DUTIES OF IPA
3.01 IPA RESPONSIBILITIES - IPA agrees to arrange for or provide Health
Care Services twenty-four (24) hours a day in coordination with PacifiCare and
with Hospital and other providers, as necessary, for each Subscriber who has
designated IPA as his or her Participating Medical Group. IPA shall be
financially responsible for all Medical Services specified in Attachment A2,
incorporated in full herein by reference, provided to Subscribers
7
<PAGE>
for whom IPA is to receive a monthly Capitation Payment from PacifiCare based
upon the PacifiCare provided Eligibility List. IPA shall be responsible for
determining whether Subscribers are eligible for Health Care Services on the
basis of the most current Eligibility List supplied to IPA by PacifiCare.
Updated eligibility information shall be available from PacifiCare as needed on
the basis of the most current information supplied PacifiCare by HCFA.
3.02 STANDARDS - All Medical Services arranged for or provided by IPA
and its Member Physicians shall be provided by professional personnel and at
physical facilities according to generally accepted standards of medical
practice and management in the community. IPA further agrees to provide or
arrange for Referrals to Specialist Physicians and facilities as are necessary,
appropriate, and in accordance with generally accepted standards of medical
practice in the community in compliance with the standards developed by
PacifiCare's Quality Assurance Committee. If IPA contracts with Specialist
Physicians to provide Medical Services under this Agreement, IPA shall require
such Specialist Physicians to provide IPA with the credentialing information set
forth herein. IPA shall obtain and maintain information concerning each Member
Physician's and Specialist Physician's education, training, references,
malpractice liability insurance, hospital staff status, hospital clinical
privileges, and hospital staff reappointment dates. Such information shall be
kept in a form prescribed by or acceptable to PacifiCare. Upon request, the
credentialing information shall be made available to PacifiCare for review or
copying.
IPA acknowledges and agrees that it shall report Member Physicians or
Specialist Physicians as required by the California Business and Professions
Code Section 805 ("Section 805"). IPA further agrees to maintain and demonstrate
to PacifiCare upon request compliance with the following:
3.02.01 IPA shall ensure that its Member Physicians and
Specialist Physicians are licensed by the State of California and have
current Drug Enforcement Agency ("DEA") registration. IPA shall immediately
notify PacifiCare in writing of any of the following actions taken by or
against a Member Physician or Specialist Physician: (i) the surrendering,
revocation, or suspension of a license; (ii) the surrendering, revocation, or
suspension of current DEA registration; (iii) any filing pursuant to Section
805; (iv) any filing pursuant to the National Practitioner Data Bank; (v) the
filing of any malpractice claim of more than [ ** ]; and (vi) a change in
hospital staff status or hospital clinical privileges, including any
restrictions or limitations.
If IPA fails to obtain and maintain the information set
forth in Paragraph 3.02 or fails to immediately notify PacifiCare
8
<PAGE>
as set forth in this Paragraph 3.02.01, IPA shall indemnify and hold harmless
PacifiCare from and against any claim, loss, damage, cost, expense or liability
arising out of or related to such nonperformance by IPA, its Member Physicians,
Specialist Physicians or employees.
3.02.02 In the event that it is determined by PacifiCare
that IPA does not obtain and maintain the information set forth in paragraph
3.02, IPA agrees to assist PacifiCare in obtaining credentialing information
concerning each Member Physician's and Specialist Physician's education,
training, references, malpractice liability insurance, hospital staff status,
hospital clinical privileges, and hospital staff reappointment dates. IPA shall
obtain from each Member Physician and Specialist Physician a signed waiver,
acceptable to PacifiCare, allowing PacifiCare access to such credentialing
information at any acute care hospital or health care facility. If IPA is unable
to obtain a signed waiver from a Member Physician or Specialist Physician, IPA
shall obtain the credentialing information directly from the acute care hospital
or health care facility and make such information available to PacifiCare upon
request for review and copying.
3.02.03 IPA agrees to provide access to continuing
education programs for its Member Physicians and Specialist Physicians in
accordance with the standards established by the California Medical Association
for continuing education. The content and delivery of such continuing education
programs shall be in the discretion and judgement of IPA, in order to maintain
high standards for the delivery of Medical Services pursuant to this Agreement.
IPA further agrees to gather, correlate, and distribute to its Member Physicians
and Specialist Physicians, information regarding professional medical activities
and developments which IPA believes may be of assistance in providing Medical
Services pursuant to this Agreement.
3.02.04 IPA agrees to provide reasonable evidence that all
nurses and other ancillary and paramedical personnel who are employed by and
contract with IPA or Specialist Physicians are properly licensed by the State of
California.
3.03 INSURANCE - IPA shall maintain professional liability insurance
and general liability insurance in the minimum amounts of one million dollars
($1,000,000) per person, three million dollars ($3,000,000) per occurrence
coverage, and three million dollars ($3,000,000) combined single limits
coverage, for its agents and employees, as applicable. In the event IPA procures
a claims made policy as distinguished from an occurrence policy, IPA shall
procure and maintain prior to termination of such insurance continuing "tail"
coverage, unless successor policy coverage provides such "tail" protection. IPA
shall provide PacifiCare with evidence of such insurance coverage upon
PacifiCare's request. IPA shall immediately notify PacifiCare of any material
changes in
9
<PAGE>
insurance coverage and shall provide a certificate of such insurance coverage to
PacifiCare upon PacifiCare's reasonable request. In the event IPA contracts with
independent contractor physicians to provide Medical Services under this
Agreement, IPA will require such independent contractor physicians and their
agents to maintain professional liability insurance and general liability
insurance in the minimum amounts as is usual and customary in the community.
3.04 REFERRALS - IPA shall refer Subscribers in need of specialty care
services only with the approval of the IPA Utilization Review Committee.
However, in the event that Emergency Services are required, IPA shall comply
with Section 3.05 below.
3.05 HOSPITAL ADMISSIONS - Whenever IPA determines that a Subscriber
on IPA's eligibility list requires Hospital Services which are not Emergency
Services, IPA shall arrange for such Hospital admissions and outpatient
surgeries through the IPA's Utilization Review Committee and its developed
utilization review program. IPA and its Member Physicians shall not serve as
admitting physicians for any Subscriber without such prior approval except in
the event that Emergency Services are required. If IPA or a Member Physician
admits a Subscriber to a Hospital for Emergency Services, IPA shall notify
PacifiCare of such admission within the time frames as required in the
PacifiCare Provider Policies and Procedures Manual, attached hereto as
Attachment D and incorporated in full herein by reference. Admissions for
Emergency Services or Urgently Needed Services shall be made to hospitals
contracting with PacifiCare, if possible.
3.06 ELIGIBILITY LIST - IPA shall accept as patients those Subscribers
who are on IPA's eligibility list provided by PacifiCare to IPA. Member
Physicians and IPA shall be entitled to rely on the most current provider list
until a new list has been provided to IPA. IPA understands that in order to
update the eligibility list, PacifiCare is dependent on the receipt of
information from HCFA.
3.07 COLLECTION OF CHARGES FROM SUBSCRIBERS - IPA shall collect
applicable Copayments from Subscribers upon the rendition of Medical Services to
Subscribers pursuant to the Secure Horizons Medical and Hospital Plan. With the
exception of Copayments and charges for non-covered services delivered on a
fee-for-service basis to Subscribers, IPA shall in no event, including, without
limitation, to non-payment by PacifiCare, insolvency of PacifiCare, or breach of
the Agreement, bill, charge, collect and deposit, or attempt to bill, charge,
collect or receive any form of payment, from any Subscriber for Medical Services
provided pursuant to this Agreement and for which Subscriber is entitled under
the Secure Horizons Medical and Hospital Plan in effect for such Subscriber.
10
<PAGE>
IPA shall not maintain any action at law or equity against a
Subscriber to collect sums owed by PacifiCare to IPA. Upon notice of any such
charge, PacifiCare may terminate this Agreement consistent with the provisions
contained in Section 7.01.02 and take all other appropriate action consistent
with the terms of this Agreement to eliminate such charges, including, without
limitation, requiring IPA and Specialist Physicians to return all sums collected
as Surcharges from Subscribers or their representatives. Nothing in this
Agreement, however, shall be construed to prevent IPA from providing non-covered
Medical Services on a usual and customary fee-for-service basis to Subscribers.
IPA's obligations regarding the collection of charges from Subscribers
shall survive the termination of this Agreement with respect to Medical Services
provided during the term of the Agreement without regard to the cause of
termination of this Agreement.
3.08 COLLECTION OF CHARGES FROM THIRD PARTIES WHEN MEDICARE NOT THE
PRIMARY PAYOR - IPA and Member Physicians accept payment from PacifiCare (plus
applicable Copayments) for Medical Services as provided herein as full payment
for such Medical Services from PacifiCare except as provided herein; provided
however, when Medicare is not the primary payor for Medical Services, such as
when the Subscriber is entitled to payment from another third party or for
payment for a Workers' Compensation claim, or from other primary insurance
coverage maintained by Subscriber, IPA and Member Physicians shall make no
demand upon PacifiCare for reimbursement under the Individual Subscriber Stop
Loss Program as specified in Attachment A3 hereto until all primary sources of
payment have been pursued and it is determined that full payment cannot be
obtained within the (10) months from the date of the provision of Medical
Services.
For purposes of accomplishing the intent of this Section 3.08,
PacifiCare hereby assigns to IPA for collection, any claims or demands against
third parties for amounts due for Medical Services provided by IPA pursuant to
this Agreement, subject to the following conditions:
3.08.01 IPA shall utilize lien forms which are provided
by PacifiCare in the PacifiCare Policies and Procedures Manual or which have
been approved in advance by PacifiCare. IPA shall notify PacifiCare each time it
pursues and each time it obtains a signed lien from a Subscriber.
3.08.02 IPA shall not commence any legal or equitable
action against a third party without obtaining the prior written consent of
PacifiCare. It is agreed that collection or demand letters consistent with the
PacifiCare Provider Policies and Procedures Manual shall not constitute the
commencement of legal or
11
<PAGE>
equitable action. Under no circumstances shall IPA commence any legal action
against a Subscriber.
3.08.03 IPA shall defend, indemnify and hold PacifiCare
harmless for all actions by IPA which relate to collections of an account
pursuant to this Section 3.08.
3.08.04 IPA shall perform such collection activities
consistent with the procedures set forth in the PacifiCare Provider Policies and
Procedures Manual.
3.08.05 PacifiCare may immediately rescind such
assignment on a claim-by-claim basis for any reason by providing written notice
of recision to IPA.
In the event IPA receives payment from a third party
after receipt of payment from PacifiCare, IPA shall reimburse PacifiCare to
the extent that the combined amounts received from all payors exceeds [ ** ]
of IPA's usual and customary fee-for-service charges.
3.09 DUTIES OF IPA UPON TERMINATION DURING PHASE-OUT PERIOD-Should
this Agreement be terminated by IPA pursuant to Section 7.01.01(a) or Section
7.01.01(b), IPA shall be released of its obligation to continue to provide or
arrange for Health Care Services to Subscribers during the phase-out period as
stated in this Section 3.09. If this Agreement is terminated for any other
reason by either party or if this Agreement terminates at the end of the Initial
Term or any renewal term, IPA shall not be released of its obligation to
continue to provide or arrange for Health Care Services to Subscribers during
the phase-out period, which phase-out period shall end on the earlier of:
3.09.01 Three (3) months from the effective date of
termination of this Agreement, or
3.09.02 The date PacifiCare has secured the transfer of
Subscribers to another medical group, individual practice association, or
physician for further treatment, and has notified IPA of such transfer in
writing.
Compensation during the phase-out period shall be at the
Capitation Rates set forth in Attachment C hereto.
3.10 CONTINUING CARE RESPONSIBILITIES - IPA and Member Physicians
shall provide or arrange for Health Care Services to Subscribers for the term of
this Agreement in accordance with Section 3.01 hereof. In the event of
termination of this Agreement and the expiration of IPA's duty to provide or
arrange for Health Care Services during the phase-out period pursuant to Section
3.09, if applicable, IPA and Member Physicians shall continue to provide or
arrange for Health Care Services to Subscribers until the
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effective date of transfer of such Subscribers to another Participating
Medical Group for further treatment and written notice of such transfer has
been provided by PacifiCare to IPA. If a Subscriber's care cannot be
transferred for the reason of hospitalization of Subscriber, continuity of
care, or other legally required medical treatment reasons, IPA shall continue
to provide or arrange for Health Care Services for such Subscriber until
PacifiCare, through consultation with the Subscriber's attending
participating physician, has made provision for the transfer of such
Subscriber to another participating provider for further Health Care Services
and has notified IPA of such transfer in writing. The payment provisions for
any continued Medical Services after expiration of the phase-out period shall
be the lesser of [ ** ] of the usual and customary fees of the Member
Physician or Specialist Physician or the Cost of Care as set forth in
Attachment A4.
Notwithstanding the above or any other provisions of this Agreement to
the contrary, IPA agrees that in the event PacifiCare ceases operations for any
reason, including insolvency, IPA shall provide Medical Services and shall not
bill, charge, collect or receive any form of payment from any Subscriber or have
any recourse against a Subscriber for Medical Services provided after PacifiCare
ceases operation. This continuation of Medical Services obligation shall be for
the period for which Subscriber Premiums have been paid, but shall not exceed a
period of thirty (30) days, except for those Subscribers who are hospitalized on
an inpatient basis as provided below.
In the event PacifiCare ceases operations or IPA terminates this
Agreement on the basis of PacifiCare's failure to make timely Capitation
Payments, IPA shall continue to arrange for Health Care Services to those
Subscribers who are hospitalized on an inpatient basis at the time PacifiCare
ceases operations or IPA terminates the Agreement until such Subscribers are
discharged from the hospital. IPA may file a claim with PacifiCare for such
Health Care Services at [ ** ] of IPA's usual and customary fee for service
charges then in effect.
IPA agrees that the provisions of this Section 3.10 and IPA's
obligations herein shall survive the termination of this Agreement without
regard to the cause of termination of the Agreement, and shall be construed to
be for the benefit of the Subscribers.
3.11 STAFF PRIVILEGES - IPA agrees to have its Member Physicians seek
and obtain (and provide evidence of) staff privileges or other appropriate
access to Hospital.
3.12 ADMINISTRATIVE GUIDELINES - IPA agrees to perform its duties
under this Agreement in a manner consistent with the reasonable administrative
guidelines provided by PacifiCare, in its Provider Policies and Procedures
Manual, attached hereto as
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Attachment D and incorporated in full herein by reference. Subject to Section
12.12 herein, PacifiCare shall notify IPA of any material amendments to the
administrative guidelines, which amendments shall become effective upon thirty
(30) days written notice by PacifiCare to IPA if IPA has not objected to
PacifiCare in writing within the thirty (30) day period to be bound by such
amendments. IPA approval of such amendments shall not be unreasonably withheld.
If IPA does provide PacifiCare reasonable written objection to be bound by such
amendments within the thirty (30) day period, such amendments to the PacifiCare
Health Plan shall have no force or effect on IPA.
3.13 UTILIZATION REVIEW - IPA agrees to participate with PacifiCare in
an ongoing utilization review program to promote efficient use of resources. The
IPA's Utilization Review Committee shall meet as frequently as necessary but at
least weekly. The Utilization Review Committee shall keep minutes of the
committee meetings, a copy of which shall be made available to PacifiCare upon
ten (10) days written notice by PacifiCare to IPA. IPA and PacifiCare shall
jointly implement a utilization review system whereby IPA shall notify
PacifiCare of any hospital or skilled nursing facility admissions. A member of
the PacifiCare medical services staff may participate in IPA's Utilization
Review Committee meetings.
3.14 QUALITY OF HEALTH CARE - IPA agrees to assure quality of Medical
Services by:
3.14.01 Assigning PacifiCare Subscribers only to Member
Physicians, Specialist Physicians or Outside Providers meeting quality health
care standards;
3.14.02 Inspecting the premises and facilities of its
Member Physicians on a regular basis and allowing PacifiCare to participate in
such inspections upon ten (10) days written notice.
3.15 QUALITY ASSURANCE AND REMEDIAL PROCEDURES - IPA shall cooperate
with PacifiCare in the operation of PacifiCare's quality assurance program and
IPA shall perform quality assurance review of Health Care Services as brought
before IPA internally or from PacifiCare's Quality Assurance Committee, the
Department of Corporations, the Department of Health and Human Services, HCFA
and any other governmental agencies with regulatory or enforcement jurisdiction
over this Agreement. IPA shall establish and maintain a Quality Assurance
Committee which shall meet at least monthly. A member of the PacifiCare medical
services staff may participate in IPA's Quality Assurance Committee meetings.
The IPA Quality Assurance Committee shall keep minutes of the committee
meetings, a copy of which shall be made available to PacifiCare upon ten (10)
days written notice by PacifiCare to IPA. The task of the Quality Assurance
Committee may be assumed by the Utilization Review Committee described in
Section 3.13; however, in such event, the
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Utilization Review and Quality Assurance Committees must hold separately
convened meetings and the minutes of each meeting must be separately maintained.
IPA shall, at the written request of PacifiCare, make available one
(1) Member Physician from IPA to attend the PacifiCare Quality Assurance
Committee meetings. The intent of this Section is to have at least one Member
Physician from IPA serve for six (6) months on the PacifiCare Quality Assurance
Committee during a three (3) year period. IPA shall develop written procedures
for remedial action whenever it is determined by PacifiCare's Quality Assurance
Committee that inappropriate or substandard Health Care Services have been
furnished or Health Care Services that should have been furnished have not been
furnished. Upon request, PacifiCare shall assist IPA in the formulation of such
remedial procedures.
3.16 COMPLIANCE WITH CIVIL RIGHTS LAWS - IPA shall comply with Title
VI of the Civil Rights Act of 1964, Section 504 of the Rehabilitation Act of
1973 and the Age Discrimination Act of 1975.
3.17 RECIPROCITY AGREEMENTS - IPA agrees to develop agreements among
PacifiCare's Participating Medical Groups to assure reciprocity of health care
among the Participating Medical Groups for PacifiCare Subscribers. IPA shall
accept non-emergency or specialty Referrals from such other Participating
Medical Groups and such other Participating Medical Groups shall be required to
accept non-emergency or specialty Referrals from IPA. Payment for the foregoing
Referrals shall be no greater than the Cost of Care Rates described in
Attachment A4.
3.18 INDIVIDUAL STOP-LOSS PROGRAM - The purpose of PacifiCare's
Individual Stop-Loss Program ("ISL") is to limit IPA's costs per Subscriber per
Year to a specified amount (the deductible) in return for a payment of an ISL
Premium. IPA shall purchase Individual Stop Loss Protection coverage from an
outside carrier and/or maintain adequate reserves to ensure coverage of
Catastrophic Cases in lieu of participating in PacifiCare's Individual Stop Loss
Program. Such Individual Stop Loss Protection and/or reserves shall be subject
to PacifiCare's review. Upon PacifiCare's request, IPA shall provide PacifiCare
with evidence of Individual Stop Loss Protection and/or reserves adequate to
cover Catastrophic Cases. In the event IPA fails to make arrangements which meet
the satisfaction of PacifiCare, PacifiCare may, by providing thirty (30) days
notice to IPA, require IPA to purchase Individual Stop Loss Protection coverage
through PacifiCare at the rates charged by PacifiCare for other Participating
IPAs. Notwithstanding Section 12.12, PacifiCare may amend the ISL Premium and
ISL Deductible on the Individual Stop Loss Program coverage offered to
Participating IPAs on an annual basis effective each January 1 by providing
sixty (60) days prior written notice to IPA.
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Individual Stop Loss claims for ISL purchased through PacifiCare's Individual
Stop Loss program shall be calculated at the Cost of Care values as set forth in
Attachment A4, of this Agreement.
3.19 OTHER CONTRACTUAL COMMITMENTS - IPA represents and assures
PacifiCare that contractual commitments with other HMOs, competitive medical
plans and health related entities do not restrict or impair IPA from performing
its duties under this Agreement.
3.20 DISSEMINATION OF INFORMATION - IPA agrees that PacifiCare may use
IPA's name, address, telephone number, and a listing of IPA's Member Physicians
in any informational material routinely distributed to Subscribers and for other
purposes related to the administration of the Secure Horizons Medical and
Hospital Plan as an indication of IPA's willingness to provide or arrange Health
Care Services to Subscribers.
Prior to listing or otherwise referencing PacifiCare in any
promotional or advertising brochures, media announcements or other advertising
or marketing material, IPA shall first obtain the prior consent of PacifiCare,
such consent not to be unreasonably withheld.
3.21 WRITTEN AGREEMENTS - IPA shall secure written agreements,
consistent with the terms of this Agreement and in compliance with all state and
federal law, with all Member Physicians and Specialist Physicians regularly
utilized as a part of IPA's referral system.
3.22 MEDICAL CARE CRITERIA - IPA shall utilize the criteria for
medical care that is established or approved by PacifiCare's Quality Assurance
Committee as a standard reference in determining appropriate lengths of stay for
hospitalized Subscribers or appropriate utilization patterns for referral to
specialty services.
3.23 NONDISCRIMINATION - IPA represents and assures that Health Care
Services are provided or arranged for Subscribers in the same manner as such
services are provided to IPA's other patients, except as required pursuant to
this Agreement. Subscribers shall not be subject to any discrimination
whatsoever by IPA in regards to access to Health Care Services.
3.24 ACCOUNTS PAYABLE SYSTEM - IPA agrees to operate its accounts
payable system in a manner which assures that providers of authorized Medical
Services who are Member Physicians and non-Member Physicians receive payment for
Medical Services rendered to Subscribers within the timeframe specified by
Federal regulation. For a claim which is contested or is not "clean", either
payment must be made to the Member Physician or non-Member Physician, or an
initial determination notice must be sent to the Subscriber within
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sixty (60) calendar days of IPA's receipt of such claim from Member Physicians
and non-Member Physicians. Any denied claim which is afterwards determined by
HCFA as payable and which falls under IPA financial responsibility, must be paid
by IPA upon notice and/or receipt of claim. In the event IPA fails to meet the
payment timelines discussed in this Section 3.24, in addition to exercising any
other remedies it may have under this Agreement, PacifiCare may take actions to
assist IPA in operating its accounts payable system including, but not limited
to, paying IPA's Member Physicians and Non-Member Physicians and charging the
claim amount paid against IPA capitation in addition to an administrative fee
for performing such services. PacifiCare shall notify IPA prior to taking any
action to charge claim amount against IPA capitation and IPA will have 30 days
upon notification to reimburse PacifiCare for valid and undisputed claims paid
on behalf of IPA. If the claim amount for a valid and undisputed claim is not
reimbursed at the end of the thirty (30) day notice period, PacifiCare may
charge the claim amount paid against the IPA capitation as discussed in this
section 3.24. Should IPA dispute such claim or claim amount, the resolution of
such dispute shall be subject to Section 12.16.
3.25 CATASTROPHIC CASE MANAGEMENT - IPA agrees that PacifiCare's
medical director may be involved in the management and coordination of
Catastrophic Cases. IPA will fully assist PacifiCare in providing information
that may be required in determining the need for a transfer of a Subscriber into
PacifiCare's regional centers for the care of Catastrophic Cases including, but
not limited to, prompt notification of known or suspected Catastrophic Cases.
Detailed procedures for Catastrophic Case management will be mutually agreed
upon by the parties based upon IPA's and PacifiCare's determination of the
Subscriber's transferability. Except in unusual circumstances, regional centers
for care of Catastrophic Cases shall be sought within the IPA Service Area and
surrounding area.
3.26 CAPACITY REPORTING - IPA will provide to PacifiCare, at the
earliest possible time, notice of any significant changes in the capacity of IPA
to provide or arrange for the Medical Services contemplated by this Agreement
(e.g., addition or deletion of Member Physicians or Specialist Physicians),
including a ninety (90) day written notice in the event IPA is unable to
properly service additional Subscribers. IPA shall still be obligated to provide
or arrange for Health Care Services to Subscribers who are with employer groups
whom PacifiCare had agreed to enroll prior to ninety (90) days from the
effective date of the written notice. PacifiCare shall provide IPA, upon IPA's
request, current marketing information within a reasonable period for purposes
of determining IPA capacity.
3.27 REPRESENTATION OF IPA MEMBER PHYSICIANS - IPA agrees to represent
its Member Physicians in matters pertaining to the provision of Medical Services
under this Agreement, and that it has
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obtained written consent to such representation from its Member Physicians.
3.28 PERFORMANCE OF MEMBER PHYSICIANS - IPA agrees: (i) to develop
methods for discussion of performance with its Member Physicians, (ii) to assure
correction of performance of its Member Physicians consistent with the
provisions of this Agreement and state and federal law applicable to the Secure
Horizons Medical and Hospital Plan, and (iii) to resolve Conformance Requests.
3.29 WITHDRAWAL OF AN IPA FACILITY - In the event IPA seeks to
withdraw one or more of the IPA Facilities listed in Attachment F from providing
or arranging for Medical Services to Subscribers under this Agreement, IPA must
notify PacifiCare of such withdrawal in writing at least one hundred and eighty
(180) days prior to the effective withdrawal date; after the effective date of
withdrawal, IPA shall still be responsible to provide or arrange for Health Care
Services to the affected Subscribers at the other IPA Facilities.
3.30 WITHDRAWAL OF A MEMBER PHYSICIAN/SPECIALIST PHYSICIAN - In the
event IPA seeks to withdraw one or more Member Physicians or Specialist
Physicians from providing or arranging Health Care Services to Subscribers under
this Agreement, IPA must notify PacifiCare of such withdrawal in writing at
least sixty (60) days prior to the effective withdrawal date. After the
effective date of such withdrawal, IPA shall still be responsible to provide or
arrange Medical Services to the affected Subscribers with the other Member
Physicians (Specialist Physicians).
4. DUTIES OF PACIFICARE
4.01 ADMINISTRATION - PacifiCare agrees to perform all necessary
administrative, accounting, enrollment and other functions consistent with the
administration of the Secure Horizons Medical and Hospital Plan and this
Agreement.
4.02 BENEFIT INFORMATION - PacifiCare agrees to apprise all
Subscribers concerning the type, scope and duration of benefits and services to
which such person is entitled under the Secure Horizons Medical and Hospital
Plan.
4.03 ASSIST IPA - PacifiCare agrees to assist and cooperate with IPA
in the development and initial implementation of procedures necessary to carry
out the intent of this Agreement.
4.04 ADMINISTRATION OF PAYMENTS - PacifiCare agrees to transmit
Capitation Payments and other payments to IPA in accordance with the terms and
procedures set forth in this Agreement.
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4.05 STATISTICAL INFORMATION AND PROVISION OF DATA - PacifiCare agrees
to provide IPA with management information and data reasonably necessary to
carry out the terms and conditions of this Agreement and for the operation of
the Secure Horizons Medical and Hospital Plan, including semi-monthly
Eligibility Lists and monthly capitation worksheets. Furthermore, PacifiCare
shall provide, upon request, quarterly reports reflecting the utilization of
Health Care Services rendered by IPA.
4.06 SERVICES RENDERED TO INELIGIBLE SUBSCRIBERS - PacifiCare
agrees to reimburse IPA for those Medical Services set forth in Attachment A2
provided to an ineligible Subscriber if the Subscriber was listed as eligible
on the most current eligibility list provided to IPA by PacifiCare. If
PacifiCare is in receipt of a billing to such ineligible Subscriber from IPA
and proof of having sent the Subscriber or the Subscriber's legal guardian
two (2) bills no less than thirty (30) days apart, PacifiCare will reimburse
IPA [ ** ] of IPA's ordinary and customary fee-for-service rates then in
effect for those Medical Services rendered but no greater than [ ** ] of
the still uncollected balance. If subsequent to payment by PacifiCare, IPA
receives any payment from another source for the services, then IPA shall
reimburse PacifiCare up to the amount previously received from PacifiCare. If
a Subscriber becomes ineligible for benefits under the Secure Horizons
Medical and Hospital Plan after IPA or Member Physicians have begun treatment
of the Subscriber (provided the Subscriber is not hospitalized at the time of
becoming ineligible), IPA shall be entitled to make all subsequent charges
for its services directly to the Subscriber. If the Subscriber is
hospitalized at the time of becoming ineligible, IPA shall be entitled to
make charges directly to the Subscriber for future medical services, only for
services provided after the Subscriber is discharged from such hospital
treatment.
4.07 DISSEMINATION OF INFORMATION - Except as provided above in
Section 3.20, prior to listing or otherwise referencing IPA in any promotional
or advertising brochures, media announcements or other advertising or marketing
material, PacifiCare shall first obtain the prior consent of IPA, such consent
not to be unreasonably withheld.
5. COMPENSATION
5.01 CAPITATION PAYMENTS - PacifiCare shall make monthly Capitation
Payments to IPA as outlined in Attachment C, attached hereto and incorporated in
full herein by reference, due and payable on the tenth (10th) day of the month
for the current month's Medical Services.
5.02 ADDITIONAL PAYMENTS - Pacificare and IPA agree to provide
payments to each other in accordance with the terms of the
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following programs, if applicable: Hospital Incentive Program, Individual
Stop-Loss Program, Benefit Withhold Incentive Program and Mammography
Reimbursement Program as specified in Attachments A, A3, E and C
respectively, incorporated in full herein by reference.
To the extent that each party owes an amount to the other party in the
risk programs noted above, IPA agrees that PacifiCare shall combine the results
of all applicable risk programs such that one aggregate payment is payable to or
receivable from IPA. A fully detailed accounting of the results of each program
shall accompany the aggregate payment or notice of amount due.
5.03 ADEQUACY OF COMPENSATION - Except as otherwise provided herein,
IPA shall accept the payments specified in this Agreement as payment in full for
all Medical Services provided Subscribers during each month for which such
payments are to be received by IPA from PacifiCare. In the event PacifiCare
fails to make any payments to IPA as provided herein, whether from PacifiCare's
insolvency or otherwise, Subscribers shall not be liable to IPA or its Member
Physicians under any circumstances for Medical Services. Surcharges for Medical
Services provided or arranged by IPA or Member Physicians are prohibited; upon
notice of the existence of any Surcharge, PacifiCare will take appropriate
action consistent with the terms of this Agreement to eliminate such Surcharges.
5.04 REINSURANCE - The purpose of the reinsurance program described
herein is to limit IPA's risk for Hospital Services under the Hospital
Control Program to a specified amount per Subscriber per Year (the
"Reinsurance Deductible") in return for a payment of a Reinsurance Premium.
For the 1996 calendar year, the Reinsurance Deductible shall be [ ** ] per
Subscriber per Year and the Reinsurance Premium shall equal [ ** ] of the
Monthly HCFA Payment per Subscriber per month. Notwithstanding Section 12.12,
PacifiCare may amend the Reinsurance Premium and Reinsurance Deductible on an
annual basis effective each January 1 by providing sixty (60) days prior
written notice to IPA.
Reinsurance claims shall be calculated at the Cost of Care values as set forth
in Attachment A5, Sections c.1, c.2, and c.3 of this Agreement.
5.05 MOST FAVORED PLAN - IPA represents that, during the term of this
Agreement, the compensation rates payable under this Agreement are and shall
continue to be equal to or less than the rates charged under other IPA
agreements for the provision of services to enrollees of health care service
plans ("Competing Plan Agreements"), when such rates are adjusted to reflect
different risk levels and programs under the Competing Plan Agreements (the
"Adjusted Rates"). If at any time IPA agrees or has agreed to accept lower
Adjusted Rates under a Competing Plan Agreement than
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the rates set forth in this Agreement, or any amendment hereto, IPA shall
immediately notify PacifiCare in writing of such agreement and the applicable
lower Adjusted Rates. Within thirty (30) days thereafter, PacifiCare and IPA
shall meet to discuss implementation of new compensation rates under this
Agreement which shall be equal to or less than the Adjusted Rates accepted under
the Competing Plan Agreement. If the parties fail to agree to implementation
procedures for the new rates within thirty (30) days of the effective date of
the Competing Plan Agreement, the compensation rates under this Agreement will
be lowered upon notice to IPA from PacifiCare to equal the lower Adjusted Rate.
The new compensation rates shall be effective the date the lower Adjusted Rates
become effective under the Competing Plan Agreement. IPA's failure to notify
PacifiCare of the acceptance of lower Adjusted Rates from a Competing Plan shall
be grounds for termination of this Agreement by PacifiCare pursuant to Section
7.01.02(d)."
Notwithstanding the above, this Section 5.05 shall have no effect for any period
of time in which the total number of Members enrolled in the IPA Service Area in
the Secure Horizons Health Plan (including Members assigned to IPA and
Participating Medical Groups other than IPA) exceeds forty percent (40%) of the
total number of Medicare eligible persons in the IPA Service Area. The number of
PacifiCare Members shall be determined by PacifiCare utilizing current
enrollment data. The number of Medicare eligible persons in the IPA Service Area
shall be calculated by either party utilizing independent data acceptable to
both parties. Either party may dispute the other's calculation of the number of
Medicare eligible persons or IPA may dispute PacifiCare's determination of the
number of PacifiCare Members by providing written notice to the appropriate
party. Upon the receipt of such notice, the parties shall select a third party
acceptable to both PacifiCare and the IPA who shall be charged with the
responsibility of determining the number of Medicare eligible persons and/or the
number of PacifiCare Members, as applicable.
Procedures for determining what constitutes Adjusted Rates and procedures for
auditing the provisions of this Section 5.05 shall be mutually agreed upon by
PacifiCare and IPA, through consultation with a mutually agreed to independent
third party. Such procedures will include audit by a mutually agreed to
independent third party auditor.
6. TERM OF AGREEMENT
6.01 TERM - The term of this Agreement shall be for fifty-four (54)
months and the commencement date shall be July 1, 1996. A "Year" under this
Agreement shall begin on January 1 and end on December 31. The term of this
Agreement shall be automatically extended for one (1) year on each successive
January 1 unless either party provides the other with written notice of such
party's
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intention not to extend the term no less than one hundred eighty (180) days
prior to the January 1 renewal date or until this Agreement is appropriately
terminated by either party as provided in Section 7 herein. The parties
understand that on each successive January 1, a term of sixty (60) months will
be in effect unless the Agreement has been terminated pursuant to Section 7 or
unless notice of non-renewal has been provided as set forth in this Section
6.01. Upon renewal of the Initial Term and any subsequent term, the applicable
rates of compensation specified in this Agreement shall apply unless otherwise
agreed upon by the parties in writing.
7. TERMINATION
7.01 TERMINATION OF AGREEMENT WITH MATERIAL CAUSE - Either party, as
appropriate, may terminate this Agreement for material cause as set forth in
Sections 7.01.01 or 7.01.02 hereof subject to the notice and cure periods set
out in Section 7.02 hereof, if applicable. In the event either party seeks to so
terminate this Agreement, the terminating party shall give written notice of
termination stating the actions of the other party constituting material cause
for termination.
7.01.01 CAUSE FOR TERMINATION OF AGREEMENT BY IPA - The
following shall constitute cause for termination of this Agreement by IPA:
a. NON-PAYMENT - Failure by PacifiCare to pay
Capitation Payments due to IPA hereunder within twenty (20) days of the
Capitation Payment due date or failure by PacifiCare to make any other payments
due to IPA hereunder within forty-five (45) days of any such payment's due date.
b. REVOCATION OF CERTIFICATION OR LICENSE -
Revocation by the State of California or the United States Government of any
certification or license of PacifiCare necessary for the performance of this
Agreement.
c. BREACH OF MATERIAL TERM AND FAILURE TO CURE -
PacifiCare's breach of any material term, covenant, or condition and subsequent
failure to cure said breach as provided in Section 7.02 hereof. The written
notice of termination shall contain specific reference as to the breaches which
have caused such failure.
7.01.02 CAUSE FOR TERMINATION OF AGREEMENT BY PACIFICARE -
The following shall constitute cause for termination of this Agreement by
PacifiCare:
a. FINANCIAL FAILURE OF IPA - PacifiCare's
reasonable determination of IPA's anticipated inability to provide or arrange
for Health Care Services as described herein due to the
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likelihood of IPA's lack of financial resources, other than due to PacifiCare's
non-payment of amounts due IPA hereunder. IPA shall have the opportunity to
dispute such determination by PacifiCare by providing reasonable evidence and
assurances of financial stability and capacity to perform under this Agreement.
b. FAILURE TO PROVIDE QUALITY MEDICAL SERVICES -
Failure to maintain the standards set forth in Section 3.02 of this Agreement
and such failure is not corrected consistent with the provisions of Section
7.02. The written notice of termination shall contain specific reference to the
breaches which have caused such failure. PacifiCare reserves the right to
withdraw from IPA all or part of its Subscribers if the Medical Services are not
being properly provided or arranged for pursuant to this Agreement and such
deficiencies are not corrected consistent with the provisions of Section 7.02 of
this Agreement.
c. FAILURE TO PROVIDE SERVICES - Failure to
provide or arrange Health Care Services to Subscribers as provided herein. The
written notice of termination shall contain specific reference as to the
breaches which have caused such failure.
d. BREACH OF MATERIAL TERM AND FAILURE TO CURE -
IPA's breach of any material term, covenant or condition of the Agreement and
subsequent failure to cure said breach as provided in Section 7.02 of this
Agreement. The written notice of termination shall contain specific reference to
the breaches which have caused such failure.
7.02 CURING PERIOD AND TERMINATION DATE - The party receiving the
written notice of termination shall have thirty (30) days from the receipt of
said notice to cure or otherwise eliminate the circumstances constituting cause
for termination. If said party fails to cure or eliminate the circumstances
constituting cause for termination within a thirty (30) day period, this
Agreement shall terminate at the end of the thirty (30) day period.
7.03 REPAYMENT UPON TERMINATION - Within one hundred and eighty (180)
days of the effective date of termination of this Agreement as provided herein,
an accounting shall be made by PacifiCare of monies due and owing either party
and payment shall be forthcoming by the appropriate party to settle such balance
within thirty (30) days of such accounting. Either party may request an
independent audit of such PacifiCare accounting by a mutually acceptable
independent certified public accountant and such audit shall be equally paid for
by both parties. The parties agree to abide by the findings of such independent
audit and appropriate payment by the appropriate party, if any, shall be made
within thirty (30) days of such independent audit.
7.04 TERMINATION NOT AN EXCLUSIVE REMEDY - Any termination by either
party pursuant to this Section 7 is not meant as an
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exclusive remedy and such terminating party may seek whatever action in law or
equity as may be necessary to enforce its rights under this Agreement.
8. RECORDS, DATA COLLECTION, CITATIONS AND RIGHT TO INSPECT RECORDS
8.01 RECORDS - IPA shall maintain and provide such records and
information as reasonably necessary for PacifiCare to properly administer the
Secure Horizons Medical and Hospital Plan and consistent with state and federal
law. The duties imposed by this Section 8.01 shall not terminate upon
termination of this Agreement, whether by rescission or otherwise, and shall be
in effect until the completion of the phase-out period pursuant to Section 3.09.
The cost for preparation and submission of this data shall be borne solely by
IPA.
IPA shall maintain records and provide such information to PacifiCare
or the California Commissioner of Corporations as may be necessary for the
compliance by PacifiCare with the provisions of state and federal law and
regulations promulgated thereto, and such records shall be retained by IPA for
at least two (2) years following the provision of Medical Services. This
obligation is not terminated upon termination of this Agreement, whether by
rescission or otherwise.
8.02 CONFIDENTIALITY OF RECORDS - IPA shall safeguard the
confidentiality of Subscriber health records and treatment in accordance with
all state and federal laws, including, without limitation, the Privacy Act, as
implemented by 45 Code of Federal Regulations 5(b) and the regulations
promulgated thereunder.
8.03 DATA COLLECTION - IPA shall maintain and provide to PacifiCare,
on a timely basis, the utilization data more particularly described in the
PacifiCare Provider Policy and Procedures Manual for the effective management
of PacifiCare's health care delivery system. PacifiCare shall impose a
penalty for failure to submit such data, which was reasonable within the
control of IPA to submit , with ninety (90) days of the date of services by
permanently withholding [ ** ] of IPA's monthly Capitation for each month
for which IPA fails to submit such data.
8.04 RIGHT TO INSPECT - IPA shall provide access at reasonable times
upon demand by PacifiCare, or any governmental regulatory agency responsible for
the administration of health care service plans, to inspect facilities,
equipment, books and records relating to the performance of this Agreement,
including, without limitation, Subscriber patient records, financial records
pertaining to the cost of operations and income received by IPA for
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Medical Services rendered to Subscribers. Unless otherwise required by law,
PacifiCare shall provide IPA with a seventy-two (72) hour prior written notice
of any such inspection.
8.05 CITATIONS - IPA shall notify PacifiCare in writing of each and
every report of any governmental or quasi-governmental agency with jurisdiction
over IPA which contains any citation of IPA for failure to meet any governmental
or quasi-governmental standard on or after the Commencement Date of this
Agreement.
8.06 FINANCIAL STATEMENTS - IPA shall provide to PacifiCare within
forty five (45) days of the end of each calendar quarter copies of its quarterly
financial statements, which shall include a balance sheet, statement of income
and a statement of cash flow (the "financial statements") prepared in accordance
with generally-accepted accounting principles. Such quarterly statements shall
be certified by the chief financial officer of IPA as accurately reflecting the
financial condition of IPA for the period indicated. In addition, IPA shall
provide to PacifiCare, within forty five (45) days of the end of each calendar
year, copies of its audited annual financial statements.
8.07 TRANSFER OF MEDICAL RECORDS UPON TERMINATION - Upon the effective
date of termination of this Agreement and, if applicable, upon the expiration of
the phase-out period set forth in Section 3.09, at PacifiCare's request, IPA
shall copy all active PacifiCare Subscriber patient medical files in IPA's
possession and forward such files to another provider of Medical Services
designated by PacifiCare, provided such copying and forwarding is not otherwise
objected to by Subscribers. The copies of such medical files may be in summary
form. The cost of copying the patient medical files shall be borne by IPA. IPA
shall cooperate with PacifiCare in maintaining the confidentiality of such
confidential and proprietary information and trade secrets at all times.
9. EXCLUSIVITY
9.01 UTILIZATION OF IPA BY PACIFICARE - Nothing in this Agreement shall
be construed to require PacifiCare to assign any minimum or maximum number of
Subscribers to IPA, nor to require PacifiCare to utilize the Medical Services of
IPA for any or all Subscribers in the IPA Service Area.
9.02 IPA COVENANTS NOT TO COMPETE - In recognition of PacifiCare's
desire to enhance the quality of care provided to its Subscribers by ensuring
continuity of care, better control and standardization in procedures and
full-time availability of services, IPA agrees that it shall not enter into any
agreements, other than those currently in effect, to provide or arrange Health
Care Services to Medicare beneficiaries who are Subscribers or enrollees of a
health maintenance organization, competitive medical plan or other similar
entity that contracts with HCFA on a risk
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basis. IPA recognized that the consideration for this covenant not to compete is
PacifiCare's financial commitment to the development of its Secure Horizons
Medical and Hospital Plan and this Agreement, and PacifiCare's commitment to
arrange for cost-effective Health Care Services to its Subscribers while
maintaining continuity and quality of care.
9.02.01 MATERIALITY OF COVENANT NOT TO COMPETE - IPA
agrees that its obligations under this Section 9.02 are material terms for
purposes of the termination provision of this Agreement.
9.02.02 VALUE OF COVENANT NOT TO COMPETE - In recognition
of IPA's covenant not to compete, PacifiCare agrees to increase the monthly
capitation payment as noted in Attachment C.
9.03 STRATEGIC ALLY - PacifiCare has designated IPA as a Strategic
Ally. Such designation means that PacifiCare and IPA will work cooperatively
toward mutual goals of membership growth, member satisfaction, administrative
efficiency and clinical process improvement. In addition, PacifiCare and IPA
agree to the additional covenants and commitments set forth below which shall
remain in effect during the period of IPA's status as a Strategic Ally.
9.03.01 PACIFICARE'S STRATEGIC ALLIANCE OBLIGATIONS - To
support IPA as a Strategic Ally, PacifiCare agrees as follows:
a. CLINICAL RESEARCH SUPPORT. PacifiCare will support
IPA through the provision of clinical research support, including
development and reporting of outcomes studies and provider profile
comparison data.
b. STRATEGIC PLANNING. PacifiCare shall support joint
strategic planning with IPA as mutually agreed upon between PacifiCare
and IPA to identify and develop plans for achievement of IPA's business
development goals.
c. SYSTEM INTEGRATION. PacifiCare will support
evaluation and implementation of technical and information system
integration to ensure compatibility between PacifiCare and IPA
information systems as mutually agreed by PacifiCare and IPA.
d. INVOLVEMENT IN MARKETING. PacifiCare will involve
IPA in planning and implementation of PacifiCare's marketing efforts in
the IPA Service Area as mutually agreed by PacifiCare and IPA.
e. RIGHT OF FIRST REFUSAL - PacifiCare agrees to
provide IPA with a right of first refusal in the development
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of PacifiCare's network of Participating Medical Groups under the terms
set forth below:
i. For the PacifiCare Group Commercial Plan and the
Secure Horizons Health Plan, PacifiCare shall not contract with any
additional Participating Medical Groups in the IPA Service Area other
than those under contract with PacifiCare as of the Strategic Alliance
Effective Date, subject to the limitations in subsections (iii) and
(iv) below.
ii. For the PacifiCare Individual Commercial Plan, the
PacifiCare Workers' Compensation Plan, and the PacifiCare Limited
Network Commercial Plan, PacifiCare shall not contract with other
Participating Medical Groups in the IPA Service Area, except for other
Participating Medical Groups also identified as Strategic Allies by
PacifiCare as of the Strategic Alliance Effective Date, or at any time
thereafter, and subject to the limitations in subsections iii) and (iv)
below.
iii. In the event PacifiCare determines that it needs
to expand its Participating Medical Group network for any PacifiCare
Health Plan product in the IPA Service Area to meet enrollment demands
or competitive pressures, PacifiCare shall notify IPA in writing of the
need for additional capacity and the terms for providing such capacity.
IPA shall have sixty (60) days from receipt of PacifiCare's notice to
develop a mutually agreed upon plan to provide such additional capacity
within a mutually agreed upon period of time. If IPA is unable to
develop a mutually agreed upon plan to realize the needed capacity
within the sixty (60) day notice period, or if IPA does not meet the
mutually agreed upon time lines for development, PacifiCare shall be
released of its obligations as described in this Section 9.03.01(e) and
the subsections hereto.
iv. PacifiCare shall not be restricted from
maintaining contracts with Participating Medical Groups under contract
with PacifiCare as of the Strategic Alliance Effective Date ("Existing
PMGs") and Existing PMGs also identified as Strategic Allies by
PacifiCare shall not be restricted from adding additional facilities or
expanding their coverage area under their PacifiCare services
agreements. Notwithstanding the above, IPA shall be restricted from
adding additional Prospect Medical Group, Inc. Networks other than
those which are stated in Attachment F.
9.03.02 MAINTENANCE OF STRATEGIC ALLY STATUS. In order to
maintain Strategic Ally status, IPA must comply with the following:
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a. IPA will maintain agreements with PacifiCare for the provision
of services to Subscribers enrolled in the PacifiCare Group Commercial Plan and
the Secure Horizons Health Plan and will continue to accept additional
Subscribers under both of these plans.
b. IPA will agree to participate in additional plans and products
offered by PacifiCare, including, without limitation, the PacifiCare Limited
Network Commercial Plan, the PacifiCare Workers' Compensation Plan, PacifiCare
point-of-service plans, and PacifiCare preferred provider organization plans.
c. IPA will maintain compliance with the terms of the Agreement,
including without limitation, Section 8 regarding Records, Data Collection,
Citations and Right to Inspect Records.
d. IPA will, no later than July 1, 1996, begin transmitting to and
accepting electronic communications from PacifiCare of Capitation Payment checks
and reports, Eligibility Lists and encounter data and reports.
e. IPA will achieve a member satisfaction level of at least
[ ** ] for both IPA and, on average, for Member Physicians as measured by
PacifiCare's Member Satisfaction Tracking System report for calendar year
1996. Thereafter, IPA will work cooperatively with PacifiCare to achieve an
improvement in member satisfaction levels under PacifiCare's Member
Satisfaction Tracking System for both the IPA and, on average, for Member
Physicians at a rate of [ ** ] per year for the period 1996 through 1998.
The PacifiCare Member Satisfaction Tracking System will be made available to
Provider for on-site review upon the request of Provider. The PacifiCare
Member Satisfaction Tracking System shall be considered proprietary
information and shall be maintained confidential by IPA under the terms
specified in Section 12.04.
f. IPA will work cooperatively and diligently with PacifiCare to
identify areas of redundant administration and to eliminate such redundancies.
g. IPA will ensure that all of IPA's Primary Care Physicians
participate as members, partners or shareholders of IPA to the exclusion of all
other organized physician groups.
h. IPA will ensure that an adequate number of Primary Care
Physicians are open, available and accessible for the acceptance of new
Subscribers in order to meet PacifiCare's marketing and regulatory compliance
needs in the IPA Service Area.
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9.03.03 TERMINATION OF STRATEGIC ALLY STATUS. In the event
that either PacifiCare or IPA ceases to meet any of the obligations specified
in Section 5.05 or Section 9.03 and PacifiCare or IPA fails to come into
compliance with such requirements within the notice period specified below,
the Strategic Ally status shall terminate at the end of the notice period.
The notice period shall be 30 days from the receipt of written notice by
either party. In addition, Strategic Ally status shall be terminated
immediately in the event that PacifiCare acquires, is acquired by, or merges
with another health care service plan and this provision would place the new
or surviving entity in breach of any other contract or in violation of any
state or federal law. PacifiCare may also terminate IPA's Strategic Ally
status upon thirty (30) days notice to IPA if IPA merges with or into another
entity, regardless of whether IPA is the surviving entity, or in the event of
a change in ownership of more than [ ** ] of the shares of IPA. Upon the
termination of Strategic Ally status, PacifiCare's obligations as set forth
in Section 9.03.01 above shall immediately terminate. Termination of
Strategic Ally status shall be the sole remedy of PacifiCare and IPA in the
event of breach by IPA or PacifiCare of the obligations set forth in this
Section 9.03.
9.03.04 ADDITION OF NEW IPA FACILITIES. IPA Facilities added
outside the IPA Service Area after the Strategic Alliance Effective Date shall
not be granted Strategic Ally status except as specifically agreed in writing by
PacifiCare and IPA.
9.03.05 IPA EXCLUSIVITY - As a condition to maintaining
Strategic Ally status and in recognition of PacifiCare's desire to enhance the
quality of care provided to its Subscribers by ensuring continuity of care,
better control and standardization in procedures and full-time availability of
services, IPA agrees that it shall not enter into any new agreements, other than
those currently in force with an entity of the St. Jude Network, to provide or
arrange Medical Services to Medicare beneficiaries who are subscribers or
enrollees of a health maintenance organization, competitive medical plan or
other similar entity that contracts with HCFA on a risk basis ("Competitor Plan
Enrollees").
10. GOVERNING LAW AND DISPUTE RESOLUTION
10.01 GOVERNING LAW - This Agreement and the rights and obligations of
the parties hereunder shall be construed, interpreted, and enforced in
accordance with, and governed by, the laws of the State of California, and the
United States and all regulations promulgated pursuant thereto.
Any provisions required to be in this Agreement by any of the above
Acts and regulations shall bind PacifiCare and IPA whether or not expressly
provided in this Agreement.
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10.02 DISPUTES BETWEEN IPA AND SUBSCRIBER NOT GOVERNED BY AGREEMENT -
Any controversies or claims between IPA and Subscriber arising out of IPA's
performance of this Agreement are not governed by this Agreement. IPA and
Subscriber may seek any appropriate legal action to resolve such controversy or
claim deemed necessary.
In the event of a dispute between IPA and a Subscriber and upon mutual
agreement between IPA and such Subscriber, PacifiCare agrees to make available
the Subscriber Grievance Resolution Process described in the Secure Horizons
Medical and Hospital Plan Agreement for resolution of such dispute. In such
instance, the decision of the PacifiCare Subscriber Satisfaction Committee and
Board of Directors shall not be binding upon the parties except upon agreement
between IPA and the Subscriber. Nor shall such grievance be subject to binding
arbitration except upon agreement between the parties. Should IPA and Subscriber
fail to resolve the grievance, IPA and Subscriber may seek any appropriate legal
action deemed necessary by such party.
10.03 PAYMENT DISPUTES INVOLVING IPA - In the event IPA fails to make a
payment to a Specialist Physician within sixty (60) days of the submission of
the bill by Specialist Physician to IPA and the validity and the amount of the
submitted bill are undisputed, PacifiCare may, in its sole and absolute
discretion, elect to pay the Specialist Physician on behalf of IPA and deduct
such payment from IPA's next monthly Capitation Payment.
Should a dispute concerning a claim for payment for Medical Services
rendered to Subscribers arise between IPA and a Specialist Physician who is a
Participating Medical Provider, IPA or the Specialist Physician may submit a
written complaint to PacifiCare. The complaint shall describe the disputed
claims and the basis for the amounts claimed and include the applicable written
agreement between IPA and the Specialist Physician. PacifiCare shall
investigate the complaint and make a determination of whether or not the claim
is valid and should be paid. In the event PacifiCare determines that IPA owes
any amount to Specialist Physician, IPA shall make such payment within thirty
(30) days of PacifiCare's termination. If IPA fails to pay the amount due within
this thirty (30) day period, PacifiCare may deduct the amount owed from IPA's
next monthly capitation payment. This amount will temporarily be placed in an
account (the "Claims Dispute Account") which shall be established by PacifiCare.
If IPA or Specialist Physician wishes to contest PacifiCare's determination,
either may do so by initiating an action for binding arbitration and notifying
PacifiCare of such initiation within thirty (30) days of PacifiCare's
determination. If IPA or Specialist Physician fails to request arbitration
within thirty (30) days or if the arbitration affirms PacifiCare's decision that
amounts are owing from IPA to Specialist Physician, PacifiCare shall release
from the Claims Dispute Account the amount owing to Specialist. If the
arbitration results in a decision that no money or a lesser amount
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than was determined by PacifiCare is owing to Specialist Physician, PacifiCare
shall release to IPA the amounts which were erroneously withheld from IPA's
Capitation Payment.
In the event this Agreement has been terminated prior to PacifiCare's
investigation and written determination and PacifiCare's investigation results
in a determination that IPA owes money to Specialist Physician, PacifiCare may,
in its sole and absolute discretion, elect to pay Specialist Physician on behalf
of IPA and seek reimbursement from IPA.
11. NOTICE
11.01 NOTICE - Any notice required to be given hereunder shall be in
writing and either delivered personally or sent by registered or certified mail,
return receipt requested, to either PacifiCare or IPA at the addresses listed
below, or at such other addresses as either PacifiCare or IPA may hereafter
designate to the other:
TO: PacifiCare, Inc.
P. O. Box 6006
Cypress, California 90630-0006
Attention: President
TO IPA: Prospect Medical Group, Inc.
18200 Yorba Linda Blvd.
Yorba Linda, CA 92686
Attention: Administrator
All notices shall be deemed given on the date of delivery if delivered
personally or on the day three (3) business days after such notice is deposited
in the United States mails, addressed and sent as provided above.
12. MISCELLANEOUS
12.01 PROTECTION OF SUBSCRIBER - IPA may not impose any limitations on
the acceptance of Subscribers for care or treatment that it does not impose on
other patients of the IPA. Neither PacifiCare, IPA nor Hospital may request,
demand, require or seek directly or indirectly the transfer, discharge, or
removal of any Subscriber for reasons of Subscriber's need for, or utilization
of, Medically Necessary Health Care Services, except in accordance with the
procedures established for such action. IPA shall not refuse or fail to provide
Medically Necessary Medical Services to any Subscriber. Procedures for
removal, discharge or transfer of Subscribers shall be mutually agreed upon
between IPA and PacifiCare consistent with the Secure Horizons Medical and
Hospital Plan.
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12.02 OTHER AGREEMENTS - Nothing in this Agreement shall prevent
PacifiCare and IPA from contracting with each other for provision of services
not covered by this Agreement.
12.03 REFUSAL BY PHYSICIAN - If IPA or any of its Member Physicians
refuses Medical Services to a Subscriber assigned to IPA for any reason
whatsoever, it shall remain the responsibility of IPA to assure that such
Subscriber receives Medical Services consistent with the terms of this
Agreement.
12.04 CONFIDENTIAL AND PROPRIETARY INFORMATION
12.04.01 INFORMATION CONFIDENTIAL AND PROPRIETARY
TO PACIFICARE - IPA acknowledges that all PacifiCare Subscribers participating
in a Secure Horizons Medical and Hospital Plan individually or through an
employer group and receiving Health Care Services shall be Subscribers of
PacifiCare. Subscriber and employer group information shall include, without
limitation, the names, addresses and telephone number of all Subscribers;
member, employer and administrative service manuals and all forms related
thereto; and records, files (other than patient medical files) and lists
contained in IPA and PacifiCare files.
IPA acknowledges that all such information is
confidential and proprietary to PacifiCare and that such Subscriber and employer
group information contains valuable trade secrets of PacifiCare.
All PacifiCare Subscriber agreements and the
information contained therein regarding PacifiCare, IPA, employer groups,
Subscribers or the financial arrangements between a hospital, IPA and PacifiCare
is confidential and proprietary to PacifiCare.
IPA shall maintain all Subscriber information and
other PacifiCare trade secret information confidential. IPA shall not disclose
or use any confidential and proprietary information for its own benefit or gain
either during the term of this Agreement or after the date of termination of
this Agreement; provided, however, that IPA may use the name, address and
telephone number or other medical information of a PacifiCare Subscriber if
Medically Necessary for the proper treatment of such Subscriber or upon express
prior written permission of PacifiCare or the Subscriber.
12.04.02 INFORMATION CONFIDENTIAL AND PROPRIETARY
TO IPA - IPA shall provide PacifiCare with a written description of all
information proprietary to IPA which is confidential and contains trade secrets
of IPA ("IPA Information"). PacifiCare shall maintain IPA Information
confidential. PacifiCare shall not disclose or use any IPA Information for its
own benefit either
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during the term of this Agreement or after the effective date of termination of
this Agreement. Upon termination of this Agreement, PacifiCare shall provide and
return to IPA all IPA Information in its possession in a manner to be specified
by IPA. PacifiCare shall cooperate with IPA in maintaining the confidentiality
of IPA Information at all times.
12.04.03 SOLICITATION OF PACIFICARE SUBSCRIBERS OR
EMPLOYER GROUPS - IPA shall not directly or indirectly engage in the practice of
solicitation or the patronage of PacifiCare's Subscribers or employer groups
without PacifiCare's prior written consent. Solicitation shall mean conduct by
an officer, agent, employee or Member Physician of IPA or its assignee or
successor during the Initial Term or any subsequent term of this Agreement and
continuing for a period of one (1) year after the effective date of termination
of this Agreement which may be reasonably interpreted as designed to persuade
PacifiCare Subscribers to discontinue their Subscriber agreements with
PacifiCare or to continue to receive health care from IPA on a fee-for-service
basis or to encourage PacifiCare Subscribers to participate in the prepaid
health service plan offered by IPA, or any other prepaid health service plan
(the "Solicitation"). The breach of this Section 12.04.03 during any term of
this Agreement shall be grounds for termination of this Agreement pursuant to
Section 7.01.02 of this Agreement.
12.05 CONFIDENTIALITY OF THIS AGREEMENT - To the extent reasonably
possible, each party agrees to maintain this Agreement as a confidential
document and not to disclose the Agreement or any of its terms without the
approval of the other party.
12.06 ASSIGNMENT - This Agreement and the rights, interests, and
benefits hereunder shall not be assigned, transferred, pledged, or hypothecated
in any way by IPA or PacifiCare and shall not be subject to execution,
attachment or similar process, nor shall the duties imposed herein be
subcontracted or delegated without the written consent of the other party.
Notwithstanding, PacifiCare may assign, transfer, pledge or hypothecate this
Agreement and its rights, interests and benefits hereunder to any entity which
has at least majority control of PacifiCare or to any entity of which PacifiCare
has at least majority control.
12.07 INVALIDITY OF SECTIONS OF AGREEMENT - The unenforceability or
invalidity of any paragraph or subparagraph of any section or subsection of this
Agreement shall not affect the enforceability and validity of the balance of
this Agreement.
12.08 WITHDRAWAL OF SUBSCRIBERS BY PACIFICARE - PacifiCare reserves the
right to withdraw from IPA all or part of the Subscribers from IPA whose Health
Care Services are not being properly provided pursuant to this Agreement.
PacifiCare shall provide written notice to IPA of such withdrawal and the
reasons
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therefore. PacifiCare shall then allow IPA thirty (30) days from the date of
such notice to correct deficiencies. If such deficiencies are not corrected to
PacifiCare's satisfaction within said period, PacifiCare may withdraw its
Subscribers as provided in this Section 12.08 and remove IPA's name from
PacifiCare's marketing materials.
12.09 TRANSFER OF SUBSCRIBERS - PacifiCare and IPA shall exercise
reasonable efforts in discouraging Subscriber transfers except at re-enrollment
periods, or when a Subscriber can show just cause for such transfer and
PacifiCare agrees to such transfer. Nevertheless, PacifiCare may require
transfer of Subscribers assigned to IPA for any reason; or, IPA may request
transfer of Subscribers assigned to it by PacifiCare to other IPAs for cause or
if the capacity of IPA is overburdened so that the provision of Medical Services
as required by this Agreement is affected; all such transfers shall be
consistent with the PacifiCare Provider Policies and Procedures Manual.
12.10 CAPTIONS - Captions in this Agreement are descriptive only and do
not affect the intent or interpretation of the Agreement.
12.11 AMENDMENT - This Agreement may be amended or modified only by
mutual written consent of the parties. Notwithstanding the foregoing sentence,
PacifiCare may amend this Agreement upon thirty (30) days written notice to IPA
in order to maintain compliance with applicable federal and state laws;
provided, however, any such amendment which affects a material duty or
responsibility of IPA and has a material adverse economic effect upon IPA as
reasonably demonstrated by IPA to PacifiCare, shall be subject to the provisions
of Section 12.12 below.
12.12 MODIFICATIONS OF THIS AGREEMENT AND/OR PACIFICARE PROVIDER
POLICIES AND PROCEDURES MANUAL AND/OR PACIFICARE HEALTH PLAN - Anything to the
contrary herein notwithstanding, in the event of any material modification of
this Agreement and/or the PacifiCare Provider Policies and Procedures Manual
and/or the Secure Horizons Medical and Hospital Plan that (i) affects a material
duty or responsibility of IPA, and (ii) causes a material adverse economic
effect to IPA, IPA and PacifiCare shall seek to agree to an amendment to this
Agreement which satisfactorily addresses the effect on IPA's material duty or
responsibility and reimburses the material economic detriment caused to IPA. In
the event such an agreement cannot be reached within sixty (60) days after the
date PacifiCare gives IPA written notice of such modification, such modification
shall not be effective.
12.13 TERMS; SECTIONS - Unless otherwise indicated, all terms in any
appropriate attachments, addendums and amendments hereto shall have the same
meaning attributed to such terms in the body of
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this Agreement and references to section numbers are to the appropriate sections
of this Agreement.
12.14 IPA'S AUTHORIZED REPRESENTATIVE - Unless otherwise indicated in
writing to PacifiCare, IPA warrants and authorizes its administrator to act as
its fully authorized representative to represent IPA and Member Physicians in
this Agreement and to receive any and all communications and notices hereunder.
12.15 ATTORNEYS' FEES AND COSTS - If any action at law or suit in
equity is brought to enforce or interpret the provisions of this Agreement or to
collect any monies due hereunder, the prevailing party shall be entitled to
reasonable attorneys' fees and reasonable costs, together with interest thereon
at the highest rate provided by law, in addition to any and all other relief to
which it may otherwise be entitled.
12.16 ARBITRATION - Any controversy, dispute or claim between
PacifiCare and IPA arising out of the interpretation, performance or breach of
this Agreement shall be resolved by binding arbitration at the request of either
party, in accordance with the rules of the American Arbitration Association. The
arbitrators shall apply California substantive law and federal substantive law
where state law is preempted. Civil discovery for use in such arbitration may
be conducted in accordance with the California Code of Civil Procedure and the
California Evidence Code, and the arbitrator selected shall have the power to
enforce the rights, remedies, duties, liabilities, and obligations of discovery
by the imposition of the same terms, conditions and penalties as can be imposed
in like circumstances in a civil action by a superior court of the State of
California. The provisions of California Code of Civil Procedure Sections 1283
and 1283.05 concerning the right to discovery and the use of depositions in
arbitration are incorporated herein by reference and made applicable to this
Agreement.
The arbitrators shall have the power to grant all legal and equitable
remedies and award compensatory damages provided by California law, but shall
not have the power to award punitive damages. The arbitrators shall prepare in
writing and provide to the parties an award including factual findings and the
legal reasons on which the decision is based. The arbitrators shall not have the
power to commit errors of law or legal reasoning, and the award may be vacated
or corrected pursuant to California Code of Civil Procedure Sections 1286.2 or
1286.6 for any such error. The cost of arbitration shall be shared equally by
both parties.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement in
______________________________________, California, on ___________, 1996.
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PACIFICARE, INC.
By: /s/ Chris Wing
--------------------------------
Title: Chris Wing, Vice
President/General Manager
Date:
------------------------------
IPA
By: /s/ Gregg DeNicola
--------------------------------
Title: CFO
Date: 6-11-96
------------------------------
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PACIFICARE
SCHEDULE OF ATTACHMENTS
A. A1. Hospital Services
A2. Medical Services
A3. Individual Stop-Loss Program
A4. Cost of Care
A5. Hospital Incentive Program
B. Secure Horizons Medical and Hospital Subscriber Agreement
C. Compensation
D. PacifiCare Provider Policies and Procedures Manual
F. IPA Facilities
G. Division of Financial Responsibility
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ATTACHMENT A1
HOSPITAL SERVICES
Hospital Services are authorized by IPA, are initially paid by PacifiCare and,
except as otherwise indicated, are the financial responsibility of PacifiCare
and IPA. A summary of Hospital Services includes the following:
1. INPATIENT HOSPITAL CARE - Medically Necessary inpatient
hospital care, as defined by Medicare, but limited to a total
of one hundred fifty (150) days per Subscriber per Year.
Unlimited days of inpatient hospital care shall be provided to
Subscribers, but PacifiCare shall be financially responsible
for days in excess of one hundred fifty (150) days.
Subscriber shall be assigned semi-private units, unless
medical necessity dictates private accommodations. Where the
Subscriber requests private accommodations, not required for
medical purposes, the incremental difference in fee-for-
service rates shall be the responsibility of the Subscriber.
A summary of inpatient care includes:
a. Medical/Surgical Care, Intensive Care, Cardiac Care and other
special care units (including Hospital Services associated with
non-experimental transplants as defined by Medicare);
b. Inpatient psychiatric;
c. Nursing Services, meals, drugs, medications (excluding take-home
medications), blood transfusions;
d. Medical and Surgical supplies and appliances;
e. Inpatient rehabilitation services, such as: inpatient physical,
occupational and speech therapy;
f. Inpatient alcohol and drug treatment and rehabilitation.
2. SKILLED NURSING - Medically Necessary Skilled Nursing Facility
care, as defined by Medicare. Patients shall be assigned
semi-private units, unless medical necessity dictates private
accommodations. Where the Subscriber requests private
accommodations, not required for medical purposes, the
incremental difference in the fee-for-service rates shall be
the responsibility of the Subscriber. Skilled nursing
facilities must be Medicare licensed and approved.
3. TRANSPORTATION EXPENSES - Medicare approved ambulance services
provided within the IPA Service Area for Subscribers. When a
transfer of Subscriber from one facility to another is
authorized by IPA or PacifiCare, the cost of such transfer
shall be a Hospital service. The method of transfer shall be
determined by IPA, but IPA shall coordinate all Subscriber
transfers to or from Hospital with designated Hospital
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personnel. Also included are paramedic services in emergency cases
in the IPA Service Area.
4. HOME HEALTH CARE - As determined to be Medically Necessary, as defined
by Medicare and provided in lieu of hospitalization, as mutually
agreed to by IPA, Hospital and PacifiCare, including any required DME
and IV Therapy Services.
5. HOSPICE CARE - Should be coordinated with Medicare for special
reimbursement provisions.
6. OUTPATIENT SURGERY - Facility and supply charges for
outpatient surgery done either at Hospital or a free-standing
surgery center.
7. END STAGE RENAL DISEASE - Facility charges for inpatient and
outpatient dialysis services for Subscribers who are medically
determined to have End Stage Renal Disease after enrollment in
one of PacifiCare's health plans.
8. OTHER HOSPITAL SERVICES
a. Devices surgically implanted during a hospital confinement or
during an outpatient surgery performed at the Hospital outpatient
surgery center or a free-standing ASC.
b. Treatment programs for outpatient substance abuse as defined by
Medicare.
c. Appealed Services - Hospital Services denied by IPA and
PacifiCare which are found on appeal or arbitration through the
Subscriber grievance resolution process to be Hospital Services
which the Subscriber was entitled to have furnished under the
PacifiCare Secure Horizons health care delivery system.
d. Chemotherapy Drugs (inpatient and outpatient).
e. Self injectable medications
9. HOSPITAL SERVICES EXCLUDE THE FOLLOWING:
a. Durable Medical Equipment, except as provided in paragraphs 5 and
8(a) above.
b. Medical Services in the IPA Service Area as defined by Attachment
A2 hereto.
c. Outpatient prescription drugs, including immunosuppressive drugs.
d. All out-of-IPA Service Area expenses, except those elective
referrals as authorized by IPA. PacifiCare, in conjunction with
IPA, shall make all decisions regarding the duration of a
Subscriber's care at the out-of-IPA Service Area facility and
transfer of the Subscriber to an IPA Service Area facility.
e. Vision materials (lenses and frames) except for those surgically
implanted during cataract surgery.
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f. Anesthesiology services (inpatient and outpatient).
g. Experimental procedures, including any type of procedure not
generally recognized as of value by the medical community and its
societies, as determined by PacifiCare and IPA, in conformance
with state and federal law.
h. Cosmetic Surgery, except when performed to correct or repair the
physical functioning of a body part as a result of a functional
disorder or accidental injury.
i. Inpatient hospital care in excess of one hundred fifty (150) days
per Subscriber per Year, except as provided in Paragraph 1 of
this Attachment A1.
j. Skilled nursing care in excess of one hundred (100) days per
Subscriber per Year, except as provided in Paragraph 2 of this
Attachment A1.
k. Respite Care
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ATTACHMENT A2
MEDICAL SERVICES
I. Medical Services provided in the IPA Service Area are the
financial responsibility of IPA. A summary of Medical
Services includes the following:
1. PHYSICIAN SERVICES - Subscribers shall be entitled to Medically
Necessary covered inpatient and outpatient physician services
included in the PacifiCare's Secure Horizons Medical and Hospital
Plan. A summary of physician services includes the following:
a. IPA Service Area inpatient services (including
anesthesiology services and physician services associated
with non-experimental transplants, as defined by Medicare)
and outpatient physician care.
b. Professional component of inpatient mental health.
c. Outside referrals to consultants including Emergency Room
consultants (not including emergency room charges) .
d. Out-of-IPA Service Area physician services when such Medical
Services are rendered on an elective basis and upon approval
of IPA.
2. OUTPATIENT SERVICES - Such services include, among others:
a. Outpatient pathology and radiology, including MRI and CT
Scans.
b. Outpatient mental health (professional services only) .
c. Short term, Medically Necessary rehabilitation (speech,
physical and occupational) therapy.
d. Health education and social services.
e. Immunizations when determined Medically Necessary by an IPA
Member Physician as recommended by the California Department
of Health Services Adult Immunization Recommendations.
f. Periodic health evaluations.
g. Hearing screening, including audiogram.
h. Allergy testing and treatment, including allergy serum.
i. Home health care, except when provided in lieu of
hospitalization.
j. Lenses and frames required after cataract surgery, except
lenses surgically implanted during an outpatient surgery
performed at Hospital or at a free-standing surgery center.
k. Anesthesiology services.
l. Mammography screening, as defined by state and federal law.
41
<PAGE>
3. DURABLE MEDICAL EQUIPMENT, PROSTHETIC DEVICES AND MEDICAL
SUPPLIES
a. Durable Medical Equipment ("DME") as defined by Medicare.
IPA agrees to provide such devices and aids on an outpatient
basis, determined Medically Necessary.
b. Prosthetic devices, as defined by Medicare, except devices
surgically implanted during a Hospital confinement or
outpatient surgery performed at Hospital or free-standing
surgery center.
c. Medical Supplies - Supplies used in connection with
treatment or to aid in the recovery of a medical condition
when considered a covered expense by Medicare.
4. OTHER SERVICES - Medical Services denied by the Participating
Medical Group and PacifiCare which are found on appeal or
arbitration through the Subscriber grievance resolution process
to be Medical Services which Subscriber was entitled to have
furnished through the Secure Horizons Medical and Hospital Plan.
5. HOSPITAL BASED PHYSICIAN SERVICE - All hospital based physician
services where the physician provides the professional component
of an inpatient hospital based service, the hospital outpatient
surgery center service, or a free-standing surgery center
service. The charges of an anesthesiologist and an emergency room
physician and the professional charges for inpatient and
outpatient dialysis are included as a Medical Service.
6. EMERGENCY SERVICES IN THE IPA SERVICE AREA - IPA Service Area
Emergency Services include emergency room charges and associated
emergency room physician and ancillary charges, inpatient medical
and other Medical Services which may not be delayed until
facilities or physicians of the Hospital or IPA (or alternatives
authorized by IPA) can be used without possible serious effects
to the health of the Subscriber. Such services must be Medically
Necessary Emergency Services.
II. Medical Services exclude the following:
a. Outpatient mental health visits in excess of twenty (20)
visits per Subscriber Year.
b. Outpatient prescription drugs, including immunosuppressive
drugs.
c. Chemotherapy drugs.
d. Out-of-IPA Service Area expenses, except pursuant to
paragraph I(1) (d) above. PacifiCare, in consultation with
IPA, shall make all decisions regarding the
42
<PAGE>
duration of a Subscriber's care at the out-of-IPA Service
Area facility and transfer of the Subscriber to an IPA
Service Area facility consistent with state and federal law.
e. Vision materials (lenses and frames), except following
cataract surgery.
f. Immunizations for foreign travel and unexpected mass
immunizations.
g. Experimental procedures, including any type of procedure not
generally recognized as of value by the medical community
and its societies, as determined by PacifiCare in accordance
with state and federal law and in connection with IPA.
h. Cosmetic Surgery, except when performed to correct or repair
the physical functioning of a body part as a result of a
functional disorder or an accidental injury.
i. Respite Care
43
<PAGE>
ATTACHMENT A3
INDIVIDUAL STOP-LOSS PROGRAM
(THIS PROGRAM NOT APPLICABLE)
44
<PAGE>
ATTACHMENT A4
COST OF CARE
For purposes of this Agreement, the Cost of Care for Medical Services provided
or arranged by IPA to Subscribers shall equal:
a) For services provided to Subscribers by Member Physicians who practice
at IPA Facilities, [ ** ] the Medicare Locality Fee Schedule for
Participating Providers as published by the Part B carrier.
b) For services provided to Subscribers by Specialist Physicians or
Outside Providers, [ ** ] of the fees actually paid by IPA.
General guidelines and special situations:
1. Services provided by IPA which are not a benefit, as specified in the
Subscriber's Secure Horizons Medical and Hospital Agreement, will not
be considered a part of Cost of Care.
2. The Cost of Care of Anesthesia Professional Services rendered by IPA
shall be set at [ ** ] of usual and customary charges. The Cost of
Care for Anesthesia Professional Services rendered through an outside
referral or reciprocity referral shall be set at the [ ** ] of usual
and customary charges, whichever is lower.
3. Any Medical Services provided where payment is considered collectible
through the coordination of benefits, third-party liability, Worker's
Compensation, or any other source including Copayments, shall not be
included in the Cost of Care. If, at a later date, these claims are
not collectible, or only partially collectible, then these services
will be included in the relevant programs, based on the Cost of Care
calculation cited above.
45
<PAGE>
ATTACHMENT A5
UTILIZATION CONTROL PROGRAM
As an incentive for the cost effective provision of Hospital Services,
In-Area Emergency Services and other selected services, PacifiCare and IPA shall
establish a Utilization Control Program. The Utilization Control Program shall
utilize a Withhold Amount, as defined below, and shall be calculated by
comparing the Budget to the Expenses, as such terms are defined below.
A. WITHHOLD AMOUNT - PacifiCare shall withhold from IPA's monthly
Capitation Payment an amount equal to [ ** ] of the Monthly HCFA Payment to
apply to IPA's share of Budget Deficits, if any. PacifiCare may prospectively
adjust the Withhold Amount on a quarterly basis based upon the results of the
Utilization Control Program calculation. If the Agreement is terminated or
non-renewed pursuant to Section 6 or Section 7 of the Agreement, PacifiCare
may choose to adjust the Withhold Amount at the time that the notice of
termination or non-renewal is served.
B. BUDGET - The Budget shall equal the sum of 1. and 2. below:
1. For Hospital Services, [ ** ] of the Monthly HCFA Payment for those
Subscribers designating IPA as their Participating Medical Group ("IPA
Subscribers"), MINUS [ ** ] of the Monthly HCFA Payment in
consideration of the Reinsurance Program as set forth in subsection
(c) (4) herein.
2. For outpatient prescription drugs and other Benefit Withhold Services,
[ ** ] of the monthly revenue received from HCFA for Subscribers who
have designated IPA as their Participating Medical Group, plus
[ ** ] per member per month rebate for drugs ("Drug Rebate") ordered
through Prescription Solutions during any calendar year.
Notwithstanding Section 12.12, PacifiCare may amend the Drug Rebate on
an annual basis effective each January 1 by providing sixty (60) days
prior written notice to IPA.
C. EXPENSES - Expenses shall be valued as the total of the following:
1. INPATIENT EXPENSE AT HOSPITAL - Inpatient costs for Hospital Services
rendered at Hospital, valued at the amount paid to Hospital by
PacifiCare; plus,
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<PAGE>
2. NON-INPATIENT EXPENSES AT HOSPITAL - Other Hospital Services provided
by Hospital other than inpatient services, valued at the amount paid
to Hospital by PacifiCare; plus,
3. HOSPITAL SERVICES NOT PROVIDED AT HOSPITAL - The actual amount paid by
PacifiCare for Hospital Services not provided by Hospital; MINUS
4. REINSURANCE LIMIT - Any amount of Hospital Services Expense, as
defined in subsection (c) (1) through (3) above, in excess of the
Reinsurance Deductible specified in Paragraph 5.04 of this Agreement;
MINUS,
5. COORDINATION OF BENEFITS - Any amount received by PacifiCare from
third parties as the result of coordination of benefits and third
party recoveries for Hospital Services; plus,
6. Outpatient prescription drugs; plus
7. Acute hospital days greater than 150 per year; plus
8. Respite Care; plus,
9. Immunosuppressive drugs; plus,
10. Mammography (see Section E of Attachment C)
D. PAYMENTS TO IPA UNDER UTILIZATION CONTROL PROGRAM
1. BUDGET EXCEEDS EXPENSES - In the event the annual Budget exceeds
annual Expenses, PacifiCare shall pay IPA the Withhold Amount, if any,
plus an amount equal to [ ** ] of the amount by which the annual
Budget exceeds annual Expenses, up to a limit of [ ** ] of the
annual Budget.
2. EXPENSES EXCEED BUDGET - In the event that annual Expenses exceed
annual Budget, PacifiCare shall pay IPA the Withhold Amount, if any,
minus an amount equal to [ ** ] of the amount by which Expenses
exceed the Budget, up to a limit of [ ** ] of the annual Budget.
To the extent that the portion of the calculated deficit for which IPA
is responsible exceeds the Withhold Amount, IPA shall not be entitled
to any of the Withhold Amount. After the Withhold Amount has been
exceeded, any remaining portion of the deficit for which IPA is
responsible shall be carried forward into the succeeding term. An
amount equal to this remaining portion of the deficit will be withheld
from IPA's monthly Capitation Payment, using a mutually agreed upon
payment schedule, not to exceed one (1) Year.
47
<PAGE>
Should this Agreement terminate leaving no successive term to carry
forward an existing deficit amount, such deficit amount shall be due
and payable by IPA to PacifiCare within one hundred fifty (150) days
of the effective date of termination of this Agreement.
E. SETTLEMENT OF UTILIZATION CONTROL PROGRAM PAYMENTS
PacifiCare shall make interim Utilization Control Program calculations and
payments, if any, on a quarterly basis within sixty (60) days after the end
of each calendar quarter from the Effective Date. Quarterly payments will
be made to IPA based on the calculations specified in subsection (D) above.
The Expense figure used in quarterly incentive program calculations shall
also include an "Incurred But Not Reported" factor in order to account for
outstanding Medical Services claims. PacifiCare shall make an annual
Utilization Control Program payment to IPA within one hundred and fifty
(150) days of the end of each Year.
48
<PAGE>
ATTACHMENT B
SECURE HORIZONS MEDICAL AND HOSPITAL SUBSCRIBER AGREEMENT
Provided to IPA by PacifiCare concurrent with the execution of this Agreement.
IPA
Received this day of , 19 ,
-------------------- ---------- --
By:
----------------------------------
Title:
-------------------------------
49
<PAGE>
ATTACHMENT C
COMPENSATION
A. BENEFIT WITHHOLD
PacifiCare shall retain [ ** ] of the revenue received each month
from HCFA to fund the following Subscriber benefits. These benefits are
outlined more specifically in the Secure Horizons Medical and Hospital
Subscriber Agreement.
1) Outpatient prescription drugs
2) Acute hospital days greater than 150 per year
3) Respite Care
4) Immunosuppressive Drugs
5) Mammography (see Section E below)
IPA shall be given the opportunity to share in any savings which may
be present in the Utilization Control Program as described in Attachment A5.
In addition, for the Secure Horizons preventative dental benefit, PacifiCare
shall retain an additional [ ** ] of the revenue received each month from
HCFA to fund the preventative dental benefit.
B. MONTHLY HCFA PAYMENT
PacifiCare shall pay IPA [ ** ] of the Monthly HCFA Payment, LESS
the applicable ISL Premium identified in Attachment A3 as payment for
Individual Stop Loss coverage. The percent of monthly HCFA Payment stated
above includes [ ** ] which is the value of IPA's covenant not to compete
as outlined in Section 9 of this Agreement. Should IPA breach the covenant
not to compete, PacifiCare shall reduce the percent of monthly HCFA Payment
by this [ ** ] commencing the month in which the breach occurs. It is
understood that any existing Medicare Risk arrangements that the IPA
currently has in effect does not constitute a breach for this purpose. The
payment per Subscriber per month by PacifiCare to IPA shall be increased or
decreased to reflect increases or decreases made by HCFA in the Monthly HCFA
Payment. PacifiCare shall make monthly retroactive adjustments to reflect
adjustments made by HCFA, if any.
PacifiCare shall provide IPA appropriate documentation in support of the actual
Capitation Payment made. Should IPA desire additional billing information,
PacifiCare shall make available for inspection other mutually agreed upon
documents, upon thirty (30) days prior written notice from IPA. IPA shall have
the right to reasonably audit PacifiCare's books and records directly relating
only to IPA's Capitation Payment determinations upon thirty (30) days prior
written notice at IPA's sole expense.
50
<PAGE>
C. RETIREE SUBSCRIBER COMPENSATION
IPA shall receive an additional per month payment from PacifiCare for
certain Retiree Subscribers whose benefit plans permit a lesser Copayment.
This additional amount shall be determined by PacifiCare based on the number of
Retiree Subscribers enrolled each month in each of the Copayment categories set
forth below.
<TABLE>
<CAPTION>
Copayment Paid Monthly Payment
By Retiree Subscriber Per Retiree Subscriber
--------------------- ----------------------
<S> <C>
$ 0 [ ** ]
$ 1 [ ** ]
$ 2 [ ** ]
$ 3 [ ** ]
$ 4 [ ** ]
$ 5 [ ** ]
</TABLE>
E. MAMMOGRAPHY
IPA shall receive [ ** ] for each screening and diagnostic
mammography study performed above the 1987 PacifiCare-wide baseline, specific
to the Secure Horizons program, for such studies. (This baseline equals 267
studies per 1,000 adult females.) The amount due to IPA shall be calculated
based upon utilization data submitted by IPA and shall be paid within one
hundred and fifty (150) days of the end of the current calendar year.
51
<PAGE>
ATTACHMENT D
PACIFICARE PROVIDER POLICIES AND PROCEDURES MANUAL
Provided to IPA by PacifiCare concurrent with the execution of this Agreement.
IPA
Received this day of , 19 ,
-------------------- ---------- --
By:
----------------------------------
Title:
-------------------------------
52
<PAGE>
ATTACHMENT F
IPA FACILITIES
(PROSPECT MEDICAL GROUP, INC. NETWORKS)
See attached list of the IPA Facilities for each of the Prospect Medical Group,
Inc. Networks listed below.
1. JOSHUA MEDICAL GROUP
CITIES IN SERVICE AREA:
Cerritos
Buena Park
Anaheim
2. NUESTRA FAMILIA MEDICAL GROUP
CITIES IN SERVICE AREA:
Huntington Park
Gardena
Bell Gardens
Los Angeles
Norwalk
Temple City
Bell
3. SEOUL MEDICAL GROUP
CITIES IN SERVICE AREA:
Los Angeles
Van Nuys
Huntington Park
Lawndale
La Palma
Garden Grove
Santa Ana
Cerritos
Bellflower
La Mirada
Anaheim
Hawaiian Gardens
Artesia
Torrance
Long Beach
53
<PAGE>
4. PROSPECT MEDICAL GROUP CENTRAL:
CITIES IN SERVICE AREA:
Fountain Valley
Garden Grove
Huntington Beach
Long Beach
Orange
Santa Ana
Tustin
5. PROSPECT MEDICAL GROUP SOUTH:
CITIES IN SERVICE AREA:
Costa Mesa
Irvine
54
<PAGE>
ATTACHMENT G
DIVISION OF FINANCIAL RESPONSIBILITY
The attached template outlines the division of financial responsibility between
IPA, the Hospital Incentive Program (HIP), and PacifiCare (PC), the intent being
to clarify Medical Service and Hospital Service categories in order to provide
for accurate administration. As it is impossible to include every service
available, the template serves as a model under which broad Medical Service and
Hospital Service categories suggest the appropriate financial responsibility for
services or items not specifically listed.
55
<PAGE>
DIVISION OF FINANCIAL RESPONSIBILITY
CALIFORNIA
Secure Horizons Shared Risk Agreement
(IPA Capitated, Hospital Incentive Program w/PacifiCare)
IPA Prospect Medical Group, Inc.
<TABLE>
<CAPTION>
Responsible Party
-------------------------------------------------------
<S> <C> <C> <C>
List of Benefits - (In area)
- ----------------------------
AIDS - Professional Component
- Facility Component
Allergy
- Testing
- Serum
Ambulance, Air or Ground - In Area
- Out of Area
Amniocentesis
Anesthetics, Administration of
(Anesthesiology)
Artificial Insemination
Artificial Limbs (DME)
Biofeedback
Blood & Blood Products (Including
Professional Component)
- From Blood Bank [ ** ](1)
- Autologous Blood Donation
Chemical Dependency Rehabilitation
- Inpatient Facility Component
- Inpatient Professional Component
- Outpatient Professional Component
- Outpatient Facility Component
Chemotherapy
- Drugs
- Professional Component
Chiropractic (Medicare Approved Only)
Colostomy Supplies
- Outpatient
- Inpatient
Contact Lenses
- Intraocular lens (surgically
implanted)
- Incident to Cataract Surgery
(not surgically implanted)
Cosmetic Surgery (Medically Necessary)
- Facility Component
- Professional Component
Dental Services (for repair of
accident/injury only)
- Facility Component
- Professional Component
Detox
- Facility Component
- Professional Component
Durable Medical Equipment (DME)
(Medicare Approved Only)
- Surgically Implanted
- Inpatient or S.N.F.
- Outpatient
- Hearing Aids
</TABLE>
(1) All references to division of responsibility have been deleted.
56
<PAGE>
DIVISION OF FINANCIAL RESPONSIBILITY
CALIFORNIA
Secure Horizons Shared Risk Agreement
(IPA Capitated, Hospital Incentive Program w/PacifiCare)
IPA Prospect Medical Group, Inc.
<TABLE>
<CAPTION>
Responsible Party
-------------------------------------------------------
<S> <C> <C> <C>
List of Benefits - (In area)
- ----------------------------
Emergency Admissions
- In Area: - Facility Component
- - Professional Component
- Out of Area: - Facility Component
- Professional Component
Emergency Room Facility Component
- In Area
- Out of Area
Emergency Room Physicians - In Area
- Initial Treatment and Hospital
Based MDs (interpretation)
- Consults
- Out of Area
Employment Physical
Endoscopic Studies
- With Biopsy [ ** ](1)
- Without Biopsy
Experimental Procedures
Family Planning (Medicare Approved Only)
(e.g.: Amniocentesis)
- Professional Component
- Facility Component
Fetal Monitoring
- Outpatient (diagnostic)
- Inpatient
Genetic Testing
Health Education
Health Evaluation (Physical)
Hearing Aids
Hearing Screening
Hemodialysis
- Inpatient
- Outpatient
Home Health Care
(includes IV or injectables)
Hospice Services (Special Medicare
Reimbursement Program)
- Inpatient
- Professional Component
Hospital Based Physicians (Inpatient)
- Anesthesiology
- Audiology
- Cardiology
- Emergency Room
- Diagnostic Services
- Neonatology
- Neurology
- Nephrology
</TABLE>
(1) All references to division of responsibility have been deleted.
57
<PAGE>
DIVISION OF FINANCIAL RESPONSIBILITY
CALIFORNIA
Secure Horizons Shared Risk Agreement
(IPA Capitated, Hospital Incentive Program w/PacifiCare)
IPA Prospect Medical Group, Inc.
<TABLE>
<CAPTION>
Responsible Party
-------------------------------------------------------
<S> <C> <C> <C>
List of Benefits - (In area)
- ----------------------------
Hospital Based Physicians (continued)
- Pathology
- Physical Medicine
- Pulmonary
- Radiology
- Radiation Oncology
- Surgeon
Hospitalization, Inpatient Services,
Supplies, Testing
- In Area
- Out of Area
Immunization and Inoculations
- As Medically Indicated
Medicare Approved
- For Work/Travel
Infertility (Diagnosis and Treatment)
- Professional Component
- Facility Component
Injections and Injected Substances
(outpatient)
Insulin & Syringes
Laboratory Services
- Outpatient [ ** ](1)
- Inpatient
Lithotripsy
- Professional Component
- Facility Component
Mammography
Marriage Counseling
Medication
- Inpatient
- Outpatient Covered Injectables
- Outpatient Non-injectables
Mental Health
- Inpatient Facility Component
- Inpatient Professional Component
- Outpatient Professional Component
Nuclear Medicine Diagnostics
Nuclear Medicine Treatment/Therapy
- Facility Component (inpatient)
- Facility Component (outpatient)
- Professional Component
Nutritional/Dietetic Counseling
Office Visit Supplies, Splints,
Bandages, etc.
Organ Transplants (non-experimental)
- Facility component
- Professional component
</TABLE>
(1) All references to division of responsibility have been deleted.
58
<PAGE>
DIVISION OF FINANCIAL RESPONSIBILITY
CALIFORNIA
Secure Horizons Shared Risk Agreement
(IPA Capitated, Hospital Incentive Program w/PacifiCare)
IPA Prospect Medical Group, Inc.
<TABLE>
<CAPTION>
Responsible Party
-------------------------------------------------------
<S> <C> <C> <C>
List of Benefits - (In area)
- ----------------------------
O.P. Surgery
- Facility Component
- Professional Component
(Facility Based Mds)
- Professional Component - other
- Anesthesiology
Outpatient Surgery/Facility/Based
Physicians
- Anesthesiology
- Audiology
- Cardiology
- Emergency Room
- Diagnostic Services
- Neonatology
- Neurology
- Nephrology
- Pathology
- Physical Medicine
- Pulmonary
- Radiology
- Radiation Oncology [ ** ](1)
- Surgeon
Outpatient Diagnostic Services
(including, but not limited to,
those listed below)
- Angiograms
- Cat Scan
- 2 D Echo
- EEG
- EKG
- EMG
- ENG
- MRI
- Treadmills
- Ultrasound
Physical Therapy
- Inpatient
- Outpatient
Physician Visits
- To Hospital
- To S.N.F.
- To Patients Home
Physician Office Visits/Consultations
Podiatry Services (requires P.M.G.
referral)
Pregnancy
- Professional Component
- Facility Component
Prosthetic Devices
- Inpatient
- Outpatient
</TABLE>
(1) All references to division of responsibility have been deleted.
59
<PAGE>
DIVISION OF FINANCIAL RESPONSIBILITY
CALIFORNIA
Secure Horizons Shared Risk Agreement
(IPA Capitated, Hospital Incentive Program w/PacifiCare)
IPA Prospect Medical Group, Inc.
<TABLE>
<CAPTION>
Responsible Party
-------------------------------------------------------
<S> <C> <C> <C>
List of Benefits - (In area)
- ----------------------------
Radiology Services
- Outpatient
- Inpatient
- O.P. Surgery
Reconstructive Surgery
- Facility Component
- Professional Component
- Prosthetics
Refractions
Rehabilitation (Short Term) (e.g.: P.T.,
O.T., Speech, Cardiac Therapy)
- Inpatient Facility Component
- Inpatient Professional Component
- Outpatient Facility Component
- Outpatient Professional Component [ ** ](1)
Skilled Nursing Facility
Social Services - Medical
Specialist Consultations
Surgical Supplies
- Inpatient
- Outpatient Facility
- Outpatient
TMJ
- Dental Treatment
- Diagnosis and Medically Necessary
Correction
- Inpatient Facility Component
Transfusions
- From Blood Bank
- Autologous Blood Donation
Tissue Plasminogen Activator (TPA)
Vision Screening
Vision Care
- Implanted Lenses (cataract surgery)
- Lenses and Frames incident to
cataract surgery
- Non-cataract Related Lenses and
Frames
- Medically necessary care
- Refractions
</TABLE>
(1) All references to division of responsibility have been deleted.
60
<PAGE>
"ALL SECTIONS MARKED WITH TWO ASTERISKS ("**") REFLECT PORTIONS WHICH HAVE
BEEN REDACTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION BY PROSPECT MEDICAL HOLDINGS, INC. AS PART OF A REQUEST FOR
CONFIDENTIAL TREATMENT."
POINT-OF-SERVICE AMENDMENT
TO IPA MEDICARE SHARED RISK SERVICES AGREEMENT
The undersigned parties to the IPA Medicare Shared Risk Services Agreement
(the "Agreement") by and between PacifiCare of California ("PacifiCare") and
Prospect Medical Group, Inc. ("IPA") do hereby amend the Agreement with
reference to the following facts:
WHEREAS, PacifiCare intends to introduce the Secure Horizons
Point-of-Service Plan, as defined below, beginning in 1996;
WHEREAS, IPA shall provide or arrange Health Care Services to Secure
Horizons Point-of-Service Plan Subscribers under the same terms and conditions
as other Secure Horizons Health Plan Subscribers;
WHEREAS, IPA shall have no financial responsibility for Out-of-Network
Services; and
WHEREAS, PacifiCare and IPA desire to establish a Secure Horizons
Point-Of-Service Control Program for the purpose of providing a financial
incentive for the control of Out-of-Network Services.
NOW THEREFORE, the Agreement shall be amended as follows:
1. The following definitions shall be added to Section One of the
Agreement.
SECURE HORIZONS POINT-OF-SERVICE PLAN - is a Secure Horizons Health
Plan under which Subscribers are entitled to coverage for both In-Network
Services and Out-of-Network Services.
CONVENTIONAL PLAN - is the Secure Horizons Health Plan which does not
provide coverage for Out-of-Network Services.
IN-NETWORK SERVICES - are [Health Care Services] which are (a)
provided or arranged by IPA under the provisions set forth in the Agreement
for coverage of Conventional Plan Subscribers; or (b) received from an
Outside Provider following an authorization from IPA; or (c) Emergency
Services.
IN-NETWORK HOSPITAL SERVICES - are In-Network Services which are also
Hospital Services and which are provided to a Secure Horizons
Point-of-Service Plan Member.
1
<PAGE>
OUT-OF-NETWORK MEDICAL SERVICES - are the Health Care Services
summarized in Attachment A2 obtained by Secure Horizons Point-Of-Service
Plan Subscribers which are not provided, arranged or authorized by IPA in
accordance with the procedures for the Conventional Secure Plan and which
do not qualify as Emergency Services.
OUT-OF-NETWORK HOSPITAL SERVICES - are the Health Care Services
summarized in Attachment A1 obtained by Secure Horizons Point-Of-Service
Plan Subscribers which are not provided, arranged or authorized by IPA in
accordance with the procedures for the Conventional Plan, and which do not
qualify as Emergency Services.
OUT-OF-NETWORK SERVICES - are Out-of-Network Medical Services and
Out-of-Network Hospital Services. IPA shall have no financial
responsibility for Out-of-Network Services.
2. Section 3.07.01 shall be added to read as follows:
3.07.01 COLLECTION OF CHARGES FOR OUT-OF-NETWORK SERVICES -
Notwithstanding anything to the contrary in Section 3.07 or elsewhere in
the Agreement, if an IPA Member Physician or Specialist Physician provides
Out-of-Network Services to a Secure Horizons Point-Of-Service Plan
Subscriber, IPA shall bill PacifiCare or PacifiCare's designee for payment
for such services and agrees to accept full reimbursement at [ ** ] of
the Medicare Locality Fee Schedule for Participating Providers as published
by the Part B carrier. Neither IPA nor its Member Physicians shall
encourage Subscribers to receive Medically Necessary Services from Outside
Providers. Breach of this Section 3.07.01 shall constitute cause for
termination of this Agreement.
3. Paragraph 3.31 shall be added to read as follows:
3.31 SECURE HORIZONS POINT-OF-SERVICE PLAN CONTROL PROGRAM - IPA
agrees to participate in the Secure Horizons Point-Of-Service Plan Control
Program as set forth in Attachment A6, attached hereto and incorporated
herein.
4. Attachment A6 SECURE HORIZONS POINT-OF-SERVICE PLAN CONTROL
PROGRAM shall be added to read as follows:
See Exhibit 1 attached hereto and incorporated herein by this
reference.
2
<PAGE>
5. The following shall be added to Attachment C, COMPENSATION,
Section B, MONTHLY HCFA PAYMENT:
SECURE HORIZONS POINT-OF-SERVICE PLAN CAPITATION PAYMENTS
Capitation Payments for Secure Horizons Point-Of-Service Plan Subscribers
will be determined in the same manner as for Conventional Plan Subscribers,
except as provided in this paragraph. IPA's Capitation Payment for Secure
Horizons Point-Of-Service Plan Subscribers shall equal the Percent of the
Monthly HCFA Payment specified in this Attachment C, multiplied by
[ ** ].
SECURE HORIZONS POINT-OF-SERVICE PLAN COVENANT NOT TO COMPETE
IPA will receive an additional [ ** ] of the Monthly HCFA Payment in
recognition of IPA's agreement not to enter into any contractual
arrangements, other then the contractual arrangement set forth in this
amendment, to provide or arrange Medical Services to Medicare beneficiaries
who are Subscribers or enrollees of a Point-Of-Service Plan under a health
maintenance organization, competitive medical plan or other similar entity
that contracts with HCFA on a risk basis. This additional [ ** ]
capitation is not included in the amount stated above and is not subject to
any withhold or deductions. If IPA enters into a contractual relationship
with any other Medicare Risk Reimbursement Plan to provide or arrange
Medical Services under a Point-Of-Service Plan, PacifiCare will decrease
the monthly capitation payment by this [ ** ] commencing the
month in which this breach occurs.
The effective date of this Amendment shall be July 1, 1996.
By signing below, both parties hereto have executed and agreed to
this Amendment.
PACIFICARE OF CALIFORNIA IPA
By: /s/ Chris Wing By: /s/ Gregg DeNicola
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Date: Date: 6-11-96
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Exhibit 1
ATTACHMENT A6
SECURE HORIZONS POINT-OF-SERVICE PLAN CONTROL PROGRAM
1. INTRODUCTION
The Secure Horizons Point-of-Service Plan Control Program is designed to provide
a financial incentive for the control of In-Network Hospital Services and
Out-of-Network Services provided to Secure Horizons Point-Of-Service Plan
Members.
Secure Horizons Point-of-Service Plan Subscriber months and related In-Network
Hospital Service expenses shall not be included in calculating the Conventional
Utilization Control Program described in Attachment A5.
2. DEFINITIONS
The following terms shall have the meanings set forth below when utilized in
this Attachment A6.
a. SECURE HORIZONS POINT-OF-SERVICE PLAN BUDGET - shall equal [ ** ] of the
Monthly HCFA Payment, less [ ** ] of the Reinsurance Premium specified in
Paragraph 5.04 of this Agreement for In-Network Hospital Services
reinsurance.
b. ACTUAL COSTS consist of:
i. In-Network Hospital Services costs incurred during the period of
calculation for which PacifiCare has received a claim and paid net of
discounts; In-Network Hospital Services incurred prior to the period
of calculation and paid during the current period; and for quarterly
interim calculations, In-Network Hospital Services incurred during the
period for which PacifiCare has received a claim but has not paid,
less an average aggregate discount factor (for year-end calculations,
only paid claims will be included); LESS Subscriber claim costs in
excess of the reinsurance deductible specified above; PLUS
ii. Claims paid charges for Out-of-Network Services incurred during the
current period; and claims paid charges for Out-of-Network Services
incurred but not included in prior period Secure Horizons
Point-of-Service Plan Control Program calculations; LESS
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iii. Third party liability and coordination of benefit recoveries for
In-Network Hospital Services and Out-of-Network Services that are
received during the period of calculation.
c. BUDGET SAVINGS - is the difference between the Secure Horizons
Point-of-Service Plan Budget and Actual Costs, to the extent
Actual Costs are less than the Secure Horizons Point-of-
Service Budget.
3. SAVINGS DISTRIBUTION
To the extent Budget Savings are available, such savings shall be shared between
IPA and PacifiCare as follows:
IPA shall receive the difference between actual Capitation Payments for
Secure Horizons Point-of-Service Plan Subscribers for the period and the
amount of Capitation Payments the IPA would have received if the Secure
Horizons Point-of-Service Plan Subscribers were enrolled in the Conventional
Plan. The above distribution to IPA shall be limited to the Budget Savings
available pursuant to the Secure Horizons Point-of-Service Plan Control
Program calculation. Additionally, IPA shall receive [ ** ] of any
remaining Budget Savings after reimbursing IPA up to the Conventional Plan
Capitation Payment amount.
4. BUDGET DEFICITS. IPA shall have no financial responsibility in the event
that Actual Costs exceed the Secure Horizons Point-Of-Service Plan Budget.
5. PERIODIC CALCULATIONS - The Secure Horizons Point-Of-Service Plan Control
Program shall be administered on an IPA-specific basis. For IPAs with multiple
IPA Facilities, the program shall be calculated for each IPA Facility. However,
Budget Savings and payment distributions shall be based on IPA's consolidated
results.
Cumulative calculations of the Secure Horizons Point-Of-Service Plan Control
Program results will be based on calendar quarters and shall be calculated
within one hundred and twenty (120) days of the end of each calendar quarter,
except for the fourth quarter for which no calculation or payment will be
made in anticipation of the year-end settlement. Interim distribution
payments will be made within one hundred and twenty (120) days following the
end of each quarter, except for the fourth quarter, and will be limited to
[ ** ] of calculated Budget Savings to account for incurred but not
received claims. Year-end calculations and payments of the Secure Horizons
Point-of-Service Plan Control Program shall be made within one hundred eighty
(180) days of the end of each calendar year.
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"ALL SECTIONS MARKED WITH TWO ASTERISKS ("**") REFLECT PORTIONS WHICH HAVE
BEEN REDACTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION BY PROSPECT MEDICAL HOLDINGS, INC. AS PART OF A REQUEST FOR
CONFIDENTIAL TREATMENT."
CALIFORNIACARE
MEDICAL SERVICES AGREEMENT
This AGREEMENT is effective on JANUARY 1, 1997 between BLUE CROSS OF CALIFORNIA
and Affiliates (jointly and severally "BLUE CROSS") and PROSPECT MEDICAL GROUP
("PARTICIPATING MEDICAL GROUP").
I. RECITALS
1.01 BLUE CROSS is a California Corporation licensed by the California
Commissioner of Corporations to operate a health care service plan
pursuant to the Knox-Keene Health Care Service Plan Act of 1975 and
the Rules of the California Commissioner of Corporations promulgated
thereunder (California Health & Safety Code, Sections 1340 to 1399.64
and California Code of Regulations, Sections 1300.43 to 1300.99,
collectively, the "Knox-Keene Act"), including without limitation to
issue Benefit Agreements covering the provision of health care
services and to enter into agreements with PARTICIPATING MEDICAL
GROUP.
1.02 PARTICIPATING MEDICAL GROUP is a PROFESSIONAL CORPORATION, a legal
entity organized under the laws of the State of California and
comprised of physicians who desire to provide and arrange for health
services to persons who are enrolled in BLUE CROSS' CALIFORNIACARE
programs.
II. DEFINITIONS
2.01 "ADJUSTED PER MEMBER PER MONTH NON-CAPITATED EXPENSE" means the
PARTICIPATING MEDICAL GROUP's Per Member Per Month Non-Capitated
Expense after adjustments for the PARTICIPATING MEDICAL GROUP's mix of
Member age/sex and plan, and the PARTICIPATING MEDICAL GROUP's
stop-loss and regional relativities for use in identifying the
PARTICIPATING MEDICAL GROUP's Non-Capitated Performance Settlement.
2.02 "AFFILIATE" means a corporation or other organization owned or
controlled, either directly or through parent or subsidiary
corporations, by BLUE CROSS, or under common control with BLUE CROSS.
2.03 "AGE/SEX FACTORS" means the factors used to adjust PARTICIPATING
MEDICAL GROUP's Per Member Per Month Non-Capitated Expenses to account
for cost variations attributable to the mix of Member age and sex.
2.04 "ALTERNATIVE BIRTHING CENTER SERVICES" means services rendered by an
Alternative Birthing Center. Alternative Birthing Center Services
include related services such as equipment, surgical and anesthetic
supplies, oxygen and drugs, blood and blood processing, laboratory
procedures and diagnostic imaging.
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2.05 "AMBULANCE SERVICES" means transportation services provided by a
licensed ambulance company.
2.06 "ATTACHMENT POINT" is the point at which no settlement shall be made
if the PARTICIPATING MEDICAL GROUP's Adjusted Per Member Per Month
Non-Capitated Expense equals or exceeds that amount. The Attachment
Point is shown in the Non-Capitated Performance Settlement Schedule as
set forth in Exhibit F.
2.07 "AWAY FROM HOME CARE" means urgent care, Away from Home Emergency
Care, routine care, and follow-up care as defined in the HMO-USA
member's plan certificate or benefit agreement.
2.08 "BENEFIT AGREEMENT(S)" means the written agreement(s) entered into
between BLUE CROSS and groups or individuals, under which BLUE CROSS
provides, indemnifies, or administers health benefits to persons
enrolled in BLUE CROSS programs including, but not limited to, the
CALIFORNIACARE programs or the BLUE CROSS PLUS program. "Benefit
Agreement(s)" also mean arrangements established by BLUE CROSS and/or
one or more of its Affiliates, or by persons or entities utilizing the
BLUE CROSS Managed Care Network pursuant to a contract with BLUE CROSS
and/or one or more of its Affiliates. Subject to the terms hereof,
BLUE CROSS and/or one or more of its Affiliates may contract, on
PARTICIPATING MEDICAL GROUP's behalf, with Other Payors wishing to
utilize the services of the BLUE CROSS Managed Care Network,
incorporating the terms and conditions of this Agreement.
2.09 "BLUE CROSS MANAGED CARE NETWORK" means the network of health care
providers that have entered into contracts with BLUE CROSS and/or one
or more of its Affiliates pursuant to which those providers have
agreed to participate in the CALIFORNIACARE, BLUE CROSS PLUS and other
programs that are to be conducted pursuant to Benefit Agreements.
2.10 "BLUE CROSS PLUS" means a point of service option benefit plan offered
by BLUE CROSS under which enrolled Members may, at the time benefits
are selected, elect to receive benefits from either a CALIFORNIACARE
provider or another licensed provider.
2.11 "CALIFORNIACARE" means direct care prepayment plan(s) offered by BLUE
CROSS.
2.12 "CALIFORNIACARE CASE MANAGER" means a CALIFORNIACARE employee charged
with assisting PARTICIPATING MEDICAL GROUPs in case management.
2.13 "CALIFORNIACARE COORDINATOR" means an employee of PARTICIPATING
MEDICAL GROUP as set forth in Section 4.08B.
2.14 "CALIFORNIACARE HOSPITAL" means a hospital which has entered into an
agreement with BLUE CROSS to provide Hospital Services to Members.
2.15 "CALIFORNIACARE QUALITY MANAGEMENT REPRESENTATIVE" means an employee
of BLUE CROSS responsible for the CALIFORNIACARE Quality Management
Program.
2.16 "CAPITATION" means a uniform prepayment fee per Member per month,
adjusted by age-sex, based on the Benefit Agreement issued to each
Subscriber and the services due thereunder.
2.17 "CAPITATION SERVICES" means all CALIFORNIACARE Covered Medical
Services which are not otherwise defined in this Agreement or in the
Division of Financial Responsibilities (Exhibit A-1 hereto) as
Non-Capitated Services.
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2.18 "CASE MANAGEMENT PROGRAM" means a program that assesses the Member's
medical needs and includes working with PARTICIPATING MEDICAL GROUP
and other Participating Providers to explore and coordinate treatment
alternatives that may (1) be more cost effective; (2) result in better
medical outcomes; (3) achieve benefit savings; and (4) increase Member
satisfaction.
2.19 "CASE MANAGEMENT STOP-LOSS THRESHOLD" means the level at which
stop-loss under Section 9.03 herein shall apply to PARTICIPATING
MEDICAL GROUP's Non-Capitated Performance Settlement.
2.20 "COVERED MEDICAL SERVICES" means the services and benefits covered
under the Benefit Agreements. A matrix of those services and benefits
is set forth in Exhibit A (incorporated by reference herein).
2.21 "COVERED PERSONS" means Members, enrollees, dependents and other
beneficiaries who are covered by an Affiliate's Benefit Agreement or
by an Other Payor.
2.22 "CUSTOMARY AND REASONABLE CHARGES" (C&R) means:
A. "Customary" means the fee that falls within the range of
prevailing fees charged by physicians and surgeons or other
licensed providers of the same service within the same area for
the performance of a specific service or procedure, and
B. "Reasonable" means the fee that meets the requirements of
Customary and is justified, considering complications or special
circumstances with respect to the performed services or
procedure.
C&R charges are determined by BLUE CROSS.
2.23 "EMERGENCY" means a sudden unexpected onset of a medical condition
manifesting itself by acute symptoms of sufficient severity
(including, without limitation, sudden and unexpected severe pain)
such that the absence of immediate medical attention could reasonably
result in any of the following:
A. Placing the patient's health in serious jeopardy,
B. Serious impairment to bodily functions,
C. Other serious medical consequences, or
D. Serious and/or permanent dysfunction of any bodily organ or part.
2.24 "ENROLLMENT PROTECTION" is a program to limit PARTICIPATING MEDICAL
GROUP's risk with respect to any individual Member who requires
Capitation Services in excess of the limit of liability per individual
Member per calendar year, as set forth in Article VIII, ENROLLMENT
PROTECTION, below.
2.25 "EXTENSION OF BENEFITS" means extended benefits which may be available
to Members who are totally disabled on the date of termination of
their Benefit Agreement. Extended benefits shall have the meaning set
forth in the group coverage agreement applicable to the Member.
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2.26 "HEALTH PROFESSIONAL" means any of the following: A doctor of medicine
or osteopathy, licensed to practice medicine or osteopathy where the
care is received, or a dentist, an optometrist, a podiatrist or
chiropodist, a clinical psychologist, a chiropractor, a clinical
social worker, a marriage family and child counselor, a physical
therapist, a speech pathologist, an audiologist, an occupational
therapist, a physician assistant, a registered nurse, a nurse
practitioner and/or nurse midwife providing services within the scope
of practice as defined by the appropriate clinical license and/or
regulatory board.
2.27 "HEMODIALYSIS SERVICES" means services rendered by a Medicare
certified hemodialysis provider. Hemodialysis Services include
facility charges, use of facility equipment and supplies, laboratory
tests and drugs administered in conjunction with on-site treatment.
2.28 "HMO-USA" means a nationwide network of Blue Cross and Blue Shield
Plan HMOs (Participating Plans) sponsored by Blue Cross and Blue
Shield Association (BCBSA). BCBSA Participating Plan HMOs have entered
into Agreements to provide each other's members with guest
memberships, urgent care and Emergency care, routine care, and
follow-up care as preapproved and authorized by BLUE CROSS when the
member is traveling away from his or her Home HMO-USA participating
plan.
2.29 "HOME HMO" means the participating plan in which a HMO-USA
participating plan member is enrolled.
2.30 "HOSPICE SERVICES" means services rendered to terminally ill patients,
by a Medicare certified hospice provider that are (a) covered by a
Benefit Agreement and (b) ordered or authorized by PARTICIPATING
MEDICAL GROUP.
2.31 "HOSPITAL SERVICES" means Medically Necessary acute and sub-acute care
inpatient and hospital outpatient services and supplies which are both
(a) covered by a Benefit Agreement, and (b) ordered or authorized by a
PARTICIPATING MEDICAL GROUP Physician. Hospital Services do not
include long-term non-acute care.
2.32 "HOST HMO" means any participating plan in whose Service Area a
HMO-USA participating plan member temporarily stays except the
member's Home HMO.
2.33 "INDEPENDENT PRACTICE ASSOCIATION" means an incorporated association
of independent physicians which has entered into an agreement with
BLUE CROSS to provide and arrange for health services to Members.
2.34 "INPATIENT HOSPITAL SERVICES" means services which include inpatient
hospital days for semi-private accommodations, or special treatment
units, or private room accommodations if specifically authorized as
Medically Necessary by PARTICIPATING MEDICAL GROUP Physician.
2.35 "MEDICALLY NECESSARY" means services or supplies which, under the
provisions of this Agreement, are determined to be:
A. Appropriate and necessary for the symptoms, diagnosis or
treatment of the medical condition;
B. Provided for the diagnosis or direct care and treatment of the
medical condition;
C. Within standards of good medical practice within the organized
medical community;
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D. Not primarily for the convenience of the Member, the Member's
physician, or another provider; and
E. The most appropriate supply or level of service which can safely
be provided. For hospital stays, this means that acute care as an
inpatient is necessary due to the kinds of services the Member is
receiving or the severity of the Member's condition, and that
safe and adequate care cannot be received as an outpatient or in
a less intensified medical setting.
2.36 "MEMBER" means a Subscriber or enrolled dependent covered by a Benefit
Agreement.
2.37 "MEMBER MONTHS" means a count that records one Member month for each
month the Member is enrolled in the CALIFORNIACARE program or the BLUE
CROSS PLUS program.
2.38 "NON-CAPITATED EXPENSES" means the actual expenses incurred by BLUE
CROSS to provide Non-Capitated Services to Members, as ordered,
authorized or referred by PARTICIPATING MEDICAL GROUP Physicians.
2.39 "NON-CAPITATED PERFORMANCE SETTLEMENT" means amount paid to
PARTICIPATING MEDICAL GROUP for managing Non-Capitated Services.
2.40 "NON-CAPITATED PERFORMANCE SETTLEMENT SCHEDULE" means a schedule of
PMPM Non-Capitated Performance Settlement amounts associated with
varying PMPM Non-Capitated Expenses. The Non-Capitated Performance
Settlement Schedule is set forth in Exhibit F.
2.41 "NON-CAPITATED SERVICES" means the designated services set forth in
Article IX and Exhibit A-1.
2.42 "OPERATIONS MANUAL" means the CaliforniaCare PMG Operations Manual.
2.43 "OTHER PAYOR" means persons or entities utilizing the BLUE CROSS
Managed Care Network pursuant to an agreement with BLUE CROSS,
including without limitation, other Blue Cross and/or Blue Shield
Plans, self-administered or self-insured programs providing health
care benefits, or employers or insurers.
2.44 "OUT-OF-AREA EMERGENCY SERVICES" means Emergency services which are
rendered to a Member at a distance of more than twenty (20) mile
radius from the medical offices of PARTICIPATING MEDICAL GROUP or the
Satellite Facility to which the Member is assigned. When PARTICIPATING
MEDICAL GROUP is organized as an Independent Practice Association,
Out-of-Area Emergency Services are those Emergency services which are
rendered to a Member at a distance of more than twenty (20) mile
radius from a hospital designated in Exhibit B as a Service Area
hospital. Out-of-Area Emergency Services shall also include Out of
Area urgently needed services to prevent serious deterioration of a
Member's health resulting from unforeseen illness or injury for which
treatment cannot be delayed until the Member returns to the Service
Area.
2.45 "OUTPATIENT HOSPITAL SERVICES" means services which include the
facility component of outpatient surgery, pre-admission testing,
laboratory and radiology services.
2.46 "OUTPATIENT PRESCRIPTION DRUG EXPENSE" means the benefit amount paid
by BLUE CROSS for a Member's covered outpatient prescription drugs.
2.47 "OUTPATIENT PRESCRIPTION DRUG SETTLEMENT" means an amount paid to
PARTICIPATING MEDICAL GROUP for managing Outpatient Prescription Drug
Expenses.
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2.48 "OUTPATIENT PRESCRIPTION DRUG SETTLEMENT SCHEDULE" means a schedule of
outpatient prescription drug settlement amounts associated with
varying Per Member per Month Outpatient Prescription Drug Expenses.
The Schedule is set forth in Exhibit H.
2.49 "PARTICIPATING MEDICAL GROUP PHYSICIAN" means a duly licensed
physician who is a shareholder, partner, associate, contractor or
employee of PARTICIPATING MEDICAL GROUP.
2.50 "PER MEMBER PER MONTH (PMPM) NON-CAPITATED EXPENSE" means the average
monthly medical Non-Capitated Expense per Member attributable to the
PARTICIPATING MEDICAL GROUP.
2.51 "PER MEMBER PER MONTH (PMPM) OUTPATIENT PRESCRIPTION DRUG EXPENSE"
means the average monthly Outpatient Prescription Drug Expenses per
Member for PARTICIPATING MEDICAL GROUP's Members with outpatient
prescription drug benefits.
2.52 "PLAN FACTORS" means factors used to adjust the PARTICIPATING MEDICAL
GROUP's PMPM Non-Capitated Expense to account for cost variations
attributable to the mix of Member Benefit Agreements. The
Non-Capitated Expense Plan Factors include a durational factor for the
durational plans.
2.53 "PRIMARY CARE PHYSICIAN" means the PARTICIPATING MEDICAL GROUP
Physician responsible for coordinating and controlling the delivery of
Covered Medical Services to the Member. Primary Care Physicians
include general and family practitioners, internists and
pediatricians, and such other specialists as BLUE CROSS may approve in
writing to be designated Primary Care Physicians.
2.54 "QUALITY MANAGEMENT COMMITTEE" means a committee of physicians and
other licensed health care providers, at least fifty percent of whom
participate in CALIFORNIACARE, which meets regularly to review the
Quality Management Program.
2.55 "QUALITY MANAGEMENT PROGRAM" means a program which provides review by
physicians and other health professionals of the appropriateness and
adequacy of the delivery of health services.
2.56 "RELATED HOSPITAL SERVICES" means services rendered to Members as part
of, and concurrent with Inpatient Hospital Services, Outpatient
Hospital Services, Hemodialysis Services, Skilled Nursing Facility
Services, Alternative Birthing Center Services and Hospice Services,
including the use of facility equipment, surgical and anesthetic
supplies, oxygen and drugs except for takehome drugs, blood and blood
processing, laboratory procedures and diagnostic imaging.
2.57 "REFERRAL SERVICES" means Capitation Services which are rendered to
Members through a process established by PARTICIPATING MEDICAL GROUP.
2.58 "REGION FACTOR" means the factors used to adjust PARTICIPATING MEDICAL
GROUP's PMPM Non-Capitated Expense to account for cost variations
across BLUE CROSS' corporate regions.
2.59 "SATELLITE FACILITY" means a medical facility separate from
PARTICIPATING MEDICAL GROUP's principal place of business, which is
dependent upon, and responsible to, PARTICIPATING MEDICAL GROUP. It is
a facility that meets the CALIFORNIACARE Satellite Criteria set forth
in the Operations Manual and is approved by BLUE CROSS prior to being
designated a CALIFORNIACARE Satellite Facility.
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2.60 "SERVICE AREA" means the geographical area within a thirty (30) mile
radius of the medical offices of PARTICIPATING MEDICAL GROUP or any
Satellite Facility to which the Member is assigned, or, in the case of
an Independent Practice Association, the medical office of the
PARTICIPATING MEDICAL GROUP Physician. The designation of a particular
geographical area shall not be construed as giving PARTICIPATING
MEDICAL GROUP an exclusive right to that Service Area.
2.61 "SKILLED NURSING FACILITY SERVICES" means inpatient and related
services provided by a licensed skilled nursing facility. Skilled
Nursing Facility Services excludes custodial care.
2.62 "STOP-LOSS FACTOR" means the factor used to adjust the PARTICIPATING
MEDICAL GROUP's PMPM Non-Capitated Expense to account for cost
variations due to different Case Management Stop-Loss thresholds.
2.63 "SUBSCRIBER" means an individual who has qualified for and is covered
under a Benefit Agreement.
2.64 "URGENT CARE CENTER" is a facility that meets CALIFORNIACARE's Urgent
Care Center criteria as set forth in the Operations Manual, and is
approved by BLUE CROSS prior to being designated as a CALIFORNIACARE
Urgent Care Center.
2.65 "UTILIZATION MANAGEMENT PROGRAM" means a program approved by BLUE
CROSS and designed to review and manage the utilization of Covered
Medical Services.
III. RELATIONSHIP BETWEEN BLUE CROSS AND PARTICIPATING MEDICAL GROUP
3.01 BLUE CROSS and PARTICIPATING MEDICAL GROUP are independent entities.
Nothing in this Agreement shall be construed, or be deemed to create,
a relationship of employer and employee or principal and agent, or any
relationship other than that of independent parties contracting with
each other solely for the purpose of carrying out the provisions of
this Agreement.
3.02 BLUE CROSS and PARTICIPATING MEDICAL GROUP agree that PARTICIPATING
MEDICAL GROUP Physicians shall maintain a physician-patient
relationship with each Member assigned to PARTICIPATING MEDICAL GROUP.
PARTICIPATING MEDICAL GROUP shall be solely responsible to the Member
for treatment and medical care with respect to the provision of
Capitation Services and arrangements for Non-Capitated Services.
3.03 Except as specifically provided herein, nothing in this Agreement is
intended to be construed, or be deemed to create, any rights or
remedies in any third party, including, but not limited to, a Member
or a provider of services, other than PARTICIPATING MEDICAL GROUP.
3.04 PARTICIPATING MEDICAL GROUP consents to the memorializing of its legal
obligations with BLUE CROSS and each particular Affiliate in one or
more separate written agreements that shall not alter the substance of
those obligations.
3.05 PARTICIPATING MEDICAL GROUP agrees that each arrangement by which
PARTICIPATING MEDICAL GROUP performs services for Covered Persons that
utilize the BLUE CROSS Managed Care Network shall constitute an
independent legal relationship between PARTICIPATING MEDICAL GROUP and
that Affiliate or Other Payor.
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3.06 PARTICIPATING MEDICAL GROUP hereby expressly acknowledges its
understanding that this Agreement constitutes a contract between
PARTICIPATING MEDICAL GROUP and BLUE CROSS as an independent
corporation, operating under a license with the Blue Cross and Blue
Shield Association, an association of independent Blue Cross and Blue
Shield Plans (the "Association"), permitting BLUE CROSS to use the
Blue Cross service mark in the State of California and that BLUE CROSS
is not contracting as the agent of the Association. PARTICIPATING
MEDICAL GROUP further acknowledges and agrees that it has not entered
into this Agreement based upon representations by any person other
than BLUE CROSS and that no person, entity, or organization other than
BLUE CROSS, or the applicable Affiliate, shall be held accountable or
liable to PARTICIPATING MEDICAL GROUP for any of BLUE CROSS', or the
applicable Affiliate's, obligations to PARTICIPATING MEDICAL GROUP
created under this Agreement. This section shall not create any
additional obligations whatsoever on the part of BLUE CROSS, other
than those obligations created under other provisions of this
Agreement.
IV. PARTICIPATING MEDICAL GROUP SERVICES AND RESPONSIBILITIES
PARTICIPATING MEDICAL GROUP and PARTICIPATING MEDICAL GROUP Physicians
agree as follows:
4.01 Provision of Services.
A. To promptly provide, arrange through referral, or authorize all
Capitation Services, and to authorize or arrange for the
provision of all Non-Capitated Services, and further, to accept
full financial responsibility for all Capitation Services
provided, authorized or arranged through referral, by
PARTICIPATING MEDICAL GROUP in accordance with the provisions of
this Agreement.
B. To provide a Primary Care Physician selected by the Member to
oversee the continuity of care for each Member who appears on
PARTICIPATING MEDICAL GROUP'S Eligibility Report.
C. To maintain a sufficient number of Primary Care Physicians to
guarantee that there is the equivalent of at least one full-time
Primary Care Physician to each [ ** ] Members served by
PARTICIPATING MEDICAL GROUP. All Primary Care Physicians shall
be PARTICIPATING MEDICAL GROUP Physicians.
D. To assure that privileges of PARTICIPATING MEDICAL GROUP
Physicians at CALIFORNIACARE Hospitals shall be adequate to meet
the requirements for the CALIFORNIACARE Hospital Services to
which Members are entitled under the terms of the Benefit
Agreement(s).
E. To engage the Referral Services of duly licensed board certified
consultants, specialists and duly certified allied health
professionals, responsible for delivering Covered Medical
Services to Members. A list of all referral physicians to whom
PARTICIPATING MEDICAL GROUP refers Members for Referral Services
shall be provided to BLUE CROSS upon request.
F. To ensure that all PARTICIPATING MEDICAL GROUP Physicians and all
PARTICIPATING MEDICAL GROUP employees responsible for delivering
Covered Medical Services to Members, continually meet all
applicable federal and state laws and regulations and all legal
standards of care.
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G. That if BLUE CROSS determines in good faith that any
PARTICIPATING MEDICAL GROUP Physician(s):
(1) does not meet the requirements specified herein; or
(2) that the health, safety or welfare of Members is jeopardized
by continuation of any PARTICIPATING MEDICAL GROUP Physician
to provide services to Members; or
(3) if PARTICIPATING MEDICAL GROUP Physician(s) furnishes false,
incomplete, or inaccurate information to BLUE CROSS in the
application to participate; or
(4) at any time during the term of this Agreement, a
PARTICIPATING MEDICAL GROUP Physician(s) suffers revocation,
termination or suspension of Physician's medical license or
medical staff privileges; or
(5) the ability of the PARTICIPATING MEDICAL GROUP Physician(s)
to perform the services covered by this Agreement is
otherwise impaired;
PARTICIPATING MEDICAL GROUP warrants that upon written request of
BLUE CROSS said PARTICIPATING MEDICAL GROUP Physician(s) shall be
excluded from providing services to Members under this Agreement.
PARTICIPATING MEDICAL GROUP and PARTICIPATING MEDICAL GROUP
Physician(s) may present to BLUE CROSS for further consideration
any additional information or explanation regarding PARTICIPATING
MEDICAL GROUP Physician's compliance with the requirements set
forth herein. However, BLUE CROSS retains the right to make the
final decision regarding a PARTICIPATING MEDICAL GROUP
Physician's participation under this Agreement.
4.02 Accessibility and Continuity of Care.
A. To promptly provide or arrange for available and accessible
Covered Medical Services for each Member assigned to
PARTICIPATING MEDICAL GROUP, in accordance with that Member's
Benefit Agreement and this Agreement, and to provide those
services in and through facilities designated in Exhibit J
(incorporated by reference herein).
B. That all Covered Medical Services, (including consultation and
Referral Services), ambulatory care services, diagnostic
laboratory, diagnostic imaging and therapeutic radiology
services, home health services and preventive health services,
shall be available to Members a minimum of forty (40) hours per
week, except for weeks including holidays. The foregoing services
shall be available beyond normal business hours during additional
hours to be scheduled by PARTICIPATING MEDICAL GROUP.
C. To promptly provide, arrange or authorize all Emergency services
for each Member assigned to PARTICIPATING MEDICAL GROUP.
Authorization of any Emergency services, as set forth in Section
2.23 herein, shall not be withheld by PARTICIPATING MEDICAL GROUP
regardless of whether PARTICIPATING MEDICAL GROUP is notified
within forty eight (48) hours from the time such Emergency
services were rendered. PARTICIPATING MEDICAL GROUP shall comply
with all requirements set forth in California Health and Safety
Code Section 1371.4(a) - (d).
D. That PARTICIPATING MEDICAL GROUP shall manage and facilitate
access to Emergency services within a twenty (20) mile radius of
each Satellite Facility and PARTICIPATING MEDICAL GROUP's main
facility at all times, twenty-four (24) hours a day, seven (7)
days a week. In the event that PARTICIPATING MEDICAL GROUP is an
Independent Practice Association, PARTICIPATING MEDICAL GROUP
shall manage and facilitate access to Emergency services within a
twenty (20) mile radius of the Hospital(s) designated in Exhibit
B (incorporated by reference herein) as the CALIFORNIACARE
Hospital(s) within PARTICIPATING MEDICAL GROUP's Service Area.
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E. To admit, or authorize admission of, Members solely to the
CALIFORNIACARE Hospitals listed in Exhibit B, except (a) when
Medically Necessary in an Emergency situation or (b) when Covered
Medical Services are not available in a CALIFORNIACARE Hospital
or (c) as otherwise required under Section 4.02F or (d) when
requested to do so in writing by the Member, with the written
understanding that admission to a hospital, other than those
listed in Exhibit B, is not a Covered Medical Service, except as
stated above in this Section 4.02E.
F. Notwithstanding Section 4.02E, for those Members that require
transplant services (solid organ and bone marrow/stem cell) that
are Covered Medical Services, PARTICIPATING MEDICAL GROUP agrees
to admit, or authorize the inpatient admission or outpatient
treatment of Members, solely at those CALIFORNIACARE Hospitals
whose transplant programs have been approved by BLUE CROSS and
identified as such in the Operations Manual.
PARTICIPATING MEDICAL GROUP will provide notification to BLUE
CROSS of all potential transplant cases, including deferred or
denied cases, when such cases are considered by PARTICIPATING
MEDICAL GROUP's Utilization Management Program Committee or other
similar PARTICIPATING MEDICAL GROUP functional committee, except
for Emergencies, in which case PARTICIPATING MEDICAL GROUP shall
provide notification within two (2) business days of the
admission. The format of such notification is provided in the
Operations Manual.
G. That in circumstances where a Member requires specialized
tertiary care or because of bed unavailability in a
CALIFORNIACARE Hospital, the Member must be admitted to a
non-CaliforniaCare in-area or out-of-area facility for Hospital
Services, then until the Member is transferred to a
CALIFORNIACARE Hospital, the PARTICIPATING MEDICAL GROUP will be
financially responsible for care the same as if care had been
provided in a CALIFORNIACARE Hospital, and the Non-Capitated
Services arrangement as set forth in Article IX. of this
Agreement will apply.
H. To use a referral request process by which Capitation Services
are to be rendered by Health Professionals other than the
Member's Primary Care Physician, including PARTICIPATING MEDICAL
GROUP Physicians or other Health Professionals who do not belong
to PARTICIPATING MEDICAL GROUP. This process shall assure that:
(1) All Health Professionals who provide Referral Services
follow appropriate billing procedures.
(2) That the Health Professional must look only to PARTICIPATING
MEDICAL GROUP for payment of Covered Medical Services and
shall not bill the Member, except for applicable co-payments
and for non-Covered Medical Services.
(3) Primary Care Physicians who determine that a referral is
necessary, may issue a referral without the prior
authorization of PARTICIPATING MEDICAL GROUP's Utilization
Management Program to physicians in the following
specialties: Cardiology, Dermatology, Endocrinology, Ear,
Nose and Throat, Gastroenterology, General Surgery,
Hematology, Neurology, Obstetrics-Gynecology, Oncology,
Ophthalmology, Orthopedic Surgery, Podiatry, Routine
Laboratory, Routine X-ray and Urology.
(4) For referrals to specialists or providers, or services other
than those listed in (3) above, PARTICIPATING MEDICAL GROUP
shall review and issue an authorization or denial of a
request for referral within five (5) business days of
receipt of such request or admission to hospital.
I. That visits to the Member's home within the PARTICIPATING MEDICAL
GROUP Service Area, by a Primary Care Physician, shall occur as
necessary within that Physician's discretion.
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J. To assure that Members shall not be subject to discrimination in
access to Covered Medical Services.
K. That PARTICIPATING MEDICAL GROUP facilities shall be reasonably
accessible to the physically handicapped.
L. To provide health education and wellness programs for Members
within the guidelines indicated in the "CaliforniaCare Health
Education and Wellness Manual." Programs are to be delivered in
accordance with these guidelines which provide for disease
prevention and management and the promotion of healthier
life-styles.
4.03 Utilization/Quality Management and Grievance Procedures.
To cooperate with BLUE CROSS' administration of its internal quality
of care review and grievance procedures. The parties acknowledge and
agree that authority to perform Utilization Management Program
activities and Quality Management Program activities under this
Agreement is a delegation of BLUE CROSS authority pursuant to Sections
1370 and 1370.1 of the Health and Safety Code, and all or part of this
authority may be revoked at any time. The scope of delegated authority
shall be as set forth in the Utilization Management Program guidelines
and the Quality Management Program guidelines issued by BLUE CROSS and
provided to PARTICIPATING MEDICAL GROUP. The proceedings of the
Utilization Management and Quality Management Committees shall be
strictly confidential between BLUE CROSS and PARTICIPATING MEDICAL
GROUP and are subject to the protections set forth in Sections 1370
and 1370.1.
4.04 Quality Management Program.
To adopt and maintain a Quality Management Program consistent with
BLUE CROSS standards and approved by BLUE CROSS. This program will
cover all Covered Medical Services provided or arranged by
PARTICIPATING MEDICAL GROUP for Members. PARTICIPATING MEDICAL GROUP
agrees to allow on-site review of its Quality Management Program by
BLUE CROSS staff.
A. The Quality Management Program shall:
(1) Provide for Quality Management review by PARTICIPATING
MEDICAL GROUP Physicians and other Health Professionals.
(2) Provide for review of all services provided to Members by
PARTICIPATING MEDICAL GROUP.
(3) Stress health outcomes by providing health education and
wellness programs for Members.
B. The Quality Management Program shall include, but not be limited
to the following activities:
(1) Credentialing and recredentialing of all PARTICIPATING
MEDICAL GROUP Physicians and allied Health Professional
providers.
(2) Credentialing and recredentialing of all Health
Professionals or providers under contract with or employed
by PARTICIPATING MEDICAL GROUP.
(3) Incident identification and risk management.
(4) Member grievance resolution.
(5) General and focused health care audits.
(6) Development and implementation of appropriate
recommendations.
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(7) Documentation of remedial procedures for instances of
inappropriate or substandard service(s) and/or failure to
provide needed Medically Necessary Covered Medical
Service(s).
C. BLUE CROSS shall validate PARTICIPATING MEDICAL GROUP's
development and implementation of the Quality Management Program
through regular audit activities as follows:
(1) The CALIFORNIACARE Quality Management Department shall
review PARTICIPATING MEDICAL GROUP's Quality Management
Program on an annual basis through a scheduled on-site
audit.
(2) The CALIFORNIACARE Quality Management Representative shall
notify PARTICIPATING MEDICAL GROUP of any deficiencies or
areas needing improvement.
(3) PARTICIPATING MEDICAL GROUP shall take corrective action to
eliminate any deficiencies in areas needing improvement
within a reasonable period of time.
(4) BLUE CROSS shall conduct follow-up reviews as necessary.
D. PARTICIPATING MEDICAL GROUP shall:
(1) Make available to BLUE CROSS summaries of all minutes and
notes from any and all Quality Management Committees and/or
activities which specifically relate to Members.
(2) Provide BLUE CROSS with access to all PARTICIPATING MEDICAL
GROUP Quality Management data directly or indirectly
relating to Members.
(3) Make available to BLUE CROSS all composite Quality
Management Program data which include Members in the
composite data set and provide such detail as is available
regarding those Members.
(4) Make known to BLUE CROSS any and all adverse actions taken
against a PARTICIPATING MEDICAL GROUP Physician when such
action is the result of deficiencies in quality of medical
care.
(5) Provide the CALIFORNIACARE Medical Director (or the Medical
Director's clinical designee) with a schedule designating
the time and place of all Quality Management Committee
meetings that relate to Members, in order that he or she
shall, in the Medical Director's discretion, attend. The
CALIFORNIACARE Medical Director shall notify the
PARTICIPATING MEDICAL GROUP in advance of his or her
attendance and shall not be excluded from any deliberation
on activities related to Members.
(6) Permit BLUE CROSS to evaluate and utilize the data obtained
from the CALIFORNIACARE Quality Management Program in a
manner that satisfies BLUE CROSS' requirements for quality
assurance, for BLUE CROSS internal use only.
(7) Implement any necessary changes in procedures, in order to
fully comply with all quality assurance standards, as
mutually agreed by the parties, and provide BLUE CROSS with
the minutes of Quality Management Committee meetings and
reviews that relate to Members.
(8) Report to BLUE CROSS quarterly on activities or actions of
PARTICIPATING MEDICAL GROUP's Quality Management Committee
as such activities or actions relate to Members.
4.05 Utilization Management Program.
To adopt and maintain a Utilization Management Program consistent with
BLUE CROSS standards and approved by BLUE CROSS. This program will
cover all Covered Medical Services provided or arranged by
PARTICIPATING MEDICAL GROUP for Members. PARTICIPATING MEDICAL GROUP
agrees to allow on-site review of Utilization Management Program by
BLUE CROSS.
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A. The Utilization Management Program shall:
(1) Include the development and implementation of appropriate
recommendations.
(2) Include documentation of remedial procedures for instances
of inappropriate or substandard services(s) and or failure
to provide Medically Necessary Covered Medical Services.
(3) Assure that PARTICIPATING MEDICAL GROUP's primary
consideration is the quality of services rendered to
Members.
(4) Assure that all services provided to Members are Medically
Necessary.
(5) Work closely with CALIFORNIACARE Hospitals.
(6) Encompass inpatient, outpatient, and ancillary care.
(7) Utilize prospective, concurrent, and retrospective review.
(8) Assure that all adverse utilization review decisions are
made by a licensed physician, and no denial of a requested
service shall be made except by a licensed physician,
experienced in the area being reviewed. Denial decisions
shall be provided to Members in writing.
(9) Permit BLUE CROSS to have access to all PARTICIPATING
MEDICAL GROUP Utilization Management data directly or
indirectly relating to Members.
B. BLUE CROSS shall validate PARTICIPATING MEDICAL GROUP's
development and implementation of the Utilization Management
Program through regular audit activities as follows:
(1) The CALIFORNIACARE Quality Management Department shall
review PARTICIPATING MEDICAL GROUP' Utilization Management
Program on an annual basis through a scheduled on-site
audit.
(2) The CALIFORNIACARE Quality Management Representative shall
notify PARTICIPATING MEDICAL GROUP of any deficiencies or
areas needing improvement.
(3) PARTICIPATING MEDICAL GROUP shall take corrective action to
eliminate any deficiencies in areas needing improvement
within a reasonable period of time.
(4) BLUE CROSS shall conduct follow-up reviews as necessary.
C. PARTICIPATING MEDICAL GROUP shall:
(1) Make available to BLUE CROSS summaries of all minutes and
notes from any and all Utilization Management Committees
and/or activities which relate to Members.
(2) Make available to BLUE CROSS upon request all composite
Utilization Management data which include Members in the
composite data set and provide such detail as is available
regarding those Members.
(3) Provide the CALIFORNIACARE Medical Director (or the Medical
Director's clinical designee) with a schedule designating
the time and place of all Utilization Management Committee
meetings that relate to Members, in order that he or she
shall, in the Medical Director's discretion, attend. The
CALIFORNIACARE Medical Director shall notify the
PARTICIPATING MEDICAL GROUP in advance of his or her
attendance and shall not be excluded from any deliberation
on activities related to Members.
4.06 Records and Reserves.
A. BLUE CROSS shall have access at reasonable times upon demand to
the books, records and papers of PARTICIPATING MEDICAL GROUP
relating to the services PARTICIPATING MEDICAL GROUP provides to
Members, to the cost thereof, and to payments PARTICIPATING
MEDICAL GROUP receives from Members or others on their behalf.
PARTICIPATING MEDICAL GROUP shall maintain such records and
provide such information to BLUE CROSS and the Commissioner of
Corporations as may be necessary
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for BLUE CROSS' compliance with the requirements of the
Knox-Keene Act. PARTICIPATING MEDICAL GROUP shall maintain such
records for at least five (5) years, and such obligations shall
not be terminated upon a termination of this Agreement, whether
by rescission or otherwise.
B. PARTICIPATING MEDICAL GROUP agrees to provide BLUE CROSS with
audited financial statements of PARTICIPATING MEDICAL GROUP no
later than three (3) months after the end of its fiscal year, and
BLUE CROSS shall maintain strict confidentiality of said records.
Audited financial statements shall illustrate net operating
surplus or profit (after taxes). Documents shall include the
following:
(1) Balance sheets
(2) Statements of revenues and expenses
(3) Statements of cash flow
PARTICIPATING MEDICAL GROUP further agrees that BLUE CROSS shall
have the right to require audited financial statements, in
addition to the latest fiscal year, at any time, upon request,
with reasonable notice, if BLUE CROSS pays for the audit.
C. To maintain financial reserves adequate to cover all risks
assumed by PARTICIPATING MEDICAL GROUP hereunder, including, but
not limited to, unanticipated claims for Referral Services that
are the potential responsibility of PARTICIPATING MEDICAL GROUP.
D. That all information shall be provided to each party to this
Agreement pursuant to procedures designed to protect the
confidentiality of patient medical records in accordance with
applicable legal requirements, recognized standards of
professional practice and generally accepted procedures followed
by health maintenance organizations (HMOs).
E. Upon termination of this Agreement, PARTICIPATING MEDICAL GROUP
shall, upon advance written notice from BLUE CROSS, make
available to BLUE CROSS and permit BLUE CROSS to copy the medical
records of each Member who has been assigned to PARTICIPATING
MEDICAL GROUP.
4.07 Insurance Programs or Policies.
PARTICIPATING MEDICAL GROUP agrees to maintain professional liability
insurance, or other risk protection program, acceptable as defined
under A. and B. below to BLUE CROSS. Notification by PARTICIPATING
MEDICAL GROUP of cancellation or material modification of the coverage
under such professional liability insurance or other risk protection
program is to be made to BLUE CROSS within thirty (30) days prior to
any cancellation or modification. Copies of the agreements or
documents evidencing professional liability insurance or other risk
protection required under this section shall be provided to BLUE CROSS
upon execution of this Agreement.
A. PROFESSIONAL LIABILITY INSURANCE
The coverage to be provided under this section shall be in
minimum amounts of ONE MILLION DOLLARS ($1,000,000.00) for any
one (1) incident, THREE MILLION DOLLARS ($3,000,000.00) annual
aggregate. PARTICIPATING MEDICAL GROUPs which are organized as
Independent Practice Associations shall ensure that PARTICIPATING
MEDICAL GROUP Physicians maintain professional liability
insurance in minimum amounts of ONE MILLION DOLLARS
($1,000,000.00) for any one incident and THREE MILLION DOLLARS
($3,000,000.00) annual aggregate. Furthermore, PARTICIPATING
MEDICAL GROUPS organized as Independent Practice Associations
shall maintain directors and
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officers liability in minimum amounts of ONE MILLION DOLLARS
($1,000,000.00) for any one incident, ONE MILLION DOLLARS
($1,000,000.00) annual aggregate.
B. OTHER INSURANCE
(1) GENERAL LIABILITY INSURANCE. In addition to Subsection A.,
above, PARTICIPATING MEDICAL GROUP shall also maintain a
policy or program of comprehensive general liability
insurance (or other risk protection) with minimum coverage
including no less than ONE HUNDRED THOUSAND DOLLARS
($100,000.00) for PARTICIPATING MEDICAL GROUP's property,
together with combined single limit bodily injury and
property damage insurance of not less that SIX HUNDRED
THOUSAND DOLLARS ($600,000.00).
(2) WORKERS' COMPENSATION. PARTICIPATING MEDICAL GROUP's
employees shall be covered by Workers' Compensation
Insurance in an amount and form meeting all requirements of
applicable provisions of the CALIFORNIA LABOR CODE.
4.08 Administrative Responsibilities.
A. To comply with all CALIFORNIACARE administrative policies and
procedures in the areas listed in Exhibit C (incorporated by
reference herein) and as set forth in the Operations Manual
(incorporated by reference herein) and to comply with all
applicable state and federal laws and regulations relating to the
delivery of Covered Medical Services.
B. To provide a CALIFORNIACARE Coordinator who will create a liaison
with BLUE CROSS and assist Members in accordance with the
procedures set forth in the Operations Manual, and who will be
available to Members during all regular office hours of
PARTICIPATING MEDICAL GROUP for the purpose of assisting Members
to resolve any problems which may arise or be perceived by the
Member.
C. To notify BLUE CROSS within Fifteen (15) days concerning:
(1) Any material change in the bylaws, membership, ownership or
officers of PARTICIPATING MEDICAL GROUP which might affect
BLUE CROSS or this Agreement.
(2) Any legal or governmental action initiated against a
PARTICIPATING MEDICAL GROUP Physician or against
PARTICIPATING MEDICAL GROUP which might affect BLUE CROSS or
this Agreement including, but not limited to, any change in
PARTICIPATING MEDICAL GROUP Physician(s) licensure,
insurance, certification, malpractice, disciplinary
experience or physical or mental health status.
(3) Any other situation that may interfere with PARTICIPATING
MEDICAL GROUP's or PARTICIPATING MEDICAL GROUP Physician's
duties and obligations under this Agreement.
D. To obtain BLUE CROSS' prior written approval for any literature
related to CALIFORNIACARE and intended for Members.
E. To continually meet all criteria for PARTICIPATING MEDICAL
GROUPS, set forth in the Operations Manual, and to continually
meet all criteria for Satellite Facilities (if applicable) set
forth in the Operations Manual.
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F. To provide BLUE CROSS, on a monthly basis, all ambulatory
encounter data either directly or through PARTICIPATING MEDICAL
GROUP's billing agent in the file format as shown in the
Operations Manual.
G. To comply with BLUE CROSS programs related to the management of
pharmaceutical expenses.
H. That all financial terms of this Agreement shall be and remain
confidential and shall not be disclosed to any third party,
except as required by law or as required to supply information
required by any financial institution.
4.09 Payments and Member Billing.
A. To accept the monthly Capitation payment from BLUE CROSS as
payment in full for Capitation Services (including all Referral
Services) provided or arranged hereunder, and not to seek
additional payments or compensation from Members for Covered
Medical Services. The foregoing restriction shall not apply to
co-payments, which may be collected by PARTICIPATING MEDICAL
GROUP in accordance with the applicable provisions of the Benefit
Agreement(s), nor shall it apply to billings and collections with
respect to non-Covered Medical Services rendered to Members by
PARTICIPATING MEDICAL GROUP. However, to the extent that the
PARTICIPATING MEDICAL GROUP's billing office is aware of the
Member's payment responsibility, PARTICIPATING MEDICAL GROUP
agrees to advise the Member of that payment responsibility prior
to rendering any service requiring a co-payment, or any
non-Covered Medical Service.
If PARTICIPATING MEDICAL GROUP should receive any surcharge or
payment from a Member, in addition to those permissible charges
set forth above, PARTICIPATING MEDICAL GROUP shall promptly
refund the full amount thereof to the Member.
B. To never charge any Member for any health service which has been
deemed not Medically Necessary or not appropriate after
utilization review by PARTICIPATING MEDICAL GROUP, unless the
Member specifically requests the service and acknowledges in
writing that the service is not a Covered Medical Service under
the Member's Benefit Agreement.
C. That BLUE CROSS and PARTICIPATING MEDICAL GROUP respectively
acknowledge that the authority and responsibility for
coordination of benefits shall be carried out in accordance with
the provisions set forth in the Benefit Agreements and the
Operations Manual.
D. That PARTICIPATING MEDICAL GROUP shall promptly notify, in
writing, the CALIFORNIACARE Case Management Department of all
cases that reach the Enrollment Protection or Case Management
Stop-Loss levels specified herein.
E. To pay all Health Professionals and hospitals who have rendered
authorized Referral Services or Out-of-Area Emergency Services to
Members, within forty-five (45) working days following receipt of
a clean, undisputed claim, consistent with the regulations of the
Commissioner of Corporations governing BLUE CROSS.
4.10 Membership.
A. To accept any and all Members who select PARTICIPATING MEDICAL
GROUP until such time as PARTICIPATING MEDICAL GROUP shall have
provided ninety (90) days prior written notice to BLUE CROSS that
it has reached its maximum capacity as set forth in Section 16.08
herein, or that it anticipates reaching such maximum within
ninety (90) days from the date of the notice to BLUE CROSS. The
maximum capacity of PARTICIPATING
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MEDICAL GROUP designated in Section 16.08 shall be reduced only
upon ninety (90) days written notice to BLUE CROSS. The parties
acknowledge their understanding that enrollment from individual
accounts, or changes in selection of PARTICIPATING MEDICAL GROUP
by Members, are not entirely within the control of BLUE CROSS.
B. That PARTICIPATING MEDICAL GROUP will not request, demand,
require or otherwise seek the transfer or removal of any Member
from the care of PARTICIPATING MEDICAL GROUP, based on that
Member's need of, or utilization of, Medically Necessary
services.
C. PARTICIPATING MEDICAL GROUP agrees that, in the event a Member
who is covered for workers' compensation benefits by a workers'
compensation carrier affiliated with BLUE CROSS, seeks services
for a work-related illness or injury, PARTICIPATING MEDICAL GROUP
shall have the option to (a) provide such Medically Necessary
medical services or (b) refer such Member to a provider that
participates in the Prudent Buyer Comp provider network or the
CalCare Comp provider network, whichever is applicable. In the
event that PARTICIPATING MEDICAL GROUP elects to treat such
Member, PARTICIPATING MEDICAL GROUP shall complete a Doctor's
First Report of Injury as defined in the California Labor Code.
As payment for such medical services rendered, PARTICIPATING
MEDICAL GROUP agrees to accept, as payment in full, compensation
in accordance with the fee schedule set forth in Exhibit E of the
Agreement (incorporated by reference herein). PARTICIPATING
MEDICAL GROUP further agrees that, in the event such Member
requires medical services in connection with such work-related
illness or injury beyond the treatment provided at the initial
visit, PARTICIPATING MEDICAL GROUP shall refer such Member only
to a provider that participates in the Prudent Buyer Comp
provider network or the CalCare Comp provider network, whichever
is applicable.
D. That unless agreed to in writing by BLUE CROSS, this Agreement
shall not apply to organized physician groups (including, but not
limited to, Independent Practice Associations) that PARTICIPATING
MEDICAL GROUP acquires, manages or affiliates with subsequent to
the effective date of this Agreement.
E. When the BLUE CROSS Managed Care Network is utilized by an
Affiliate or Other Payor, PARTICIPATING MEDICAL GROUP agrees to
provide services to Covered Persons of that Affiliate or Other
Payor in accordance with the terms of this Agreement. BLUE CROSS
shall compensate PARTICIPATING MEDICAL GROUP in accordance with
the terms of this Agreement for services provided to Covered
Persons of any such Other Payor. When an Other Payor utilizes the
Managed Care Network, such Other Payor shall comply with the
terms of this Agreement.
In the event the BLUE CROSS Managed Care Network is to be
utilized by an Other Payor that has operational requirements that
are materially different from those required under this
Agreement, BLUE CROSS agrees to notify PARTICIPATING MEDICAL
GROUP in writing thirty (30) days prior to the commencement of
such utilization. PARTICIPATING MEDICAL GROUP may decline to
provide services to such Other Payor by providing written notice
of such decision to BLUE CROSS within ten (10) days of receipt of
notice by BLUE CROSS referenced above.
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V. BLUE CROSS SERVICES AND RESPONSIBILITIES
BLUE CROSS agrees:
5.01 To perform, or arrange for the performance of, all necessary
accounting and enrollment functions with respect to marketing and
administering the CALIFORNIACARE program, and to issue an
identification card to each Subscriber or to each Subscriber and one
additional eligible Member covered under a two-party or family
contract as described in the Operations Manual.
5.02 To provide PARTICIPATING MEDICAL GROUP with Member Eligibility
Reports, as set forth in Article VI.
5.03 That, to the extent compatible with its obligations to BLUE CROSS
hereunder, PARTICIPATING MEDICAL GROUP reserves the right to provide
professional services to persons who are not Members.
5.04 To provide PARTICIPATING MEDICAL GROUP with claims paid and
Non-Capitated Services data as described in the Operations Manual.
5.05 To make trained personnel available to PARTICIPATING MEDICAL GROUP to
assist in Quality Management activities, the establishment of
procedures for pre-admission medical review and concurrent medical
review of Members who require, or may require, hospitalization.
5.06 To notify PARTICIPATING MEDICAL GROUP of any CALIFORNIACARE Group
Benefit Agreements between BLUE CROSS and employers, government
agencies, or any other groups, which may substantially affect
enrollment at PARTICIPATING MEDICAL GROUP.
5.07 To undertake reasonable efforts, in accordance with a standard of good
faith, to assure that Members assigned to PARTICIPATING MEDICAL GROUP
will live or work within the Service Area defined in this Agreement.
However, BLUE CROSS reserves the right to assign any Members to
PARTICIPATING MEDICAL GROUP at the Member's open enrollment period, or
when the Member changes residence, or when BLUE CROSS determines such
transfer to be in the Member's best interest due to special
circumstances under the terms of the Member's Benefit Agreement.
5.08 To exercise reasonable efforts to negotiate special rates with
hospitals and other providers who contract with BLUE CROSS to render
Non-Capitated Services to Members and to pay hospitals in accord with
those agreements.
5.09 To notify and consult with PARTICIPATING MEDICAL GROUP with respect to
the development of any material changes, as determined by BLUE CROSS,
or amendments to the Benefit Agreements, and to obtain PARTICIPATING
MEDICAL GROUP's consent to changes that BLUE CROSS believes may
materially affect PARTICIPATING MEDICAL GROUP, except for changes
required by law. The foregoing consent will not be unreasonably
withheld by PARTICIPATING MEDICAL GROUP, so long as Capitation
payments are adjusted as mutually agreed to reflect any additional
services which may be required due to any amendment or change in
Member benefits.
5.10 To accept sole responsibility for filing reports, obtaining approvals,
and complying with the applicable laws and regulations of state,
federal, and other regulatory agencies having jurisdiction over BLUE
CROSS, on the condition that PARTICIPATING MEDICAL GROUP cooperates in
providing BLUE CROSS with any information and assistance reasonably
required. PARTICIPATING MEDICAL GROUP is not required to provide
information which is confidential in any other existing contract of
PARTICIPATING MEDICAL GROUP.
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5.11 That nothing contained in this Agreement is intended to interfere with
the professional relationship between any Member and the Member's
PARTICIPATING MEDICAL GROUP Physician(s).
5.12 To collect, or arrange to have collected, all premiums, Member
payments and other items of income to which BLUE CROSS is entitled
under its group and individual contracts or otherwise, except for (a)
co-payments, (b) payments for non-Covered Medical Services, (c)
coordination of benefits payments for professional services which may
be collected by PARTICIPATING MEDICAL GROUP under the conditions set
forth in the Member's Benefit Agreement, and (d) third party liability
payments for professional services. Pursuant to the Benefit
Agreement(s) BLUE CROSS may hold a lien on third party liability
payments in the amount of benefits paid by BLUE CROSS and the value of
medical care provided under CALIFORNIACARE for the treatment of the
illness, injury or condition for which a third party is liable. BLUE
CROSS shall assign to PARTICIPATING MEDICAL GROUP that portion of any
such lien related to professional services rendered under this
Agreement by PARTICIPATING MEDICAL GROUP. PARTICIPATING MEDICAL
GROUP's methods of collection of such payments shall be conducted in a
reasonable and nonegregious manner and only proper legal procedures
may be used to enforce such payment.
5.13 To consult with PARTICIPATING MEDICAL GROUP regarding any material
changes, as determined by BLUE CROSS, in operating procedures and
policies, as set forth in the Operations Manual, and to provide
PARTICIPATING MEDICAL GROUP with an opportunity to comment on any
policy and procedural changes which may have a substantial impact on
PARTICIPATING MEDICAL GROUP.
VI. ELIGIBILITY LISTINGS
6.01 Eligibility listings of Members of employer groups who have personally
selected, or been assigned to, PARTICIPATING MEDICAL GROUP shall be
provided in the following manner:
A. BLUE CROSS shall maintain, update and distribute monthly, Member
Eligibility Reports listing the persons who are eligible to
receive Covered Medical Services during the applicable month.
B. PARTICIPATING MEDICAL GROUP shall receive a copy of the
Eligibility Reports at PARTICIPATING MEDICAL GROUP's main
site. Should PARTICIPATING MEDICAL GROUP request reports in
an electronic format, paper reports will continue to be
provided for an additional ninety (90) days only. As
described in the Operations Manual, BLUE CROSS will charge a
fee of between [ ** ] and [ ** ] per report, for each of
the following:
(1) duplicate copies of paper reports,
(2) copies of paper reports delivered in addition to reports in
electronic format after the ninety (90) day parallel
reporting period (tape, diskette, NDM or other electronic
medium),
(3) duplicate reports for prior months.
C. BLUE CROSS will discourage retroactive cancellation by an
employer group of more than ninety (90) days from BLUE CROSS'
applicable monthly billing process date. However, when no
services have been rendered, BLUE CROSS may make occasional
exceptions due to legitimate administrative processing
requirements. Notwithstanding any retroactive cancellation of a
Member by an employer group of more than ninety (90) days, BLUE
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CROSS shall not be entitled to any refund of Capitation payments
made for such Member beyond the ninety (90) day period. BLUE
CROSS will attempt to discourage retroactively adding any Member
after the applicable billing is reconciled. In the event BLUE
CROSS finds it necessary to assign, up to ninety (90) days
retroactively, a new Member to PARTICIPATING MEDICAL GROUP,
Capitation payment for that Member shall be made, and
PARTICIPATING MEDICAL GROUP agrees to be responsible for all
Covered Medical Services due that Member under the terms of the
Member's Benefit Agreement which were provided or arranged by
PARTICIPATING MEDICAL GROUP, from the date the Member was
assigned.
D. In the event care is provided to an ineligible person, based on
an erroneous or delayed Eligibility Report, BLUE CROSS shall be
financially responsible for all care provided by PARTICIPATING
MEDICAL GROUP prior to the time PARTICIPATING MEDICAL GROUP
received notice of that person's ineligibility and, on the
condition that PARTICIPATING MEDICAL GROUP shall supply BLUE
CROSS with evidence that PARTICIPATING MEDICAL GROUP has
unsuccessfully sought payment for all or a portion of the charges
from the ineligible person, or the person having legal
responsibility for the ineligible person, through two billing
cycles, or through a period of sixty (60) days, whichever is
greater. In that event, BLUE CROSS' responsibility for physician
compensation shall be measured as set forth in Exhibit E or the
actual billed amount, whichever is less. The obligations of BLUE
CROSS unclear this Subsection D shall be conditioned upon the
exercise of prudent judgment by PARTICIPATING MEDICAL GROUP,
evidenced by reasonable efforts to contact BLUE CROSS for
verification of the eligibility of each Member prior to providing
or arranging Covered Medical Services.
VII. COMPENSATION TO PARTICIPATING MEDICAL GROUP
7.01 Exhibits D, G and G-1 (all incorporated by reference herein), set
forth Capitation payments for new and renewing business. The
applicable Capitation payment for each Member assigned to
PARTICIPATING MEDICAL GROUP, shall be paid monthly, prorated in
accordance with Member eligibility.
Such Capitation payment shall be adjusted for Member age, sex and
Benefit Agreement in accordance with age, sex and plan relativities
that have been developed by BLUE CROSS based upon actuarial
assumptions and BLUE CROSS' utilization experience. BLUE CROSS
reserves the right to adjust such relativity factors, upon contract
renewal, based upon BLUE CROSS' experience.
7.02 Capitation shall be paid in consideration for providing Capitation
Services and arranging NonCapitated Services for each Member assigned
to PARTICIPATING MEDICAL GROUP, and in consideration for all
Capitation Services arranged through referral for Members by
PARTICIPATING MEDICAL GROUP. The Capitation payment shall be made by
the tenth of each month and shall be computed on the basis of the most
current group and individual information available. In the event that
an error is made in the computation of the Capitation payment,
resulting in an overpayment or underpayment to PARTICIPATING MEDICAL
GROUP, BLUE CROSS reserves the right to adjust subsequent Capitation
payments to PARTICIPATING MEDICAL GROUP to offset such overpayment or
underpayment.
Each Capitation payment shall be accompanied by a remittance summary.
The remittance summary identifies the total Capitation amount payable,
including retroactivity and identifies those Members whose
retroactivity had a financial impact on the total Capitation payment.
A complete listing of Members that are eligible for Capitation
Services is provided in the monthly Eligibility Report, as set forth
in Article VI.
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7.03 PARTICIPATING MEDICAL GROUP agrees that in no event shall any
allowable co-payment or reimbursement amount, or sum thereof, due
PARTICIPATING MEDICAL GROUP, exceed the cost to PARTICIPATING MEDICAL
GROUP of providing the service or item which was billed.
7.04 PARTICIPATING MEDICAL GROUP agrees to continue to provide or arrange
for all Covered Medical Services and benefits to any Member, or former
Member, who is eligible for coverage under the Extension of Benefits
provision of the Benefit Agreements, in exchange for the then current
Capitation amount per Member per month of the Benefit Agreement type
under which the Member is, or was, enrolled. Under the circumstances
described in this Section 7.04 BLUE CROSS shall be financially
responsible for Non-Capitated Services.
7.05 PARTICIPATING MEDICAL GROUP agrees to be responsible for professional
and technical charges, as described in Exhibit A-1 (incorporated by
reference herein), for laboratory, radiology and diagnostic testing
procedures and diagnostic imaging examinations rendered to Members, as
a part of, and concurrent with benefits set forth in this Agreement,
whether billed by the hospital or by a qualified health professional
7.06 In the event a referral provider has not been reimbursed for
authorized Referral Services or that any other provider has not been
reimbursed by PARTICIPATING MEDICAL GROUP as required under their
agreement for services provided to Members within forty-five (45)
working days following receipt of a clean, undisputed claim, then
after notice BLUE CROSS shall have the option to pay a clean and
uncontested claim and deduct such payment (including any interest
payable under Health & Safety Code Section 1371), plus an
administrative charge equal to [ ** ] of the claim amount,
from any money due from BLUE CROSS to PARTICIPATING MEDICAL GROUP. If
a total of five (5) or more instances occur where any provider
associated with PARTICIPATING MEDICAL GROUP bills a Member in
violation of this Agreement during any calendar year, BLUE CROSS may,
in its sole discretion, suspend the assignment of new Members to
PARTICIPATING MEDICAL GROUP until such time as PARTICIPATING MEDICAL
GROUP has rectified the problem to BLUE CROSS' satisfaction.
VIII. ENROLLMENT PROTECTION
8.01 Enrollment Protection is a program designed to limit PARTICIPATING
MEDICAL GROUP's liability for Capitation Services expense.
8.02 For PARTICIPATING MEDICAL GROUPs with less than [ ** ] Members, on
the effective date of this Agreement, the liability of PARTICIPATING
MEDICAL GROUP for expenses for Capitation Services rendered to any
single Member during the calendar year shall be limited to the first
[ ** ] of such expenses.
8.03 If PARTICIPATING MEDICAL GROUP's assigned CALIFORNIACARE and BLUE
CROSS PLUS enrollment is [ ** ] or more Members, on the effective
date of this Agreement, PARTICIPATING MEDICAL GROUP agrees to accept
risk under either Subsection A or Subsection B, as indicated below.
A. The liability of PARTICIPATING MEDICAL GROUP for expenses for
Capitation Services rendered to any single Member during the
calendar year, shall be limited to the first [ ** ] of
Capitation Services expenses, which have been incurred by
PARTICIPATING MEDICAL GROUP for that Member, or
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B. The liability of PARTICIPATING MEDICAL GROUP for expenses for
Capitation Services rendered to any single Member during the
calendar year, shall be limited to the first [ ** ] of
Capitation Services expenses which have been incurred by
PARTICIPATING MEDICAL GROUP for that Member.
PARTICIPATING MEDICAL GROUP hereby elects to accept risk pursuant
to Section 8.03.
/ / A. / / B. (Check one).
8.04 Notwithstanding Section 8.02 or 8.03 above, the liability of
PARTICIPATING MEDICAL GROUP for expenses for Capitation Services for
Members who have been diagnosed as having Acquired Immune Deficiency
Syndrome (AIDS) shall be limited to [ ** ] for any Member who has
been diagnosed as having AIDS according to the most current criteria
established by the Center for Disease Control (CDC) at the time of
the diagnosis.
8.05 The total expenses of PARTICIPATING MEDICAL GROUP for Capitation
Services rendered to any single Member during the calendar year shall
be calculated according to the fee schedule set forth in Exhibit E. In
the event the foregoing calculation for any given procedure results in
a figure greater than the actual cost of the procedure as billed by a
third party, then the actual cost for that procedure shall be deemed
to be the amount actually paid by PARTICIPATING MEDICAL GROUP.
8.06 Expenses in connection with the following services shall not be
included as Capitation Services expenses incurred by PARTICIPATING
MEDICAL GROUP in reaching the Enrollment Protection level:
A. Services rendered in connection with Workers' Compensation cases.
B. Services for which payment is obtained from third-party sources.
C. Services for which payment is obtained from BLUE CROSS through
any coverage other than CALIFORNIACARE.
All co-payments applicable to Capitation Services rendered to Members
shall be subtracted from Capitation Services expenses. When the
PARTICIPATING MEDICAL GROUP is capitated by two coverages for one
Member, the PARTICIPATING MEDICAL GROUP agrees to coordinate all
related co-payments under the Coordination of Benefits rules in the
Member's Benefit Agreement.
8.07 PARTICIPATING MEDICAL GROUP shall maintain records necessary to
evidence having reached the Enrollment Protection level. After
reaching the Enrollment Protection level with regard to any Member,
during the remainder of the calendar year PARTICIPATING MEDICAL GROUP
shall bill BLUE CROSS for [ ** ] of services rendered, or provided,
to that Member by PARTICIPATING MEDICAL GROUP, calculated in
accordance with Sections 8.02, 8.03, 8.04, 8.05 and 8.06.
Reimbursement to PARTICIPATING MEDICAL GROUP for Enrollment
Protection shall be made by BLUE CROSS in accordance with the lesser
of actual billed charges or the fee schedule set forth in Exhibit E,
on a monthly basis, within forty-five (45) working days of submission
of complete and accurate documentation by PARTICIPATING MEDICAL GROUP.
Services which are not set forth in Exhibit E shall be reimbursed by
BLUE CROSS at the actual charges paid by PARTICIPATING MEDICAL GROUP.
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8.08 PARTICIPATING MEDICAL GROUP and BLUE CROSS acknowledge and agree that
PARTICIPATING MEDICAL GROUP limitations of liability as set forth in
this Article VIII shall be conditioned upon submission of clean
undisputed claims to BLUE CROSS no later than twelve (12) months after
the date of the service rendered to Members. Any claims under the
Enrollment Protection program which would otherwise be the
responsibility of BLUE CROSS under this Agreement shall be the
financial responsibility of PARTICIPATING MEDICAL GROUP if a clean
undisputed claim is not submitted within twelve (12) months of the
date of service. For the purpose of this Agreement, a clean claim
shall mean a claim that meets all BLUE CROSS requirements with respect
to back-up information.
IX. NON-CAPITATED SERVICES
9.01 Non-Capitated Services, as defined in this Article, shall include
Covered Medical Services, as set forth in the applicable Benefit
Agreement and as authorized or referred by PARTICIPATING MEDICAL
GROUP.
The Covered Medical Services encompassed in Non-Capitated Services are
delineated in Exhibit A(1) and include, but are not limited to:
A. Inpatient Hospital Services (exclusive of professional charges).
B. Outpatient Hospital Services (exclusive of professional charges).
C. Hemodialysis Services (exclusive of professional charges).
D. In-Area Emergency Room Facility Services (exclusive of
professional charges).
E. Related Hospital Services.
F. Skilled Nursing Facility Services.
G. Ambulance Services.
H. Home Health Services.
I. Alternative Birthing Center Services (exclusive of professional
charges).
J. Ten percent (10%) of expenses related to Out-of-Area Emergency
Services (Facility and Professional Expenses).
K. Durable Medical Equipment and prosthetic devices.
L. Hospice Services.
M. [ ** ] of the average wholesale price (AWP) related to
chemotherapy drugs (intravenously administered) and injectable
medications administered during a visit to the physician's office
(excluding take-home insulin).
N. Mammography Services.
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9.02 Billing for Non-Capitated Services shall be as follows:
A. The provider of Non-Capitated Services may bill BLUE CROSS
directly, in which case, BLUE CROSS shall reimburse said provider
within forty-five (45) working days following receipt of a clean
undisputed claim accompanied by an authorization from
PARTICIPATING MEDICAL GROUP; or,
B. The provider of Non-Capitated Services may bill PARTICIPATING
MEDICAL GROUP, in which case, PARTICIPATING MEDICAL GROUP shall
bill BLUE CROSS for reimbursement. BLUE CROSS shall reimburse
PARTICIPATING MEDICAL GROUP within forty-five (45) working days
following BLUE CROSS's receipt of a clean undisputed claim from
PARTICIPATING MEDICAL GROUP, on the condition that such claim
shall be submitted to BLUE CROSS no later than twelve (12) months
after the date of service. This section shall only apply for the
following Non-Capitated Services: mammography services, DME,
prosthetics and injectable medications (including chemotherapy
drugs and infused substances).
In either case described above, BLUE CROSS shall pay contracting
providers at the rate negotiated between BLUE CROSS and said
provider. In the case of non-contracting providers, BLUE CROSS
shall pay the lesser of: the actual billed charges, or the
maximum allowable rate according to the BLUE CROSS Customary and
Reasonable charges, or the rate arranged for by a CALIFORNIACARE
Case Manager.
9.03 Case Management Stop-Loss.
A. The Case Management Program is a program in which a Member's
medical needs are assessed by PARTICIPATING MEDICAL GROUP in
conjunction with a CALIFORNIACARE Case Manager to explore and
coordinate treatment alternatives. PARTICIPATING MEDICAL GROUP
should notify the CALIFORNIACARE Case Manager prior to the Member
achieving the applicable Case Management Stop-Loss Threshold, as
described below.
B. For PARTICIPATING MEDICAL GROUPs with enrollment of [ ** ] or
more Member Months for the calendar year, the Case Management
Stop-Loss Threshold for an individual Member shall be [ ** ]
of Non-Capitated Expenses.
For PARTICIPATING MEDICAL GROUPs with enrollment of less than
[ ** ] Member Months, the Case Management Stop-Loss Threshold
shall be [ ** ] of Non-Capitated Expenses.
C. Authorized expenses for Member's Non-Capitated Services, up to
the Case Management Stop-Loss Threshold specified above will be
accrued toward PARTICIPATING MEDICAL GROUP's PMPM Non-Capitated
Expenses. Additionally, [ ** ] of expenses between the
applicable Case Management Stop-loss Threshold and [ ** ]
incurred by an individual Member will be accrued toward
PARTICIPATING MEDICAL GROUP's PMPM Non-Capitated Expenses.
Non-Capitated expenses greater than [ ** ] for any individual
Member will not be included in PARTICIPATING MEDICAL GROUP's PMPM
Non-Capitated Expenses.
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D. The Case Management Stop-loss Thresholds described above will
apply to Members whose treatment includes transplants (solid
organ and bone marrow/stem cell), except in those cases where
PARTICIPATING MEDICAL GROUP fails to notify BLUE CROSS, as
described in Section 4.02F. When PARTICIPATING MEDICAL GROUP
fails to provide such notice, all of that Member's Non-Capitated
Expenses will be included in PARTICIPATING MEDICAL GROUP's PMPM
Non-Capitated Expenses.
9.04 Calculating PARTICIPATING MEDICAL GROUP PMPM Non-Capitated Expenses.
The Non-Capitated Expenses shall include actual expenses incurred by
BLUE CROSS to provide Non-Capitated Services to Members, as authorized
or referred by the PARTICIPATING MEDICAL GROUP. Expenses above the
Case Management Stop-Loss Threshold, as set forth in Section 9.03, and
expenses incurred by Members or former Members covered under the
Extension of Benefits provision of the Benefit Agreements are excluded
from PARTICIPATING MEDICAL GROUP's Non-Capitated Expenses for purposes
of determining the Non-Capitated Performance Settlement.
BLUE CROSS shall accrue Non-Capitated Expenses by each PARTICIPATING
MEDICAL GROUP by the calendar year the services were incurred and paid
through one hundred and twenty (120) days (April 30) after year-end.
Beginning in year two (2) of this Agreement, any claims received after
calculation of the final Non-Capitated Performance Settlement will be
charged to the following year's Non-Capitated Expenses. Any
Non-Capitated Services treatments that begin in one calendar year and
extend into the next year shall accrue to the year the treatment
began. Notwithstanding the aforementioned, any claims for
Non-Capitated Services or Shared Risk Services (as defined in the
CALIFORNIACARE Medical Services Agreement in effect for years prior to
1997) paid after April 30, 1997 will be charged to the 1997
Non-Capitated Expense.
PARTICIPATING MEDICAL GROUP's PMPM Non-Capitated Expense is the
quotient of PARTICIPATING MEDICAL GROUP's Non-Capitated Expenses
divided by PARTICIPATING MEDICAL GROUP's calendar year Member Months.
BLUE CROSS shall provide PARTICIPATING MEDICAL GROUP with quarterly
reports advising them of their Non-Capitated Expenses. The Operations
Manual describes the PARTICIPATING MEDICAL GROUP reports.
9.05 Non-Capitated Performance Settlement Schedule.
Non-Capitated Performance Settlement Schedule shall mean a schedule
that will be the basis for determining the Non-Capitated Performance
Settlement. This schedule presents BLUE CROSS's prior year aggregate
PMPM Non-Capitated Expenses adjusted by factors to account for medical
inflation. Exhibit F (incorporated by reference herein) sets forth the
Non-Capitated Performance Settlement Schedule.
9.06 Calculating the Non-Capitated Performance Settlement.
A. PARTICIPATING MEDICAL GROUP's Adjusted PMPM Non-Capitated
Expense.
PARTICIPATING MEDICAL GROUP's Adjusted PMPM Non-Capitated
Expenses is the quotient of PARTICIPATING MEDICAL GROUP's PMPM
Non-Capitated Expenses divided by the composite of PARTICIPATING
MEDICAL GROUP's Age/Sex, Plan, Stop-Loss and Region Factors.
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The PARTICIPATING MEDICAL GROUP's PMPM Non-Capitated Expense is
adjusted to account for the PARTICIPATING MEDICAL GROUP's mix of
Members and make the PARTICIPATING MEDICAL GROUP's PMPM
Non-Capitated Expenses comparable to the Non-Capitated
Performance Settlement Schedule, as set forth in Exhibit F.
B. Non-Capitated Performance Settlement.
If the PARTICIPATING MEDICAL GROUP's Adjusted PMPM Non-Capitated
Expense is equal to or greater than the Attachment Point, the
PARTICIPATING MEDICAL GROUP will not receive a Non-Capitated
Performance Settlement. If the PARTICIPATING MEDICAL GROUP's
Adjusted PMPM Non-Capitated Expense is less than the Attachment
Point, the PARTICIPATING MEDICAL GROUP will receive a
Non-Capitated Performance Settlement.
The PMPM Non-Capitated Performance Settlement is determined by
allocating a portion of the difference between the Attachment
Point and the PARTICIPATING MEDICAL GROUP's Adjusted PMPM
Non-Capitated Expense. The proportion of the difference allocated
to the PMPM Non-Capitated Performance Settlement is according to
the Non-Capitated Performance Settlement Schedule, set forth in
Exhibit F. The PMPM Non-Capitated Performance Settlement amount
multiplied by the PARTICIPATING MEDICAL GROUP's calendar year
Member Months determines the total Non-Capitated Performance
Settlement.
Within forty-five (45) working days after April 30, BLUE CROSS
shall pay the Non-Capitated Performance Settlement if a
Non-Capitated Performance Settlement amount is due to the
PARTICIPATING MEDICAL GROUP.
Notwithstanding the above, in the event this Agreement is
terminated, BLUE CROSS shall calculate the Non-Capitated
Performance Settlement in accordance with this Article IX and
shall pay PARTICIPATING MEDICAL GROUP a preliminary Non-Capitated
Performance Settlement equal to [ ** ] of any amount due
PARTICIPATING MEDICAL GROUP based upon this calculation. Twelve
(12) months following the calculation and payment of the
preliminary Non-Capitated Performance Settlement, BLUE CROSS
shall calculate a final Non-Capitated Performance Settlement in
accordance with this Article IX and shall pay any amount due
PARTICIPATING MEDICAL GROUP, less any amounts paid at the time
of preliminary Non-Capitated Performance Settlement. In the
event monies paid PARTICIPATING MEDICAL GROUP at the time of
the preliminary Non Capitated Performance Settlement exceed the
final Non-Capitated Performance Settlement, PARTICIPATING MEDICAL
GROUP shall reimburse BLUE CROSS any amounts owed within
forty-five (45) working days of notification from BLUE CROSS.
X. OUTPATIENT PRESCRIPTION DRUG EXPENSE
10.01 Calculating PARTICIPATING MEDICAL GROUP PMPM Outpatient Prescription
Drug Expenses ("PMPM OPDE").
The Outpatient Prescription Drug Expense ("OPDE") shall include
expenses incurred by BLUE CROSS to provide covered outpatient
prescription drugs to Members assigned to PARTICIPATING MEDICAL GROUP.
BLUE CROSS shall accrue OPDE for each PARTICIPATING MEDICAL GROUP by
the calendar year the services were incurred and paid through one
hundred and twenty (120) days after yearend. Beginning in year two (2)
of this Agreement, any claims received after calculation of the final
Outpatient Prescription Drug Settlement will be charged to the
following year's OPDE. Notwithstanding the aforementioned, any claims
for outpatient prescription drug services
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incurred prior to 1997 but paid after the final Non-Capitated
Performance Settlement calculation for 1996 and if applicable, for
subsequent years, will be charged to the following year's OPDE.
PARTICIPATING MEDICAL GROUP's PMPM OPDE is the quotient of
PARTICIPATING MEDICAL GROUP's OPDE divided by the PARTICIPATING
MEDICAL GROUP's calendar year Member Months for Members with
outpatient prescription drug benefits.
BLUE CROSS shall provide PARTICIPATING MEDICAL GROUP with quarterly
reports advising them of their OPDE. Report formats are described in
the Operations Manual.
10.02 Outpatient Prescription Drug Settlement Schedule.
The Outpatient Prescription Drug Settlement Schedule set forth at
Exhibit H (incorporated by reference herein) will be the basis for
determining PARTICIPATING MEDICAL GROUP's Outpatient Prescription Drug
Settlement.
10.03 Calculating the Outpatient Prescription Drug Settlement.
If PARTICIPATING MEDICAL GROUP's PMPM OPDE is less than the Outpatient
Prescription Drug Expense Target, the PARTICIPATING MEDICAL GROUP will
receive an Outpatient Prescription Drug Settlement. If the
PARTICIPATING MEDICAL GROUP's PMPM Outpatient Prescription Drug
Expense is equal to or greater than the Outpatient Prescription Drug
Expense Target, the PARTICIPATING MEDICAL GROUP will not receive an
Outpatient Prescription Drug Settlement.
A. Outpatient Prescription Drug Settlement.
The PMPM Outpatient Prescription Drug Settlement is determined by
allocating a portion of the difference between the OPDE Target,
and the PARTICIPATING MEDICAL GROUP's PMPM Outpatient
Prescription Drug Expense. The proportion of the difference
allocated to the PMPM Outpatient Prescription Drug Settlement is
determined in accordance with the Outpatient Prescription Drug
Schedule, set forth in Exhibit H.
B. Formulary Utilization Incentive.
If PARTICIPATING MEDICAL GROUP's use of the BLUE CROSS Outpatient
Prescription Drug Formulary (the "Formulary") is equal to or
greater than [ ** ], as described in Exhibit H, and
PARTICIPATING MEDICAL GROUP's PMPM OPDE is less than the OPDE
Target, an additional [ ** ] PMPM will be added to
PARTICIPATING MEDICAL GROUP's PMPM Outpatient Prescription Drug
Settlement.
The amount of the Outpatient Prescription Drug Settlement and
Formulary utilization incentive will be based on the applicable PMPM
Settlement calculation under Exhibit H multiplied by PARTICIPATING
MEDICAL GROUP's Member Months for Members with outpatient prescription
drug benefits. Within forty-five (45) working days after April 30,
BLUE CROSS will pay any Outpatient Prescription Drug Settlement that
is due PARTICIPATING MEDICAL GROUP for the previous year.
Notwithstanding the above, in the event this Agreement is terminated
BLUE CROSS shall calculate the Outpatient Prescription Drug Settlement
in accordance with this Article X and shall pay PARTICIPATING MEDICAL
GROUP a preliminary Outpatient Prescription Drug Settlement equal to
[ ** ] of any amount due PARTICIPATING MEDICAL GROUP based upon
this calculation. Twelve (12) months following the calculation and
payment of the preliminary Outpatient Prescription Drug Settlement,
BLUE CROSS shall calculate a final
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Outpatient Prescription Drug Settlement in accordance with this
Article X and shall pay any amount due PARTICIPATING MEDICAL GROUP.
less any amounts paid at the time of preliminary Outpatient
Prescription Drug Settlement. In the event monies paid PARTICIPATING
MEDICAL GROUP at the time of the preliminary Outpatient Prescription
Drug Settlement exceed the final Outpatient Prescription Drug
Settlement, PARTICIPATING MEDICAL GROUP shall reimburse BLUE CROSS any
amounts owed within forty-five (45) working days of notification from
BLUE CROSS.
XI. QUALITY MANAGEMENT BONUS
Blue Cross will evaluate PARTICIPATING MEDICAL GROUP's Quality
Management Program and Member quality of care using a scorecard.
PARTICIPATING MEDICAL GROUP will be notified of the scorecard
parameters and scoring methodology prior to the start of each year, as
described in the Operations Manual.
PARTICIPATING MEDICAL GROUP must meet minimum eligibility criteria to
receive a scorecard score and therefore to be eligible for a Quality
Management Bonus. These criteria include a minimum of [ ** ] Member
months for a calendar year and submission to BLUE CROSS of all
necessary encounter data.
A Quality Management Bonus will be paid if PARTICIPATING MEDICAL
GROUP's performance on the scorecard is average or above average. No
Quality Management Bonus will be paid if PARTICIPATING MEDICAL GROUP's
scorecard performance is below average. BLUE CROSS will notify
PARTICIPATING MEDICAL GROUP of the scorecard results sixty (60) days
following the end of the calendar year.
The Quality Management Bonus paid to PARTICIPATING MEDICAL GROUP,
should a payment be due in accordance with the PMPM Quality Management
Bonus Schedule shown in Exhibit I (incorporated by reference herein),
will be made by the fifteenth of June following the end of the
calendar year for which it is based.
XII. BILLING FOR HMO-USA AWAY FROM HOME CARE SERVICES
12.01 PARTICIPATING MEDICAL GROUP agrees to render or refer urgent care,
Emergency services, follow-up care and routine services, as Host HMO
to out-of-state members of HMO-USA participating plans, when such care
is prearranged by BLUE CROSS. Urgent care as it relates to the HMO-USA
Away From Home Care Program means outpatient medical care which the
Host HMO determines is required for an unexpected illness or injury
that is not life threatening, but which cannot reasonably be postponed
until the HMO-USA participating plan member returns to the service
area of the member's Home HMO.
All medical services rendered at PARTICIPATING MEDICAL GROUP or
Satellite Facilities and all Referral Services rendered to members of
HMO-USA participating plans, due to unavailability of the required
services at PARTICIPATING MEDICAL GROUP, shall be paid by BLUE CROSS.
For services PARTICIPATING MEDICAL GROUP provides directly to members
of HMO-USA participating plans, BLUE CROSS shall reimburse
PARTICIPATING MEDICAL GROUP at PARTICIPATING MEDICAL GROUP's invoiced
amount, not to exceed reimbursement in accordance with Exhibit E of
this Agreement. For Referral Services, PARTICIPATING MEDICAL GROUP may
instruct providers of Referral Services to bill BLUE CROSS directly
or, such providers may bill PARTICIPATING MEDICAL GROUP, in which
case, PARTICIPATING MEDICAL GROUP shall be reimbursed by BLUE CROSS.
In all cases, PARTICIPATING MEDICAL GROUP or provider of Referral
Services shall note on the claim that services were
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rendered to a member of an HMO-USA participating plan. Neither
PARTICIPATING MEDICAL GROUP nor provider of Referral Services shall
bill members of HMO-USA participating plans.
12.02 BLUE CROSS agrees to pay PARTICIPATING MEDICAL GROUP within forty-five
(45) working days of receipt of a completed professional services
claim form for authorized services rendered to members of HMO-USA
participating plans.
XIII. TERM OF AGREEMENT, TERMINATION
13.01 This Agreement shall be in effect for a THREE (3) year period (the
"Initial Term") from the date noted on page 1. Unless written notice
of intent not to renew or of intent to modify this Agreement is
provided at least one hundred twenty (120) days prior to completion of
the Initial Term or any subsequent renewal period, this Agreement
shall renew upon the same terms and conditions for consecutive one
year periods each year thereafter.
13.02 Should this Agreement be terminated pursuant to Section 13.01 above,
PARTICIPATING MEDICAL GROUP agrees to continue to provide Capitation
Services and to arrange NonCapitated Services for all Members assigned
to PARTICIPATING MEDICAL GROUP, including any Members who become
eligible during the notice period set forth in Section 13.01 above;
and to provide these services consistent with the terms and conditions
of the applicable Benefit Agreements. In such case, Capitation
Services rendered to Members shall be compensated at the applicable
rates set forth in Exhibit E, until the annual anniversary dates of
the Benefit Agreements of Members assigned to PARTICIPATING MEDICAL
GROUP.
In the event this Agreement is terminated, BLUE CROSS shall have the
right, but not the obligation, to directly pay any bills for expenses
for Referral Services rendered to Members assigned to PARTICIPATING
MEDICAL GROUP which remain outstanding on the date of termination.
BLUE CROSS shall immediately be notified in writing of all such
outstanding bills for Referral Services and BLUE CROSS shall have the
right to set off the amount of such payments against any amount due
PARTICIPATING MEDICAL GROUP for Capitation and NonCapitated Services
pursuant to Article IX, or any other payments due PARTICIPATING
MEDICAL GROUP.
The right to set off such payments against any amounts due under this
Agreement shall be in addition to any other rights BLUE CROSS may have
under this Agreement, or in law or in equity.
13.03 Termination of this Agreement shall not affect any rights or
obligations hereunder which shall have previously accrued, or shall
thereafter arise, with respect to any occurrence prior to termination,
and such rights and obligations shall continue to be governed by the
terms of this Agreement.
Without limiting the foregoing, if this Agreement is terminated,
PARTICIPATING MEDICAL GROUP shall continue to provide and be
compensated under the terms of this Agreement for Covered Medical
Services provided to each Member who is under the care of
PARTICIPATING MEDICAL GROUP at the time of that termination, until the
services being rendered to that Member are completed or reasonable and
medically appropriate provision is made for the assumption of such
services by another contracting provider.
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13.04 In the event of a material breach of this Agreement the party claiming
the breach shall give written notice to the other, with registered or
certified mail. The notice shall specify the breach with as much
detail as possible. The party receiving the notice shall then have
thirty (30) days to commence curing the breach. If the breach is not
cured to the satisfaction of the complaining party within sixty (60)
days after the notice is received by the other party, this Agreement
shall terminate at the end of the sixtieth (60th) day or, if the
breach is by PARTICIPATING MEDICAL GROUP, BLUE CROSS may in the
alternative freeze enrollment of PARTICIPATING MEDICAL GROUP and/or
withhold [ ** ] of the Capitation until such breach is cured to
BLUE CROSS' satisfaction.
XIV. ARBITRATION OF DISPUTES BETWEEN BLUE CROSS AND PARTICIPATING MEDICAL
GROUP
14.01 PARTICIPATING MEDICAL GROUP and BLUE CROSS agree to meet and confer in
good faith to resolve any problems or disputes that may arise under
this Agreement.
14.02 Any problem or dispute arising under this Agreement and/or concerning
the terms of this Agreement that is not satisfactorily resolved under
Section 14.01 shall be arbitrated. The arbitration shall be initiated
by either party making a written demand for arbitration on the other
party. Arbitration shall be conducted by the American Arbitration
Association (AAA) under the Commercial Rules of the AAA. The
arbitration shall also be subject to California Code of Civil
Procedure, Title Nine, Section 1280, ET. SEQ., unless otherwise
mutually agreed. The parties agree that the decision of the arbitrator
shall be final and binding as to each of them, except to the extent
that California or Federal law provide for the review of arbitration
proceedings. Issues as to whether malpractice was committed by a
physician shall not be subject to Arbitration by the AAA unless
otherwise agreed in writing by the parties and the AAA.
14.03 ARBITRATION FEE. In all cases submitted to AAA, the parties agree to
share equally the AAA administrative fee as well as the arbitrator's
fee, if any, unless otherwise assessed by the arbitrator. The
administrative fee shall be advanced by the initiating party.
14.04 ENFORCEMENT OF AWARD. The parties agree that the arbitrator's award
may be enforced in any court having jurisdiction thereof by the filing
of a petition to enforce said award. Costs of filing may be recovered
by the party that initiates the action to have an award enforced.
14.05 ALTERNATIVE DISPUTE SETTLEMENT TECHNIQUES. Should the parties, prior
to submitting a dispute to arbitration, desire to utilize other
impartial dispute settlement techniques, such as mediation or
fact-finding, a joint request for such services may be made to the
AAA, or the parties may initiate such other procedures as they may
mutually agree upon.
14.06 LIMITATION. Nothing contained herein is intended to create, nor shall
it be construed to create, any right of any Member to independently
initiate the arbitration procedure established in this Article. This
limitation shall not prevent BLUE CROSS from initiating such
procedures as the representative of its Members, or PARTICIPATING
MEDICAL GROUP from initiating such procedures on behalf of Members for
whom they have assumed responsibility for the provision of Capitation
Services, and for arranging Non-Capitated Services provided that in
any such case BLUE CROSS or PARTICIPATING MEDICAL GROUP, respectively,
shall be considered the initiating party for the purposes of Section
14.03 hereof.
14.07 Each party hereto agrees to notify the other at the earliest
reasonable time in the event of any dispute which may be arbitrated,
and in the event either party becomes aware of facts or circumstances
which indicate a reasonable possibility of litigation with any third
person or entity, and which are relevant to any rights, obligations,
or other responsibilities under this Agreement.
30
<PAGE>
XV. CALIFORNIACARE MEMBER GRIEVANCE SYSTEM
15.01 In the event a Member perceives a problem which the CALIFORNIACARE
Coordinator is unable to satisfactorily resolve, the Member shall be
advised to complete a Grievance Form and submit it to the
CALIFORNIACARE Coordinator. The grievance shall be reviewed and
resolved if possible, by the PARTICIPATING MEDICAL GROUP's Quality
Management Committee.
15.02 PARTICIPATING MEDICAL GROUP shall maintain a log of all grievances
heard by PARTICIPATING MEDICAL GROUP's Quality Management Committee
filed by Members who are assigned to PARTICIPATING MEDICAL GROUP and
shall, on a quarterly basis, forward a copy of each grievance to the
CALIFORNIACARE Quality Management Representative.
15.03 PARTICIPATING MEDICAL GROUP shall provide a written response to Member
within fifteen (15) working days of receipt of grievance. In the
event a grievance cannot be resolved by the PARTICIPATING MEDICAL
GROUP's Quality Management Committee to the complaining Member's
satisfaction within fifteen (15) working days of receipt, the Member
may appeal to BLUE CROSS using the procedures in the Member's Benefit
Agreement and in the Operations Manual. In the event that the Member
appeals to BLUE CROSS, PARTICIPATING MEDICAL GROUP agrees to provide
BLUE CROSS with a response to the grievance and the pertinent medical
records within ten (10) days from the date of such request by BLUE
CROSS.
15.04 The Member shall be notified of the disposition of the complaint by
BLUE CROSS within fifteen (15) working days of making the appeal.
XVI. MISCELLANEOUS PROVISIONS
16.01 AMENDMENT. This Agreement or any part or section of it may be amended
at any time during the term of the Agreement by mutual written consent
of duly authorized representatives of BLUE CROSS and PARTICIPATING
MEDICAL GROUP.
16.02 ASSIGNMENT. BLUE CROSS and PARTICIPATING MEDICAL GROUP, pursuant to
mutual written agreement, may assign rights and duties established
under this Agreement, provided that no such assignment shall adversely
affect the rights or duties of Members or be in conflict with the
requirements of state or federal laws or regulations under which BLUE
CROSS is licensed or regulated.
16.03 MARKETING, ADVERTISING AND PUBLICITY. BLUE CROSS shall have the right
to use the name of PARTICIPATING MEDICAL GROUP for purposes of
informing Members and prospective Members of the identity of
PARTICIPATING MEDICAL GROUP.
Except as provided above, BLUE CROSS and PARTICIPATING MEDICAL GROUP
each reserve the right to control the use of their respective names
and all symbols, trademarks or service marks presently existing, or
later established. In addition, except as provided above, neither BLUE
CROSS nor PARTICIPATING MEDICAL GROUP shall use the other party's
name, symbols, trademarks or service marks in advertising or
promotional materials, or otherwise, without the prior written consent
of that party, and shall cease any such usage immediately upon written
notice of the party, or on termination of this Agreement, whichever
first occurs.
16.04 SOLE AGREEMENT. This Agreement with its Exhibits and the Operations
Manual, represents the entire agreement between the parties hereto and
supersedes any and all prior or contemporaneous, written or oral
agreements, representations or understandings.
31
<PAGE>
16.05 INDEPENDENT CONTRACTORS. PARTICIPATING MEDICAL GROUP shall furnish
care or other benefits to Members as an independent contractor, and
BLUE CROSS shall not be liable for any claim or demand on account of
damages arising out of, or in connection with, any injuries suffered
by any Member while receiving care from, or care authorized by,
PARTICIPATING MEDICAL GROUP or any of its Member Physicians.
16.06 SEVERABILITY. If any term, provision, covenant or condition of this
Agreement is held by a court of competent jurisdiction to be invalid,
void or unenforceable, the remainder of the provisions hereof shall
remain in full force and effect and shall in no way be affected,
impaired, or invalidated as a result of such decision.
16.07 NOTICES. Any notice which is required or permitted to be given
pursuant to this Agreement shall be in writing and shall either be
personally delivered, or sent by registered or certified mail, in the
United States Postal Service, return receipt requested, postage
prepaid, addressed to each party at its principal office or at the
address provided in writing to the other. Notices shall be effective
when received.
16.08 MAXIMUM CAPACITY. The Maximum Capacity of PARTICIPATING MEDICAL GROUP
during the term of this Agreement shall be UNLIMITED Members.
16.09 KNOX-KEENE ACT. BLUE CROSS is subject to the requirements of the
Knox-Keene Act and any provision required to be in this Agreement
thereunder shall bind BLUE CROSS and PARTICIPATING MEDICAL GROUP,
whether or not expressly provided in this Agreement.
16.10 SOLICITATION OF MEMBERS. The business relationship between BLUE CROSS
and its Members, and BLUE CROSS and the employer groups with which it
contracts, shall be deemed the property of BLUE CROSS. Similarly, all
lists of Members accepted by PARTICIPATING MEDICAL GROUP under the
provisions of this Agreement and of the employer groups to which they
belong, shall be deemed the property of BLUE CROSS. During the term of
this Agreement or any renewal thereof, and for a period of one (1)
year from the date of termination, PARTICIPATING MEDICAL GROUP agrees
and will require its PARTICIPATING MEDICAL GROUP Physicians and all
other contracted Health Professionals to agree, that they will not,
within the service area of BLUE CROSS: (1) interfere with BLUE CROSS'
contract and/or property rights; (2) advise or counsel any Member or
employer groups to dissenroll from BLUE CROSS; (3) solicit such Member
or employer group to become enrolled with any other health maintenance
organization, preferred provider organization or any other similar
hospitalization or medical payment plan or insurance company; or (4)
disclose proprietary BLUE CROSS information. This section shall not
apply to general mailings unless the mailings specifically target BLUE
CROSS Members and as long as the mailings do not violate the intent of
this section.
16.11 CONFIDENTIALITY. PARTICIPATING MEDICAL GROUP and BLUE CROSS agree to
keep confidential, except as otherwise required by applicable law or
this Agreement, the terms and conditions of this Agreement and any
amendments thereto. Violation of the above shall be deemed a material
breach.
16.12 WAIVER. The waiver by either party of a failure to perform any
covenant or condition set forth in this Agreement shall not act as a
waiver of performance for a subsequent breach of the same or any other
covenant or condition set forth in this Agreement.
32
<PAGE>
16.13 GOVERNING LAW. This Agreement shall be construed and enforced in
accordance with the laws of the State of California.
BLUE CROSS OF CALIFORNIA PARTICIPATING MEDICAL GROUP
Signature: /s/ Ferial Bahremand Signature: /s/ Gregg DeNicola
-------------------------------- -----------------------
Name: Ferial Bahremand Name: Gregg DeNicola
-------------------------------- -----------------------
Title: Vice President Title: President
-------------------------------- -----------------------
Network Development & Manaqement
-------------------------------- -----------------------
Date: 2/13/97 Date: 11-26-96
-------------------------------- -----------------------
33
<PAGE>
EXHIBIT A
COVERED MEDICAL SERVICES
I. MEDICAL AND SURGICAL SERVICES
A. Physician's services at the:
(1) Physician's office; the Member shall pay any copayment directly
to the physician for each such visit
(2) Hospital or Skilled Nursing Facility
B. Professional services of an anesthetist or anesthesiologist
C. Diagnostic X-ray examinations
D. Laboratory tests
E. Radiation therapy in Physician's office, including use of X-ray,
radium, cobalt and other radioactive substances
F. Professional services of other participating Health Professionals
G. Professional services of a physician at the Member's home when the
Member is too ill or disabled to be seen during regular office hours.
The Member shall pay the amounts set forth in the Member's Benefit
Agreement to the physician for each such visit.
II. PSYCHIATRIC CARE BENEFITS
A. Inpatient Visits
Physician's hospital visits shall be limited as set forth in the
Member's Benefit Agreement during each calendar year and the Member
shall pay the amounts set forth in the Member's Benefit Agreement to
the physician for each such visit.
B. Outpatient Visits or Sessions
Outpatient care shall be provided for short-term evaluation of the
Member's condition when such care is ordered by the attending
PARTICIPATING MEDICAL GROUP Physician. Charges and limitations as set
forth in the Member's Benefit Agreement. This care shall not include
visits for psychoanalysis.
III. COVERED PREVENTIVE CARE BENEFITS
The following services shall be provided when performed by, authorized by,
or deemed appropriate by the Member's Primary Care Physician. The Member
shall pay any copayment listed in the Member's Benefit Agreement directly
to the physician for each service performed.
A. Well baby care through age 2 years, including immunizations.
B. Scheduled physical examinations as set forth in the Member's Benefit
Agreement.
C. Pediatric and adult immunizations.
D. Eye examinations
E. Infertility studies for Members aged 18 or over.
A-1
<PAGE>
F. Ear examinations.
G. Health education services as follows:
(1) Health education services and education in the appropriate use of
health services and in the contribution each Member can make to
the maintenance of his/or her own health.
(2) Instruction in personal health care measures.
(3) Information about services provided, including recommendations on
generally accepted medical standards for use and frequency of
such services.
H. Services such as pre- and post-hospitalization planning; referral to
services provided through community health and social welfare agencies
and related family counseling for the physical, emotional and economic
impact of illness and disability.
I. Allergy testing and administration of injections.
A-2
<PAGE>
EXHIBIT A(1) CALIFORNIACARE
DIVISION OF FINANCIAL RESPONSIBILITIES
<TABLE>
<CAPTION>
NON-
LIST OF BENEFITS / SERVICES CAPITATION CAPITATED
--------------------------- ---------- ---------
<S> <C> <C>
ACUPUNCTURE
AIDS
Inpatient Facility Component
Professional Component
ALLERGY TESTING & TREATMENT
Professional Component
Serums
AMBULANCE: Air or Ground
In-Area [ ** ](1)
Out-of-Area
AMNIOCENTESIS
Outpatient Facility Component
Professional Component
ANESTHETICS, Administration of
ARTIFICIAL EYE
* ARTIFICIAL INSEMINATION
ARTIFICIAL LIMBS (Prosthetic Device)
BIOFEEDBACK
BLOOD AND BLOOD PRODUCTS
From Blood Bank
Autologous Blood Donation
* CHEMICAL DEPENDENCY REHABILITATION
Inpatient Facility Component
Inpatient Professional Component
Outpatient Facility Component
Outpatient Professional Component
</TABLE>
* As set forth in the applicable Benefit Agreement
(1) All references to division of responsibility have been deleted.
A(1)-1
<PAGE>
EXHIBIT A(1)
CALIFORNIACARE
DIVISION OF FINANCIAL RESPONSIBILITIES
<TABLE>
<CAPTION>
NON-
LIST OF BENEFITS / SERVICES CAPITATION CAPITATED
- --------------------------- ---------- ---------
<S> <C> <C>
CHEMOTHERAPY DRUGS (intravenously administered)
Professional Component
Chemotherapy Drugs
CHIROPRACTIC (REFERRED SERVICE ONLY)
CIRCUMCISION
COLOSTOMY SUPPLIES
Inpatient Facility Component
Outpatient Dispensing
In Conjunction with Home Health
DENTAL SERVICES
(ACCIDENTAL INJURY TO SOUND NATURAL TEETH AND DENTAL WORK
NECESSARY FOR THE CONSTRUCTION OF NON-DENTAL STRUCTURES)
Inpatient Facility Component
Professional Component
DETOXIFICATION
Inpatient Facility Component
Professional Component [ ** ](1)
* DURABLE MEDICAL EQUIPMENT (DME)
EMERGENCY ADMISSIONS: In-Area
Facility Component
Professional Component
EMERGENCY ADMISSIONS: Out-of-Area
Facility Component
Professional Component
EMERGENCY ROOM: In-Area
Facility Component
Professional Component
</TABLE>
* As set forth in the applicable Benefit Agreement
(1) All references to division of responsibility have been deleted.
A(1)-2
<PAGE>
EXHIBIT A(1)
CALIFORNIACARE
DIVISION OF FINANCIAL RESPONSIBILITIES
<TABLE>
<CAPTION>
NON-
LIST OF BENEFITS / SERVICES CAPITATION CAPITATED
- --------------------------- ---------- ---------
<S> <C> <C>
EMERGENCY ROOM: Out-of-Area
Facility Component
Professional Component
EMPLOYMENT PHYSICAL EXAMS
ENDOSCOPIC STUDIES
Inpatient / Outpatient Facility Component
Professional Component
EXPERIMENTAL PROCEDURES
FAMILY PLANNING SERVICES [ ** ](1)
Inpatient Facility Component
Outpatient Clinic or Non-Hospital Facility Component
Professional Component
FETAL MONITORING
Inpatient Facility Component
Professional Component
GENETIC TESTING
HEALTH EDUCATION
**HEALTH EVALUATIONS / PHYSICALS
(REQUIRED BY THIRD PARTY OR OUTSIDE AGENCY)
* HEARING AIDS
HEARING SCREENING
HEMODIALYSIS
Inpatient / Outpatient Facility Component
Professional Component
</TABLE>
* As set forth in the applicable Benefit Agreement
** Routine physical examinations or tests which do not directly treat an actual
illness, injury or condition unless authorized by a Primary Care Physician,
except in no event will any physical examination or test required by
employment or government authority, or at the request of a third party such
as a school, camp or sport affiliated organization be covered.
(1) All references to division of responsibility have been deleted.
A(1)-3
<PAGE>
EXHIBIT A(1)
CALIFORNIACARE
DIVISION OF FINANCIAL RESPONSIBILITIES
<TABLE>
<CAPTION>
NON-
LIST OF BENEFITS / SERVICES CAPITATION CAPITATED
- --------------------------- ---------- ---------
<S> <C> <C>
HEPATITIS B VACCINE/ GAMMA GLOBULIN
HOME HEALTH (including medications)
HOSPICE (in lieu of acute inpatient or SNF care)
Inpatient Facility Component
Professional Component
HOSPITAL BASED PHYSICIANS
Anesthesiology
Audiology
Cardiology
Emergency Medicine
General Surgery
Neonatology
Nephrology
Neurology [ ** ](1)
Neurosurgery
Obstetrics / Gynecology
Orthopedic Surgery
Pathology
Pediatrics
Physical Medicine
Pulmonary Medicine
Radiology
Radiation Oncology
Urology
* HOSPITALIZATION / INPATIENT SERVICES,
SUPPLIES & TESTING
In-Area
Out-of-Area (Emergency)
</TABLE>
* As set forth in the applicable Benefit Agreement
(1) All references to division of responsibility have been deleted.
A(1)-4
<PAGE>
EXHIBIT A(1)
CALIFORNIACARE
DIVISION OF FINANCIAL RESPONSIBILITIES
<TABLE>
<CAPTION>
NON-
LIST OF BENEFITS / SERVICES CAPITATION CAPITATED
- --------------------------- ---------- ---------
<S> <C> <C>
IMMEDIATE CARE
Facility Component
Professional Component
IMMUNIZATION SERUMS (pediatric)
IMMUNIZATION SERUMS (Adult)
INFANT APNEA MONITOR (DME)
(IN CONJUNCTION WITH OR CONCURRENT WITH AUTHORIZED INPATIENT
ADMISSION)
OUTPATIENT INFANT APNEA MONITOR
* INFERTILITY (Diagnosis / Treatment)
*Inpatient Facility Component
*Professional Component
INFUSION THERAPY [ ** ](1)
Inpatient / Outpatient Facility Component
Professional Component
Infused Substances
INJECTABLE MEDICATIONS: Outpatient
(EXCLUDING TAKE-HOME INSULIN)
LABORATORY SERVICES
Inpatient Facility Component
Outpatient Hospital Facility Component
Outpatient Clinic or Non-Hospital Facility Component
Professional Component
* LITHOTRIPSY
Inpatient / Outpatient Hospital Facility Component
Professional Component
MAMMOGRAPHY
Technical Component
Professional Component
</TABLE>
* As set forth in the applicable Benefit Agreement
(1) All references to division of responsibility have been deleted.
A(1)-5
<PAGE>
EXHIBIT A(1)
CALIFORNIACARE
DIVISION OF FINANCIAL RESPONSIBILITIES
<TABLE>
<CAPTION>
NON-
LIST OF BENEFITS / SERVICES CAPITATION CAPITATED
- --------------------------- ---------- ---------
<S> <C> <C>
MENTAL HEALTH
*Inpatient Facility Component
*Inpatient Professional Component
*Outpatient Professional Component
NUTRITIONIST / DIETITIAN
OBSTETRICAL SERVICES
Inpatient Facility Component
Inpatient Professional Component
Outpatient Diagnostic Services
OFFICE VISIT SUPPLIES, SPLINTS, CASTS, BANDAGES,
DRESSINGS etc.
ORGAN TRANSPLANTS (non-experimental) [ ** ](1)
Inpatient Facility Component
Professional Component
* OUTPATIENT DIAGNOSTIC SERVICES & TREATMENTS
Primary Care Physicians
Specialty Physicians
OUTPATIENT CLINIC OR NON-HOSPITAL FACILITY COMPONENT
FOR DIAGNOSTIC SERVICES & TREATMENTS
These services include, but are not limited to the following:
Angiograms
CAT Scan
2-D Echo
EEG
EKG (aka: ECG)
EMG
Holter Monitor
MRI
Treadmill
Ultrasound
</TABLE>
* As set forth in the applicable Benefit Agreement
(1) All references to division of responsibility have been deleted.
A(1)-6
<PAGE>
EXHIBIT A(1)
CALIFORNIACARE
DIVISION OF FINANCIAL RESPONSIBILITIES
<TABLE>
<CAPTION>
NON-
LIST OF BENEFITS / SERVICES CAPITATION CAPITATED
- --------------------------- ---------- ---------
<S> <C> <C>
OUTPATIENT DIAGNOSTIC SERVICES & TREATMENTS
Professional Component for:
Anesthesiology
Audiology
Cardiology
Emergency Medicine
General Surgery
Neonatology
Nephrology
Neurology
Obstetrics / Gynecology [ ** ](1)
Orthopedics
Pathology
Pediatrics
Physical Medicine
Pulmonary Medicine
Radiation Oncology
Radiology
Urology
OUTPATIENT SURGERY
Facility Component
Professional Component for:
Anesthesiology
Audiology
Cardiology
Emergency Medicine
Neonatology
Neurology
Nephrology
Orthopedics
Pathology
</TABLE>
* As set forth in the applicable Benefit Agreement
(1) All references to division of responsibility have been deleted.
A(1)-7
<PAGE>
EXHIBIT A(1)
CALIFORNIACARE
DIVISION OF FINANCIAL RESPONSIBILITIES
<TABLE>
<CAPTION>
NON-
LIST OF BENEFITS / SERVICES CAPITATION CAPITATED
- --------------------------- ---------- ---------
<S> <C> <C>
OUTPATIENT SURGERY: Professional Component
CONTINUED
Pediatrics
Physical Medicine
Pulmonary Medicine
Radiation Oncology
Radiology
Urology
PEDIATRIC SERVICES (newborn)
PHYSICAL THERAPY
Inpatient Facility Component
Outpatient Clinic or Non-Hospital Facility Component
Inpatient / Outpatient Professional Component
PHYSICIAN VISITS
To Hospital
To Skilled Nursing Facility
To Patient Home
PHYSICIAN OFFICE VISITS [ ** ](1)
Consultations
Specialty Visits
PODIATRY SERVICES
PREADMISSION TESTING
Inpatient Facility Component
Outpatient Hospital Facility Component
Outpatient Clinic or Non-Hospital Facility Component
Inpatient / Outpatient Professional Component
PRE-EXISTING PREGNANCY
Inpatient Facility Component
Professional Component
</TABLE>
* As set forth in the applicable Benefit Agreement
(1) All references to division of responsibility have been deleted.
A(1)-8
<PAGE>
EXHIBIT A(1)
CALIFORNIACARE
DIVISION OF FINANCIAL RESPONSIBILITIES
<TABLE>
<CAPTION>
NON-
LIST OF BENEFITS / SERVICES CAPITATION CAPITATED
- --------------------------- ---------- ---------
<S> <C> <C>
PREGNANCY SERVICES
Inpatient Facility Component
Professional Component
PROSTHETIC DEVICES
RADIATION THERAPY
Inpatient Facility Component
Outpatient Hospital Facility Component
Outpatient Clinic Facility Component
Professional Component
RADIOLOGY SERVICES
Inpatient Facility Component
Outpatient Hospital Facility Component [ ** ](1)
Outpatient Clinic or Non-Hospital Facility Component
Professional Component
RECONSTRUCTIVE SURGERY
Inpatient Facility Component
Professional Component
REFRACTIONS
REHABILITATION SERVICES
(SHORT TERM: PHYSICAL THERAPY, OCCUPATIONAL THERAPY, SPEECH
THERAPY, CARDIAC THERAPY)
Inpatient Facility Component
Inpatient Professional Component
Outpatient Clinic or Non-Hospital Facility Component
Outpatient Professional Component
ROUTINE PHYSICAL EXAMINATIONS
SKILLED NURSING FACILITY (SNF)
SPECIALIST CONSULTATIONS
</TABLE>
* As set forth in the applicable Benefit Agreement
(1) All references to division of responsibility have been deleted.
A(1)-9
<PAGE>
EXHIBIT A(1)
CALIFORNIACARE
DIVISION OF FINANCIAL RESPONSIBILITIES
<TABLE>
<CAPTION>
NON-
LIST OF BENEFITS / SERVICES CAPITATION CAPITATED
- --------------------------- ---------- ---------
<S> <C> <C>
SURGICAL SUPPLIES
Inpatient Facility Component
Outpatient Facility Component
TEMPORO-MANDIBULAR JOINT SYNDROME (TMJ)
Dental Treatment
Professional Component
(FOR THE DIAGNOSIS AND MEDICALLY NECESSARY CORRECTION)
Inpatient Facility Component
TRANSFUSIONS
From Blood Bank
Autologous Blood Donations
URGENT CARE: In-Area [ ** ](1)
Facility Component
Professional Component
URGENT CARE: Out-of-Area
Facility Component
Professional Component
VISION SCREENING
VISION CARE
Medically Necessary Care
Refraction
Lenses / Frames (covered by optional rider)
Contact lenses (fitting only)
</TABLE>
* As set forth in the applicable Benefit Agreement
(1) All references to division of responsibility have been deleted.
A(1)-10
<PAGE>
HIQPVHD CORPORATE SYSTEMS P 2/12/97 08:46:20 0001
HPCT26 VTC01642 BCNMS HMO DATA INQUIRY VERSION 001
PHYSICIAN CROSS REFERENCE
<TABLE>
<CAPTION>
SITE CODE: 0PY000
SITE NAME: PROSPECT MEDICAL GROUP
=========================================================== ALL PHYSICIANS
DR NO. P/S LICENSE NO. NAME EFF DATE PRC/ACC SPECIALTY
<S> <C> <C> <C> <C> <C> <C>
_ 0PY010 PCP G 00049616 BARKER,THOMAS C 12/01/94 S Y FAMILY PRACTICE
_ 0PY013 PCP G 00028655 CAMPAGNA,EDWARD T 12/01/94 S Y INTERNAL MEDICINE
_ 0PY015 PCP G 00043562 DENICOLA,GREGG A 12/01/94 S Y FAMILY PRACTICE
_ 0PY017 PCP G 00066822 HALL,MICHAEL D 12/01/94 S Y FAMILY PRACTICE
_ 0PY018 PCP C 00024394 HALL,RUBLE S 12/01/94 S Y FAMILY PRACTICE
_ 0PY019 PCP C 00034125 HURST,FRED M 12/01/94 S Y FAMILY PRACTICE
_ 0PY020 PCP G 00058879 JORDAN,PAUL M 12/01/94 S Y FAMILY PRACTICE
_ 0PY021 PCP A 00021159 KENFIELD,RICHARD C 12/01/94 S Y FAMILY PRACTICE
_ 0PY022 PCP G 00023941 LEONARD,JAMES R 12/01/94 S Y INTERNAL MEDICINE
_ 0PY023 PCP 20A00004456 MAURER,ROBERT J 12/01/94 S Y FAMILY PRACTICE
_ 0PY024 PCP G 00058421 MAY,DANIEL L 12/01/94 S N FAMILY PRACTICE
_ 0PY025 PCP C 00027117 MCGINTY,WILLIAM R 12/01/94 S Y FAMILY PRACTICE
_ 0PY026 PCP G 00048075 OKIMOTO,DEAN I 12/01/94 S Y FAMILY PRACTICE
_ 0PY027 PCP G 00068922 PONZIO,DENNIS J 12/01/94 S Y FAMILY PRACTICE
</TABLE>
NEXT TRAN: ___________ NEXT KEY: ____________ SVC DATES: 02/12/97 02/12/97
PF3: HMO MAIN PF5: SYSRETRN PF6: CORPMENU PF7: PAGEBACK PF8: PAGENEXT
PLEASE ENTER "S" NEXT TO DESIRED PHYSICIAN
<PAGE>
HIQPVHD CORPORATE SYSTEMS P 2/12/97 08:46:24 0002
HPCT26 VTC01642 BCNMS HMO DATA INQUIRY VERSION 001
PHYSICIAN CROSS REFERENCE
<TABLE>
<CAPTION>
SITE CODE: 0PY000
SITE NAME: PROSPECT MEDICAL GROUP
============================================================ ALL PHYSICIANS
DR NO. P/S LICENSE NO. NAME EFF DATE PRC/ACC SPECIALTY
<S> <C> <C> <C> <C> <C> <C>
_ 0PY028 PCP G 00068671 PONZIO,SHEILA K 12/01/94 S Y PEDIATRICS
_ 0PY029 PCP A 00016939 SCHMIDT,JOHN C 12/01/94 S Y FAMILY PRACTICE
_ 0PY031 PCP G 00024260 SMITH,LYTTON W 12/01/94 S Y FAMILY PRACTICE
_ 0PY032 PCP A 00036922 TAN,JOANNA K 12/01/94 S N FAMILY PRACTICE
_ 0PY033 PCP G 00044401 TAN,KENNETH K 12/01/94 S Y FAMILY PRACTICE
_ 0PY034 PCP G 00047710 HOYLE,BRUCE R 01/01/95 S N FAMILY PRACTICE
_ 0PY035 PCP A 00045020 WONG,WINSTON C 03/01/95 S Y INTERNAL MEDICINE
_ 0PY037 PCP A 00037201 EL-ZAYAT,SAID L 03/01/95 S Y FAMILY PRACTICE
_ 0PY038 PCP A 00046536 IMBASTARI,GRACIELA L 03/01/95 S Y INTERNAL MEDICINE
_ 0PY041 PCP 20A00005078 HEFNER,RICHARD A 03/01/95 S Y FAMILY PRACTICE
_ 0PY042 PCP G 00063280 SARKARIA,JOHN A 03/01/95 S Y INTERNAL MEDICINE
_ 0PY043 PCP A 00032367 KAZEMI,FERDOUS 03/01/95 S Y PEDIATRICS
_ 0PY044 PCP A 00036482 FURMAN,GEOFFREY D 03/01/95 S Y FAMILY PRACTICE
_ 0PY047 PCP A 00040151 MESKIN,DENIS J 03/01/95 S Y FAMILY PRACTICE
</TABLE>
NEXT TRAN: __________ NEXT KEY: ____________ SVC DATES: 02/12/97 02/12/97
PF3: HMO MAIN PF5: SYSRETRN PF6: CORPMENU PF7: PAGEBACK PF8: PAGENEXT
PLEASE ENTER "S" NEXT TO DESIRED PHYSICIAN
<PAGE>
HIQPVHD CORPORATE SYSTEMS P 2/12/97 08:46:28 0003
HPCT26 VTC01642 BCNMS HMO DATA INQUIRY VERSION 001
PHYSICIAN CROSS REFERENCE
<TABLE>
<CAPTION>
SITE CODE: 0PY000
SITE NAME: PROSPECT MEDICAL GROUP
========================================================== ALL PHYSICIANS
DR NO. P/S LICENSE NO. NAME EFF DATE PRC/ACC SPECIALTY
<S> <C> <C> <C> <C> <C> <C>
_ 0PY049 PCP G 00049533 JOSS,DAVID R 03/01/95 S Y FAMILY PRACTICE
_ 0PY050 PCP A 00026326 GEDISSMAN,ALBERTO 03/01/95 S Y PEDIATRICS
_ 0PY051 PCP A 00029589 NAVARRO,GERMAN 03/01/95 S Y INTERNAL MEDICINE
_ 0PY052 PCP G 00050845 WOLF,GREGORY H 03/01/95 S Y FAMILY PRACTICE
_ 0PY053 PCP A 00031399 SUNG,HUNG-MIN 03/01/95 S Y INTERNAL MEDICINE
_ 0PY056 PCP G 00038827 HUTCHISON,EDWARD R 03/01/95 S Y FAMILY PRACTICE
_ 0PY057 PCP A 00041405 MOSLEY,MANSOOR 03/01/95 S Y PEDIATRICS
_ 0PY058 PCP G 00012740 HANAUER,FRANKLIN A 03/01/95 S Y INTERNAL MEDICINE
_ 0PY059 PCP A 00021065 BURNS,ROBERT E 03/01/95 S Y FAMILY PRACTICE
_ 0PY060 PCP G 00057931 SIMON,DAVID R 03/01/95 S Y INTERNAL MEDICINE
_ 0PY061 PCP G 00052987 YONG,EVA Y 03/01/95 S Y FAMILY PRACTICE
_ 0PY062 PCP C 00024221 SMITH,STEELE C 03/01/95 S Y FAMILY PRACTICE
_ 0PY064 PCP A 00026340 RAU,SUBRAMANYAM L 03/01/95 S Y INTERNAL MEDICINE
_ 0PY065 PCP G 00034289 CHU,EDMOND K 03/01/95 S Y GENERAL PRACTICE
</TABLE>
NEXT TRAN: __________ NEXT KEY: ____________ SVC DATES: 02/12/97 02/12/97
PF3: HMO MAIN PF5: SYSRETRN PF6: CORPMENU PF7: PAGEBACK PF8: PAGENEXT
PLEASE ENTER "S" NEXT TO DESIRED PHYSICIAN
<PAGE>
HIQPVHD CORPORATE SYSTEMS P 2/12/97 08:46:31 0004
HPCT26 VTC01642 BCNMS HM0 DATA INQUIRY VERSION 001
PHYSICIAN CROSS REFERENCE
<TABLE>
<CAPTION>
SITE CODE: 0PY000
SITE NAME: PROSPECT MEDICAL GROUP
========================================================ALL PHYSICIANS
<S> <C> <C> <C> <C> <C> <C>
DR NO. P/S LICENSE NO. NAME EFF DATE PRC/ACC SPECIALTY
_ 0PY066 PCP G 00029008 ISERI,ALLEN L 03/01/95 S Y PEDIATRICS
_ 0PY067 PCP A 00050714 GADDAM,SYAM P 03/01/95 S Y INTERNAL MEDICINE
_ 0PY068 PCP G 00007270 NICHOLLS,EDWARD S 03/01/95 S Y FAMILY PRACTICE
_ 0PY069 PCP A 00028456 REESE,PATRICK F 03/01/95 S Y FAMILY PRACTICE
_ 0PY070 PCP A 00032508 TANG,HOONG-FOONG 03/01/95 S Y FAMILY PRACTICE
_ 0PY071 PCP A 00042255 YOUSSEF,GEORGE F 03/01/95 S Y FAMILY PRACTICE
_ 0PY072 PCP A 00025263 KHEMKA,MAHAVEER P 03/01/95 S Y INTERNAL MEDICINE
_ 0PY073 PCP C 00021941 MANZO,RICHARD 0 03/01/95 S Y FAMILY PRACTICE
_ 0PY074 PCP 20A00005043 PARSA,ABBAS T 03/01/95 S Y FAMILY PRACTICE
_ 0PY075 PCP G 00045491 NITTA,DOUGLAS 03/01/95 S Y FAMILY PRACTICE
_ 0PY076 PCP 20A00005249 RIOUX,DOREEN M 03/01/95 S Y GENERAL PRACTICE
_ 0PY077 PCP 20A00004541 REDD,JOE W 03/01/95 S Y GENERAL PRACTICE
_ 0PY080 PCP A 00037367 FONMIN,JOHN 03/01/95 S Y FAMILY PRACTICE
_ 0PY083 PCP 20A00003863 STREELMAN,ALLEN J 03/01/95 S Y FAMILY PRACTICE
</TABLE>
NEXT TRAN: ________ NEXT KEY: _________________ SVC DATES: 02/12/97 02/12/97
PF3: HMO MAIN PF5: SYSRETRN PF6: CORPMENU PF7: PAGEBACK PF8: PAGENEXT
PLEASE ENTER "S" NEXT TO DESIRED PHYSICIAN
<PAGE>
HIQPVHD CORPORATE SYSTEMS P 2/12/97 08:46:35 0005
HPCT26 VTC01642 BCNMS HMO DATA INQUIRY VERSION 001
PHYSICIAN CROSS REFERENCE
<TABLE>
<CAPTION>
SITE CODE:
SITE NAME: PROSPECT MEDICAL GROUP
============================================================ ALL PHYSICIANS
<S> <C> <C> <C> <C> <C> <C>
DR NO. P/S LICENSE NO. NAME EFF DATE PRC/ACC SPECIALTY
_ 0PY084 PCP C 00020769 YURY,WALTER E 03/01/95 S Y FAMILY PRACTICE
_ 0PY085 PCP C 00031892 GO,ALEX S 03/01/95 S Y FAMILY PRACTICE
_ 0PY086 PCP A 00039761 MEKA,AJAY G 03/01/95 S Y FAMILY PRACTICE
_ 0PY087 PCP A 00045658 VALDEZ,JOSE L 03/01/95 S Y FAMILY PRACTICE
_ 0PY088 PCP G 00036930 NAPLES,ANTHONY F 03/01/95 S Y FAMILY PRACTICE
_ 0PY089 PCP G 00044205 CHANG,WESLEY J 03/01/95 S Y INTERNAL MEDICINE
_ 0PY092 PCP A 00036211 CHONG,CHARNG F 03/01/95 S Y INTERNAL MEDICINE
_ 0PY093 PCP G 00058282 HERNANDEZ-SCHNEIDER, 03/01/95 S Y FAMILY PRACTICE
_ 0PY094 PCP A 00031191 YANG,DAVID C 03/01/95 S Y PEDIATRICS
_ 0PY095 PCP A 00038792 MENON,RAJ 03/01/95 S Y FAMILY PRACTICE
_ 0PY096 PCP A 00034243 LOHIYA,GHANSHYAM K 03/01/95 S Y FAMILY PRACTICE
_ 0PY097 PCP A 00026512 MEHTA,ONKAR N 03/01/95 S Y INTERNAL MEDICINE
_ 0PY098 PCP A 00024756 CILLIANI,GASTON F 03/01/95 S Y FAMILY PRACTICE
_ 0PY099 PCP A 00030342 DANON,ALAN C 03/01/95 S Y GENERAL PRACTICE
</TABLE>
NEXT TRAN: ________ NEXT KEY: _________________ SVC DATES: 02/12/97 02/12/97
PF3: HMO MAIN PF5: SYSRETRN PF6: CORPMENU PF7: PAGEBACK PF8: PAGENEXT
PLEASE ENTER "S" NEXT TO DESIRED PHYSICIAN
<PAGE>
HIQPVHD CORPORATE SYSTEMS P 2/12/97 08:46:39 0006
HPCT26 VTC01642 BCNMS HMO DATA INQUIRY VERSION 001
PHYSICIAN CROSS REFERENCE
<TABLE>
<CAPTION>
SITE CODE: 0PY000
SITE NAME: PROSPECT MEDICAL GROUP
============================================================ ALL PHYSICIANS
<S> <C> <C> <C> <C> <C> <C>
DR NO. P/S LICENSE NO. NAME EFF DATE PRC/ACC SPECIALTY
_ 0PY100 PCP A 00025045 CILLIANI,INES C 03/01/95 S Y GENERAL PRACTICE
_ 0PY101 PCP A 00036505 CHOU,ALLEN C 03/01/95 S Y INTERNAL MEDICINE
_ 0PY102 PCP A 00038317 CHUNG,YONG W 03/01/95 S Y INTERNAL MEDICINE
_ 0PY103 PCP A 00021020 ZANCHI,GIACOMO 03/01/95 S Y GENERAL PRACTICE
_ 0PY104 PCP G 00048383 ROMERO,ELIOTT 03/01/95 S Y FAMILY PRACTICE
_ 0PY105 PCP A 00028815 RUBINOFF,M L 03/01/95 S Y FAMILY PRACTICE
_ 0PY106 PCP G 00031211 BADER,ROBERT F 03/01/95 S Y INTERNAL MEDICINE
_ 0PY107 PCP G 00011142 LEON,YOLANDA V 03/01/95 S Y FAMILY PRACTICE
_ 0PY108 PCP A 00024610 MARFLEET,BARRY R 03/01/95 S Y FAMILY PRACTICE
_ 0PY109 PCP A 00049740 NUESSE,WILLIAM H 03/01/95 S Y FAMILY PRACTICE
_ 0PYll0 PCP 20A00005021 WILLIAMS,KENNETH L 03/01/95 S Y FAMILY PRACTICE
_ 0PYlll PCP A 00052391 LEE,UN S 03/01/95 S Y FAMILY PRACTICE
_ 0PYll2 PCP C 00024935 CORLESS,JOE D 03/01/95 S Y PEDIATRICS
_ 0PYll4 PCP G 00067093 ETEMADI,ALIREZA 03/01/95 S Y FAMILY PRACTICE
</TABLE>
NEXT TRAN: ________ NEXT KEY: _______________ SVC DATES: 02/12/97 02/12/97
PF3: HMO MAIN PF5: SYSRETRN PF6: CORPMENU PF7: PAGEBACK PF8: PAGENEXT
PLEASE ENTER "S" NEXT TO DESIRED PHYSICIAN
<PAGE>
HIQPVHD CORPORATE SYSTEMS P 2/12/97 08:46:42 0007
HPCT26 VTC01642 BCNMS HMO DATA INQUIRY VERSION 001
PHYSICIAN CROSS REFERENCE
<TABLE>
<CAPTION>
SITE CODE: 0PY000
SITE NAME: PROSPECT MEDICAL GROUP
============================================================ ALL PHYSICIANS
<S> <C> <C> <C> <C> <C> <C>
DR NO. P/S LICENSE NO. NAME EFF DATE PRC/ACC SPECIALTY
_ 0PYll5 PCP G 00049359 KRAMER,DAVID S 03/01/95 S Y INTERNAL MEDICINE
_ 0PYll6 PCP A 00036414 ESTRADA,RAUL A 01/01/95 S Y PEDIATRICS
_ 0PYll7 PCP G 00061762 LEE,CHING G 01/01/95 S Y INTERNAL MEDICINE
_ 0PYll9 PCP A 00037985 SARAN,NAVIN 05/01/95 S Y INTERNAL MEDICINE
_ 0PY121 PCP A 00034095 STRAND,JOHN N 08/01/95 S Y FAMILY PRACTICE
_ 0PY122 PCP 20A00006510 SHAMS,FARIBORZ 08/01/95 S Y INTERNAL MEDICINE
_ 0PY123 PCP G 00068455 RUIZ,CARA B 09/01/95 S Y PEDIATRICS
_ 0PY124 PCP A 00045651 RABINOWITZ,SAMUEL C 10/01/95 S Y FAMILY PRACTICE
_ 0PY125 PCP G 00070251 FONG,KAREN A 10/01/95 S Y INTERNAL MEDICINE
_ 0PY126 PCP A 00031479 EISMAN,PAUL M 11/01/95 S Y FAMILY PRACTICE
_ 0PY129 PCP G 00034800 FAYNER,SHELDON R 11/01/95 S Y FAMILY PRACTICE
_ 0PY131 PCP G 00025942 LEVITAN,CHARLES T 01/01/96 S Y FAMILY PRACTICE
_ 0PY132 PCP A 00051549 MOJICA,CHESTER D 01/01/96 S Y INTERNAL MEDICINE
_ 0PY133 PCP A 00043752 PATEL,JYOTINKUMAR K 06/15/96 S Y PEDIATRICS
</TABLE>
NEXT TRAN: ________ NEXT KEY: _______________ SVC DATES: 02/12/97 02/12/97
PF3: HMO MAIN PF5: SYSRETRN PF6: CORPMENU PF7: PAGEBACK PF8: PAGENEXT
PLEASE ENTER "S" NEXT TO DESIRED PHYSICIAN
<PAGE>
HIQPVHD CORPORATE SYSTEMS P 02/12/97 08:46:46 0008
HPCT26 VTC01642 BCNMS HMO DATA INQUIRY VERSION 001
PHYSICIAN CROSS REFERENCE
<TABLE>
<CAPTION>
SITE CODE: 0PY000
SITE NAME: PROSPECT MEDICAL GROUP
============================================================ ALL PHYSICIANS
<S> <C> <C> <C> <C> <C> <C>
DR NO. P/S LICENSE NO. NAME EFF DATE PRC/ACC SPECIALTY
_ 0PY134 PCP A 00022838 HAXTON,RONALD S 06/15/96 S Y PEDIATRICS
_ 0PY135 PCP A 00030945 SHEK,DAVID Y 07/01/96 S Y PEDIATRICS
_ 0PY136 PCP C 00039890 SEARS,WILLIAM P 07/01/96 S Y PEDIATRICS
_ 0PY137 PCP A 00037744 MAPARA,SUNIL C 07/01/96 S Y FAMILY PRACTICE
_ 0PY139 PCP G 00074232 TAN,KWAN T 06/01/96 S Y INTERNAL MEDICINE
_ 0PY140 PCP A 00015117 PEVIDA,EMILIO R 06/01/96 S Y PEDIATRICS
_ 0PY141 PCP A 00052561 MOJICA,REGINA Y 06/01/96 S Y FAMILY PRACTICE
_ 0PY142 PCP G 00066916 STOUFFER,JOHN E 06/01/96 S Y INTERNAL MEDICINE
_ 0PY143 PCP A 00050474 PARK,SAMUEL K 06/01/96 S Y FAMILY PRACTICE
_ 0PY144 PCP A 00049335 NUVAL,ARTHUR Q 06/01/96 S Y FAMILY PRACTICE
_ 0PY146 PCP G 00011220 STREGER,MITCHELL I 09/01/96 S Y INTERNAL MEDICINE
_ 0PY147 PCP A 00045267 PATEL,BAKULKUMAR K 09/01/96 S Y INTERNAL MEDICINE
_ 0PY148 PCP A 00032006 WOLSZTEJN,JACOBO 10/01/96 S Y PEDIATRICS
_ 0PYA02 SPC G 00015113 GRAHN,EVERETT P 01/01/95 M Y HEMATOLOGY
</TABLE>
NEXT TRAN: ________ NEXT KEY: ______________ SVC DATES: 02/12/97 02/12/97
PF3: HMO MAIN PF5: SYSRETRN PF6: CORPMENU PF7: PAGEBACK PF8: PAGENEXT
PLEASE ENTER "S" NEXT TO DESIRED PHYSICIAN
<PAGE>
<TABLE>
<CAPTION>
HIQPVHD CORPORATE SYSTEMS P 02/12/97 08:46:50 0009
HPCT26 VTC01642 BCNMS HMO DATA INQUIRY VERSION 001
PHYSICIAN CROSS REFERENCE
SITE CODE: 0PY000
SITE NAME: PROSPECT MEDICAL GROUP
============================================================== ALL PHYSICIANS
DR NO. P/S LICENSE NO. NAME EFF DATE PRC/ACC SPECIALTY
<S> <C> <C> <C> <C> <C> <C> <C>
_ 0PYA03 SPC G 00017298 SAUNDERS, MARVOUS 01/01/95 M Y GENERAL PRACTICE
_ 0PYA04 SPC G 00011836 PADOVA, JAMES A 01/01/95 M Y HEMATOLOGY
_ 0PYA05 SPC G 00010122 BAUGHAN, MARJORIE A 01/01/95 M Y HEMATOLOGY
_ 0PYA06 SPC C 00041528 STURMAN, JOHN K 01/01/95 M Y NEUROLOGY
_ 0PYA07 SPC A 00025731 SRINIVASAN, NATHAPET 03/01/95 M Y INTERNAL MEDICINE
_ 0PYA08 SPC G 00012458 GORDON, L S 03/01/95 M Y PEDIATRIC CARDIOL0
_ 0PYA09 SPC G 00028788 DALLAS, JOHN G 03/01/95 M N ORTHOPEDIC SURGERY
_ 0PYA10 SPC G 00071049 VASSALLI, LUCA 03/01/95 M Y OTOLARYNGOLOGY
_ 0PYA11 SPC G 00022754 TURPIN, IVAN M 03/01/95 M Y PLASTIC SURGERY
_ 0PYA12 SPC DDS 00025236 BLUM, MICHAEL P 03/01/95 M Y ORAL MAX FACIAL SU
_ 0PYA13 SPC A 00029509 RAVIKUMAR, GADASALLI 03/01/95 M Y INTERNAL MEDICINE
_ 0PYA14 SPC G 00022888 STANOWICZ, STEVEN F 06/01/95 M Y DERMATOLOGY
_ 0PYA15 SPC A 00036842 RAHMAN, HAMID U 06/01/95 M Y ORTHOPEDIC SURGERY
_ 0PYA16 SPC C 00040813 LOTT, IRA T 06/01/95 M Y PEDIATRIC NEUROLOG
</TABLE>
NEXT TRAN: ____________ NEXT KEY: ____________ SVC DATES: 02/12/97 02/12/97
PF3: HMO MAIN PF5: SYSRETRN PF6: CORPMENU PF7: PAGEBACK PF8: PAGENEXT
PLEASE ENTER "S" NEXT TO DESIRED PHYSICIAN
<PAGE>
<TABLE>
<CAPTION>
HIQPVHD CORPORATE SYSTEMS P 02/12/97 08:46:54 0010
HPCT26 VTC01642 BCNMS HMO DATA INQUIRY VERSION 001
PHYSICIAN CROSS REFERENCE
SITE CODE: 0PY000
SITE NAME: PROSPECT MEDICAL GROUP
============================================================== ALL PHYSICIANS
DR NO. P/S LICENSE NO. NAME EFF DATE PRC/ACC SPECIALTY
<S> <C> <C> <C> <C> <C> <C> <C>
_ 0PYA17 SPC G 00023626 JEKUMS, THEODORE J 06/01/95 M Y SURGERY
_ 0PYA18 SPC A 00024898 BARTLOW, GREGORY A 06/01/95 M Y DERMATOLOGY
_ 0PYA19 SPC A 00025829 KHURANA, KRISHAN S 06/01/95 M Y INTERNAL MEDICINE
_ 0PYA20 SPC G 00053769 GOODMAN, MATTHEW M 06/01/95 M Y DERMATOLOGY
_ 0PYA21 SPC C 00036534 FOX, LEONARD L 06/01/95 M Y NEONATAL MEDICINE
_ 0PYA22 SPC G 00034562 BOHR, ROBERT J 06/01/95 M Y ORTHOPEDIC SURGERY
_ 0PYA23 SPC PSY 00011468 KATZ, JEFFREY S 06/01/95 M Y PSYCHOLOGY
_ 0PYA24 SPC G 00038575 KAWAI, SHARON K 06/01/95 M Y PHYSICAL MED & REH
_ 0PYA25 SPC A 00031698 FERNANDEZ, EDGAR J 06/01/95 M Y SURGERY
_ 0PYA26 SPC G 00064401 THAI, DIEUMY 06/01/95 M Y PHYSICAL MED & REH
_ 0PYA27 SPC A 00019323 GIBSON, HARRY L 06/01/95 M Y ORTHOPEDIC SURGERY
_ 0PYA28 SPC G 00069571 OLSEN, JEFFREY D 06/01/95 M Y PHYSICAL MED & REH
_ 0PYA29 SPC MFC 00025197 TROJNAR, ELLEN T 06/01/95 M Y MFCC
_ 0PYA30 SPC G 00049428 STANTON, DAVID B 05/01/95 M Y GASTROENTEROLOGY
</TABLE>
NEXT TRAN: ____________ NEXT KEY: ____________ SVC DATES: 02/12/97 02/12/97
PF3: HMO MAIN PF5: SYSRETRN PF6: CORPMENU PF7: PAGEBACK PF8: PAGENEXT
PLEASE ENTER "S" NEXT TO DESIRED PHYSICIAN
<PAGE>
<TABLE>
<CAPTION>
HIQPVHD CORPORATE SYSTEMS P 02/12/97 08:46:57 0011
HPCT26 VTC01642 BCNMS HMO DATA INQUIRY VERSION 001
PHYSICIAN CROSS REFERENCE
SITE CODE: 0PY000
SITE NAME: PROSPECT MEDICAL GROUP
============================================================== ALL PHYSICIANS
DR NO. P/S LICENSE NO. NAME EFF DATE PRC/ACC SPECIALTY
<S> <C> <C> <C> <C> <C> <C> <C>
_ 0PYA31 SPC C 00041671 DHAR, NAVEEN 05/01/95 M Y THORACIC SURGERY
_ 0PYA32 SPC G 00042457 BUCHANAN, DENNIS J 05/01/95 M Y OBSTETRICS & GYNEC
_ 0PYA33 SPC A 00036111 HUR, IN H 05/01/95 M Y OBSTETRICS & GYNEC
_ 0PYA34 SPC DC 00021346 HANDY, JAMES K 08/01/95 M Y CHIROPRACTOR
_ 0PYA35 SPC A 00019731 ANDES, JERRY P 08/01/95 M Y OBSTETRICS & GYNEC
_ 0PYA36 SPC A 00021727 KOBASHI, LUIS I 08/01/95 M Y UROLOGY
_ 0PYA37 SPC C 00041897 HENDERSON, DONALD W 08/01/95 M Y OBSTETRICS & GYNEC
_ 0PYA38 SPC G 00058799 RUBINSTEIN, MICHAEL P 08/01/95 M Y ORTHOPEDIC SURGERY
_ 0PYA39 SPC G 00049280 KATZ, STANLEY G 08/01/95 M Y ORTHOPEDIC SURGERY
_ 0PYA40 SPC G 00054069 FIELD, BYRON T 06/01/95 M Y ORTHOPEDIC SURGERY
_ 0PYA42 SPC DC 00022259 POON, SUSAN H 08/01/95 M Y CHIROPRACTOR
_ 0PYA44 SPC G 00014971 HOUSE, JOHN W 08/01/95 M Y OTOLARYNGOLOGY
_ 0PYA46 SPC A 00034425 RAHMAN, NAINAMOHAMED 08/01/95 M Y OTOLARYNGOLOGY
_ 0PYA47 SPC E 00003412 BERNSTEIN, ALLAN L 08/01/95 M Y PODIATRISTS
</TABLE>
NEXT TRAN: ____________ NEXT KEY: ____________ SVC DATES: 02/12/97 02/12/97
PF3: HMO MAIN PF5: SYSRETRN PF6: CORPMENU PF7: PAGEBACK PF8: PAGENEXT
PLEASE ENTER "S" NEXT TO DESIRED PHYSICIAN
<PAGE>
<TABLE>
<CAPTION>
HIQPVHD CORPORATE SYSTEMS P 02/12/97 08:47:00 0012
HPCT26 VTC01642 BCNMS HMO DATA INQUIRY VERSION 001
PHYSICIAN CROSS REFERENCE
SITE CODE: 0PY000
SITE NAME: PROSPECT MEDICAL GROUP
============================================================== ALL PHYSICIANS
DR NO. P/S LICENSE NO. NAME EFF DATE PRC/ACC SPECIALTY
<S> <C> <C> <C> <C> <C> <C> <C>
_ 0PYA48 SPC G 00073749 NANDA, MOHIT 08/01/95 M Y OPHTHALMOLOGY
_ 0PYA49 SPC A 00044723 FERNANDO, PETER E 08/01/95 M Y ANESTHESIOLOGY
_ 0PYA50 SPC C 00037346 TERTZAKIAN, GARO M 08/01/95 M Y UROLOGY
_ 0PYA51 SPC PSY 00014165 LICHMAN, JEANNE 08/01/95 M Y PSYCHOLOGY
_ 0PYA52 SPC DC 00023131 TUREK, PAUL H 08/01/95 M Y CHIROPRACTOR
_ 0PYA53 SPC E 00002539 SWARTZ, STEVEN L 08/01/95 M Y PODIATRISTS
_ 0PYA54 SPC E 00003833 MOY, RICHARD R 08/01/95 M Y PODIATRISTS
_ 0PYA55 SPC A 00036380 NOWROOZI, FRED 08/01/95 M Y PHYSICAL MED & REH
_ 0PYA56 SPC G 00071898 ROQUE, JOSE M 10/01/95 M Y GASTROENTEROLOGY
_ 0PYA58 SPC A 00033138 SHENOY, PRAKASH N 11/01/95 M Y INTERNAL MEDICINE
_ 0PYA59 SPC G 00034099 ROSENQUIST, RONALD W 11/15/95 M Y UROLOGY
_ 0PYA60 SPC E 00003792 LIN, PARKSON J 11/15/95 M Y PODIATRISTS
_ 0PYA62 SPC G 00072693 ENNIS, CRAIG A 11/15/95 M Y INTERNAL MEDICINE
_ 0PYA63 SPC PSY 00012071 KIRSCHBAUM, STUART 11/15/95 M Y PSYCHOLOGY
</TABLE>
NEXT TRAN: ____________ NEXT KEY: ____________ SVC DATES: 02/12/97 02/12/97
PF3: HMO MAIN PF5: SYSRETRN PF6: CORPMENU PF7: PAGEBACK PF8: PAGENEXT
PLEASE ENTER "S" NEXT TO DESIRED PHYSICIAN
<PAGE>
<TABLE>
<CAPTION>
HIQPVHD CORPORATE SYSTEMS P 02/12/97 08:47:04 0013
HPCT26 VTC01642 BCNMS HMO DATA INQUIRY VERSION 001
PHYSICIAN CROSS REFERENCE
SITE CODE: 0PY000
SITE NAME: PROSPECT MEDICAL GROUP
============================================================== ALL PHYSICIANS
DR NO. P/S LICENSE NO. NAME EFF DATE PRC/ACC SPECIALTY
<S> <C> <C> <C> <C> <C> <C> <C>
_ 0PYA64 SPC G 00054162 SANCHEZ, ANA M 11/15/95 M Y OBSTETRICS & GYNEC
_ 0PYA65 SPC DC 00019076 CATANZARITE, JEFFREY 11/15/95 M Y CHIROPRACTOR
_ 0PYA66 SPC C 00041445 ELLIS, MARK H 11/15/95 M Y PEDIATRICS
_ 0PYA67 SPC G 00016543 GILLMAN, SHERWIN A 11/15/95 M Y ALLERGY & IMMUNOLO
_ 0PYA68 SPC A 00034163 CHAMBI, ISRAEL P 01/01/96 M Y NEUROLOGICAL SURGE
_ 0PYA69 SPC A 00029781 BHASKAR, BIRBAL S 01/01/96 M Y INTERNAL MEDICINE
_ 0PYA70 SPC C 00028212 DANTO, BRUCE L 01/01/96 M Y PSYCHIATRY
_ 0PYA71 SPC G 00039256 AYOUB, ELIAS I 03/01/96 M Y OTOLARYNGOLOGY
_ 0PYA72 SPC A 00021894 BIER, ROBERT 03/01/96 M Y RADIOLOGY
_ 0PYA73 SPC G 00050355 BLOSE, DOUGLAS A 03/01/96 M Y DERMATOLOGY
_ 0PYA74 SPC G 00055330 CASSIDENTI, ANDREW P 03/01/96 M Y OBSTETRICS & GYNEC
_ 0PYA75 SPC G 00047629 NAGLIE, RONALD A 03/01/96 M Y NEONATAL MEDICINE
_ 0PYA76 SPC A 00019070 WALCOTT, JOHN M 03/01/96 M Y OPHTHALMOLOGY
_ 0PYA77 SPC G 00042276 ZEPEDA, MARC A 03/01/96 M Y OBSTETRICS & GYNEC
</TABLE>
NEXT TRAN: ____________ NEXT KEY: ____________ SVC DATES: 02/12/97 02/12/97
PF3: HMO MAIN PF5: SYSRETRN PF6: CORPMENU PF7: PAGEBACK PF8: PAGENEXT
PLEASE ENTER "S" NEXT TO DESIRED PHYSICIAN
<PAGE>
HIQPVHD CORPORATE SYSTEMS P 02/12/97 08:47:07 0014
HPCT26 VTC01642 BCNMS HMO DATA INQUIRY VERSION 001
PHYSICIAN CROSS REFERENCE
<TABLE>
<CAPTION>
SITE CODE: 0PY000
SITE NAME: PROSPECT MEDICAL GROUP
============================================================== ALL PHYSICIANS
DR NO. P/S LICENSE NO. NAME EFF DATE PRC/ACC SPECIALTY
<S> <C> <C> <C> <C> <C> <C>
_ 0PYA78 SPC A 00041163 GUPTA,ABHA S 03/15/96 M Y OBSTETRICS & GYNEC
_ 0PYA79 SPC A 00051302 PATEL,HASMUKH K 04/01/96 M Y SURGERY
_ 0PYA80 SPC A 00032247 FREED,ROBERT L 04/01/96 M Y RHEUMATOLOGY
_ 0PYA81 SPC G 00067568 DEYAN,ALEXANDER 04/01/96 M Y OBSTETRICS & GYNEC
_ 0PYA82 SPC G 00044062 ECKERLING,GORDON B 04/01/96 M Y INTERNAL MEDICINE
_ 0PYA83 SPC G 00071549 HAGADORN,BRUCE A 04/01/96 M Y OBSTETRICS & GYNEC
_ 0PYA84 SPC A 00045786 LIN,CHAO-I 04/01/96 M Y ALLERGY & IMMUNOLO
_ 0PYA85 SPC A 00048188 FARBAKHSH,NASRIN 05/01/96 M Y OBSTETRICS & GYNEC
_ 0PYA86 SPC A 00025746 MONASTERSKY,JORGE A 05/01/96 M Y INTERNAL MEDICINE
_ 0PYA88 SPC A 00044025 AHDOUT,DJAHANGIR J 06/01/96 M Y INTERNAL MEDICINE
_ 0PYA89 SPC G 00047680 DONNER,BARRY S 06/01/96 M Y INTERNAL MEDICINE
_ 0PYA90 SPC A 00041039 GHODSIAN,KAMRAN 06/01/96 M Y OBSTETRICS & GYNEC
_ 0PYA91 SPC A 00030819 ABEDIASL,SHAHLA A 06/01/96 M Y OPHTHALMOLOGY
_ 0PYA92 SPC A 00038941 SADRI-TABRIZI,SHAHPO 06/01/96 M Y OBSTETRICS & GYNEC
</TABLE>
NEXT TRAN:________ NEXT KEY:________ SVC DATES: 02/12/97 02/12/97
PF3: HMO MAIN PF5: SYSRETRN PF6: CORPMENU PF7: PAGEBACK PF8: PAGENEXT
PLEASE ENTER "S" NEXT TO DESIRED PHYSICIAN
<PAGE>
HIQPVHD CORPORATE SYSTEMS P 02/12/97 08:47:10 0015
HPCT26 VTC01642 BCNMS HMO DATA INQUIRY VERSION 001
PHYSICIAN CROSS REFERENCE
<TABLE>
<CAPTION>
SITE CODE: 0PY000
SITE NAME: PROSPECT MEDICAL GROUP
============================================================== ALL PHYSICIANS
DR NO. P/S LICENSE NO. NAME EFF DATE PRC/ACC SPECIALTY
<S> <C> <C> <C> <C> <C> <C>
_ 0PYA93 SPC G 00057651 STERNFELD,DANIEL R 06/01/96 M Y OBSTETRICS & GYNEC
_ 0PYA94 SPC A 00049758 SHAH,MITA H 06/01/96 M Y PEDIATRICS
_ 0PYA95 SPC G 00062616 BARSOTTI,MICHAEL R 06/01/96 M Y PEDIATRICS
_ 0PYA96 SPC G 00076417 GAZZANIGA,CATHERINE 07/01/96 M Y OBSTETRICS & GYNEC
_ 0PYA97 SPC DC 00018565 NOBLE,TIMOTHY R 07/01/96 M Y CHIROPRACTOR
_ 0PYA98 SPC G 00073198 CHANES,LUIS A 07/01/96 M Y OPHTHALMOLOGY
_ 0PYA99 SPC A 00046389 AHDOUT,KHOSRO J 07/01/96 M Y NEPHROLOGY
_ 0PYB01 SPC G 00041537 DIETERICH,FREDERICK 07/01/96 M Y OBSTETRICS & GYNEC
_ 0PYB02 SPC G 00050776 DOBYNS,JEFFREY L 07/01/96 M Y ORTHOPEDIC SURGERY
_ 0PYB03 SPC G 00017825 NANKIN,SHELDON J 07/01/96 M Y OPHTHALMOLOGY
_ 0PYB04 SPC G 00037045 ROSENFELD,SAMUEL R 07/01/96 M Y ORTHOPEDIC SURGERY
_ 0PYB05 SPC G 00039051 WEINERT,CARL R 07/01/96 M Y ORTHOPEDIC SURGERY
_ 0PYB06 SPC A 00023526 HALLIDAY,WILLIAM K 06/01/96 M Y CARDIOVASCU DISEAS
_ 0PYB07 SPC G 00028746 BIEGLER,TODD L 06/01/96 M Y CARDIOVASCU DISEAS
</TABLE>
NEXT TRAN:________ NEXT KEY:________ SVC DATES: 02/12/97 02/12/97
PF3: HMO MAIN PF5: SYSRETRN PF6: CORPMENU J PF7: PAGEBACK PF8: PAGENEXT
PLEASE ENTER "S" NEXT TO DESIRED PHYSICIAN
<PAGE>
HIQPVHD CORPORATE SYSTEMS 02/12/97 08:47:13 0016
HPCT26 VTC01642 BCNMS HMO DATA INQUIRY VERSION 001
PHYSICIAN CROSS REFERENCE
<TABLE>
<CAPTION>
SITE CODE: 0PY000
SITE NAME: PROSPECT MEDICAL GROUP
============================================================== ALL PHYSICIANS
DR NO. P/S LICENSE NO. NAME EFF DATE PRC/ACC SPECIALTY
<S> <C> <C> <C> <C> <C> <C>
_ 0PYB08 SPC LCS00012523 VANDEHEY,REBECCA R 06/01/96 M Y LCSW
_ 0PYB09 SPC A 00029368 BARRAGAN,ALFONSO L 06/01/96 M Y SURGERY
_ 0PYB10 SPC A 00045410 RAMIREZ,RUBEN 06/01/96 M Y UROLOGY
_ 0PYB11 SPC A 00029687 ONG,ANTONIO C 06/01/96 M Y NEUROLOGICAL SURGE
_ 0PYB12 SPC G 00043398 MORGAN,BEVERLY C 06/01/96 M Y PEDIATRIC CARDIOLO
_ 0PYB13 SPC PSY00010977 MORI,LISA T 06/01/96 M Y PSYCHOLOGY
_ 0PYB14 SPC G 00067377 FAKINOS,LAURENCE M 06/01/96 M Y OBSTETRICS & GYNEC
_ 0PYB15 SPC G 00047957 YORK,ANITA C 06/01/96 M Y OBSTETRICS & GYNEC
_ 0PYB16 SPC A 00038317 CHUNG,YONG W 06/01/96 M Y INTERNAL MEDICINE
_ 0PYB17 SPC A 00052121 MEZA,CARLOS R 06/01/96 M Y INTERNAL MEDICINE
_ 0PYB18 SPC OPT00003828 LE VINE,MYRON L 06/01/96 M Y OPTOMETRY
_ 0PYB19 SPC C 00035334 COBB,TYSON C 06/01/96 M Y CARDIOVASCU DISEAS
_ 0PYB20 SPC MFC00029953 ERICKSON-ROBINSON,MA 06/01/96 M Y MFCC
_ 0PYB21 SPC PSY00012070 KIRSCHBAUM,DEBORAH L 06/01/96 M Y PSYCHOLOGY
</TABLE>
NEXT TRAN:________ NEXT KEY:________ SVC DATES: 02/12/97 02/12/97
PF3: HMO MAIN PF5: SYSRETRN PF6: CORPMENU PF7: PAGEBACK PF8: PAGENEXT
PLEASE ENTER "S" NEXT TO DESIRED PHYSICIAN
<PAGE>
HIQPVHD CORPORATE SYSTEMS P 02/12/97 08:47:17 0017
HPCT26 VTC01642 BCNMS HMO DATA INQUIRY VERSION 001
PHYSICIAN CROSS REFERENCE
<TABLE>
<CAPTION>
SITE CODE: 0PY000
SITE NAME: PROSPECT MEDICAL GROUP
============================================================== ALL PHYSICIANS
DR NO. P/S LICENSE NO. NAME EFF DATE PRC/ACC SPECIALTY
<S> <C> <C> <C> <C> <C> <C>
_ 0PYB22 SPC MFC00016388 KHALSA,GURUCHARAN S 06/01/96 M Y MFCC
_ 0PYB23 SPC G 00064918 BAGINSKI,LEON J 06/01/96 M Y OBSTETRICS & GYNEC
_ 0PYB24 SPC A 00043562 GONZALEZ,CARLOS R 06/01/96 M Y NEPHROLOGY
_ 0PYB25 SPC G 00017470 GIBBS,JAMES A 06/01/96 M Y PATHOLOGY
_ 0PYB26 SPC G 00044536 CHAVEZ,RUDY 06/01/96 M Y PSYCHIATRY
_ 0PYB27 SPC G 00044673 FIGUEROA,CARLOS M 06/01/96 M Y PSYCHIATRY
_ 0PYB28 SPC A 00044904 ARIOLA,SERAFIN E 06/01/96 M Y ANESTHESIOLOGY
_ 0PYB29 SPC A 00044552 ALVARADO,PATRICIA M 06/01/96 M Y NEPHROLOGY
_ 0PYB30 SPC A 00040197 ALARCON-VARGAS,JUAN 06/01/96 M Y UROLOGY
_ 0PYB31 SPC G 00053241 LEE,SCOTT S 06/01/96 M Y OBSTETRICS & GYNEC
_ 0PYB32 SPC G 00028735 RAKOWER,STEPHEN R 06/01/96 M Y SURGERY
_ 0PYB33 SPC G 00042829 SOWERBY,MAREN R 06/01/96 M Y DIAGNOSTIC RADIOLO
_ 0PYB34 SPC G 00074511 ROBINSON,MING H 06/01/96 M Y OBSTETRICS & GYNEC
_ 0PYB35 SPC G 00070407 BITTNER,DONALD E 06/01/96 M Y ORTHOPEDIC HAND SU
</TABLE>
NEXT TRAN:________ NEXT KEY:________ SVC DATES: 02/12/97 02/12/97
PF3: HMO MAIN PF5: SYSRETRN PF6: CORPMENU PF7: PAGEBACK PF8: PAGENEXT
PLEASE ENTER "S" NEXT TO DESIRED PHYSICIAN
<PAGE>
HIQPVHD CORPORATE SYSTEMS P 02/12/97 08:47:20 0018
HPCT26 VTC01642 BCNMS HMO DATA INQUIRY VERSION 001
PHYSICIAN CROSS REFERENCE
<TABLE>
<CAPTION>
SITE CODE: 0PY000
SITE NAME: PROSPECT MEDICAL GROUP
============================================================== ALL PHYSICIANS
DR NO. P/S LICENSE NO. NAME EFF DATE PRC/ACC SPECIALTY
<S> <C> <C> <C> <C> <C> <C>
_ 0PYB36 SPC A 00045742 DE LA PENA,VICTOR E 06/01/96 M Y OBSTETRICS & GYNEC
_ 0PYB37 SPC A 00038493 IBARRA,FERNAND0 06/01/96 M Y INTERNAL MEDICINE
_ 0PYB38 SPC A 00043518 DELAROSA,JOSE L 06/01/96 M Y OBSTETRICS & GYNEC
_ 0PYB39 SPC C 00033575 COLIAS,JOHN G 06/01/96 M Y ORTHOPEDIC SURGERY
_ 0PYB40 SPC C 00038037 KENNEDY,PETER S 06/01/96 M Y MEDICAL ONCOLOGY
_ 0PYB41 SPC G 00045372 PALMER,HIRAM S 06/01/96 M Y CARDIOVASCU DISEAS
_ 0PYB42 SPC A 00033853 RIVAS,JOSE L 06/01/96 M Y THORACIC SURGERY
_ 0PYB43 SPC C 00041397 KAVOOSSI-SHARIFABAD, 06/01/96 M Y PHYSICAL MED & REH
_ 0PYB44 SPC DC 00016644 MORALES,ROBERTO P 06/01/96 M Y CHIROPRACTOR
_ 0PYB45 SPC A 00044650 NACINO,ISMAEL B 06/01/96 M Y ANESTHESIOLOGY
_ 0PYB47 SPC A 00025157 FUENZALIDA,SERGIO A 06/01/96 M Y NEUROLOGY
_ 0PYB48 SPC A 00029007 SANDLER,JOSEPH I 06/01/96 M Y RHEUMATOLOGY
_ 0PYB49 SPC G 00037056 SHEAR,STUART L 06/01/96 M Y DERMATOLOGY
_ 0PYB50 SPC A 00039226 SEE,ROSALINA C 06/01/96 M Y INFECTIOUS DISEASE
</TABLE>
NEXT TRAN:________ NEXT KEY:________ SVC DATES: 02/12/97 02/12/97
PF3: HMO MAIN PF5: SYSRETRN PF6: CORPMENU PF7: PAGEBACK PF8: PAGENEXT
PLEASE ENTER "S" NEXT TO DESIRED PHYSICIAN
<PAGE>
HIQPVHD CORPORATE SYSTEMS P 02/12/97 08:47:20 0019
HPCT26 VTC01642 BCNMS HMO DATA INQUIRY VERSION 001
PHYSICIAN CROSS REFERENCE
<TABLE>
<CAPTION>
SITE CODE: 0PY000
SITE NAME: PROSPECT MEDICAL GROUP
============================================================== ALL PHYSICIANS
DR NO. P/S LICENSE NO. NAME EFF DATE PRC/ACC SPECIALTY
<S> <C> <C> <C> <C> <C> <C>
_ 0PYB51 SPC G 00051075 URREA,PAUL T 06/01/96 M Y OPHTHALMOLOGY
_ 0PYB52 SPC G 00043480 SUAREZ,DANIEL 06/01/96 M Y INTERNAL MEDICINE
_ 0PYB53 SPC A 00030158 SANCHEZ,ALEJANDRO M 06/01/96 M Y PLASTIC SURGERY
_ 0PYB54 SPC A 00039778 SUCHOV,MORDO 06/01/96 M Y INTERNAL MEDICINE
_ 0PYB55 SPC G 00045202 SAUCEDO,TOMAS 06/01/96 M Y ORTHOPEDIC SURGERY
_ 0PYB56 SPC G 00027036 ZAPANTA,RICHARD 06/01/96 M Y ORTHOPEDIC SURGERY
_ 0PYB57 SPC E 00003593 UNG,ALVIN W 06/01/96 M Y PODIATRISTS
_ 0PYB58 SPC G 00032178 THROPAY,JOHN P 06/01/96 M Y RADIATION ONCOLOGY
_ 0PYB59 SPC G 00020647 LAW,ANNA C 09/01/96 M Y EMERGENCY MEDICINE
_ 0PYB60 SPC G 00035526 BROWN,MARK W 09/15/96 M Y ORTHOPEDIC SURGERY
_ 0PYB61 SPC A 00025389 LINZEY,EDWARD M 11/15/96 M Y OBSTETRICS & GYNEC
</TABLE>
NEXT TRAN:________ NEXT KEY:________ SVC DATES: 02/12/97 02/12/97
PF3: HMO MAIN PF5: SYSRETRN PF6: CORPMENU PF7: PAGEBACK PF8: PAGENEXT
NO MORE PHYSICIAN RECORDS FOR THIS SITE
<PAGE>
HIQPVHG CORPORATE SYSTEMS
HPCT26 BCNMS HMO DATA INQUIRY VERSION 001
AFFILIATED HOSPITAL CROSS REFERENCE
SITE CODE: 0PY000
SITE NAME: PROSPECT MEDICAL GROUP
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MEDICARE ID HOSPITAL NAME EFFDATE ENDDATE
<S> <C> <C> <C> <C>
_ 050065 ** WESTERN MEDICAL CENTER-SANTA ANA 10/01/96 99/99/99
_ 050168 ** ST JUDE MEDICAL CENTER 12/01/94 99/99/99
_ 050282 ** MARTIN LUTHER HOSPITAL MEDICAL CENTER 10/01/96 99/99/99
_ 050535 ** COASTAL COMMUNITIES HOSPITAL 10/01/96 99/99/99
_ 050567 ** MISSION HOSPITAL REGIONAL
MEDICAL CENTER 10/01/96 99/99/99
_ 050603 __ SADDLEBACK MEMORIAL MEDICAL CENTER 10/01/96 99/99/99
_ 050693 ** IRVINE MEDICAL CENTER 10/01/96 99/99/99
</TABLE>
NEXT TRAN: NEXT KEY: SVC DATES: 02/12/97 02/12/97
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NO MORE HOSPITAL RECORDS FOR THIS SITE
<PAGE>
EXHIBIT C
ADMINISTRATIVE RESPONSIBILITIES OF PARTICIPATING MEDICAL GROUP
This exhibit lists the areas in which PARTICIPATING MEDICAL GROUP and
PARTICIPATING MEDICAL GROUP Physicians will have administrative
responsibility. The extent and type of responsibility to be undertaken will
be agreed upon by the PARTICIPATING MEDICAL GROUP and BLUE CROSS through an
annual audit process.
A. PROFESSIONAL SERVICES ADMINISTRATION
Professional Services - Schedule, control, process and report encounter
information
Outside Referrals - Control, process and report encounter information
Ancillary - Control, process and report encounter information
B. INSTITUTIONAL SERVICES ADMINISTRATION
Preadmission certification process
Medical Review of claims
Length-of-stay (monitoring and control)
C. UTILIZATION REVIEW
D. PEER REVIEW, EDUCATION AND CREDENTIALING
E. QUALITY MANAGEMENT
F. GRIEVANCE PROCEDURE COMPLIANCE
G. MONITOR AND REVISE SPECIALIST/OTHER REFERRAL CONTRACTS
H. PATIENT EDUCATION
I. CASE MANAGEMENT
C-1
<PAGE>
CALIFORNIACARE HEALTH PLANS
SCHEDULE D
Intentionally omitted. Confidential Treatment Requested.
<PAGE>
Effective December 1, 1996 Blue Cross of California
Prudent Buyer Plan
EXHIBIT E
PHYSICIAN PAYMENT STRUCTURE
AREA 5
Blue Cross of California establishes and, from time to time, revises unit
values based on observed charge patterns by CPT-4 procedure code. The maximum
allowable for physician claims shall be calculated using the unit values as
in effect, multiplied by the following conversion factors: *
<TABLE>
<CAPTION>
CONVERSION FACTORS
------------------
<S> <C>
Anesthesia [ ** ]
Medicine [ ** ]
Pathology
CPT codes 88100-88399 [ ** ]
All other CPT codes [ ** ]
Radiology [ ** ]
Surgery
CPT-4 codes 59400-59622 [ ** ]
All other CPT-4 codes [ ** ]
</TABLE>
When PHYSICIAN does not submit claims electronically in a format specified
by BLUE CROSS, a handling fee of [ ** ] per OCR scannable claim and
[ ** ] per paper claim will be deducted from payment due PHYSICIAN.
PHYSICIAN will not charge Members for the handling fee.
REIMBURSEMENT FOR HCPCS LEVEL II CODES
PHARMACY (INCLUDING INFUSION THERAPY DRUGS): Maximum Allowable reimbursement
based on Average Wholesale Price (AWP) according to published market data
(such as DRUG TOPICS RED BOOK, AMERICAN DRUGGIST BLUE BOOK, OR MEDISPAN).
Oral prescription drugs dispensed in the physician's office will be denied as
not payable, and the Member may not be billed by physician.
DURABLE MEDICAL EQUIPMENT, SUPPLIES (INCLUDING, BUT NOT LIMITED TO, INFUSION
THERAPY SUPPLIES), PROSTHETICS AND ORTHOTICS: Maximum Allowable Reimbursement
not to exceed the lesser of the average retail price or the Medicare regional
allowable reimbursement rates applied to California for the appropriate code
ranges. The average retail price will be determined annually from claims data
and/or external data. Reimbursement rates will be based on whether the
equipment is new, used or rented as identified by the CPT code modifier.
Codes not identified by modifier will be considered as rentals.
ALL OTHER HCPCS CODES: For all other HCPCS codes the Maximum Allowable will
be determined by Blue Cross using claims data and/or external data.
<PAGE>
EXHIBIT F
NON-CAPITATED PERFORMANCE SETTLEMENT SCHEDULE
FOR NON-CAPITATED MEDICAL SERVICES
Based on Plan C, $60,000 Stop Loss,
Age/Sex Factor = 1.00 and Regional Factor = 1.00
NON-CAPITATED PERFORMANCE SETTLEMENT CALCULATION METHOD:
1) Identify the payment band that contains the PARTICIPATING MEDICAL GROUP's
Adjusted PMPM Non-Capitated Expense
2) Subtract the PARTICIPATING MEDICAL GROUP's PMPM Non-Capitated Expense from
the high value of the payment band
3) Multiply the result from Step 2 by the multiplier column for the payment
band
4) Add the result from Step 3 to the minimum payment amount for the payment
band to get the PMPM Non-Capitated Performance Settlement
5) Multiply the PMPM Non-Capitated Performance Settlement from Step 4 by the
PARTICIPATING MEDICAL GROUP's Member Months to calculate the Non-Capitated
Performance Settlement
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
Non-Capitated Expense Ranges
Payment Bands (PMPM Non-Capitated Expense) Multiplier Minimum Payment Amount
----------------------------
Low High
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 $31.63 > $31.63 [ ** ] [ ** ]
- ------------------------------------------------------------------------------------
2 $30.30 $31.62* [ ** ] [ ** ]
- ------------------------------------------------------------------------------------
3 $28.97 $30.29 [ ** ] [ ** ]
- ------------------------------------------------------------------------------------
4 $27.64 $28.96 [ ** ] [ ** ]
- ------------------------------------------------------------------------------------
5 $26.31 $27.63 [ ** ] [ ** ]
- ------------------------------------------------------------------------------------
6 $24.98 $26.30 [ ** ] [ ** ]
- ------------------------------------------------------------------------------------
7 $23.65 $24.97 [ ** ] [ ** ]
- ------------------------------------------------------------------------------------
8 $22.32 $23.64 [ ** ] [ ** ]
- ------------------------------------------------------------------------------------
9 $20.99 $22.31 [ ** ] [ ** ]
- ------------------------------------------------------------------------------------
10 < $20.98 $20.98 [ ** ] [ ** ]
- ------------------------------------------------------------------------------------
</TABLE>
* Attachment Point
- --------------------------------------------------------------------------------
Example of Non-Capitated Performance Settlement Calculation
Assume: PARTICIPATING MEDICAL GROUP has an PMPM Non-Capitated Expense of
$26.63; and there are 100,000 member months
(1) Identify the payment band that contains the PARTICIPATING MEDICAL GROUP's
Adjusted PMPM Non-Capitated Expense.
The PARTICIPATING MEDICAL GROUP's PMPM Non-Capitated Expense of $26.63
falls between the low and high values of payment band 5
(2) Subtract the PARTICIPATING MEDICAL GROUP's PMPM Non-Capitated Expense from
the high value for the payment band.
$27.63 - $26.63 = $1.00
(3) Multiply the result from Step 2 by the multiplier for the payment band.
$1.00 x [ ** ] = [ ** ]
(4) Add the result from Step 3 to the minimum payment amount for the payment
band to get the PMPM Non-Capitated Performance Settlement.
[ ** ] + [ ** ] = [ ** ] PMPM Non-Capitated Performance Settlement
(5) Multiply the PMPM Non-Capitated Performance Settlement from Step 4 by the
PARTICIPATING MEDICAL GROUP's Member Months to calculate the Non-Capitated
Performance Settlement.
[ ** ] PMPM Non-Capitated Performance Settlement x 100,000 member months
= [ ** ] Non-Capitated Performance Settlement
- --------------------------------------------------------------------------------
F-1
<PAGE>
EXHIBIT G
COMPENSATION FOR SERVICES TO BLUE CROSS PLUS MEMBERS
In consideration for the mutual promises herein set forth, PARTICIPATING MEDICAL
GROUP and BLUE CROSS hereby agree as follows:
I. DEFINITIONS
A. "ADVANCE SUPPLEMENTAL CAPITATION PAYMENT" means a supplemental
Capitation payment apportioned monthly and paid in advance of the
date it is earned. Advance Supplemental Capitation Payments are
subject to recoupment by BLUE CROSS if not actually earned prior to
the end of the calendar quarter.
B. "BASELINE CAPITATION PAYMENT" means the monthly Capitation payment for
each Member covered by a BLUE CROSS PLUS Benefit Agreement and
assigned to PARTICIPATING MEDICAL GROUP.
C. "IN-NETWORK SERVICES" means those services which are provided,
arranged by, referred or authorized by PARTICIPATING MEDICAL GROUP for
BLUE CROSS PLUS Members and which would be CALIFORNIACARE Capitation
Services if they had been rendered under the Agreement to a
CALIFORNIACARE Member.
D. "IN-NETWORK UTILIZATION FACTOR" means the quotient of the Baseline
Capitation Payment, divided by the sum of Baseline Capitation Payments
plus expenses for Out-of-Network Services, modified each calendar
quarter to allow for incurred but not reported expenses (IBNR) based
on BLUE CROSS's overall BLUE CROSS PLUS experience, as follows:
Baseline Capitation Payment = A
Expenses for Out-of-Network Services = B
(Modified to allow for IBNR)
In-Network Utilization Factor = C
A
C = -------
A + B
E. "NON-PARTICIPATING PROVIDER" means a Health Professional, hospital,
emergency facility, skilled nursing facility, ambulance service, home
health agency, or Alternate Birthing Center that has rendered services
to a BLUE CROSS PLUS Member without authorization from the
PARTICIPATING MEDICAL GROUP to which the Member is assigned.
F. "OUT-OF-NETWORK SERVICES" means those services rendered to BLUE CROSS
PLUS Members by a Non-Participating Provider, and which would be
Capitation Services if rendered by PARTICIPATING MEDICAL GROUP under
the Agreement to CALIFORNIACARE Members, except for Out-of-Area
Emergency Services.
G. "SUPPLEMENTAL CAPITATION PAYMENT" means a Capitation payment per BLUE
CROSS PLUS Member per month, which may be earned based on the
In-Network Utilization Factor as set forth in Exhibit G-1.
G-1
<PAGE>
CALIFORNIACARE HEALTH PLANS
SCHEDULE G-1
Intentionally omitted. Confidential Treatment Requested.
<PAGE>
EXHIBIT H
OUTPATIENT PRESCRIPTION DRUG SETTLEMENT SCHEDULE
PMPM Outpatient Prescription Drug Expense Target: $10.45 PMPM
PMPM EXPENSE RANGE SETTLEMENT CALCULATION
Greater than $10.45 [ ** ]
$9.60 to $10.45 [ ** ]
$8.75 to $9.59 [ ** ]
Less than $8.75 [ ** ]
If PARTICIPATING MEDICAL GROUP's PMPM OPDE is less than the OPDE Target, an
additional [ ** ] PMPM will be due to PARTICIPATING MEDICAL GROUP if
PARTICIPATING MEDICAL GROUP's Formulary utilization is equal to or greater
than 95%.
Formulary Utilization: Is the quotient of the number of prescriptions for
Members with outpatient prescription drug benefits
assigned to PARTICIPATING MEDICAL GROUP using drugs
listed in the Blue Cross of California Outpatient
Prescription Drug Formulary divided by the total
number of prescriptions for Members with outpatient
prescription drug benefits assigned to PARTICIPATING
MEDICAL GROUP.
H-1
<PAGE>
EXHIBIT I
QUALITY MANAGEMENT BONUS SCHEDULE
Quality Management Scorecard Rating PMPM Quality Bonus Settlement
Below Average [ ** ]
Average [ ** ]
Above Average [ ** ]
Where:
"Average" is the numeric average of all PARTICIPATING MEDICAL GROUP
scorecard scores plus or minus one standard deviation.
"Above Average" is a score that is greater than one standard deviation above
the numeric average of all PARTICIPATING MEDICAL GROUP scorecard scores.
"Below Average" is a score that is less than one standard deviation below the
numeric average of all PARTICIPATING MEDICAL GROUP scorecard scores.
I-1
<PAGE>
AMENDMENT
CALIFORNIACARE
MEDICAL SERVICES AGREEMENT
This Amendment to the CaliforniaCare Medical Services Agreement is entered
into at Woodland Hills, Los Angeles County, California, effective as of May 1,
1997, between Blue Cross of California and Affiliates ("BLUE CROSS") and
PROSPECT MEDICAL GROUP ("PARTICIPATING MEDICAL GROUP").
A. BLUE CROSS and PARTICIPATING MEDICAL GROUP have previously entered into a
CaliforniaCare Medical Services Agreement ("Agreement") effective January
1, 1997, whereby PARTICIPATING MEDICAL GROUP agreed to provide or arrange
for certain Covered Medical Services to Members assigned to PARTICIPATING
MEDICAL GROUP.
B. Pursuant to Section 16.01 of the Agreement, the parties now desire to amend
the Agreement.
THEREFORE, IT IS AGREED:
I. The following is hereby added as Section 3.07 to the Agreement:
BLUE CROSS agrees that from and after the date hereof until November
30, 1999 (provided this Agreement remains in effect for such period),
it shall not enter into any new CaliforniaCare Medical Service
Agreements with any other medical groups, other than Sansum Medical
Group, for the provision of Covered Medical Services to Members in the
metropolitan Santa Barbara area.
II. The following is hereby added as Section 7.07 to the Agreement:
Notwithstanding anything to the contrary stated in this Agreement,
BLUE CROSS shall not be liable under this Agreement to pay
PARTICIPATING MEDICAL GROUP rates in excess of any rates paid to
PARTICIPATING MEDICAL GROUP for the same services by any other person,
health care service plan, insurer or other entity. If at any time
during the term of this Agreement, PARTICIPATING MEDICAL GROUP accepts
or charges any rates which are lower than the rates set forth in this
Agreement, PARTICIPATING MEDICAL GROUP shall immediately notify BLUE
CROSS and such lower rates shall immediately become the applicable
rates under this Agreement. PARTICIPATING
1
<PAGE>
MEDICAL GROUP shall also retroactively adjust all invoices sent to
BLUE CROSS since the earliest date PARTICIPATING MEDICAL GROUP
accepted or charged these lower rates.
III. Upon acceptance by the parties, this Amendment, as of the effective date
hereof, shall become a part of this Agreement and all provisions of the
Agreement not specifically inconsistent herewith shall remain in full
force and effect.
For BLUE CROSS OF CALIFORNIA For PARTICIPATING MEDICAL GROUP
/s/ Ferial Bahremand /s/ Gregg DeNicola
- ----------------------------- -----------------------------
Signature Signature
Ferial Bahremand Gregg DeNicola
- ----------------------------- -----------------------------
Please Print Name Please Print Name
V.P. CEO
- ----------------------------- -----------------------------
Title Title
7/18/97 6/5/97
- ----------------------------- -----------------------------
Date Date
2
<PAGE>
"ALL SECTIONS MARKED WITH TWO ASTERISKS ("**") REFLECT PORTIONS WHICH HAVE
BEEN REDACTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION BY PROSPECT MEDICAL HOLDINGS, INC. AS PART OF A REQUEST FOR
CONFIDENTIAL TREATMENT."
LETTER OF AGREEMENT
SERVING AS ADDENDUM TO THE 1997 MEDICAL SERVICES AGREEMENT
BETWEEN BLUE CROSS OF CALIFORNIA AND
PROSPECT MEDICAL GROUP
FOR
CALIFORNIACARE, BLUE CROSS PLUS AND PERSONAL CALIFORNIACARE
This will serve as confirmation that BLUE CROSS OF CALIFORNIA ("BLUE CROSS") has
agreed to the following terms of the CaliforniaCare Medical Services Agreement
between BLUE CROSS and PROSPECT MEDICAL GROUP ("PARTICIPATING MEDICAL GROUP")
effective January 1, 1997.
Effective January 1 1997, BLUE CROSS shall increase professional capitation
rates (excluding Durational Benefit Plans, AIM, CalKids, and non-commercial
products such as Workers' Compensation, Medi-Cal and Medicare Risk) for
PARTICIPATING MEDICAL GROUP by [ ** ], which rates shall remain in effect
through December 31, 1997.
Effective January 1, 1998 BLUE CROSS shall increase the above mentioned rates
by another [ ** ] to remain in effect through December 31, 1999.
Upon acceptance of the parties, this Addendum shall become part of the
CaliforniaCare Medical Services Agreement between PARTICIPATING MEDICAL GROUP
and BLUE CROSS effective January 1, 1997.
BLUE CROSS PARTICIPATING MEDICAL
GROUP
Name: Ferial Bahremand Name: Gregg DeNicola M.D.
------------------------------- -------------------------------
Signature: /s/ Ferial Bahremand Signature: /s/ Gregg DeNicola
-------------------------- --------------------------
Title: Vice President Title: President
----------------------------- ------------------------------
Date: 2/13/97 Date: 11-26-96
------------------------------- --------------------------
<PAGE>
"ALL SECTIONS MARKED WITH TWO ASTERISKS ("**") REFLECT PORTIONS WHICH HAVE
BEEN REDACTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION BY PROSPECT MEDICAL HOLDINGS, INC. AS PART OF A REQUEST FOR
CONFIDENTIAL TREATMENT."
LETTER OF AGREEMENT
SERVING AS ADDENDUM TO THE 1997 MEDICAL SERVICES AGREEMENT
BETWEEN BLUE CROSS OF CALIFORNIA AND
PROSPECT MEDICAL GROUP FOR
CALIFORNIACARE, BLUE CROSS PLUS AND
PERSONAL CALIFORNIACARE
This will serve as a confirmation letter in which Blue Cross of California
("BLUE CROSS") has agreed to the following terms of the CaliforniaCare Medical
Services Agreement between BLUE CROSS and PROSPECT MEDICAL GROUP ("PARTICIPATING
MEDICAL GROUP") effective January 1, 1997.
Article VIII. ENROLLMENT PROTECTION, is hereby deleted in its entirety and is
replaced by the following:
A. BLUE CROSS and PARTICIPATING MEDICAL GROUP agree that PARTICIPATING
MEDICAL GROUP shall assume full financial responsibility and liability
for all Capitation Services. BLUE CROSS agrees to compensate
PARTICIPATING MEDICAL GROUP [ ** ] per Member per month in addition
to the Capitation due pursuant to the Capitation rates contained in
this Agreement.
B. Prior to execution of this Agreement, PARTICIPATING MEDICAL GROUP
shall provide to BLUE CROSS the following: (i) PARTICIPATING MEDICAL
GROUP's financial statement for its immediately preceding two (2)
fiscal years; (ii) PARTICIPATING MEDICAL GROUP's cumulative financial
statements for the current fiscal year; and (iii) PARTICIPATING
MEDICAL GROUP's federal income tax returns for the immediately
preceding two (2) years.
C. PARTICIPATING MEDICAL GROUP shall provide to BLUE CROSS evidence of
coverage or reinsurance for professional services stop-loss with a
carrier or self-insurance program acceptable to BLUE CROSS, within
thirty (30) days of execution of this Agreement.
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Letter of Agreement between BLUE CROSS
and PARTICIPATING MEDICAL GROUP
Exhibit G, Section II, Item E of this section is amended to read:
Total claims for Out-of-Network Expenses rendered to any single BLUE
CROSS PLUS Member during the calendar year shall be limited to
[ ** ].
Upon acceptance of the parties, this letter, as of the effective date, shall
become part of the Medical Services Agreement.
BLUE CROSS OF CALIFORNIA PARTICIPATING MEDICAL GROUP
Signature: /s/ Ferial Bahremand Signature: /s/ Gregg De Nicola
-------------------------- --------------------------
Name: Ferial Bahremand Name: Gregg De Nicola
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Title: Vice President Title: President
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Network Development & Management
Date: 2/13/97 Date: 11-26-96
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"ALL SECTIONS MARKED WITH TWO ASTERISKS ("**") REFLECT PORTIONS WHICH HAVE
BEEN REDACTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION BY PROSPECT MEDICAL HOLDINGS, INC. AS PART OF A REQUEST FOR
CONFIDENTIAL TREATMENT."
PACIFICARE OF CALIFORNIA
MEDICAL GROUP/IPA SERVICES AGREEMENT
(SPLIT CAPITATION)
THIS PACIFICARE MEDICAL GROUP/IPA SERVICES AGREEMENT (this "Agreement") is made
and entered into this First day of March, 1998, by and between PACIFICARE OF
CALIFORNIA, INC., a California corporation ("PacifiCare"), and SIERRA MEDICAL
GROUP ("Medical Group"), with reference to the following facts:
WHEREAS, PacifiCare operates various prepaid health plans for the provision of
Covered Services to persons enrolled as Members in such plans in a manner
consistent with the laws of the State of California and the United States; and
WHEREAS, Medical Group and its Participating Providers desire to participate in
PacifiCare's prepaid health service delivery system by providing or arranging
for Covered Services to Members on a prepaid basis in coordination with
PacifiCare and its Participating Providers under the terms specified in this
Agreement.
NOW, THEREFORE, it is agreed as follows:
ARTICLE 1
DEFINITIONS
Whenever used in this Agreement, the following terms shall have the definitions
contained in this Article 1:
1.1 ACCREDITATION ORGANIZATION is any organization, including, without
limitation, the National Committee for Quality Assurance (NCQA), engaged
in accrediting or certifying PacifiCare, any Managed Care Plans, or any
Participating Providers.
1.2 AGREEMENT is this Medical Group/IPA Services Agreement between PacifiCare
and Medical Group, and any amendments, exhibits and attachments hereto,
including Product Attachments.
1.3 BASE AGREEMENT is this Medical Group/IPA Services Agreement between
PacifiCare and Medical Group, and any amendments, exhibits and
attachments hereto, excluding Product Attachments.
1.4 CAPITATION PAYMENTS are monthly payments made to Medical Group on a
prepaid basis for Covered Services provided or arranged by Medical Group
under this Agreement.
1.5 COMMENCEMENT DATE is the commencement date of this Agreement as specified
in Section 6.1.
1.6 COPAYMENT is a fee that may be charged to Medical Group Members for
certain Medical Group Services and collected by Medical Group or its
Participating Providers at the time Medical Group Services are provided,
as set forth in the applicable Managed Care Plan.
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1.7 COST OF CARE is the valuation of Covered Services and other health care
services provided or arranged by Medical Group, as described in Section
5.7.
1.8 COVERED SERVICES are those medically necessary health care services,
supplies and benefits which are required by a Member as determined by
Medical Group or PacifiCare in accordance with the Member's Managed Care
Plan and PacifiCare's Quality Improvement Program and Utilization
Management Program. For purposes of this Agreement, "medically necessary"
shall have the meaning set forth in the applicable Subscriber Agreement.
1.9 DIVISION OF FINANCIAL RESPONSIBILITY is the matrix for each Managed Care
Plan which specifies the financial responsibility of PacifiCare, Medical
Group and Hospital for Covered Services. The Division of Financial
Responsibility for each Managed Care Plan is set forth in Attachment A.
1.10 ELIGIBILITY LIST is the list of Members for whom Medical Group shall
provide or arrange Covered Services.
1.11 EMERGENCY SERVICES are Covered Services required by a Member as the
result of a medical condition manifesting itself by the sudden onset of
symptoms of sufficient severity, which may include severe pain, such that
a reasonable person would expect the absence of immediate medical
attention to result in: (1) placing the health of the Member in serious
jeopardy; (2) serious impairment to bodily functions; or (3) serious
dysfunction of any bodily part. The final determination of whether
Emergency Services were required shall be made by the PacifiCare medical
director or designee, subject to appeal under the applicable Member
appeals procedure.
1.12 GOVERNMENT AGENCY shall mean any local, state or federal government
agency or entity with regulatory or other authority over PacifiCare, this
Agreement or any Managed Care Plan.
1.13 HOSPITAL is the licensed acute care hospital (or hospitals), identified
in EXHIBIT 1 to this Agreement, which has (or have) entered into a
written agreement with PacifiCare to provide Hospital Services to Medical
Group Members assigned to Hospital in the Medical Group Service Area.
1.14 HOSPITAL SERVICES are Covered Services for Medical Group Members assigned
to Hospital which are the financial responsibility of Hospital, as
specified in the Division of Financial Responsibility for each Managed
Care Plan (as set forth in Attachment A).
1.15 MANAGED CARE PLAN is any one of the various health plans or products
sponsored or administered by PacifiCare or its subsidiaries or affiliates
including, without limitation, a commercial prepaid health plan
("PacifiCare Commercial Health Plan"), a commercial point-of-service plan
("PacifiCare Commercial POS Health Plan"), a Medicare-risk plan ("Secure
Horizons Health Plan") and a Medicare-risk point-of-service plan ("Secure
Horizons POS Health Plan"). Each Managed Care Plan is described in the
applicable Subscriber Agreement and Product Attachment. PacifiCare may
make available some, and not all, of the Managed Care Plans under this
Agreement.
1.16 MEDICAL GROUP SERVICE AREA is the geographic area as defined in EXHIBIT 1
to this Agreement.
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1.17 MEDICAL GROUP FACILITY is each office of Medical Group and its
Participating Providers, identified in EXHIBIT 1 to this Agreement, where
Medical Group Services may be provided to Medical Group Members.
1.18 MEDICAL GROUP MEMBERS are the Members listed on the Eligibility List.
1.19 MEDICAL GROUP SERVICES are Covered Services for Medical Group Members
which are the financial responsibility of Medical Group, as specified in
the Division of Financial Responsibility for each Managed Care Plan (as
set forth in Attachment A).
1.20 MEMBER is an individual who is enrolled in a Managed Care Plan and meets
all the eligibility requirements for membership in the Managed Care Plan
and for whom the applicable Premium has been received by PacifiCare.
1.21 OUT-OF-AREA MEDICAL SERVICES are those Urgently Needed Services and
Emergency Services provided while a Member is outside the Medical Group
Service Area which would have been the financial responsibility of
Medical Group had the services been provided within the Medical Group
Service Area.
1.22 PARTICIPATING PROVIDERS are (i) physicians and health care professionals
who are shareholders, partners or employees of Medical Group and (ii)
physicians, medical groups, individual practice associations ("IPA"),
health care professionals, hospitals, facilities and other providers of
health care services or supplies that have entered into written contracts
with PacifiCare, Medical Group or Hospital to provide Covered Services to
Members pursuant to Managed Care Plans.
1.23 PREMIUM is the payment for Covered Services under each Managed Care Plan
as defined in the applicable Product Attachment.
1.24 PRIMARY CARE PHYSICIAN is any of Medical Group's Participating Providers
who meet PacifiCare's criteria for providing initial and primary care
Covered Services to Medical Group Members, for maintaining the continuity
of patient care, and for initiating and coordinating referrals for
Covered Services to Medical Group Members.
1.25 PRODUCT ATTACHMENTS are the attachments to the Base Agreement which set
forth the terms and conditions under which Medical Group shall provide or
arrange Covered Services to Medical Group Members pursuant to the Managed
Care Plans. All Product Attachments which are signed by both PacifiCare
and Medical Group shall become a part of this Agreement and are
incorporated herein.
1.26 PROVIDER MANUAL is the PacifiCare Provider Policies and Procedures Manual
and related written materials which shall be provided to Medical Group by
PacifiCare prior to or concurrent with the execution of this Agreement.
The Provider Manual is incorporated into this Agreement, and may be
updated from time to time by PacifiCare as provided in this Agreement.
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1.27 QUALITY MANAGEMENT AND IMPROVEMENT ("QI") PROGRAM are those standards,
protocols, policies and procedures adopted by PacifiCare to monitor and
improve the quality of clinical care and quality of services provided to
Members. The QI Program is described in the Provider Manual, and may be
updated from time to time by PacifiCare as provided in this Agreement.
1.28 STATE AND FEDERAL LAW shall mean any and all laws and regulations of the
State of California or of the United States which are applicable to
PacifiCare, this Agreement, Managed Care Plans, and Medical Group and its
Participating Providers.
1.29 SUBSCRIBER AGREEMENT is the contract between PacifiCare and a Subscriber
or Subscriber Group which describes the costs, benefits or services,
procedures, conditions, limitations, exclusions, and other obligations to
which Members are entitled and subject to under a Managed Care Plan. A
copy of the current standard form Subscriber Agreement for each Managed
Care Plan shall be provided to Medical Group by PacifiCare concurrent
with the execution of each Product Attachment, and may be updated from
time to time by PacifiCare.
1.30 SUBSCRIBER OR SUBSCRIBER GROUP is the individual or employer,
organization, firm or other entity which contracts with PacifiCare under
a Subscriber Agreement to obtain the benefits of a Managed Care Plan.
1.31 URGENTLY NEEDED SERVICES are Covered Services under a Managed Care Plan
which are required without delay in order to prevent the serious
deterioration of a Member's health as a result of an unforeseen illness
or injury while the Member is temporarily outside the PacifiCare Service
Area (that is, the geographic area in which PacifiCare is licensed in the
State of California to offer each Managed Care Plan).
1.32 UTILIZATION MANAGEMENT ("UM") PROGRAM are those standards, protocols,
policies and procedures adopted by PacifiCare regarding the management,
review and approval of the provision of Covered Services to Members. The
UM Program is described in the Provider Manual, and may be updated from
time to time by PacifiCare as provided in this Agreement.
ARTICLE 2
DUTIES OF MEDICAL GROUP
2.1 PROVIDE OR ARRANGE COVERED SERVICES. Medical Group, through its
Participating Providers, shall provide or arrange Covered Services in the
Medical Group Service Area to Medical Group Members, in coordination with
PacifiCare and PacifiCare's Participating Providers and in accordance
with the terms and conditions set forth in this Agreement and the Managed
Care Plans. Medical Group shall be financially responsible for Medical
Group Services. The primary concern of Medical Group and its
Participating Providers under this Agreement shall be the quality of
Covered Services provided to or arranged for Medical Group Members.
Nothing stated in this Agreement shall be interpreted to diminish this
responsibility.
2.2 PROFESSIONAL STANDARDS. All Covered Services provided or arranged by
Medical Group shall be provided or arranged by duly licensed, certified
or otherwise authorized professional personnel and at physical facilities
in accordance with (i) the generally accepted medical and surgical
practices and standards prevailing in the applicable professional
community at the time of
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treatment, (ii) the provisions of PacifiCare's QI Program and UM Program,
(iii) the requirements of State and Federal Law and (iv) the standards of
Accreditation Organizations.
2.2.1 LICENSURE OF MEDICAL GROUP. Medical Group is legally organized
and incorporated under the laws of the State of California.
Medical Group shall maintain in good standing at all times during
the term of this Agreement any and all licenses, certificates
and/or approvals required under State and Federal Law for the
performance by Medical Group of the duties required by this
Agreement.
2.2.2 LICENSURE/CERTIFICATION OF MEDICAL GROUP'S PARTICIPATING
PROVIDERS. Each of Medical Group's Participating Providers shall
maintain in good standing at all times during the term of this
Agreement the necessary licenses or certifications required by
State and Federal Law and by the Managed Care Plans to provide
Covered Services to Medical Group Members.
2.2.3 HOSPITAL PRIVILEGES FOR MEDICAL GROUP'S PARTICIPATING PROVIDERS.
Unless otherwise specified by Medical Group and approved by
PacifiCare for specific Participating Providers, Group shall make
best efforts to ensure that each of Medical Group's Participating
Providers who is a physician shall maintain in good standing at
all times during the term of this Agreement medical staff
membership and clinical privileges at Hospital necessary to
provide or arrange Covered Services to Medical Group Members.
2.3 MEDICAL GROUP'S PARTICIPATING PROVIDERS. Medical Group shall have a
sufficient number of Participating Providers throughout the Medical Group
Service Area to provide or arrange Covered Services and meet the needs of
PacifiCare and Medical Group Members as determined by PacifiCare's QI
Program and in accordance with State and Federal Law. Medical Group's
Participating Providers shall provide or arrange Covered Services,
including Emergency Services, to Medical Group Members twenty four (24)
hours a day, seven (7) days a week. Medical Group's Participating
Providers must meet PacifiCare's credentialing standards and must be
approved by PacifiCare before providing or arranging Covered Services to
Medical Group Members.
2.3.1 PARTICIPATING PROVIDER INFORMATION. Medical Group shall provide
PacifiCare with a complete list of its Participating Providers,
together with the provider specific information required by
PacifiCare for credentialing and for administration of the
Managed Care Plans, at the time this Agreement is signed.
2.3.2 NOTICE OF PARTICIPATING PROVIDER ADDITIONS. Medical Group shall
use its best efforts to provide at least sixty (60) calendar days
prior written notice to PacifiCare of the addition of any new
Participating Providers. Such notice shall include the provider
specific information required by PacifiCare. All new
Participating Providers must be approved by PacifiCare before
providing or arranging Covered Services to Medical Group Members.
PacifiCare shall use its best efforts to approve new
Participating Providers as quickly as possible after receiving
the written notice from Medical Group.
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2.3.3 NOTICE OF PARTICIPATING PROVIDER TERMINATIONS. Medical Group
shall provide sixty (60) calendar days prior written notice to
PacifiCare of the termination of any of its Participating
Providers; provided, however, that if any Participating Providers
are terminated with less than sixty (60) calendar days notice,
then Medical Group shall provide written notice to PacifiCare
within five (5) business days of Medical Group becoming aware of
such termination. Notwithstanding the termination of any
Participating Providers, Medical Group shall remain responsible
for providing or arranging Covered Services through its remaining
Participating Providers and shall remain financially responsible
for Medical Group Services provided to Medical Group Members
under this Agreement.
2.3.4 RESTRICTION, SUSPENSION OR TERMINATION OF PARTICIPATING
PROVIDERS. Medical Group shall, as warranted, immediately
restrict, suspend or terminate its Participating Providers from
providing or arranging Covered Services to Medical Group Members
in the following circumstances: (i) the Participating Provider
ceases to meet the licensing/certification requirements or other
professional standards described in this Agreement; (ii)
PacifiCare or Medical Group reasonably determines that there are
serious deficiencies in the professional competence, conduct or
quality of care of the Participating Provider which affects or
could adversely affect the health or safety of Medical Group
Members; or (iii) PacifiCare reasonably demands that the
Participating Provider be restricted, suspended or terminated.
Medical Group shall immediately notify PacifiCare of any of its
Participating Providers who cease to meet the
licensing/certification requirements or other professional
standards described in this Agreement and Medical Group's actions
under this Section. If Medical Group fails to act as required by
this Section with respect to any of its Participating Providers,
PacifiCare shall have the right to immediately prohibit such
Participating Providers from continuing to provide Covered
Services to Medical Group Members.
2.3.5 CHANGES IN CAPACITY. Medical Group and its Participating
Providers will continue to accept Members enrolled by PacifiCare
for so long as Medical Group and its Participating Providers have
the capacity to provide and arrange Covered Services under this
Agreement and for so long as Medical Group continues to accept
new patients from any HMO or other prepaid health plan. Medical
Group shall provide at least ninety (90) calendar days prior
written notice to PacifiCare of any significant changes in the
capacity of Medical Group to provide or arrange Covered Services
that would prevent Medical Group from accepting additional
Members. A significant change in capacity includes, without
limitation, the following: (i) inability of Medical Group to
properly serve additional Members due to a lack of Primary Care
Physicians or other Participating Providers; (ii) inability of
any one of Medical Group's Primary Care Physicians or other
Participating Providers to serve additional Members; or (iii)
closure of any Medical Group Facility. PacifiCare may continue to
enroll Members with Medical Group until the expiration of the
notice period required under this Section, and in such event,
Medical Group and its Primary Care Physicians and other
Participating Providers shall continue to accept such Members.
PacifiCare shall discontinue the enrollment of Members with
Medical Group upon expiration of the notice period required under
this Section until such time, if any, that Medical Group
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provides written notification to PacifiCare that it has the
capacity to accept new Members.
2.4 MEDICAL GROUP'S SUBCONTRACTS WITH PARTICIPATING PROVIDERS. Medical Group
shall demonstrate and certify to PacifiCare prior to the Commencement
Date and upon PacifiCare's written request at any time during the term of
this Agreement (in the format specified by PacifiCare) that its
subcontracts with Participating Providers comply with requirements of
this Agreement. Medical Group shall amend any and all of its existing
subcontracts with Participating Providers which do not comply with this
Agreement within ninety (90) calendar days following the execution of
this Agreement and shall provide PacifiCare with written certification
thereof.
2.4.1 COMPLIANCE WITH PROVISIONS OF AGREEMENT. Medical Group's
subcontracts with Participating Providers shall be in writing.
All such subcontracts shall be consistent with the terms and
conditions of this Agreement (including the Product Attachments)
and shall meet PacifiCare's requirements for Participating
Provider subcontracts. If this Agreement is amended or modified,
all such subcontracts shall be amended or modified within sixty
(60) calendar days to be consistent with such amendments or
modifications.
2.4.2 COMPLIANCE WITH STANDARDS OF ACCREDITATION ORGANIZATIONS AND
REQUIREMENTS OF STATE AND FEDERAL LAW. Medical Group's
subcontracts with Participating Providers shall comply with the
standards of Accreditation Organizations and requirements of
State and Federal Law. If there are changes in such standards
and/or requirements, Medical Group shall amend its subcontracts
with Participating Providers to comply with such changes within
thirty (30) calendar days following notice thereof from
PacifiCare.
2.4.3 ACCESS BY PACIFICARE, ACCREDITATION ORGANIZATIONS AND GOVERNMENT
AGENCIES TO SUBCONTRACTS AND BOOKS AND RECORDS OF PARTICIPATING
PROVIDERS. Medical Group shall make available for inspection,
examination and copying by PacifiCare, Accreditation
Organizations and Government Agencies during normal business
hours (i) its Participating Provider subcontracts and (ii) books
and records of its Participating Providers relating to Covered
Services provided to Medical Group Members. Unless shorter notice
is specified by a Government Agency, PacifiCare shall provide
Medical Group with two (2) business days prior written notice of
any inspection, examination and copying under this Section. Any
such inspection, examination and copying shall be conducted
consistent with State and Federal Law. Copies of subcontracts and
the books and records of Participating Providers shall be
maintained for at least five (5) years from the close of the
fiscal year in which the Covered Services were provided.
2.4.4 MEDICAL GROUP'S RESPONSIBILITY FOR PROVIDING OR ARRANGING COVERED
SERVICES. Notwithstanding the existence of Medical Group's
subcontracts with its Participating Providers, Medical Group
shall remain responsible for satisfying the obligations of
Medical Group set forth in this Agreement. If any of Medical
Group's subcontracts with Participating Providers are terminated,
Medical Group shall remain responsible for providing or arranging
Covered Services through its remaining Participating Providers
and shall remain financially responsible for Medical Group
Services provided to Medical Group Members under this Agreement.
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2.5 ACCEPTANCE AND TRANSFER OF MEMBERS. Medical Group and its Participating
Providers may not impose any limitations on the acceptance of Members for
care or treatment that are not imposed on other patients. PacifiCare,
Medical Group and its Participating Providers shall not request, demand,
require or seek directly or indirectly the transfer, discharge or removal
of any Member for reasons of Member's need for, or utilization of,
Covered Services, except in accordance with the procedures established
for such action. Medical Group and its Participating Providers shall not
refuse or fail to provide or arrange Covered Services to any Member.
PacifiCare and Medical Group shall exercise reasonable efforts in
following the procedures for transfer, discharge or removal of Members as
set forth in the Provider Manual. Nevertheless, PacifiCare may require
transfer of Medical Group Members for any reason, and Medical Group may
request that PacifiCare transfer Medical Group Members to another of
PacifiCare's Participating Providers if Medical Group is unable to
provide Covered Services required by this Agreement for reasons related
to capacity of Medical Group and its Participating Providers. In
addition, Medical Group may request that PacifiCare transfer a Medical
Group Member to another of PacifiCare's Participating Providers in the
event of a material breakdown in the physician-patient relationship.
PacifiCare shall evaluate such requests considering the best interests of
the Member. In the event PacifiCare grants a request for transfer of a
Member by Medical Group, the transfer shall not be effective until the
end of the month following the month in which the Member receives notice
of transfer, unless the Member agrees to an earlier transfer and
PacifiCare has made arrangements with another of PacifiCare's
Participating Providers to accept the Member.
2.6 MEDICAL RECORDS. Medical Group and its Participating Providers shall
maintain all patient medical records relating to Covered Services
provided to Members, in such form and containing such information as
required by the QI Program, Accreditation Organizations and State and
Federal Law. Medical records shall be maintained in a manner that is
current, detailed, organized and permits effective patient care and
quality review by Medical Group and PacifiCare pursuant to the QI
Program. Medical records shall be maintained in a form and physical
location which is accessible to Medical Group's Participating Providers,
PacifiCare, Government Agencies and Accreditation Organizations. Upon
reasonable request and within the time frame requested, Medical Group and
its Participating Providers shall provide to PacifiCare, at Medical
Group's or Participating Provider's expense, copies of Member medical
records for purposes of conducting quality assurance, case management and
utilization reviews, credentialing and peer review, claims processing,
verification and payment, resolving Member grievances and appeals and
other activities reasonably necessary for the proper administration of
the Managed Care Plans consistent with State and Federal Law. If Medical
Group or its Participating Providers do not provide copies of Member
medical records to PacifiCare within the time frame requested, Medical
Group and its Participating Providers shall allow PacifiCare immediate
access to such medical records for onsite copying and shall reimburse
PacifiCare for the actual copying expense. Medical Group and its
Participating Providers shall maintain the confidentiality of all Member
medical records and treatment information in accordance with State
and Federal Law. Medical records shall be retained by Medical Group and
its Participating Providers for at least five (5) years following the
provision of Covered Services and as required by State and Federal Law.
The provisions of this Section shall survive termination of this
Agreement for the period of time required by State and Federal Law.
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2.7 INSURANCE. Medical Group, at its sole cost and expense, shall maintain
throughout the term of this Agreement and for a period of four years
following termination of this Agreement, professional liability insurance
(i.e., medical malpractice insurance) and managed care errors and
omissions insurance in the minimum amount of one million dollars
($1,000,000) per occurrence and three million dollars ($3,000,000) annual
aggregate, the annual aggregate to apply separately for each physician
and health care practitioner who is insured under the policy (or
policies) purchased by Medical Group. If the policy (or policies) is
canceled or not renewed and coverage is provided on a claims-made basis,
Medical Group agrees to exercise any option contained in the policy (or
policies) to extend the reporting period to the maximum period permitted
under the policy (or policies); provided, however, that Medical Group
need not exercise such option if the superseding insurer will accept all
prior claims.
Medical Group, at its sole cost and expense, shall also maintain
throughout the term of this Agreement, workers' compensation insurance as
required by the State of California and general liability insurance,
including but not limited to premises, personal injury and contractual
liability insurance, in a minimum amount of one million dollars
($1,000,000) per occurrence, combined single limit, bodily injury and
property damage, to insure Medical Group and its employees, agents, and
representatives against claims for damages arising by reason of (i)
personal injuries or death occasioned in connection with the performance
of any Covered Services provided under this Agreement, (ii) the use of
any property and facilities of the Medical Group, and (iii) activities
performed in connection with this Agreement.
Medical Group's Participating Providers who are not insured under the
Medical Group's policy (or policies) shall maintain the same insurance
coverage required of Medical Group under this Section, unless otherwise
consented to by PacifiCare in writing.
All insurance required under this Agreement shall be provided by insurers
who meet PacifiCare's standards. A certificate of insurance shall be
issued to PacifiCare prior to the Commencement Date and upon the renewal
of the insurance coverage specified in this Section. The certificate
shall provide that PacifiCare shall receive thirty (30) days prior
written notice of cancellation or material reduction in the insurance
coverage specified in this Section. Notwithstanding any other provision
of this Agreement, failure to provide the certificate of insurance when
requested by PacifiCare shall be grounds for immediate termination of
this Agreement.
2.8 FINANCIAL STATEMENTS. Medical Group shall allow PacifiCare access, within
forty five (45) calendar days of the end of each calendar quarter, to
Medical Group's quarterly financial statements, which shall include a
balance sheet, statement of income and statement of cash flow (the
"Financial Statements") prepared in accordance with generally-accepted
accounting principles. Such quarterly Financial Statements shall be
certified by the chief financial officer of Medical Group as accurately
reflecting the financial condition of Medical Group for the period
indicated. In addition, Medical Group shall provide to PacifiCare, within
forty five (45) calendar days of the end of each fiscal year, or upon
completion of audit if later, copies of its audited annual Financial
Statements.
2.9 ADMINISTRATIVE REQUIREMENTS
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2.9.1 ADMINISTRATIVE GUIDELINES. Medical Group agrees to perform its
duties under this Agreement in accordance with the administrative
guidelines, policies and procedures set forth in the Provider
Manual and State and Federal Law. Medical Group shall be
responsible for distributing copies of the Provider Manual, as
necessary, to its Participating Providers.
2.9.2 MEDICAL DIRECTOR, HEALTH PLAN COORDINATOR, QUALITY. IMPROVEMENT
COMMITTEE AND UTILIZATION MANAGEMENT COMMITTEE. Medical Group
shall designate one of its Participating Providers who is a
physician or osteopath to act as Medical Group's Medical Director
and shall designate an individual to act as the health plan
coordinator with PacifiCare. The duties of Medical Group's
Medical Director and health plan coordinator shall be set forth
in the Provider Manual. In addition, Medical Group shall
establish and maintain a quality improvement committee and a
utilization management committee to assist PacifiCare in
implementing the QI Program and UM Program with respect to
Medical Group Members.
2.9.3 PARTICIPATION IN PACIFICARE ORIENTATION AND TRAINING PROGRAMS.
Medical Group shall require its administrative personnel and its
Participating Providers to participate in PacifiCare's
orientation and training programs.
2.9.4 ENCOUNTER DATA. Medical Group shall maintain and provide to
PacifiCare, no later than the fifteenth (15th) day of each month,
(i) the utilization data pertaining to Covered Services which are
provided directly by Medical Group and its Participating
Providers and (ii) the utilization data pertaining to Covered
Services which are paid for by Medical Group during the preceding
month, including data not provided in the most recent submission,
as required by PacifiCare (the "Encounter Data"). Medical Group
shall submit Encounter Data in accordance with the procedures and
standards established by PacifiCare. Medical Group shall submit
Encounter Data in an electronic format acceptable to PacifiCare.
For each month in which Medical Group fails to submit Encounter
Data described above in this Section, PacifiCare shall deduct
[ ** ] of the Medical Group's Capitation Payment until such
data is submitted. PacifiCare shall provide 15 days written
notice of intent to implement [ ** ] deduction in Capitation
Payment
2.9.5 OTHER DATA AND INFORMATION. Medical Group shall maintain and
provide to PacifiCare, upon written request, any and all
information required by PacifiCare, State and Federal Law,
Government Agencies or Accreditation Organizations for the
administration of Managed Care Plans. Medical Group shall submit
such information and data to PacifiCare in the format and within
the time periods specified by PacifiCare.
2.10 MEDICAL GROUP'S FAILURE TO COMPLY WITH AGREEMENT, PROVIDER MANUAL OR
MANAGED CARE PLANS. If Medical Group fails to comply with any
provision(s) of this Agreement, the Provider Manual or the Managed Care
Plans, PacifiCare may provide written notice of such failure to Medical
Group, specifying a date at least forty five (45) days following the date
of the notice by
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which Medical Group must be in compliance with such provision(s), as
reasonably determined by PacifiCare. If Medical Group fails to comply
with such provision(s) by the date specified in the notice, PacifiCare
shall have the right to cease marketing efforts on behalf of Medical
Group and/or discontinue enrollment of Members with Medical Group until
such time as Medical Group complies with such provision(s), as reasonably
determined by PacifiCare. In addition, PacifiCare shall have the right to
either (i) collect from Medical Group or (ii) offset against amounts due
Medical Group under this Agreement, any penalties or other monetary
amounts payable by PacifiCare to Government Agencies, Subscriber Groups,
Participating Providers or any other health care providers as a result of
Medical Group's failure to comply with any provision(s) of this
Agreement, the Provider Manual or Managed Care Plans. PacifiCare's rights
and remedies under this Section shall be in addition to all other rights
and remedies available to PacifiCare to enforce this Agreement, including
the right of termination.
2.11 RECIPROCITY ARRANGEMENTS. If any Member who is not a Medical Group Member
or if any individual who is enrolled in a benefit plan and program of any
PacifiCare affiliated entity ("PacifiCare Affiliate") receives services
or treatment from Medical Group or its Participating Providers, Medical
Group or the Participating Provider agrees to bill PacifiCare or the
PacifiCare Affiliate (or their respective designees), as applicable, at
billed charges and to accept the Cost of Care amount less any applicable
Copayments, coinsurance, and/or deductibles as payment in full for such
services or treatment. PacifiCare or the PacifiCare Affiliate will
process payment for such services or treatment in accordance with the
payment procedures for the applicable benefit plan or program.
If any Medical Group Member receives Covered Services from a PacifiCare
Participating Provider or PacifiCare Affiliate contracted provider,
PacifiCare shall, where contractually available, provide reciprocity to
Medical Group at PacifiCare rates for such Covered Services. Medical
Group shall comply with the procedures established by PacifiCare or the
PacifiCare Affiliate for reimbursement of such Covered Services.
Only medically appropriate Covered Services, as determined by PacifiCare,
shall be subject to the reciprocity arrangement specified in this
Section. Medical Group shall abide by all provisions of this Agreement
relating to non-billing of Members with respect to all services and
treatment subject to this reciprocity arrangement.
2.12 HOSPITAL ADMISSIONS. In recognition of the need for coordination of
Covered Services provided to Medical Group Members and to ensure
continuity and quality of care, Medical Group agrees to utilize Hospital
as the provider of Hospital Services for Medical Group Members, subject
to the following exceptions:
(i) Medical Group Members admitted for Emergency Services or Urgently
Needed Services;
(ii) Medical Group Members requiring Hospital Services not available
at Hospital; and
(iii) Medical Group Members directed to any other PacifiCare
Participating Provider in accordance with PacifiCare's
Utilization Management Program.
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Notwithstanding the foregoing, Medical Group Member requests for
treatment at another PacifiCare Participating Provider may be granted due
to limited Hospital bed capacity or if such request is in the Member's
best interest, as determined by PacifiCare.
2.13 OUT-OF-AREA MEDICAL SERVICES. Medical Group shall manage and coordinate
Out-of-Area Medical Services. Medical Group shall cooperate fully with
PacifiCare in providing information that may be required for transferring
Members back into the Medical Group Service Area, including promptly
notifying PacifiCare of known or suspected Out-of-Area Medical Services,
and shall accept the prompt transfer of Members to the care of Medical
Group and its Participating Providers following the receipt of
Out-of-Area Medical Services.
ARTICLE 3
ADMINISTRATIVE DUTIES OF PACIFICARE
3.1 ADMINISTRATION AND PROVISION OF DATA. PacifiCare shall perform
administrative, accounting, enrollment, eligibility verification and
other functions necessary for the administration and operation of the
Managed Care Plans. PacifiCare shall provide Medical Group with
management information and data reasonably necessary to carry out the
terms and conditions of this Agreement and for the operation of the
Managed Care Plans.
3.2 MARKETING. PacifiCare shall make reasonable efforts to market the Managed
Care Plans. Medical Group agrees that PacifiCare may, in its discretion,
use Medical Group's name, address and telephone number as well as the
names, addresses and telephone numbers and specialties of its
Participating Providers in PacifiCare's marketing and informational
materials including, without limitation, PacifiCare's directory of
Participating Providers. Nothing in this Agreement shall be deemed to
require PacifiCare to conduct any specific marketing activities on behalf
of Medical Group and its Participating Providers or to identify Medical
Group or its Participating Providers in any specific PacifiCare marketing
or informational materials.
3.3 ENROLLMENT AND ASSIGNMENT OF MEMBERS. PacifiCare shall be responsible for
distributing the PacifiCare Enrollment Packet to all Members upon
enrollment and at open enrollment periods. PacifiCare shall provide
benefit information to Members concerning the type, scope and duration of
benefits to which Members are entitled under the Managed Care Plans.
Nothing in this Agreement shall be construed to require PacifiCare to
assign any minimum or maximum number of Members to Medical Group or to
utilize Medical Group for any Members in the Medical Group Service Area.
3.4 ELIGIBILITY INFORMATION. PacifiCare shall provide the Eligibility List to
Medical Group on or about the fifteenth (15th) day of each month.
3.5 BENEFIT DESIGN AND INTERPRETATION; COVERAGE DECISIONS. PacifiCare shall
be solely responsible for the benefit design of all Managed Care Plans,
including establishing benefits, Premiums and Copayments. PacifiCare
shall be solely responsible for interpreting the terms of and making
final coverage determinations under the Managed Care Plans.
3.6 CASE MANAGEMENT. PacifiCare shall manage and coordinate Covered Services
for Medical Group Members (including Emergency Services and Urgently
Needed Services) with complex
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medical conditions to ensure that care is provided in a manner which encourages
quality, continuity of care and cost-effectiveness ("Case Management"). Medical
Group shall cooperate fully with PacifiCare in providing information that may be
required in determining the need for Case Management and in the transfer of
Medical Group Members to designated PacifiCare Participating Providers for cost
effective care.
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ARTICLE 4
MANAGED CARE PROGRAM SERVICES
4.1 MANAGED CARE PROGRAM SERVICES. PacifiCare shall be accountable for the
performance of the following services for all Managed Care Plans: (i)
quality management and improvement, (ii) utilization management, (iii)
credentialing, (iv) member rights and responsibilities, (v) preventive
health services, (vi) medical record review and (vii) payment and
processing of claims (collectively, "Managed Care Program Services").
Medical Group and its Participating Providers shall participate,
cooperate and comply with PacifiCare in the performance of all Managed
Care Program Services. Specific activities related to utilization
management, credentialing and claims processing may be delegated by
PacifiCare to Medical Group in accordance with the provisions of this
Article 4. Before the performance of any activities is delegated to
Medical Group, PacifiCare shall conduct a comprehensive audit of Medical
Group's ability and administrative capacity to perform such activities.
Medical Group shall provide all reasonable documentation requested by
PacifiCare and shall provide PacifiCare representatives with on-site
access to Medical Group's facilities and personnel for purposes of
conducting such audit.
4.1.1 QUALITY MANAGEMENT AND IMPROVEMENT. PacifiCare shall maintain an
ongoing Quality Management and Improvement Program ("QI Program")
to assess and improve the quality of clinical care and the
quality of service provided to Members under the Managed Care
Plans. The QI Program shall be maintained in accordance with the
requirements of State and Federal Law and the standards of
Accreditation Organizations. Medical Group and its Participating
Providers shall participate, cooperate and comply with the QI
Program.
Medical Group shall, at the written request of PacifiCare, make
available its Participating Providers who are physicians to serve
on PacifiCare's QI Committee. Medical Group shall establish and
maintain an independent quality improvement committee which shall
meet as frequently as necessary, but at least monthly. A member
of the PacifiCare medical services staff may participate in
Medical Group's quality improvement committee meetings. Medical
Group shall keep minutes of its quality improvement committee
meetings, a copy of which shall be made available to PacifiCare
upon ten (10) days written notice by PacifiCare to Medical Group.
If the functions of the quality improvement committee are
performed by the Medical Group's utilization review committee,
each committee must hold separately convened meetings and the
minutes of each meeting must be separately maintained.
Medical Group shall develop and provide to PacifiCare for its
review and approval written procedures for focused review or
remedial action whenever it is determined by PacifiCare's QI
Committee that inappropriate or substandard Covered Services have
been furnished or Covered Services that should have been
furnished have not been furnished. Upon request, PacifiCare shall
assist Medical Group in the formulation of such focused review
and remedial procedures.
4.1.2 UTILIZATION MANAGEMENT. PacifiCare shall maintain an ongoing
Utilization Management Program ("UM Program") to address
pre-authorization, concurrent and
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retrospective review of the quality, appropriateness, level of care and
utilization of all Covered Services provided or to be provided to
Members under the Managed Care Plans. The UM Program shall be
maintained in accordance with the requirements of State and Federal Law
and the standards of Accreditation Organizations. Medical Group and its
Participating Providers shall participate, cooperate and comply with
the UM Program.
Medical Group shall establish and maintain a utilization review
committee which shall meet as frequently as necessary, but at least
weekly. A member of the PacifiCare medical services staff may
participate in Medical Group's utilization review committee meetings.
Medical Group shall keep minutes of its utilization review committee
meetings, a copy of which shall be made available to PacifiCare upon
ten (10) days written notice by PacifiCare to Medical Group. Medical
Group's utilization review committee shall review elective referrals
and hospital and skilled nursing facility admissions on a prospective
basis, and Emergency Services and Urgently Needed Services requiring
hospital admissions on a retrospective basis. The committee shall also
be responsible for monitoring patterns of care, isolating inappropriate
utilization and performing other management and review duties as
specified in the UM Program.
4.1.3 CREDENTIALING. PacifiCare shall maintain standards, policies and
procedures for credentialing and recredentialing physicians, hospitals
and other health care professionals and facilities that provide Covered
Services to Members under the Managed Care Plans ("Credentialing
Program"). The Credentialing Program shall be maintained in accordance
with the requirements of State and Federal Law and the standards of
Accreditation Organizations. Medical Group and its Participating
Providers shall participate, cooperate and comply with PacifiCare's
Credentialing Program.
4.1.4 MEMBER RIGHTS AND RESPONSIBILITIES. PacifiCare shall inform Members of
their rights and responsibilities under each Managed Care Plan, provide
Members with membership cards and member handbooks, distribute periodic
communications to Members, process Member complaints and grievances and
respond to inquiries and requests from Members regarding Managed Care
Plans (collectively "Member Services"). Medical Group and its
Participating Providers shall participate, cooperate
and comply with PacifiCare's Member Services activities.
4.1.5 PREVENTIVE HEALTH SERVICES. PacifiCare shall develop preventive health
guidelines for the prevention and early detection of illness and
disease ("Preventive Health Guidelines') and shall encourage Members to
use preventive health services. The Preventive Health Guidelines shall
be maintained in accordance with the standards of Accreditation
Organizations and shall be distributed to Participating Providers.
Medical Group and its Participating Providers shall provide preventive
health services to Medical Group Members in accordance with the
Preventive Health Guidelines.
4.1.6 MEDICAL RECORD REVIEW. PacifiCare shall on an ongoing basis review
medical records maintained by Medical Group and its Participating
Providers to assess compliance with the requirements of State and
Federal Law and the standards of Accreditation
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Organizations. Medical Group and its Participating Providers
shall maintain medical records in accordance with the provisions
of this Agreement regarding medical records and in accordance
with PacifiCare's guidelines regarding medical records.
4.1.7 CLAIMS PROCESSING. PacifiCare shall establish and maintain
standards, policies and procedures for the timely and accurate
processing and payment of claims for Covered Services provided to
Members ("Claims Processing Guidelines"). The Claims Processing
Guidelines shall be maintained in accordance with the
requirements of State and Federal Law and the Managed Care Plans.
Medical Group and its Participating Providers shall comply with
PacifiCare's Claims Processing Guidelines.
4.2 PERFORMANCE OF DELEGATED ACTIVITIES. As of the Commencement Date,
PacifiCare shall delegate to Medical Group, and Medical Group shall
perform, those activities which are specified in EXHIBIT 2 to this
Agreement relating to the following Managed Care Program Services which
are described above: (i) Utilization Management; (ii) Credentialing;
(iii) Claims Processing (collectively, the "Delegated Activities").
4.2.1 PACIFICARE POLICIES. For all Delegated Activities, PacifiCare
shall provide Medical Group with PacifiCare's standards and
requirements applicable to the Delegated Activities, as amended
from time to time (the "PacifiCare Policies") and shall notify
Medical Group of all substantive changes to the PacifiCare
Policies. Medical Group may utilize its own policies and
procedures for the Delegated Activities, provided that such
policies and procedures are consistent with the PacifiCare
Policies and are provided to PacifiCare for its review and
approval. If Medical Group's policies and procedures are
inconsistent with the PacifiCare Policies, the PacifiCare
Policies shall apply.
4.2.2 SUB-DELEGATION. Medical Group shall not further delegate the
performance of Delegated Activities to any of its Participating
Providers or any other organization or entity without the prior
written consent of PacifiCare. Medical Group acknowledges and
agrees that PacifiCare is accountable for all Delegated
Activities, and therefore, Medical Group and its Participating
Providers agree to participate, cooperate and comply with
PacifiCare with respect to all Delegated Activities.
4.2.3 MAINTENANCE OF INFORMATION AND RECORDS. Medical Group shall
maintain all information and records reviewed or created in
connection with performing the Delegated Activities in a form
acceptable to PacifiCare, provide PacifiCare with access to
such information and records, and permit PacifiCare to review
and copy such information and records, in accordance with the
requirements of State and Federal Law and standards of
Accreditation Organizations.
4.2.4 REPORTING OBLIGATIONS. Medical Group shall provide PacifiCare
with periodic written reports regarding all Delegated
Activities in the formats specified by PacifiCare for each of
the Delegated Activities.
4.2.5 MONITORING/AUDITS. PacifiCare shall oversee Medical Group's
performance of Delegated Activities through review of periodic
written reports provided by Medical
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Group as described above and meetings with appropriate Medical
Group representatives and on-site audits and assessments of
Medical Group. Medical Group shall cooperate, participate and
comply with PacifiCare in such monitoring and oversight
activities. Such audits and assessments will be performed in
accordance with the requirements of State and Federal Law and
the standards of Accreditation Organizations. Without limiting
the foregoing, Medical Group agrees that arrangements with its
Participating Providers will permit Medical Group to disclose
to PacifiCare its Participating Provider credentialing files.
4.3 PAYMENT FOR PERFORMANCE OF DELEGATED ACTIVITIES. Payment for
performance of the Delegated Activities by Medical Group is included in
Capitation Payments made to Medical Group under this Agreement. The
following percentage points have been allocated to the performance of
Delegated Activities:
<TABLE>
<CAPTION>
Delegated Activity Percentage points
------------------ -----------------
<S> <C>
Utilization Management [ ** ]
Credentialing [ ** ]
Claims Processing [ ** ]
</TABLE>
For each month in which the performance of any Delegated Activity is
revoked by PacifiCare as provided in this Article 4, the Capitation
Payment shall be reduced by the percentage points specified above for
such Delegated Activity. PacifiCare may modify the payment for
Delegated Activities effective at the beginning of any calendar year by
providing Medical Group with sixty (60) calendar days prior written
notice.
4.4 REVOCATION OF DELEGATED ACTIVITIES. PacifiCare may revoke any or all
Delegated Activities if PacifiCare determines that they are not being
performed in accordance with the standards and requirements established
by PacifiCare or if Medical Group's performance of Delegated Activities
is inconsistent with, or in violation of, State and Federal Law or
threatens PacifiCare's accreditation by any Accreditation Organization.
PacifiCare shall provide Medical Group at least thirty (30) calendar
days prior written notice specifying the Delegated Activities which
PacifiCare intends to revoke, unless PacifiCare determines that Medical
Group's continued performance of Delegated Activities presents a risk
of harm to PacifiCare Members, in which case the Delegated Activities
shall be revoked immediately. If Medical Group does not conform to the
applicable standards and requirements within such notice period,
PacifiCare shall send a second written notice to Medical Group
confirming the revocation of the Delegated Activities, the effective
date of such revocation and the period of time such revocation shall
remain in effect (the "Revocation Period"). During the Revocation
Period, Medical Group shall take corrective action to conform with
applicable standards and requirements established by PacifiCare. At the
end of the Revocation Period, PacifiCare shall evaluate Medical Group's
corrective action, determine whether Medical Group is able to resume
performance of the Delegated Activities, and provide written notice to
Medical Group of such determination.
The written notices from PacifiCare to Medical Group under this Section
shall specify (i) the adjustments to Capitation Payments as a result of
the revocation of any Delegated Activities in
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accordance with the allocations set forth in this Article 4, and (ii)
in the event that claims processing is revoked, the adjustments to
Capitation Payments for claims payment as set forth in Section 5.2. If
only a portion of a specific Delegated Activity is revoked (e.g.,
Medical Group continues to perform some, but not all, of a specific
Delegated Activity), PacifiCare shall have the right to adjust the
allocations set forth in this Article 4 to reflect the portion of the
specific Delegated Activity which continues to be performed by Medical
Group. Notwithstanding any other provision of the Agreement, the
written notices from PacifiCare to Medical Group under this Section
shall be deemed valid and enforceable modifications to the Agreement,
whether or not signed by Medical Group.
Upon revocation of any of the Delegated Activities, PacifiCare will
resume responsibility for performing such activities, and Medical Group
and its Participating Providers shall continue to cooperate,
participate and comply with PacifiCare with respect to the performance
of such activities.
Notwithstanding PacifiCare's right to revoke Delegated Activities,
Medical Group's failure to perform the Delegated Activities shall be a
breach of the Agreement. In such event, PacifiCare may exercise all of
its rights and remedies to enforce the Agreement, including the right
of termination.
ARTICLE 5
COMPENSATION
5.1 CAPITATION PAYMENTS. PacifiCare shall make monthly Capitation Payments
to Medical Group as payment for providing and arranging Covered
Services to Medical Group Members for each Managed Care Plan, as
specified in this Agreement and the applicable Product Attachment.
5.1.1 DUE DATE. Each Capitation Payment shall be due and payable on
the tenth (10th) day of the month for the current month's
Covered Services. In the event the tenth (10th) day of the
month is not a business day, the Capitation Payment shall be
due and payable on the next business day following the tenth
(10th) day of the month.
5.1.2 DOCUMENTATION. PacifiCare shall provide Medical Group
appropriate documentation in support of each Capitation
Payment.
5.1.3 RETROACTIVE ADJUSTMENTS. Capitation Payments shall be subject
to retroactive adjustments either upward or downward due to
retroactive changes in the Premium for each Managed Care Plan
as specified in the applicable Product Attachment and
retroactive changes in the number of Medical Group Members for
each Managed Care Plan. Retroactive adjustments to Capitation
Payments for Medical Group Members enrolled in Managed Care
Plans which are government funded (including, without
limitation, Medicare, Medicaid, public employees) shall be made
within thirty (30) days after the adjustment is determined.
Retroactive adjustments to Capitation Payments for Medical
Group Members enrolled in Managed Care Plans which are not
government funded shall be made within one hundred eighty (180)
days after the end of the month for which the Capitation
Payment applies.
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5.2 ADJUSTMENT FOR CLAIMS PROCESSING. If PacifiCare does not delegate
performance of claims processing to Medical Group or if the delegation
of claims processing is revoked by PacifiCare, PacifiCare shall deduct
from monthly Capitation Payments an amount reasonably estimated by
PacifiCare to be necessary for PacifiCare to process and pay claims for
Medical Group Services which are not provided directly by Medical Group
and its employed Participating Providers. Initially, this amount shall
be [ ** ] of Medical Group's monthly Capitation Payment. This amount
shall be increased or decreased each month to more accurately reflect
Medical Group's actual and expected claims experience and any changes
in Covered Services which are provided or arranged by Medical Group and
its Participating Providers, with adjustments for claims incurred but
not received.
5.3 ADJUSTMENT FOR REVOCATION OF DELEGATED ACTIVITIES. PacifiCare shall
deduct the amounts specified in Article 4, above, for any Delegated
Activity which is revoked by PacifiCare in accordance with the
provisions of Article 4.
5.4 INCENTIVE PROGRAMS. Incentive programs are designed to ensure that
PacifiCare, Medical Group and, for some programs, Hospital work
collaboratively to deliver Covered Services in an effective and
efficient manner by ensuring appropriate utilization of Covered
Services. Incentive programs for each Managed Care Plan are set forth
in the applicable Product Attachment.
5.4.1 INCENTIVE PROGRAM WITHHOLD. PacifiCare shall establish a single
withhold from Medical Group's monthly Capitation Payment for
purposes of offsetting potential deficits for the combined
incentive programs, excluding the Commercial Hospital Incentive
Program and the Secure Horizons Hospital Incentive Program for
which separate withholds may be established. The monthly
incentive withhold shall initially be [ ** ] of Premium for
each Managed Care Plan. PacifiCare, in its sole discretion,
shall prospectively adjust the withhold based on Medical Group's
experience under the combined incentive programs at the time of
the program settlements described below.
5.4.2 INCENTIVE PROGRAM SETTLEMENTS. PacifiCare shall conduct
combined settlements for all of the incentive programs for
Managed Care Plans applicable to Medical Group. Surpluses and
deficits under each of the incentive programs shall be
aggregated and offset against one another. PacifiCare will
conduct an estimated calculation after six (6) months (the
"Interim Calculation") and a final calculation annually (the
"Final Calculation") based on the calendar year. The incentive
program withhold described above shall be refunded to the
Medical Group at the time of the incentive program settlements,
except that Medical Group's share of any incentive program
deficits shall be deducted from such refund. Payments under the
combined incentive programs will be due from the owing party
within one hundred and twenty (120) days following the end of
the six (6) months for the Interim Calculation and within one
hundred and eighty (180) days following the end of the calendar
year for the Final Calculation. For the Interim Calculation,
the payment due will be limited to [ ** ] of the calculated
amount due to account for incurred but not received claims. To
the extent a Medical Group deficit has been carried forward from
a prior settlement period, this deficit shall be offset against
amounts due to Medical Group hereunder.
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5.4.3 INCENTIVE PROGRAM COMPLIANCE WITH STATE AND FEDERAL LAW.
PacifiCare and Medical Group acknowledge and agree that the
payments which may be made directly or indirectly under the
incentive programs described in this Agreement are not made as
an inducement to reduce or limit Covered Services to any
specific Member. Medical Group acknowledges and agrees that any
payments which may be made directly or indirectly under
physician incentive programs Medical Group may utilize with
respect to its Participating Providers shall not be made as an
inducement to reduce or limit Covered Services to any specific
Member. Medical Group further acknowledges and agrees that the
incentive programs described in this Agreement shall be subject
to modification by PacifiCare during the term of this Agreement
in order to comply with changes in State and Federal Law, and
Medical Group further agrees to modify any physician incentive
programs utilized with respect to its Participating Providers
to comply with such changes.
5.4.4 LIMITATION ON MEDICAL GROUP'S RISK. In the event Medical Group
incurs an obligation under the overall incentive program
settlement described above, Medical Group shall not be
responsible for reimbursing PacifiCare nor shall PacifiCare
offset the Medical Group's obligation against Medical Group's
Capitation Payments due under this Agreement. PacifiCare shall
carry forward any Medical Group obligations as the result of an
incentive program obligation and the amount carried forward
shall be offset against amounts otherwise due to Medical Group
under future settlements for the combined incentive programs.
5.5 INDIVIDUAL STOP-LOSS PROGRAM. PacifiCare shall provide Individual
Stop-Loss ("ISL") protection in order to limit Medical Group's
financial risk for Medical Group Services. The ISL Program is designed
to limit Medical Group's financial responsibility for Medical Group
Services to a specified dollar amount per Medical Group Member per
calendar year (the "ISL Deductible"), while encouraging Medical Group's
continuing involvement with Medical Group Member's care by sharing a
portion of the financial responsibility for Medical Group Services which
exceed the ISL Deductible ("ISL Coinsurance"). PacifiCare shall charge a
premium (the "ISL Premium") as consideration for the ISL Program. The
ISL Deductible, ISL Coinsurance and ISL Premium for Medical Group are
specified in each Product Attachment. Notwithstanding any other
provision of this Agreement, PacifiCare may amend the ISL Deductible,
ISL Coinsurance and ISL Premium on an annual basis effective at the
beginning of any calendar year by providing sixty (60) calendar days
prior written notice to Medical Group. For Medical Group Services which
exceed the ISL Deductible, PacifiCare will pay Cost of Care, less the
Medical Group's ISL Coinsurance amount, subject to the Medical Group's
compliance with the procedures set forth in the Provider Manual and the
provisions set forth below.
5.5.1 SUBMISSION OF ISL CLAIMS. Medical Group shall submit all claims
under the ISL Program in accordance with the procedures set
forth in the Provider Manual. PacifiCare shall pay claims under
the ISL Program only if such claims are submitted within one
(1) year following the date the claim is incurred.
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5.5.2 NOTIFICATION OF ISL CLAIMS. Medical Group shall provide written
notification to PacifiCare when Medical Group Services for any
Medical Group Member(s) equal fifty percent (50%) of the ISL
Deductible. Such written notification shall be provided to
PacifiCare no later than the fifteenth (15th) day of the month
following the month in which such threshold is reached. Medical
Group acknowledges and agrees that if Medical Group fails to
provide the written notice required by this Section within the
time frame specified in this Section, Medical Group shall be
financially responsible for [ ** ] of all Medical Group
Services provided to the Medical Group Member(s) in excess of
the ISL Deductible, which amount shall be in addition to the
ISL Coinsurance.
5.5.3 OPT-OUT FROM ISL PROGRAM. Subject to PacifiCare's approval,
Medical Group may elect to opt out of the ISL Program,
effective upon the Commencement Date or at the beginning of any
calendar year. In such event, Medical Group shall be required
to obtain stop-loss coverage from a third-party insurance
carrier acceptable to PacifiCare and in the amounts required by
PacifiCare and State and Federal Law. In order to opt-out of
PacifiCare's ISL Program, Medical Group must provide written
notice to PacifiCare at least thirty (30) days prior to the
beginning of the calendar year. Such notice shall specify the
name of the third-party insurance carder, and proposed
effective date, coverage levels and charges. If PacifiCare does
not object to such coverage in writing within fifteen (15) days
of the date of the notice, Medical Group shall be required to
purchase such coverage as of the effective date specified in
the notice.
5.6 PAYMENTS FOLLOWING TERMINATION OF AGREEMENT. Following termination of
this Agreement, PacifiCare shall make Capitation Payments to Medical
Group as compensation for providing and arranging Covered Services to
remaining Medical Group Members until transferred to PacifiCare
Participating Providers.
5.7 COST OF CARE. Certain provisions of this Agreement require that Medical
Group provide or arrange health care services which are not covered by
Capitation Payments at Cost of Care and certain provisions of this
Agreement require that Covered Services be valued at Cost of Care. For
purposes of this Agreement, "Cost of Care" shall mean the amount
determined to be payable for such health care services or Covered
Services by PacifiCare as follows: (i) for professional services which
are paid under the Medicare Fee Schedule, the Cost of Care shall be the
lesser of billed charges or amount payable under the Medicare Fee
Schedule; (ii) for all other health care services (other than inpatient
and outpatient Hospital Services) which are paid by Medicare, the Cost
of Care shall be the lesser of billed charges or amount payable by
Medicare; (iii) for any other Covered Services or health care services
covered under a Managed Care Plan which do not fall within any of the
above specified categories, other than inpatient and outpatient Hospital
Services, the Cost of Care shall be the lesser of billed charges or the
amount determined under PacifiCare's allowable fee schedule.
5.8 COLLECTION OF COPAYMENTS. Medical Group and its Participating Providers
shall be responsible for the collection of Copayments upon rendering
Medical Group Services to Medical Group Members in accordance with the
applicable Subscriber Agreement. Any Copayments which
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<PAGE>
are stated as a percentage shall be calculated using the Cost of Care
for such Medical Group Services.
5.9 COLLECTION OF CHARGES FROM THIRD PARTIES. If a Medical Group Member is
entitled to payment from a third party (excluding a workers'
compensation carrier or primary insurance carrier under applicable
coordination of benefits rules), PacifiCare hereby assigns to Medical
Group for collection, any claims or demands against such third parties
for amounts due for Medical Group Services, subject to the following
conditions: (i) To the extent liens are utilized, Medical Group shall
utilize lien forms which are provided by PacifiCare or approved in
advance by PacifiCare; (ii) Medical Group shall notify PacifiCare each
time it pursues and each time it obtains a signed lien from a Medical
Group Member; (iii) Medical Group shall not commence any legal action
as it relates to this Agreement against a third party without obtaining
the prior written consent of PacifiCare; (iv) Medical Group shall make
no demand upon PacifiCare for reimbursement under the ISL Program until
all third party claims have been pursued and it is determined that full
payment cannot be obtained within twelve (12) months from the date of
the provision of Medical Group Services; (v) PacifiCare may immediately
rescind the assignment of any or all claims and demands against third
parties by providing written notice of rescission to Medical Group; and
(vi) in the event Medical Group receives payment from a third party
after receipt of an ISL payment from PacifiCare, Medical Group shall
reimburse PacifiCare to the extent that the combined amounts received
from all parties exceeds [ ** ] of Medical Group's usual and customary
fee-for-service rates.
5.10 COORDINATION OF BENEFITS. Medical Group shall cooperate with and
support, as mutually agreed upon by the parties, PacifiCare's
coordination of benefits rights.
5.10.1 PLAN IS PRIMARY. If a Medical Group Member possesses health
benefits coverage through another policy which is secondary to
PacifiCare under applicable coordination of benefits rules,
including the Medicare secondary payor program, Medical Group
shall accept payment from PacifiCare for Covered Services as
provided herein as full payment for such Covered Services,
except for applicable Copayments. Medical Group Member shall
have no obligation for any fees, regardless of whether
secondary insurance is available.
5.10.2 PLAN IS SECONDARY. If a Medical Group Member possesses health
benefits coverage through another policy which is primary to
PacifiCare under applicable coordination of benefits rules,
including the Medicare secondary payor program, or if Medical
Group Member is entitled to payment under a workers'
compensation policy or automobile insurance policy, Medical
Group may pursue payment from the primary payor or workers'
compensation carrier consistent with applicable law and
regulations and Medical Group's contract, if any, with the
primary payor. In such event, PacifiCare's responsibility
shall equal the amount of out-of-pocket expenses (i.e.,
Copayments, coinsurance, and deductibles) that Medical Group
Member would incur in) the absence of PacifiCare's secondary
coverage, minus the ISL Deductible and ISL Coinsurance.
5.11 OFFSETTING. Except as may otherwise be specifically provided in this
Agreement, PacifiCare shall have the right to offset any and all
amounts owed by Medical Group to PacifiCare against
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amounts, including Capitation Payments, owed by PacifiCare to Medical
Group. This right to offset shall include, without limitation,
PacifiCare's right to offset the following amounts owed to PacifiCare
by Medical Group: (i) amounts owed by Medical Group due to overpayments
or payments made in error by PacifiCare; (ii) amounts owed by Medical
Group as a result of claims for Medical Group Services that PacifiCare
may pay on behalf of Medical Group; (iii) amounts owed by Medical Group
for Covered Services provided outside the Medical Group Service Area;
and (iv) amounts owed by Medical Group as a result of the outcome of
the Member appeals and grievance procedure.
5.12 ADEQUACY OF COMPENSATION. Medical Group agrees to accept payment as
provided herein as payment in full for providing and arranging the
Covered Services required under this Agreement, whether that amount is
paid in whole or in part by Member, PacifiCare or any Subscriber,
including other health care plans that pay before PacifiCare as
required by applicable state or federal coordination of benefits
provisions. This Section does not prohibit Medical Group from
collecting applicable Copayments, coinsurance, or deductibles
consistent with the Managed Care Plans.
ARTICLE 6
TERM AND TERMINATION
6.1 TERM. The term of this Agreement shall commence on MARCH 01, 1998 (the
"Commencement Date") and end on DECEMBER 31. 1998. Thereafter, the term
of this Agreement shall be automatically extended for one (1) year on
each JANUARY. 01, ("Anniversary Date"), unless either party provides
the other with written notice of such party's intention not to extend
the term at least one hundred twenty (120) calendar days prior to the
Anniversary Date or until this Agreement is appropriately terminated by
either party as provided herein.
6.2 TERMINATION OF AGREEMENT WITH CAUSE. Either PacifiCare or Medical Group
may terminate this Agreement for cause as set forth below, subject to
the notice requirement and cure period set forth below.
6.2.1 CAUSE FOR TERMINATION OF AGREEMENT BY MEDICAL GROUP. The
following shall constitute cause for termination of this
Agreement by Medical Group:
(i) NON-PAYMENT. Failure by PacifiCare to pay Capitation
Payments due Medical Group hereunder within thirty (30)
days of the Capitation Payment due date or failure by
PacifiCare to make any other payments due Medical Group
hereunder within forty-five (45) days of any such
payment's due date.
(ii) BREACH OF MATERIAL TERM AND FAILURE TO CURE.
PacifiCare's breach of any material term, covenant, or
condition and subsequent failure to cure such breach as
provided below.
6.2.2 CAUSE FOR TERMINATION OF AGREEMENT BY PACIFICARE. The
following shall constitute cause for termination of this
Agreement by PacifiCare:
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(i) FINANCIAL FAILURE OF MEDICAL GROUP. PacifiCare's
reasonable determination of Medical Group's anticipated
inability to provide or arrange for Covered Services as
a result of the likelihood of Medical Group's lack of
financial resources, other than due to PacifiCare's
non-payment of amounts due Medical Group hereunder.
Medical Group shall have the opportunity to dispute
such determination by PacifiCare by providing
reasonable evidence and assurances of financial
stability and capacity to perform under this Agreement.
(ii) FAILURE TO PROVIDE QUALITY SERVICES. Medical Group's
failure to arrange or provide Covered Services in
accordance with the standards set forth in this
Agreement and PacifiCare's QI Program and UM Program.
Notwithstanding the foregoing, PacifiCare reserves the
right to immediately withdraw from Medical Group or any
of its Participating Providers any or all Members in
the event the health or safety of Members is endangered
by the actions of Medical Group or any of its
Participating Providers or as a result of continuation
of this Agreement.
(iii) BREACH OF MATERIAL TERM AND FAILURE TO CURE. Medical
Group's breach of any material term, covenant or
condition of this Agreement and subsequent failure to
cure such breach as provided below.
6.2.3 NOTICE OF TERMINATION AND EFFECTIVE DATE OF TERMINATION. The
party asserting cause for termination of this Agreement (the
"terminating party") shall provide written notice of
termination to the other party. The notice of termination
shall specify the breach or deficiency underlying the cause
for termination. The party receiving the written notice of
termination shall have thirty (30) calendar days from the
receipt of such notice to cure the breach or deficiency to the
satisfaction of the terminating party (the "Cure Period"). If
such party fails to cure the breach or deficiency to the
satisfaction of the terminating party within the Cure Period
or if the breach or deficiency is not curable, the terminating
party shall provide written notice of failure to cure the
breach or deficiency to the other party following expiration
of the Cure Period. This Agreement shall terminate upon
receipt of the written notice of failure to cure or at such
other date as may be specified in such notice. During the Cure
Period, PacifiCare may cease marketing efforts for Medical
Group, discontinue enrollment of Members with Medical Group
and begin transferring Medical Group Members to other
PacifiCare Participating Providers.
6.3 AUTOMATIC TERMINATION UPON REVOCATION OF LICENSE OR CERTIFICATE. This
Agreement shall automatically terminate upon the revocation, suspension
or restriction of any license, certificate or other authority required
to be maintained by Medical Group or PacifiCare in order to perform the
services required under this Agreement or upon the Medical Group's or
PacifiCare's failure to obtain such license, certificate or authority.
6.4 TERMINATION FOR TRANSFER TO A SUCCESSOR ENTITY. As set forth in Section
7.12, PacifiCare shall have the right to terminate Medical Group on
ninety (90) days prior written notice to Medical Group if PacifiCare
reasonably determines that any successor entity or management company,
as defined in Section 7.12, cannot satisfactorily perform the
obligations of Medical Group
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under this Agreement or that PacifiCare prefers not to do business with
the successor entity or management company.
6.5 TRANSFER OF MEDICAL RECORDS. Following termination of this Agreement,
at PacifiCare's request, Medical Group and its Participating Providers
shall copy all requested Medical Group Member patient medical files in
the possession of Medical Group or its Participating Providers and
forward such files to another provider of Covered Services designated
by PacifiCare, provided such copying and forwarding is not otherwise
objected to by such Members. The copies of such medical files may be in
summary form. The cost of copying the patient medical files shall be
borne by Medical Group. Medical Group shall cooperate with PacifiCare
in maintaining the confidentiality of such Member medical records at
all times.
6.6 REPAYMENT UPON TERMINATION. Within one hundred eighty (180) calendar
days of the effective date of termination of this Agreement, an
accounting shall be made by PacifiCare of the monies due and owing
either party and payment shall be forthcoming by the appropriate party
to settle such balance within thirty (30) calendar days of such
accounting. Either party may request an independent audit of such
PacifiCare accounting by a mutually acceptable independent certified
public accountant and such audit shall be equally paid for by both
parties. The parties agree to abide by the findings of such
independent audit. Appropriate payment, if any, by the appropriate
party shall be made within thirty (30) calendar days of such
independent audit.
6.7 TERMINATION NOT AN EXCLUSIVE REMEDY. Any termination by either party
pursuant to this Article is not meant as an exclusive remedy and such
terminating party may seek whatever action in law or equity as may be
necessary to enforce its rights under this Agreement.
ARTICLE 7
GENERAL PROVISIONS
7.1 INDEPENDENT CONTRACTOR RELATIONSHIP. The relationship between
PacifiCare and Medical Group is an independent contractor relationship.
Neither Medical Group nor its Participating Providers, employees or
agents are employees or agents of PacifiCare and neither PacifiCare nor
its employees or agents are members, partners, employees or agents of
Medical Group. None of the provisions of this Agreement shall be
construed to create a relationship of agency, representation, joint
venture, ownership, control of employment between the parties other
than that of independent parties contracting solely for the purpose of
effectuating this Agreement. Nothing contained in this Agreement shall
cause either party to be liable or responsible for any debt, liability
or obligation of the other party or any third party unless such
liability or responsibility is expressly assumed by the party sought to
be charged therewith.
7.2 RESPONSIBILITY FOR OWN ACTS. Each party shall be responsible for its
own acts or omissions and for any and all claims, liabilities,
injuries, suits, demands and expenses of all kinds which may result or
arise out of any alleged malfeasance or neglect caused or alleged to
have been caused by that party or its employees or representatives in
the performance or omission of any act or responsibility of that party
under this Agreement. In the event that a claim is made against both
parties, it is the intent of both parties to cooperate in the defense
of said claim and to cause their insurers to do likewise. However both
parties shall have the right to take any and all actions they believe
necessary to protect their interest.
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7.3 PHYSICIAN-PATIENT RELATIONSHIP. PacifiCare and Medical Group
acknowledge and agree that Medical Group or each of Medical Group's
Participating Providers shall maintain the physician-patient
relationship with each Medical Group Member. Nothing contained in this
Agreement is intended to interfere with such physician-patient
relationship. Nothing in this Agreement shall be interpreted to
discourage or prohibit Medical Group and its Participating Providers
from discussing treatment options or providing other medical advice or
treatment deemed appropriate by Medical Group or its Participating
Providers. Medical Group or its Participating Providers shall have the
sole responsibility for the medical care and treatment of Medical
Group Members.
7.4 MEMBER APPEALS AND GRIEVANCES. PacifiCare shall be responsible for
resolving Medical Group Member claims for benefits under the Managed
Care Plans and all other claims against PacifiCare. PacifiCare shall
resolve such claims utilizing the Member Appeals and Grievance
Procedures set forth in the Subscriber Agreement and the Provider
Manual. Medical Group shall assist PacifiCare in the handling of Member
complaints, grievances and appeals, consistent with the Member Appeals
and Grievance Procedures. In the event an oral or written complaint,
grievance or appeal is presented to Medical Group or any of its
Participating Providers relating to benefits or coverage under a
Managed Care Plan and is not resolved within two (2) business days,
Medical Group or its Participating Provider will immediately deliver
such complaint, grievance or appeal to PacifiCare for handling pursuant
to the Member Appeals and Grievance Procedures. At the end of each
month, Medical Group shall submit a report to PacifiCare of all Medical
Group Member complaints and grievances which were received and resolved
by Medical Group and its Participating Providers within two (2) business
days during the previous month. The monthly report shall include the
Medical Group Member's name and PacifiCare identification number, date
of complaint, nature of complaint, and the resolution of complaint.
Medical Group and its Participating Providers shall comply with all
final determinations made by PacifiCare through the Member Appeals and
Grievance Procedures. Medical Group Member claims against Medical
Group or its Participating Providers, other than claims for benefits
under the Managed Care Plans, are not subject to the Member Appeals
and Grievance Procedures and are not governed by this Agreement.
7.5 DISPUTES BETWEEN MEDICAL GROUP OR ITS PARTICIPATING PROVIDERS AND
MEMBER. Any controversies or claims between Medical Group or its
Participating Providers and a Member arising out of the performance of
this Agreement by Medical Group or the Medical Group's Participating
Provider, other than claims for benefits under Managed Care Plans, are
not governed by this Agreement. Medical Group or its Participating
Provider and the Member may seek any appropriate legal action to
resolve such controversy or claim deemed necessary.
7.6 DISPUTES BETWEEN PACIFICARE AND MEDICAL GROUP
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7.6.1 DISPUTE RESOLUTION PROCEDURE. PacifiCare has established a
Provider Dispute Resolution Procedure, set forth in the
Provider Manual, to provide a mechanism by which PacifiCare's
Participating Providers, including Medical Group and any of
its Participating Providers, may submit to PacifiCare certain
disputes arising out of the performance of this Agreement or
relating to the decisions made by PacifiCare under this
Agreement for resolution on an informal basis. Any dispute
submitted pursuant to the Provider Dispute Resolution
Procedure should be addressed to the appropriate PacifiCare
person(s) or department(s) at the address and/or telephone
number identified in the Provider Manual. Any provider dispute
which is not resolved informally through the Provider Dispute
Resolution Procedure may be submitted for arbitration as
provided in Section 7.6.2 below.
7.6.2 ARBITRATION. Any controversy, dispute or claim arising out of
the interpretation, performance or breach of this Agreement
which is nor resolved pursuant to the Provider Dispute
Resolution Procedure specified above shall be resolved by
binding arbitration at the request of either party, in
accordance with the Commercial Rules of the American
Arbitration Association. Such arbitration shall occur in Los
Angeles, California, unless the parties mutually agree to have
such proceeding in some other locale. The arbitrators shall
apply California substantive law and federal substantive law
where state law is preempted. Civil discovery for use in such
arbitration may be conducted in accordance with the provisions
of California law, and the arbitrator(s) selected shall have
the power to enforce the rights, remedies, duties, liabilities
and obligations of discovery by the imposition of the same
terms, conditions and penalties as can be imposed in like
circumstances in a civil action by a court of competent
jurisdiction of the State of California. The provisions of
California law concerning the right to discovery and the use
of depositions in arbitration are incorporated herein by
reference and made applicable to this Agreement.
The arbitrators shall have the power to grant all legal and
equitable remedies and award compensatory damages provided by
California law, except that punitive damages shall not be
awarded. The arbitrators shall prepare in writing and provide
to the parties an award including factual findings and the
legal reasons on which the award is based. The arbitrators
shall not have the power to commit errors of law or legal
reasoning.
Notwithstanding the above, in the event either Medical Group
or PacifiCare wishes to obtain injunctive relief or a
temporary restraining order, such party may initiate an action
for such relief in a court of general jurisdiction in the
State of California. The decision of the court with respect to
the requested injunctive relief or temporary restraining order
shall be subject to appeal only as allowed under California
law. However, the courts shall not have the authority to
review or grant any request or demand for damages.
7.7 NOTICE. All notices required or permitted by this Agreement shall be in
writing and may be delivered in person or may be sent by registered or
certified mail or US Postal Service Express Mail, with postage prepaid,
or by Federal Express or other overnight courier that guarantees next
day delivery, or by facsimile transmission, and shall be deemed
sufficiently given if served
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in the manner specified in this Section. The addresses below shall be
the particular party's address for delivery or mailing of notice
purposes:
If to PacifiCare:
PacifiCare of California
5701 Katella Avenue
Cypress, CA 90630-0006
Attention: President
If to Medical Group:
Sierra Medical Group
44469 10th Street West
Lancaster, CA 93534
Attention: Administrator
The parties may change the names and addresses noted above through
written notice in compliance with this Section. Any notice sent by
registered or certified mail, return receipt requested, shall be deemed
given on the date of delivery shown on the receipt card, or if no
delivery date is shown, the postmark date. Notices delivered by US
Postal Service Express mail, Federal Express or overnight courier that
guarantees next day delivery shall be deemed given twenty-four (24)
hours after delivery of the notice to the United States Postal Service,
Federal Express or overnight courier. If any notice is transmitted by
facsimile transmission or similar means, the notice shall be deemed
served or delivered upon telephone confirmation of receipt of the
transmission, provided a copy is also delivered via delivery or mail.
7.8 ASSIGNMENT. This Agreement and the rights, interests and benefits
hereunder shall not be assigned, transferred or pledged in any way by
Medical Group or PacifiCare and shall not be subject to execution,
attachment or similar process. However, PacifiCare may assign this
Agreement and its rights, interests and benefits hereunder to any
entity which is a corporate affiliate of PacifiCare.
7.9 AMENDMENTS
7.9.1 AMENDMENTS TO MANAGED CARE PLANS. PacifiCare may amend or
change any or all provisions of the Managed Care Plans by
providing thirty (30) calendar days prior written notice to
Medical Group. Such amendment shall be binding upon Medical
Group at the end of the thirty (30) calendar day period.
7.9.2 AMENDMENTS TO PROVIDER MANUAL. PacifiCare may amend the
Provider Manual by providing thirty (30) calendar days prior
written notice to Medical Group. Such amendments shall be
binding upon Medical Group at the end of the thirty (30)
calendar day period, except as provided in Section 7.9.5 of
this Agreement.
7.9.3 AMENDMENTS TO AGREEMENT TO COMPLY WITH STATE AND FEDERAL LAW.
PacifiCare may amend this Agreement by providing thirty (30)
calendar days prior written notice to Medical Group in order
to maintain compliance with State and Federal Law. Such
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amendment shall be binding upon Medical Group at the end of
the thirty (30) calendar day period, except as provided in
Section 7.9.5 of this Agreement.
7.9.4 AMENDMENTS OR MODIFICATIONS TO AGREEMENT. Except as otherwise
provided in this Section 7.9, all amendments or modifications
to this Agreement shall be effective only upon mutual written
agreement of the parties.
7.9.5 MATERIAL AMENDMENTS. In the event PacifiCare provides notice
of amendment to the Agreement or the Provider Manual, Medical
Group shall be bound by such amendment unless (i) Medical
Group provides PacifiCare with notice of objection within the
thirty (30) calendar day notice period, and (ii) such change
affects a material duty or responsibility of Medical Group,
and (iii) the change has a material adverse economic effect
upon Medical Group as reasonably demonstrated by Medical Group
to PacifiCare. In such event, Medical Group and PacifiCare
shall seek to agree to an amendment to this Agreement which
satisfactorily addresses the effect on Medical Group's
material duty or responsibility and reimburses the material
economic detriment caused to Medical Group. In such event, the
amendment shall not be effective until the parties amend the
Agreement through a written amendment signed by both parties.
7.10 CONFIDENTIAL AND PROPRIETARY INFORMATION
7.10.1 INFORMATION CONFIDENTIAL AND PROPRIETARY TO PACIFICARE.
Medical Group and its Participating Providers shall maintain
confidential all information designated in this Section. The
information which Medical Group and its Participating
Providers shall maintain confidential (the "Confidential
Information") consists of: (i) the Eligibility List and any
other information containing the names, addresses and
telephone numbers of Members which has been compiled by
PacifiCare; (ii) lists or documents compiled by PacifiCare
which include the names, addresses and telephone numbers of
employers, employees of such employers responsible for health
benefits and the officers and directors of such employers;
(iii) PacifiCare's Provider Manual and any of PacifiCare's
member, employer and administrative service manuals and all
forms related thereto; (iv) the financial arrangements between
PacifiCare and any of PacifiCare's Participating Providers;
(v) PacifiCare underwriting and rating information and any
other information utilized by PacifiCare for determining
eligibility or rates for the Managed Care Plans; and (vi) any
other information compiled or created by PacifiCare which is
proprietary to PacifiCare and which PacifiCare identifies in
writing to Medical Group.
7.10.2 NON-DISCLOSURE OF CONFIDENTIAL INFORMATION. Medical Group and
its Participating Providers shall not disclose or use the
Confidential Information for their own benefit or gain either
during the term of this Agreement or after the date of
termination of this Agreement. Medical Group and its
Participating Providers may use the Confidential Information
to the extent necessary to perform their duties under this
Agreement or upon express prior written permission of
PacifiCare. Upon the effective date of termination of this
Agreement, Medical Group and its Participating Providers shall
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provide and return to PacifiCare the Confidential Information
in their possession in the manner specified by PacifiCare.
7.10.3 INFORMATION CONFIDENTIAL AND PROPRIETARY TO MEDICAL GROUP.
Medical Group shall provide PacifiCare with a written
description of all information proprietary to Medical Group
which is confidential and contains trade secrets of Medical
Group (the "Medical Group Information"). PacifiCare shall
maintain and shall cooperate with Medical Group to maintain
the confidentiality of Medical Group Information. PacifiCare
shall not disclose or use any Medical Group Information for
its own benefit either during the term of this Agreement or
after the effective date of termination of this Agreement.
Upon termination of this Agreement, PacifiCare shall provide
and return to Medical Group all Medical Group Information in
its possession in the manner to be specified by Medical Group.
7.10.4 PACIFICARE NAMES, LOGOS AND SERVICE MARKS. Medical Group shall
obtain the written consent of PacifiCare prior to using
PacifiCare's name, product names, logos and service marks in
any of Medical Group's promotional, marketing or advertising
materials or for any other reason.
7.11 SOLICITATION OF PACIFICARE MEMBERS OR SUBSCRIBER GROUPS. Medical Group
and its Participating Providers shall not engage in the practice of
solicitation of Members, Subscribers and Subscriber Groups without
PacifiCare's prior written consent. Solicitation shall mean conduct by
an officer, agent, employee of Medical Group or its Participating
Providers or their respective assignees or successors during the term
of this Agreement and continuing for a period of one (1) year after the
effective date of termination of this Agreement which may be reasonably
interpreted as designed to persuade Members, Subscribers or Subscriber
Groups to disenroll from any Managed Care Plan or discontinue their
relationship with PacifiCare. Notwithstanding any other provision of
this Agreement, Medical Group agrees that PacifiCare shall, in addition
to any other remedies provided for under this Agreement, have the right
to seek a judicial temporary restraining order, preliminary injunction,
or other equitable relief against Medical Group and its Participating
Providers to enforce its rights under this Section. Nothing in this
Agreement shall be interpreted to discourage or prohibit Medical Group
and its Participating Providers from discussing a Member's health care,
including, without limitation, communications regarding treatment
options, alternative plans or other coverage arrangements, unless such
communications are for the primary purpose of securing financial gain.
7.12 NOTIFICATION AND APPROVAL OF SALE OR CHANGE IN MANAGEMENT OF MEDICAL
GROUP. Medical Group agrees that it shall provide prior written notice
to PacifiCare of its intent to either (i) sell, transfer or convey its
business or any substantial portion of its business assets to another
entity ("successor entity") or (ii) enter into a management contract
with a physician practice management company ("management company")
which does not manage Medical Group as of the Commencement Date. Such
prior written notice shall be given at least ninety (90) days prior to
Medical Group selling its business or entering into such contract. As
set forth in Section 6.4, PacifiCare shall have the fight to terminate
this Agreement upon ninety (90) days written notice to Medical Group if
PacifiCare reasonably determines that any successor entity or any
management company cannot satisfactorily perform the obligations of
Medical Group under this Agreement or that PacifiCare prefers not to do
business with the successor entity or
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management company. Medical Group warrants and assures that this
Agreement, if not otherwise terminated by PacifiCare, will be assumed
by all successor entities and that all successor entities and
management companies will be bound by the terms and conditions of this
Agreement.
7.13 CONFIDENTIALITY OF THIS AGREEMENT. To the extent reasonably possible,
each party agrees to maintain this Agreement as a confidential document
and not to disclose the Agreement or any of its terms without the
approval of the other party.
7.14 INVALIDITY OF SECTIONS OF AGREEMENT. The unenforceability or invalidity
of any paragraph or subparagraph of any section or subsection of this
Agreement shall not affect the enforceability and validity of the
balance of this Agreement.
7.15 CAPTIONS. Captions in this Agreement are descriptive only and do not
affect the intent or interpretation of the Agreement.
7.16 WAIVER OF BREACH. The waiver by either party to this Agreement of a
breach or violation of any provision of this Agreement shall not
operate as or be construed to be a waiver of any subsequent breach or
violation thereof.
7.17 MEDICAL GROUP'S AUTHORIZED REPRESENTATIVE. Unless otherwise indicated
in writing to PacifiCare, Medical Group warrants and authorizes its
administrator to act as its fully authorized representative to
represent Medical Group in this Agreement and to receive any and
all communications and notices hereunder.
7.18 NO THIRD PARTY BENEFICIARIES. This Agreement shall not create any
rights in any third parties who have not entered into this Agreement,
nor shall this Agreement entitle any such third party to enforce any
rights or obligations that may be possessed by such third party.
7.19 ENTIRE AGREEMENT. This Agreement, including all exhibits, attachments
and amendments hereto, contains all the terms and conditions agreed
upon by the parties regarding the subject matter of this Agreement. Any
prior agreements, promises, negotiations or representations of or
between the parties, either oral or written, relating to the subject
matter of this Agreement, which are not expressly set forth in this
Agreement are null and void and of no further force or effect.
7.20 INCORPORATION OF EXHIBITS, ATTACHMENTS AND PROVIDER MANUAL. The exhibits
and attachments to this Agreement and the Provider Manual are an
integral part of this Agreement and are incorporated in full herein by
this reference.
ARTICLE 8
GOVERNING LAW AND REGULATORY REQUIREMENTS
8.1 GOVERNING LAW. This Agreement and the rights and obligations of the
parties hereunder shall be construed, interpreted, and enforced in
accordance with, and governed by, the laws of the State of California
and the United States of America, including, without limitation, the
Knox-Keene Health Care Service Plan Act of 1975, as amended, and the
regulations adopted
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thereunder by the California Department of Corporations, the federal
Health Maintenance Organization Act of 1973, as amended, and the
regulations adopted thereunder by the United States Department of
Health and Human Services. Any provisions required to be in this
Agreement by State and Federal Law or by Government Agencies shall bind
PacifiCare and Medical Group whether or not expressly provided in this
Agreement.
8.2 NO BILLING OF MEMBERS (MEMBER HOLD HARMLESS PROVISION). With the
exception of Copayments and charges for non-covered services delivered
on a fee-for-service basis to Members, Medical Group shall in no event,
including, without limitation, non-payment by PacifiCare, insolvency of
PacifiCare, or breach of the Agreement, bill, charge, collect a deposit
from, or attempt to bill, charge, collect or receive any form of
payment from any Member for Covered Services provided or arranged
pursuant to this Agreement.
Medical Group and its Participating Providers shall not maintain any
action at law or equity against a Member to collect sums owed by
PacifiCare to Medical Group. Upon notice of any such action, PacifiCare
may terminate this Agreement as provided above and take all other
appropriate action consistent with the terms of this Agreement to
eliminate such charges, including, without limitation, requiring
Medical Group and its Participating Providers to return all sums
collected as surcharges from Members or their representatives. For
purposes of this Agreement, "Surcharges" are additional fees for
Covered Services which are not disclosed to Members in the Subscriber
Agreement, are not allowable Copayments and are not authorized by this
Agreement. Nothing in this Agreement shall be construed to prevent
Medical Group from providing non-Covered Services on a usual and
customary fee-for-service basis to Members.
Medical Group's obligations under this Section shall survive the
termination of this Agreement with respect to Covered Services provided
or arranged during or after the term of this Agreement, regardless of
the cause giving rise to such termination.
8.3 CONTINUING CARE OBLIGATIONS OF MEDICAL GROUP. In the event of
termination of this Agreement for any reason, Medical Group and its
Participating Providers shall continue to provide or arrange Covered
Services to Members, including any Members who become eligible during
the termination notice period, beginning on the effective date of
termination and continuing until the termination or next renewal date
of the Member's Subscriber Agreement, unless PacifiCare arranges for
the transfer of the Member to another PacifiCare Participating Provider
and provides written notice to Medical Group of such transfer prior to
the termination or next renewal date of the Subscriber Agreement.
Notwithstanding the foregoing, Medical Group and its Participating
Providers will continue to provide or arrange Covered Services to any
Members who cannot be transferred within the time period specified
above in accordance with PacifiCare's legal and contractual
obligations to (i) provide Covered Services under the Managed Care
Plans and Subscriber Agreements, (ii) provide notice of termination
to Members and (iii) ensure continuity of care for its Members.
Notwithstanding the above or any other provisions to the contrary,
Medical Group agrees that in the event PacifiCare ceases operations for
any reason, including insolvency, Medical Group shall provide or
arrange Covered Services and shall not bill, charge, collect or receive
any form of payment from any Member for Covered Services provided after
PacifiCare ceases
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operations. This continuation of Covered Services obligation shall be
for the period for which Premium has been paid, but shall not exceed a
period of thirty (30) calendar days, except for those Members who are
hospitalized on an inpatient basis as provided below.
In the event PacifiCare ceases operations or Medical Group terminates
this Agreement on the basis of PacifiCare's failure to make timely
Capitation Payments, Medical Group shall continue to arrange for
Covered Services to those Members who are hospitalized on an inpatient
basis at the time PacifiCare ceases operations or Medical Group
terminates this Agreement until such Members are discharged from the
hospital. Medical Group may file a claim with PacifiCare for such
services as previously specified in this Section.
Medical Group agrees that the provisions of this Section and the
obligations of Medical Group and its Participating Providers herein
shall survive termination of this Agreement regardless of the cause
giving rise to such termination, and shall be construed to be for the
benefit of Members.
8.4 INSPECTION AND AUDIT OF RECORDS AND FACILITIES. Upon written notice,
Medical Group and its Participating Providers shall allow access during
normal business hours to PacifiCare, Accreditation Organizations and
Governmental Agencies to periodically audit or inspect the facilities,
offices, equipment, books, documents and records of Medical Group and
its Participating Providers relating to the performance of this
Agreement and the Covered Services provided to Members, including,
without limitation, all phases of professional and ancillary medical
care provided or arranged for Members by Medical Group and its
Participating Providers, Member medical records and financial records
pertaining to the cost of operations and income received by Medical
Group for Covered Services rendered to Members. Medical Group and its
Participating Providers shall comply with any requirements or
directives issued by PacifiCare, Accreditation Organizations and
Government Agencies as a result of such evaluation, inspection or audit
of Medical Group and its Participating Providers. Medical Group and its
Participating Providers shall retain the books and records described in
this Section for at least five (5) years. The provisions of this
Section shall survive termination of this Agreement for the period of
time required by State and Federal Law.
8.5 NONDISCRIMINATION. Medical Group assures that Covered Services shall be
provided to Members in the same manner as such services are provided to
other patients of Medical Group and its Participating Providers, except
as required pursuant to this Agreement. Medical Group and its
Participating Providers shall not unlawfully discriminate against any
Member on the basis of source of payment or in any manner in regards to
access to, and the provision of, Covered Services. Medical Group and
its Participating Providers shall not unlawfully discriminate against
any Member, employee or applicant for employment on the basis of race,
religion, color, national origin, ancestry, physical handicap, medical
condition, marital status, age or sex.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement in Los
Angeles, California.
33
<PAGE>
PACIFICARE OF CALIFORNIA
By: /s/ Cathy Batteer
---------------------------
Title: V.P. Health Services
------------------------
Date: 1/27/98
-------------------------
MEDICAL GROUP
By: /s/ Karunyan Arulanantham
---------------------------
Title:
------------------------
Date:
-------------------------
34
<PAGE>
PACIFICARE OF CALIFORNIA
MEDICAL GROUP/IPA SERVICES AGREEMENT
(SPLIT CAPITATION)
EXHIBIT 1
MEDICAL GROUP FACILITIES AND HOSPITAL(S)
(This EXHIBIT 1 is an integral part of this Agreement)
MEDICAL GROUP FACILITIES:
44469 10th Street West
Lancaster, CA 93534
HOSPITALS:
Antelope Valley Hospital Medical Center
1600 West Avenue J
Lancaster, CA 93534
MEDICAL GROUP SERVICE AREA:
The geographic area within a thirty (30) mile radius of each of the
above listed Medical Group Facilities. Such radius shall be determined
by PacifiCare, based upon the shortest route using public streets and
highways.
35
<PAGE>
PACIFICARE OF CALIFORNIA
MEDICAL GROUP/IPA SERVICES AGREEMENT
(SPLIT CAPITATION)
EXHIBIT 2
DELEGATED ACTIVITIES
(This EXHIBIT 2 is an integral part of this Agreement)
This EXHIBIT 2 specifies those activities related to the UM Program,
Credentialing and Claims Processing which PacifiCare has delegated to Medical
Group and which Medical Group shall perform on behalf of PacifiCare.
SUMMARY OF CREDENTIALING, RECREDENTIALING AND PEER REVIEW STANDARDS AND
REQUIREMENTS
The PacifiCare credentialing and recredentialing process is designed to provide
ongoing verification of the credentials of Participating Providers and their
ability to render specific patient care and treatment to Members within limits
defined by licensure, education, experience, health status and judgment, thereby
ensuring the competency of the physicians and other health care practitioners
providing services within PacifiCare's health delivery system. The following
outline is a summary of PacifiCare's credentialing, recredentialing and peer
review standards and requirements. Detailed standards and requirements are set
forth in the Provider Manual.
I. PACIFICARE CREDENTIALING PROGRAM
A. PACIFICARE CREDENTIALING APPLICATION
All individual Participating Providers ("Practitioners") must complete
and submit PacifiCare's approved credentialing application to be
considered for participation in PacifiCare's health delivery system.
The credentialing application includes a release and authorization to
review confidential credentialing information and an attestation
regarding the correctness and completeness of the information
submitted.
B. PACIFICARE CREDENTIALING STANDARDS
PacifiCare has established credentialing standards sufficient to meet
or exceed credentialing standards of Accreditation Organizations, and
all Participating Providers must be credentialed according to these
standards. PacifiCare's credentialing standards generally require the
following of Practitioners, as defined by Accreditation Organizations:
1. Obtaining and verifying for each Practitioner the following
information from primary sources:
(a) a current valid license to practice medicine or osteopathy;
36
<PAGE>
(b) clinical privileges in good standing at the hospital
designated by the practitioner as the primary admitting
facility;
(c) a valid DEA or CDS certificate, as applicable;
(d) graduation from medical school and completion of a
residency, or board certification, as applicable;
(e) work history;
(f) current adequate malpractice insurance as described in
this Agreement and the Provider Manual; and
(g) professional liability claims history.
2. Obtaining from each Practitioner a statement or attestation
regarding physical and mental health status and lack of
present illegal drug use, history of loss or limitation of
medical license and/or felony convictions and history or loss
or limitation of hospital clinical privileges or disciplinary
activity;
3. Requesting information concerning each Practitioner from the
National Practitioner Data Bank and the California Medical
Board and reviewing for previous sanction activity by Medicare
and Medicaid.
4. Reporting Practitioners to the California Medical Board as
required by State law and to the National Practitioner Data
Bank as required by the federal Health Care Quality
Improvement Act.
C. APPROVAL AND TERMINATION OF PARTICIPATING PROVIDERS.
Medical Group acknowledges and agrees: (i) that only Participating
Providers who meet PacifiCare's credentialing standards shall be
approved by PacifiCare to provide Covered Services to Members; and
(ii) that PacifiCare retains the right, in its sole discretion, to
approve or disapprove any Participating Provider to provide Covered
Services to Members and to suspend or terminate any Participating
Provider from continuing to provide Covered Services to Members at
any time. Participating Providers who are disapproved by PacifiCare
shall not provide Covered Services to PacifiCare Members.
1. NOTICE OF INITIAL CREDENTIALING
Medical Group shall provide PacifiCare with written notice of
each new Participating Provider credentialed by Medical Group
at least thirty (30) days prior to the Participating Provider
providing Covered Services to Members. New Participating
Providers shall be deemed approved by PacifiCare at the end of
such thirty (30) day period unless Medical Group is notified
otherwise in writing.
2. NOTICE OF RECREDENTIALING
Medical Group shall provide PacifiCare with written notice of
Medical Group's determination within thirty (30) days
following the recredentialing of each
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<PAGE>
Participating Provider. Recredentialing of Participating
Providers shall be deemed approved by PacifiCare unless
Medical Group is notified otherwise in writing.
3. NOTICE OF TERMINATION OR SUSPENSION OF PARTICIPATING PROVIDERS.
Medical Group shall take immediate action to terminate, suspend
or otherwise prohibit a Participating Provider from providing
Covered Services to Members in the following circumstances: (i)
Participating Provider ceases to meet PacifiCare's credentialing
standards or is disapproved by PacifiCare as provided in this
Agreement; (ii) PacifiCare's or Medical Group's determination of
serious deficiencies in the quality of care, professional
competence or professional conduct of Participating Provider
which affects or could adversely affect the health or welfare of
Members; or (iii) upon receipt of written notice from PacifiCare
demanding such action. Medical Group shall immediately and
concurrently notify PacifiCare of Medical Group's actions
hereunder.
D. APPROVAL OF MEDICAL GROUP FACILITIES.
Medical Group acknowledges and agrees that: (i) PacifiCare's
Credentialing Program includes standards for review and approval of
the facilities and/or medical offices of Medical Group and
Participating Providers where Covered Services shall be provided to
Members; and (ii) PacifiCare retains the ultimate right, in its sole
discretion, to approve or disapprove any Medical Group or
Participating Provider facility or medical office.
Medical Group agrees to inspect and audit the facilities or medical
offices of its Participating Providers on a regular basis and to allow
PacifiCare to participate in such inspections or audits upon request.
Medical Group further agrees to permit and cooperate with PacifiCare,
Accreditation Organizations and Governmental Agencies in periodic
inspections and audits of Medical Group's or Participating Provider's
facilities or medical offices as necessary for Accreditation
Organizations' accreditation and compliance with State and Federal
Law.
II. PACIFICARE RECREDENTIALING PROGRAM
A. PACIFICARE RECREDENTIALING APPLICATION
All Practitioners must complete and submit PacifiCare's approved
recredentialing application to be considered for continued
participation in PacifiCare's health delivery system. The
recredentialing application includes an attestation regarding the
correctness and completeness of the information submitted.
B. PACIFICARE RECREDENTIALING STANDARDS
PacifiCare's recredentialing standards require the recredentialing of
Practitioners at least once every two (2) years. Generally,
PacifiCare's recredentialing standards require the following:
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<PAGE>
1. Reverifying from primary sources the information described in
Section I.B.1 above, updated to insure current accuracy.
2. Obtaining a current statement or attestation by each Practitioner
regarding physical and mental health status and lack of present
illegal drug use.
3. Requesting information from the National Practitioner Data Bank
and the California Medical Board and reviewing for previous
sanction activity by Medicare and Medicaid.
4. Conducting an appraisal of Practitioner's performance over the
previous two (2) years, including reviewing data from quality
management and utilization management reports, Member complaints,
Member satisfaction surveys, practice pattern analyses and
patient outcome studies.
5. Conducting on-site visits and audits of offices and of medical
record-keeping practices.
III. PACIFICARE PEER REVIEW PROCESS
PacifiCare conducts ongoing peer review of Practitioners in conjunction
with the PacifiCare Quality Management Program and through the PacifiCare
Quality Management Committee. PacifiCare's peer review standards and
procedures generally require the following:
A. Ongoing monitoring and evaluating of Practitioners and their
performance of Covered Services under this Agreement to ensure
continued compliance with applicable professional standards and
PacifiCare's credentialing standards.
B. Suspending or terminating Practitioners who no longer meet one or more
of PacifiCare's credentialing criteria or for reasons related to
deficiencies in quality of care, professional competence or conduct
which could adversely affect the health and welfare of Members.
C. Reporting to the California Medical Board and the National
Practitioner Data Bank the suspension or termination of a Practitioner
for reasons related to quality of care, professional competence or
conduct, to the extent required by applicable law.
D. Providing a fair process by which a Practitioner may appeal suspension
or termination for reasons related to quality of care, professional
competence or conduct, to the extent required by applicable law.
SUMMARY OF UTILIZATION MANAGEMENT PROGRAM STANDARDS AND REQUIREMENTS
PacifiCare both conducts and delegates to its contracting Medical Group's the
responsibility for conducting utilization management and review activities.
Those Medical Groups which have been determined by PacifiCare pursuant to its
delegation assessment audit processes to be capable of
39
<PAGE>
assuming responsibility for performing utilization management and review
activities according to PacifiCare's UM Program are required to comply with the
requirements set forth herein. The following outline is a summary of
PacifiCare's utilization management program standards and requirements. Detailed
standards and requirements are set forth in the Provider Manual.
I. MEDICAL GROUP WRITTEN UM PROGRAM.
A documented description of Medical Group's UM Program which, at minimum,
satisfies the standards and procedures required by PacifiCare's UM
Program shall be provided by Medical Group to PacifiCare, for its review
and approval, on or before the Commencement Date and at anytime
thereafter upon PacifiCare's request or whenever a material modification
to such documented UM Program is made by Medical Group. All delegated
utilization management and review activities shall be performed by
Medical Group in strict compliance with Medical Group's written UM
Program as approved by PacifiCare.
II. MEDICAL GROUP UTILIZATION MANAGEMENT COMMITTEE
Medical Group shall maintain a Utilization Management Committee which
shall meet as frequently as necessary but at least weekly to conduct and
oversee utilization management activities.
III. PACIFICARE STANDARDS FOR UTILIZATION REVIEW
Medical Group represents and warrants that Medical Group's UM Program
shall be administered in accordance with PacifiCare's UM Program
standards and procedures established in accordance with utilization
management standards of Accreditation Organizations and shall include,
but is not limited to, the following:
A. Medical Group will maintain a written UM Program description that sets
forth delegated utilization management and review activities, in form
and content acceptable to PacifiCare. Such UM Program description
shall include, at a minimum, policies and procedures to evaluate
medical necessity and criteria used, information sources, and the
processes used to review and approve the provision of medical services
to Members. The written UM Program must include a mechanism for
reviewing and updating the UM Program description on a periodic basis,
but no less than once annually, subject to PacifiCare's review and
approval.
B. Qualified medical professionals must supervise utilization review
decisions relating to preauthorization and concurrent review. A
physician must conduct a medical appropriateness review on any
pre-authorization or concurrent review denial; Medical Group will use
physician consultants from appropriate specialty areas of medicine and
surgery who are certified by the applicable American Board of Medical
Specialties for pre-authorization and concurrent review activities.
C. Medical Group will adopt and implement a set of written utilization
review decision protocols that are based on reasonable medical
evidence. Criteria to determine appropriateness of Covered Services
must be clearly documented and available, upon
40
<PAGE>
request, to Participating Providers. Medical Group will employ a
mechanism for ascertaining the consistency of application of this
criteria by reviewers and will implement a procedure for updating this
review criteria on a periodic basis, but no less than once annually,
subject to PacifiCare's review and approval.
D. Medical Group will use best efforts, when conducting pre-authorization
and concurrent review, to obtain all necessary information, including
pertinent clinical information and a consultation with the treating
physician, as appropriate.
E. All UM Program decisions must be made in a timely manner, depending on
the urgency of the situation.
F. Reasons for preauthorization or concurrent denials must be clearly
documented and available to Members and PacifiCare. All notifications
to Members of denials must be in a format and content approved by
PacifiCare and must include appeal process information.
G. Medical Group will develop and implement, through the use of
appropriate professionals, policies and procedures to evaluate the
appropriate use of new medical technologies and new applications of
established technologies, including medical procedures, drugs and
devices. Criteria evaluated by Medical Group will include the review
of information from appropriate government regulatory bodies and
published scientific evidence.
H. Medical Group must employ mechanisms to evaluate the effects of the UM
Program, using Member satisfaction data, Participating Provider data
and/or other appropriate means. Medical Group will also cooperate and
comply with PacifiCare's mechanisms to evaluate the effectiveness of
Medical Group's UM Program.
IV. SUBMISSION OF DATA AND REPORTING OBLIGATIONS
A. AUTHORIZATIONS
Medical Group must transmit all authorizations for Medically Necessary
Covered Services for Members to PacifiCare in accordance with the
requirements specified in the Provider Manual.
B. UTILIZATION DATA
Medical Group must submit to PacifiCare utilization data pertaining to
all Covered Services provided or arranged by Medical Group and
Participating Providers to Members as described in this Agreement and
the Provider Manual. Such utilization data includes all
Member-specific encounter data reasonably required by PacifiCare to
conduct utilization review and to comply with all reporting
requirements of Governmental Agencies.
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<PAGE>
C. REPORTING OF EMERGENCY ROOM AND HOSPITAL ADMISSIONS
Medical Group's utilization management personnel must report each
working day, via telephone or facsimile transmission, all emergency
room encounters and hospital admissions to PacifiCare's UM Department.
SUMMARY OF CLAIMS PROCESSING PROGRAM STANDARDS AND REQUIREMENTS
PacifiCare both performs and delegates to its contracting Medical Group the
responsibility for processing claims. Those Medical Groups which have been
determined by PacifiCare pursuant to its claim processing audit to be capable of
assuming responsibility for performing claims processing activities according to
PacifiCare's Claim Processing Program are required to comply with the
requirements set forth herein.
I. CLAIMS PROCESSING WRITTEN PROGRAM
A documented description of Medical Group's Claim Processing Program
which, at a minimum, satisfies the standards and procedures required by
PacifiCare's Claim Processing Program shall be provided by Medical Group
to PacifiCare, for PacifiCare's review and approval, on or before the
Effective date of this Agreement and at anytime thereafter upon
PacifiCare's request or whenever a material modification to such
documented Claims Processing Program is made by Medical Group. All
delegated claims processing activities shall be performed by Medical
Group in strict compliance with Medical Group's written Claims
Processing Program as approved by PacifiCare.
II. PACIFICARE STANDARDS FOR CLAIMS PROCESSING
Medical Group represents and warrants that Medical Group's Claim
Processing Program shall be administered in accordance with PacifiCare's
Claims Processing Program standards and procedures established in
accordance with State and Federal law standards and shall include, but is
not limited to, the following:
A. All claims shall be processed within the earlier of the following time
periods: (i) the time specified in the applicable agreement between
Medical Group and its Participating Provider; (ii) forty five (45)
working days of Medical Group's or any of its Participating Providers
receipt of an uncontested claims for services provided to Commercial
Medical Group Members; or (iii) the time period required by State and
Federal Law for payment of claims.
B. Medical Group shall notify Member of any contested claim(s) within the
time periods identified above which states the portion of the claim
that is contested and the specific reasons for contesting the claim.
C. Medical Group shall have sufficient administrative capacity to carry
out the requirements of this delegated function
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<PAGE>
D. Medical Group shall have written procedures available to staff for
review, including work flow charts and inventory data.
E. Medical Group shall have an appropriate medical review process in
place to review claims when necessary. Medical Group must
participate, cooperate, and comply with PacifiCare for accessing
medical records.
III. PACIFICARE STANDARDS FOR CLAIMS PROCESSING REPORTING
Medical Group shall provide PacifiCare periodic reports, questionnaire
responses or other information required by PacifiCare or by State and
Federal Agencies with respect to claims processing.
A. The minimum requirements of the Medical Group's claims processing
system claims tracking and data collection and reporting as
specified in the Provider Manual.
B. The minimum requirements of the Medical Group's claims processing
system management reports and auditing tools as specified in the
Provider Manual.
IV. CLAIMS DENIALS AND APPEALS
All claim denials with supporting documentation shall be provided to
PacifiCare within five (5) working days of the issuance of the denial.
Medical Group must notify the Member and the billing provider of any
denials and must provide to the Member a statement of the right to appeal
on approved by PacifiCare. PacifiCare shall be responsible for receiving
and managing all appeals of Members.
PACIFICARE OF CALIFORNIA MEDICAL GROUP
By: /s/ CATHY BATTEER By: /s/ Karunyan Arulantham
--------------------------- ---------------------------
Title: V P, Health Services Title:
------------------------ ------------------------
Date: 1/27/98 Date:
------------------------- -------------------------
43
<PAGE>
PACIFICARE OF CALIFORNIA
MEDICAL GROUP/IPA SERVICES AGREEMENT
(SPLIT CAPITATION)
EXHIBIT 3
PRODUCT ATTACHMENTS
VERIFICATION OF RECEIPT OF PROVIDER MANUAL
AND FORM SUBSCRIBER AGREEMENTS
(This EXHIBIT 3 is an integral part of this Agreement)
MEDICAL GROUP NAME: SIERRA MEDICAL GROUP
VERIFICATION OF RECEIPT OF PROVIDER MANUAL AND SUBSCRIBER AGREEMENTS:
A copy of the PacifiCare Provider Policies and Procedures Manual and standard
form Subscriber Agreements for each of the Managed Care Plans specified below
has been provided to Medical Group by PacifiCare prior to the execution of this
Agreement:
By:
-----------------------
Title:
--------------------
Date:
---------------------
PRODUCT ATTACHMENTS:
The following attachments, when initialed by PacifiCare and Medical Group, are
an integral part of this Agreement:
PacifiCare Medical Group
A - PacifiCare Commercial Health Plan CS KA
------ ------
B - PacifiCare Commercial POS Health Plan CS KA
------ ------
C - Secure Horizons Health Plan CS KA
------ ------
D - Secure Horizons POS Health Plan CS KA
------ ------
44
<PAGE>
PRODUCT ATTACHMENT A
PACIFICARE COMMERCIAL HEALTH PLAN
This Product Attachment A, along with the Base Agreement, sets forth the
specific terms and conditions which are applicable to the PacifiCare Commercial
Health Plan, as defined below.
ARTICLE 1
DEFINITIONS
The following terms shall have the meaning attributed below for purposes of the
PacifiCare Commercial Health Plan, as described in this Product Attachment A.
Capitalized terms not otherwise defined herein shall have the meaning assigned
to them in the Base Agreement.
1.1 COMMERCIAL PLAN PREMIUM is the premium received by PacifiCare each month
for PacifiCare Commercial Plan Members, excluding amounts to pay broker and
agent commissions/compensation, Premium taxes and premiums for Supplemental
Benefits.
1.2 OPM AGREEMENT is the agreement between PacifiCare and the Federal Office of
Personnel Management for the provision of Covered Services to persons
enrolled in the PacifiCare Commercial Plan through their participation in
the health benefits programs for federal employees and their dependents.
1.3 PACIFICARE COMMERCIAL PLAN is any and all of the various Managed Care Plans
sold by PacifiCare to individuals (excluding individuals eligible for the
PacifiCare Medicaid Plan and the Secure Horizons Health Plan) and employer
groups, associations with employer group participation and unions which
purchase benefits for their employees and their dependents.
1.4 COMMERCIAL PLAN MEMBERS are Medical Group Members enrolled in the
PacifiCare Commercial Plan.
1.5 SUPPLEMENTAL BENEFITS are benefits offered under the PacifiCare Commercial
Plan which require separate premium, in addition to the Commercial Plan
Premium, as consideration for the additional benefits.
ARTICLE 2
DUTIES OF MEDICAL GROUP
2.1 PROVISION OF COVERED SERVICES. Medical Group and its Participating
Providers shall provide Covered Services to Commercial Plan Members
pursuant to the terms of the Base Agreement and this Product Attachment A.
2.2 COMPLIANCE WITH OPM AGREEMENT. Medical Group shall comply with all
requirements in the OPM Agreement which are applicable to Medical Group as
a subcontractor of PacifiCare as a result of this Agreement. Without
limiting the foregoing, Medical Group shall ensure that all provisions of
the OPM Agreement which are applicable to Medical Group's Participating
providers are included in Medical Group's subcontracts with its
Participating Providers. A copy
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<PAGE>
of the OPM Agreement shall be provided to Medical Group concurrent with the
execution of this Agreement.
2.3 COMPLIANCE WITH SUBSCRIBER AGREEMENTS FOR PACIFICARE COMMERCIAL PLAN.
Medical Group and its Participating Providers shall comply with all
requirements in Subscriber Agreements for the PacifiCare Commercial Plan
which are applicable to Medical Group. PacifiCare shall make good faith
efforts to notify Medical Group of any such requirements that are not
otherwise reflected in this Agreement.
ARTICLE 3
COMPENSATION
3.1 CAPITATION PAYMENTS FOR COMMERCIAL PLAN MEMBERS. Capitation Payments for
Commercial Plan Members shall be [ ** ] of the Commercial Plan Premium
per Commercial Plan Member per month, subject to the adjustments set forth
in Article 5 of the Base Agreement and the adjustments set forth below in
this Section.
3.1.1 PREMIUM ADJUSTMENTS. The Commercial Plan Premium and benefits may
be amended for each Subscriber Agreement upon the annual renewal
date of each Subscriber Agreement at the sole discretion of
PacifiCare.
3.1.2 ADJUSTMENT FOR ISL PREMIUM. In calculating Capitation Payments due
to Medical Group, PacifiCare shall deduct the ISL Premium amount
set forth herein from the amounts otherwise due to Medical Group,
unless PacifiCare has approved of Medical Group's opting out of
PacifiCare's ISL Program.
3.1.3 ADJUSTMENT FOR EXPERIENCE-RATED MANAGED CARE PLANS. Capitation
Payments for Experience Rated Plans shall be calculated utilizing
the following definitions and methodology:
(i) An "Experience-Rated Plan" is a non-federally-qualified plan
in which the Subscriber Group's premium is partially
deferred or adjusted to reflect the actual medical costs
incurred by Commercial Plan Members.
(ii) The "Net Actuarial Experience Rate" shall mean a rate
calculated by the same method used to determine premium for
federally-qualified plans, except that trended claims and
utilization data may be considered to determine expected
medical costs and PacifiCare's administrative retention may
be adjusted to reflect actuarial risk taken by the
Subscriber Group instead of PacifiCare.
(iii) For Experience-Rated Plans, Capitation Payments shall be
calculated as a percent of the Net Actuarial Experience Rate
rather than based on a percent of the Commercial Plan
Premium. The Net Actuarial Experience Rate, like the
Commercial Plan Premium, shall exclude broker and agent
commissions, premium taxes and premiums for Supplemental
Benefits.
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3.2 INDIVIDUAL STOP LOSS PROGRAM. The ISL Deductible and ISL Premium for the
PacifiCare Commercial Plan initially will be:
(i) ISL DEDUCTIBLE - Non-Applicable
(ii) ISL PREMIUM - Non-Applicable
3.3 COMMERCIAL HOSPITAL INCENTIVE PROGRAM. Medical Group and Hospital shall
establish and maintain an annual Commercial Hospital Incentive Program for
the PacifiCare Commercial Plan (the "CHIP"). The CHIP shall be designed to
provide an incentive for efficient and effective use of Hospital Services,
and shall be consistent with this Agreement and with State and Federal Law.
A copy of the CHIP shall be attached to this Product Attachment A and
incorporated herein. Medical Group shall provide PacifiCare with a copy of
any and all revisions to the CHIP, which shall be deemed incorporated into
this Agreement, and a copy of any and all reports and payment schedules
prepared by Medical Group or Hospital relating to the CHIP. PacifiCare
reserves the right to require that the CHIP be modified from time to time
to comply with this Agreement and State and Federal Law.
3.4 COMMERCIAL PLAN PHARMACY INCENTIVE PROGRAM. PacifiCare shall establish and
administer an annual Pharmacy Incentive Program for the PacifiCare
Commercial Plan (the "PIP"). The PIP is designed to provide an incentive
for efficient and effective use of Outpatient Pharmacy Supplemental
Benefits for Commercial Plan Members. The PIP shall be calculated as
follows:
3.4.1 OUTPATIENT PHARMACY SUPPLEMENTAL BENEFITS shall be the benefits
made available by PacifiCare under the PacifiCare Supplemental
Pharmacy Benefit, as defined in the applicable Subscriber
Agreement.
3.4.2 PIP BUDGET shall equal [ ** ] of the premium received by
PacifiCare for Outpatient Pharmacy Supplemental Benefits for
Commercial Plan Members. The PIP Budget shall be retained by
PacifiCare for purposes of administering the PIP.
3.4.3 PIP EXPENSE shall equal the actual or valued expenses incurred for
the provision of Outpatient Pharmacy Supplemental Benefits during
the applicable period, less amounts received from pharmacy rebates
and third parties as the result of coordination of benefits and
third party recoveries.
3.4.4 PIP SURPLUS. In the event the PIP Expense is less than the PIP
Budget, [ ** ] of the surplus shall be allocated to Medical Group.
3.4.5 PIP DEFICIT. In the event that the PIP Expense is greater than the
PIP Budget, [ ** ] of the deficit shall be allocated to Medical
Group.
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ARTICLE 4
DIVISION OF FINANCIAL RESPONSIBILITY
(PacifiCare Commercial & Secure Horizons Plan)
The following matrix outlines the division of financial responsibility between
PacifiCare, Medical Group and Hospital, the intent being to clarify Covered
Services categories in order to provide for accurate administration. The matrix
serves as a model under which broad Covered Service categories suggest the
appropriate financial responsibility for Covered Services not specifically
listed. The applicable Subscriber Agreement should be consulted for an accurate
and complete description of Covered Services and the Provider Manual for
administrative clarification.
48
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<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
SERVICE DESCRIPTION MED GRP HOSP PACIFICARE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Allergy - Serum *
Allergy - Testing & Tx
Ambulance (Air and Ground)
Amniocentesis / Genetic Testing
Anesthesiology - IP & OP
Biofeedback (Medically Necessary) - OP
Blood & Plasma - Admin/Processing
Chemical Dependency (Detox) - Facility
Chemical Dependency (Detox) - Professional
Chemical Dependency (Rehab) - IP &
OP - Prof & Fac (Commercial) *
Chemical Dependency (Rehab) - IP & OP - Facility (Secure Horizons)
Chemical Dependency (Rehab) - IP & OP - Professional (Secure Horizons)
Chemotherapy Drugs - IP & OP - Inject/Oral
Chemotherapy - IP & OP - Professional
Chiropractic - Medical
Chiropractic - Supplemental *
Circumcision
Contact Lenses - Cataract/Intraocular [ ** ](1)
Diagnostic Imaging and Tests - Op - Facility
Diagnostic Imaging and Tests - OP - Professional
DME - IP
DME - OP
Emergency Room - Facility
Emergency Room - Professional
Endoscopic Studies - OP - Facility
Endoscopic Studies - IP & OP - Professional
Family Planning - Abortions - Facility
Family Planning - Abortions - Professional
Family Planning - Contraceptive Devices - Prescription *
Family Planning - Contraceptive Devices - Non Prescription
(eg. Norplant/IUD) *
Family Planning - Contraceptive Devices - Insertion
Family Planning - GIFT/ZIFT/IVF - Prof & Fac *
Family Planning - Infertility procedures - Facility
Family Planning - Infertility testing - Professional
Family Planning - Sterilization - Facility
Family Planning - Sterilization - Professional
Fetal monitoring - OP - Prof & Fac
Health Education
Health Eval/Physical
Hearing Aids/Molds *
Hearing screening (Audio Logic Evaluation)
Hemodialysis / Dialysis - IP - Facility
Hemodialysis / Dialysis - IP & OP - Professional
Hemodialysis / Dialysis - OP - Facility
Home Health Care
Home Infusion Therapy
Hospice Services (Commercial)
Hospice Services (Secure Horizons) **
</TABLE>
(1) All references to division of responsibility have been deleted.
49
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
SERVICE DESCRIPTION MED GRP HOSP PACIFICARE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Hospital Based Physicians Interpretative Service Incl. Radiology
and Pathology
Hospitalization IP Services - Facility
Immunizations & Inoculations (Medically Necessary)
Injectables - Administered in Physician Office
Injectables- Self Administered *
Laboratory/Pathology - IP - Facility
Laboratory/Pathology - IP & OP - Professional
Laboratory/Pathology - OP - Facility
Lithotripsy - IP & OP - Facility
Lithotripsy - IP & OP - Professional
Med/Surg Supplies (casts, splints, bandages) - Office
Medication - Prescription *
Mental Health - Crisis Intervention
Mental Health - IP & OP - Prof & Fac (Commercial) *
Mental Health - IP & OP - Facility (Secure Horizons)
Mental Health - IP & OP - Professional (Secure Horizons)
Observation Room
Oral Surgery / Dental Services - Accident & Injury Only - Facility
Oral Surgery / Dental Services - Accident & Injury Only - Professional
Ostomy / Colostomy Supplies (See OP DME)
Out of Area - Facility
Out of Area - Professional
Outpatient Surgery - Facility
Outpatient Surgery - Professional [ ** ](1)
Physician Services (All Professional Services)
Prosthetics / Orthotics (See OP DME)
Prosthetics - Surgical Implants
Radiation therapy - IP & OP - Facility
Radiation therapy - IP & OP - Professional
Radiology - IP - Facility
Radiology - IP & OP - Professional
Radiology - OP - Facility
Reconstructive Surgery - IP & OP - Facility
Reconstructive Surgery - IP & OP - Professional
Rehabilitation - Cardiac/OT/PT/RT/ST - IP - Facility
Rehabilitation - Cardiac/OT/PT/RT/ST - IP - Professional
Rehabilitation - Cardiac/OT/PT/RT/ST - OP - Prof & Fac
Skilled Nursing Facility
Sleep Studies - OP - Prof & Fac
TMJ - Evaluation (excludes dental exams/treatment)
Transfusions - IP & OP - Facility
Transplants - Facility
Transplants - Professional
Urgent Care
Vision (Eye Exam, Refraction and Medical Treatment)
Vision Care - Contact Lenses/Frames (non-cataract) (Commercial) *
Vision Care - Contact Lenses/Frames (non-cataract) (Secure Horizons)
</TABLE>
* If member has benefit
** Opt-out to Medicare benefit for Hospice
(1) All references to division of responsibility have been deleted.
50
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Product Attachment A.
PACIFICARE OF CALIFORNIA
By: /s/ Cathy Batteer
---------------------------
Title: VP, Health Services
------------------------
Date: 1/27/98
-------------------------
MEDICAL GROUP
By: /s/ Karunyan Arulanantham
---------------------------
Title:
------------------------
Date:
-------------------------
51
<PAGE>
PRODUCT ATTACHMENT B
PACIFICARE COMMERCIAL POINT-OF-SERVICE PLAN
This Product Attachment B, along with Product Attachment A and the Base
Agreement, sets forth the terms and conditions which are applicable to the
PacifiCare Commercial Point-of-Service Plan, as defined below.
ARTICLE 1
DEFINITIONS
The following terms shall have the meaning attributed below for purposes of the
PacifiCare Commercial Point-of-Service Plan, as described in this Product
Attachment B. Capitalized terms not otherwise defined herein shall have the
meaning assigned to them in the Base Agreement.
1.1 IN-NETWORK SERVICES are Covered Services which are (a) provided or arranged
by Medical Group pursuant to the PacifiCare Commercial Plan; (b) received
from a non-contracting Provider following an authorization from Medical
Group; (c) Emergency Services and (d) Urgently Needed Services.
1.2 OUT-OF-NETWORK SERVICES are Covered Services, excluding Emergency Services
and Urgently Needed Services, which are received without the prior
authorization of Medical Group.
1.3 PACIFICARE COMMERCIAL POINT-OF-SERVICE ("POS") PLAN is any PacifiCare
Commercial Plan, as defined in Product Attachment A, under which Members
are entitled to coverage for both In-Network Services and Out-of-Network
Services.
1.4 COMMERCIAL POS PLAN MEMBERS are Medical Group Members enrolled in the
PacifiCare Commercial POS Plan.
1.5 POS PLAN PREMIUM is the sum of the In-Network Premium and the
Out-of-Network Premium, as defined below:
1.5.1 IN-NETWORK PREMIUM is the Commercial Plan Premium, as defined in
Product Attachment A, billed or accounted for by PacifiCare for
coverage of In-Network Services under the PacifiCare Commercial
POS Plan.
1.5.2 OUT-OF-NETWORK PREMIUM is the Commercial Plan Premium, as defined
in Product Attachment A, billed or accounted for by PacifiCare
(or an insurance company or self-insured employer which has
assumed the risk for the Out-of-Network Services), for coverage
of Out-of-Network Services under the PacifiCare Commercial POS
Plan.
52
<PAGE>
ARTICLE 2
DUTIES OF MEDICAL GROUP
2.1 COVERED SERVICES. Medical Group and its Participating Providers shall
provide or arrange Covered Services to Commercial POS Plan Members under
same terms and conditions as Commercial Plan Members.
2.2 RECIPROCITY: REIMBURSEMENT FOR OUT-OF-NETWORK SERVICES. If any of Medical
Group's Participating Providers provides Out-of-Network Services to a
Commercial POS Plan Member, such Medical Group Participating Provider shall
bill PacifiCare or the payor responsible for payment for Out-of-Network
Services for such services and agrees to accept full payment at the Cost of
Care. Neither Medical Group nor its Participating Providers shall encourage
Members to receive Covered Services from non-Participating Providers.
Medical Group shall include the requirements of this Section in all
subcontracts with its Participating Providers.
ARTICLE 3
COMPENSATION
3.1 CAPITATION PAYMENTS FOR COMMERCIAL POS PLAN MEMBERS. For Commercial POS
Plan Members, PacifiCare will pay Medical Group [ ** ] of the Capitation
Payment for Commercial Plan Members, subject to the adjustments set forth
in Article 5 of the Base Agreement and Section 3.1 of Product Attachment A.
Capitation Payments for Commercial POS Plan Members will be based on a
percentage of the In-Network Premium only. The payment described in this
Section is payment in full for In-Network Services, except for Copayments,
coordination of benefits, third party recoveries and payments under the
PacifiCare POS Control Program set forth below.
3.2 COMMERCIAL POS CONTROL PROGRAM. PacifiCare shall establish and administer
an annual Control Program for the PacifiCare Commercial Point-of-Service
Plan ("Commercial POS Control Program"). The Commercial POS Control Program
is designed to provide an incentive to control Out-of-Network Services, and
shall be calculated in accordance with the following provisions.
3.2.1 DEFINITIONS. The following terms shall have the meaning
attributed below for purposes of the Commercial POS Control
Program.
(i) POS PLAN BUDGET shall equal [ ** ] of In-Network Premium
plus [ ** ] of Out-of-Network Premium.
(ii) OUT-OF-NETWORK COSTS shall mean the following:
claims paid for Out-of-Network Services incurred during
the current period, calculated at the actual amount paid;
PLUS
claims paid for Out-of-Network Services incurred but not
included in prior period Commercial POS Control Program
calculations, calculated at the actual amount paid; MINUS
53
<PAGE>
third party liability and coordination of benefit
recoveries for Out-of-Network Services that are received
during the period of calculation.
(iii) BUDGET SURPLUS. The amount, if any, by which the POS Plan
Budget exceeds the Out-of-Network Costs for any calendar
year.
(iv) BUDGET DEFICIT. The amount, if any, by which the
Out-of-Network Costs exceeds the POS Plan Budget for any
calendar year.
(v) CAPITATION RESTORATION AMOUNT. The difference between (a)
the actual capitation paid to Medical Group or Hospital
for Commercial POS Plan Members for the relevant contract
year and (b) the amount Medical Group or Hospital would
have received if Medical Group's Capitation Payments for
Commercial POS Plan Members had been determined by
multiplying the percentage set forth in Section 3.1 of
Product Attachment A by the In-Network Premium. The
Capitation Restoration Amount shall be calculated
separately for Medical Group and Hospital.
3.2.2 DOCUMENTATION. PacifiCare shall provide Medical Group with a list
of Out-of-Network claim payments in support of computation and
accuracy of Out-of-Network Costs, third party liability and
coordination of benefit recoveries, assumptions and data
supporting the POS Plan Budget, the Budget Surplus, and the
Budget Deficit and the Capitation Restoration Amount.
3.2.3 BUDGET SURPLUS RECONCILIATION. Medical Group and Hospital shall
each receive [ ** ] of the Budget Surplus, until such time as
either Hospital or Medical Group has received the applicable
Capitation Restoration Amount. Additional Budget Surplus amounts
shall be paid to the party whose capitation has yet to be
restored until that party has received the applicable Capitation
Restoration Amount. If the Budget Surplus exceeds the Capitation
Restoration Amount for both Hospital and Medical Group, then
PacifiCare, Hospital and Medical Group shall each be entitled to
[ ** ] of the remaining Budget Surplus.
3.2.4 BUDGET DEFICIT RECONCILIATION. In the event of a Budget Deficit,
neither Medical Group nor Hospital shall be responsible for
making any payments under the PacifiCare POS Control Program.
However, [ ** ] of the Budget Deficit amount shall be
considered a Medical Group obligation for purposes of offsetting
surpluses under other incentive programs under the Agreement.
3.3 ADJUSTMENT OF RATES. Capitation Payments for Commercial POS Plan Members
and the POS Plan Budget may be prospectively adjusted on an annual basis to
reflect actual experience under the PacifiCare Commercial POS Plan;
provided, however, that in no event shall the amount of any increase or
decrease to such Capitation Payments be greater than [ ** ] in any given
year.
54
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Product Attachment B.
PACIFICARE OF CALIFORNIA
By: /s/ Cathy Batteer
---------------------------
Title: VP, Health Services
------------------------
Date: 1/27/98
-------------------------
MEDICAL GROUP
By: /s/ Karunyan Arulanantham
---------------------------
Title:
------------------------
Date:
-------------------------
55
<PAGE>
PRODUCT ATTACHMENT C
SECURE HORIZONS HEALTH PLAN
This Product Attachment C, along with the Base Agreement, sets forth the terms
and conditions which are applicable to the Secure Horizons Health Plan, as
defined below.
ARTICLE 1
DEFINITIONS
The following terms shall have the meaning attributed below for purposes of the
Secure Horizons Health Plan, as described in this Product Attachment C.
Capitalized terms not otherwise defined herein shall have the meaning assigned
to them in the Base Agreement.
1.1 HCFA is the Health Care Financing Administration, an administrative
agency of the United States Government, responsible for administering the
Medicare program.
1.2 HCFA AGREEMENT is the Medicare-risk contract between PacifiCare and HCFA.
1.3 MEDICARE is the Hospital Insurance Plan (Part A) and the Supplementary
Medical Insurance Plan (Part B) provided under Title XVIII of the Social
Security Act, as amended.
1.4 MONTHLY HCFA PAYMENT is the revenue received by PacifiCare each month
from HCFA, as determined by HCFA, for providing Covered Services to
Secure Horizons Members.
1.5 SECURE HORIZONS HEALTH PLAN is the prepaid health plan operated by
PacifiCare pursuant to the HCFA Agreement which provides Covered Services
to individuals (including retirees) eligible to receive Medicare
benefits.
1.6 SECURE HORIZONS MEMBERS are Medical Group Members enrolled in the Secure
Horizons Health Plan.
1.7 SECURE HORIZONS REVENUE is the Monthly HCFA Payment for Medical Group
Members enrolled in the Secure Horizons Health Plan, less amounts used to
fund the Market Specific Benefit Program (as defined below).
ARTICLE 2
DUTIES OF MEDICAL GROUP
2.1 COMPLIANCE WITH HCFA AGREEMENT AND FEDERAL MEDICARE LAW. Medical Group
shall comply with all requirements in the HCFA Agreement which are
applicable to Medical Group as a subcontractor of PacifiCare as a result
of this Agreement. Without limiting the foregoing, Medical Group shall
ensure that all provisions of the HCFA Agreement which are applicable to
Medical Group's Participating Providers as a subcontractor of PacifiCare
are included in Medical Group's subcontracts with its Participating
Providers. A copy of the HCFA Agreement shall be made available to Medical
Group concurrent with the execution of this Agreement. Medical
56
<PAGE>
Group and its Participating Providers shall comply with Title XVIII of
the Social Security Act and the regulations adopted thereunder by HCFA
for the Medicare program.
2.2 MEDICARE PARTICIPATION STANDARDS. Medical Group shall require that all of
its Participating Providers who provide services to Secure Horizons
Members meet the standards for participation and all applicable
requirements for providers of health care services under the Medicare
program. In addition, Medical Group shall require that all facilities and
offices utilized by Medical Group and its Participating Providers to
provide or arrange Covered Services to Secure Horizons Members shall
comply with facility standards established by HCFA.
2.3 CONFIDENTIALITY OF MEDICAL RECORDS. Medical Group shall establish and
maintain procedures and controls so that no information contained in its
records or obtained from HCFA or from others in carrying out the terms of
this Agreement shall be used by or disclosed by it, its agents, officers,
or employees except as provided in Section 1106 of the Social Security
Act, as amended, and regulations prescribed thereunder.
2.4 SITE EVALUATIONS: RIGHT TO INSPECT. Medical Group shall permit the United
States Department of Health and Human Services or its designated
representatives, to conduct periodic site evaluations of Medical Group's
facilities, offices, equipment, medical records of Secure Horizons
Members, and all phases of professional and ancillary medical care
provided to Secure Horizons Members by Medical Group and its
Participating Providers. Such site evaluation may include inspection and
audit of books, documents, papers and records relating to any aspect of
Covered Services provided to Secure Horizons Members and determinations
of amounts payable under this Agreement, as required by law. The right of
the United States Department of Health and Human Services to inspect,
evaluate and audit shall extend through three (3) years from the date of
the final settlement between PacifiCare and an agency thereof. Medical
Group and its Participating Providers shall comply with any requirements
or directives issued by Government Agencies as a result of such site
evaluation, inspection and/or audit.
2.5 SUBMISSION OF DATA. Medical Group shall cooperate with PacifiCare in
submitting to the Secretary of Health and Human Services statistical data
pertaining to Covered Services provided by Medical Group, enrollment and
disenrollment data and any other reports the Secretary may reasonably
require to carry out its functions under the Medicare program.
2.6 ADVANCE DIRECTIVES. Medical Group shall document all Secure Horizons
Member patient records with respect to the existence of an Advance
Directive in compliance with the Patient Self-Determination Act (Section
4751 of the Omnibus Reconciliation Act of 1990), as amended, and other
appropriate laws. For purposes of this Agreement, an Advance Directive is
a Member's written instructions, recognized under State law, relating to
the provision of health care when the Member is not competent to make
health care decisions as determined under State law. Examples of Advance
Directives are living wills and durable powers of attorney for health
care.
2.7 NON-DISCRIMINATION. Medical Group understands that HCFA requires
compliance with the provisions of this Section as a condition for
participation in the Secure Horizons Health Plan. Medical Group and its
Participating Providers shall not unlawfully discriminate against any of
their employees or applicants for employment or against any Members on the
basis of race, color, creed, national origin, ancestry, religion, sex,
marital status, age (except as provided by
57
<PAGE>
law), or physical or mental handicap. Medical Group and its Participating
Providers shall ensure that the evaluation and treatment of their
employees and applicants for employment and of Members are free of such
discrimination. Medical Group and its Participating Providers shall
comply with Title VI of the Civil Rights Act of 1964, as amended
(42 U.S.C. Section 2000d et. seq.), Section 504 of the Rehabilitation
Act of 1973, as amended (29 U.S.C. Section 794) and the regulations
thereunder, Title IX of the Education Amendments of 1972, as amended
(20 U.S.C. Section 1681 et. seq.), the Age Discrimination Act of 1975,
as amended (42 U.S.C. Section 6101 et. seq.), Section 654 of the Omnibus
Budget Reconciliation Act of 1981, as amended (42 U.S.C. Section 9849),
the Americans With Disabilities Act (PL. 101-365) and all implementing
regulations, guidelines and standards as are now or may be lawfully
adopted under the above statutes.
2.8 TERMINATION OF HCFA AGREEMENT. In the event the HCFA Agreement is
terminated or not renewed, the provisions of this Agreement relating to
the Secure Horizons Health Plan shall automatically terminate unless
otherwise agreed by HCFA and PacifiCare.
ARTICLE 3
COMPENSATION
3.1 CAPITATION PAYMENTS FOR SECURE HORIZONS MEMBERS. Capitation Payments for
Secure Horizons Members shall be [ ** ] of the Secure Horizons Revenue
per Secure Horizons Member per month, subject to the adjustments set forth
in Article 5 of the Base Agreement.
3.1.1 ADJUSTMENT FOR ISL PREMIUM. In calculating Capitation Payments
due to Medical Group, PacifiCare shall deduct the ISL Premium
amount set forth herein from the amounts otherwise due to Medical
Group, unless PacifiCare has approved of Medical Group's opting
out of PacifiCare's ISL Program.
3.2 INDIVIDUAL STOP LOSS PROYAM. The ISL Deductible and ISL Premium for the
Secure Horizons Health Plan initially will be:
(i) ISL DEDUCTIBLE - NOT APPLICABLE dollars per Secure Horizons
Member per calendar year.
(ii) ISL PREMIUM - NOT APPLICABLE percent of Secure Horizons Revenue.
3.3 MARKET-SPECIFIC BENEFIT PROGRAM. PacifiCare may establish, at its sole
discretion, an annual Market-Specific Benefit Program (the "MSBP"). The
MSBP is designed to provide an incentive to control costs for certain
additional benefits (the "MSBP Benefits") offered to Secure Horizons
Members, as defined in the applicable Subscriber Agreement, for the
purpose of enhancing the marketability of the Secure Horizons Health
Plan. The MSBP may include the following additional benefits and may
be amended from time to time by PacifiCare to reflect changes in the
benefits:
Dental Benefits
58
<PAGE>
Immunosuppressive Drugs
Outpatient Pharmacy Benefits
Respite Care
PacifiCare shall retain [ ** ] of the Monthly HCFA Payment (the "MSBP
Budget") for purposes of funding and administering the MSBP. The MSBP
shall be calculated as follows:
3.4.1 MSBP BENEFITS shall be the additional benefits listed above in
this Section and made available under the Secure Horizons Health
Plan as defined in the applicable Subscriber Agreement.
3.4.2 MSBP EXPENSE shall equal the actual or valued expenses incurred
for the provision of MSBP Benefits during the applicable period,
less amounts received from pharmacy rebates (in the case of
Outpatient Pharmacy Benefits) and third parties as the result of
coordination of benefits and third party recoveries.
3.4.3 MSBP SURPLUS. In the event the MSBP Expense is less than the MSBP
Budget, [ ** ] of the surplus shall be allocated to the Medical
Group, but not more than [ ** ] of the MSBP Budget for the
calendar year.
3.4.4 MSBP DEFICIT. In the event the MSBP Expense is greater than the
MSBP Budget, [ ** ] of the deficit shall be allocated to the
Medical Group, but not more than [ ** ] of the MSBP Budget for
the calendar year.
3.4.5 SETTLEMENTS. The calculations in this Section and settlements
shall be performed in accordance with the procedures specified in
Article 5 of the Base Agreement.
3.5 COLLECTION OF CHARGES FROM THIRD PARTIES WHEN MEDICARE IS NOT THE
PRIMARY, PAYOR. Medical Group shall accept Capitation Payments from
PacifiCare as payment in full for Covered Services provided to Secure
Horizons Members; provided, however, when Medicare is not the primary
payor for Covered Services, such as when the Secure Horizons Member is
entitled to payment from another third party or for payment for a workers'
compensation claim, or from other primary insurance coverage maintained
by Secure Horizons Member, Medical Group shall make no demand upon
PacifiCare for reimbursement under the Individual Stop Loss Program until
all primary sources of payment have been pursued and it is determined that
full payment cannot be obtained within ten (10) months from the date of
the provision of Covered Services.
ARTICLE 4
DIVISION OF FINANCIAL RESPONSIBILITY
(Secure Horizons)
The following matrix outlines the division of financial responsibility between
PacifiCare, Medical Group and Hospital, the intent being to clarify Covered
Services categories in order to provide for accurate administration. The matrix
serves as a model under which broad Covered Service categories suggest the
appropriate financial responsibility for Covered Services not specifically
listed. The
59
<PAGE>
Secure Horizons Member's Subscriber Agreement should be consulted for an
accurate and complete description of Covered Services.
The Division of Financial Responsibility for the PacifiCare Commercial Health
Plan set forth in Product Attachment A shall also apply to the Secure Horizons
Health Plan.
IN WITNESS WHEREOF, the parties hereto have executed this Product Attachment C.
PACIFICARE OF CALIFORNIA
By: /s/ Cathy Batteer
---------------------------
Title: VP, Health Services
------------------------
Date: 1/27/98
-------------------------
MEDICAL GROUP
By: Karunyan Arulanantham
---------------------------
Title:
------------------------
Date:
-------------------------
60
<PAGE>
PRODUCT ATTACHMENT D
SECURE HORIZONS POINT-OF-SERVICE PLAN
This Product Attachment D, along with Product Attachment C and the Base
Agreement, sets forth the terms and conditions which are applicable to the
Secure Horizons Point-of-Service Plan, as defined below.
ARTICLE 1
DEFINITIONS
The following terms shall have the meaning attributed below for purposes of the
Secure Horizons Point-of-Service Plan, as described in this Product Attachment
D. Capitalized terms not otherwise defined herein shall have the meaning
assigned to them in the Base Agreement.
1.1 SECURE HORIZONS POINT-OF-SERVICE ("POS") PLAN are various Secure Horizons
Plans, as defined in Product Attachment C, under which Members are
entitled to coverage for both In-Network Services and Out-of-Network
Services.
1.2 IN-NETWORK SERVICES are Covered Services which are (a) provided or
arranged by Medical Group pursuant to the Secure Horizons Health Plan;
(b) received from a non-Participating Provider following an authorization
from Medical Group; (c) Emergency Services; and (d) Urgently Needed
Services.
1.3 OUT-OF-NETWORK SERVICES are the Covered Services, excluding Emergency
Services and Urgently Needed Services, which are received without the
prior authorization of Medical Group.
1.4 SECURE HORIZONS POS MEMBERS are Medical Group Members enrolled in the
Secure Horizons POS Plan.
1.5 SECURE HORIZONS POS MEMBER PREMIUM is a monthly charge to Secure Horizons
POS Members for the Secure Horizons POS Plan.
ARTICLE 2
DUTIES OF MEDICAL GROUP
2.1 COVERED SERVICES. Medical Group shall provide or arrange Covered Services
to Secure Horizons POS Members under same terms and conditions applicable
to Secure Horizons Members.
2.2 RECIPROCITY; REIMBURSEMENT FOR OUT-OF-NETWORK SERVICES. If any of Medical
Group's Participating Providers provides Out-of-Network Services to a
Secure Horizons POS Member, such Participating Provider shall bill
PacifiCare or the payor responsible for payment for Out-of-Network
Services for such services and agrees to accept full reimbursement at
the Cost of Care. Neither Medical Group nor its Participating Providers
shall encourage Members to receive Covered Services from
non-Participating Providers. Medical Group shall include the requirements
of this Section in all subcontracts with Medical Group's Participating
Providers.
61
<PAGE>
ARTICLE 3
COMPENSATION
3.1 CAPITATION PAYMENTS FOR SECURE HORIZONS POS MEMBERS. For Secure Horizons
POS Members, PacifiCare will pay Medical Group [ ** ] of the Capitation
Payment for Secure Horizons Members, as set forth in Product Attachment C
subject to the adjustments set forth in Article 5 of the Base Agreement.
Medical Group's Capitation Payment for Secure Horizons POS Members will
be based on a percentage of the Secure Horizons Revenue. The payment
described in this Section is payment in full for In-Network Services,
except for Copayments, coordination of benefits, third party recoveries
and payments under the Secure Horizons POS Control Program set forth
below.
3.2 SECURE HORIZONS POS CONTROL PROGRAM. PacifiCare shall establish and
administer an annual Control Program for the Secure Horizons POS Plan
(the "Secure Horizons POS Control Program"). The Secure Horizons POS
Control Program is designed to provide an incentive to control
Out-of-Network Services, and shall be calculated in accordance with the
following provisions.
3.2.1 DEFINITIONS. The following terms shall have the meaning
attributed below for purposes of the Secure Horizons POS Control
Program.
(i) SECURE HORIZONS POS BUDGET shall equal [ ** ] of the
Capitation Payment for Secure Horizons Members, as set
forth in Product Attachment C, subject to the adjustments
set forth in Sections 5.1.3 and 5.4 of the Base Agreement.
(ii) OUT-OF-NETWORK COSTS shall mean the following:
claims paid for Out-of-Network Services incurred during
the current period, calculated at the actual amount paid;
PLUS
claims paid for Out-of-Network Services incurred but not
included in prior period Secure Horizons POS Control
Program calculations, calculated at the actual amount
paid; MINUS
third party liability and coordination of benefit
recoveries for Out-of-Network Services that are received
during the period of calculation.
(iii) BUDGET SURPLUS. The amount, if any, by which the Secure
Horizons POS Plan Budget exceeds the Out-of-Network Costs
for any calendar year.
(iv) BUDGET DEFICIT. The amount, if any, by which the
Out-of-Network Costs exceeds the Secure Horizons POS Plan
Budget for any calendar year.
3.2.2 DOCUMENTATION. PacifiCare shall provide Medical Group with a list
of Out-of-Network claim payments in support of the computation
and accuracy of Out-of-Network Costs, third party liability and
coordination of benefit recoveries, assumptions and data
62
<PAGE>
supporting the Secure Horizons POS Budget, the Budget Surplus and
the Budget Deficit.
3.2.3 BUDGET SURPLUS RECONCILIATION. In the event of a Budget Surplus,
Medical Group and Hospital shall share the surplus as follows:
(i) Medical Group's distribution shall equal a percentage in
which the numerator is the Capitation Payments the Medical
Group would have received if the Secure Horizons POS
Members were enrolled in the Secure Horizons Plan (the
"Medical Group Secure Horizons Plan Capitation") and the
denominator is the sum of the Medical Group Secure
Horizons Plan Capitation and the Capitation Payments
Hospital would have received if the Secure Horizons POS
Plan Members were enrolled in the Secure Horizons Plan
(the "Hospital Secure Horizons Plan Capitation").
(ii) The Hospital's distribution shall equal a percentage in
which the numerator is the Hospital Secure Horizons Plan
Capitation and the denominator is the sum of the Medical
Group Secure Horizons Plan Capitation and the Hospital
Secure Horizons Plan Capitation.
3.2.4 BUDGET DEFICIT RECONCILIATION. In the event of a Budget Deficit,
neither Medical Group nor Hospital shall be responsible for
making any payments under the PacifiCare POS Control Program.
However [ ** ] of the Budget Deficit amount shall be considered
a Medical Group obligation for purposes of offsetting surpluses
under other incentive programs under the Agreement.
3.3 ADJUSTMENT OF RATES. Capitation Payments for Secure Horizons POS Members
and the Secure Horizons POS Budget may be prospectively adjusted to
reflect actual experience under the Secure Horizons POS Plan; provided,
however, that in no event shall the amount of any increase or decrease to
such Capitation Payments be greater than [ ** ] points in any given
year.
63
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Product Attachment D.
PACIFICARE OF CALIFORNIA
By: /s/ Cathy Batteer
---------------------------
Title: VP, Health Services
------------------------
Date: 1/27/98
-------------------------
MEDICAL GROUP
By: /s/ Karunyan Arulanantham
---------------------------
Title:
------------------------
Date:
-------------------------
64
<PAGE>
EXHIBIT 16.1
September 14, 1998
Securities and Exchange Commission
Washington, D.C. 20549
Re: Prospect Medical Holdings, Inc.
We have read the last paragraph under the caption "Experts" in the Prospectus
constituting a part of this Registration Statement on Form S-1 for Prospect
Medical Holdings, Inc., and are in agreement with the information contained
therein insofar as it relates to BDO Seidman, LLP.
Very truly yours,
/s/ BDO Seidman, LLP
--------------------------
BDO Seidman, LLP
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES OF REGISTRANT
Prospect Medical Systems, Inc., a Delaware corporation
Sierra Medical Management, Inc., a Delaware corporation
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated December 8, 1997, except for Note 4, as to which the
date is February 6, 1998 and Note 7, as to which the date is July 1, 1998, with
respect to the consolidated financial statements of Prospect Medical Holdings,
Inc. as of and for the year ended September 30, 1997; our report dated June 26,
1998 with respect to the financial statements of Antelope Valley Medical Group,
Inc. as of December 31, 1997 and 1996 and for the years then ended; our report
dated March 2, 1998 with respect to the combined financial statements of Sierra
Primary Care Medical Group, a Medical Corporation and Sierra Medical Management,
Inc. as of September 30, 1997, and December 31, 1996, and for the nine months
ended September 30, 1997 and the year ended December 31, 1996; our report dated
March 23, 1998 with respect to the financial statements of Santa Ana-Tustin
Physicians Group, Inc. as of July 13, 1997 and for the period from January 1,
1997 to July 13, 1997, included in the Registration Statement (Form S-1 No.
333- ) and related Prospectus of Prospect Medical Holdings, Inc. for
the registration of 3,000,000 shares of its common stock.
/s/ ERNST & YOUNG LLP
Los Angeles, California
September 18, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Prospect Medical Holdings, Inc.
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement on Form S-1 of our report dated November 20, 1996,
relating to the combined balance sheet of Prospect Medical Holdings, Inc. and
Prospect Medical Group, Inc. (predecessor business) as of September 30, 1996 and
the related combined statements of operations, stockholders' equity and cash
flows for each of the two years then ended, which are contained in that
Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ BDO SEIDMAN, LLP
Los Angeles, California
September 14, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Santa Ana-Tustin Physicians Group, Inc.
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement on Form S-1 of our report dated February 11, 1997,
relating to the statements of income, changes in stockholder's equity and cash
flows of Santa Ana-Tustin Physicians Group, Inc. for the ten month period ended
December 31, 1996 and year ended February 29, 1996, which are contained in that
Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ BDO SEIDMAN, LLP
Los Angeles, California
September 14, 1998
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<PAGE>
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<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> SEP-30-1997 SEP-30-1998
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<PERIOD-END> SEP-30-1997 JUN-30-1998
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