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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- --- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996.
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-21098.
Physicians Health Services, Inc.
(Exact name of registrant as specified in charter)
Delaware 06-1116976
(State or other (IRS employer
jurisdiction of identification number)
incorporation or
organization)
120 Hawley Lane 06611
Trumbull, Connecticut (Zip Code)
(Address of principal
executive offices)
Registrant's telephone number, including area code (203) 381-6400
Not applicable
____________________________________________________________
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ____
There were 5,483,716 shares of Class A Common Stock ($0.01 par value) and
3,823,480 shares of
Class B Common Stock ($0.01 par value) outstanding as of August 7, 1996.
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PHYSICIANS HEALTH SERVICES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE NO.
PART I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at
June 30, 1996 and December 31, 1995 3
Condensed Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 1996 and 1995 4
Condensed Consolidated Statements of Stockholders' Equity
for the Six Months Ended June 30, 1996 and 1995 5
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1996 and 1995 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II. Other Information
Item 4. Submission of Matter to a Vote of Security Holders 12
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
<PAGE>
PHYSICIANS HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
June 30, December 31,
1996 1995
--------- ---------
(Unaudited)
<S> <C> <C>
Assets:
Current Assets
Cash and Cash Equivalents $ 7,969 $ 7,536
Investments, Available for Sale at fair value:
Fixed Securities - (amortized cost--1996--$82,224 and 1995--$101,181) 82,260 102,130
Equity Securities - (amortized cost--1996--$1,417 and 1995--$1,417) 1,339 1,355
Accounts Receivable Less Allowances (1996--$1,525 and 1995--$1,050) 37,773 31,548
Other Receivables 14,157 14,815
Advances to Participating Hospitals 1,921 5,903
Prepaid Expenses and Other 706 204
--------- ---------
Total Current Assets 146,125 163,491
Property, Plant, and Equipment
Land 6,530 3,322
Building and Improvements 29,493 14,645
Furniture and Equipment 38,861 29,817
--------- ---------
74,884 47,784
Less Accumulated Depreciation and Amortization 12,875 11,028
--------- ---------
Total Property, Plant, and Equipment 62,009 36,756
--------- ---------
Other Assets 11,792 10,821
--------- ---------
Total Assets $ 219,926 $ 211,068
========= =========
Liabilities and Stockholders' Equity:
Current Liabilities
Accrued Health Care Expenses $ 31,801 $ 23,878
Unearned Premiums 26,646 25,022
Amounts Due to IPA's, Physicians and other Providers 30,969 37,806
Accounts Payable and Accrued Expenses 6,484 14,199
--------- ---------
Total Current Liabilities 95,900 100,905
Non Current Liabilities
Long Term Debt 18,101 --
Excess of Net Assets Over Cost of Company Acquired 1,222 1,282
Stockholders' Equity
Class A Common Stock, Par Value $0.01 per Share--Authorized 55 53
13,000,000 Shares, Issued and Outstanding; 1996--5,465,278
shares; 1995--5,310,347 shares
Class B Common Stock, Par Value $0.01 per Share; 39 41
non-transferable--authorized and issued 1996--3,924,598 shares;
1995--4,052,974 shares; voting rights - 10 per share
Additional Paid-In Capital 41,256 40,760
Unrealized Appreciation (Depreciation) of Marketable Securities,
Net of Tax (25) 510
Retained Earnings 63,379 67,518
--------- ---------
104,704 108,882
Less Cost of Class B Common Stock (86,400) Shares in Treasury 1 1
--------- ---------
Total Stockholders' Equity 104,703 108,881
--------- ---------
Total Liabilities and Stockholders' Equity $ 219,926 $ 211,068
========= =========
See Notes to Condensed Consolidated Financial Statements
</TABLE>
-3-
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PHYSICIANS HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(Unaudited)
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ -------------------------
1996 1995 1996 1995
------------------------ -------------------------
<S> <C> <C> <C> <C>
REVENUES:
Premiums $ 118,432 $ 78,692 $ 230,252 $ 158,258
Investment and Other Income 1,595 1,462 3,261 3,309
---------- ---------- ------------ ----------
120,027 80,154 233,513 161,567
COSTS AND EXPENSES:
Hospital Services 44,131 27,543 83,786 53,525
Physicians and Related Health Care Services 49,620 30,260 90,558 62,015
Other Health Care Services 10,817 2,979 20,496 7,719
Indemnity Costs 4,375 -- 7,008 --
Selling, General and Administrative Expenses 19,670 13,026 38,376 26,105
Guardian Joint Marketing Expense, Net 361 513 1,016 513
Proxy Defense Costs -- 450 -- 900
---------- ---------- ------------ ----------
128,974 74,771 241,240 150,777
---------- ---------- ------------ ----------
Income (Loss) before Income Taxes (8,947) 5,383 (7,727) 10,790
Income Tax Expense (Benefit) (3,942) 1,723 (3,588) 3,986
---------- ---------- ------------ ----------
NET INCOME (LOSS) $ (5,005) $ 3,660 $ (4,139) $ 6,804
========== ========== ============= ==========
Net Income (Loss) Per Common Share $ (0.54) $ 0.39 $ (0.45) $ 0.72
========== ========== ============= ==========
Weighted Average Number of Common
Shares Outstanding 9,303 9,403 9,293 9,399
========== ========== ============= ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
-4-
<PAGE>
PHYSICIANS HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
(Unaudited)
<TABLE>
Six Months Ended
June 30, June 30,
1996 1995
--------- ---------
<S> <C> <C>
Class A Common Stock
Balance at Beginning of Period $ 53 $ 49
Conversion of Class B Common Stock
into Class A Common Stock 2 2
========= =========
Balance at End of Period $ 55 $ 51
========= =========
Class B Common Stock
Balance at Beginning of Period $ 41 $ 45
Conversion of Class B Common Stock
into Class A Common Stock (2) (2)
========= =========
Balance at End of Period $ 39 $ 43
========= =========
Additional Paid in Capital
Balance at Beginning of Period $ 40,760 $ 40,514
Exercise of Stock Options 496 28
========= =========
Balance at End of Period $ 41,256 $ 40,542
========= =========
Unrealized Appreciation (Depreciation) of Marketable
Securities, Net of Tax
Balance at Beginning of Period $ 510 $ (949)
Unrealized Appreciation (Depreciation) (535) 1,430
========= =========
Balance at End of Period $ (25) $ 481
========= =========
Retained Earnings
Balance at Beginning of Period $ 67,518 $ 51,548
Net Income (Loss) (4,139) 6,804
========= =========
Balance at End of Period $ 63,379 $ 58,352
========= =========
Treasury Stock
========= =========
Balance at Beginning and End of Period $ (1) $ (1)
========= =========
Total Stockholders' Equity
Balance at Beginning of Period $ 108,881 $ 91,206
Exercise of Stock Options 496 28
Net Income (Loss) (4,139) 6,804
Unrealized Appreciation (Depreciation) of
Marketable Securities (535) 1,430
========= =========
Balance at End of Period $ 104,703 $ 99,468
========= =========
</TABLE>
See Notes to Condensed Consoldiated Financial Statements
-5-
<PAGE>
PHYSICIANS HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(IN THOUSANDS)
(Unaudited)
<TABLE>
Six Months Ended
June 30, June 30,
1996 1995
--------- ---------
<S> <C> <C>
Operating Activities
Net Income (Loss) $ (4,139) $ 6,804
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided by (Used by) Operating Activities:
Depreciation and Amortization 1,847 1,997
Provision for Doubtful Accounts 630 90
Amortization of Excess of Net Assets over Cost
of Company Acquired (60) (60)
Deferred income tax expense (161) (361)
Changes in Assets and Liabilities:
Accounts Receivable - Trade (6,855) (4,218)
Other Receivables 658 1,383
Advances to Participating Hospitals 3,982 (224)
Prepaid Expenses and Other (502) 2,017
Accrued Health Care Expenses 7,923 2,414
Unearned Premiums 1,624 (46)
Due to IPA's, Physicians and Other Providers (6,837) (21,242)
Accounts Payable and Accrued Expenses (7,949) (5,562)
--------- ---------
Net Cash Used by Operating Activities (9,839) (17,008)
Investing Activities
Purchases of Property, Plant, and Equipment (27,106) (4,263)
Proceeds from Disposal of Equipment 6 44
Increase in Other Assets (971) (437)
Purchases of Marketable Securities (169,290) (163,343)
Proceeds from Sales and Maturities of Marketable Securities 189,036 159,274
--------- ---------
Net Cash Used by Investing Activities (8,325) (8,725)
Financing Activities
Proceeds from Revolving Credit Line 18,101 --
Exercise of Stock Options 496 28
--------- ---------
Net Cash Provided by Financing Activities 18,597 28
--------- ---------
Increase (Decrease) in cash and cash equivalents 433 (25,705)
Cash and cash equivalents at beginning of period 7,536 28,467
========= =========
Cash and cash equivalents at end of period $ 7,969 $ 2,762
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
-6-
<PAGE>
PHYSICIANS HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
(unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting solely of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the six month period ending June 30, 1996 are not necessarily indicative of
the results that may be expected for the year ending December 31, 1996. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Physicians Health Services, Inc. and
Subsidiaries' annual report on Form 10-K for the year ended December 31,
1995.
Certain reclassifications were made to conform prior year amounts to
current year presentation.
2. Stockholders' Equity and Per Share Data
Pursuant to the Company's Certificate of Incorporation, upon conversion of
Class B shares to Class A shares, such Class B shares are canceled and
cannot be reissued. Per share data are based upon the weighted average
number of common and common equivalent shares outstanding during the
period. Common stock equivalent shares are excluded to the extent they have
an antidilutive effect on per share data.
3. Long Term Debt
In June 1996, the Company entered into a $30 million revolving credit
agreement which expires on June 27, 2001. This agreement provides for cash
borrowings under a line of credit at a variable spread over the London
Interbank Offered Rate. The applicable rate at June 30, 1996 was 6.0%. At
June 30, 1996 there was $18.0 million outstanding under this line which
represented funds borrowed to purchase the Company's new corporate
headquarters building. Interest payments on this debt are required to be
paid monthly. The Company pays a commitment fee based on the unused portion
of the line of credit. Under the terms of the agreement, the Company is
subject to certain financial covenants, including covenants related to
minimum net worth and operating earnings and a material adverse change
condition. At June 30, the Company is in compliance with all convenants.
4. Tax Provision
The effective tax rate for the quarter ended June 30, 1996 is a benefit of
44.1% compared to a tax provision of 32.0% for the second quarter of 1995.
For the six months ended June 30, 1996, the effective tax rate is a benefit
of 46.4% as compared to a tax provision of 36.9% for 1995. The effective
tax rate benefited from the favorable effect of income from tax exempt
securities which increased the tax benefit available in 1996 and reduced
the tax provisions in 1995.
7
<PAGE>
PHYSICIANS HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
(unaudited)
4. Tax Provision (cont.)
The Company is currently under examination by the Internal Revenue Service
(IRS) for certain prior tax years. Management does not expect any proposed
adjustments which may result from the IRS' audit to have a material adverse
impact on the Company's financial position or results of operations.
5. Agreements with The Guardian Life Insurance Company of America
The Company and The Guardian Life Insurance Company of America (the
"Guardian") amended the New York reinsurance agreement to reduce the
Company's share of the indemnity business being assumed from 50% to 10%,
retroactive to January 1, 1996. The amendment also provides that the
Company will assume no further indemnity business after July 1, 1996. The
impact of this amendment reduced the Company's indemnity loss by $936
thousand, after taxes.
Additionally, the Company and Guardian have agreed in principle to replace,
effective July 1, 1996, the profit sharing agreement in Connecticut with a
reinsurance agreement similar to the arrangements in effect in New York and
New Jersey. The reinsurance agreement would only cover the managed care
products and would exclude indemnity business. In anticipation of
converting from a profit sharing to a reinsurance arrangement in
Connecticut, the Company recognized approximately $1.1 million in after tax
losses attributable to 1995 and the first half of 1996, which otherwise
could have been deferred to offset future income from this arrangement. If
the Company either does not finalize the reinsurance agreement with
Guardian or does not receive the regulatory approval required, this $1.1
million adjustment would be reversed to income; however, it is expected
that the agreement will be finalized and the required regulatory approval
will be received.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
Quarter Ended June 30, 1996 Versus June 30, 1995
Six Months Ended June 30, 1996 Versus June 30, 1995
Premium revenue increased 50.5% to $118.4 million in the second quarter of 1996
from $78.7 million for the comparable 1995 quarter. For the six months ended
June 30, 1996, premium revenue increased 45.5% to $230.3 million from $158.3
million for the comparable 1995 period. Enrollment at June 30, 1996 was 346,868,
an increase of 70.8% from enrollment of 203,045 at June 30, 1995. Overall
premium revenues increased at a lower rate than the growth in enrollment due to
competitive conditions which depressed pricing flexibility and a shift in
product mix to lower revenue yielding and lower margin products such as the
gatekeeper products, Healthcare Solutions products and Medicaid. Also, enrollee
statistics include 100% of the enrollees in the New York Healthcare Solutions
products (which accounted for 29% of the enrollment growth from 1995) while
premium revenue includes only the Company's 50% share of revenues derived from
the NY Healthcare Solutions products. This arrangement became effective July 1,
1995. The Company expects that the growth in premium revenue may continue to lag
the growth in enrollment to the extent that the current competitive conditions
and demand for lower margin products continue.
On a year to date basis, investment income declined 1.4% from 1995 to 1996 due
to a decline in invested assets and lower investment yields due to lower
interest rates, offset in part by the interest income earned on a receivable
from Guardian.
Health care expenses as a percentage of premium revenues (medical loss ratio)
increased to 93.4% for the second quarter of 1996 as compared to 78.7% for the
comparable 1995 quarter. For the six months ended June 30, 1996, the medical
loss ratio was 89.1% compared to 79.2% for the first six months of 1995. Total
health care expenses increased $48.2 million to $108.9 million in the second
quarter of 1996 from $60.8 million for the comparable 1995 quarter. On a year to
date basis, total health care expenses increased $78.6 million to $201.8 million
for the first six months of 1996 from $123.3 million for the same 1995 period.
As a result of the competitive market conditions and demand for the Company's
lower margin products referred to above, and since a substantial portion of the
Company's premium revenue is on a calendar year renewal cycle, the Company
expects that the medical loss ratios in 1996 will continue to be higher than
those reported for the respective year earlier periods.
Hospital services expense increased 60.2% to $44.1 million for the second
quarter of 1996 from $27.5 million for the second quarter of 1995. Hospital
services expense for the first six months of 1996 totaled $83.8 million, up
56.5% from $53.5 million in the first six months of 1995. The increase in
hospital services expense is due primarily to the increase in fully-insured
membership. Inpatient hospital utilization for fully insured enrollees,
excluding Medicare cost contract enrollees, declined 16.7% to 269 days per
thousand members for the quarter ended June 30, 1996 from 323 days per thousand
members for the comparable 1995 period. For the six months ended June 30, 1996,
bed days per thousand members declined 12.9% to 275 days in 1996 from 316 days
in 1995. The decrease in inpatient hospital costs, as a result of this lower
utilization, was offset by a corresponding increase in outpatient hospital
costs. The rise in outpatient hospital costs is attributable to an increase in
the cost and complexity of outpatient procedures as more procedures are shifted
from inpatient to outpatient settings, where costs are less fixed, and due to
increased frequency and cost of emergency room visits.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations (cont.)
Physician and related health care expenses increased by 64.0% from $30.3 million
for the second quarter of 1995 to $49.6 million for the second quarter of 1996.
For the six months ended June 30, 1996, physician and related health care
expenses increased 46.0% to $90.6 million from $62.0 million for the same 1995
period. The increase is reflective of the increase in membership offset in part
by more favorable utilization and improved fee arrangements.
Other health care expenses increased by $7.8 million in the second quarter of
1996 and by $12.8 million on a year to date basis. The increase is almost
entirely due to higher prescription drug costs resulting from a shift in
membership to drug riders that offer greater benefits, lower generic drug
utilization and unfavorable mix of medications being prescribed.
Indemnity costs reflect the medical costs associated with the indemnity business
assumed under the New York reinsurance agreement with Guardian. As a result of
continuing adverse experience related to in this business, the Company began
negotiations with Guardian to reduce the Company' participation in the
assumption of the indemnity business. As a result of the negotiations, the
Company and Guardian amended the New York reinsurance agreement to reduce the
Company's share of the indemnity business being assumed from 50% to 10%,
retroactive to January 1, 1996. The amendment also provides that the Company
will assume no further indemnity business after July 1, 1996. As a result of the
amendment, the Company will not participate in the experience of the indemnity
business written after June 30, 1996 under the Joint Marketing Arrangement with
Guardian.
The second quarter results of operations included certain items that arose out
of the Company's arrangements with Guardian. First, the impact of the amendment
to the New York reinsurance agreement referred to in the prior paragraph reduced
the Company's losses associated with the indemnity portion of this arrangement
by $1.7 million. Second, the Company recognized additional indemnity costs of
$983 thousand which related to claims in excess of the level that had previously
been estimated for 1995 and the first half of 1996. Third, the Company
recognized approximately $1.4 million of additional physician claims related to
the managed care business in Connecticut and New York above the level that had
been previously estimated for services rendered in 1995 and the first half of
1996. Fourth, there was an overaccrual of estimated premiums recorded in
Connecticut in the first quarter of 1996 which totalled $463 thousand that were
reversed during the second quarter. Fifth, in anticipation of converting from a
profit sharing to a reinsurance arrangement in Connecticut, the Company
recognized $1.9 million in losses, attributible to 1995 and the first half of
1996 as more fully described in Note 5 to the Condensed Consolidated Financial
Statements. The after tax effect of these five items in the second quarter was a
reduction in net income of approximately $1.8 million.
Selling, general and administrative expenses increased by 51.0% or $6.6 million
in the second quarter of 1996 from the comparable 1995 period. For the six
months ended June 30, 1996, selling, general and administrative expenses are up
47.0% or $12.3 million over the prior year. The increase is due primarily to the
continuing resource commitments needed to support the geographic expansion and
the enrollment growth and diversity. Selling, general and administrative
expenses as a percentage of revenue improved to 16.6% for the second quarter of
1996 as compared to 17.1% for the second quarter of 1995. On a year to date
basis, selling, general and administrative expenses as a percentage of revenue
totaled 16.7% and 16.5% for the six months ended June 30, 1996 and 1995,
respectively.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations (cont.)
The Company's effective tax rate for the second quarter of 1996 is a benefit of
44.1% as compared to a tax provision of 32.0% for the second quarter of 1995.
For the six months ended June 30, 1996, the effective tax benefit rate is 46.4%
as compared to a tax provision of 36.9% for 1995. The effective tax rate
benefited from the favorable effect of income from tax exempt securities which
increased the tax benefit available in 1996 and reduced the tax provisions in
1995.
Liquidity and Capital Resources
Cash and cash equivalents increased $433 thousand at June 30, 1996 from December
31, 1995. For the six months ended June 30, 1996, $9.8 million was used by
operating activities, primarily to fund the loss for the period as well as to
fund the payment of risk retention to IPAs, physicians and other providers and
to fund the payment of accrued liabilities. During the first six months, $18.1
million was provided from a revolving credit line which was used to fund the
purchase of the Company's new corporate headquarters building in the second
quarter. Approximately $19.7 million of net cash was provided from the sales and
maturities of investments which was used to fund the enhancement of the
Company's computer systems and also to fund the risk retention payments made in
March, 1996.
Stockholders' equity declined to $104.7 million during the first six months of
1996 from $108.9 million at December 31, 1995 due primarily to the net losses.
The Company expects to spend additional capital, principally in computer and
technology system and building enhancements over the next several years. The
Company believes that in addition to its current capital resources and
internally generated funds, it will be able to draw down on the revolving credit
line or obtain financing, if necessary, sufficient for its continued operations,
the funding of geographical and product expansions, system enhancements and its
additional space requirements.
11
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its 1996 Annual Meeting on June 11, 1996 at which meeting
it elected six Directors for terms to expire at the 1999 Stockholders' meeting.
The Directors who were elected at such meeting and the votes cast in connection
with such election are as follows:
CLASS A DIRECTORS(1)
<TABLE>
<CAPTION>
<S> <C> <C>
Term to Expire in 1999 Votes Cast in Favor Withheld
Michael E. Herbert 4,056,617 41,882
Larry Coletti, M.D. 4,056,617 41,882
CLASS B DIRECTORS
Term to Expire in 1999 Votes Cast in Favor Withheld
Arnold DoRosario, M.D. 38,119,177 2,118,882
Andrew Lozyniak 38,088,127 2,149,932
John C. Washburn 38,089,127 2,148,932
Arthur H. Sheer 38,089,127 2,148,932
</TABLE>
At the Annual Meeting, the Stockholders also were asked to ratify the
appointment of Ernst & Young, LLP as independent auditors for the Company for
the fiscal year ending December 31, 1996. The total votes for, against and
withheld are as follows:
For: 14,898,413 Against: 48,081 Abstain: 25,300,565
Due to the large number of abstentions, the motion to ratify did not
carry. In the proxy statement for the Annual Meeting, the Board said it
would reconsider the appointment under these circumstances. The Audit
Committee met on July 25, 1996 and recommended that Ernst & Young continue
to be retained. The Board approved this recommendation on July 30, 1996.
________________________________________
1 Only Class A Stockholders may vote for Class A Directors
12
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K
Exhibit No. Description of Document
- ----------- -----------------------
10(a) Credit Agreement dated as of June 27, 1996 between
Physicians Health Services, Inc. and The Chase Manhattan
Bank, N.A.
10(b) Reinsurance Agreement between Physicians Health
Services (Bermuda) Ltd.
Hamilton, Bermuda and The Guardian Life Insurance
Company of America,
New York, New York (relating to Healthcare
Solutions business of Physicians
Health Services of New Jersey, Inc.)
10(c) Reinsurance Agreement among Physicians Health
Services of New Jersey, Inc.,
Paramus, New Jersey, Physicians Health Services
(Bermuda) Ltd., Hamilton,
Bermuda and The Guardian Life Insurance Company of
America, New York,
New York (relating to Healthcare Solutions
business of Physicians Health Services of New
Jersey, Inc.)
10(d) Amendment to Reinsurance Agreement between The
Guardian Life Insurance Company of America and
Physicians Health Services (Bermuda) Ltd. (relating
to Healthcare Solutions business of Physicians Health Services
of New York, Inc.)
(b) Reports on Form 8-K
There were no reports filed on Form 8-K for the three months
ended June 30, 1996.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Physicians Health Services, Inc.
(Registrant)
Date: August 14, 1996 /s/ James L. Elrod, Jr.
--------------------------
James L. Elrod, Jr.
Chief Financial Officer
Date August 14, 1996 /s/ Michael E. Herbert
--------------------------
Michael E. Herbert
President
14
<PAGE>
EXHIBIT 10.(a)
CREDIT AGREEMENT
dated as of June 27, 1996
between
PHYSICIANS HEALTH SERVICES, INC.
and
THE CHASE MANHATTAN BANK, N.A.
<PAGE>
Table of Contents
<TABLE>
<S> <C>
ARTICLE 1 DEFINITIONS; ACCOUNTING TERMS.
Section 1.1 Definitions
Section 1.2 Accounting Terms
Section 1.3 Rules of Interpretation
ARTICLE 2 THE CREDIT.
Section 2.1 The Loans
Section 2.2 The Note
Section 2.3 Purpose
Section 2.4 Borrowing Procedures
Section 2.5 Prepayments and Conversions
Section 2.6 Interest Periods; Renewals
Section 2.7 Changes of Commitment
Section 2.8 Certain Notices
Section 2.9 Minimum Amounts
Section 2.10 Interest
Section 2.11 Fees
Section 2.12 Payments Generally
ARTICLE 3 YIELD PROTECTION; ILLEGALITY; ETC.
Section 3.1 Additional Costs
Section 3.2 Limitation on Types of Loans
Section 3.3 Illegality
Section 3.4 Certain Compensation
ARTICLE 4 CONDITIONS PRECEDENT.
Section 4.1 Initial Conditions Precedent
Section 4.2 Additional Conditions Precedent
Section 4.3 Deemed Representations
ARTICLE 5 REPRESENTATIONS AND WARRANTIES.
Section 5.1 Incorporation, Good Standing and Due Qualification
Section 5.2 Corporate Power and Authority; No Conflicts
Section 5.3 Legally Enforceable Agreements
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Section 5.4 Litigation
Section 5.5 Financial Statements
Section 5.6 Ownership and Liens
Section 5.7 Taxes
Section 5.8 ERISA
Section 5.9 Subsidiaries and Ownership of Stock
Section 5.10 Credit Arrangements
Section 5.11 Operation of Business
Section 5.12 Hazardous Materials
Section 5.13 No Default on Outstanding Judgments or Orders
Section 5.14 No Defaults on Other Agreements
Section 5.15 Labor Disputes and Acts of God
Section 5.16 Governmental Regulation
Section 5.17 Partnerships
Section 5.18 No Forfeiture
Section 5.19 Insurance
Section 5.20 Accreditation
ARTICLE 6 AFFIRMATIVE COVENANTS.
Section 6.1 Maintenance of Existence
Section 6.2 Conduct of Business
Section 6.3 Maintenance of Properties
Section 6.4 Maintenance of Records
Section 6.5 Maintenance of Insurance
Section 6.6 Compliance with Laws; Payment of Taxes and Other Potential
Charges and Priority Claims
Section 6.7 Right of Inspection
Section 6.8 Reporting Requirements
Section 6.9 Accreditation
ARTICLE 7 NEGATIVE COVENANTS.
Section 7.1 Debt
Section 7.2 Liens
Section 7.3 Investments
Section 7.4 Dividends
Section 7.5 Sale of Assets
Section 7.6 Stock of Subsidiaries, Etc.
Section 7.7 Transactions with Affiliates
Section 7.8 Mergers, Etc.
Section 7.9 Acquisitions
</TABLE>
-ii-
<PAGE>
<TABLE>
<S> <C>
ARTICLE 8 FINANCIAL COVENANTS.
Section 8.1 Minimum Net Worth
Section 8.2 Leverage Ratio
Section 8.3 Interest Coverage Ratio
ARTICLE 9 EVENTS OF DEFAULT.
Section 9.1 Events of Default
Section 9.2 Remedies
ARTICLE 10 MISCELLANEOUS
Section 10.1 Amendments and Waivers
Section 10.2 Usury
Section 10.3 Expenses
Section 10.4 Survival
Section 10.5 Assignment; Participations
Section 10.6 Notices
Section 10.7 Setoff
Section 10.8 Jurisdiction; Immunities
Section 10.9 Table of Contents; Headings
Section 10.10 Severability
Section 10.11 Counterparts
Section 10.12 Integration
Section 10.13 Governing Law
Section 10.14 Confidentiality
Section 10.15 Treatment of Certain Information
Section 10.16 Changes in Accounting Principles
Section 10.17 Independence of Covenants
Section 10.18 Time of the Essence
Section 10.19 Commercial Waiver
</TABLE>
-iii-
<PAGE>
<TABLE>
<S> <C>
EXHIBITS
Exhibit A Promissory Note
Exhibit B Authorization Letter
Exhibit C Opinion of Counsel for Borrower
Exhibit D Notice of Borrowing
Exhibit E Financial Covenants Compliance Report
Exhibit F Confidentiality Agreement
Exhibit G Form of Application Agreement for Stand by Letters of Credit
SCHEDULES
Schedule 1.1 Municipal Earnings Gross-Up Formula
Schedule 5.7 Taxes
Schedule 5.8 Employment Matters
Schedule 5.9 Subsidiaries of Borrower
Schedule 5.10 Credit Arrangements
Schedule 5.12 Hazardous Materials
Schedule 5.17 Partnerships
Schedule 5.19 Insurance
Schedule 7.2 Liens
Schedule 7.3 Borrower's Investment Policy
</TABLE>
-iv-
<PAGE>
CREDIT AGREEMENT dated as of June 27, 1996 between PHYSICIANS HEALTH
SERVICES, INC., a corporation organized under the laws of the State of Delaware
(the "Borrower"), and THE CHASE MANHATTAN BANK, N.A., a national banking
association organized under the laws of the United States of America (the
"Bank").
The Borrower desires that the Bank extend credit as provided herein
and the Bank is prepared to extend such credit. Accordingly, the Borrower and
the Bank agree as follows:
ARTICLE 1. DEFINITIONS; ACCOUNTING TERMS.
Section 1.1. Definitions. As used in this Agreement the following
-----------
terms have the following meanings (terms defined in the singular to have a
correlative meaning when used in the plural and vice versa):
---- -----
"Acceptable Acquisition" means any Acquisition: (i) which has been
either (A) approved by the Board of Directors of the corporation which is the
subject of such Acquisition or (B) recommended by such Board to the shareholders
of such corporation; and (ii) with respect to which the following conditions are
satisfied:
(a) no Default or Event of Default exists or would result from
such Acquisition;
(b) the corporation or assets acquired involve health care and
related industries;
(c) the Borrower demonstrates that, on a combined basis with the
acquired assets and/or company, in accordance with GAAP, they would have been in
compliance with the financial covenants contained in Article 8 on a trailing
four quarters pro forma basis as of the end of the immediately preceding fiscal
quarter; and
(d) the Borrower remains as the surviving entity.
"Acceptable Investments" means investments that are in compliance with
the Borrower's Investment Policy as set forth in Schedule 7.3 hereto or any
updated or modified Schedule 7.3 that is accepted by the Bank in its sole
discretion.
"Acquisition" means any transaction pursuant to which the Borrower or
any of its Subsidiaries (a) acquires equity securities (or warrants, options or
other rights to acquire such securities) of any corporation other than the
Borrower or any corporation
<PAGE>
which is not then a Subsidiary of the Borrower, such that such corporation would
become a Subsidiary of the Borrower, pursuant to a solicitation of tenders
therefor, or in one or more negotiated block, market or other transactions not
involving a tender offer, or a combination of any of the foregoing, or (b) makes
any corporation a Subsidiary of the Borrower, or causes any such corporation to
be merged into the Borrower or any of its Subsidiaries, in any case pursuant to
a transaction providing for the delivery or issuance to the holders of such
corporation's then outstanding securities, in exchange for such securities, of
cash or securities of the Borrower or any of its Subsidiaries, or a combination
thereof, or (c) purchases all or substantially all of the business or assets of
any corporation.
"Affiliate" means any Person: (a) which directly or indirectly
Controls, or is Controlled by, or is under common Control with, the Borrower or
any of its Subsidiaries; (b) which directly or indirectly beneficially owns or
holds 5% or more of any class of voting stock of the Borrower or any such
Subsidiary; (c) 5% or more of the voting stock of which is directly or
indirectly beneficially owned or held by the Borrower or such Subsidiary; or (d)
which is a partnership in which the Borrower or any of its Subsidiaries is a
general partner.
"Agreement" means this Credit Agreement, as amended or supplemented
from time to time. References to Articles, Sections, Exhibits, Schedules and the
like refer to the Articles, Sections, Exhibits, Schedules and the like of this
Agreement unless otherwise indicated.
"Applicable Margin" means, at any time and from time to time, (a) with
respect to any Variable Rate Loan, a percentage per annum equal to 0.0%, and (b)
with respect to any Eurodollar Loan, a percentage per annum equal to the
applicable percentage set forth below for the Performance Level set forth below:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
PERFORMANCE APPLICABLE
LEVEL MARGIN
----- ------
- --------------------------------------------------------------------------------
<S> <C>
I 0.500%
- --------------------------------------------------------------------------------
II 0.625%
- --------------------------------------------------------------------------------
III 0.750%
- --------------------------------------------------------------------------------
IV 1.000%
- --------------------------------------------------------------------------------
</TABLE>
The Applicable Margin for Eurodollar Loans shall be determined by reference to
the Performance Level in effect from time to time.
"Applicable Measurement Date" means, with respect to any Performance
Level, the most recent date on which the Borrower's calculation of the Leverage
Ratio has been received and accepted by the Bank.
-2-
<PAGE>
"Applicable Percentage" means, at any time and from time to time, with
respect to the Commitment Fee, a percentage per annum equal to the applicable
percentage set forth below for the Performance Level set forth below:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
PERFORMANCE APPLICABLE
LEVEL MARGIN
----- ------
- --------------------------------------------------------------------------------
<S> <C>
I 0.20%
- --------------------------------------------------------------------------------
II 0.20%
- --------------------------------------------------------------------------------
III 0.25%
- --------------------------------------------------------------------------------
IV 0.25%
- --------------------------------------------------------------------------------
</TABLE>
The Applicable Percentage for the Commitment Fee shall be determined by
reference to the Performance Level in effect from time to time.
"Authorization Letter" means the letter agreement executed by the
Borrower in the form of Exhibit B.
"Banking Day" means any day on which commercial banks are not
authorized or required to close in New York City, and whenever such day relates
to a Eurodollar Loan or notice with respect to any Eurodollar Loan, a day on
which dealings in Dollar deposits are also carried out in the London interbank
market.
"Capital Lease" means any lease which has been or should be
capitalized on the books of the lessee in accordance with GAAP.
"Closing Date" means the date this Agreement has been executed by the
Borrower and the Bank.
"Code" means the Internal Revenue Code of 1986, as amended from time
to time.
"Commitment" means the obligation of the Bank to make the Loans and
issue its Letters of Credit under this Agreement in the aggregate principal
amount of $30,000,000, as such amount may be reduced or otherwise modified from
time to time.
"Commitment Fee" has the meaning specified in Section 2.11.
"Consolidated Subsidiary" means any Subsidiary of a Person whose
accounts are or are required to be consolidated with the accounts of such Person
in accordance with GAAP.
-3-
<PAGE>
"Control" means the possession, directly or indirectly, of the power
to direct or cause the direction of the management and policies of a Person,
whether through the ownership of voting securities, by contract, or otherwise.
"Debt" means, with respect to any Person at any date (without
duplication): (a) indebtedness created, issued, incurred or assumed by such
Person for borrowed money or evidenced by bonds, debentures, notes or similar
instruments; (b) all obligations of such Person to pay the deferred purchase
price of property or services, excluding, however, (i) trade accounts payable
(other than for borrowed money) arising in, and accrued expenses incurred in,
the ordinary course of business of such Person so long as such trade accounts
payable are paid within 120 days of the date the respective goods are delivered
or the services are rendered and (ii) customary holdback in the payment of
healthcare providers which is accrued as a current liability on such Person's
financial statement; (c) all Debt of others secured by a Lien on any asset of
such Person, whether or not such Debt is assumed by such Person; (d) all Debt of
others Guaranteed by such Person; (e) all obligations of such Person as lessee
under Capital Leases; (f) reimbursement obligations of such Person (whether
contingent or otherwise) in respect of bankers acceptances, surety or other
bonds and similar instruments (other than commercial, standby or performance
letters of credit); (g) contingent obligations under swaps, derivatives,
currency exchanges and similar transactions; and (h) unpaid reimbursement
obligations of such Person (other than contingent obligations) in respect of
commercial, standby or performance letters of credit.
"Default" means any event which with the giving of notice or lapse of
time, or both, would become an Event of Default.
"Default Rate" means, with respect to the principal of any Loan and,
to the extent permitted by law, any other amount payable by the Borrower under
this Agreement or any Note that is not paid when due (whether at stated
maturity, by acceleration or otherwise), a rate per annum equal to 2% above the
Variable Rate as in effect from time to time plus the Applicable Margin
(provided that, if the amount so in default is principal of a Eurodollar Loan
and the due date thereof is a day other than the last day of the Interest Period
therefor, the "Default Rate" for such principal shall be, for the period from
and including the due date and to but excluding the last day of the Interest
Period therefor, 2% above the interest rate for such Loan as provided in Section
2.10 hereof and, thereafter, the rate provided for above in this definition).
"Dollars" and the sign "$" mean lawful money of the United States of
America.
"EBIT" means, for the Borrower, for any period, earnings before
Interest Expense, taxes, other non-cash charges relating to the Guardian Warrant
and extraordinary items (including any effect for minority interests) for the
Borrower and its Consolidated
-4-
<PAGE>
Subsidiaries, determined on a consolidated basis in accordance with GAAP;
provided, however, for any period in which the Borrower shall certify to the
Bank that its effective tax rate is lower than its statutory tax rate solely as
a result of Tax-Exempt Investment Income, and not as a result of any other tax
benefit (such as a tax loss carry forward, tax credit, tax sharing agreement or
otherwise), EBIT for such period shall be grossed up in a manner described in
Schedule 1.1 or, if the Borrower is unable to so certify, in such other manner
that the Bank may consent to in its sole discretion from time to time in
writing.7
"EBITDA" means, for the Borrower, for any period, earnings before
Interest Expense, taxes, depreciation, amortization, other non-cash charges
relating to the Guardian Warrant and extraordinary items (including any effect
for minority interests) for the Borrower and its Consolidated Subsidiaries,
determined on a consolidated basis in accordance with GAAP; provided, however,
for any period in which the Borrower shall certify to the Bank that its
effective tax rate is lower than its statutory tax rate solely as a result of
Tax Exempt Investment Income, and not as a result of any other tax benefit (such
as a tax loss carry forward, tax credit, tax sharing agreement or otherwise),
EBITDA for such period shall be grossed up in a manner described in Schedule
1.1 or, or if the Borrower is unable to so certify, in such other manner that
the Bank may consent to in its sole discretion from time to time in writing.
"Environmental Laws" means any and all federal, state, local and
foreign statutes, laws, regulations, ordinances, rules, judgments, orders,
decrees, permits, concessions, grants, franchises, licenses, agreements or other
governmental restrictions relating to the environment or to emissions,
discharges, releases or threatened releases of pollutants, contaminants,
chemicals, or industrial, toxic or hazardous substances or wastes into the
environment including, without limitation, ambient air, surface water, ground
water, or land, or otherwise relating to the manufacture, processing
distribution, use, treatment, storage, disposal, transport, or handling of
pollutants, contaminants, chemicals, or industrial, toxic or hazardous
substances or wastes.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, including any rules and regulations promulgated
thereunder.
"ERISA Affiliate" means any corporation or trade or business which is
a member of any group of organizations (i) described in Section 414(b) or (c) of
the Code of which the Borrower is a member, or (ii) solely for purposes of
potential liability under Section 302(c)(11) of ERISA and Section 412(c)(11) of
the Code and the lien created under Section 302(f) of ERISA and Section 412(n)
of the Code, described in Section 414(m) or (o) of the Code of which the
Borrower is a member.
-5-
<PAGE>
"Eurodollar Base Rate" means with respect to any Interest Period for a
Eurodollar Loan, the rate per annum (rounded upwards, if necessary, to the
nearest 1/16 of 1%) quoted at approximately 11:00 a.m. London time by the
principal London branch of the Bank two Banking Days prior to the first day of
such Interest Period for the offering to leading banks in the London interbank
market of Dollar deposits in immediately available funds, for a period, and in
an amount, comparable to the Interest Period and principal amount of the
Eurodollar Loan which shall be made by the Bank and outstanding during such
Interest Period.
"Eurodollar Loan" means any Loan when and to the extent the interest
rate therefor is determined on the basis of the Eurodollar Rate.
"Eurodollar Rate" means, for any Eurodollar Loan for any Interest
Period therefor, a rate per annum (rounded upwards, if necessary, to the nearest
1/100 of 1%) determined by the Bank to be equal to the quotient of (i) the
Eurodollar Base Rate for such Loan for such Interest Period, divided by (ii) one
minus the Reserve Requirement for such Loan for such Interest Period.
"Event of Default" has the meaning given such term in Section 9.1.
"Facility Documents" means this Agreement, the Note, the L/C
Documents, the Authorization Letter, and each of the documents, certificates or
other instruments referred to in Article 4 hereof executed by or on behalf of
the Borrower as well as any other documents, instrument or certificate to be
delivered by the Borrower in connection with this Agreement or in connection
with the documents, certificates or instruments referred to in Article 4
executed by or on behalf of the Borrower, including documents delivered in
connection with any borrowing or any issuance of any Letter of Credit.
"Federal Funds Rate" means, for any day, the rate per annum (expressed
on a 365/366 day basis of calculation, if the rate on Variable Rate Loans is so
calculated) equal to the weighted average of the rates on overnight federal
funds transactions as published by the Federal Reserve Bank of New York for such
day (or for any day that is not a Banking Day, for the immediately preceding
Banking Day).
"Forfeiture Proceeding" means any action, proceeding or investigation
affecting the Borrower or any of its Subsidiaries before any court, governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign, or the receipt of notice by any such party that any of them is a
suspect in or a target of any governmental inquiry or investigation, which may
result in an indictment of any of them or the seizure or forfeiture of any of
their property.
-6-
<PAGE>
"GAAP" means generally accepted accounting principles in the United
States of America as in effect from time to time, applied on a basis consistent
with those used in the preparation of the financial statements referred to in
Section 5.5 (except for changes concurred in by the Borrower's independent
public accountants).
"Governmental Authority" shall mean any government or political
subdivision or an agency, authority, bureau, central bank, commission,
department or instrumentality of either, or any court, tribunal, grand jury or
arbitrator, in each case whether foreign or domestic.
"Guarantee" means, for any Person, any guarantee, endorsement,
contingent agreement to purchase or to furnish funds for the payment or
maintenance of, or any other contingent liability on or with respect to, the
Debt, other obligations, net worth, working capital or earnings of any other
Person (including, without limitation, the liability of such Person in respect
of the Debt of any partnership of which such person is a general partner), or
the guarantee by such Person of the payment of dividends or other distributions
upon the stock of any other Person, or the agreement by such Person to purchase,
sell or lease (as lessee or lessor) property, products, materials, supplies or
services primarily for the purpose of enabling any other Person to make payment
of its obligations or to assure a creditor against loss, and the verb
"Guarantee" shall have a correlative meaning, provided that the term "Guarantee"
shall not include endorsements for collection or deposits in the ordinary course
of business. If any Guarantee relates to an obligation that is not in the nature
of a Debt, then the value ascribed to such Guarantee shall be the maximum
liability under such Guarantee that is estimated in good faith by the management
of the Borrower.
"Guardian Warrant" means the Stock Warrant Purchase Agreement, dated
November 28, 1995 between the Borrower and The Guardian Life Insurance Company
of America.
"Interest Coverage Ratio" means, for the Borrower, as at any date, the
ratio of (a) EBIT for the immediately preceding four full fiscal quarters of the
Borrower (including the fiscal quarter ending on such date if such date is the
last day of a fiscal quarter) to (b) Interest Expense for such period.
"Interest Expense" shall mean, with respect to the Borrower, for any
period, the sum, for the Borrower and its Consolidated Subsidiaries, determined
on a consolidated basis in accordance with GAAP, of (a) all interest on Debt
that is accrued as an expense during such period (including, without limitation,
imputed interest on Capital Lease obligations), plus (b) all amounts paid,
----
accrued or amortized as an expense during such period in respect of interest
rate protection agreements, minus (c) all amounts received or accrued as income
-----
during such period in respect of interest rate protection agreements.
-7-
<PAGE>
"Interest Period" means, with respect to any Eurodollar Loan, the
period commencing on the date such Loan is made, converted from another type of
Loan or renewed, as the case may be, and ending, as the Borrower may select
pursuant to Section 2.6, on the numerically corresponding day in the first,
second, third or sixth calendar month thereafter, provided that (i) each such
Interest Period which commences on the last Banking Day of a calendar month (or
on any day for which there is no numerically corresponding day in the
appropriate subsequent calendar month) shall end on the last Banking Day of the
appropriate calendar month, and (ii) if an Interest Period would end on a day
which is not a Banking Day, such Interest Period shall be extended to the next
Banking Day, unless such Banking Day would fall in the next calendar month in
which event such Interest Period shall end on the immediately preceding Banking
Day.
"L/C Credit" means, at any date of determination, the aggregate
undrawn balance of all outstanding Letters of Credit plus the aggregate amount
of each payment or disbursement made by the Bank under a Letter of Credit
honoring any drawing under a Letter of Credit to the extent not reimbursed by
the Borrower.
"L/C Documents" means any application and agreement or other documents
or other instruments executed or delivered by the Borrower in connection with
Letters of Credit.
"Lending Office" means, for each type of Loan, the lending office of
the Bank (or of an affiliate of the Bank) designated as such for such type of
Loan on its signature page hereof or such other office of the Bank (or of an
affiliate of the Bank) as the Bank may from time to time specify to the Borrower
as the office by which its Loans of such type are to be made and maintained.
"Letters of Credit" means one or more standby letters of credit, each
with an expiration date of up to twelve (12) months from the date of issue,
issued by the Bank for the account of the Borrower as more particularly set
forth in Section 2.1(b) hereof.
"Leverage Ratio" means, for the Borrower, as at any date, on a
consolidated basis, the ratio of (a) Debt of the Borrower and its Consolidated
Subsidiaries as at the end of the Borrower's most recently completed full fiscal
quarter to (b) EBITDA for the immediately preceding four full fiscal quarters of
the Borrower (including the fiscal quarter ending on such date if such date is
the last day of a fiscal quarter).
"Lien" means any lien (statutory or otherwise), security interest,
mortgage, deed of trust, priority, pledge, negative pledge, charge, conditional
sale, title retention agreement, financing lease or other encumbrance or similar
right of others, or any agreement to give or refrain from giving any of the
foregoing.
-8-
<PAGE>
"Loan" means any loan made by the Bank pursuant to Section 2.1.
"Material Adverse Effect" means (a) a material adverse effect on the
business, operations, management, property, condition (financial or otherwise)
or prospects of the Borrower or and its Subsidiaries, taken as a whole, (b) a
material adverse effect on the ability of the Borrower or any of its
Subsidiaries to perform or comply with any of the terms and conditions of this
Agreement, the Note or any other Facility Document, or (c) an adverse effect on
the legality, validity, binding effect, enforceability or admissibility into
evidence of this Agreement, the Note or any other Facility Document, or the
ability of the Bank to enforce any rights or remedies under or in connection
with this Agreement, the Note or any other Facility Document.
"Multiemployer Plan" means a Plan defined as such in Section 3(37) of
ERISA to which contributions have been made by the Borrower or any ERISA
Affiliate and which is covered by Title IV of ERISA.
"Net Income" of the Borrower for any period means the net income
(loss) of the Borrower and its Consolidated Subsidiaries for such period,
determined on a consolidated basis in accordance with GAAP.
"Net Worth" of the Borrower means, at any date of determination
thereof, the excess of total assets of the Borrower and its Consolidated
Subsidiaries over total liabilities of the Borrower and its Consolidated
Subsidiaries, determined on a consolidated basis in accordance with GAAP.
"Note" means a promissory note of the Borrower in the form of Exhibit
A hereto evidencing the Loans made by the Bank hereunder.
"Notice of Borrowing" shall mean the notice of borrowing required by
Section 4.2.
"PBGC" means the Pension Benefit Guaranty Corporation and any entity
succeeding to any or all of its functions under ERISA.
"Performance Level" means Performance Level I, Performance Level II,
Performance Level III or Performance Level IV, as appropriate.
"Performance Level I" means, at any Applicable Measurement Date, the
Leverage Ratio is less than 1.0 to 1.0.
-9-
<PAGE>
"Performance Level II" means, at any Applicable Measurement Date, (a)
the Performance Level does not meet the requirements of Performance Level I, and
(b) the Leverage Ratio is less than 2.0 to 1.0.
"Performance Level III" means, at any Applicable Measurement Date, (a)
the Performance Level does not meet the requirements of Performance Level I or
Performance Level II, and (b) the Leverage Ratio is less than 2.5 to 1.0.
"Performance Level IV" means, at any Applicable Measurement Date, (a)
the Performance Level does not meet the requirements of Performance Level I,
Performance Level II or Performance Level III, and (b) the Leverage Ratio is
greater than or equal to 2.5 to 1.0.
"Person" means an individual, partnership, corporation, limited
liability company, business trust, joint stock company, trust, unincorporated
association, joint venture, Governmental Authority or other entity of whatever
nature.
"Plan" means any employee benefit or other plan established or
maintained, or to which contributions have been made, by the Borrower or any
ERISA Affiliate and which is covered by Title IV of ERISA, other than a
Multiemployer Plan.
"Prime Rate" means that rate of interest from time to time announced
by the Bank at its principal office as its prime commercial lending rate.
"Principal Office" means the principal office of the Bank, presently
located at One Chase Manhattan Plaza, New York, New York 10082.
"Regulation D" means Regulation D of the Board of Governors of the
Federal Reserve System as the same may be amended or supplemented from time to
time.
"Regulation U" means Regulation U of the Board of Governors of the
Federal Reserve System as the same may be amended or supplemented from time to
time.
"Regulatory Change" means, with respect to the Bank, any change after
the date of this Agreement in United States federal, state, municipal or foreign
laws or regulations (including without limitation Regulation D) or the adoption
or making after such date of any interpretations, directives or requests
applying to a class of banks including such Bank of or under any United States,
federal, state, municipal or foreign laws or regulations (whether or not having
the force of law) by any court or Governmental Authority or monetary authority
charged with the interpretation or administration thereof.
-10-
<PAGE>
"Reserve Requirement" means, for any Interest Period for any
Eurodollar Loan, the average maximum rate at which reserves (including any
marginal, supplemental or emergency reserves) are required to be maintained
during such Interest Period under Regulation D by member banks of the Federal
Reserve System in New York City with deposits exceeding $1,000,000,000 against
"Eurocurrency liabilities" (as such term is used in Regulation D). Without
limiting the effect of the foregoing, the Reserve Requirement shall reflect any
other reserves required to be maintained by such member banks by reason of any
Regulatory Change against (i) any category of liabilities which includes
deposits by reference to which the Eurodollar Base Rate is to be determined as
provided in the definition of "Eurodollar Base Rate" in this Section 1.1 or (ii)
any category of extensions of credit or other assets which include Eurodollar
Loans.
"Subsidiary" means, with respect to any Person, any corporation or
other entity (a) of which at least a majority of the securities or other
ownership interests having ordinary voting power (absolutely or contingently)
for the election of directors or other persons performing similar functions are
at the time owned directly or indirectly by such Person or (b) with respect to
which such Person otherwise possesses Control.
"Tax-Exempt Investment Income" means non-taxable municipal earnings
and the tax exempt portion of dividends received in respect of preferred stock.
"Termination Date" means June 27, 2001; provided that if such date is
not a Banking Day, the Termination Date shall be the next succeeding Banking Day
(or, if such next succeeding Banking Day falls in the next calendar month, the
next preceding Banking Day) or (ii) the earlier date of termination in whole of
the Commitments pursuant to Section 2.7 or Section 9.2.
"Unfunded Benefit Liabilities" means, with respect to any Plan, the
amount (if any) by which the present value of all benefit liabilities (within
the meaning of Section 4001(a)(16) of ERISA) under the Plan exceeds the fair
market value of all Plan assets allocable to such benefit liabilities, as
determined on the most recent valuation date of the Plan and in accordance with
the provisions of ERISA for calculating the potential liability of the Borrower
or any ERISA Affiliate under Title IV of ERISA.
"Variable Rate" means, for any day, the higher of (a) the Federal
Funds Rate for such day plus 1/2 of 1% and (b) the Prime Rate for such day.
"Variable Rate Loan" means any Loan when and to the extent the
interest rate for such Loan is determined in relation to the Variable Rate.
-11-
<PAGE>
Section 1.2. Accounting Terms. All accounting terms not specifically
----------------
defined herein shall be construed in accordance with GAAP, and all financial
data required to be delivered hereunder shall be prepared in accordance with
GAAP.
Section 1.3. Rules of Interpretation.
------------------------
(a) A reference to any document or agreement shall include
such document or agreement as amended, modified or supplemented from time to
time in accordance with its terms and the terms of this Agreement.
(b) The singular includes the plural and the plural includes the
singular.
(c) A reference to any law includes any amendment or
modification to such law.
(d) A reference to any Person includes its permitted successors
and permitted assigns.
(e) The words "include", "includes" and "including" are not
limiting.
(f) All terms not specifically defined herein or by GAAP, which
terms are defined in the Uniform Commercial Code as in effect in New York, have
the meanings assigned to them therein.
(g) Reference to a particular "Section" refers to that section
of this Agreement unless otherwise indicated.
(h) The words "herein", "hereof", "hereunder" and words of like
import shall refer to this Agreement as a whole and not to any particular
section or subdivision of this Agreement.
ARTICLE 2. THE CREDIT.
Section 2.1. The Loans; Letters of Credit.
----------------------------
(a) Subject to the terms and conditions of this Agreement, the
Bank agrees to make loans (the "Loans") to the Borrower from time to time from
and including the date hereof to and including the Termination Date, up to but
not exceeding in the aggregate principal amount at any one time outstanding, the
amount by which the (i) the Commitment exceeds (ii) the aggregate amount of L/C
Credits. The Loans may be
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<PAGE>
outstanding as Variable Rate Loans or Eurodollar Loans (each a "type" of Loans).
Each type of Loans shall be made and maintained at the Bank's Lending Office for
such type of Loans.
The Loans shall be due and payable on the Termination Date.
(b) Subject to the terms and conditions of this Agreement,
the Bank agrees, for the account of the Borrower from time to time during the
period from the date hereof until the Termination Date, to issue Letters of
Credit, provided, however, that the aggregate amount of all L/C Credits may not
-------- -------
exceed at any time the lesser of (i) $ Ten Million Dollars ($10,000,000) or (ii)
the amount by which the Commitment exceeds the aggregate principal amount of all
outstanding Loans. All payments in respect of a Letter of Credit issued by the
Bank will be due and payable in accordance with the terms of this Agreement and
the L/C Documents relating to such issuance.
Notwithstanding anything to the contrary herein, no Letter of
Credit shall have an expiry date later than five (5) days prior to the
Termination Date.
Section 2.2. The Note. The Loans of the Bank shall be evidenced by a
--------
single promissory note in favor of the Bank in the form of Exhibit A, dated the
date of this Agreement, duly completed and executed by the Borrower.
Section 2.3. Purpose. The Borrower shall use the proceeds of the
-------
Loans for general corporate purchases, including for the purchase and renovation
of 1 Far Mill Road, Shelton, Connecticut, and for acquisitions. The Borrower
shall use the Letters of Credit in connection with general corporate purposes.
Such proceeds shall not be used for the purpose, whether immediate, incidental
or ultimate, of buying or carrying "margin stock" within the meaning of
Regulation U, except for the repurchase of the Borrower's outstanding common
stock, which shall be done in compliance with Regulation U.
Section 2.4. Borrowing Procedures. The Borrower shall give the Bank
--------------------
notice of each borrowing to be made hereunder as provided in Section 2.8. Not
later than 1:00 p.m. New York City time on the date of such borrowing, the Bank
shall, through its Lending Office and subject to the conditions of this
Agreement, make the amount of the Loan to be made by it on such day available to
the Borrower, in immediately available funds, by the Bank crediting an account
of the Borrower designated by the Borrower and maintained with the Bank at the
Lending Office. Each Letter of Credit shall be issued by the Bank upon
completion of an application and agreement substantially in the form of Exhibit
G for standby Letters of Credit, together with any additional documentation
necessary or desirable to the Bank, on the third Banking Day after the
completion and receipt by the Bank of such documentation. Each Letter of Credit
shall be in a form, and to a beneficiary, approved by the Bank in its sole
discretion.
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<PAGE>
Section 2.5. Prepayments and Conversions. The Borrower shall have
---------------------------
the right to make prepayments of principal, or to convert one type of Loans into
another type of Loans, at any time or from time to time; provided that: (a) the
Borrower shall give the Bank notice of each such prepayment or conversion as
provided in Section 2.8; and (b) if any Eurodollar Loans are prepaid or
converted other than on the last day of an Interest Period for such Loans, then
the Borrower shall compensate the Bank as provided in Section 3.4.
Section 2.6. Interest Periods; Renewals.
--------------------------
(a) In the case of each Eurodollar Loan, the Borrower shall
select an Interest Period of any duration in accordance with the definition of
Interest Period in Section 1.1, subject to the following limitations: (i) no
Interest Period may extend beyond the Termination Date; (ii) notwithstanding
clause (i) above, no Interest Period shall have a duration less than one month,
and if any such proposed Interest Period would otherwise be for a shorter
period, such Interest Period shall not be available; and (iii) no more than five
Interest Periods may be outstanding at any one time.
(b) Upon notice to the Bank as provided in Section 2.8, the
Borrower may renew any Eurodollar Loan on the last day of the Interest Period
therefor as the same type of Loans with an Interest Period of the same or
different duration in accordance with the limitations provided above. If the
Borrower shall fail to give notice to the Bank of such a renewal, such
Eurodollar Loan shall automatically become a Variable Rate Loan on the last day
of the current Interest Period.
Section 2.7. Changes of Commitment.
---------------------
(a) Optional Reductions. The Borrower shall have the right
-------------------
to reduce or terminate the amount of unused Commitment at any time or from time
to time, provided that: (a) the Borrower shall give notice of each such
reduction or termination to the Bank as provided in Section 2.8; and (b) each
partial reduction shall be in an aggregate amount that is an integral multiple
of $1,000,000 and at least equal to $5,000,000. The Commitment once reduced or
terminated may not be reinstated without the written agreement of the Bank in
its sole discretion.
(b) Additional Collateral Following Termination. At any time
-------------------------------------------
that the Commitment is terminated pursuant to Section 9.2 or otherwise, the
Borrower shall furnish the Bank for deposit in a cash collateral account
maintained at the Bank adequate cash reserves for the benefit of the Bank on the
Termination Date in the amount of any Letters of Credit then outstanding which
have a tenor which extends beyond the Termination Date, or must otherwise
provide for a financial institution acceptable to the
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<PAGE>
Bank to (x) issue a letter of credit in form and substance satisfactory to the
Bank naming the Bank as "beneficiary" therein, or, at the option of the Bank,
(y) otherwise indemnify the Bank against loss in connection with outstanding
Letters of Credit, pursuant to indemnification documentation in form and
substance satisfactory to the Bank.
Section 2.8. Certain Notices. Notices by the Borrower to the Bank of
---------------
each borrowing pursuant to Section 2.4, and each prepayment or conversion
pursuant to Section 2.5 and each renewal pursuant to Section 2.6(b), and each
reduction or termination of the Commitment pursuant to Section 2.7 shall be
irrevocable and shall be effective only if received by the Bank not later than
11:00 a.m. New York City time, and (a) in the case of borrowings and prepayments
of, conversions into and (in the case of Eurodollar Loans) renewals of (i)
Variable Rate Loans, given on the Banking Day therefor; (ii) Eurodollar Loans,
given three Banking Days prior thereto; (b) in the case of reductions or
termination of the Commitment, given three Banking Days prior thereto. Each
such notice shall specify the Loans to be borrowed, prepaid, converted or
renewed and the amount (subject to Section 2.9) and type of the Loans to be
borrowed, or converted, or prepaid or renewed (and, in the case of a Eurodollar
Loan, the Interest Period therefor) and the date of the borrowing or prepayment,
or conversion or renewal (which shall be a Banking Day). Each such notice of
reduction or termination shall specify the amount of the Commitment to be
reduced or terminated.
Section 2.9. Minimum Amounts. Except for borrowings in respect of
---------------
Variable Rate Loans which exhaust the full remaining amount of the Commitment,
and for prepayments or conversions which result in the prepayment or conversion
of all Loans of a particular type or conversions made pursuant to Section
3.1(b), each borrowing, prepayment, conversion and renewal of principal of Loans
of a particular type shall be in an amount at least equal to (a) $1,000,000 for
Variable Rate Loans, and (b) $3,000,000 and integral multiples of $1,000,000 in
excess thereof for Eurodollar Loans (borrowings, prepayments, conversions or
renewals of or into Loans of different types or, in the case of Eurodollar
Loans, having different Interest Periods at the same time hereunder to be deemed
separate borrowings, prepayments, conversions and renewals for the purposes of
the foregoing, one for each type of Interest Period).
Section 2.10. Interest.
--------
(a) Interest shall accrue on the outstanding and unpaid
principal amount of each Loan for the period from and including the date of such
Loan to but excluding the date such Loan is due at the following rates per
annum: (i) for a Variable Rate Loan, at a variable rate per annum equal to the
Variable Rate plus the Applicable Margin and (ii) for a Eurodollar Loan, at a
fixed rate equal to the Eurodollar Rate plus the Applicable Margin. If the
principal amount of any Loan and any other amount payable by the Borrower
hereunder or under the Note shall not be paid when due (at stated maturity,
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<PAGE>
by acceleration or otherwise), interest shall accrue on such amount to the
fullest extent permitted by law from and including such due date to but
excluding the date such amount is paid in full at the Default Rate. After the
occurrence of an Event of Default other than payment defaults described in the
preceding sentence, then the Bank may, by written notice to the Borrower,
increase the interest rate hereunder during the continuance of such Event of
Default to the Default Rate, effective on the date of such notice.
(b) The interest rate on each Variable Rate Loan shall change
when the Variable Rate changes and interest on each such Loan shall be
calculated on the basis of a year of 365 (or, in the case of a leap year, 366)
days for the actual number of days elapsed. Interest on each Eurodollar Loan
shall be calculated on the basis of a year of 360 days for the actual number of
days elapsed. Promptly after the determination of any interest rate provided for
herein or any change therein, the Bank shall notify the Borrower.
(c) Accrued interest shall be due and payable in arrears upon
any payment of principal or conversion and (i) for each Variable Rate Loan, on
the last day of each March, June, September and December, commencing the first
such date after such Loan; (ii) for each Eurodollar Loan, on the last day of the
Interest Period with respect thereto and, in the case of an Interest Period
greater than three months, at three-month intervals after the first day of such
Interest Period; provided that interest accruing at the Default Rate shall be
due and payable from time to time on demand of the Bank.
Section 2.11. Fees.
----
(a) Commitment Fee. The Borrower shall pay to the Bank a
--------------
commitment fee (the "Commitment Fee") for the period from and including the date
hereof to the Termination Date, payable in arrears upon any reduction or
termination of the Commitment and on the last day of each March, June, September
and December, commencing on the first such date after the Closing Date, on the
daily average unused Commitment of the Bank for the period for which payment is
made, at a rate per annum equal to the Applicable Percentage, calculated on the
basis of a year of 365 (or, in a leap year, 366) days for the actual number of
days elapsed.
(b) Letters of Credit. For each Letter of Credit, the Borrower
-----------------
shall: (i) pay to the Bank its standard charges for issuing said letter of
credit and for any draws under said letter of credit and (ii) an amount equal to
x] a percentage per annum equal to the Applicable Margin in effect from time to
time for Eurodollar Loans (based upon a year of three hundred sixty (360) days
elapsed), multiplied by (y) the maximum aggregate amount available to be drawn,
to be paid quarterly in arrears. The Borrower will further pay to the Bank, on
demand, all other charges, costs and expenses paid or incurred by the Bank in
connection with any Letter of Credit, and interest where chargeable, including
fees and
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<PAGE>
charges of counsel and costs allocated by the Bank's internal legal department
in connection with the preparation, performance or enforcement of any Letter of
Credit.
Section 2.12. Payments Generally. All payments under this Agreement
------------------
or the Note shall be made in Dollars in immediately available funds not later
than 1:00 p.m. New York City time on the relevant dates specified above (each
such payment made after such time on such due date to be deemed to have been
made on the next succeeding Banking Day) to an account designated by the Bank
and maintained at the Lending Office of the Bank. The Bank may (but shall not
be obligated to) debit the amount of any such payment which is not made by such
time to any ordinary deposit account of the Borrower with the Bank. The
Borrower shall, at the time of making each payment under this Agreement or the
Note, specify to the Bank the principal or other amount payable by the Borrower
under this Agreement or the Note to which such payment is to be applied (and in
the event that it fails to so specify, or if a Default or Event of Default has
occurred and is continuing, the Bank may apply such payment as it may elect in
its sole discretion ). If the due date of any payment under this Agreement or
the Note would otherwise fall on a day which is not a Banking Day, such date
shall be extended to the next succeeding Banking Day and interest shall be
payable for any principal so extended for the period of such extension.
ARTICLE 3. YIELD PROTECTION; ILLEGALITY; ETC.
Section 3.1. Additional Costs.
----------------
(a) The Borrower shall pay to the Bank from time to time on
demand such amounts as the Bank may determine to be necessary to compensate it
for any costs which the Bank determines are attributable to its making or
maintaining any Eurodollar Loans under this Agreement or the Note or its
obligation to make any such Loans hereunder, or any reduction in any amount
receivable by the Bank hereunder in respect of any such Loans or such obligation
(such increases in costs and reductions in amounts receivable being herein
called "Additional Costs"), resulting from any Regulatory Change which: (i)
changes the basis of taxation of any amounts payable to the Bank under this
Agreement or the Note in respect of any of such Loans (other than taxes imposed
on the overall net income of the Bank or of its Lending Office for any of such
Loans by the jurisdiction in which the principal office or such Lending Office
is located); or (ii) imposes or modifies any reserve, special deposit, deposit
insurance or assessment, minimum capital, capital ratio or similar requirements
relating to any extensions of credit or other assets of, or any deposits with or
other liabilities of, the Bank (including any of such Loans or any deposits
referred to in the definition of "Eurodollar Base Rate" in Section 1.1); or
(iii) imposes any other condition affecting this Agreement or the Note (or any
of such
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<PAGE>
extensions of credit or liabilities). The Bank will notify the Borrower of any
event occurring after the date of this Agreement which will entitle the Bank to
compensation pursuant to this Section 3.1(a) as promptly as practicable after it
obtains knowledge thereof and determines to request such compensation.
(b) Without limiting the effect of the foregoing provisions of
this Section 3.1, in the event that, by reason of any Regulatory Change, the
Bank either (i) incurs Additional Costs based on or measured by the excess above
a specified level of the amount of a category of deposits or other liabilities
of the Bank which includes deposits by reference to which the interest rate on
Eurodollar Loans is determined as provided in this Agreement or a category of
extensions of credit or other assets of the Bank which includes Eurodollar Loans
or (ii) becomes subject to restrictions on the amount of such a category of
liabilities or assets which it may hold, then, if the Bank so elects by notice
to the Borrower, the obligation of the Bank to make or renew, and to convert
Loans of any other type into, Loans of such type hereunder shall be suspended
until the date such Regulatory Change ceases to be in effect and on the last
day(s) of the then current Interest Period(s) for the outstanding Loans of such
type, the Borrower shall either prepay such Loans or such Loans shall convert
into Variable Rate Loans.
(c) Without limiting the effect of the foregoing provisions
of this Section 3.1 (but without duplication), the Borrower shall pay directly
to the Bank from time to time on request such amounts as the Bank may determine
to be necessary to compensate the Bank for any costs which it determines are
attributable to the maintenance by it or any of its affiliates pursuant to any
law or regulation of any jurisdiction or any interpretation, directive or
request (whether or not having the force of law and whether in effect on the
date of this Agreement or thereafter) of any Governmental Authority or monetary
authority of capital in respect of its Loans hereunder or its obligation to make
Loans hereunder (such compensation to include, without limitation, an amount
equal to any reduction in return on assets or equity of the Bank to a level
below that which it could have achieved but for such law, regulation,
interpretation, directive or request). The Bank will notify the Borrower if it
is entitled to compensation pursuant to this Section 3.1(c) as promptly as
practicable after it determines to request such compensation.
(d) Determinations and allocations by the Bank for purposes
of this Section 3.1 of the effect of any Regulatory Change pursuant to
subsections (a) or (b), or of the effect of capital maintained pursuant to
subsection (c), on its costs of making or maintaining Loans or its obligation to
make Loans, or on amounts receivable by, or the rate of return to, it in respect
of Loans or such obligation, and of the additional amounts required to
compensate the Bank under this Section 3.1, shall be conclusive, provided that
such determinations and allocations are made on a reasonable basis and
consistent with the Bank's policy towards loans of like type and having
substantially similar provisions as contained in this Section 3.1.
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<PAGE>
Section 3.2. Limitation on Types of Loans. Anything herein to the
----------------------------
contrary notwithstanding, if:
(a) the Bank determines (which determination shall be
conclusive) that quotations of interest rates for the relevant deposits referred
to in the definition of "Eurodollar Base Rate" in Section 1.1 are not being
provided in the relevant amounts or for the relevant maturities for purposes of
determining the rate of interest for any type of Eurodollar Loans as provided in
this Agreement; or
(b) the Bank determines (which determination shall be
conclusive) that the relevant rates of interest referred to in the definition of
"Eurodollar Base Rate" in Section 1.1 upon the basis of which the rate of
interest for Eurodollar Loans is to be determined do not adequately cover the
cost to the Bank of making or maintaining such Loans;
then the Bank shall give the Borrower prompt notice thereof, and so long as such
condition remains in effect, the Bank shall be under no obligation to make or
renew Loans of such type or to convert Loans of any other type into Loans of
such type and the Borrower shall, on the last day(s) of the then current
Interest Period(s) for the outstanding Loans of the affected type, prepay such
Loans or such Loans shall convert into Variable Rate Loans.
Section 3.3. Illegality. Notwithstanding any other provision in this
----------
Agreement, in the event that it becomes unlawful for the Bank or its Lending
Office to (a) honor its obligation to make or renew Eurodollar Loans hereunder
or convert Loans of any type into Loans of such type, or (b) maintain Eurodollar
Loans hereunder, then the Bank shall promptly notify the Borrower thereof and
the Bank's obligation to make or renew Eurodollar Loans and to convert other
types of Loans into Loans of such type hereunder shall be suspended until such
time as the Bank may again make, renew, or convert and maintain such affected
Loans and the Borrower shall, on the last day(s) of the current Interest
Period(s) for the outstanding Eurodollar Loans (or on such earlier date as the
Bank may specify to the Borrower), either prepay such Loans or convert such
Loans into Variable Rate Loans.
Section 3.4 Certain Compensation. The Borrower shall pay to the Bank
--------------------
, upon the request of the Bank, such amount or amounts as shall be sufficient
(in the reasonable opinion of the Bank) to compensate it for any loss, cost or
expense which the Bank determines is attributable to:
(a) any payment, prepayment, conversion or renewal of a
Eurodollar Loan made by the Bank on a date other than the last day of an
Interest Period for such Loan (whether by reason of acceleration or otherwise);
or
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<PAGE>
(b) any failure by the Borrower to borrow, convert into or renew
a Eurodollar Loan to be made, converted into or renewed by the Bank on the date
specified therefor in the relevant notice under Section 2.4, 2.5 or 2.6, as the
case may be.
Without limiting the foregoing, such compensation shall include an
amount equal to the excess, if any, of: (i) the amount of interest which
otherwise would have accrued on the principal amount so paid, prepaid, converted
or renewed or not borrowed, converted or renewed for the period from and
including the date of such payment, prepayment or conversion or failure to
borrow, convert or renew to but excluding the last day of the then current
Interest Period for such Loan (or, in the case of a failure to borrow, convert
or renew, to but excluding the last day of the Interest Period for such Loan
which would have commenced on the date specified therefor in the relevant
notice) at the applicable rate of interest for such Loan provided for herein;
over (ii) the amount of interest (as reasonably determined by the Bank) the Bank
would have bid in the London interbank market for Dollar deposits for amounts
comparable to such principal amount and maturities comparable to such period. A
determination of the Bank as to the amounts payable pursuant to this Section 3.4
shall be conclusive absent manifest error.
ARTICLE 4. CONDITIONS PRECEDENT.
Section 4.1. Initial Conditions Precedent. The obligation of the
----------------------------
Bank to make the Loans or to issue any Letter of Credit constituting the initial
borrowing are subject to the condition precedent that the Bank shall have
received on or before the date of such Loans or such issuance of any Letter of
Credit each of the following, in form and substance satisfactory to the Bank and
its counsel, or, with respect to non-documentary conditions precedent, that the
Bank shall have determined that such conditions shall have been satisfied on or
before the date of such Loans or such issuance of any Letter of Credit:
(a) the Note duly executed by the Borrower;
(b) the Authorization Letter duly executed by the Borrower;
(c) certified copies of requests for information identifying
all of the financing statements on file with respect to the Borrower or any
Subsidiary in all jurisdictions in which the Borrower has operations;
(d) a favorable opinion of counsel for the Borrower, dated
the Closing Date, in substantially the form of Exhibit C and as to such other
matters as the Bank may reasonably request;
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<PAGE>
(e) a certificate of the Secretary or Assistant Secretary of
the Borrower, dated the Closing Date, attesting to all corporate action taken by
the Borrower, including resolutions of its Board of Directors authorizing the
execution, delivery and performance of the Facility Documents to which it is a
party and each other document to be delivered pursuant to this Agreement and
certifying true copies of the certificate of incorporation, by-laws and other
organizational documents of the Borrower;
(f) a certificate of the Secretary or Assistant Secretary of
the Borrower, dated the Closing Date, certifying the names and true signatures
of the officers of the Borrower authorized to sign the Facility Documents to
which it is a party and the other documents to be delivered by the Borrower
under this Agreement;
(g) a certificate of good standing for the Borrower from the
Secretary of State of each jurisdiction in which the Borrower is qualified to do
business;
(h) payment by the Borrower to the Bank of all reasonable
expenses and fees incurred by the Bank;
(i) any and all licenses required by the Borrower or any of
its Subsidiaries to conduct its respective existing business; and
(j) satisfactory review of all environmental matters,
including reviews of Phase I and, if applicable, Phase II, environmental audits
with respect to the Shelton, Connecticut property to be acquired.
Section 4.2. Additional Conditions Precedent. The obligation of the
-------------------------------
Bank to make any Loans pursuant to a borrowing which increases the amount
outstanding hereunder (including the initial borrowing) or to issue any Letters
of Credit shall be subject to the further conditions precedent that on the date
of such Loans or the issuance of such Letters of Credit:
(a) the following statements shall be true:
(i) the representations and warranties contained in
Article 5 herein, and in each other Facility Document, are true and correct on
and as of the date of such Loan or such issuance of a Letter of Credit as though
made on and as of such date; and
(ii) no Default or Event of Default has occurred and
is continuing, or would result from such Loan or issuance of Letter of Credit;
and
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<PAGE>
(iii) there has been no change in the business,
management, operations, properties, prospects or condition (financial or
otherwise) of the Borrower or any of its Subsidiaries since the Closing Date
which has had, or could reasonably be expected to have, a Material Adverse
Effect;
(b) the Borrower shall have delivered to the Bank a Notice of
Borrowing in substantially the form of Exhibit D;
(c) in the case of the issuance of a Letter of Credit, as of the
date of issuance of such Letter of Credit, no order, judgment or decree of any
court, arbitrator or Governmental Authority shall purport by its terms to
restrain the Bank from issuing such Letter of Credit and no law, rule or
regulation applicable to the Bank and no request or directive (whether or not
having the force of law and whether or not the failure to comply therewith would
be unlawful) from any Governmental Authority with jurisdiction over the Bank
shall prohibit or request the Bank to refrain from the issuance of letters of
credit generally or the issuance of such Letter of Credit; and
(d) the Bank shall have received such approvals, opinions or
documents as the Bank may reasonably request.
Section 4.3. Deemed Representations. Each Notice of Borrowing
----------------------
hereunder and acceptance by the Borrower of the proceeds of such borrowing shall
constitute a representation and warranty that the statements contained in
Section 4.2(a) are true and correct both on the date of such notice and, unless
the Borrower otherwise notifies the Bank prior to such borrowing, as of the date
of such borrowing.
ARTICLE 5. REPRESENTATIONS AND WARRANTIES.
The Borrower hereby represents and warrants that:
Section 5.1. Incorporation, Good Standing and Due Qualification.
--------------------------------------------------
Each of the Borrower and its Subsidiaries is duly incorporated, validly existing
and in good standing under the laws of the jurisdiction of its incorporation,
has the corporate power and authority to own its assets and to transact the
business in which it is now engaged or proposed to be engaged, and is duly
qualified as a foreign corporation and in good standing under the laws of each
other jurisdiction in which such qualification is required, except where the
failure to so qualify would not have, and could not reasonably be expected to
have, a Material Adverse Effect.
Section 5.2. Corporate Power and Authority; No Conflicts. The
-------------------------------------------
execution, delivery and performance by the Borrower of the Facility Documents to
which
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<PAGE>
it is a party have been duly authorized by all necessary corporate action and do
not and will not: (a) require any consent or approval of its stockholders; (b)
contravene its charter or by-laws; (c) violate any provision of, or require any
filing, registration, consent or approval under, any law, rule, regulation
(including, without limitation, Regulation U), order, writ, judgment,
injunction, decree, determination or award presently in effect having
applicability to the Borrower or any of its Subsidiaries; (d) result in a breach
of or constitute a default or require any consent under any indenture or loan or
credit agreement or any other agreement, lease or instrument to which the
Borrower is a party or by which it or its properties may be bound or affected;
(e) result in, or require, the creation or imposition of any Lien, upon or with
respect to any of the properties now owned or hereafter acquired by the
Borrower; or (f) cause the Borrower (or any Subsidiary or Affiliate, as the case
may be) to be in default under any such law, rule, regulation, order, writ,
judgment, injunction, decree, determination or award or any such indenture,
agreement, lease or instrument.
Section 5.3. Legally Enforceable Agreements. Each Facility Document
------------------------------
to which the Borrower is a party is, or when delivered under this Agreement will
be, a legal, valid and binding obligation of the Borrower enforceable against
the Borrower in accordance with its terms, except to the extent that such
enforcement may be limited by applicable bankruptcy, insolvency and other
similar laws affecting creditors' rights generally and by general equity
principles.
Section 5.4. Litigation. There are no actions, suits or proceedings
----------
pending or, to the knowledge of the Borrower, threatened, against or affecting
the Borrower or any of its Subsidiaries before any Governmental Authority,
which, in any one case or in the aggregate, could reasonably be expected to have
a Material Adverse Effect.
Section 5.5. Financial Statements. The consolidated balance sheet of
--------------------
the Borrower and its Consolidated Subsidiaries as at December 31, 1995, and the
related consolidated income statement and statements of cash flows and
stockholders' equity of the Borrower and its Consolidated Subsidiaries for the
fiscal year then ended, and the accompanying notes, together with the report
thereon, of Ernst & Young, LLP, independent certified public accountants, and
the interim consolidated balance sheet of the Borrower and its Consolidated
Subsidiaries as at March 31, 1995, and the related consolidated income statement
and statements of cash flows and stockholders' equity for the three month period
then ended, copies of which have been furnished to the Bank, are complete and
correct and fairly present the financial condition of the Borrower and its
Consolidated Subsidiaries as at such dates and the results of the operations of
the Borrower and its Consolidated Subsidiaries for the periods covered by such
statements, all in accordance with GAAP consistently applied (subject to year
end adjustments in the case of the interim financial statements and notes not
typically contained in interim statements), except as noted therein. There are
no liabilities of the Borrower or any of its Consolidated
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<PAGE>
Subsidiaries, fixed or contingent, which are material but are not reflected in
the financial statements or in the notes thereto, other than liabilities arising
in the ordinary course of business since December 31, 1995. No information,
exhibit or report furnished by the Borrower to the Bank in connection with the
negotiation of this Agreement contained any material misstatement of fact or
omitted to state a material fact necessary to make the statements contained
therein, in the light of the circumstances under which they were made, not
misleading. Since December 31, 1995, there has been no change in the condition
(financial or otherwise), business, operations or prospects of the Borrower or
any of its Subsidiaries which has had, or could reasonably be expected to have,
a Material Adverse Effect.
Section 5.6. Ownership and Liens. The Borrower and its Consolidated
-------------------
Subsidiaries have title to, or valid leasehold interests in, all of their
respective properties and assets, real and personal, including the properties
and assets, and leasehold interests reflected in the financial statements
referred to in Section 5.5 (other than any properties or assets disposed of in
the ordinary course of business), and none of the properties and assets owned by
the Borrower or any of its Subsidiaries and none of its leasehold interests is
subject to any Lien, except as disclosed in such financial statements or as may
be permitted hereunder.
Section 5.7. Taxes. All tax and other information returns required to
-----
be filed by or on behalf of the Borrower and its Subsidiaries have been properly
prepared, executed and filed. All taxes, assessments, fees and other
governmental charges upon the Borrower or any of its Subsidiaries or upon any of
their respective properties, incomes, sales or franchises which are due and
payable have been paid other than those not yet delinquent and payable without
premium or penalty, and except for those being diligently contested in good
faith and by appropriate proceedings, and in each case adequate reserves and
provisions for taxes on the books of the Borrower and each of its Subsidiaries
are adequate for all open years and for its current fiscal period. The Borrower
and its Subsidiaries do not know of any proposed additional assessment or basis
for any material assessment for additional taxes (whether or not reserved
against). The federal, state and local and foreign income tax liabilities of
the Borrower have been finally determined by the Internal Revenue Service and
other relevant taxing authorities, or the time for audit has expired, for all
fiscal periods ending on or prior to December 31, 1991 and all such liabilities
(including all deficiencies assessed following audit) have been satisfied.
Neither the Borrower, nor its Subsidiaries nor any of their respective
consolidated return groups has at any time filed a consolidated tax return with
any Person other than the Borrower and its Subsidiaries, except as set forth in
Schedule 5.7. Schedule 5.7 describes all tax sharing arrangements or agreements
to which the Borrower or any of its Subsidiaries is bound.
Section 5.8. ERISA.
-----
-24-
<PAGE>
(a) Schedule 5.8 sets forth a correct and complete list of all
bonus, deferred compensation, incentive compensation, stock purchase, stock
option, employment, consulting, severance or termination pay, hospitalization or
other medical, life or other insurance, or retirement plan, program, agreement
or arrangement, and each other Plan or Multiemployer Plan with respect to the
employees of the Borrower and its ERISA Affiliates, not otherwise filed as an
exhibit to the Borrower's 1995 Form 10-K.
(b) Each Plan, and, to the best knowledge of the Borrower, each
Multiemployer Plan, is in compliance in all material respects with, and has been
administered in all material respects in compliance with, the applicable
provisions of ERISA, the Code and any other applicable Federal or state law, and
no event or condition is occurring or exists concerning which the Borrower would
be under an obligation to furnish a report to the Bank in accordance with
Section 6.8(h) hereof. As of the most recent valuation date for each Plan, each
Plan was "fully funded", which for purposes of this Section 5.8 shall mean that
the fair market value of the assets of the Plan is not less than the present
value of the accrued benefits of all participants in the Plan, computed on a
Plan termination basis. To the best knowledge of the Borrower, no Plan has
ceased being fully funded as of the date these representations are made with
respect to any Loan or issuance of any Letter of Credit under this Agreement.
Section 5.9. Subsidiaries and Ownership of Stock. Schedule 5.9 is a
-----------------------------------
complete and accurate list of the Subsidiaries of the Borrower, showing the
jurisdiction of incorporation or organization of each Subsidiary and showing the
percentage of the Borrower's ownership of the outstanding stock or other
interest of each such Subsidiary. Except as described therein, all of the
outstanding capital stock or other interest of each such Subsidiary has been
validly issued, is fully paid and nonassessable and is owned by the Borrower
free and clear of all Liens.
Section 5.10. Credit Arrangements. Schedule 5.10 is a complete and
-------------------
correct list of all credit agreements, indentures, purchase agreements,
Guarantees, Capital Leases and other investments, agreements and arrangements
presently in effect providing for or relating to extensions of credit (including
agreements and arrangements for the issuance of letters of credit or for
acceptance financing) in respect of which the Borrower or any of its
Subsidiaries is in any manner directly or contingently obligated, excluding
trade payables in the ordinary course of business; and the maximum principal or
face amounts of the credit in question, outstanding and which can be
outstanding, are correctly stated, and all Liens of any nature given or agreed
to be given as security therefor are correctly described or indicated in such
Schedule.
Section 5.11. Operation of Business. Each of the Borrower and its
---------------------
Subsidiaries possesses all licenses, permits, franchises, patents, copyrights,
trademarks and trade names, or rights thereto, to conduct its respective
business substantially as now
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<PAGE>
conducted and as presently proposed to be conducted, and neither the Borrower
nor any of its Subsidiaries is in violation of any valid rights of others with
respect to any of the foregoing, except where such violation is not reasonably
expected to have a Material Adverse Effect.
Section 5.12. Hazardous Materials. The Borrower and each of its
-------------------
Subsidiaries have obtained all permits, licenses and other authorizations which
are required under all Environmental Laws, except to the extent failure to have
any such permit, license or authorization could not reasonably be expected to
have a Material Adverse Effect. The Borrower and each of its Subsidiaries are
in compliance with the terms and conditions of all such permits, licenses and
authorizations, and are also in compliance with all other limitations,
restrictions, conditions, standards, prohibitions, requirements, obligations
schedules and timetables contained in any applicable Environmental Law or in any
regulation, code, plan, order, decree, judgment, injunction, notice or demand
letter issued, entered, promulgated or approved thereunder, except to the extent
failure to comply could not reasonably be expected to have a Material Adverse
Effect.
In addition, except as set forth in Schedule 5.12 hereto:
(a) No notice, notification, demand, request for information,
citation, summons or order has been issued, no complaint has been filed, no
penalty has been assessed and no investigation or review is pending or
threatened by any governmental or other entity with respect to any alleged
failure by the Borrower or any of its Subsidiaries to have any permit, license
or authorization required in connection with the conduct of the business of the
Borrower or any of its Subsidiaries or with respect to any generation,
treatment, storage, recycling, transportation, release or disposal, or any
release as defined in 42 U.S.C. 9601(22) ("Release"), of any substance regulated
-------
under Environmental Laws ("Hazardous Materials") generated by the Borrower or
-------------------
any of its Subsidiaries.
(b) Neither the Borrower nor any of its Subsidiaries has handled
any Hazardous Material, other than as a generator, on any property now or
previously owned or leased by the Borrower or any of its Subsidiaries to an
extent that it has, or may reasonably be expected to have, a Material Adverse
Effect.
(c) Except to the extent that it has not had, and could not
reasonably be expected to have, a Material Adverse Effect:
(i) no PCB is or has been present at any property
now or previously owned or leased by the Borrower of any of its Subsidiaries;
(ii) no asbestos is or has been present at any
property now or previously owned or leased by the Borrower of any of its
Subsidiaries;
-26-
<PAGE>
(iii) there are no underground storage tanks for
Hazardous Materials, active or abandoned, at any property now or previously
owned or leased by the Borrower of any of its Subsidiaries;
(iv) no Hazardous Materials have been Released, in a
reportable quantity, where such a quantity has been established by statute,
ordinance, rule, regulation or order, at, on or under any property now or
previously owned by the Borrower of any of its Subsidiaries.
(d) Neither the Borrower nor any of its Subsidiaries has
transported or arranged for the transportation of any Hazardous Material to any
location which is listed on the National Priorities List under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended
("CERCLA"), listed for possible inclusion on the National Priorities List by the
Environmental Protection Agency in the Comprehensive Environmental Response and
Liability Information System as provided by 40 C.F.R. 300.5 ("CERCLIS") or on
any similar state list or which is the subject of federal, state or local
enforcement actions or other investigations which may lead to claims against the
Borrower or any of its Subsidiaries for clean-up costs, remedial work, damages
to natural resources or for personal injury claims, including, but not limited
to, claims under CERCLA.
(e) No Hazardous Material generated by the Borrower or any
of its Subsidiaries has been recycled, treated, stored, disposed of or Released
by the Borrower or any of its Subsidiaries at any location other than those
listed in Schedule 5.12 hereto.
(f) No oral or written notification of a Release of a Hazardous
material has been filed by or on behalf of the Borrower or any of its
Subsidiaries and no property now or previously owned or leased by the Borrower
or any of its Subsidiaries is listed or proposed for listing on the National
Priorities List promulgated pursuant to CERCLA, on CERCLIS or on any similar
state list of sites requiring investigation or clean-up.
(g) There are no Liens arising under or pursuant to any
Environmental Laws on any of the real property or properties owned or leased by
the Borrower or any of its Subsidiaries, and no government actions have been
taken or are in process which could subject any of such properties to such Liens
and neither the Borrower nor any of its Subsidiaries would be required to place
any notice or restriction relating to the presence of Hazardous Materials at any
property owned by it in any deed to such property.
(h) There have been no environmental investigations, studies,
audits, test, reviews or other analyses conducted by or which are in the
possession of the Borrower or any of its Subsidiaries in relation to any
property or facility now or previously
-27-
<PAGE>
owned or leased by the Borrower or any of its Subsidiaries which have not been
made available to the Bank.
Section 5.13. No Default on Outstanding Judgments or Orders. Each of
---------------------------------------------
the Borrower and its Subsidiaries has satisfied all judgments applicable to it,
and neither the Borrower nor any of its Subsidiaries is in default with respect
to any judgment, writ, injunction, decree, rule or regulation of any
Governmental Authority applicable to it.
Section 5.14. No Defaults on Other Agreements. Neither the Borrower
-------------------------------
nor any of its Subsidiaries is a party to any indenture, loan or credit
agreement or any lease or other agreement or instrument or subject to any
charter or corporate restriction which could have a Material Adverse Effect.
Neither the Borrower nor any of its Subsidiaries is in default in any respect in
the performance, observance or fulfillment of any of the obligations, covenants
or conditions contained in any agreement or instrument material to its business
to which it is a party.
Section 5.15. Labor Disputes and Acts of God. Neither the business
------------------------------
nor the properties of the Borrower or of any of its Subsidiaries are affected by
any fire, explosion, accident, strike, lockout or other labor dispute, drought,
storm, hail, earthquake, embargo, act of God or public enemy or other casualty
(whether or not covered by insurance), that could reasonably be expected to have
a Material Adverse Effect.
Section 5.16. Governmental Regulation. Neither the Borrower nor any
-----------------------
of its Subsidiaries is subject to regulation under the Public Utility Holding
Company Act of 1935, the Investment Company Act of 1940, the Interstate Commerce
Act, the Federal Power Act or any statute or regulation limiting the Borrower's
ability to incur indebtedness for money borrowed as contemplated hereby.
Section 5.17. Partnerships. Except as set forth in Schedule 5.17,
------------
neither the Borrower nor any of its Subsidiaries is a partner in any
partnership.
Section 5.18. No Forfeiture. Neither the Borrower nor any of its
-------------
Subsidiaries or Affiliates is engaged in or proposes to be engaged in the
conduct of any business or activity which could result in a Forfeiture
Proceeding and no Forfeiture Proceeding against any of them is pending or
threatened.
Section 5.19. Insurance. The Borrower maintains through itself or its
---------
Subsidiaries or through financially sound and reputable insurers not related to
or affiliated with the Borrower insurance with respect to its properties and
business and against at least such liabilities, casualties and contingencies and
in at least such types and amounts as is customary in the case of corporations
engaged in the same or a similar business or having similar properties similarly
situated. It is understood that the Borrower shall be self-
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<PAGE>
insured only for casualty coverage normally covered by a builder's risk policy
or endorsement, not liability. Schedule 5.19 sets forth a complete and correct
list and brief description of all insurance currently maintained by or on
respect of the Borrower, setting forth the identity of the insurance carrier,
the type of coverage, the amount of coverage and the deductible. There are no
claims, actions, suits, proceedings against, arising under or based upon any of
such insurance policies except as set forth in Schedule 5.19. Schedule 5.19
identifies each insurance policy providing for a retrospective premium
adjustment or other change in compensation payable to the insurer on the basis
of claim or loss experience, and describes any liability the Borrower has in
respect of such matters.
Section 5.20. Licenses. Each Subsidiary of the Borrower that
--------
operates as a commercial health maintenance organization is duly licensed as
such in each jurisdiction in which such license is necessary and there exists no
proceeding or other action challenging any such license. The Borrower and each
of its Subsidiaries possess all other licenses as are necessary to conduct their
respective businesses substantially as now conducted and as presently proposed
to be conducted and there exists no proceeding or other action challenging any
such licenses.
ARTICLE 6. AFFIRMATIVE COVENANTS.
So long as the Note shall remain unpaid or the Bank shall have any
Commitment under this Agreement, the Borrower shall:
Section 6.1. Maintenance of Existence. Preserve and maintain, and
------------------------
cause each of its Subsidiaries to preserve and maintain, its corporate existence
and good standing in the jurisdiction of its incorporation, and qualify and
remain qualified, and cause each of its Subsidiaries to qualify and remain
qualified, as a foreign corporation in each jurisdiction in which such
qualification is required, except where the failure to so qualify would not
have, and could not reasonably be expected to have, a Material Adverse Effect.
Section 6.2. Conduct of Business. Continue, and cause each of its
-------------------
Subsidiaries to continue, to engage in an efficient and economical manner in a
business of the same general type as conducted by it on the date of this
Agreement.
Section 6.3. Maintenance of Properties. Maintain, keep and preserve,
-------------------------
and cause each of its Subsidiaries to maintain, keep and preserve, all of its
properties (tangible and intangible) necessary or useful in the proper conduct
of its business in good working order and condition, ordinary wear and tear
excepted.
Section 6.4. Maintenance of Records. Keep, and cause each of its
----------------------
Subsidiaries to keep, adequate records and books of account, in which complete
entries
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<PAGE>
will be made in accordance with GAAP, reflecting all financial transactions of
the Borrower and its Subsidiaries.
Section 6.5. Maintenance of Insurance. Maintain either through
------------------------
itself or its Subsidiaries or with financially sound and reputable insurers,
insurance with respect to its properties and business and against such
liabilities, casualties and contingencies and of such types and in such amounts
as is customary in the case of corporations engaged in the same or similar
businesses or having similar properties similarly situated as is satisfactory
from time to time to the Bank, which insurance shall in any event not provide
for a materially lower level of coverage than the insurance referred to in
Section 5.19 in effect on the Closing Date. Further, the Borrower shall (a)
furnish to the Bank from time to time upon request the policies under which such
insurance is issued, certificates of insurance and such other information
relating to such insurance as the Bank may request and (b) provide such other
insurance and endorsements as are required by this Agreement and the other
Facility Documents.
Section 6.6. Compliance with Laws; Payment of Taxes and Other
-------------------------------------------------
Potential Charges and Priority Claims. Comply, and cause each of its
- -------------------------------------
Subsidiaries to comply, in all respects with all applicable laws, rules,
regulations and orders, such compliance to include, without limitation, the
payment or discharge
(a) on or prior to the date on which penalties attach
thereto, all taxes, assessments and other governmental charges imposed upon it
or any of its properties;
(b) on or prior to the date when due, all lawful claims of
materialmen, mechanics, carriers, warehousemen, landlords and other like Persons
which, if unpaid, might result in the creation of a Lien upon any such property;
and
(c) on or prior to the date when due, all other lawful claims
which, if unpaid, might result in the creation of a Lien upon any such property
or which, if unpaid, might give rise to a claim entitled to priority over
general creditors of the Borrower in a case under Title 11 (Bankruptcy) of the
United States Code, as amended;
provided, that unless and until foreclosure, distraint, levy, sale or similar
proceedings shall have been commenced, the Borrower need not pay or discharge
any such tax, assessment, charge or claim so long as (x) the validity thereof is
contested in good faith and by appropriate proceedings diligently conducted, and
(y) such reserves or other appropriate provisions as may be required by GAAP
shall have been made therefor.
Section 6.7. Right of Inspection. At any reasonable time and from
-------------------
time to time, permit the Bank or any agent or representative thereof, to examine
and make
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<PAGE>
copies and abstracts from the records and books of account of, and visit the
properties of, the Borrower and any of its Subsidiaries, and to discuss the
affairs, finances and accounts of the Borrower and any such Subsidiary with any
of their respective officers and directors and the Borrower's independent
accountants, and to conduct an audit of the Borrower.
Section 6.8. Reporting Requirements. Furnish directly to the Bank:
----------------------
(a) as soon as available and in any event within 90 days after
the end of each fiscal year of the Borrower, a consolidated balance sheet of the
Borrower and its Consolidated Subsidiaries as of the end of such fiscal year and
a consolidated income statement and statements of cash flows and stockholders'
equity of the Borrower and its Consolidated Subsidiaries for such fiscal year,
all in reasonable detail and stating in comparative form the respective
consolidated figures for the corresponding date and period in the prior fiscal
year and all prepared in accordance with GAAP and accompanied by a report
thereon acceptable to the Bank by Ernst & Young, LLP or other independent
auditors of national standing selected by the Borrower;
(b) as soon as available and in any event within 45 days after
the end of each of the first three quarters of each fiscal year of the Borrower,
a consolidated balance sheet of the Borrower and its Consolidated Subsidiaries
as of the end of such quarter and a consolidated income statement and statements
of cash flows and stockholders' equity, of the Borrower and its Consolidated
Subsidiaries for the period commencing at the end of the previous fiscal year
and ending with the end of such quarter, all in reasonable detail and stating in
comparative form the respective consolidated figures for the corresponding date
and period in the previous fiscal year and all prepared in accordance with GAAP
and certified by the chief financial officer of the Borrower (subject to year-
end adjustments);
(c) simultaneously with the delivery of the financial statements
referred to in subsections (a) and (b) above, a certificate substantially in the
form of Exhibit E of the chief financial officer of the Borrower (i) certifying
that to the best of his knowledge no Default or Event of Default has occurred
and is continuing or, if a Default or Event of Default has occurred and is
continuing, a statement as to the nature thereof and the action which is
proposed to be taken with respect thereto, and (ii) with computations
demonstrating compliance with the covenants contained in Article 8;
(d) simultaneously with the delivery of the annual financial
statements referred to in Section 6.8(a), a certificate of the independent
auditors who audited such statements to the effect that, in making the
examination necessary for the audit of such statements, they have obtained no
knowledge of any condition or event which
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<PAGE>
constitutes a Default or Event of Default, or if such accountants shall have
obtained knowledge of any such condition or event, specifying in such
certificate each such condition or event of which they have knowledge and the
nature and status thereof;
(e) promptly after the commencement thereof, notice of all
actions, suits, and proceedings before any Governmental Authority, affecting the
Borrower or any of its Subsidiaries which, if determined adversely to the
Borrower or such Subsidiary, could have a Material Adverse Effect;
(f) as soon as possible and in any event within 10 days after
the occurrence of each Default or Event of Default a written notice setting
forth the details of such Default or Event of Default and the action which is
proposed to be taken by the Borrower with respect thereto;
(g) as soon as possible, and in any event within ten days after
the Borrower knows or has reason to know that any of the events or conditions
specified below with respect to any Plan or Multiemployer Plan have occurred or
exist, a statement signed by a senior financial officer of the Borrower setting
forth details respecting such event or condition and the action, if any, which
the Borrower or its ERISA Affiliate proposes to take with respect thereto (and a
copy of any report or notice required to be filed with or given to PBGC by the
Borrower or an ERISA Affiliate with respect to such event or condition):
(i) any reportable event, as defined in Section
4043(b) of ERISA, with respect to a Plan, as to which PBGC has not by regulation
waived the requirement of Section 4043(a) of ERISA that it be notified within 30
days of the occurrence of such event (provided that a failure to meet the
minimum funding standard of Section 412 of the Code or Section 302 of ERISA
including, without limitation, the failure to make on or before its due date a
required installment under Section 412(m) of the Code or Section 302(e) of
ERISA, shall be a reportable event regardless of the issuance of any waivers in
accordance with Section 412(d) of the Code) and any request for a waiver under
Section 412(d) of the Code for any Plan;
(ii) the distribution under Section 4041 of ERISA of
a notice of intent to terminate any Plan or any action taken by the Borrower or
an ERISA Affiliate to terminate any Plan;
(iii) the institution by PBGC of proceedings under
Section 4042 of ERISA for the termination of, or the appointment of a trustee to
administer, any Plan, or the receipt by the Borrower or any ERISA Affiliate of a
notice from a Multiemployer Plan that such action has been taken by PBGC with
respect to such Multiemployer Plan;
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<PAGE>
(iv) the complete or partial withdrawal from a
Multiemployer Plan by the Borrower or any ERISA Affiliate that results in
liability under Section 4201 or 4204 of ERISA (including the obligation to
satisfy secondary liability as a result of a purchaser default) or the receipt
of the Borrower or any ERISA Affiliate of notice from a Multiemployer Plan that
it is in reorganization or insolvency pursuant to Section 4241 or 4245 of ERISA
or that it intends to terminate or has terminated under Section 4041A of ERISA;
(v) the institution of a proceeding by a fiduciary
or any Multiemployer Plan against the Borrower or any ERISA Affiliate to enforce
Section 515 of ERISA, which proceeding is not dismissed within 30 days;
(vi) the adoption of an amendment to any Plan that
pursuant to Section 401(a)(29) of the Code or Section 307 of ERISA would result
in the loss of tax-exempt status of the trust of which such Plan is a part if
the Borrower or an ERISA Affiliate fails to timely provide security to the Plan
in accordance with the provisions of said Sections;
(vii) any event or circumstance exists which may
reasonably be expected to constitute grounds for the Borrower or any ERISA
Affiliate to incur liability under Title IV of ERISA or under Sections
412(c)(11) or 412(n) of the Code with respect to any Plan; and
(viii) the Unfunded Benefit Liabilities of one or more
Plans increase after the date of this Agreement in an amount which is material
in relation to the financial condition of the Borrower and its Subsidiaries, on
a consolidated basis; provided, however, that such increase shall not be deemed
to be material so long as it does not exceed the Unfunded Benefit Liabilities of
one or more Plans equal or exceed $2,500,000 in the aggregate;
(h) promptly after the request of the Bank, copies of each
annual report filed pursuant to Section 104 of ERISA with respect to each Plan
(including, to the extent required by Section 104 of ERISA, the related
financial and actuarial statements and opinions and other supporting statements,
certifications, schedules and information referred to in Section 103) and each
annual report filed with respect to each Plan under Section 4065 of ERISA;
provided, however, that in the case of a Multiemployer Plan, such annual reports
shall be furnished only if they are available to the Borrower or an ERISA
Affiliate;
(i) promptly after the furnishing thereof, copies of any
statement or report furnished to any other party pursuant to the terms of any
indenture, loan or credit
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<PAGE>
or similar agreement and not otherwise required to be furnished to the Bank
pursuant to any other clause of this Section 6.8;
(j) as soon as available and in any event within three (3)
Banking Days after filing the same with the Securities and Exchange Commission,
but in no event later than 50 days after the end of each fiscal quarter of the
Borrower, a true and complete copy of the Borrower's Form 10-Q;
(k) as soon as available and in any event within three (3)
Banking Days after filing the same with the Securities and Exchange Commission,
but in no event later than 110 days after the end of each fiscal year of the
Borrower, a true and complete copy of the Borrower's Form 10-K;
(i) promptly after the sending or filing thereof, copies of all
proxy statements, financial statements and reports which the Borrower or any of
its Subsidiaries sends to its stockholders, and copies of all regular, periodic
and special reports, and all registration statements, which the Borrower or any
such Subsidiary files with the Securities and Exchange Commission or any
Governmental Authority which may be substituted therefor, or with any national
securities exchange;
(m) promptly after the commencement thereof or promptly after
the Borrower knows of the commencement or threat thereof, notice of any
Forfeiture Proceeding; and
(n) such other information respecting the condition or
operations, financial or otherwise, of the Borrower or any of its Subsidiaries
as the Bank may from time to time reasonably request.
Section 6.9. Licensing. Cause each Subsidiary which is licensed as a
---------
health maintenance organization to maintain its license as a health maintenance
organization in each jurisdiction in which it is licensed as of the Closing Date
and each other jurisdiction in which it becomes, or is required under applicable
law to become, licensed after the Closing Date, and maintain, and cause its
Subsidiaries to maintain, all other licenses as are necessary to conduct their
respective businesses substantially as now conducted and as proposed to be
conducted.
ARTICLE 7. NEGATIVE COVENANTS.
So long as the Note shall remain unpaid or the Bank shall have any
Commitment under this Agreement, the Borrower shall not:
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<PAGE>
Section 7.1. Debt. Create, incur, assume or suffer to exist, or
----
permit any of its Subsidiaries to create, incur, assume or suffer to exist any
Debt, except:
(a) Debt of the Borrower under this Agreement or the Note;
(b) Debt described in Schedule 5.10, including renewals,
extensions or refinancings thereof, provided that the principal amount thereof
does not increase;
(c) Debt of the Borrower subordinated on terms satisfactory
to the Bank to the Borrower's obligations under this Agreement and the Note;
(d) Debt of the Borrower to any such Subsidiary or of any
Subsidiary to the Borrower or another such Subsidiary;
(e) Debt in respect of standby letters of credit issued for
the account of the Borrower or any such Subsidiary in an aggregate face amount
outstanding at any time of up to $10,000,000;
(f) Debt of any Person which becomes a Subsidiary of the
Borrower in connection with any Acceptable Acquisition permitted by Section 7.9
or Debt which is acquired and assumed by the Borrower or any of its Subsidiaries
in connection with an Acceptable Acquisition permitted by Section 7.9; provided
--------
that such Debt was in existence and outstanding prior to and on the date that
such Person became a Subsidiary or such Acceptable Acquisition was consummated,
and such Debt was not created in contemplation of such Person becoming a
Subsidiary or such Acceptable Acquisition being consummated, and any renewals,
extensions or refinancings thereof, provided that the principal amount thereof
does not increase; and provided, further, however, that the Debt permitted by
-------- ------- -------
this subsection (f) shall not (i) cause the Borrower to exceed the limitations
contained in subsections (e) of this Section 7.1 or (ii) cause the Borrower to
exceed the limitation contained in subsection (h) of this Section 7.1 after
recalculating such amounts on a consolidated basis with the acquired Debt and
the acquired business or Person;
(g) Debt of the Borrower or any such Subsidiary secured by
purchase money Liens permitted by Section 7.2;
(h) Other Debt of the Borrower not to exceed (i) $10,000,000,
less (ii) Debt permitted by subsection (f) of this Section 7.1;
Section 7.2. Liens. Create, incur, assume or suffer to exist, or
-----
permit any of its Subsidiaries to create, incur, assume or suffer to exist, any
Lien, upon or with respect to any of its properties, now owned or hereafter
acquired, except:
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<PAGE>
(a) Liens in favor of the Bank securing the Loans or L/C Credits
hereunder;
(b) Liens for taxes or assessments or other government charges
or levies if not yet due and payable or if due and payable if they are being
contested in good faith by appropriate proceedings and for which appropriate
reserves are maintained;
(c) Liens imposed by law, such as mechanic's, materialmen's,
landlord's, warehousemen's and carrier's Liens, and other similar Liens,
securing obligations incurred in the ordinary course of business which are not
past due for more than 30 days, or which are being contested in good faith by
appropriate proceedings and for which appropriate reserves have been
established;
(d) Liens under workmen's compensation, unemployment insurance,
social security or similar legislation (other than ERISA);
(e) Liens, deposits or pledges to secure the performance of
bids, tenders, contracts (other than contracts for the payment of money), leases
(permitted under the terms of this Agreement), public or statutory obligations,
surety, stay, appeal, indemnity, performance or other similar bonds, or other
similar obligations arising in the ordinary course of business;
(f) judgment and other similar Liens arising in connection with
court proceedings; provided that the execution or other enforcement of such
Liens is effectively stayed and the claims secured thereby are being actively
contested in good faith and by appropriate proceedings;
(g) easements, rights-of-way, restrictions and other similar
encumbrances which, in the aggregate, do not materially interfere with the
occupation, use and enjoyment by the Borrower or any such Subsidiary of the
property or assets encumbered thereby in the normal course of its business or
materially impair the value of the property subject thereto;
(h) Liens securing obligations of such a Subsidiary to the
Borrower or another such Subsidiary;
(i) Liens securing Debt existing on the Closing Date as set
forth in Schedule 7.2;
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<PAGE>
(j) Liens securing Debt permitted under Section 7.1(f), provided
--------
that such Liens only affect property acquired in connection with the Acceptable
Acquisition pursuant to which such Debt was incurred;
(k) purchase money Liens on any property heretofore or hereafter
acquired or the assumption of any Lien on property existing at the time of such
acquisition, or a Lien incurred in connection with any conditional sale or other
title retention agreement or a Capital Lease; provided that:
(i) any property subject to any of the foregoing is
acquired by the Borrower or any such Subsidiary in the ordinary course of its
business and the Lien on any such property is created contemporaneously with
such acquisition;
(ii) the obligation secured by any Lien so created,
assumed or existing shall not exceed 100% of the lesser of cost or fair market
value as of the time of acquisition of the property covered thereby to the
Borrower or such Subsidiary acquiring the same;
(iii) each such Lien shall attach only to the property
so acquired and fixed improvements thereon;
(iv) the Debt secured by all such Liens shall not
exceed $10,000,000 at any time outstanding in the aggregate;
(v) the obligations secured by such Lien are
permitted by the provisions of Section 7.1.
Section 7.3. Investments. Make, or permit any of its Subsidiaries to
-----------
make, any loan or advance to any Person or purchase or otherwise acquire, or
permit any such Subsidiary to purchase or otherwise acquire, any capital stock,
assets, obligations or other securities of, make any capital contribution to, or
otherwise invest in, or acquire any interest in, any Person, except: (a)
Acceptable Investments; (b) for stock, obligations or securities received in
settlement of debts (created in the ordinary course of business) owing to the
Borrower or any such Subsidiary; (c) for other investments (including minority
interests in joint ventures, partnerships and other Persons) not exceeding
$20,000,000 in the aggregate for all such investments; (d) any Acceptable
Acquisition permitted by Section 7.9.
Section 7.4. Sale of Assets. Sell, lease, assign, transfer or
--------------
otherwise dispose of, or permit any of its Subsidiaries to sell, lease, assign,
transfer or otherwise dispose of, any of its now owned or hereafter acquired
assets (including, without
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<PAGE>
limitation, shares of stock and indebtedness of such Subsidiaries, receivables
and leasehold interests); except: (a) for inventory disposed of in the ordinary
course of business; (b) the sale or other disposition of assets no longer used
or useful in the conduct of its business; (c) that any such Subsidiary may sell,
lease, assign, or otherwise transfer its assets to the Borrower or another
Subsidiary; and (d) the sale or other disposition of assets in any fiscal year
with an aggregate value not exceeding ten percent (10%) of the consolidated
assets of the Borrower and its Subsidiaries for the immediately preceding fiscal
year.
Section 7.5. Stock of Subsidiaries, Etc. Sell or otherwise dispose
--------------------------
of any shares of capital stock of any of its Subsidiaries, except in connection
with a transaction permitted under Section 7.8 or shares of PHS of New Jersey,
Inc. previously committed to Mastercare, Inc., or permit any such Subsidiary to
issue any additional shares of its capital stock, except directors' qualifying
shares.
Section 7.6. Transactions with Affiliates. Enter into any
----------------------------
transaction, including, without limitation, the purchase, sale or exchange of
property or the rendering of any service, with any Affiliate or permit any of
its Subsidiaries to enter into any transaction, including, without limitation,
the purchase, sale or exchange of property or the rendering of any service, with
any Affiliate, except in the ordinary course of and pursuant to the reasonable
requirements of the Borrower's or such Subsidiary's business and upon fair and
reasonable terms no less favorable to the Borrower or such Subsidiary than would
it obtain in a comparable arm's length transaction with a Person not an
Affiliate.
Section 7.7. Mergers, Etc. Merge or consolidate with, or sell,
------------
assign, lease or otherwise dispose of (whether in one transaction or in a series
of transactions) all or substantially all of its assets (whether now owned or
hereafter acquired) to, any Person, or acquire all or substantially all of the
assets or the business of any Person (or enter into any agreement to do any of
the foregoing), or permit any of its Subsidiaries to do so except that: (a) any
such Subsidiary may merge into or transfer assets to the Borrower; (b) any
Subsidiary may merge into or consolidate with or transfer assets to any other
Subsidiary; (c) the Borrower may effect any Acceptable Acquisition permitted by
Section 7.9.
Section 7.8. Acquisitions. Make any Acquisition other than an
------------
Acceptable Acquisition.
ARTICLE 8. FINANCIAL COVENANTS.
So long as the Note shall remain unpaid or the Bank shall have any
Commitment under this Agreement:
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<PAGE>
Section 8.1. Minimum Net Worth. The Borrower shall maintain at all
-----------------
times, as measured at the end of each fiscal quarter of the Borrower, a Net
Worth of not less than (a) $87,105,000, plus (b) the greater of zero (0) or 50%
of cumulative Net Income after December 31, 1995.
Section 8.2. Leverage Ratio. The Borrower shall maintain at all
--------------
times, as measured at the end of each fiscal quarter of the Borrower, a Leverage
Ratio of not greater than 3.0 to 1.0.
Section 8.3. Interest Coverage Ratio. The Borrower shall maintain an
-----------------------
Interest Coverage Ratio, as measured at the end of each fiscal quarter of the
Borrower, of not less than 3.0 to 1.0 at any time.
ARTICLE 9. EVENTS OF DEFAULT.
Section 9.1. Events of Default. Any of the following events shall be
-----------------
an "Event of Default":
(a) the Borrower shall: (i) fail to pay the principal of the
Note as and when due and payable; or (ii) fail to pay interest on the Note or
any fee or other amount due hereunder as and when due and payable and such
failure shall continue for three (3) days;
(b) any representation or warranty made or deemed made by the
Borrower in this Agreement or in any other Facility Document or which is
contained in any certificate, document, opinion, financial or other statement
furnished at any time under or in connection with any Facility Document shall
prove to have been incorrect in any material respect on or as of the date made
or deemed made;
(c) the Borrower shall: (i) fail to perform or observe any term,
covenant or agreement contained in Section 2.3, Section 6.8 or Articles 7 or 8;
or (ii) fail to perform or observe any term, covenant or agreement on its part
to be performed or observed (other than the obligations specifically referred to
in clause (i) or elsewhere in this Section 9.1) in any Facility Document and
such failure shall continue for 30 consecutive days after written notice of such
Default has been given by the Bank or the Borrower to the other party;
(d) the Borrower or any of its Subsidiaries shall: (i) fail
to pay any Debt in an amount in excess of $2,500,000 in the aggregate, including
but not limited to Debt for borrowed money (other than the payment obligations
described in (a) above), of the Borrower or such Subsidiary, as the case may be,
or any interest or premium
-39-
<PAGE>
thereon, when due (whether by scheduled maturity, required prepayment,
acceleration, demand or otherwise); or (ii) fail to perform or observe any term,
covenant or condition on its part to be performed or observed under any
agreement or instrument relating to any such Debt, when required to be performed
or observed, if the effect of such failure to perform or observe is to
accelerate, or to permit the acceleration of, after the giving of notice or
passage of time, or both, the maturity of such Debt, whether or not such failure
to perform or observe shall be waived by the holder of such Debt; or any such
Debt shall be declared to be due and payable, or required to be prepaid (other
than by a regularly scheduled required prepayment), prior to the stated maturity
thereof;
(e) the Borrower or any of its Subsidiaries: (i) shall generally
not, or be unable to, or shall admit in writing its inability to, pay its debts
as such debts become due; or (ii) shall make an assignment for the benefit of
creditors, petition or apply to any tribunal for the appointment of a custodian,
receiver or trustee for it or a substantial part of its assets; or (iii) shall
commence any proceeding under any bankruptcy, reorganization, arrangement,
readjustment of debt, dissolution or liquidation law or statute of any
jurisdiction, whether now or hereafter in effect; or (iv) shall have had any
such petition or application filed or any such proceeding shall have been
commenced, against it, in which an adjudication or appointment is made or order
for relief is entered, or which petition, application or proceeding remains
undismissed for a period of 30 days or more; or shall be the subject of any
proceeding under which its assets having a value of greater than $500,000 may be
subject to seizure, forfeiture or divestiture (other than a proceeding in
respect of a Lien permitted under Section 7.2 (b)); or (v) by any act or
omission shall indicate its consent to, approval of or acquiescence in any such
petition, application or proceeding or order for relief or the appointment of a
custodian, receiver or trustee for all or any substantial part of its property;
or (vi) shall suffer any such custodianship, receivership or trusteeship to
continue undischarged for a period of 30 days or more;
(f) one or more judgments, decrees or orders for the payment of
money in excess of $2,500,000 in the aggregate shall be rendered against the
Borrower or any of its Subsidiaries and such judgments, decrees or orders shall
continue unsatisfied and in effect for a period of 30 consecutive days without
being vacated, discharged, satisfied or stayed or bonded pending appeal;
(g) any event or condition shall occur or exist with respect to
any Plan or Multiemployer Plan concerning which the Borrower is under an
obligation to furnish a report to the Bank in accordance with Section 6.8(h)
hereof and as a result of such event or condition, together with all other such
events or conditions, the Borrower or any ERISA Affiliate has incurred or in the
opinion of the Bank is reasonably likely to incur a liability to a Plan, a
Multiemployer Plan, the PBGC, or a Section 4042 Trustee (or any combination of
the foregoing) which is material in relation to the financial position of the
Borrower and its Subsidiaries, on a consolidated basis; provided, however, that
any such
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<PAGE>
amount shall not be deemed to be material so long as all such amounts do not
exceed in the aggregate $2,500,000;
(h) the Unfunded Benefit Liabilities of one or more Plans have
increased after the date of this Agreement in an amount which is material (as
specified in Section 9.1(g) hereof);
(i) there shall occur any non-compliance with any laws or
regulations pertaining to health maintenance organizations, where such non-
compliance has had, or could reasonably be expected to have, a Material Adverse
Effect; or
(j) this Agreement or any other Facility Document or term or
provision hereof or thereof shall cease to be in full force and effect (except
in accordance with the express terms of such document), or the Borrower shall,
or purport to, terminate (except in accordance with the terms of such document),
repudiate, declare voidable or void or otherwise contest, this Agreement or any
Facility Document or any other term hereof or thereof or any obligation or
liability of the Borrower hereunder or thereunder.
Section 9.2. Remedies. If any Event of Default shall occur and be
--------
continuing, the Bank shall, by notice to the Borrower, (a) declare the
Commitment to be terminated, whereupon the same shall forthwith terminate, and
(b) declare the outstanding principal of the Note, all interest thereon and all
other amounts payable under this Agreement and the Note to be forthwith due and
payable, whereupon the Note, all such interest and all such amounts shall become
and be forthwith due and payable, without presentment, demand, protest or
further notice of any kind, all of which are hereby expressly waived by the
Borrower, and all outstanding Letters of Credit will be immediately
collateralized in accordance with Section 2.7 (b); provided that, in the case of
an Event of Default referred to in Section 9.1(e) above, the Commitment shall be
immediately terminated, and the Note, all interest thereon and all other amounts
payable under this Agreement shall be immediately due and payable without
notice, presentment, demand, protest or other formalities of any kind, all of
which are hereby expressly waived by the Borrower.
ARTICLE 10. MISCELLANEOUS.
Section 10.1. Amendments and Waivers. Except as otherwise expressly
----------------------
provided in this Agreement, any provision of this Agreement may be amended or
modified only by an instrument in writing signed by the Borrower and the Bank,
and any provision of this Agreement may be waived by the Borrower and the Bank.
No failure on the part of the Bank to exercise, and no delay in exercising, any
right hereunder shall operate as a waiver thereof or preclude any other or
further exercise thereof or the exercise of any other
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<PAGE>
right. The remedies herein provided are cumulative and not exclusive of any
remedies provided by law.
Section 10.2. Usury. Anything herein to the contrary notwithstanding,
-----
the obligations of the Borrower under this Agreement and the Note shall be
subject to the limitation that payments of interest shall not be required to the
extent that receipt thereof would be contrary to provisions of law applicable to
the Bank limiting rates of interest which may be charged or collected by the
Bank.
Section 10.3. Expenses; Indemnification. The Borrower shall reimburse
-------------------------
the Bank on demand for all reasonable costs, expenses, and charges (including,
without limitation, reasonable fees and charges of external legal counsel for
the Bank and costs allocated by its internal legal department) incurred by the
Bank in connection with the preparation, performance, or enforcement (whether
through negotiations, legal proceedings or otherwise) of this Agreement or the
Note. The Borrower agrees to indemnify the Bank and its directors, officers,
employees and agents from, and hold each of them harmless against, any and all
losses, liabilities, claims, damages or expenses incurred by any of them arising
out of or by reason of any investigation or litigation or other proceedings
(including any threatened investigation or litigation or other proceedings)
relating to any actual or proposed use by the Borrower or any Subsidiary of the
proceeds of the Loans, including without limitation, the reasonable fees and
disbursements of counsel incurred in connection with any such investigation or
litigation or other proceedings (but excluding any such losses, liabilities,
claims, damages or expenses incurred by reason of the gross negligence or
willful misconduct of the Person to be indemnified. In addition to amounts
payable as elsewhere provided in this Agreement, the Borrower hereby agree to
protect, indemnify, pay and save the Bank harmless from and against any and all
liabilities, claims, losses, damages, costs and expenses which the Bank may
incur or be subject to as a consequence, direct or indirect, of (A) the issuance
of any Letter of Credit other than as a result of its gross negligence or
willful misconduct as determined by a final judgment of a court of competent
jurisdiction or (B) the failure of the Bank to honor a drawing under such Letter
of Credit as a result of any act or omission, whether rightful or wrongful, of
any present or future de jure or de facto Governmental Authority. As between the
------- --------
Borrower and the Bank, the Borrower assumes all risks of the acts and omissions
of, or misuse of such Letter of Credit by, the beneficiary of such Letter of
Credit. In furtherance and not in limitation of the foregoing, subject to the
provisions of the Letter of Credit application and agreements, the Bank shall
not (except in the case of gross negligence of the Bank as determined by a final
judgment of a court of competent jurisdiction) be responsible: (A) for the form,
validity, sufficiency, accuracy, genuineness or legal effect of any document
submitted to any party in connection with any party in connection with the
application for and issuance of the Letters of Credit, even if it should prove
to be in any or all respects invalid, insufficient, inaccurate, fraudulent or
forged; (B) for the validity or sufficiency of any instrument transferring or
assigning or purporting to transfer or assign a Letter of
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<PAGE>
Credit or the rights or benefits thereunder or proceeds thereof, in whole or in
part; (C) for failure of the beneficiary of a Letter of Credit to comply duly
with conditions required in order to draw upon such Letter of Credit (other than
conditions expressly stated in such Letter of Credit); (D) for errors,
omissions, interruptions or delays in transmission or delivery of any message by
mail, cable, telegraph, telex, or other similar form of teletransmission or
otherwise, whether or not they be in cipher; (E) for errors in interpretation of
technical terms; (F) for any loss or delay in the transmission or otherwise of
any document required in order to make a drawing under any Letter of Credit or
in the proceeds thereof; (G) for the misapplication by the beneficiary of any
Letter of Credit; and (H) for any consequence arising from any cause beyond the
control of the Bank, including, without limitation, any act by a Governmental
Authority. None of the above shall affect, impair, or prevent the vesting of any
of the Bank's rights or powers under this Agreement.
Section 10.4. Survival. The obligations of the Borrower under
--------
Sections 3.1, 3.4 and 10.3 shall survive the repayment of the Loans, the
satisfaction of reimbursement obligations under any L/C Documents and the
termination of the Commitment.
Section 10.5. Assignment; Participations.
--------------------------
(a) This Agreement shall be binding upon, and shall inure to the
benefit of, the Borrower and the Bank and their respective successors and
assigns, except that the Borrower may not assign or transfer its rights or
obligations hereunder. The Bank may assign, or sell participations in, all or
any part of any Loan to another bank or other entity, in which event (i) in the
case of an assignment, upon notice thereof by the Bank to the Borrower , the
assignee shall have, to the extent of such assignment (unless otherwise provided
therein), the same rights, benefits and obligations as it would have if it were
the Bank hereunder; and (ii) in the case of a participation, the participant
shall have no rights under the Facility Documents and all amounts payable by the
Borrower under Article 3 shall be determined as if the Bank had not sold such
participation. The agreement executed by the Bank in favor of the participant
shall not give the participant the right to require the Bank to take or omit to
take any action hereunder except action directly relating to (i) the extension
of a payment date with respect to any portion of the principal of or interest on
any amount outstanding hereunder allocated to such participant, (ii) the
reduction of the principal amount outstanding hereunder or (iii) the reduction
of the rate of interest payable on such amount or any amount of fees payable
hereunder to a rate or amount, as the case may be, below that which the
participant is entitled to receive under its agreement with the Bank. The Bank
may furnish any information concerning the Borrower in the possession of such
Bank from time to time to assignees and participants (including prospective
assignees and participants); provided that the Bank shall require any such
prospective assignee or such participant (prospective or otherwise) to agree in
writing to
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<PAGE>
maintain the confidentiality of such information by execution of an Agreement
substantially in the form of Exhibit F.
(b) In addition to the assignments and participations permitted
under paragraph (a) above, the Bank may assign and pledge all or any portion of
its Loans and Note to (i) any affiliate of the Bank or (ii) any Federal Reserve
Bank as collateral security pursuant to Regulation A of the Board of Governors
of the Federal Reserve System and any Operating Circular issued by such Federal
Reserve Bank. No such assignment shall release the Bank from its obligations
hereunder.
Section 10.6. Notices. Unless the party to be notified otherwise
-------
notifies the other party in writing as provided in this Section, and except as
otherwise provided in this Agreement, notices shall be delivered in person or
sent by overnight courier, facsimile, ordinary mail, cable or telex addressed to
such party at its "Address for Notices" on the signature page of this Agreement.
Notices shall be effective: (a) on the day on which delivered to such party in
person, (b) on the first Banking Day after the day on which sent to such party
by overnight courier, (c) if given by mail, 48 hours after deposit in the mails
with first-class postage prepaid, addressed as aforesaid, and (d) if given by
facsimile, cable or telex, when the facsimile, cable or telex is transmitted to
the facsimile, cable or telex number as aforesaid; provided that notices to the
Bank shall be effective upon receipt.
Section 10.7. Setoff. The Borrower agrees that, in addition to (and
------
without limitation of) any right of setoff, banker's lien or counterclaim the
Bank may otherwise have, the Bank shall be entitled, at its option, to offset
balances (general or special, time or demand, provisional or final) held by it
for the account of the Borrower at the Bank's offices, in Dollars or in any
other currency, against any amount payable by the Borrower to the Bank under
this Agreement or the Note which is not paid when due (regardless of whether
such balances are then due to the Borrower), in which case it shall promptly
notify the Borrower; provided that the Bank's failure to give such notice shall
not affect the validity thereof. Payments by the Borrower hereunder shall be
made without setoff or counterclaim.
SECTION 10.8. JURISDICTION; IMMUNITIES.
---------------------------------------
(A) THE BORROWER HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION
----------------------------------------------------------------
OF ANY NEW YORK STATE OR UNITED STATES FEDERAL COURT SITTING IN NEW YORK COUNTY
- -------------------------------------------------------------------------------
OVER ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR
- -----------------------------------------------------------------------------
THE NOTE, AND THE BORROWER HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT
- -------------------------------------------------------------------------------
OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN SUCH NEW YORK STATE
- -------------------------------------------------------------------------------
OR FEDERAL COURT. THE BORROWER IRREVOCABLY CONSENTS TO THE SERVICE OF ANY AND
- -----------------------------------------------------------------------------
ALL
- ---
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<PAGE>
PROCESS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES OF SUCH
- -------------------------------------------------------------------------
PROCESS TO THE BORROWER AT ITS ADDRESS SPECIFIED IN SECTION 10.6. THE BORROWER
- ------------------------------------------------------------------------------
AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE
- ----------------------------------------------------------------------
CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR
- --------------------------------------------------------------------------------
IN ANY OTHER MANNER PROVIDED BY LAW. THE BORROWER FURTHER WAIVES ANY OBJECTION
- ------------------------------------------------------------------------------
TO VENUE IN SUCH STATE AND ANY OBJECTION TO AN ACTION OR PROCEEDING IN SUCH
- ---------------------------------------------------------------------------
STATE ON THE BASIS OF FORUM NON CONVENIENS. THE BORROWER FURTHER AGREES THAT ANY
- --------------------------------------------------------------------------------
ACTION OR PROCEEDING BROUGHT AGAINST THE BANK SHALL BE BROUGHT ONLY IN NEW YORK
- -------------------------------------------------------------------------------
STATE OR UNITED STATES FEDERAL COURT SITTING IN NEW YORK COUNTY. THE BORROWER
- ----------------------------------------------------------------------------
WAIVES ANY RIGHT IT MAY HAVE TO JURY TRIAL.
- ------------------------------------------
(b) Nothing in this Section 10.8 shall affect the right of the
Bank to serve legal process in any other manner permitted by law or affect the
right of the Bank to bring any action or proceeding against the Borrower or its
property in the courts of any other jurisdictions.
(c) To the extent that the Borrower has or hereafter may acquire
any immunity from jurisdiction of any court or from any legal process (whether
from service or notice, attachment prior to judgment, attachment in aid of
execution, execution or otherwise) with respect to itself or its property, the
Borrower hereby irrevocably waives such immunity to the fullest extent permitted
by law in respect of its obligations under this Agreement and the Note.
Section 10.9. Table of Contents; Headings. Any table of contents and
---------------------------
the headings and captions hereunder are for convenience only and shall not
affect the interpretation or construction of this Agreement.
Section 10.10.Severability. The provisions of this Agreement are
------------
intended to be severable. If for any reason any provision of this Agreement
shall be held invalid or unenforceable in whole or in part in any jurisdiction,
such provision shall, as to such jurisdiction, be ineffective to the extent of
such invalidity or unenforceability without in any manner affecting the validity
or enforceability thereof in any other jurisdiction or the remaining provisions
hereof in any jurisdiction.
Section 10.11.Counterparts. This Agreement may be executed in any
------------
number of counterparts, all of which taken together shall constitute one and the
same instrument, and any party hereto may execute this Agreement by signing any
such counterpart.
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<PAGE>
Section 10.12.Integration. The Facility Documents set forth the
-----------
entire agreement among the parties hereto relating to the transactions
contemplated thereby and supersede any prior oral or written statements or
agreements with respect to such transactions.
SECTION 10.13. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY,
---------------------------------------------------------------------
AND INTERPRETED AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW
- ----------------------------------------------------------------------------
YORK.
- ----
Section 10.14.Confidentiality. The Bank agrees (on behalf of itself
---------------
and each of its affiliates, directors, officers, employees and representatives)
to use reasonable precautions to keep confidential, in accordance with safe and
sound banking practices, any non-public information supplied to it by the
Borrower pursuant to this Agreement which is identified by the Borrower as being
confidential at the time the same is delivered to the Bank, provided that
nothing herein shall limit the disclosure of any such information (i) to the
extent required by statute, rule, regulation or judicial process, (ii) to
counsel for the Bank , (iii) to bank examiners, auditors or accountants, (iv) in
connection with any litigation to which the Bank is a party or (v) to any
assignee or participant (or prospective assignee or participant) so long as such
assignee or participant (or prospective assignee or participant) first executes
and delivers to the Bank a Confidentiality Agreement in substantially the form
of Exhibit F hereto; and provided finally that in no event shall the Bank be
obligated or required to return any materials furnished by the Borrower.
Section 10.15.Treatment of Certain Information. The Borrower (a)
--------------------------------
acknowledges that services may be offered or provided to it (in connection with
this Agreement or otherwise) by the Bank or by one or more of its subsidiaries
or affiliates and (b) acknowledges that information delivered to the Bank by the
Borrower may be provided to each such subsidiary and affiliate.
Section 10.16.Changes in Accounting Principles.
--------------------------------
(a) If any changes in accounting principles from those used in
the preparation of the financial statements referred to in Section 5.5 are
hereafter occasioned by the promulgation of rules, regulations, pronouncements,
or opinions of, or required by, the Financial Accounting Standards Review Board
of the American Institute of Certified Public Accountants (or successors thereto
or agencies with similar functions), or there shall occur any change in the
Borrower's or any Subsidiary's fiscal or tax years and, as a result of any such
changes, there shall result a change in the method of calculating any of the
financial covenants, negative covenants, standards, or other terms or conditions
found in this Agreement or any other Facility Document, or
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<PAGE>
(b) If the Borrower, for reasonable business purposes, shall
desire to change such accounting principles or the application thereof (which
change shall be consistent with accounting principles then in effect pursuant to
rules, regulations, pronouncements, or opinions or the Financial Accounting
Standards Review Board of the American Institute of Certified Public
Accountants) and such desired change would result in a change in the method of
calculating any of the financial covenants, negative covenants or other terms
and conditions found in this Agreement or any other Facility Document,
then the parties hereto agree to enter into negotiations in order to amend such
provisions and the definition of GAAP set forth in Section 1.1 so as to reflect
equitably such changes with the desired result that the criteria for evaluating
the financial condition and performance of the Borrower and its Subsidiaries
shall be the same after such changes as if such changes had not been made.
Section 10.17.Independence of Covenants. All covenants hereunder
-------------------------
shall be given independent effect so that if a particular action or condition is
not permitted by any of such covenants, the fact that it would be permitted by
an exception to, or be otherwise within the limitations of, another covenant
shall not avoid the occurrence of a Default or Event of Default if such action
is taken or condition exists.
Section 10.18.Time of the Essence. Time and punctuality shall be of
-------------------
the essence with respect to this instrument, but no delay or failure of the Bank
to enforce any of the provisions herein contained and no conduct or statement of
the Bank shall waive or affect any of the Bank's rights hereunder.
SECTION 10.19.COMMERCIAL WAIVER. THE BORROWER ACKNOWLEDGES THAT THE
-----------------
LOANS EVIDENCED BY THE NOTE ARE FOR COMMERCIAL PURPOSES AND WAIVES ANY RIGHT TO
NOTICE AND HEARING UNDER SECTIONS 52-278a THROUGH 52-278n OF THE CONNECTICUT
GENERAL STATUTES AS NOW OR HEREAFTER AMENDED AND AUTHORIZES THE ATTORNEY OF THE
BANK, OR ANY SUCCESSOR THERETO, TO ISSUE A WRIT OF PREJUDGMENT REMEDY WITHOUT
COURT ORDER. FURTHER, THE BORROWER HEREBY WAIVES, TO THE EXTENT PERMITTED BY
LAW, THE BENEFITS OF ALL VALUATION, APPRAISEMENTS, HOMESTEAD, EXEMPTION, STAY,
REDEMPTION AND MORATORIUM LAWS NOW IN FORCE OR WHICH MAY HEREAFTER BECOME LAWS.
THE BORROWER ACKNOWLEDGES THAT IT MAKES THESE WAIVERS AND THE WAIVERS CONTAINED
IN SECTION 10.8 KNOWINGLY AND VOLUNTARILY AND ONLY AFTER EXTENSIVE CONSIDERATION
OF THE RAMIFICATIONS OF THESE WAIVERS WITH ITS ATTORNEYS.
-47-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the day and year first above written.
PHYSICIANS HEALTH SERVICES, INC.
By _______________________________
Name: James L. Elrod Jr.
Title: Executive Vice President
Address for Notices:
120 Hawley Lane
Trumbull, CT 06611-5343
Attention: Chief Financial Officer
Facsimile No.:(203) 381-6683
THE CHASE MANHATTAN BANK, N.A.
By _______________________________
A. Neil Sweeny
Vice President
Lending Office and Address for Notices:
999 Broad Street, 2nd Floor
Bridgeport, Connecticut 06604
Facsimile No.: (203) 382-6573
-48-
<PAGE>
EXHIBIT A
PROMISSORY NOTE
$30,000,000
June[___], 1996
PHYSICIANS HEALTH SERVICES, INC. (the "Borrower"), a corporation
organized under the laws of the State of Delaware, for value received, hereby
promises to pay to the order of THE CHASE MANHATTAN BANK, N.A. (the "Bank") at
the principal office of the Bank at One Chase Manhattan Plaza, New York, New
York 10081, for the account of the appropriate Lending Office of the Bank, the
principal sum of THIRTY MILLION DOLLARS ($30,000,000) or, if less, the amount
loaned by the Bank to the Borrower pursuant to the Credit Agreement referred to
below, in lawful money of the United States of America and in immediately
available funds, on the date(s) and in the manner provided in said Credit
Agreement. The Borrower also promises to pay interest on the unpaid principal
balance hereof, for the period such balance is outstanding, at said principal
office for the account of said Lending Office, in like money, at the rates of
interest as provided in the Credit Agreement described below, on the date(s) and
in the manner provided in said Credit Agreement.
The date and amount of each type of Loan made by the Bank to the
Borrower under the Credit Agreement referred below, and each payment of
principal thereof, shall be recorded by the Bank on its books and, prior to any
transfer of this Note (or, at the discretion of the Bank, at any other time),
endorsed by the Bank on the schedule attached hereto or any continuation
thereof.
This is the Note referred to in, and is entitled to the benefits of,
that certain Credit Agreement (as amended from time to time the "Credit
Agreement") dated as of even date hereof between the Borrower and the Bank and
evidences the Loans made by the Bank thereunder. All terms not defined herein
shall have the meanings given to them in the Credit Agreement.
The Credit Agreement provides for the acceleration of the maturity of
principal upon the occurrence of certain Events of Default and for prepayments
on the terms and conditions specified therein.
The Borrower waives presentment, notice of dishonor, protest and any
other notice or formality with respect to this Note.
<PAGE>
This Note shall be governed by, and interpreted and construed in
accordance with, the laws of the State of New York.
PHYSICIANS HEALTH SERVICES, INC.
By______________________________
James L. Elrod Jr.
Executive Vice President
-2-
<PAGE>
<TABLE>
<CAPTION>
AMOUNT OF TYPE OF AMOUNT OF BALANCE NOTATION
DATE LOAN LOAN PAYMENT OUTSTANDING BY
<S> <C> <C> <C> <C> <C>
</TABLE>
-3-
<PAGE>
EXHIBIT B
June [___], 1996
The Chase Manhattan Bank, N.A.
999 Broad Street
Bridgeport, CT 06604
Attn: A. Neil Sweeny
Re: Credit Agreement dated as of June [___], 1996 (the "Credit Agreement")
between Physicians Health Services, Inc. and The Chase Manhattan Bank, N.A.
Ladies and Gentlemen:
In connection with the captioned Credit Agreement, we hereby designate
any one of the following persons to give to you instructions, including notices
required pursuant to the Agreement, orally or by telephone or teleprocess:
NAME (Typewritten)
------------------
_________________________
_________________________
_________________________
_________________________
_________________________
Instructions may be honored on the oral, telephonic or teleprocess
instructions of anyone purporting to be any one of the above designated persons
even if the instructions are for the benefit of the person delivering them. We
will furnish you with confirmation of each such instruction either by telex
(whether tested or untested) or in writing signed by any person designated above
(including any facsimile which appears to bear the signature of any person
designated above) on the same day that the instruction is provided to you but
your responsibility with respect to any instruction shall not be affected by
your failure to receive such confirmation or by its contents.
You shall be fully protected in, and shall incur no liability to us
for, acting upon any instructions which you in good faith believe to have been
given by any person designated above, and in no event shall you be liable for
special, consequential or punitive damages. In addition, we agree to hold you
and your agents harmless from any and all liability, loss and expense arising
directly or indirectly out of instructions that we provide to you in connection
with the Credit Agreement except for liability, loss or expense occasioned by
the gross negligence or willful misconduct of you or your agents.
<PAGE>
Upon notice to us, you may, at your option, refuse to execute any
instruction, or part thereof, without incurring any responsibility for any loss,
liability or expense arising out of such refusal if you in good faith believe
that the person delivering the instruction is not one of the persons designated
above or if the instruction is not accompanied by an authentication method that
we have agreed to in writing.
We will promptly notify you in writing of any change in the persons
designated above and, until you have actually received such written notice and
have had a reasonable opportunity to act upon it, you are authorized to act upon
instructions, even though the person delivering them may no longer be
authorized.
Very truly yours,
PHYSICIANS HEALTH SERVICES, INC.
By_________________________
Name:
Title:
-2-
<PAGE>
EXHIBIT C
---------
(Letterhead of counsel to the Borrower)
[Closing Date]
The Chase Manhattan Bank, N.A.
One Chase Manhattan Plaza
New York, New York 10081
Ladies and Gentlemen:
We have acted as counsel to Physicians Health Services, Inc. (the
"Borrower") in connection with the execution and delivery of that certain Credit
Agreement (the "Credit Agreement") dated as of June [___], 1996, between the
Borrower and The Chase Manhattan Bank, N.A. (the "Bank"), and the other Facility
Documents executed in connection therewith. Except as otherwise defined herein,
all terms used herein and defined in the Credit Agreement or any agreement
delivered thereunder shall have the meanings assigned to them therein.
In connection with this opinion, we have examined executed copies of
the Facility Documents and such other documents, records, agreements and
certificates as we have deemed appropriate. We have also reviewed such matters
of law as we have considered relevant for the purpose of this opinion.
In stating our opinion, we have assumed the legal capacity of all
natural persons, the genuineness of all signatures of parties other than the
Borrower on original or certified copies, the authority of all persons signing
any document on behalf of parties thereto other than the Borrower, the
authenticity of documents submitted to us as originals and the conformity to
authentic originals of all copies submitted to us as certified or conformed
copies or photocopies.
We have also assumed, for the purposes of the opinions expressed
herein, that the parties to the Credit Agreement and the other Facility
Documents, other than the Borrower, have the corporate power and authority to
enter into and perform each of those documents and that each of those documents
has been duly authorized, executed and delivered by each such other party.
<PAGE>
Based upon the foregoing, and subject to the limitations set forth
herein, we are of the opinion that:
1. The Borrower and each of its Subsidiaries is a corporation
duly incorporated, validly existing and in good standing under the laws of the
jurisdiction of its incorporation, has the power and authority to own its assets
and to transact the business in which it is now engaged or proposed to be
engaged, and is duly qualified as a foreign corporation and in good standing
under the laws of each other jurisdiction in which such qualification is
required.
2. The execution, delivery and performance by the Borrower of
the Credit Agreement and the other Facility Documents is within the power of the
Borrower, have been duly authorized by all necessary action, and do not: (a)
require any consent or approval of the stockholders of the Borrower; (b)
contravene the charter or by-laws of the Borrower; (c) violate any provision of,
or require any filing, registration, consent or approval under, any law, rule,
regulation (including, without limitation, Regulation U), order, writ, judgment,
injunction, decree, determination or award presently in effect having
applicability to the Borrower; (d) result in a breach of or constitute a default
or require any consent under any indenture or loan or credit agreement or any
other agreement, lease or instrument to which the Borrower is a party or by
which the properties of the Borrower may be bound or affected; (e) result in, or
require, the creation or imposition of any Lien (other than in favor of the
Administrative Agent on behalf of the Banks), upon or with respect to any of the
properties now owned or hereafter acquired by the Borrower; (f) cause the
Borrower to be in default under or contravene any such law, rule, regulation,
order, writ, judgment, injunction, decree, determination or award or any such
indenture, agreement, lease, instrument or other agreements or instruments to
which the Borrower is a party or by which its properties may be bound or
affected.
3. The Credit Agreement and each other Facility Document to
which the Borrower is a party is a legal, valid and binding obligation of the
Borrower, enforceable against the Borrower in accordance with its terms, except
to the extent that such enforcement may be limited by applicable bankruptcy,
insolvency and other similar laws affecting creditors' rights generally. The
Credit Agreement and each other Facility Document has been duly executed and
delivered by the Borrower.
4. To the best of our knowledge (after due inquiry), there are
no pending or threatened actions, suits or proceedings against or affecting the
Borrower or any of its Subsidiaries before any court, governmental agency or
arbitrator, which, in any one case or in the aggregate, could reasonably be
expected to have a Material Adverse Effect.
5. Neither the execution of the Credit Agreement, the making of
any loans thereunder, nor the use made or proposed to be made of the proceeds of
any
-2-
<PAGE>
loan thereunder constitutes or will constitute a violation of Regulation G,
Regulation T, Regulation U or Regulation X promulgated by the Board of Governors
of the Federal Reserve System.
6. The Borrower is not entitled to claim for itself or any of
its assets immunity from suit, execution, attachment or other legal process;
provided, however, that this opinion is subject to (a) applicable bankruptcy,
- -------- -------
insolvency, fraudulent conveyance, reorganization, moratorium, or other similar
laws now or hereafter in effect relating to creditors' rights and remedies
generally and (b) the effect of consideration of overriding principles of public
policy.
7. The provisions of the Credit Agreement (without regard to the
provisions thereof limiting the payment of interest or any sums thereunder to
the highest rate permitted by applicable law) do not violate any applicable law
of the State of New York relating to usury.
8. To the best of our knowledge (after due inquiry), the
Borrower is not in violation of any laws, ordinances, decrees, orders,
governmental rules or regulations to which it is subject, nor has it failed to
obtain any licenses, permits, franchises or other governmental authorizations
necessary to the ownership of its properties or assets or to the conduct of its
business, which violation or failure to obtain could reasonably be expected to
have a Material Adverse Effect.
9. Neither the Borrower nor any of its Subsidiaries is: (a) an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended; (b) a "holding company" or an "affiliate" of a "holding company,"
or a "subsidiary company" of a "holding company," or a "public utility" within
the meaning of the Public Utility Holding Company Act of 1935, as amended; or
(c) subject to regulation under the Interstate Commerce Act, as amended, or the
Federal Power Act, as amended.
We are members of the Bar of the State of New York and we express no
opinion as to the laws of any jurisdiction other than those of the United States
of America, the State of New York and the General Corporation Law of the State
of Delaware (the "Jurisdictions"). To the extent that any opinion set forth
herein relates to or is impacted by the law of any jurisdiction other than the
Jurisdictions, we have (with your permission) assumed that the laws of such
other jurisdiction are identical in all material respects to the laws of the
State of New York. By expressing an opinion upon matters governed by laws
other than the laws of the State of New York, we do not thereby assume any
greater standard of liability hereunder than would be applicable if such opinion
was based exclusively on New York laws.
-3-
<PAGE>
This opinion letter has been required of us in connection with your
entering into the Credit Agreement with the Borrower. We acknowledge that this
opinion is requested directly by the Bank, that the Borrower has caused this
opinion to be rendered directly to the Bank and that the Bank is relying on the
conclusions rendered in this opinion. This opinion is intended for the
exclusive benefit of the Bank, and the benefit of its counsel, and no other
person shall be entitled to rely hereon.
Very truly yours,
-4-
<PAGE>
EXHIBIT D
---------
NOTICE OF BORROWING
-------------------
______________, 19__
The Chase Manhattan Bank, N.A.
999 Broad Street
Bridgeport, CT 06604
ATTN: A. Neil Sweeny
Ladies and Gentlemen:
The undersigned, a duly authorized officer of Physician Health
Services, Inc. refers to the Credit Agreement dated as of June [__], 1996 (the
"Credit Agreement," the terms defined therein being used herein as therein
defined), between Physician Health Services, Inc. and The Chase Manhattan Bank,
N.A., and hereby gives you notice pursuant to Section 4.2 of the Credit
Agreement that the undersigned hereby requests a Loan, and in that connection
sets forth below the information relating to such Loan (the "Proposed
Borrowing") as required by the Credit Agreement:
(i) The Banking Day of the Proposed Borrowing is
_____________, 19__.
(ii) The aggregate amount of the Proposed Borrowing
is US $___________________.
(iii) The interest rate for the Proposed Borrowing is
(check one):
____ Variable Rate
____ Eurodollar Rate
In accordance with Section 4.2 of the Credit Agreement, the
undersigned hereby certifies that all representations and warranties of the
Borrower contained in each Facility Document, including Article 5 of the Credit
Agreement, are true and correct on the
<PAGE>
date hereof, and unless we otherwise notify you in writing, you may rely on the
fact that such statements are true and correct on the day of the Proposed
Borrowing before and after giving effect to such Proposed Borrowing and the
application of the proceeds thereof, as though made on and as of such date. The
undersigned also certifies that there has been no change in the business,
management, operations, properties, prospects or condition (financial or
otherwise) of the Borrower or any of its Subsidiaries since the Closing Date
which has had, or could reasonably be expected to have, a Material Adverse
Effect.
Very truly yours,
PHYSICIANS HEALTH SERVICES, INC.
By _____________________________
Name:
Title:
-2-
<PAGE>
EXHIBIT E
---------
[Borrowers Letterhead]
Date:
To: The Chase Manhattan Bank, N.A.
Pursuant to the terms and conditions of the Credit Agreement, dated as
of June [___], 1996, Physicians Health Services, Inc. and The Chase Manhattan
Bank, N.A. (the "Credit Agreement") please be advised that:
1. The financial statements for the period ending
___________________ as required by Section 6.8 of the Credit Agreement are
enclosed.
2. [To the best of the undersigned officer's knowledge, no event has
occurred and is continuing which constitutes a Default or an Event of
Default.]/[An event which constitutes a Default or an Event of Default has
occurred and is continuing, and:
(a) The nature of the event is as follows:
(b) The action which is proposed to be taken with respect
thereto is as follows:]
3. The undersigned certifies that as of [date of end of quarter or
year], the following information is true:
<TABLE>
<CAPTION>
Section Permitted/Required Actual
- ------- ------------------ ------
<S> <C> <C> <C>
8.1 Minimum Net Worth $87,105,000
8.2 Leverage Ratio 3.0 to 1.0
8.3 Interest Coverage Ratio 3.0 to 1.0
</TABLE>
[show computations]
Very truly yours,
<PAGE>
EXHIBIT F
---------
CONFIDENTIALITY AGREEMENT
[Date]
[Insert Name and
Address of Prospective
Participant or Assignee]
Re: Credit Agreement dated as of June [__], 1996 between Physicians
Health Services, Inc. and The Chase Manhattan Bank, N.A..
Dear _______________:
As the Bank, party to the above-referenced Credit Agreement (the
"Credit Agreement"), we have agreed with Physicians Health Services, Inc. (the
- -----------------
"Borrower"), pursuant to Section 10.14 of the Credit Agreement to use reasonable
precautions to keep confidential, except as otherwise provided therein, all non-
public information identified by the Borrower as being confidential at the time
the same is delivered to us pursuant to the Credit Agreement.
As provided in said Section 10.14, we are permitted to provide you, as
a prospective [holder of a participation in the Loans (as defined in the Credit
Agreement)] [assignee Bank], with certain of such non-public information subject
to the execution and delivery by you, prior to receiving such non-public
information, of a Confidentiality Agreement in this form. Such information will
not be made available to you until your execution and return to us of this
Confidentiality Agreement.
Accordingly, in consideration of the foregoing, you agree (on behalf
of yourself and each of your affiliates, directors, officers, employees and
representatives) that (A) such information will not be used by you except in
connection with the proposed [participation] [assignment] mentioned above and
(B) you shall use reasonable precautions, in accordance with your customary
procedures for handling confidential information and in accordance with safe and
sound banking practices, to keep such information confidential, provided that
nothing herein shall limit the disclosure of any such information (i) to the
extent required by statute, rule, regulation or judicial process, (ii) to your
counsel or to counsel for the Bank, (iii) to bank examiners, auditors or
accountants, (iv) in connection with any litigation to which you or the Bank is
a party; and provided finally that in no
<PAGE>
event shall you be obligated to return any materials furnished to you pursuant
to this Confidentiality Agreement.
Would you please indicate your agreement to the foregoing by signing
at the place provided below the enclosed copy of this Confidentiality Agreement.
Very truly yours,
The Chase Manhattan Bank, N.A.
By:________________________________
The foregoing is agreed to
as of the date of this letter.
[Insert name of prospective
participant or assignee]
By:________________________________
-2-
<PAGE>
SCHEDULE 5.7
Taxes
None
<PAGE>
SCHEDULE 5.8
Employment Matters
None
<PAGE>
SCHEDULE 5.9
Subsidiaries of Borrower
<TABLE>
<CAPTION>
NAME AND ADDRESS INCORPORATION PERCENTAGE OF OWNERSHIP
<S> <C> <C>
Physicians Health Services CT 100
of Connecticut, Inc.
Physicians Health Services NY 100
of New York, Inc.
Physicians Health Services NJ 80
of New Jersey, Inc.
Physicians Health DEL 100
Insurance Services, Inc.
Physicians Health Services Bermuda 100
(Bermuda), Ltd.
PHS Investments, Inc. DEL 100
PHS Insurance of CT 100
Connecticut, Inc.
Physicians Health Services NY 100
Insurance of New York,
Inc.
PHS Real Estate, Inc. DEL 100
PHS Real Estate II, Inc. DEL 100*
</TABLE>
*100% owned by PHS Real Estate, Inc.
<PAGE>
SCHEDULE 5.10
Credit Arrangements
None
<PAGE>
SCHEDULE 5.12
Hazardous Materials
None
<PAGE>
SCHEDULE 5.17
Partnerships
None
<PAGE>
SCHEDULE 5.19
Insurance
See Attached List
<PAGE>
SCHEDULE 7.2
Liens
None
<PAGE>
EXHIBIT 10.(b)
REINSURANCE AGREEMENT
between
PHYSICIANS HEALTH SERVICES (BERMUDA) LTD.
Hamilton, Bermuda
and
THE GUARDIAN LIFE INSURANCE COMPANY OF AMERICA
New York, New York
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I DEFINITIONS................................................. 1
ARTICLE II REINSURANCE COVERAGE........................................ 5
2.1 Coverage........................................................ 5
2.2 Plan of Reinsurance............................................. 5
2.3 Conditions...................................................... 5
2.4 Exclusions...................................................... 6
ARTICLE III GENERAL PROVISIONS.......................................... 6
3.1 Contract Administration......................................... 6
3.2 Non-Solicitation................................................ 6
3.3 Inspection...................................................... 6
3.4 Misunderstandings and Oversights................................ 7
3.5 Reinstatements.................................................. 7
3.6 Contract Changes or Reserve Changes............................. 7
3.7 Compliance with Applicable Laws and Regulations................. 8
3.8 Amendment and/or Termination Upon Failure to Comply............. 8
3.9 Notification of Disapproval or Change in Law.................... 9
3.10 Setoff.......................................................... 9
3.11 Limitations on Liability........................................ 10
3.12 Exclusivity..................................................... 10
3.13 Press Releases.................................................. 11
3.14 Restrictions on the Reinsurer and the Company
Relating to Other Agreements................................... 11
3.15 Investigations.................................................. 11
3.16 Change In Control............................................... 11
3.17 Reinsurance or Sale of Health Insurance Contracts............... 12
3.18 Commission Scale and Commission Scale Changes................... 12
3.19 Statement of Actuarial Opinion.................................. 13
ARTICLE IV PREMIUMS AND RESERVES....................................... 13
4.1 Premiums........................................................ 13
4.2 Reinsurer's Capital and Surplus................................. 13
4.3 Reserves........................................................ 13
ARTICLE V EXPENSE ALLOWANCE........................................... 14
5.1 Administrative Expenses......................................... 14
5.2 Payment......................................................... 14
</TABLE>
-i-
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE VI CLAIMS...................................................... 14
6.1 Payment of Claims............................................... 14
6.2 Notice of Claim................................................. 14
6.3 Determination of Claims by Company.............................. 14
ARTICLE VII ACCOUNTING AND REPORTING.................................... 15
7.1 Reinsurance Accounting.......................................... 15
7.2 Quarterly Accounting Reports.................................... 15
7.3 Settlements..................................................... 16
7.4 Reconciliation.................................................. 16
7.5 Annual Accounting Reports....................................... 16
7.6 Best Efforts to Supply Actual Data.............................. 16
7.7 Interest on Delayed Payments.................................... 17
ARTICLE VIII DURATION AND TERMINATION.................................... 17
8.1 Duration........................................................ 17
8.2 Commencement of Liability....................................... 17
8.3 Termination of Liability........................................ 17
8.4 Termination of Agreement........................................ 17
8.5 Automatic Termination........................................... 18
8.6 Termination Due to Insufficient Premium......................... 18
8.7 Termination Subsequent to a Change In Control................... 18
8.8 Termination for Cause........................................... 19
8.9 Termination of Agreement Upon the Occurrence of Certain
Events......................................................... 20
8.10 Termination for Material Change
in PHS Network................................................. 20
ARTICLE IX PAYMENTS UPON TERMINATION OF AGREEMENT...................... 21
9.1 Payments on Termination......................................... 21
9.2 Supplemental Accounting......................................... 22
ARTICLE X CALCULATION OF PROFIT AND LOSS.............................. 22
10.1 Determination and Allocation of Profit or Loss.................. 22
10.2 Investment Income............................................... 22
ARTICLE XI CONDITIONS PRECEDENT........................................ 23
11.1 Condition Precedent............................................. 23
11.2 Extension of Time............................................... 23
11.3 Cooperation of Parties.......................................... 23
11.4 Guarantee of Reinsurer.......................................... 23
ARTICLE XII INSOLVENCY OF THE COMPANY................................... 24
</TABLE>
-ii-
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
12.1 Payments by the Reinsurer....................................... 24
12.2 Claims.......................................................... 24
12.3 Executory Contract.............................................. 25
ARTICLE XIII ARBITRATION................................................. 25
13.1 Appointment of Arbitrators...................................... 25
13.2 Decision of Arbitrators; Expenses............................... 26
13.3 Applicable Law; Survival........................................ 26
13.4 Other Actions................................................... 26
ARTICLE XIV REPRESENTATIONS AND WARRANTIES.............................. 27
14.1 Representations and Warranties of the Company................... 27
14.2 Representations and Warranties of the Reinsurer................. 27
ARTICLE XV CONFIDENTIALITY............................................. 28
15.1 Obligations of the Parties...................................... 28
15.2 Survival of Article XV.......................................... 29
ARTICLE XVI MISCELLANEOUS PROVISIONS.................................... 29
16.1 Notices......................................................... 29
16.2 Successors and Assigns.......................................... 29
16.3 Counterparts.................................................... 30
16.4 Currency........................................................ 30
16.5 Amendment....................................................... 30
16.6 Entire Agreement; Headings...................................... 30
16.7 Binding Effect.................................................. 31
16.8 Governing Law................................................... 31
16.9 Severability.................................................... 31
16.10 Waivers and Remedies............................................ 31
ARTICLE XVII EXECUTION................................................... 32
</TABLE>
-iii-
<PAGE>
SCHEDULES
---------
<TABLE>
<S> <C>
SCHEDULE A CONTRACTS AND RISKS REINSURED................................A-1
SCHEDULE B FEES AND COMMISSIONS.........................................B-1
SCHEDULE C QUARTERLY PROFIT/LOSS........................................C-1
SCHEDULE D ANNUAL REPORTS...............................................D-1
SCHEDULE E INTEREST RATES...............................................E-1
SCHEDULE F QUARTERLY FUNDS RECONCILIATION...............................F-1
</TABLE>
-iv-
<PAGE>
REINSURANCE AGREEMENT
---------------------
This Reinsurance Agreement (this "Agreement") is made and entered into
as of this 1st day of May, 1996 between PHYSICIANS HEALTH SERVICES (BERMUDA)
LTD., a stock insurance company organized under the laws of Bermuda (the
"Reinsurer") and THE GUARDIAN LIFE INSURANCE COMPANY OF AMERICA, of New York,
New York, a mutual life insurance company organized under the laws of the State
of New York (the "Company").
The Company and the Reinsurer mutually agree to enter into a
reinsurance agreement (the "Agreement") on the terms and conditions stated
herein. This Agreement is a reinsurance agreement solely between the Company and
the Reinsurer, and the performance of the obligations of each party under this
Agreement shall be rendered solely to the other party. In no instance, except as
set forth in Article XII, shall anyone other than the Company or the Reinsurer
have any rights under this Agreement, and the Company shall be and remain solely
liable to any insured, contractholder, physician or other provider or
beneficiary under any contract reinsured hereunder.
ARTICLE I
DEFINITIONS
-----------
As used in this Agreement, the following terms shall have the
following meanings (definitions are applicable to both the singular and the
plural forms of each term defined in this Article):
"Accounting Period" means the Fiscal Quarter, except that the first
-----------------
Accounting Period shall be the period commencing with the Effective Date and
ending with the last day of
<PAGE>
the then current Fiscal Quarter, and the last Accounting Period shall be the
period commencing with the first day of the last Fiscal Quarter preceding the
Terminal Accounting Date and ending on the Terminal Accounting Date.
"Administrative Expense" means an expense which will be reimbursable
----------------------
each Accounting Period and is intended to compensate the Company or the
Reinsurer for a reasonable estimate of the actual cost of performing
administrative services in connection with the Health Insurance Contracts, as
set forth in the Marketing and Administrative Services Agreement, without
provision for profit.
"Affiliate" means with respect to a specified person, a person that
---------
directly, or indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with, the person specified.
"Annual Accounting Report" means the report required to be prepared in
------------------------
accordance with Section 7.5 and providing the data as shown on Schedule D.
"Change In Control" means the acquisition, in a single transaction
-----------------
or in a series of related transactions, by a person, an entity, or a group of
persons or entities acting in concert of: (i) twenty-five percent (25%) or more
(a) of the voting common stock of the Reinsurer or PHS (excluding any
acquisition of stock by a party currently owning twenty-five (25%) or more of
such common stock), or (b)of the aggregate value of the business of the
Reinsurer or PHS; or (ii) twenty-five percent (25%) or more of any ownership
interest in the Company.
"Commissions" means commissions and other incentives or bonuses
-----------
applicable to the marketing of the Health Insurance Contracts.
2
<PAGE>
"Contractholder" means an employer who or which executes an
--------------
enrollment agreement with respect to any Plan subject to this Agreement.
"Direct Paid Claims" means amounts paid to health care providers for
------------------
medical claims and/or to subscribers for services covered by Health Insurance
Contracts.
"Direct Paid Premium" means premiums received.
-------------------
"Earned Premium" shall consist of the item shown on Schedule C, line
--------------
I.A.6.
"Effective Date" shall have the meaning set forth in Section 2.1.
--------------
"Fiscal Quarter" means each of the four consecutive three-month
--------------
periods in a fiscal year commencing on January 1 of each year and ending on
December 31 of that calendar year.
"Health Insurance Contracts" means only those health insurance
--------------------------
contracts issued by the Company in the Service Area that are marketed (i) as
part of a "multi-choice" arrangement, together with HMO Plans (as defined in the
Marketing and Services Agreement) issued by PHS New Jersey; or (ii) on a "stand
alone" basis, if sold by the sales force of PHS New Jersey. The term Health
Insurance Contract includes "preferred provider organization" contracts using
PHCS' network of providers when sold as part of a multi-choice arrangement with
HMO Plans or when sold by the marketing force of PHS New Jersey.
"Insurance Taxes" means all insurance taxes, licenses and fees
---------------
directly imposed with respect to premiums on the Health Insurance Contracts
reinsured hereunder and shall be given the same meaning as Insurance Taxes,
Licenses and Fees, Excluding Federal Income Taxes in the Summary of Operations
Schedule in the NAIC Life, Accident and Health Convention Blank which is taken
from the Taxes, Licenses and Fees Exhibit, or similar entries
3
<PAGE>
on financial statements filed by the Company. Such term shall not include any
franchise or other federal, state or local tax measured by net income.
"Marketing and Services Agreement" shall have the meaning set forth
--------------------------------
in Section 3.1.
"PHCS" shall mean Private Health Care Systems Incorporated, a
----
corporation with its corporate offices in Waltham, Massachusetts that develops
medical provider networks and provides utilization review services. "
"PHS" shall mean Physicians Health Services, Inc., a Delaware
---
corporation with administrative offices in Trumbull, Connecticut, which is the
ultimate parent corporation of the Reinsurer.
"PHS New Jersey" shall mean Physicians Health Services of New Jersey,
--------------
Inc., a corporation organized as a health maintenance organization in the State
of New Jersey.
"Profit or Loss" shall have the meaning set forth in Article X.
--------------
"Quarterly Accounting Report" means the report required to be
---------------------------
prepared in accordance with Section 7.2 and providing the data as shown on
Schedule C.
"Quarterly Settlement" means the net amount due and payable to
--------------------
either party with respect to any Accounting Period as set forth in Section 7.3.
"Quota Share" means the percentage of Profit or Loss assumed by the
-----------
Reinsurer with respect to Health Insurance Contracts, as set forth on Schedule
A.
"Renewal Date" means, with respect to a Health Insurance Contract, the
------------
date that is the anniversary of the day on which the liability of the Company
began under such Health Insurance Contract.
4
<PAGE>
"Reserves" means the amounts shown in the Company's Annual Statement
--------
as filed with the State of New York as reserves for Health Insurance Contracts.
"Service Area" means the State of New Jersey.
------------
"Terminal Accounting and Settlement" means the final accounting and
----------------------------------
payment of any amount due either party upon the termination of this Agreement,
as described in Section 9.1.
"Terminal Accounting Date" shall have the meaning set forth in Section
------------------------
9.1.
"Termination Date" means the date upon which the Reinsurer shall no
----------------
longer be required to reinsure any Health Insurance Contracts in force as of
that date.
"Written Premiums" means the consideration paid for the Health
----------------
Insurance Contracts reinsured hereunder, and shall consist of the items shown on
Schedule C, line I.A.7 plus line I.A.3.
ARTICLE II
REINSURANCE COVERAGE
--------------------
2.1 Coverage. Effective May 1, 1996 (the "Effective Date"), the Company
--------
agrees to cede to the Reinsurer the Quota Share of the risks under the Health
Insurance Contracts, all as more specifically described in Schedule A, and the
Reinsurer agrees to indemnify the Company against the Quota Shares of risks
ceded by the Company under this Agreement.
2.2 Plan of Reinsurance. The reinsurance hereunder shall be on a calendar
-------------------
year renewable term basis.
5
<PAGE>
2.3 Conditions. The reinsurance hereunder is subject to the same
----------
limitations and conditions as the Health Insurance Contracts, except as
expressly provided for in this Agreement.
2.4 Exclusions. The reinsurance hereunder does not apply to the following
----------
risks: (i) any portion of the risk under any Health Insurance Contract issued by
the Company other than the risk reinsured hereunder; (ii) any Health Insurance
Contract issued and delivered in a jurisdiction in which issuance and delivery
of such contract constituted the doing of business where the Company was not
properly licensed; (iii) those risks for which the Reinsurer is not liable
pursuant to the provisions of Section 3.11 hereof; and (iv) any risks under
Health Insurance Contracts issued by the Company (other than risks under Health
Insurance Contracts) sold in conjunction with any entity other than PHS New
Jersey.
ARTICLE III
GENERAL PROVISIONS
------------------
3.1 Contract Administration. The Company and the Reinsurer each shall
-----------------------
have responsibility for certain aspects of the marketing and administration of
the Health Insurance Contracts, in accordance with the Marketing and Services
Agreement between the Company, PHS and PHS New Jersey (the "Marketing and
Services Agreement").
3.2 Non-Solicitation. Neither party, nor any of its Affiliates, shall
----------------
contact, solicit or contract with any of the other party's full-time employees
who have been engaged in the activities covered by this Agreement without the
consent of the other party.
3.3 Inspection. Either party or its designated representative may
----------
inspect, at the offices of the Company or the Reinsurer, as the case may be,
where such records are located,
6
<PAGE>
and conduct reasonable audits of, the papers and any and all other books or
documents of the Company or the Reinsurer reasonably relating to the Health
Insurance Contracts and the administrative responsibilities hereunder, during
normal business hours for such period as this Agreement is in effect or for as
long thereafter as the Company or the Reinsurer, as the case may be, seeks
performance by the other party pursuant to the terms of this Agreement. The
information obtained shall be used only for purposes relating to the reinsurance
provided under this Agreement and shall not be disclosed to any person without
the express permission of the other party, except to the extent that disclosure
is required by law. Each party's rights under this Section 3.3 shall survive
termination of this Agreement.
3.4 Misunderstandings and Oversights. If any delay, omission, error or
--------------------------------
failure to pay amounts due or to perform any other act required by this
Agreement is unintentional and caused by misunderstanding or oversight, the
Company and the Reinsurer will adjust the situation to what it would have been
had the misunderstanding or oversight not occurred. The party that first
discovers such oversight or incorrect act as a result of the misunderstanding
will notify the other party in writing promptly upon discovery of the
misunderstanding or oversight. The parties shall act to correct the error,
omission or oversight within twenty (20) days of notification of the problem.
This Section 3.4 shall not be construed as a waiver by either party of its right
to enforce strictly the terms of this Agreement.
3.5 Reinstatements. If a Health Insurance Contract reinsured hereunder
--------------
that was terminated or lapsed is reinstated while this Agreement is in effect,
the reinsurance for such Health Insurance Contract under this Agreement will be
reinstated automatically as if the
7
<PAGE>
Health Insurance Contract had not been terminated or lapsed. All amounts
received in connection with such reinstatement shall be treated as Direct Paid
Premiums.
3.6 Contract Changes or Reserve Changes. The Company and the Reinsurer
-----------------------------------
shall share, based upon the applicable Quota Share, in any increase or decrease
in the Company's liability that results from any change in the terms or
conditions of any Health Insurance Contract reinsured hereunder or in the
calculation of Reserves. The Company must provide written notification to the
Reinsurer within fifteen (15) days after any such change, if such change can
reasonably be expected to have a significant effect on the transactions
contemplated by this Agreement.
3.7 Compliance with Applicable Laws and Regulations. It is the intention
-----------------------------------------------
of the parties that this Agreement comply with all existing applicable laws and
regulations, as from time to time are in effect, so that the agreement remains
in full force and the Health Insurance Contracts remain reinsured on a calendar
year renewable term basis. Each of the parties agrees to comply with all laws,
ordinances, rules, regulations and orders of regulatory bodies applicable to the
transactions contemplated by this Agreement, including those relating to the
payment of commissions.
3.8 Amendment and/or Termination Upon Failure to Comply. In the event
---------------------------------------------------
that it is determined by an insurance or health regulatory authority, the
Internal Revenue Service or any other federal, state or local regulatory
authority or by either party to this Agreement upon the advice of an insurance
or health regulatory authority or the Internal Revenue Service that this
Agreement fails to conform to, or that the intent of this Agreement cannot be
effected as a result of, the requirements of existing applicable laws and
regulations and that this Agreement
8
<PAGE>
may be brought into conformity with said requirements, or the intent of this
Agreement may be effected, only by means of a material change to this Agreement,
or in the event that such laws or regulations are changed subsequent to the
Effective Date and such change has a material adverse effect on either party or
requires a material change to this Agreement in order for this Agreement to
conform with applicable laws and regulations or for its intent to be effected,
the parties shall exercise reasonable efforts to reach an agreement to amend
this Agreement so as to return the parties to the economic position that they
would have been in had no such change occurred or so that both parties share the
economic detriment of such change proportionately. If the parties are unable to
reach an agreement to amend the Agreement, then the differences between the
parties shall be resolved through arbitration in accordance with the provisions
of Article XIII. In the event that any required change is not material, this
Agreement shall be amended in accordance with such requirement.
3.9 Notification of Disapproval or Change in Law. The Company shall
--------------------------------------------
promptly notify the Reinsurer of any actual or anticipated disapprovals or
required changes regarding this Agreement that are made by any insurance or
health regulatory authority or taxing authority and of any change in the laws,
regulations or rulings affecting this Agreement or related documents. The
Reinsurer shall be allowed to participate in the defense of this Agreement or
related documents on its own behalf with such authority after consultation with
the Company.
3.10 Setoff. It is expressly understood that any debts or credits, matured
------
or unmatured, liquidated or unliquidated, regardless of when they arose or were
incurred, including but not limited to such debts and credits arising under
Articles IV, V and VI shall, at
9
<PAGE>
all times and under all circumstances relevant to the rights and liabilities of
the parties to this Agreement, be deemed mutual debts or credits, as the case
may be, and shall be set off, and only the net balance shall be allowed or paid.
3.11 Limitations on Liability. (a) The Reinsurer does not indemnify and
------------------------
shall not be liable pursuant to this Agreement or otherwise for any of the
Company's risk, to the extent any damages result from the negligent acts or
omissions to act, reckless or intentional wrongs, fraud, oppression or bad faith
of the Company. The Reinsurer shall be liable and indemnify the Company fully
for all losses arising from the negligent acts or omissions to act, reckless or
intentional wrongs, fraud, oppression or bad faith of the Reinsurer, PHS New
Jersey or any Affiliate of the Reinsurer, acting in connection with a Health
Insurance Contract reinsured hereunder.
(b) The Company does not indemnify and shall not be liable pursuant to
this Agreement or otherwise for any of the Reinsurer's risk, to the extent any
damages result from the negligent acts or omissions to act, reckless or
intentional wrongs, fraud, oppression or bad faith of the Reinsurer, PHS New
Jersey or of an Affiliate of the Reinsurer. The Company shall be liable and
indemnify the Reinsurer fully for all losses arising from the negligent acts or
omissions to act, reckless or intentional wrongs, fraud, oppression or bad faith
of the Company acting in connection with a Health Insurance Contract reinsured
hereunder.
(c) The Reinsurer shall be liable, based on the applicable Quota Share,
and subject to the election permitted by Section 6.2, for any losses arising
from non-negligent acts or omissions to act taken by the Company in good faith
pursuant to Health Insurance Contracts reinsured hereunder.
10
<PAGE>
3.12 Exclusivity. The Company and the Reinsurer shall not enter into an
-----------
arrangement similar to this Agreement for health insurance products to be
offered in the Service Area with other parties, except as expressly permitted
under the Marketing and Services Agreement.
3.13 Press Releases. No public statement or press release regarding the
--------------
existence of this Agreement or the terms thereof shall be made by either party
hereto without the prior written consent of the other party, except as required
by applicable laws, ordinances, rules and regulations.
3.14 Restrictions on the Reinsurer and the Company Relating to Other
---------------------------------------------------------------
Agreements. During the period from the Effective Date through the last date on
- ----------
which the provisions of this Agreement are in effect, each of the Reinsurer and
the Company shall be prohibited from, directly or indirectly, entering into any
contract, lease, sublease, license, sublicense, promissory note, evidence of
indebtedness or other contract or commitment (whether oral or written), which
will, or can reasonably be expected to at any time, place any material
restriction or restrictions on such party's ability to perform any or all of its
obligations under this Agreement.
3.15 Investigations. Each party to this Agreement shall immediately notify
--------------
the other party, in writing, of any and all investigations of such party or its
directors, principal officers or shareholders conducted by any federal, state or
local governmental or regulatory authority other than routine examinations or
surveys by state insurance or health regulatory authorities and federal or state
tax authorities.
11
<PAGE>
3.16 Change In Control. Each party shall fully disclose the details of any
-----------------
pending Change In Control to the other party, and shall provide the other party
with copies of any and all applications for approval therefor made to federal,
state or local regulatory authorities ( for purposes of this Section 3.16, PHS
shall be deemed to be a party hereto). Such disclosure shall be made prior to
or concurrent with notification and/or application for approval to such Federal,
state or local regulatory authorities of a Change In Control. In the event that
such Change In Control shall be approved, the party that intends to undergo the
Change In Control shall notify the other party immediately thereof and the other
party shall have the rights set forth in Section 8.7.
3.17 Reinsurance or Sale of Health Insurance Contracts. (a) The Company
-------------------------------------------------
agrees that, during the period in which this Agreement is in effect, it shall
not reinsure, sell or assign the Health Insurance Contracts to ano ther entity.
(b) Notwithstanding paragraph (a) above, this Section 3.17 shall not
restrict the ability of the Company to (i) enter into a merger or consolidation,
or (ii) effect a sale of its business as an entirety or substantially as an
entirety; provided, however, that the Company may not enter into a transaction
listed in (i) or (ii) above with another entity unless such other entity
provides the Reinsurer with a writing, in form and substance satisfactory to the
Reinsurer, which shall state that the entity agrees to be bound by the terms of
this Agreement to the same extent and effect as if such entity had been a party
to this Agreement.
3.18 Commission Scale and Commission Scale Changes. The commission scale
---------------------------------------------
applicable to the Health Insurance Contracts as of the Effective Date of this
Agreement shall be set forth in Schedule B. Commission payments made with
respect to any Health Insurance
12
<PAGE>
Contracts reinsured hereunder shall be made according to the same commission
scale used by the Company with respect to the specific types of products listed
on Schedule A, or substantially similar products, that are not subject to this
Agreement, as that scale may be changed from time to time.
3.19 Statement of Actuarial Opinion. Within forty-five (45) days after the
------------------------------
end of the calendar year, the Company shall provide the Reinsurer with a
Statement of Actuarial Opinion certifying the adequacy of the reserves which are
covered under this Agreement. In addition, the Actuarial Opinion must state
whether or not the reserves covered under this Agreement meet the minimum
standards of all states where the Company is licensed, and if not the difference
between the Company's reserves and state minimums. The Actuarial Opinion shall
meet the requirements as set forth in the NAIC's Actuarial Opinion and
Memorandum Regulation. The Opinion shall be signed by the Company's "Appointed
Actuary."
ARTICLE IV
PREMIUMS AND RESERVES
4.1 Premiums. Premiums with respect to Health Insurance Contracts shall
--------
be allocated to the Company and the Reinsurer in accordance with the Quota Share
specified in Schedule A, and the portion of the Premiums allocated to the
Reinsurer shall constitute the consideration in respect of the Reinsurer's
acceptance of risk under this Agreement.
4.2 Reinsurer's Capital and Surplus. The Reinsurer agrees that it shall
-------------------------------
maintain capital and surplus in an amount of assets or letters of credit in
accordance with, and to the extent permitted by, the insurance laws of Bermuda
with respect to the Reinsurer's share of
13
<PAGE>
Premiums allocated to the Reinsurer under Section 4.1 above with respect to all
Health Insurance Contracts in force that are reinsured hereunder.
4.3 Reserves. The Company shall establish and maintain reserves with
--------
respect to the Health Insurance Contracts reinsured hereunder.
ARTICLE V
EXPENSE ALLOWANCE
-----------------
5.1 Administrative Expenses. Each party shall be entitled to
-----------------------
reimbursement for its Administrative Expenses (not including pre-marketing
expenses), identified in Schedule B, for each Accounting Period. Such
Administrative Expenses, plus any Insurance Taxes and Commissions, paid by such
party with respect to the Health Insurance Contracts during the Accounting
Period, shall be considered reimbursable expenses.
5.2 Payment. The Company and the Reinsurer shall be reimbursed for the
--------
amounts shown as Company Expenses or Reinsurer Expenses, as set forth in
Schedule F in connection with each Quarterly Settlement.
ARTICLE VI
CLAIMS
6.1 Payment of Claims. The Company shall fund an account which will be
-----------------
used to pay claims under the Health Insurance Contracts. The Reinsurer shall
reimburse the Company for the Reinsurer's Quota Share of such claims in
connection with each Quarterly Settlement.
6.2 Notice of Claim. Upon receipt of any claim on any Health Insurance
---------------
Contract, which claim is reasonably anticipated to exceed an amount mutually
agreed to by the Company
14
<PAGE>
and the Reinsurer, the Company shall promptly notify the Reinsurer of such
claim. Copies of notification, claim papers, and proofs shall be furnished by
the Company to the Reinsurer upon request.
6.3 Determination of Claims by the Company. The Reinsurer will accept the
--------------------------------------
decision of the Company with respect to the payment of a claim under a Health
Insurance Contract; provided, however, that the Company shall promptly advise
the Reinsurer of the Company's intention to contest a claim under a Health
Insurance Contract, and the Reinsurer shall have the right to advise and assist
the Company in its determination of liability and in the best procedure to
follow with respect to any such claim of doubtful validity. The Company and the
Reinsurer shall share, in accordance with the applicable Quota Share, all
expenses incurred in connection with contesting, compromising or settling claims
under Health Insurance Contracts, subject to the limitations of Section 3.11.
Such expenses may include, but are not limited to, all costs and expenses of
investigation, settlement of claims, litigation costs and judgments. If,
however, the Reinsurer has advised the Company that a contested claim should be
paid, and elects to assume liability for its Quota Share of the claim as
originally presented, the Reinsurer shall not share in any additional costs or
expenses associated with such claim.
ARTICLE VII
ACCOUNTING AND REPORTING
------------------------
7.1 Reinsurance Accounting. The Company shall maintain separate books or
----------------------
details of account with respect to the Health Insurance Contracts reinsured
hereunder, setting forth the data required in Schedules C, D and F.
15
<PAGE>
7.2 Quarterly Accounting Reports. Following the end of each Accounting
----------------------------
Period, the Company shall supply the Reinsurer with a Quarterly Accounting
Report providing the data required in Schedules C and F. The Quarterly
Accounting Report shall be submitted within twenty (20) business days following
the close of each calendar quarter. On November 30 of each year that this
Agreement is in effect, the Reinsurer and the Company shall make a projection
for year end, which Reinsurer shall use in preparing its annual statements.
Subsequent corrections shall be made in the following fiscal year.
7.3 Settlements. The Company shall be entitled to payment by the
-----------
Reinsurer for any positive amounts shown on Schedule F, line A.6. The Reinsurer
shall be entitled to payment for any positive amounts shown on Schedule F, line
B.3. The Reinsurer or the Company, as the case may be, shall pay any such
positive amounts to the other party within twenty (20) days following the
receipt or submission of the Quarterly Accounting Report.
7.4 Reconciliation. Each party shall have the right to review all
--------------
individual components of transactions entered into each Quarterly Accounting
Report, such as Premiums received, Commissions and Insurance Taxes, claims
incurred or paid, and similar items. The parties shall have a reasonable period
from the day the Quarterly Accounting Report is submitted to report any
deficiency in such report and to request an adjustment of any payment made to or
received by either party. Any amount due either party in connection with such
reconciliation shall be paid within twenty (20) days of the receipt of notice
that additional amounts are due.
16
<PAGE>
7.5 Annual Accounting Reports. Following the end of each fiscal year, the
-------------------------
Company shall supply the Reinsurer with an Annual Accounting Report providing
the data required in Schedule D, at a time to be mutually agreed to by the
parties.
7.6 Best Efforts to Supply Actual Data. In preparing all reports required
----------------------------------
in this Agreement, the Reinsurer or the Company, as the case may be, shall make
its best efforts to supply the actual data. If the actual data cannot be
supplied with the appropriate report, the Reinsurer or the Company, as the case
may be, shall produce best estimates, and shall provide amended reports based on
actual data no more than forty-five (45) days after such report was originally
due.
7.7 Interest on Delayed Payments. Should any payment due the Company or
----------------------------
the Reinsurer be delayed beyond its due date, such delayed payment shall accrue
interest during such period of delay at an annual rate calculated pursuant to
the formula set forth in Schedule E.
ARTICLE VIII
DURATION AND TERMINATION
------------------------
8.1 Duration. Except as otherwise provided herein, this Agreement shall
--------
be unlimited in duration.
8.2 Commencement of Liability. The liability of the Reinsurer on
-------------------------
reinsurance ceded hereunder shall commence on the later of the Effective Date
and the date the liability of the Company commences under a Health Insurance
Contract reinsured hereunder.
8.3 Termination of Liability. The liability of the Reinsurer with respect
------------------------
to any Health Insurance Contract shall terminate on the date the liability of
the Company on such
17
<PAGE>
Health Insurance Contract is terminated. If this Agreement is terminated, the
Reinsurer's liability with respect to Health Insurance Contracts that remain in
force shall terminate on the later of the Termination Date or the dates referred
to in Sections 8.4 or 8.7.
8.4 Termination of Agreement. Either party shall have the right to
------------------------
terminate this Agreement without cause upon the giving of one hundred eighty
(180) days advance written notice to the other party. In the event that either
party elects to terminate this Agreement pursuant to this provision, the other
party may elect to continue this Agreement in force and effect with respect to
any Health Insurance Contract subject to this Agreement in effect as of the
Termination Date until the date that is 180 days after the first Renewal Date
for such Health Insurance Contract following the Termination Date. The
Termination Date under this Section 8.4 shall be the effective date set forth in
the written notice required hereunder.
8.5 Automatic Termination. If, at the end of an Accounting Period, none
---------------------
of the Health Insurance Contracts is in force, this Agreement shall
automatically terminate; provided, however, that if the parties intend to
continue to perform their respective marketing activities under the Marketing
and Services Agreement, the automatic termination shall be deemed to be waived.
In the event of termination pursuant to this Section 8.5, the last day of such
Accounting Period shall be the Termination Date.
8.6 Termination Due to Insufficient Premium. If the total annualized
---------------------------------------
premiums for (i) all Health Insurance Contracts reinsured hereunder, plus (ii)
premiums for HMO contracts issued by PHS New Jersey in dual choice arrangements
with Health Insurance Contracts do not exceed five million dollars ($5,000,000)
on the first anniversary of the implementation of this Agreement, then either
party may, within forty-five (45) days thereafter, elect to terminate
18
<PAGE>
this Agreement. The Termination Date shall be ninety (90) days thereafter. The
implementation of this Agreement shall be construed as the date the Health
Insurance Contracts are available for sale under the Marketing and Services
Agreement. The Contractholder of each Health Insurance Contract reinsured
hereunder shall, in compliance with applicable law, be given the choice of
terminating its coverage at the Termination Date or continuing coverage under
such Contract until the Renewal Date applicable thereto next following the
Termination Date.
8.7 Termination Subsequent to a Change In Control. In the event of a
---------------------------------------------
Change In Control of PHS, the Company or the Reinsurer, the party not undergoing
the Change In Control may elect to terminate this Agreement. The party intending
to undergo a Change In Control shall provide the notice described in Section
3.16 to the other party. In the event that this Agreement is terminated
following a Change In Control, the party not undergoing a Change In Control may
elect to continue this Agreement in force and effect with respect to any case
that was originally written as an Health Insurance Contract and that was in
force on the Termination Date, until the tenth (10th) Renewal Date applicable to
such Health Insurance Contract, or continuation health insurance contract issued
by the Company, following the Termination Date. The Termination Date under this
Section 8.7 shall be the effective date of the Change in Control.
8.8 Termination for Cause. (a) In the event that either party shall
---------------------
default in the performance of the duties and obligations imposed on it pursuant
to the terms of this Agreement or the Marketing and Services Agreement, or
breach any of the provisions contained herein or therein, including the failure
to pay any amount when due, or the failure of
19
<PAGE>
either party to maintain a level of services under the Marketing and Services
Agreement that is reasonably satisfactory to the other party, the defaulting
party shall be allowed thirty (30) days from receipt of written notice of such
default or breach to present to the non-defaulting party a plan to cure such
default or breach that is reasonably satisfactory to the non-defaulting party.
If a reasonably satisfactory plan to cure the default or breach is not submitted
within that time, or if the plan is not carried out according to its terms, the
non-defaulting party shall have the right to terminate this Agreement upon
delivery of written notice of such termination to the defaulting party, which
shall be effective on receipt, without prejudice to any other rights or remedies
available to the non-defaulting party by reason of such default or breach.
(b) In the event that either party shall engage in fraudulent, illegal or
grossly negligent conduct with respect to its duties and obligations under this
Agreement or the Marketing and Services Agreement, the other party shall have
the right to terminate this Agreement upon delivery of written notice of such
termination to the defaulting party, which shall be effective upon receipt,
without prejudice to any other rights or remedies available to the non-
defaulting party by reason of the other party's conduct.
(c) The Termination Date under this Section 8.8 shall be the date of
receipt of the notice of termination.
8.9 Termination of Agreement Upon the Occurrence of Certain Events. This
--------------------------------------------------------------
Agreement may be terminated at the election of the other party pursuant to
written notice upon the occurrence of either of the following events:
20
<PAGE>
(a) one of the parties to this Agreement fails to remain in good standing
under the laws of its state of domicile, or fails for any reason to remain
qualified to engage in the transaction contemplated by this Agreement under
applicable laws, ordinances, rules or regulations; or
(b) a voluntary or involuntary proceeding is commenced in any state by or
against one of the parties to this Agreement for the purpose of supervising,
conserving, rehabilitating or liquidating such party; this Agreement may be
terminated at the election of the other party pursuant to a written notice.
The Termination Date under this Section 8.9 will be the day of receipt of
the notice of termination.
8.10 Termination for Material Change in PHS Network. In the event that the
----------------------------------------------
PHS Network (as that term is defined in the Marketing and Services Agreement)
undergoes a material change within the meaning of Section 6.3 of the Marketing
and Services Agreement, the Company shall have the right to terminate this
Agreement. Notice of termination of this Agreement under this Section 8.10 shall
be made by the Company within ninety (90) days of the receipt of notice of a
change in the composition of the PHS Network submitted by the PHS pursuant to
Section 6.3 of the Marketing and Services Agreement. The Termination Date under
this Section 8.10 shall be ten (10) days after notice of termination is given by
the Company.
21
<PAGE>
ARTICLE IX
PAYMENTS UPON TERMINATION OF AGREEMENT
--------------------------------------
9.1 Payments on Termination. (a) In the event that this Agreement shall
-----------------------
be terminated pursuant to Article VIII, a net accounting and settlement as to
any balance due under this Agreement shall be undertaken by the parties to this
Agreement (the "Terminal Accounting and Settlement"), which calculations shall
be performed as of the day that is one (1) year from the date that the liability
of the Reinsurer shall have terminated pursuant to Section 8.3 of this Agreement
(the "Terminal Accounting Date").
(b) The Company shall supply the Reinsurer with final Schedules C and D
which shall show the Terminal Accounting and Settlement. If the Terminal
Accounting and Settlement shows a final net Loss attributable to the Company,
the Company shall pay the amount of such Loss to the Reinsurer. If the Terminal
Accounting and Settlement by the Company shows a final net Profit attributable
to the Company, the Reinsurer shall pay the amount of the Profit to the Company.
Such Schedules shall be supplied by the Company within the period agreed by the
parties.
(c) Any payment required under the Terminal Accounting and Settlement by
the Company shall be paid by the Company no later than the day on which the
final Schedules C and D, as required by Section 9.1(b), are due. The Reinsurer
shall make any payment required to be made by the Reinsurer hereunder within ten
(10) days of receipt of such final schedules. In the event that the calculation
for the payment required under the Terminal Accounting and Settlement cannot be
accurately calculated by such date, then an estimate shall
22
<PAGE>
be paid, with a supplemental accounting being made when the accurate information
shall become available.
9.2 Supplemental Accounting. In the event that, subsequent to the
-----------------------
Terminal Accounting and Settlement, an adjustment is made with respect to any
amount taken into account in the Terminal Accounting and Settlement, a
supplemental accounting shall be made. Any net amount owed to the Reinsurer or
the Company by reason of such supplemental accounting, plus any interest due
pursuant to Section 7.7, shall be paid promptly upon the completion of such
supplemental accounting.
ARTICLE X
CALCULATION OF PROFIT AND LOSS
------------------------------
10.1 Determination and Allocation of Profit or Loss. The Company shall
----------------------------------------------
calculate Profit or Loss with respect to the Health Insurance Contracts, and the
Reinsurer or the Company, as appropriate, shall make settlements as required by
Section 7.3 or Section 9.1, as appropriate, according to the calculations as
shown on Schedules C and F and shall be made part of each Quarterly Accounting
Report.
10.2 Investment Income. (a) Investment Income as shown in Schedules C and
-----------------
F shall be calculated as follows: a rate of interest determined pursuant to
Section 10.2(b) shall be credited or charged on the average Quarterly cash
balance developed with respect to the Health Insurance Contracts. The Quarterly
cash balance shall consist of the prior closing cash balance, plus Direct Paid
Premium, minus Direct Paid Claims and further reduced by cash payment to the
Company or the Reinsurer as shown in Schedule F. Such Investment Income shall be
reflected on line II.A of Schedule C.
23
<PAGE>
(b) The interest rate for purposes of this Section 10.2 shall be equal to
the non-loaned portfolio rate for the Company, determined from the most recent
annual financial statement submitted to the New York Insurance Department for
the Company's general account, as more specifically described in Schedule E.
ARTICLE XI
CONDITION PRECEDENT
-------------------
11.1 Condition Precedent. When, under insurance, public health or other
-------------------
applicable laws or regulations, approval of arrangements of the type
contemplated by this Agreement by one or more Federal, state or local
governmental or regulatory authorities is required, the receipt by the Company
and the Reinsurer of any and all such approvals shall be a condition precedent
to the other party's liability under this Agreement. Subject to Section 11.2, if
this condition precedent is not met by the Company or the Reinsurer by the
Effective Date, this Agreement shall be void as of the Effective Date.
11.2 Extension of Time. In the event that the necessary approvals set
-----------------
forth in Section 11.1 have not been obtained by the Company or the Reinsurer as
of the Effective Date, the parties may mutually agree to modify the Effective
Date of this Agreement.
11.3 Cooperation of the Parties. The Reinsurer and the Company shall each
--------------------------
use its best efforts to cooperate with and assist the other party in obtaining
the necessary approvals referred to in Section 11.1.
11.4 Guarantee of Reinsurer. As a further condition precedent to the
----------------------
obligation of the Company to cede reinsurance under this Agreement, on or before
the Effective Date hereof, the Reinsurer shall deliver to the Company an
agreement by PHS to guarantee the
24
<PAGE>
solvency of the Reinsurer. Such agreement shall be in form and content
acceptable to the Company in its sole discretion, and shall be effective for as
long as the Company seeks performance by the Reinsurer under this Agreement. Any
termination or substantial amendment of PHS' agreement to guarantee the
obligations of the Reinsurer shall be cause for termination by the Company under
Section 8.8 above.
ARTICLE XII
INSOLVENCY OF THE COMPANY
-------------------------
12.1 Payments by the Reinsurer. In the event of the insolvency of the
-------------------------
Company, payments due the Company on all reinsurance made, ceded, renewed or
otherwise becoming effective under this Agreement shall, subject to Section
12.2, be payable by the Reinsurer directly to the Company or to its liquidator,
receiver, or statutory successor on the basis of the liability of the Company
under the Health Insurance Contracts reinsured hereunder without diminution
because of the insolvency of the Company.
12.2 Claims. In the event of the insolvency of the Company, the Reinsurer
------
shall be given written notice of the pendency of a claim against the insolvent
Company on a Health Insurance Contract reinsured hereunder within a reasonable
time after such claim is filed in the insolvency proceeding. During the pendency
of such claim, the Reinsurer may investigate such claim and interpose, at its
own expense, in the proceeding where such claim is to be adjudicated, any
defense or defenses which it may deem available to the Company or its liquidator
or receiver or statutory successor. The expense thus incurred by the Reinsurer
shall be chargeable, subject to court approval, against the insolvent Company as
part of the expense of liquidation to the extent of a proportionate share of the
benefit which may accrue to the
25
<PAGE>
Company solely as a result of the defense undertaken by the Reinsurer. Where two
or more assuming reinsurers are involved in the same claim and a majority in
interest elect to interpose defenses to such claim, the expense shall be
apportioned in accordance with the terms of this Agreement as though such
expense had been incurred by the Company.
12.3 Executory Contract. It is expressly understood that this Agreement is
------------------
an executory contract as long as both parties are required to perform under this
Agreement. On the insolvency of either party, if this Agreement is not confirmed
by the insolvent party and given status as an "Administrative Expense," then the
other party may terminate for non-performance without additional payment other
than payments relating to Health Insurance Contracts for which liability
continues under this Agreement.
ARTICLE XIII
ARBITRATION
-----------
13.1 Appointment of Arbitrators. In the event of any disputes or
--------------------------
differences arising hereafter between the contracting parties with respect to
any transaction, matter or issue arising from or relating in any way to this
Agreement on which agreement between the parties hereto cannot be reached, the
same shall be decided by arbitration. Three arbitrators will decide any dispute
or difference. The arbitrators must be disinterested officers or retired
officers of health maintenance organizations or managed health care companies,
or insurance companies with experience in managed health care, other than the
two parties to this Agreement or their Affiliates. Each of the contracting
companies agrees to appoint one of the arbitrators with the third, the "Umpire,"
to be chosen by the other arbitrators. In the event
26
<PAGE>
that either party should fail to choose an arbitrator within 30 days following a
written request by the other party to do so, the requesting party may choose an
Umpire before entering upon arbitration. In the event that the two arbitrators
shall not be able to agree on the choice of the Umpire within 30 days following
their appointment, each arbitrator shall nominate five candidates within 10 days
thereafter, four of whom the other arbitrator shall decline, and the Umpire
shall be chosen from the two remaining nominees by the President of the American
Arbitration Association.
13.2 Decision of Arbitrators; Expenses. The arbitrators shall consider
---------------------------------
customary and standard practices in the managed health care insurance
businesses. They shall decide by a majority vote of the arbitrators. There
shall be no appeal from their written decision. Judgment may be entered on the
decision. Each party shall bear the expense of its own arbitrator and outside
attorney fees, and shall jointly and equally bear with the other party the
expenses of the third arbitrator.
13.3 Applicable Law; Survival. Any arbitration instituted pursuant to this
------------------------
Article XIII shall be held in New Jersey and the laws of the State of New Jersey
and, to the extent applicable, the Federal Arbitration Act shall apply. This
Article XIII shall survive termination of this Agreement.
13.4 Other Actions. Submission of a matter to arbitration shall be a
-------------
condition precedent to any right to institute a proceeding at law or in equity
concerning such matter, except for injunctive or other provisional relief
pending the arbitration of a matter subject to arbitration pursuant to this
Agreement.
27
<PAGE>
ARTICLE XIV
REPRESENTATIONS AND WARRANTIES
------------------------------
14.1 Representations and Warranties of the Company. The Company hereby
---------------------------------------------
represents and warrants to the Reinsurer as follows:
The Company is a mutual life insurance company organized and existing under
the laws, including the insurance laws, of the State of New York and is in good
standing under these laws. The Company further represents and warrants that it
is duly licensed and admitted as an insurer under the laws of those
jurisdictions in which the Health Insurance Contracts reinsured hereunder have
been issued and is authorized under the laws and regulations of said
jurisdictions to act as a reinsurer in those jurisdictions. In addition, the
Company covenants that, so long as this Agreement is in effect, it shall take
all actions reasonably necessary to remain duly licensed under the laws of those
jurisdictions wherein the Health Insurance Contracts have been issued. The
Company shall notify the Reinsurer immediately in the event that its license
shall be revoked or suspended in any jurisdiction hereunder.
The Company has full corporate power and authority to execute and deliver
this Agreement and the other agreements and documents contemplated hereby and to
carry out all of its obligations hereunder.
The execution and delivery by the Company of this Agreement and the other
agreements and documents contemplated hereby, the consummation by the Company of
the transactions as herein contemplated and the carrying out by the Company of
its obligations contemplated hereby have been duly and validly authorized by all
necessary corporate action.
28
<PAGE>
14.2 Representations and Warranties of the Reinsurer. The Reinsurer hereby
-----------------------------------------------
represents and warrants to the Company as follows:
The Reinsurer is a corporation organized and existing under the laws,
including the insurance laws, of Bermuda and is in good standing under these
laws. The Reinsurer covenants that, so long as this Agreement is in effect, that
it shall take all reasonable actions necessary to remain duly licensed within
the purview of this Agreement under the insurance laws of Bermuda. The Reinsurer
shall notify the Reinsurer immediately in the event that its license shall be
revoked or suspended in any jurisdiction hereunder.
The Reinsurer has full corporate power and authority to execute and deliver
this Agreement and the other agreements and documents contemplated hereby and to
carry out all of its obligations hereunder.
The execution and delivery by the Reinsurer of this Agreement and the other
agreements and documents contemplated hereby, the consummation by the Reinsurer
of the transactions as herein contemplated and the carrying out by the Reinsurer
of its obligations contemplated hereby have been duly and validly authorized by
all necessary corporate action.
ARTICLE XV
CONFIDENTIALITY
---------------
15.1 Obligations of the Parties. Each party agrees that all information
--------------------------
concerning the business affairs of the Company or the Reinsurer (or PHS, PHS New
Jersey or any Affiliate thereof), as the case may be, which is not generally
available to the public, including but not limited to, lists of physicians and
other health care providers, lists of brokers and other information of a
proprietary nature relating to methods of doing business heretofore or
29
<PAGE>
hereinafter received by it from the other party shall be kept and maintained as
confidential and in complete secrecy. Neither party shall, without the prior
written consent of the other party, disclose at any time, either orally, or in
writing, or otherwise, in any manner, directly or indirectly, to any person or
entity, except to other employees or agents of the non-disclosing party, any
such proprietary information. Any breach of confidentiality shall give the non-
breaching party the right of injunctive relief in addition to any other remedy
permitted by law.
15.2 Survival of Article XV. This Article XV shall survive termination of
----------------------
this Agreement.
ARTICLE XVI
MISCELLANEOUS PROVISIONS
------------------------
16.1 Notices. All notices required pursuant to this Agreement shall be in
-------
writing and shall become effective when received. Each written notice shall be
sent by certified or registered mail, return receipt requested, or a nationally
recognized overnight delivery service (providing for delivery receipt) or
delivered by hand. All notices under this Agreement shall be addressed as
follows:
If to the Company:
The Guardian Life Insurance Company of America
201 Park Avenue South
New York, New York 10003
ATTENTION: Edward K. Kane, Esq.
Senior Vice President & General Counsel
If to the Reinsurer:
Physicians Health Services (Bermuda) Ltd.
120 Hawley Lane
Trumbull, Connecticut 06611
30
<PAGE>
ATTENTION: Regina M. Campbell
Senior Vice President & Chief Administrative Officer
If to PHS:
Physicians Health Services, Inc.
120 Hawley Lane
Trumbull, Connecticut 06611
ATTENTION: Regina M. Campbell
Senior Vice President & Chief Administrative Officer
16.2 Successors and Assigns. This Agreement cannot be assigned by the
----------------------
Company or the Reinsurer without the prior written approval of the other party.
The provisions of this Agreement shall be binding upon and inure to the benefit
of and be enforceable by the parties hereto and their respective permitted
successors and assigns.
16.3 Counterparts. This Agreement may be executed simultaneously in any
------------
number of counterparts, each of which will be deemed an original, but all of
which will constitute one and the same agreement.
16.4 Currency. All payments and accounts shall be made in United States
--------
Dollars, and all fractional amounts shall be rounded to the nearest whole
dollar.
16.5 Amendment. This Agreement shall be amended only by written agreement
---------
signed by a duly authorized officer of each of the Company and the Reinsurer,
and any change to this Agreement shall be null and void unless made by such
amendment; provided, however, that where, under insurance, public health or
other applicable laws or regulations, the approval of any such amendment to this
Agreement by one or more Federal, state or local governmental or regulatory
authorities is required, the amendment shall not take effect unless and until
all
31
<PAGE>
such necessary approvals have been received by the Company. In the event that
such an approval is required, the Company, the Reinsurer, PHS and PHS New Jersey
shall each be obligated to take all necessary actions in order to obtain such
approval.
16.6 Entire Agreement; Headings. This Agreement and the Schedules and
--------------------------
Exhibits attached hereto, together with the Marketing and Services Agreement,
supersede all prior discussions and written and oral agreements between the
parties with respect to the subject matter of this Agreement, and contain the
sole and entire agreement between the parties hereto with respect to the subject
matter hereof. Headings are not part of this Agreement, and shall not affect the
terms hereof.
16.7 Binding Effect. This Agreement is binding upon and will inure to the
--------------
benefit of the parties and their respective successors and permitted assigns.
16.8 Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of New Jersey, without giving effect to
its provisions relating to conflicts of law.
16.9 Severability. In the event any section or provision of this
------------
Agreement or related documents is found to be void and unenforceable by a court
of competent jurisdiction, the remaining sections and provisions of this
Agreement or related documents shall nevertheless be binding upon the parties
with the same force and effect as though the void or unenforceable part had not
been severed or deleted.
16.10 Waivers and Remedies. The waiver by any of the parties of any other
--------------------
party's prompt and complete performance, or breach or violation, of any
provisions of this Agreement and related documents shall not operate nor be
construed as a waiver of any subsequent breach
32
<PAGE>
or violation, and the waiver by any of the parties to exercise any right or
remedy which it may possess hereunder shall not operate nor be construed as a
bar to the exercise of such right or remedy by such party upon the occurrence of
any subsequent breach or violation.
33
<PAGE>
EXECUTION
---------
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their duly authorized representatives as of the date first above
written.
PHYSICIANS HEALTH SERVICES
(BERMUDA) LTD.
By ________________________________
Name
Title
THE GUARDIAN LIFE INSURANCE
COMPANY OF AMERICA
By ________________________________
Name
Title
34
<PAGE>
SCHEDULE A
----------
CONTRACTS AND RISKS REINSURED
-----------------------------
Quota Share
-----------
The Reinsurer agrees to reinsure a 50% quota share (the "Quota Share")
of the risks on the Health Insurance Contracts (as defined), issued (or to be
issued) by the Company in the Service Area.
A-1
<PAGE>
SCHEDULE B
----------
FEES AND COMMISSIONS
--------------------
I. Guardian's Administrative Services Fee (as a percentage of premium)
-------------------------------------------------------------------
<TABLE>
<CAPTION>
PPO Indemnity
--- ---------
<S> <C> <C>
Sales % %
Billing & Collection % %
Claims % %
Marketing % %
Other % %
- -
Total % %
</TABLE>
II. PHS' Administrative Services Fee (as a percentage of premium)
-------------------------------------------------------------
<TABLE>
<CAPTION>
PPO Indemnity
--- ---------
<S> <C> <C>
Network
Management % %
Claims % %
Member Relations % %
Marketing % %
Other + Bad Debt % %
- -
Total % %
</TABLE>
III. Schedule of Commissions
-----------------------
Scales will be filed with the Department of Insurance prior to implementation.
B-1
<PAGE>
SCHEDULE C
QUARTERLY PROFIT/LOSS
---------------------
<TABLE>
<CAPTION>
PPO Indemnity
--- ---------
<C> <C>
<S>
I. Profits/Losses from Underwriting:
--------------------------------
A. Earned Premium:
1. Cash Received
2. Change in Due and Unpaid
3. Change in Unearned Premium Reserve
4. Change in Advance Premium
5. Gross Earned Premium (1+2-3-4)
B. Incurred Claims:
---------------
(i) Cash Claims
1. Claims Paid
2. COB Recoveries
3. Subrogation Recoveries
4. Total Cash Claims (1-2-3)
(ii) Change in Reserves
5. Change in IBNR
6. Change in Subrogation Recoverables
7. Change in COB Recoverables
8. Total Change in Reserves (5-6-7)
9. Total Incurred Claims (4+8)
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
PPO Indemnity
--- ---------
<S> <C> <C>
C. Expenses
--------
1. Incurred Commissions
a. Cash
b. Change in Liability
c. Total Incurred (a+b)
2. Incurred Premium Taxes, Licenses & Fees
a. Cash
b. Change in Liability
c. Total Incurred (a+b)
3. Incurred Guardian Administration Expenses
4. Incurred PHS Administration Expenses
5. Joint Marketing Expenses
6. IHC Assessments Paid
7. Change in IHC Assessments Payable
8. Incurred Expenses (1+2+3+4+5+6+7)
II. Profit for Investment Income
----------------------------
A. Net Investment Income Profit/Loss
III. Profit Share
------------
A. Net Aggregate Profit/Loss (I.A5-I.B9-I.C8+IIA)
B. PHS Bermuda Profit/Loss
C. Guardian Profit/Loss
</TABLE>
C-2
<PAGE>
SCHEDULE D
----------
ANNUAL REPORTS
--------------
PERIOD COVERING _______ TO _______
INTENTIONALLY LEFT BLANK
PARTIES WILL AGREE ON THE CONTENTS AT A LATER DATE
D-1
<PAGE>
SCHEDULE E
----------
INVESTMENT INCOME INTEREST RATES
--------------------------------
The annual Investment Income Interest Rate shall equal the non-loaned portfolio
-------------------------------
rate for the Company's general account assets for the current calendar year.
The portfolio rate shall be determined from the Annual Statement submitted to
the New York Insurance Department for the Company's general account based on the
formula given below:
rate = (I+CG)/(.5x(A+B-I-CG))
Where:
A = cash and invested assets plus accrued investment income less borrowed
money at the end of year (page 2, line 10A less line 5 plus line 16 plus
line 2102, less page 3, line 11.4 less line 16 less line 22 less line
2501);
B = same quantity as "A" above except for the beginning of year;
I = net investment income for the year (exhibit 2, line 16) plus amortization
of interest maintenance reserve (page 4, line 4A);
CG = capital gains/loss, less interest maintenance reserve (exhibit 3, line
10, column 4 minus footnote exhibit 3, line 2, column A plus exhibit 4,
line 10, column 4).
The pages and lines referred to above are as they appear in the Company's 1994
Annual Statement. These pages and lines may change from year to year.
For quarterly reporting purposes, the Investment Income Interest Rate shall be
determined based on the following, with an adjustment to reflect the actual
experience during the first quarter of the succeeding calendar year:
First quarter: The prior year Investment Income Interest Rate.
Subsequent quarters: A reasonable estimate of the current year Investment
Income Interest Rate.
E-1
<PAGE>
SCHEDULE F
----------
QUARTERLY FUNDS RECONCILIATION
------------------------------
PERIOD COVERING _______ TO _______
<TABLE>
<S> <C>
A. Cash To Company Guardian
--------------- --------
1. Company Profit
--------------
(Sch. C, III C): 0
--------------- --------
2. Investment Income
-----------------
Sch. C, II A): 0
------------- --------
3. Earned Premium
--------------
(Sch. C, I.A.7): 0
--------------- --------
4. Incurred Claims
---------------
(Sch. C, I.B.13): 0
---------------- --------
5. Company Expenses
----------------
(Sch. C, I.C
------------
1+2+3+5+6+7): 0
------------ --------
6. Total Cash to Company
---------------------
(1. - 2. -3.+4.+5.): 0
------------------- --------
B. Cash to Reinsurer PHS Bermuda
----------------- -----------
1. Reinsurer Profit
----------------
(Sch. C, III B): 0
--------------- --------
2. Reinsurer Expenses
------------------
(Sch. C, I.C.4): 0
--------------- --------
3. Total Cash to
-------------
Reinsurer
---------
(1.+2.): 0
------- --------
</TABLE>
F-1
<PAGE>
EXHIBIT 10.(c)
REINSURANCE AGREEMENT
among
PHYSICIANS HEALTH SERVICES OF NEW JERSEY, INC.
Paramus, New Jersey
PHYSICIANS HEALTH SERVICES (ERMUDA)LTD.
Hamilton, Bermuda
and
THE GUARDIAN LIFE INSURANCE COMPANY OF AMERICA
New York, New York
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I DEFINITIONS.................................................... 2
ARTICLE II REINSURANCE COVERAGE........................................... 7
2.1 Coverage............................................................ 7
2.2 Plan of Reinsurance................................................. 7
2.3 Conditions.......................................................... 8
2.4 Exclusions.......................................................... 8
ARTICLE III GENERAL PROVISIONS............................................. 8
3.1 Contract Administration............................................. 8
3.2 Non-Solicitation.................................................... 8
3.3 Inspection.......................................................... 9
3.4 Misunderstandings and Oversights.................................... 10
3.5 Reinstatements...................................................... 10
3.6 Contract Changes or Reserve Changes................................. 11
3.7 Compliance with Applicable Laws and Regulations..................... 11
3.8 Amendment and/or Termination Upon Failure to Comply................. 11
3.9 Notification of Disapproval or Change in Law........................ 12
3.10 Setoff.............................................................. 13
3.11 Limitations on Liability............................................ 13
3.12 Exclusivity......................................................... 14
3.13 Press Releases...................................................... 14
3.14 Restrictions on the Reinsurer, PHS (Bermuda) and the Company
Relating to Other Agreements....................................... 15
3.15 Investigations...................................................... 15
3.16 Change In Control................................................... 15
3.17 Reinsurance or Sale of HMO or POS Contracts......................... 16
3.18 Commission Scale and Commission Scale Changes....................... 16
3.19 Stop-Loss Reinsurance............................................... 17
3.20 Statement of Actuarial Opinion...................................... 17
ARTICLE IV PREMIUMS AND RESERVES.......................................... 18
4.1 Premiums - HMO Contracts and In-Network Portion of the POS
Contracts.......................................................... 18
4.2 Premiums - Out-of-Network Portion of the POS Contracts.............. 18
4.3 HMO and POS Contract Reserves....................................... 19
ARTICLE V EXPENSE ALLOWANCE.............................................. 19
5.1 Administrative Expenses............................................. 19
5.2 Payment............................................................. 19
</TABLE>
-i-
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE VI CLAIMS......................................................... 20
6.1 Notice of Claim..................................................... 20
6.2 Determination of Claims by the Company.............................. 20
6.3 Payment............................................................. 21
ARTICLE VII ACCOUNTING AND REPORTING....................................... 21
7.1 Reinsurance Accounting.............................................. 21
7.2 Quarterly Accounting Reports........................................ 21
7.3 Settlements......................................................... 22
7.4 Reconciliation...................................................... 22
7.5 Annual Accounting Reports........................................... 23
7.6 Best Efforts to Supply Actual Data.................................. 23
7.7 Interest on Delayed Payments........................................ 23
ARTICLE VIII DURATION AND TERMINATION....................................... 23
8.1 Duration............................................................ 23
8.2 Commencement of Liability........................................... 23
8.3 Termination of Liability............................................ 24
8.4 Termination of Agreement............................................ 24
8.5 Automatic Termination............................................... 24
8.6 Termination Due to Insufficient Premium............................. 25
8.7 Termination Subsequent to a Change
In Control.......................................................... 25
8.8 Termination for Cause............................................... 26
8.9 Termination of Agreement Upon the Occurrence of Certain Events...... 27
8.10 Termination for Material Change
in PHS Network...................................................... 28
ARTICLE IX PAYMENTS UPON TERMINATION OF AGREEMENT......................... 28
9.1 Payments on Termination............................................. 28
9.2 Supplemental Accounting............................................. 29
ARTICLE X CALCULATION OF PROFIT AND LOSS................................. 30
10.1 Determination and Allocation of Profit or Loss...................... 30
10.2 Investment Income................................................... 30
ARTICLE XI CONDITION PRECEDENT............................................ 31
11.1 Condition Precedent................................................. 31
11.2 Extension of Time................................................... 31
11.3 Cooperation of the Parties.......................................... 31
11.4 Guarantee of PHS (Bermuda).......................................... 31
</TABLE>
-ii-
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE XII INSOLVENCY OF THE COMPANY....................................... 32
12.1 Payments by the Reinsurer or PHS (Bermuda)........................... 32
12.2 Claims............................................................... 32
12.3 Executory Contract................................................... 33
ARTICLE XIII ARBITRATION..................................................... 33
13.1 Appointment of Arbitrators........................................... 33
13.2 Decision of Arbitrators; Expenses.................................... 34
13.3 Applicable Law; Survival............................................. 34
13.4 Other Actions........................................................ 35
ARTICLE XIV REPRESENTATIONS AND WARRANTIES.................................. 35
14.1 Representations and Warranties of the Reinsurer...................... 35
14.2 Representations and Warranties of PHS (Bermuda)...................... 36
14.3 Representations and Warranties of the Company........................ 37
ARTICLE XV CONFIDENTIALITY................................................. 38
15.1 Obligations of the Parties........................................... 38
15.2 Survival of Article XV............................................... 38
ARTICLE XVI MISCELLANEOUS PROVISIONS........................................ 39
16.1 Notices.............................................................. 39
16.2 Successors and Assigns............................................... 40
16.3 Counterparts......................................................... 40
16.4 Currency............................................................. 40
16.5 Amendment............................................................ 40
16.6 Entire Agreement..................................................... 41
16.7 Binding Effect....................................................... 41
16.8 Governing Law........................................................ 41
16.9 Severability......................................................... 41
16.10 Waivers and Remedies................................................. 41
ARTICLE XVII EXECUTION....................................................... 43
</TABLE>
-iii-
<PAGE>
SCHEDULES AND EXHIBITS
----------------------
<TABLE>
<S> <C>
SCHEDULE A CONTRACTS AND RISKS REINSURED..................................A-1
SCHEDULE B FEES AND COMMISSIONS...........................................B-1
SCHEDULE C QUARTERLY PROFIT/LOSS..........................................C-1
SCHEDULE D ANNUAL REPORTS.................................................D-1
SCHEDULE E INTEREST RATES.................................................E-1
SCHEDULE F QUARTERLY FUNDS RECONCILIATION.................................F-1
EXHIBIT A FORM OF GUARANTEE OF PHYSICIANS
HEALTH SERVICES, INC..........................................EA-1
</TABLE>
-iv-
<PAGE>
REINSURANCE AGREEMENT
---------------------
This Reinsurance Agreement (this "Agreement") is made and entered into
as of this 1st day of May, 1996 between PHYSICIANS HEALTH SERVICES OF NEW
JERSEY, INC. (the "Company"), a corporation organized under the laws of the
State of New Jersey as an health maintenance organization, PHYSICIANS HEALTH
SERVICES (BERMUDA) LTD., a stock insurance company organized under the laws of
Bermuda ("PHS (Bermuda") and THE GUARDIAN LIFE INSURANCE COMPANY OF AMERICA, of
New York, New York, a mutual life insurance company organized under the laws of
the State of New York (the "Reinsurer").
The Company, PHS (Bermuda) and the Reinsurer mutually agree to enter
into a reinsurance agreement (the "Agreement") on the terms and conditions
stated herein. This Agreement is a reinsurance agreement solely between the
Company, PHS (Bermuda) and the Reinsurer, and the performance of the obligations
of each party under this Agreement shall be rendered solely to the other
parties. In no instance, except as set forth in Article XII, shall anyone other
than the Company, PHS (Bermuda) or the Reinsurer have any rights under this
Agreement, and the Company shall be and remain solely liable to any insured,
contractholder, physician or other provider or beneficiary under any contract
reinsured hereunder.
<PAGE>
ARTICLE I
DEFINITIONS
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As used in this Agreement, the following terms shall have the
following meanings (definitions are applicable to both the singular and the
plural forms of each term defined in this Article):
"Accounting Period" means the Fiscal Quarter, except that the first
-----------------
Accounting Period shall be the period commencing with the Effective Date and
ending with the last day of the then current Fiscal Quarter, and the last
Accounting Period shall be the period commencing with the first day of the last
Fiscal Quarter preceding the Terminal Accounting Date and ending on the Terminal
Accounting Date.
"Administrative Expense" means an expense which will be reimbursable
----------------------
each Accounting Period and is intended to compensate the Company or the
Reinsurer for a reasonable estimate of the actual cost of performing
administrative services in connection with the HMO and POS Contracts, as set
forth in the Marketing and Administrative Services Agreement, without provision
for profit.
"Affiliate" means with respect to a specified person, a person that
---------
directly, or indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with, the person specified.
"Annual Accounting Report" means the report required to be prepared in
------------------------
accordance with Section 7.5 and providing the data as shown on Schedule D.
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<PAGE>
"Capitation Agreement" means a health care provider contract pursuant
--------------------
to which the Company agrees to pay a provider a per subscriber fee in lieu of
all or a portion of actual claims made.
"Capitation Fees" means the per subscriber fees to health care
---------------
providers incurred under Capitation Agreements, net of amounts paid or payable
to the Company by providers under such agreements.
"Change In Control" means the acquisition, in a single transaction or
-----------------
in a series of related transactions, by a person, an entity, or a group of
persons or entities acting in concert of: (i) twenty-five percent (25%) or more
(a) of the voting common stock of the Company, PHS or PHS (Bermuda), excluding
any acquisition of stock by a party currently owning twenty-five (25%) or more
of such common stock), or (b)of the aggregate value of the business of the
Company, PHS or PHS (Bermuda); or (ii) twenty-five percent (25%) or more of any
ownership interest in the Reinsurer.
"Commissions" means commissions and other incentives or bonuses
-----------
applicable to the marketing of the HMO and POS Contracts.
"Contractholder" means an employer who or which executes an enrollment
--------------
agreement with respect to any Plan subject to this Agreement.
"Direct Paid Claims" means amounts paid to health care providers for
------------------
medical claims and/or to subscribers for services covered by HMO and POS
Contracts, including withholds paid to providers, but not including Capitation
Fees.
"Direct Paid Premium" means premiums received.
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"Earned Premium" shall consist of the item shown on Schedule C, line
--------------
I.A.6.
"Effective Date" shall have the meaning set forth in Section 2.1.
--------------
"Fiscal Quarter" means each of the four consecutive three-month
--------------
periods in a fiscal year commencing on January 1 of each year and ending on
December 31 of that calendar year.
"HMO Contracts" means only those health maintenance organization
-------------
("HMO") products, other than POS products, issued by the Company in the Service
Area that are marketed (i) as part of a "multi-choice" arrangement together with
Health Insurance Contracts (as defined in the Marketing and Services Agreement);
or (ii) on a "stand alone" basis, if sold by the sales force of the Reinsurer.
"Insurance Taxes" means all insurance taxes, licenses and fees
---------------
directly imposed with respect to premiums on the HMO and POS Contracts reinsured
hereunder and shall be given the same meaning as Insurance Taxes, Licenses and
Fees, Excluding Federal Income Taxes in the Summary of Operations Schedule in
the NAIC Life, Accident and Health Convention Blank which is taken from the
Taxes, Licenses and Fees Exhibit, or similar entries on financial statements
filed by the Company. Such term shall not include any franchise or other
federal, state or local tax measured by net income.
"Marketing and Services Agreement" shall have the meaning set forth in
--------------------------------
Section 3.1.
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<PAGE>
"PHCS" shall mean Private Health Care Systems Incorporated, a
----
corporation with its corporate offices in Waltham, Massachusetts that develops
medical provider networks and provides utilization review services.
"PHS" shall mean Physicians Health Services, Inc., a Delaware
---
corporation and the parent of the Company.
"POS Contract" means only those point-of-service ("POS") products
------------
issued by the Company in the Service Area that are marketed (i) as part of a
"multi-choice" arrangement together with Health Insurance Contracts (as defined
in the Marketing and Services Agreement); or (ii) on a "stand alone" basis, if
sold by the sales force of the Reinsurer. POS Contracts include: (i) an in-
network benefit ("In-Network") under which enrollees are required to utilize
health care providers who are part of the PHS Network (as defined in the
Marketing and Services Agreement); and (ii) an "out-of-network" ("Out-of-
Network") benefit under which enrollees may choose to utilize health care
providers who are not part of the PHS Network.
"Profit or Loss" shall have the meaning set forth in Article X.
--------------
"Quarterly Accounting Report" means the report required to be prepared
---------------------------
in accordance with Section 7.2 and providing the data as shown on Schedule C.
"Quarterly Settlement" means the net amount due and payable to any
--------------------
party with respect to any Accounting Period as set forth in Section 7.3.
"Renewal Date" means, with respect to a HMO or POS Contract, the date
------------
that is the anniversary of the day on which the liability of the Company began
under such HMO or POS Contract.
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"Reserves" means amounts shown in the Company's annual statement as
--------
filed with the State of New Jersey as reserves for the HMO and POS Contracts.
"Service Area" means the State of New Jersey.
------------
"Stop Loss Reinsurance" means reinsurance other than the reinsurance
---------------------
under this Agreement obtained by the Company and provided in connection with HMO
and POS Contracts.
"Stop Loss Reinsurance Premium" means consideration paid by the
-----------------------------
Company for Stop Loss Reinsurance provided.
"Stop Loss Reinsurance Recoveries Received" means amounts collected
-----------------------------------------
pursuant to Stop Loss Reinsurance.
"Terminal Accounting and Settlement" means the final accounting and
----------------------------------
payment of any amount due any party upon the termination of this Agreement, as
described in Section 9.1.
"Terminal Accounting Date" shall have the meaning set forth in Section
------------------------
9.1.
"Termination Date" means the date upon which the Reinsurer and PHS
----------------
(Bermuda) shall no longer be required to reinsure any HMO or POS Contracts in
force as of that date.
"Withholds" means amounts withheld by the Company from payments of
---------
claims submitted by primary care physicians and specialists.
6
<PAGE>
ARTICLE II
REINSURANCE COVERAGE
--------------------
2.1 Coverage. (a) Effective May 1, 1996 (the "Effective Date"), the
--------
Company agrees to cede to the Reinsurer: (i) fifty percent (50%) of the risks
under the HMO Contracts, and (ii) fifty percent (50%) of the risks under the In-
Network portion of the POS Contracts, all as more specifically described in
Schedule A, and the Reinsurer agrees to indemnify the Company against fifty
percent (50%) of the risks under such HMO and In-Network portion of the POS
Contracts.
(b) Effective the Effective Date, the Company agrees to cede to the
Reinsurer one hundred percent (100%) of the risks under the Out-of-Network
portion of the POS Contracts, all as more specifically described in Schedule A,
and the Reinsurer agrees to indemnify the Company against one hundred percent
(100%) of the risks under such Out-of-Network portion of the POS Contracts.
(c) Effective the Effective Date, the Reinsurer agrees to retrocede to
PHS (Bermuda) fifty percent (50%) of the risks under the Out-of-Network portion
of the POS Contracts, all as more specifically described in Schedule A, and PHS
(Bermuda) agrees to indemnify the Reinsurer against fifty percent (50%) of the
risks under such Out-of-Network portion of the POS Contracts.
7
<PAGE>
2.2 Plan of Reinsurance. The reinsurance hereunder shall be on a
-------------------
coinsurance basis. The Out-of-Network portion of the POS Contracts shall be
100% reinsured hereunder on a coinsurance basis.
2.3 Conditions. The reinsurance hereunder is subject to the same
----------
limitations and conditions as the HMO and POS Contracts, except as otherwise
expressly provided for in this Agreement.
2.4 Exclusions. The reinsurance hereunder does not apply to the
----------
following risks: (i) any portion of the risk under any HMO or POS Contract
issued by the Company other than the risk reinsured hereunder; (ii) any HMO or
POS Contract issued and delivered in a jurisdiction in which issuance and
delivery of such contract constituted the doing of business where the Company
was not properly licensed; (iii) those risks for which the Reinsurer is not
liable pursuant to the provisions of Section 3.11 hereof; and (iv) any risks
under health maintenance organization or point-of-service contracts issued by
the Company (other than risks under HMO Contracts or POS Contracts) sold in
conjunction with any entity other than the Reinsurer.
ARTICLE III
GENERAL PROVISIONS
------------------
3.1 Contract Administration. The Company and the Reinsurer each shall
-----------------------
have responsibility for certain aspects of the marketing and administration of
the HMO and POS Contracts, in accordance with a Marketing and Services Agreement
between the Reinsurer, the Company and PHS (the "Marketing and Services
Agreement").
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<PAGE>
3.2 Non-Solicitation. (a) During the term of this Agreement, the
----------------
Reinsurer shall not contact, solicit or contract for services with any health
care provider in the Service Area currently under contract with the Company. In
addition, during the term of this Agreement, and following its termination, the
Reinsurer will not provide any party with lists of health care providers under
contract with the Company or non-public information concerning contracts between
the Company (or its Affiliates) and its health care providers under contract;
provided, however, that provider lists must be made available to the Departments
- -------- -------
of Health or Insurance of the State of New Jersey, to prospective
Contractholders, to the Reinsurer's insureds and as otherwise required under
applicable law. This Section 3.2 shall not apply (i) to contracting efforts by
third parties, including, but not limited to, PHCS acting on behalf of the
Reinsurer, for the purpose of developing managed care networks, provided,
however, that, the names of health care providers solicited by such third
parties shall not have been furnished by the Reinsurer, its employees or agents,
or (ii) following the Termination Date of this Agreement, as described in the
provisions of Article VIII hereof. The Reinsurer further agrees not to replace
a HMO or POS Contract with a PHCS managed health care plan during the term of
this Agreement.
(b) No party, nor any of its Affiliates, shall contact, solicit or
contract with any other party's full-time employees who have been engaged in the
activities covered by this Agreement without the consent of such other party.
3.3 Inspection. Any party, or its designated representative, may
----------
inspect, at the offices of the Company, PHS (Bermuda) or the Reinsurer, as the
case may be,
9
<PAGE>
where such records are located, and conduct reasonable audits of, the papers and
any and all other books or documents of the Company, PHS (Bermuda) or the
Reinsurer reasonably relating to the HMO or POS Contracts and the administrative
responsibilities hereunder, during normal business hours for such period as this
Agreement is in effect or for as long thereafter as the Company, PHS (Bermuda)
or the Reinsurer, as the case may be, seeks performance by any other party
pursuant to the terms of this Agreement. The information obtained shall be used
only for purposes relating to the reinsurance provided under this Agreement and
shall not be disclosed to any person without the express permission of the other
party, except to the extent that disclosure is required by law. Each party's
rights under this Section 3.3 shall survive termination of this Agreement.
3.4 Misunderstandings and Oversights. If any delay, omission, error or
--------------------------------
failure to pay amounts due or to perform any other act required by this
Agreement is unintentional and caused by misunderstanding or oversight, the
Company, PHS (Bermuda) and the Reinsurer will adjust the situation to what it
would have been had the misunderstanding or oversight not occurred. The party
that first discovers such oversight or incorrect act as a result of the
misunderstanding will notify the other parties in writing promptly upon
discovery of the misunderstanding or oversight. The parties shall act to
correct the error, omission or oversight within twenty (20) days of notification
of the problem. This Section 3.4 shall not be construed as a waiver by any
party of its right to enforce strictly the terms of this Agreement.
10
<PAGE>
3.5 Reinstatements. If a HMO or POS Contract reinsured hereunder that
--------------
was terminated or lapsed is reinstated while this Agreement is in effect, the
reinsurance for such Contract shall be reinstated automatically as if such
Contract had not been terminated or lapsed. All amounts received in connection
with such reinstatement shall be treated as Direct Paid Premiums.
3.6 Contract Changes or Reserve Changes. The Company, PHS (Bermuda) and
-----------------------------------
the Reinsurer shall share, based upon the percentages set forth in Section 2.1
and Schedule A, in any increase or decrease in the Company's liability that
results from any change in the terms or conditions of any HMO or POS Contract
reinsured hereunder or in the calculation of Reserves. The Company must provide
written notification to the Reinsurer and PHS (Bermuda) within fifteen (15) days
after any such change, if such change can reasonably be expected to have a
significant effect on the transactions contemplated by this Agreement.
3.7 Compliance with Applicable Laws and Regulations. It is the intention
-----------------------------------------------
of the parties that this Agreement comply with all existing applicable laws and
regulations, as from time to time are in effect, so that the agreement remains
in full force and the HMO and POS Contracts remain reinsured hereunder. Each of
the parties agrees to comply with all laws, ordinances, rules, regulations and
orders of regulatory bodies applicable to the transactions contemplated by this
Agreement, including those relating to the payment of commissions.
3.8 Amendment and/or Termination Upon Failure to Comply. In the event
---------------------------------------------------
that it is determined by an insurance or health regulatory authority, the
Internal
11
<PAGE>
Revenue Service or any other federal, state or local regulatory authority or by
any party to this Agreement upon the advice of an insurance or health regulatory
authority or the Internal Revenue Service that this Agreement fails to conform
to, or that the intent of this Agreement cannot be effected as a result of, the
requirements of existing applicable laws and regulations and that this Agreement
may be brought into conformity with said requirements, or the intent of this
Agreement may be effected, only by means of a material change to this Agreement,
or in the event that such laws or regulations are changed subsequent to the
Effective Date and such change has a material adverse effect on any party or
requires a material change to this Agreement in order for this Agreement to
conform with applicable laws and regulations or for its intent to be effected,
the parties shall exercise reasonable efforts to reach an agreement to amend
this Agreement so as to return the parties to the economic position that they
would have been in had no such change occurred or so that both parties share the
economic detriment of such change proportionately. If the parties are unable to
reach an agreement to amend the Agreement, then the differences between the
parties shall be resolved through arbitration in accordance with the provisions
of Article XIII. In the event that any required change is not material, this
Agreement shall be amended in accordance with such requirement.
3.9 Notification of Disapproval or Change in Law. The Company shall
--------------------------------------------
promptly notify the Reinsurer and PHS (Bermuda) of any actual or anticipated
disapprovals or required changes regarding this Agreement that are made by any
insurance or health regulatory authority or taxing authority and of any change
in the
12
<PAGE>
laws, regulations or rulings affecting this Agreement or related documents. The
Reinsurer and PHS (Bermuda) shall be allowed to participate in the defense of
this Agreement or related documents on its own behalf with such authority after
consultation with the Company.
3.10 Setoff. It is expressly understood that any debts or credits,
------
matured or unmatured, liquidated or unliquidated, regardless of when they arose
or were incurred, including but not limited to such debts and credits arising
under Articles IV, V and VI shall, at all times and under all circumstances
relevant to the rights and liabilities of the parties to this Agreement, be
deemed mutual debts or credits, as the case may be, and shall be set off, and
only the net balance shall be allowed or paid.
3.11 Limitations on Liability. (a) The Reinsurer shall not indemnify or
------------------------
be liable pursuant to this Agreement or otherwise for any of the Company's risk,
to the extent any damages result from the negligent acts or omissions to act,
reckless or intentional wrongs, fraud, oppression or bad faith of the Company.
PHS (Bermuda) or the Reinsurer, as the case may be, shall be liable and
indemnify the Company fully for all losses arising from the negligent acts or
omissions to act, reckless or intentional wrongs, fraud, oppression or bad faith
of the Reinsurer or PHS (Bermuda), as the case may be, acting in connection with
a HMO or POS Contract reinsured hereunder.
(b) The Company does not indemnify and shall not be liable pursuant to
this Agreement or otherwise for any of the Reinsurer's risk, to the extent any
damages result from the negligent acts or omissions to act, reckless or
intentional wrongs, fraud, oppression or bad faith of the Reinsurer. The
Company shall be liable and indemnify
13
<PAGE>
the Reinsurer fully for all losses arising from the negligent acts or omissions
to act, reckless or intentional wrongs, fraud, oppression or bad faith of the
Company acting in connection with a HMO or POS Contract reinsured hereunder.
(c) The Reinsurer and PHS Bermuda shall be liable, based on the
applicable percentages set forth in Section 2.1 and Schedule A, and subject to
the election permitted by Section 6.2, for any losses arising from non-negligent
acts or omissions to act taken by the Company in good faith pursuant to HMO or
POS Contracts reinsured hereunder.
(d) For purposes of this Agreement, any damages, claims, liabilities or
other expenses for which the Reinsurer shall be liable shall be net of the
appropriate share of any recoveries from third parties, including, without
limitation, recoveries under Stop-Loss Reinsurance Contracts.
(e) The Reinsurer shall not be liable for any damages incurred by the
Company, PHS (Bermuda) or the Reinsurer to the extent such liability or damages
arise from the action or actions of a health care provider or health care
facility in connection with the HMO or POS Contracts reinsured hereunder.
3.12 Exclusivity. The Company and the Reinsurer shall not enter into an
-----------
arrangement similar to this Agreement for Managed Care products to be offered in
the Service Area with other parties, except as expressly permitted under the
Marketing and Services Agreement.
3.13 Press Releases. No public statement or press release regarding the
--------------
existence of this Agreement or the terms thereof shall be made by any party
hereto
14
<PAGE>
without the prior written consent of the other parties, except as required by
applicable laws, ordinances, rules and regulations.
3.14 Restrictions on the Reinsurer, PHS (Bermuda) and the Company Relating
---------------------------------------------------------------------
to Other Agreements. During the period from the Effective Date through the last
- -------------------
date on which the provisions of this Agreement are in effect, each of the
Reinsurer, PHS (Bermuda) and the Company shall be prohibited from, directly or
indirectly, entering into any contract, lease, sublease, license, sublicense,
promissory note, evidence of indebtedness or other contract or commitment
(whether oral or written), which will, or can reasonably be expected to at any
time, place any material restriction or restrictions on such party's ability to
perform any or all of its obligations under this Agreement.
3.15 Investigations. Each party to this Agreement shall immediately
--------------
notify the other parties, in writing, of any and all investigations of such
party or its directors, principal officers or shareholders conducted by any
federal, state or local governmental or regulatory authority other than routine
examinations or surveys by state insurance or health regulatory authorities and
federal or state tax authorities.
3.16 Change In Control. Each party shall fully disclose the details of
-----------------
any pending Change In Control to the other parties, and shall provide the other
parties with copies of any and all applications for approval therefor made to
federal, state or local regulatory authorities. Such disclosure shall be made
prior to or concurrent with notification and/or application for approval to such
Federal, state or local regulatory authorities of a Change In Control. In the
event that such Change In Control shall be
15
<PAGE>
approved, the party that intends to undergo the Change In Control shall notify
the other parties immediately thereof and the other parties shall have the
rights set forth in Section 8.7.
3.17 Reinsurance or Sale of HMO or POS Contracts. (a) The Company agrees
-------------------------------------------
that, during the period in which this Agreement is in effect, it shall not
reinsure, sell or assign the HMO or POS Contracts to another entity (other than
in connection with Stop Loss Reinsurance).
(b) Notwithstanding paragraph (a) above, this Section 3.17 shall not
restrict the ability of the Company to (i) enter into a merger or consolidation,
(ii) effect a sale of all or a portion of its capital stock or (iii) effect a
sale of its business as an entirety or substantially as an entirety; provided,
however, that the Company may not enter into a transaction listed in (i), (ii)
or (iii) above with another entity unless such other entity provides the
Reinsurer and PHS (Bermuda) with a writing, in form and substance satisfactory
to the Reinsurer and PHS (Bermuda) which shall state that the entity agrees to
be bound by the terms of this Agreement to the same extent and effect as if such
entity had been a party to this Agreement.
3.18 Commission Scale and Commission Scale Changes. The commission scale
---------------------------------------------
applicable to the HMO and POS Contracts as of the Effective Date of this
Agreement shall be set forth in Schedule B. Commission payments made with
respect to any HMO or POS Contracts reinsured hereunder shall be made according
to the same commission scale used by the Company with respect to the specific
types of
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<PAGE>
products listed in Schedule A, or substantially similar products, that are not
subject to this Agreement, as that scale may be changed from time to time.
3.19 Stop-Loss Reinsurance. The Company agrees, during the period that
---------------------
this Agreement is in effect, that it will maintain Stop-Loss Reinsurance with
respect to the HMO Contracts and the POS Contracts in effect, with deductibles,
coverages and limits of liability that are substantially the same as those that
apply under the Stop Loss Reinsurance contract or contracts of the Company that
are in effect on the Effective Date, a copy or copies of which are attached as
Exhibit I; provided, however, that each Stop Loss Reinsurance contract or
contracts of the Company relating to HMO or POS Contracts must provide coverage
with respect to claims relating to any periods during which the Company is
obligated to provide services with respect to HMO or POS Contracts, without
regard to (i) the failure of the Company to remain qualified to conduct the
business for which it is organized, or (ii) the insolvency or the commencement
of supervision, conservation, rehabilitation, liquidation or similar proceedings
against the Company. In the event that any Stop Loss Reinsurance contract
issued to the Company does not meet the requirements of this Section 3.19 at the
Effective Date, or at any time thereafter, the Company will obtain substitute
Stop Loss Reinsurance meeting such requirements from a qualified reinsurer,
including the Reinsurer.
3.20 Statement of Actuarial Opinion. Within forty-five (45) days after
------------------------------
the end of the calendar year, the Company shall provide the Reinsurer with a
Statement of Actuarial Opinion certifying the adequacy of the reserves which are
covered under this
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<PAGE>
Agreement. In addition, the Actuarial Opinion must state whether or not the
reserves covered under this Agreement meet the minimum standards of all states
where the Company is licensed, and if not the difference between the Company's
reserves and state minimums. The Actuarial Opinion shall meet the requirements
as set forth in the NAIC's Actuarial Opinion and Memorandum Regulation. The
Opinion shall be signed by the Company's "Appointed Actuary."
ARTICLE IV
PREMIUMS AND RESERVES
---------------------
4.1 Premiums - HMO Contracts and In-Network Portion of the POS Contracts.
---------------------------------------------------------------------
Premiums under HMO Contracts and under the In-Network portion of the POS
Contracts received by the Reinsurer, pursuant to the terms of the Marketing and
Services Agreement, shall be allocated to the Company and the Reinsurer in
accordance with the applicable percentages set forth in Section 2.1 and in
Schedule A, and the portion of the Premiums allocated to the Reinsurer shall
constitute the consideration in respect of the Reinsurer's acceptance of risk
under this Agreement. The portion of Premiums allocated to the Company shall be
paid over to the Company in accordance with the Quarterly Settlements required
by Section 7.2 of this Agreement.
4.2 Premiums - Out-of-Network Portion of the POS Contracts. Premiums
------------------------------------------------------
under the Out-of-Network portion of the POS Contracts received by the Reinsurer,
pursuant to the terms of the Marketing and Services Agreement, shall be
allocated to the Reinsurer and PHS (Bermuda) in accordance with the applicable
percentages set
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<PAGE>
forth in Section 2.1 and in Schedule A, and the portion of the Premiums
allocated to the Reinsurer and PHS (Bermuda) shall constitute the consideration
in respect of the Reinsurer's and PHS (Bermuda)'s acceptance of risk under this
Agreement.
4.3 HMO and POS Contract Reserves. Each of the Company, the Reinsurer
-----------------------------
and PHS (Bermuda) shall establish and maintain reserves with respect to the HMO
and POS Contracts reinsured hereunder in accordance with the applicable
percentages set forth in Section 2.1 and Schedule A and all applicable
regulatory requirements.
ARTICLE V
EXPENSE ALLOWANCE
-----------------
5.1 Administrative Expenses. Each party shall be entitled to
-----------------------
reimbursement for its Administrative Expenses (not including pre-marketing
expenses), identified in Schedule B, for each Accounting Period. Such
Administrative Expenses, plus any Insurance Taxes and Commissions, paid by such
party with respect to the HMO and POS Contracts during the Accounting Period,
shall be considered reimbursable expenses.
5.2 Payment. The Company, PHS (Bermuda) and the Reinsurer shall be
-------
reimbursed for the amounts shown as Company Expenses, PHS (Bermuda) Expenses or
Reinsurer Expenses, as set forth in Schedule F in connection with each Quarterly
Settlement.
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<PAGE>
ARTICLE VI
CLAIMS
------
6.1 Notice of Claim. Upon receipt of any claim on any HMO or POS
---------------
Contract, which claim is reasonably anticipated to exceed an amount mutually
agreed to by the Company, PHS (Bermuda) and the Reinsurer, the Company shall
promptly notify the Reinsurer and PHS (Bermuda) of such claim. Copies of
notification, claim papers, and proofs shall be furnished by the Company to the
Reinsurer and to PHS (Bermuda) upon request.
6.2 Determination of Claims by the Company. The Reinsurer and PHS
--------------------------------------
(Bermuda) will accept the decision of the Company with respect to the payment of
a claim under a HMO or POS Contract; provided, however, that the Company shall
promptly advise the Reinsurer and PHS (Bermuda) of the Company's intention to
contest a claim under a HMO or POS Contract, and the Reinsurer and PHS (Bermuda)
shall have the right to advise and assist the Company in its determination of
liability and in the best procedure to follow with respect to any such claim of
doubtful validity. The Company, PHS (Bermuda) and the Reinsurer shall share, in
accordance with the applicable percentages set forth in Section 2.1 and Schedule
A, all expenses incurred in connection with contesting, compromising or settling
claims under a HMO or POS Contract, subject to the limitations of Section 3.11.
Such expenses may include, but are not limited to, all costs and expenses of
investigation, settlement of claims, litigation costs and judgments. If,
however, the Reinsurer or PHS (Bermuda), as the case may be, has advised the
Company that a contested claim should be paid, and elects
20
<PAGE>
to assume liability for its applicable percentage (as set forth in Section 2.1
and Schedule A) of the claim as originally presented, the Reinsurer or PHS
(Bermuda), as the case may be, shall not share in any additional costs or
expenses associated with such claim.
6.3 Payment. Payment of Direct Paid Claims with respect to HMO and POS
-------
Contracts shall be made by the Company. The Company shall draw upon a zero
balance bank account maintained by the Reinsurer for the payment of claims. The
Reinsurer shall credit interest on the funds held by the Reinsurer at a rate
calculated pursuant to the formula set forth in Schedule E.
ARTICLE VII
ACCOUNTING AND REPORTING
------------------------
7.1 Reinsurance Accounting. The Company shall maintain separate books or
----------------------
details of account with respect to the HMO and POS Contracts reinsured
hereunder, setting forth the data required in Schedules C, D and F.
7.2 Quarterly Accounting Reports. Following the end of each Accounting
----------------------------
Period, the Company shall supply the Reinsurer and PHS (Bermuda) with a
Quarterly Accounting Report providing the data required in Schedules C and F.
The Quarterly Accounting Report shall be submitted within twenty (20) business
days following the close of each calendar quarter. On November 30 of each year
that this Agreement is in effect, the Reinsurer, PHS (Bermuda) and the Company
shall make a projection
21
<PAGE>
for year end, which Reinsurer shall use in preparing its annual statements.
Subsequent corrections shall be made in the following fiscal year.
Settlements of reimbursable amounts (such as taxes, Withholds, bonuses and
other items paid by the Company) shall be made quarterly, within twenty (20)
business days following the receipt of the information described in the
preceding paragraph. Profit or loss shall be allocated to the parties, and the
appropriate payments made, in connection with the quarterly settlement.
7.3 Settlements. The Company shall be entitled to payment by the
-----------
Reinsurer for any positive amounts shown on Schedule F, line A.3. The Reinsurer
shall be entitled to payment for any positive amounts shown on Schedule F, line
B.6. PHS (Bermuda) shall be entitled to payment for any positive amounts shown
on Schedule F, line C.1. The Reinsurer, PHS (Bermuda) or the Company, as the
case may be, shall pay any such positive amounts to the other party within
twenty (20) days following the receipt or submission of the Quarterly Accounting
Report.
7.4 Reconciliation. Each party shall have the right to review all
--------------
individual components of transactions entered into each Quarterly Accounting
Report, such as Premiums received, Commissions and Insurance Taxes, claims
incurred or paid, and similar items. The parties shall have a reasonable period
from the day the Quarterly Accounting Report is submitted to report any
deficiency in such report and to request an adjustment of any payment made to or
received by any party. Any amount due any party in connection with such
reconciliation shall be paid within twenty (20) days of the receipt of notice
that additional amounts are due.
22
<PAGE>
7.5 Annual Accounting Reports. Following the end of each fiscal year,
-------------------------
the Company shall supply the Reinsurer and PHS (Bermuda) with an Annual
Accounting Report providing the data required in Schedule D, at a time to be
mutually agreed to by the parties.
7.6 Best Efforts to Supply Actual Data. In preparing all reports
----------------------------------
required in this Agreement, the Reinsurer, PHS (Bermuda) or the Company, as the
case may be, shall make its best efforts to supply the actual data. If the
actual data cannot be supplied with the appropriate report, the Reinsurer, PHS
(Bermuda) or the Company, as the case may be, shall produce best estimates, and
shall provide amended reports based on actual data no more than forty-five (45)
days after such report was originally due.
7.7 Interest on Delayed Payments. Should any payment due the Company,
----------------------------
PHS (Bermuda) or the Reinsurer be delayed beyond its due date, such delayed
payment shall accrue interest during such period of delay at an annual rate
calculated pursuant to the formula set forth in Schedule E.
ARTICLE VIII
DURATION AND TERMINATION
------------------------
8.1 Duration. Except as otherwise provided herein, this Agreement shall
--------
be unlimited in duration.
8.2 Commencement of Liability. The liability of the Reinsurer and PHS
-------------------------
(Bermuda) on reinsurance ceded hereunder shall commence on the later of the
Effective
23
<PAGE>
Date and the date the liability of the Company commences under a HMO or POS
Contract, as the case may be, reinsured hereunder.
8.3 Termination of Liability. The liability of the Reinsurer or PHS
------------------------
(Bermuda) with respect to any HMO or POS Contract, as the case may be, shall
terminate on the date the liability of the Company on such HMO Contract or POS
Contract is terminated. If this Agreement is terminated, the Reinsurer's and
PHS (Bermuda)'s liability with respect to HMO and POS Contracts that remain in
force shall terminate on the later of the Termination Date or the dates referred
to in Sections 8.4 or 8.7.
8.4 Termination of Agreement. Any party shall have the right to
------------------------
terminate this Agreement without cause upon the giving of one hundred eighty
(180) days advance written notice to the other parties. In the event that a
party elects to terminate this Agreement pursuant to this provision, the other
parties may elect to continue this Agreement in force and effect with respect to
any HMO or POS Contract subject to this Agreement in effect as of the
Termination Date until the date that is 180 days after the first Renewal Date
for such HMO or POS Contract following the Termination Date. The Termination
Date under this Section 8.4 shall be the effective date set forth in the written
notice required hereunder.
8.5 Automatic Termination. If, at the end of an Accounting Period, none
---------------------
of the HMO or POS Contracts is in force, this Agreement shall automatically
terminate. In the event of termination pursuant to this Section 8.5, the last
day of such Accounting Period shall be the Termination Date.
24
<PAGE>
8.6 Termination Due to Insufficient Premium. If the total annualized
---------------------------------------
premiums for (i) all HMO and POS Contracts reinsured hereunder, plus (ii)
premiums for health insurance contracts issued by the Reinsurer in multi-choice
arrangements with HMO or POS Contracts do not exceed five million dollars
($5,000,000) on the first anniversary of the implementation of this Agreement,
then any party may, within forty-five (45) days thereafter, elect to terminate
this Agreement. The Termination Date shall be ninety (90) days thereafter. The
implementation of this Agreement shall be construed as the date the HMO and POS
Contracts are available for sale under the Marketing and Services Agreement.
The Contractholder of each HMO or POS Contract reinsured hereunder shall, in
compliance with applicable law, be given the choice of terminating its coverage
at the Termination Date or continuing coverage under such Contract until the
Renewal Date applicable thereto next following the Termination Date.
8.7 Termination Subsequent to a Change In Control. In the event of a
---------------------------------------------
Change In Control of the Company (for purposes of this Section 8.7, the term
"Company" shall include PHS), PHS (Bermuda) or the Reinsurer, the party not
undergoing the Change In Control may elect to terminate this Agreement. The
party intending to undergo a Change In Control shall provide the notice
described in Section 3.16 to the other parties. In the event that this
Agreement is terminated following a Change In Control, the party not undergoing
a Change In Control may elect to continue this Agreement in force and effect
with respect to any case that was originally written as an HMO Contract and that
was in force on the Termination Date,
25
<PAGE>
until the tenth (10th) Renewal Date applicable to such HMO Contract, or
continuation managed care contract issued by the Company, following the
Termination Date. The Termination Date under this Section 8.7 shall be the
effective date of the Change In Control.
8.8 Termination for Cause. (a) In the event that any party shall default
---------------------
in the performance of the duties and obligations imposed on it pursuant to the
terms of this Agreement or the Marketing and Services Agreement, or breach any
of the provisions contained herein or therein, including the failure to pay any
amount when due, or the failure of any party to maintain a level of services
under the Marketing and Services Agreement that is reasonably satisfactory to
the other parties, the defaulting party shall be allowed thirty (30) days from
receipt of written notice of such default or breach to present to the non-
defaulting parties a plan to cure such default or breach that is reasonably
satisfactory to the non-defaulting parties. If a reasonably satisfactory plan
to cure the default or breach is not submitted within that time, or if the plan
is not carried out according to its terms, each of the non-defaulting parties
shall have the right to terminate this Agreement upon delivery of written notice
of such termination to the defaulting party, which shall be effective on
receipt, without prejudice to any other rights or remedies available to the non-
defaulting parties by reason of such default or breach.
(b) In the event that any party shall engage in fraudulent, illegal or
grossly negligent conduct with respect to its duties and obligations under this
Agreement or the Marketing and Services Agreement, each of the other parties
shall have the right to
26
<PAGE>
terminate this Agreement upon delivery of written notice of such termination to
the defaulting party, which shall be effective upon receipt, without prejudice
to any other rights or remedies available to the non-defaulting parties by
reason of the defaulting party's conduct.
(c) The Termination Date under this Section 8.8 shall be the date of
receipt of the notice of termination.
8.9 Termination of Agreement Upon the Occurrence of Certain Events. (a)
--------------------------------------------------------------
Upon the occurrence of either of the following events:
(i) one of the parties to this Agreement fails to remain in good standing
under the laws of its state of domicile, or fails for any reason to remain
qualified to engage in the transaction contemplated by this Agreement under
applicable laws, ordinances, rules or regulations; or
(ii) a voluntary or involuntary proceeding is commenced in any state by or
against one of the parties to this Agreement for the purpose of supervising,
conserving, rehabilitating or liquidating such party;
this Agreement may be terminated at the election of either of the other parties
pursuant to a written notice.
The Termination Date under this Section 8.9 will be the day of receipt of
the notice of termination.
8.10 Termination for Material Change in PHS Network. In the event that
----------------------------------------------
the PHS Network (as that term is defined in the Marketing and Services
Agreement) undergoes a material change within the meaning of Section 6.3 of the
Marketing and
27
<PAGE>
Services Agreement, the Reinsurer shall have the right to terminate this
Agreement. Notice of termination of this Agreement under this Section 8.10 shall
be made by the Reinsurer within ninety (90) days of the receipt of notice of a
change in the composition of the PHS Network submitted by the Company pursuant
to Section 6.3 of the Marketing and Services Agreement. The Termination Date
under this Section 8.10 shall be ten (10) days after notice of termination is
given to the Reinsurer.
ARTICLE IX
PAYMENTS UPON TERMINATION OF AGREEMENT
--------------------------------------
9.1 Payments on Termination. (a) In the event that this Agreement shall
-----------------------
be terminated pursuant to Article VIII, a net accounting and settlement as to
any balance due under this Agreement shall be undertaken by the parties to this
Agreement (the "Terminal Accounting and Settlement"), which calculations shall
be performed as of the day that is one (1) year from the date that the liability
of the Reinsurer and PHS (Bermuda) shall have terminated pursuant to Section 8.3
of this Agreement (the "Terminal Accounting Date").
(b) The Company shall supply the Reinsurer and PHS (Bermuda) with final
Schedules C and D which shall show the Terminal Accounting and Settlement. If
the Terminal Accounting and Settlement shows a final net Loss attributable to
the Company, the Company shall pay the appropriate amount of such Loss to each
of the Reinsurer and PHS (Bermuda). If the Terminal Accounting and Settlement
by the Company shows a final net Profit attributable to the Company, the
Reinsurer and PHS
28
<PAGE>
(Bermuda) shall each pay the appropriate amount of such Profit to the Company.
Such Schedules shall be supplied by the Company within the period agreed by the
parties.
(c) Any payment required under the Terminal Accounting and Settlement by
the Company shall be paid by the Company no later than the day on which the
final Schedules C and D, as required by Section 9.1(b), are due. The Reinsurer
and PHS (Bermuda) shall make any payment required to be made by the Reinsurer or
PHS (Bermuda) hereunder within ten (10) days of receipt of such final schedules.
In the event that the calculation for the payment required under the Terminal
Accounting and Settlement cannot be accurately calculated by such date, then an
estimate shall be paid, with a supplemental accounting being made when the
accurate information shall become available.
9.2 Supplemental Accounting. In the event that, subsequent to the
-----------------------
Terminal Accounting and Settlement, an adjustment is made with respect to any
amount taken into account in the Terminal Accounting and Settlement, a
supplemental accounting shall be made. Any net amount owed to the Reinsurer,
PHS (Bermuda) or the Company by reason of such supplemental accounting, plus any
interest due pursuant to Section 7.7, shall be paid promptly upon the completion
of such supplemental accounting.
ARTICLE X
CALCULATION OF PROFIT AND LOSS
------------------------------
10.1 Determination and Allocation of Profit or Loss. The Company shall
----------------------------------------------
calculate Profit or Loss with respect to the HMO and POS Contracts, and the
29
<PAGE>
Reinsurer, PHS (Bermuda) or the Company, as appropriate, shall make settlements
as required by Section 7.3 or Section 9.1, as appropriate, according to the
calculations as shown on Schedules C and F and shall be made part of each
Quarterly Accounting Report.
10.2 Investment Income. (a) Investment Income as shown in Schedules C
-----------------
and F shall be calculated as follows: a rate of interest determined pursuant to
Section 10.2(b) shall be credited or charged on the average daily cash balance
developed with respect to HMO and POS Contracts. The daily cash balance shall
consist of the prior day's closing cash balance, plus Direct Paid Premium
receipts for the day, minus Direct Paid Claims and Capitation Fees paid that day
and further reduced by cash payments to the Company, PHS (Bermuda) or the
Reinsurer on that day, as shown in Schedule F. Such Investment Income shall be
reflected on line II.A of Schedule C.
(b) The interest rate for purposes of this Section 10.2 shall be equal to
the non-loaned portfolio rate for the Reinsurer. The portfolio rate shall be
determined from the most recent annual financial statement submitted to the New
York Insurance Department for the Reinsurer's general account, as more
specifically described in Schedule E.
ARTICLE XI
CONDITION PRECEDENT
-------------------
11.1 Condition Precedent. When, under insurance, public health or other
-------------------
applicable laws or regulations, approval of arrangements of the type
contemplated by this Agreement by one or more Federal, state or local
governmental or regulatory
30
<PAGE>
authorities is required, the receipt by the Company, PHS (Bermuda) and the
Reinsurer of any and all such approvals shall be a condition precedent to the
other party's liability under this Agreement. Subject to Section 11.2, if this
condition precedent is not met by the Company, PHS (Bermuda) or the Reinsurer by
the Effective Date, this Agreement shall be void as of the Effective Date.
11.2 Extension of Time. In the event that the necessary approvals set
-----------------
forth in Section 11.1 have not been obtained by the Company, PHS (Bermuda) or
the Reinsurer as of the Effective Date, the parties may mutually agree to modify
the Effective Date of this Agreement.
11.3 Cooperation of the Parties. Each of the Reinsurer, PHS (Bermuda) and
--------------------------
the Company shall each use its best efforts to cooperate with and assist the
other parties in obtaining the necessary approvals referred to in Section 11.1.
11.4 Guarantee of PHS (Bermuda). As a further condition precedent to the
--------------------------
obligation of the Reinsurer to retrocede the Out-of-Network portion of the POS
Contracts, on or before the Effective Date hereof, PHS (Bermuda) shall deliver
to the Reinsurer an agreement by PHS to guarantee the solvency of PHS (Bermuda).
Such agreement shall be in the form attached hereto as Exhibit A, and shall be
effective for as long as the Reinsurer seeks performance by PHS (Bermuda) under
this Agreement. Any termination or substantial amendment of PHS' agreement to
guarantee the obligations of PHS (Bermuda) shall be cause for termination by the
Reinsurer under Section 8.8 above.
31
<PAGE>
ARTICLE XII
INSOLVENCY OF THE COMPANY
-------------------------
12.1 Payments by the Reinsurer or PHS (Bermuda). In the event of the
------------------------------------------
insolvency of the Company, payments due the Company on all reinsurance made,
ceded, renewed or otherwise becoming effective under this Agreement shall,
subject to Section 12.2, be payable by the Reinsurer or PHS (Bermuda), as the
case may be, directly to the Company or to its liquidator, receiver, or
statutory successor on the basis of the liability of the Company, the Reinsurer
and/or PHS (Bermuda) under the HMO Contracts and the POS Contracts reinsured
hereunder without diminution because of the insolvency of the Company.
12.2 Claims. In the event of the insolvency of the Company, the Reinsurer
------
and PHS (Bermuda) shall be given written notice of the pendency of a claim
against the insolvent Company on a HMO or POS Contract reinsured hereunder
within a reasonable time after such claim is filed in the insolvency proceeding.
During the pendency of such claim, the Reinsurer or PHS (Bermuda) may
investigate such claim and interpose, at its own expense, in the proceeding
where such claim is to be adjudicated, any defense or defenses which it may deem
available to the Company or its liquidator or receiver or statutory successor.
The expense thus incurred by the Reinsurer or PHS (Bermuda) shall be chargeable,
subject to court approval, against the insolvent Company as part of the expense
of liquidation to the extent of a proportionate share of the benefit which may
accrue to the Company solely as a result of the defense undertaken by the
Reinsurer or PHS (Bermuda). Where two or more assuming
32
<PAGE>
reinsurers are involved in the same claim and a majority in interest elect to
interpose defenses to such claim, the expense shall be apportioned in accordance
with the terms of this Agreement as though such expense had been incurred by the
Company.
12.3 Executory Contract. It is expressly understood that this Agreement
------------------
is an executory contract as long as both parties are required to perform under
this Agreement. On the insolvency of any party, if this Agreement is not
confirmed by the insolvent party and given status as an "Administrative
Expense," then the other parties may terminate for non-performance without
additional payment other than payments relating to HMO or POS Contracts for
which liability continues under this Agreement.
ARTICLE XIII
ARBITRATION
-----------
13.1 Appointment of Arbitrators. In the event of any disputes or
--------------------------
differences arising hereafter between the contracting parties with respect to
any transaction, matter or issue arising from or relating in any way to this
Agreement on which agreement between the parties hereto cannot be reached, the
same shall be decided by arbitration. Three arbitrators will decide any dispute
or difference. The arbitrators must be disinterested officers or retired
officers of health maintenance organizations or managed health care companies,
or insurance companies with experience in managed health care, other than the
parties to this Agreement or their Affiliates. Each of the Company and the
Reinsurer agrees to appoint one of the arbitrators with the third, the "Umpire,"
to be chosen by the other arbitrators. In the event that either such party
should fail to
33
<PAGE>
choose an arbitrator within 30 days following a written request by the other
party to do so, the requesting party may choose an Umpire before entering upon
arbitration. In the event that the two arbitrators shall not be able to agree on
the choice of the Umpire within 30 days following their appointment, each
arbitrator shall nominate five candidates within 10 days thereafter, four of
whom the other arbitrator shall decline, and the Umpire shall be chosen from the
two remaining nominees by the President of the American Arbitration Association.
13.2 Decision of Arbitrators; Expenses. The arbitrators shall consider
---------------------------------
customary and standard practices in the HMO and managed health care insurance
businesses. They shall decide by a majority vote of the arbitrators. There
shall be no appeal from their written decision. Judgment may be entered on the
decision. Each party shall bear the expense of its own arbitrator and outside
attorney fees, and shall jointly and equally bear with the other party the
expenses of the third arbitrator.
13.3 Applicable Law; Survival. Any arbitration instituted pursuant to
------------------------
this Article XIII shall be held in New Jersey and the laws of the State of New
Jersey and, to the extent applicable, the Federal Arbitration Act shall apply.
This Article XIII shall survive termination of this Agreement.
13.4 Other Actions. Submission of a matter to arbitration shall be a
-------------
condition precedent to any right to institute a proceeding at law or in equity
concerning such matter, except for injunctive or other provisional relief
pending the arbitration of a matter subject to arbitration pursuant to this
Agreement.
34
<PAGE>
ARTICLE XIV
REPRESENTATIONS AND WARRANTIES
------------------------------
14.1 Representations and Warranties of the Reinsurer. The Reinsurer hereby
-----------------------------------------------
represents and warrants to the Company and PHS (Bermuda) as follows:
The Reinsurer is a mutual life insurance company organized and existing
under the laws, including the insurance laws, of the State of New York and is in
good standing under these laws. The Reinsurer further represents and warrants
that it is duly licensed and admitted as an insurer under the laws of those
jurisdictions in which the HMO and POS Contracts reinsured hereunder have been
issued and is authorized under the laws and regulations of said jurisdictions to
act as a reinsurer in those jurisdictions. In addition, the Reinsurer covenants
that, so long as this Agreement is in effect, the Reinsurer shall take all
actions reasonably necessary to remain duly licensed under the laws of those
jurisdictions wherein the HMO and POS Contracts have been issued. The Reinsurer
shall notify the Company and PHS (Bermuda) immediately in the event that any
license shall be revoked or suspended in any jurisdiction hereunder.
The Reinsurer has full corporate power and authority to execute and deliver
this Agreement and the other agreements and documents contemplated hereby and to
carry out all of its obligations hereunder.
The execution and delivery by the Reinsurer of this Agreement and the other
agreements and documents contemplated hereby, the consummation by the Reinsurer
of the transactions as herein contemplated and the carrying out by the Reinsurer
of its
35
<PAGE>
obligations contemplated hereby have been duly and validly authorized by all
necessary corporate action.
14.2 Representations and Warranties of PHS (Bermuda). PHS (Bermuda)
-----------------------------------------------
hereby represents and warrants to the Company and the Reinsurer as follows:
PHS (Bermuda) is a corporation organized and existing under the laws,
including the insurance laws, of Bermuda and is in good standing under these
laws. PHS (Bermuda) covenants that, so long as this Agreement is in effect,
that it shall take all reasonable actions necessary to remain duly licensed
within the purview of this Agreement under the insurance laws of Bermuda. PHS
(Bermuda) shall notify the Company and the Reinsurer immediately in the event
that its license shall be revoked or suspended in any jurisdiction hereunder.
PHS (Bermuda) has full corporate power and authority to execute and deliver
this Agreement and the other agreements and documents contemplated hereby and to
carry out all of its obligations hereunder.
The execution and delivery by PHS (Bermuda) of this Agreement and the other
agreements and documents contemplated hereby, the consummation by PHS (Bermuda)
of the transactions as herein contemplated and the carrying out by PHS (Bermuda)
of its obligations contemplated hereby have been duly and validly authorized by
all necessary corporate action.
14.3 Representations and Warranties of the Company. The Company hereby
---------------------------------------------
represents and warrants to the Reinsurer and PHS (Bermuda) as follows:
36
<PAGE>
The Company is a corporation organized and existing under the laws,
including the insurance and/or public health laws, of the State of New Jersey
and is in good standing under these laws. The Company further represents and
warrants that it is duly licensed as a health maintenance organization under the
laws of those jurisdictions wherein the HMO and POS Contracts have been issued.
In addition, the Company covenants that, so long as this Agreement is in effect,
the Company shall take all reasonable actions necessary to remain duly licensed
as a health maintenance organization within the purview of this Agreement under
the laws of those jurisdictions wherein the HMO and POS Contracts have been
issued. The Company shall notify the Reinsurer and PHS (Bermuda) immediately in
the event that any license shall be revoked or suspended in any jurisdiction
hereunder.
The Company has full corporate power and authority to execute and deliver
this Agreement and the other agreements and documents contemplated hereby and to
carry out all of its obligations hereunder.
The execution and delivery by the Company of this Agreement and the other
agreements and documents contemplated hereby, the consummation by the Company of
the transactions as herein contemplated and the carrying out by the Company of
its obligations contemplated hereby have been duly and validly authorized by all
necessary corporate action.
ARTICLE XV
CONFIDENTIALITY
---------------
37
<PAGE>
15.1 Obligations of the Parties. Each party agrees that all information
--------------------------
concerning the business affairs of the Company, PHS (Bermuda) or the Reinsurer,
as the case may be, which is not generally available to the public, including
but not limited to, lists of physicians and other health care providers, lists
of brokers and other information of a proprietary nature relating to methods of
doing business heretofore or hereinafter received by it from the other parties
shall be kept and maintained as confidential and in complete secrecy. No party
shall, without the prior written consent of the other parties, disclose at any
time, either orally, or in writing, or otherwise, in any manner, directly or
indirectly, to any person or entity, except to other employees or agents of the
non-disclosing party, any such proprietary information. Any breach of
confidentiality shall give the non-breaching party the right of injunctive
relief in addition to any other remedy permitted by law.
15.2 Survival of Article XV. This Article XV shall survive termination of
----------------------
this Agreement.
38
<PAGE>
ARTICLE XVI
MISCELLANEOUS PROVISIONS
------------------------
16.1 Notices. All notices required pursuant to this Agreement shall be in
-------
writing and shall become effective when received. Each written notice shall be
sent by certified or registered mail, return receipt requested, or a nationally
recognized overnight delivery service (providing for delivery receipt) or
delivered by hand. All notices under this Agreement shall be addressed as
follows:
If to the Reinsurer:
The Guardian Life Insurance Company of America
201 Park Avenue South
New York, New York 10003
ATTENTION: Edward K. Kane, Esq.
Senior Vice President & General Counsel
If to the Company:
Physicians Health Services of New Jersey, Inc.
Mach Center 4
South 61
Paramus Road
Paramus, New Jersey 07652
ATTENTION: Ronald J. Hjelm
Executive Director
If to PHS (Bermuda):
Physicians Health Services (Bermuda) Ltd.
120 Hawley Lane
Trumbull, Connecticut 06611
ATTENTION: Regina M. Campbell
Senior Vice President & Chief Administrative Officer
39
<PAGE>
If to PHS:
Physicians Health Services, Inc.
120 Hawley Lane
Trumbull, Connecticut 06611
ATTENTION: Regina M. Campbell
Senior Vice President & Chief Administrative Officer
16.2 Successors and Assigns. This Agreement cannot be assigned by the
----------------------
Company, PHS (Bermuda) or the Reinsurer without the prior written approval of
the other parties. The provisions of this Agreement shall be binding upon and
inure to the benefit of and be enforceable by the parties hereto and their
respective permitted successors and assigns.
16.3 Counterparts. This Agreement may be executed simultaneously in any
------------
number of counterparts, each of which will be deemed an original, but all of
which will constitute one and the same agreement.
16.4 Currency. All payments and accounts shall be made in United States
--------
Dollars, and all fractional amounts shall be rounded to the nearest whole
dollar.
16.5 Amendment. This Agreement shall be amended only by written agreement
---------
signed by a duly authorized officer of each of the Company, PHS (Bermuda) and
the Reinsurer, and any change to this Agreement shall be null and void unless
made by such amendment; provided, however, that where, under insurance, public
health or other applicable laws or regulations, the approval of any such
amendment to this Agreement by one or more Federal, state or local governmental
or regulatory authorities is required, the amendment shall not take effect
unless and until all such
40
<PAGE>
necessary approvals have been received by the Company. In the event that such an
approval is required, the Company, PHS (Bermuda) and the Reinsurer shall each be
obligated to take all necessary actions in order to obtain such approval.
16.6 Entire Agreement. This Agreement and the Schedules and Exhibits
----------------
attached hereto, together with the Marketing and Services Agreement, supersede
all prior discussions and written and oral agreements between the parties with
respect to the subject matter of this Agreement, and contain the sole and entire
agreement between the parties hereto with respect to the subject matter hereof.
Headings are not part of this Agreement, and shall not affect the terms hereof.
16.7 Binding Effect. This Agreement is binding upon and will inure to the
--------------
benefit of the parties and their respective successors and permitted assigns.
16.8 Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of New Jersey, without giving effect to
its provisions relating to conflicts of law.
16.9 Severability. In the event any section or provision of this
------------
Agreement or related documents is found to be void and unenforceable by a court
of competent jurisdiction, the remaining sections and provisions of this
Agreement or related documents shall nevertheless be binding upon the parties
with the same force and effect as though the void or unenforceable part had not
been severed or deleted.
16.10 Waivers and Remedies. The waiver by any of the parties of any other
--------------------
party's prompt and complete performance, or breach or violation, of any
provisions of this Agreement and related documents shall not operate nor be
construed as a waiver of
41
<PAGE>
any subsequent breach or violation, and the waiver by any of the parties to
exercise any right or remedy which it may possess hereunder shall not operate
nor be construed as a bar to the exercise of such right or remedy by such party
upon the occurrence of any subsequent breach or violation.
42
<PAGE>
EXECUTION
---------
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their duly authorized representatives as of the date first above
written.
PHYSICIANS HEALTH SERVICES
OF NEW JERSEY, INC.
By ________________________________
Name
Title
PHYSICIANS HEALTH SERVICES
(BERMUDA) LTD.
By ________________________________
Name
Title
THE GUARDIAN LIFE INSURANCE
COMPANY OF AMERICA
By ________________________________
Name
Title
43
<PAGE>
SCHEDULE A
----------
CONTRACTS AND RISKS REINSURED
-----------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
CONTRACT RISKS REINSURED
- --------------------------------------------------------------------------------
<S> <C>
- - HMO Contracts and In-Network Portion - The Reinsurer agrees to accept 50%
of POS Contracts of the risks under such Contracts
- --------------------------------------------------------------------------------
- - Out-of-Network Portion of POS - The Reinsurer agrees to accept 100%
Contracts of the risks under such Contracts and
to re-trocede 50% of such risks to
PHS (Bermuda)
- PHS (Bermuda) agrees to accept 50%
of the risks under such Contracts
- --------------------------------------------------------------------------------
</TABLE>
A-1
<PAGE>
SCHEDULE B
----------
FEES AND COMMISSIONS
--------------------
I. Guardian's Marketing and Administrative Services Fee (as a percentage of
------------------------------------------------------------------------
premium)
- --------
HMO Plans and POS Plans
-----------------------
Sales %
Billing & Collection %
Marketing %
Other %
-
Total %
II. PHS' Administrative Services Fee (as a percentage of premium)
-------------------------------------------------------------
HMO Plans and POS Plans
-----------------------
Network Management %
Claims %
Member Relations %
Marketing %
Other + Bad Debt 0.5% %
-
Total %
III. Schedule of Commissions
-----------------------
Scales will be filed with the Insurance Department prior to
implementation.
B-1
<PAGE>
SCHEDULE C
----------
PHS/GUARDIAN/PHS (BERMUDA)
--------------------------
QUARTERLY PROFIT/LOSS
---------------------
PHS
---
HMO POS(In)
--- ---
POS(Out)
---
I. Profits/Losses from Underwriting:
--------------------------------
A. Earned Premium:
--------------
1. Cash Received
2. Change in Due and Unpaid
3. Change in Unearned Premium Reserve
4. Change in Advance Premium
5. Gross Earned Premium (1+2-3-4)
B. Incurred Claims:
---------------
(i) Cash Claims
1. Claims Paid
2. Withholds Paid
3. Direct Paid Capitations
4 COB Recoveries
5. Subrogation Recoveries
6. PCP Bonuses
7. Total Cash Claims (1+2+3-4-5+6)
(ii)Change in Reserves
8. Change in IBNR
9. Change in Withholds Payable
10. Change in Subrogation Recoverables
11. Change in COB Recoverables
12. Change in PCP Bonus Payables
13. Total Change in Reserves (8+9-10-11+12)
14. Total Incurred Claims (7+13)
C-1
<PAGE>
PHS
---
HMO POS(In) POS(Out)
--- --- ---
C. Expenses:
--------
1. Incurred Commissions
a. Cash
b. Change in Liability
c. Total Incurred (a+b)
2. Incurred Premium Taxes, Licenses & Fees
a. Cash
b. Change in Liability
c. Total Incurred (a+b)
3. Incurred Guardian Administration Expenses
4. Incurred PHS Administration Expenses
5. Joint Marketing Expenses
6. IHC Assessments Paid
7. Change in IHC Assessments Payable
8. Incurred Expenses (1+2+3+4+5+6+7)
II. Profit for Investment Income:
-----------------------------
A. Net Investment Income Profit/Loss
III. Profit Share:
-------------
A. Net Aggregate Profit/Loss (I.A5-I.B14-I.C8+IIA)
B. PHS Profit/Loss
C. Guardian Profit/Loss
D. PHS (Bermuda) Profit/Loss
C-2
<PAGE>
SCHEDULE D
ANNUAL REPORTS
--------------
Period Covering _______ to _______
INTENTIONALLY LEFT BLANK
TO BE DEVELOPED BY THE PARTIES AT A LATER DATE
D-1
<PAGE>
SCHEDULE E
----------
INTEREST RATES
--------------
The annual Investment Income Interest Rate shall equal the non-loaned
-------------------------------
portfolio rate for the Reinsurer's general account assets for the current
calendar year. The portfolio rate shall be determined from the Annual
Statement submitted to the New York Insurance Department for the Reinsurer's
general account based on the formula given below:
rate = (I+CG)/(.5x(A+B-I-CG))
Where:
A = cash and invested assets plus accrued investment income less borrowed
money at the end of year (page 2, line 10A less line 5 plus line 16 plus line
2102, less page 3, line 11.4 less line 16 less line 22 less line 2501);
B = same quantity as "A" above except for the beginning of year;
I = net investment income for the year (exhibit 2, line 16) plus
amortization of interest maintenance reserve (page 4, line 4A);
CG = capital gains/loss, less interest maintenance reserve (exhibit 3,
line 10, column 4 minus footnote exhibit 3, line 2, column A plus exhibit 4,
line 10, column 4).
The pages and lines referred to above are as they appear in the Reinsurer's
1994 annual statement. These pages and lines may change from year to year.
For quarterly reporting purposes, the Investment Income Interest Rate shall
be determined based on the following, with an adjustment to reflect the
actual experience during the first quarter of the succeeding calendar year:
First quarter: The prior year Investment Income Interest Rate.
Subsequent quarters: A reasonable estimate of the current year Investment
Income Interest Rate.
E-1
<PAGE>
SCHEDULE F
----------
Quarterly Funds Reconciliation
------------------------------
Period Covering _______ to _______
<TABLE>
<CAPTION>
A. Cash To Company PHS
- ----------------------- ---
<S> <C> <C>
1. Company Profit 0
-------------- --------
Sch. C, III. B.):
-------------------
2. Company Expenses
----------------
Sch. C, I. C.4): 0
---------------- --------
3. Total Cash to Company
-----------------------
(1.+ 2.): 0
--------- --------
B. Cash to Reinsurer Guardian
- -- ----------------- --------
1. Reinsurer Profit
----------------
(Sch. C, III C): 0
---------------- --------
2. Investment Income
-----------------
(Sch. C, II A): 0
----------------------- --------
3. Earned Premium
--------------
(Sch. C, I. A.7): 0
----------------- --------
4. Incurred Claims
---------------
(Sch. C, I. B.(ii) 18): 0
----------------------- --------
5. Reinsurer Expenses
------------------
(Sch. C, I. C.8): 0
----------------- --------
6. Total Cash to
------------------
Reinsurer
---------
(1-2-3+4+5): 0
------------ --------
</TABLE>
F-1
<PAGE>
C. Cash to PHS (Bermuda) PHS (Bermuda)
- -------------------------- -------------
1. PHS (Bermuda) Profit
--------------------
Sch. C, III D 0
--------
F-2
<PAGE>
EXHIBIT 10.(d)
AMENDMENT TO REINSURANCE AGREEMENT
This Amendment to the Agreement (as defined below) is between The Guardian
Life Insurance Company of America ("Guardian") and Physicians Health Services
(Bermuda) Ltd ("PHS (Bermuda)") and is dated as of July 31, 1996.
WHEREAS, Guardian and PHS (Bermuda) entered into a Reinsurance Agreement
dated April 27, 1995 (the "Agreement"), pursuant to which Guardian agreed to
cede to PHS (Bermuda) fifty percent (50%) of the risks under certain of
Guardian's health insurance contracts, as more fully described in the Agreement;
and
WHEREAS, Guardian and PHS (Bermuda) wish to retroactively amend the
Agreement as set forth herein.
NOW, THEREFORE, the parties hereto agree as follows:
1. EFFECTIVE AS OF JANUARY 1, 1996 THROUGH AND INCLUDING JUNE 30, 1996:
The Agreement is hereby amended by the deletion, in its entirety, of the
first paragraph in Schedule A to the Agreement, which states:
Quota Share
The Reinsurer agrees to reinsure a 50% quota share (the
"Quota Share") of the risks on the Health Insurance
Contracts (as defined), issued (or to be issued) by the
Company in the Service Area.
; and by the substitution therefor of the following paragraph:
Quota Share
The Reinsurer agrees to reinsure: (i) a 10% quota share
(the "Quota Share") of the risks on those Health Insurance
Contracts that are not the "out-of network" component of a
PHS health maintenance organization plan; and (ii) a 50%
Quota Share of the risks on those Health Insurance Contracts
that are the "out-of-network" component of a PHS health
maintenance organization plan.
<PAGE>
2. EFFECTIVE AS OF JULY 1, 1996:
A. The Agreement is hereby amended by the deletion, in its entirety, of the
definition of the term "Health Insurance Contracts" on page 3 of the Agreement,
which states:
"Health Insurance Contracts" means only those health insurance
contracts issued by the Company in the Service Area that are marketed
(i) by the sales force of an Affiliate of the Reinsurer or the
Company's sales force as part of a "dual choice" offering under which
an Affiliate of the Reinsurer and the Company cooperate in offering
managed care and health insurance arrangements, or (ii) by the sales
force of an Affiliate of the Reinsurer in "stand alone" arrangements.
The term Health Insurance Contract includes "preferred provider
organization" contracts using PHS' network of health care providers,
or PHCS' network of providers when sold in conjunction with a PHS HMO
product, and any "out-of-network" component of a health maintenance
organization plan when such component is underwritten by the Company.
; and by the substitution therefor of the following paragraph:
"Health Insurance Contracts" means the "out-of-network" component
of a PHS health maintenance organization plan when such
"out-of-network" component is underwritten by the Company and offered
for sale in the Service Area.
B. The Agreement is hereby amended by the deletion, in its entirety, of the
first paragraph in Schedule A to the Agreement, as amended, which states:
Quota Share
The Reinsurer agrees to reinsure: (i) a 10% quota share (the
"Quota Share") of the risks on those Health Insurance Contracts that
are not the "out-of network" component of a PHS health maintenance
organization plan; and (ii) a 50% Quota Share of the risks on those
Health Insurance Contracts that are the "out-of-network" component of
a PHS health maintenance organization plan.
; and by the substitution therefor of the following paragraph:
2
<PAGE>
Quota Share
The Reinsurer agrees to reinsure a 50% quota share (the "Quota
Share") of the risks on the Health Insurance Contracts (as such
defined term has been amended), issued (or to be issued) by the
Company in the Service Area.
C. The Agreement is hereby amended by the deletion, in its entirety, of
Schedule B to the Agreement, which states:
SCHEDULE B
CONTRACT ALLOWANCES, ADMINISTRATIVE SERVICE FEES
I. Guardian's Administrative Services Fee (as a percentage of premium)
<TABLE>
<CAPTION>
POS (Out) PPO Indemnity
<S> <C> <C> <C>
Sales 2.0% 2.0% 2.0%
Billing & Collection 1.5% 1.5% 1.5%
Claims N/A N/A 3.5%
Marketing 0.25% 0.25% 0.25%
Other 1.25% 1.25% 1.25%
----- ----- -----
Total 5.00% 5.00% 8.50%
II. PHS' Administrative Services Fee (as a percentage of premium)
POS (Out) PPO Indemnity
Network
Management 3.5% 3.5% N/A
Claims 3.5% 3.5% N/A
Member Relations 1.2% 1.2% N/A
Marketing 0.25% 0.25% N/A
Other + Bad Debt 0.75% 0.75% N/A
----- -----
Total 9.20% 9.20%
</TABLE>
; and by the substitution therefor of a new Schedule B, as follows:
3
<PAGE>
SCHEDULE B
CONTRACT ALLOWANCES, ADMINISTRATIVE SERVICE FEES
I. Guardian's Administrative Services Fee (as a percentage of premium)
<TABLE>
<CAPTION>
POS (Out)
<S> <C>
Sales 2.0%
Billing & Collection 1.5%
Claims N/A
Marketing 0.25%
Other 1.25%
-----
Total 5.00%
II. PHS' Administrative Services Fee (as a percentage of premium)
POS (Out)
Network
Management 3.5%
Claims 3.5%
Member Relations 1.2%
Marketing 0.25%
Other + Bad Debt 0.75%
-----
Total 9.20%
</TABLE>
3. From and after the effective date hereof, references in the Agreement to
"the Agreement," "hereafter," "herein" and words of similar import shall be
deemed to be references to the Agreement, as amended hereby.
4. The Agreement, as amended hereby, contains all covenants, terms and
undertakings of the parties thereto with respect to the transaction contemplated
thereby; any and all other agreements, whether written or oral, between such
parties with respect to the same subject matter shall, from and after the date
hereof, be of no force or effect.
5. This Amendment shall be governed by the laws of the State of New York,
without giving effect to the principles of conflicts of laws thereof.
6. This Amendment may be executed in counterparts, each of which shall
constitute an original, but all of which taken together shall constitute a
single instrument.
4
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amendment to
Reinsurance Agreement to be executed by their duly authorized officers as of the
day and year first above written.
The Guardian Life Insurance
Company of America
By: \s\ Edward K. Kane
------------------------------
Name: Edward K. Kane
Title: Senior VP and General Counsel
Physicians Health Services (Bermuda) Ltd.
By: Regina M. Campbell
------------------------------
Name: Regina M. Campbell
Title: Secretary
5
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 7,969
<SECURITIES> 82,260
<RECEIVABLES> 37,773
<ALLOWANCES> 1,525
<INVENTORY> 0
<CURRENT-ASSETS> 146,125
<PP&E> 62,009
<DEPRECIATION> 12,875
<TOTAL-ASSETS> 219,926
<CURRENT-LIABILITIES> 95,900
<BONDS> 18,101
0
0
<COMMON> 94
<OTHER-SE> 104,609
<TOTAL-LIABILITY-AND-EQUITY> 219,926
<SALES> 230,252
<TOTAL-REVENUES> 233,513
<CGS> 201,848
<TOTAL-COSTS> 201,848
<OTHER-EXPENSES> 38,376
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (7,727)
<INCOME-TAX> (3,588)
<INCOME-CONTINUING> (4,139)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,139)
<EPS-PRIMARY> (0.45)
<EPS-DILUTED> (0.45)
</TABLE>
