<PAGE>
As filed with the Securities and Exchange Commission on April 29, 1997
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________________
FORM S-1
REGISTRATION STATEMENT
under
THE SECURITIES ACT OF 1933
_____________________________
PHYSICIANS QUALITY CARE, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 8011 04-3267297
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction Classification Code Number) Identification No.)
of incorporation or
organization)
</TABLE>
950 Winter Street, Suite 2410
Waltham, Massachusetts 02154
(617) 890-5560
(Address, including zip code, and telephone number, including area code of
registrant's principal executive offices)
____________________________
Jerilyn P. Asher
Chief Executive Officer and
Chairman of the Board
PHYSICIANS QUALITY CARE, INC.
950 Winter Street, Suite 2410
Waltham, Massachusetts 02154
(617) 890-5560
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
____________________________
Copies to:
Thomas E. Neely, Esq.
Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109
(617) 526-6000
Approximate date of commencement of proposed sale to the public:
As promptly as practicable after this Registration Statement becomes effective.
_________________________________
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [_] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_] _________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Proposed Maximum
Title of Each Class of Amount to be Offering Price per Proposed Maximum Amount of
Securities to be Registered Registered Share/(1)/ Aggregate Offering Price/(1)/ Registration Fee
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Common Stock, $.01 8,000,000 $3.00 $24,000,000 $7,273
par value
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
/(1)/ Estimated solely for purposes of calculating the amount of the
registration fee paid pursuant to Rule 457(a).
_________________________________
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
SUBJECT TO COMPLETION DATED APRIL 29, 1997
PROSPECTUS
8,000,000 Shares
PHYSICIANS QUALITY CARE, INC.
Class A Common Stock
_________________________________
This Prospectus relates to a total of 8,000,000 shares of Class A
Common Stock, $.01 par value per share (the "Common Stock"), of Physicians
Quality Care, Inc. ("PQC" or the "Company"), which may be offered and
issued from time to time by the Company in connection with future
affiliation transactions with physician practices (the "Affiliations") in
accordance with Rule 415(a)(1)(viii) of Regulation C under the Securities
Act of 1933, as amended (the "Securities Act"). These shares will
ordinarily represent consideration paid upon the affiliation of a physician
practice with the Company. The shares may also include shares to be
delivered upon the exercise or satisfaction of conversion or purchase
rights which were previously created or assumed by the medical practices
whose businesses or properties become affiliated with PQC. At the date
hereof all the shares described herein remain available for issuance in
connection with future Affiliations.
_________________________________
See "Risk Factors" beginning on page 8 for a discussion of
certain factors which should be considered by prospective investors.
_________________________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
May __,1997
<PAGE>
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. NO ONE SHOULD INVEST WHO
IS NOT PREPARED TO LOSE HIS OR HER ENTIRE INVESTMENT. THERE IS NO PUBLIC
MARKET FOR THESE SECURITIES, THE SHARES WILL BE SUBJECT TO CONTRACTUAL
RESTRICTIONS ON RESALE, AND IT IS NOT EXPECTED THAT THERE WILL BE A MARKET
FOR THE RESALE OF THESE SECURITIES IN THE FORESEEABLE FUTURE.
IN MAKING AN INVESTMENT DECISION INVESTORS MUST RELY ON THEIR OWN
EXAMINATION OF THE COMPANY AND THE TERMS OF THE TRANSACTION DESCRIBED
HEREIN, INCLUDING THE MERITS AND RISKS INVOLVED. PROSPECTIVE INVESTORS
SHOULD NOT CONSTRUE THE CONTENTS OF THIS PROSPECTUS AS LEGAL OR INVESTMENT
ADVICE. INVESTORS SHOULD CONSULT THEIR OWN COUNSEL, ACCOUNTANTS OR
BUSINESS ADVISORS AS TO LEGAL AND RELATED MATTERS CONCERNING AN INVESTMENT
IN THE SECURITIES OFFERED HEREBY.
THE COMPANY WILL MAKE AVAILABLE TO ANY PROSPECTIVE INVESTOR, PRIOR TO THE
CLOSING, THE OPPORTUNITY TO ASK QUESTIONS OF AND TO RECEIVE ANSWERS FROM
THE COMPANY CONCERNING THE TERMS AND CONDITIONS OF THE OFFERING, THE
COMPANY OR ANY OTHER RELEVANT MATTERS, AND TO OBTAIN ANY ADDITIONAL
INFORMATION TO THE EXTENT THE COMPANY POSSESSES SUCH INFORMATION OR CAN
OBTAIN IT WITHOUT UNREASONABLE EXPENSE.
BY ACCEPTING DELIVERY OF THIS PROSPECTUS, PROSPECTIVE INVESTORS RECOGNIZE
AND ACCEPT THE NEED TO CONDUCT THEIR OWN THOROUGH INVESTIGATION AND TO
EXERCISE THEIR OWN DUE DILIGENCE BEFORE CONSIDERING AN INVESTMENT IN THE
COMPANY.
______________________________________________
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (the "Registration
Statement") under the Securities Act with respect to the shares of Common
Stock offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto, as permitted by the rules and regulations of the
Commission. For further information with respect to the Company and the
shares of Common Stock offered hereby, reference is hereby made to such
Registration Statement, exhibits and schedules. Statements contained in
this Prospectus as to the contents of any contract or other document
referred to are not necessarily complete, and in each instance reference is
made to the copy of such contract or other document filed as an exhibit to
the Registration Statement, each such statement being qualified in all
respects by such reference. A copy of the Registration Statement may be
examined without charge at the offices of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 and at regional offices of the
Commission located at 7 World Trade Center, 13th Floor, New York, New York
10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of all or any part thereof may be obtained
from the Public Reference Section of the Commission, Washington, D.C. 20549
upon payment of the fees prescribed by the Commission. The Commission
maintains a website (http://www.sec.gov) that contains the Registration
Statement and exhibits.
______________________________________________
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary 4
Risk Factors 8
Use of Proceeds 15
Dividend Policy 15
Selected Financial Data 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 17
Business 20
Management 33
Certain Transactions 38
Plan of Distribution 38
Dilution 39
Principal Stockholders 40
Description of Capital Stock 42
Shares Eligible for Future Sale 47
Legal Matters 47
Index to Financial Statements F-1
</TABLE>
No person has been authorized in connection with the offering made hereby to
give any information or to make any representation not contained in this
Prospectus and, if given or made, such information or representation must not be
relied upon as having been authorized by the Company. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any of the
securities offered hereby to any person or by anyone in any jurisdiction in
which it is unlawful to make such offer or solicitation. Neither the delivery of
this Prospectus nor any sale made hereunder shall, under any circumstances,
create any implication that the information contained herein is correct as of
any date subsequent to the date hereof.
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more
detailed information and the Financial Statements and notes thereto
appearing elsewhere in this Prospectus, including the information under
"Risk Factors."
The Company
Physicians Quality Care, Inc. ("PQC" or the "Company") provides
practice management services for multi-specialty medical practice groups.
The Company's objective is to establish networks of primary and specialty
care physicians and related diagnostic and therapeutic support services
which can provide comprehensive healthcare services in targeted geographic
areas.
PQC was incorporated in March 1995 as a Delaware corporation.
The Company's executive offices are located at 950 Winter Street, Suite
2410, Waltham, Massachusetts 02154 and its telephone number is (617) 890-
5560.
PQC's strategy has four central elements:
. developing economies of scale and geographic penetration by affiliating
with large numbers of qualified physicians;
. assisting the affiliated practices in providing cost-effective
healthcare to special populations;
. building comprehensive local healthcare networks by developing
contractual or strategic relationships with providers of, or eventually
itself providing, a full continuum of health care services in the
community; and
. improving practice performance by seeking to maximize the value of each
physician encounter.
The Company believes that this strategy will enable it to generate
increased demand for the services and capabilities of its affiliated physicians,
treat patients in lower cost settings and negotiate favorable managed care
contracts. The Company intends to achieve growth through the recruitment of
additional physicians, the expansion of managed care relationships and the
development of contractual or strategic relationships with providers of
ancillary services.
The core of PQC's proposed integrated healthcare delivery system is its
affiliation with groups of physicians who enter into long-term management
agreements with the Company. The Company assumes responsibility for non-medical
aspects of an affiliated physician's practice and focuses its efforts on
increasing revenues and improving operating margins, implementing management
information systems and negotiating managed care contracts. The physicians
remain responsible for, among other things, the medical, professional and
ethical aspects of their practices. By affiliating with the Company, physicians
have increased opportunity to access capital, continue to participate in the
profitability of their individual practices and, through stock ownership, share
a financial interest in the overall performance of the Company.
General Affiliation Model. Although the details of each affiliation
transaction may differ, the Company has developed a general affiliation model
designed to capture the benefits of integration while preserving significant
physician autonomy (the "General Affiliation Model"). In the General Affiliation
Model, physicians initially affiliating with the Company in each geographic area
become stockholders of the Company and transfer their practices by mergers or
asset sales to a newly-formed professional
4
<PAGE>
corporation or professional association permitted to practice medicine
under applicable law (each, an "Affiliated Group"). These physicians,
along with other physicians in that geographic area who subsequently become
part of an Affiliated Group and become stockholders of the Company
(collectively, the "Stockholder Physicians"), execute multi-year employment
agreements (each, an "Employment Agreement") with the Affiliated Group at
the time that they transfer their practice assets. The Affiliated Group,
in turn, enters into a 40-year agreement (a "Services Agreement") with the
Company pursuant to which the Company agrees to provide the physicians in
the Affiliated Group with comprehensive management services in exchange for
a fee. As consideration for transferring their practices to and becoming
employed by the Affiliated Group, Stockholder Physicians receive shares of
the Company's Class A Common Stock, $.01 par value (the "Class A Common
Stock") and in some cases cash, the amount of which is negotiated on an
individual basis between each Stockholder Physician and the Company.
Physicians who are not stockholders of the Company may also be employed by
the Affiliated Group.
The Employment Agreements with the Stockholder Physicians contain certain
restrictive covenants, including covenants relating to noncompetition,
confidentiality and nonsolicitation of employees. Each Employment Agreement
generally is terminable by the Affiliated Group with respect to any
individual Stockholder Physician upon the death or disability of such
Stockholder Physician or upon the occurrence of certain events that either
interfere with the ability of such Stockholder Physician to practice
medicine or significantly diminish the value of such Stockholder
Physician's affiliation to the Affiliated Group. Each Stockholder
Physician may terminate his or her Employment Agreement under certain
circumstances, including without cause upon six months notice to the
Affiliated Group.
Established Affiliations. The Company is in the early stages of its
development. The Company has completed affiliation transactions with (i)
thirty-nine (39) physicians in the Springfield, Massachusetts area who
transferred their practices to, and became employees of, a newly formed
Massachusetts professional corporation, Medical Care Partners, P.C. (the
"Springfield Affiliated Group"), that has a long-term Services Agreement
with PQC and (ii) fifty-nine (59) physicians in the greater Baltimore-
Annapolis, Maryland area who transferred their practices to, and became
employees of, a newly formed Maryland professional association, Flagship
Health, P.A. (the "Flagship Affiliated Group"), that also has a long-term
Services Agreement with PQC. The physicians in the Springfield Affiliated
Group and Flagship Affiliated Group remain in their pre-affiliation
locations offering their patients the continuity and convenience of
decentralized offices. Laboratory and administrative services are provided
on a centralized basis, however, thereby providing the Company with the
potential for economies of scale in purchasing and other administrative
efficiencies.
The physicians in the Springfield Affiliated Group treat patients in
western Massachusetts and northern Connecticut. Twenty-four (24) of the
physicians are engaged in primary care practices and fifteen (15) are
engaged in specialist practices including pulmonology, cardiology,
oncology, infectious diseases, rheumatology and gastroenterology. During
1996, the practices combined into the Springfield Affiliated Group
generated approximately $16.5 million in patient revenue. The physicians
in the Flagship Affiliated Group serve patients in the Baltimore-Annapolis,
Maryland area. Forty-one (41) of the Flagship physicians are engaged in
primary care practices, including twenty (20) physicians with pediatric
practices. Eighteen (18) of the Flagship physicians are engaged in
specialist practices, including hematology, cardiology, oncology,
infectious diseases, rheumatology, gastroenterology and neurology. The
practices combined into the Flagship Affiliated Group generated
approximately $25 million in patient revenue in 1996.
5
<PAGE>
The Offering
<TABLE>
<CAPTION>
<S> <C>
Common Stock offered by the Company...................... 8,000,000 shares
Common Stock to be outstanding after this offering....... 32,071,614 shares(1)
Use of Common Stock being offered........................ To constitute all or a portion
of the purchase price of the
Affiliations. See "Use of
Proceeds."
</TABLE>
- -----------------
(1) Includes outstanding shares of Class A Common Stock, Class B-1 Common
Stock, $.01 par value per share (the "Class B-1 Common Stock") and Class B-2
Common Stock, $.01 par value per share (the "Class B-2 Common Stock," and
together with the Class B-1 Common Stock, the "Class B Common Stock"). The
number of shares to be outstanding after the offering does not include any
shares of Class A or Class B Common Stock that may be issued by the Company to
finance its operations or cash payments in Affiliations or shares issuable
pursuant to outstanding options or warrants. Such sources of equity financing
may include certain institutional funds affiliated with Bain Capital, Inc. that
have entered into a Stock Purchase Agreement with the Company, pursuant to which
the Company, subject to certain conditions, may sell an additional 8,000,000
shares of Class B Common Stock to certain institutional investors affiliated
with Bain Capital, Inc. See "Business -- The Bain Financing." On a fully diluted
basis, assuming exercise of all outstanding warrants and options, and the
issuance of shares under certain earn-out agreements, 40,800,157 shares of Class
A and Class B Common Stock were outstanding on March 31, 1997.
6
<PAGE>
Summary Of Financial Data
(in thousands, except per share data)
The following summary financial data for the Company and Springfield
Medical Associates, Inc. (the "Predecessor") should be read in conjunction with
the financial statements and notes thereto, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the pro forma
financial statements of the Company and notes thereto, included elsewhere in
this Prospectus. The summary financial data of the Predecessor as of December
31, 1993, 1994 and 1995 and for the period from January 1, 1996 to August 30,
1996, have been derived from the financial statements of the Predecessor, which
have been audited by Ernst & Young LLP, independent auditors. The summary
financial data of the Company for the period from March 20, 1995 (inception)
through December 31, 1995 and for the year ended December 31, 1996 have been
derived from financial statements of the Company which have been audited by
Ernst & Young LLP, independent auditors. Ernst & Young LLP's report on the
financial statements of the Company for the year ended December 31, 1996 and
Note 2 to such financial statements which are included in this Prospectus
describe an uncertainty about the Company's ability to continue as a going
concern. The pro forma summary financial data for the Predecessor for the year
ended December 31, 1996 is unaudited. However, such financial statements have
been derived from the financial statements of the Predecessor for the period
from January 1, 1996 to August 30, 1996, which have been audited by Ernst &
Young LLP, and the unaudited financial statements of the Predecessor for the
period August 31, 1996 to December 31, 1996. These unaudited financial
statements include all adjustments consisting of normal, recurring accruals the
Company considers necessary for a fair presentation of the financial position
and the results of operations for this period.
<TABLE>
<CAPTION>
Predecessor
---------------------------------------------------------------------------
Period from Pro Forma
January 1, 1996 to Year Ended
August 30, December 31,
1993 1994 1995 1996 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net patient service revenue.................. $6,188 $6,664 $7,022 $5,986 $ 8,968
Retained by physicians....................... 2,383 2,470 2,315 1,080 2,010
Management fee revenue....................... - - - - -
Nonphysician salaries and benefits........... 1,616 1,814 1,930 1,215 2,114
Other practice expenses...................... 1,374 1,613 1,921 1,733 2,665
General corporate expenses................... - - - - -
Depreciation and amortization................ 98 97 128 97 139
Provision for bad debts...................... 669 755 885 1,203 1,345
Operating income (loss)...................... 49 (85) (158) 658 695
Other, net................................... (15) (15) 114 78 77
PQC allocation............................... - - - - (71)
Income (loss) before taxes................... 33 (99) (44) 736 701
Income taxes (benefit)....................... (2) (38) (130) 298 280
Net income (loss)............................ $ 35 $ (62) $ 86 $ 438 $ 421
Net income (loss) per common share...........
Weighted average common shares and
common share equivalents outstanding........
</TABLE>
<TABLE>
<CAPTION>
PQC
------------------------------------------
Period from
March 20, 1995 Pro Forma Year
(inception) to Year Ended Ended
December 31, December 31, December 31,
1995 1996(1) 1996
-------- -------- --------
<S> <C> <C> <C>
Statement of Operations Data:
Net patient service revenue.................. $ - $ 6,027 $34,475
Retained by physicians....................... - 2,195 11,968
Management fee revenue....................... - 3,832 22,507
Nonphysician salaries and benefits........... - 1,816 8,618
Other practice expenses...................... - 535 9,439
General corporate expenses................... 2,062 5,953 6,286
Depreciation and amortization................ 6 194 1,216
Provision for bad debts...................... - 214 1,880
Operating income (loss)...................... (2,068) (4,882) (4,933)
Other, net................................... 18 (13) 324
PQC allocation............................... - - -
Income (loss) before taxes................... (2,050) (4,895) (4,609)
Income taxes (benefit)....................... 32 78 -
Net income (loss)............................ $(2,082) $(4,973) $(4,609)
Net income (loss) per common share........... $ (0.27) $(1.80) $(0.86)
Weighted average common shares and
common share equivalents outstanding........ 7,706 10,786 22,047
</TABLE>
<TABLE>
<CAPTION>
Predecessor PQC
-------------------- --------------------
December 31, December 31,
1994 1995 1995 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents................. $ 41 $ 179 $ 3,480 $ 1,275
Net current assets........................ 259 245 2,651 2,217
Total assets.............................. 1,545 1,892 4,363 39,354
Total current liabilities................. 942 1,257 850 6,488
Long-term obligations..................... 253 199 1,411 1,287
Class A Common Stock, subject to put...... - - - 31,851
Total stockholders' equity (deficiency)... 350 436 2,104 (272)
</TABLE>
(1) Reflects affiliations completed through December 31, 1996 with the
Springfield Affiliated Group and the Flagship Affiliated Group. See page 5.
7
<PAGE>
RISK FACTORS
In evaluating the Company and its business, prospective investors should
carefully consider the following risk factors, in addition to the other
information contained elsewhere in this Prospectus.
Lack of Operating History; History of Operating Losses
The Company was formed in March 1995, the first group of physicians
affiliated with the Company in August 1996 and a majority of the current
physicians affiliated with the Company in December 1996. Accordingly, the
Company's historical financial condition and results of operations should not be
relied upon in making an investment decision. For the period from March 20, 1995
(inception) to December 31, 1995, the Company recorded a net loss of $2,082,264
and for the year ended December 31, 1996, the Company recorded a net loss of
$4,973,188. The Company expects to incur operating losses for at least the
immediate future and to fund such operating losses through the issuance of
additional equity and debt securities. See "-- Need for Substantial Additional
Capital." There can be no assurance that the Company will achieve or maintain
profitability.
Need for Substantial Additional Capital
The Company will require substantial capital resources to obtain the
necessary scale to become profitable and to fulfill its business plan.
Additional funds will be required to fund the acquisition, integration,
operation and expansion of affiliated practices, capital expenditures including
the development of the information systems to manage such practices, operating
losses and general corporate purposes. As of March 31, 1997, the Company has
satisfied its capital requirements through the issuance of $10 million of Class
B Common Stock to affiliates of Bain Capital, Inc. ("Bain Capital") pursuant to
a contractual arrangement with the Company providing for the purchase of up to
$30 million of Class B Common Stock (the "Bain Financing"), private offerings of
Class A Common Stock and a $3.5 million line of credit with Banker's Trust
Company ("Banker's Trust") as Agent, and the lenders from time to time a party
thereto (the "Credit Agreement"). The Company expects that the capital that
remains available under the Bain Financing and the Credit Agreement will be
sufficient, depending upon the Company's operating results and the consideration
paid in connection with the Affiliations, to satisfy the Company's projected
capital requirements for the next two years. To date, a significant portion of
the consideration paid in affiliation transactions has been in the form of Class
A Common Stock. If the percentage of cash required to finance future affiliation
transactions increases significantly, the Company's capital requirement will
also significantly increase. Each of the Bain Financing and the Credit Agreement
has significant financial and other conditions to their continued availability
(and in the case of the Credit Agreement to avoid a default) and there can be no
assurance that such conditions will be satisfied when capital is sought. The
Company's ability to meet the financial conditions is dependent upon a
significant increase in revenues and income from future affiliation transactions
and improved productivity of the Springfield and Flagship Affiliated Groups. The
Bain Financing also restricts the sources of capital available to the Company
without the consent of the Bain Investors. There can also be no assurance that
the Company will be able to refinance the Credit Agreement when the outstanding
balance becomes due in January 1998. See "Business -- The Bain Financing" and
"Business -- The Credit Agreement." Except for the Bain Financing and the Credit
Agreement, the Company has no committed external sources of capital. With the
consent of the director elected by the stockholders of the Class B-1 Common
Stock (the "Class B-1 Director") and the director elected by the stockholders of
the Class B-2 Common Stock (the "Class B-2 Director," and together with the
Class B-1 Director the "Class B Directors"), the Company may obtain additional
financing through external borrowings or the issuance of additional securities,
which could have an adverse effect on the value of the shares of Common Stock
held by the then existing stockholders. See "-- Dilution." There can be no
assurance that the Class B Directors will approve such capital raising
activities or that the Company will be able to raise additional capital when
needed on satisfactory terms or at all. The failure to obtain additional
financing when needed and on appropriate terms could have a material adverse
effect on the Company.
8
<PAGE>
Absence of Trading Market for Common Stock
No trading market for the Common Stock of the Company currently exists.
The Common Stock is not listed on a stock exchange or traded through the
National Association of Securities Dealers, Inc. There can be no assurance that
a public market in the Common Stock will develop in the future and the Company
does not expect such a market to develop until such time, if any, that the
Company completes a public offering of its securities other than to Stockholder
Physicians. Also, the Bain Financing requires that most current and all future
stockholders of the Company become parties to a Stockholders Agreement dated as
of August 30, 1996 (the "Stockholders Agreement"), which agreement, among other
things, contains provisions which significantly limit the transferability of the
Class A Common Stock and provide the Company with a right to purchase Class A
Common Stock from Stockholder Physicians who are parties to such Stockholders
Agreement upon their termination of employment. Consequently, an investment in
the Common Stock should only be considered as a long-term investment and is
extremely illiquid. Stockholders will be required to make their own judgment as
to the value of their shares without the benefit of an independent market price.
In circumstances where the Company is entitled to repurchase the Common Stock of
a Physician Stockholder upon death or termination of the Physician Stockholder's
employment by an Affiliated Group or the right of the Physician Stockholders to
sell the Common Stock to the Company upon a Physician Stockholder's death, the
fair market value of the Common Stock, if a public market has not yet developed,
will be determined by the Board of Directors of the Company. See "Description of
Capital Stock --Stockholders Agreement."
Risk that Future Affiliation Transactions Will Not Be Consummated; Costs of
Affiliation Transactions
There can be no assurance that any future affiliation transactions will
be consummated. There is no assurance that the Company would be able to use the
shares registered in this offering to affiliate with additional medical
practices on acceptable terms. In consummating these future affiliation
transactions, the Company will rely upon certain representations, warranties and
indemnities made by sellers with respect to the affiliation transaction, as well
as its own due diligence investigation. There can be no assurance that such
representations and warranties will be true and correct, that the Company's due
diligence will uncover all material adverse facts relating to the operations and
financial condition of the affiliated medical practices or that all of the
conditions to the Company's obligations to consummate these future affiliations
will be satisfied. Any material misrepresentations could have a material adverse
effect on the Company's financial condition and results of operations.
The Company has incurred significant accounting, legal and other costs in
developing its affiliation structure and completing its initial affiliation
transactions. The Company's ability to enter into affiliation transactions with
a significant number of physicians and to achieve positive cash flow will be
adversely affected unless it is able to reduce the expenses associated with
future transactions. There can be no assurance that the Company will be able to
reduce transaction costs on a per affiliated physician basis in the future.
Dependence upon Affiliated Medical Practices
Although the Company does not and will not employ physicians or control
the medical aspects of the practices of the physicians employed by the
Springfield Affiliated Group, the Flagship Affiliated Group or similar
Affiliated Groups, the Company's revenue and profitability are directly
dependent on the revenue generated by the operation and performance of and
referrals among the affiliated medical practices. The compensation to the
Company under its Service Agreements with the Affiliated Groups is based upon a
percentage of the profits generated by the Affiliated Groups' practices with a
substantial portion of the profits being allocated to the physicians until
threshold levels of income, based upon the physicians' historical compensation,
are achieved. Accordingly, the performance of affiliated physicians affects the
Company's profitability and the success of the Company depends, in part, upon an
increase in net revenues from the practice of affiliated physicians compared to
historical levels. The inability of the Company's Affiliated Groups to attract
and retain patients, to manage patient care effectively and to generate
sufficient revenue or a material decrease in the revenues of the Affiliated
Groups would have a material adverse effect on the financial performance of the
Company. To the extent that the physicians affiliated with the Company are
concentrated
9
<PAGE>
in a limited number of target markets, as is currently the case in western
Massachusetts and Maryland, deterioration in the economies of such markets could
have a material adverse effect upon the Company.
Need to Hire, Retain and Integrate Physicians
The success of the Company is dependent upon its ability to affiliate
with a significant number of qualified physicians and the willingness of such
affiliated physicians to maintain and enhance the productivity of their
practices following affiliation with PQC. The market for affiliation with
physicians is highly competitive, and the Company expects this competition to
increase. The Company competes for physician affiliations with many other
entities, some of which have substantially greater resources, greater name
recognition and a longer operating history than the Company and some of which
offer alternative affiliation strategies which the Company may not be able to
offer. In addition, under current law the Company has no or only limited ability
to enforce restrictive covenants in the employment agreements with the
physicians with whom the Company affiliates. The Company is subject to the risk
that physicians who receive affiliation payments may discontinue such
affiliation with the Company, resulting in a significant loss to the Company and
a decrease in the patient base associated with such affiliated physicians. There
can be no assurance that PQC will be able to attract and retain a sufficient
number of qualified physicians. If the Company were unable to affiliate with and
retain a sufficient number of physicians, the Company's operating results and
financial condition would be materially adversely affected. A material increase
in costs of affiliations could also adversely affect PQC and its stockholders.
In the Springfield and greater Baltimore-Annapolis areas and in other
potential affiliation markets, the Company is integrating physician practice
groups that have previously operated independently. The Company may encounter
difficulties in integrating the operations of such physician practice groups and
the benefits expected from such affiliations may not be realized. Any delays or
unexpected costs incurred in connection with integrating such operations could
have an adverse effect on the Company's business, operating results or financial
condition.
Management of Expanding Operations
The Company is seeking to expand its operations rapidly, which, if
successful, will create significant demands on the Company's administrative,
operational and financial personnel and systems. There can be no assurance that
the Company's systems, procedures, controls and staffing will be adequate to
support the proposed expansion of the Company's operations. The Company's future
operating results will substantially depend on the ability of its officers and
key employees to integrate the management of the Affiliated Groups, to implement
and improve operational, financial control and reporting systems and to manage
changing business conditions.
Dependence upon Growth of Managed Healthcare Plans
The Company believes that the future growth in the demand for its
practice management services is dependent, among other things, upon the
enrollment of managed healthcare plans and the ability of the Company to help
Affiliated Groups attract managed healthcare contracts. There can be no
assurance, however, that such growth in enrollment will occur, that growth in
the demand for practice management services will follow, or that the Company
will be able to assist the Affiliated Groups in attracting such contracts. Such
developments could have a material adverse effect on the Company's prospects.
Industry Integration and Consolidation
The healthcare industry is in the process of rapid and fundamental
change, triggered by the deregulation of the acute care hospital reimbursement
system in many states and the growing strength of managed care plans. The growth
of the managed care industry is being driven, in part, by increasing pressure
from employers and other purchasers who are seeking to reduce their healthcare
premium costs. As the healthcare market in many states shifts from a heavily
regulated, largely fee-for-service payment system towards a deregulated,
capitated payment system, large integrated delivery systems are developing.
These
10
<PAGE>
systems are intended to provide adequate geographical coverage for major
purchasers of healthcare and to provide a system in which significant cost
savings can be realized from efficiencies resulting from the alignment of the
financial interests of physicians and other providers. Many of these integrated
systems may be substantially larger and better capitalized than the Company. In
addition, the rapidly changing alignment of numerous market participants creates
an uncertain environment in which it may be difficult for smaller market
participants, such as the Company, to implement an effective strategic plan. The
Company's inability to implement its business strategy could have a material
adverse effect on the Company.
Regulatory Environment
The healthcare industry is subject to extensive federal and state
regulation. Changes in the regulations or interpretations of existing
regulations could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Governmental
Regulations."
Prohibition on Corporate Practice of Medicine. The laws of most states,
including Massachusetts and Maryland, prohibit business corporations such as the
Company from practicing medicine or employing physicians to do so. The
contractual relationships with the Affiliated Groups are designed to comply with
these laws. Because there is very limited judicial or regulatory interpretation
of the scope of these laws in most states, however, there can be no assurance
that the Company's contractual arrangements will be found to comply with such
laws. Any determination that such contractual relationships violate such laws
could have a material adverse effect on the Company, and there can be no
assurance that the Company would be able to restructure its arrangements on
favorable terms or at all.
The Massachusetts Board of Registration in Medicine (the "BRM") has
proposed regulations that, if promulgated as proposed, might limit physicians
licensed within the Commonwealth of Massachusetts in entering into management
contracts with proprietary business entities unless a majority of the governing
board of those business entities are licensed physicians and certain other
conditions are met. The BRM also indicated that it may seek to limit
significantly the extent to which proprietary business entities may have control
or consultation rights with respect to medical decisions or business decisions
that may affect patient care, such as the amount of time each physician spends
with a patient. Extensive commentary has been filed in opposition to the
proposed regulations, and it is not known whether, when or in what form final
regulations will be promulgated. The final regulations may have a material
adverse effect on the Company's relationship with the Springfield Affiliated
Group and its ability to operate in Massachusetts as currently contemplated.
Comparable regulations have not been proposed in Maryland, but there can be no
assurance that such regulations will not be proposed or adopted.
Stark Law. The federal law commonly known as the "Stark law"
significantly limits the ability of physicians to maintain any ownership or
other financial relationship with an entity (including their own group practice)
to which they refer patients for a broad class of "designated health services",
including ancillary services such as laboratory and radiology services. The
Stark law is extremely broad and complex, and extensive regulations have been
promulgated governing the application of the Stark law to physician
relationships with clinical laboratories. These clinical laboratory regulations
are difficult to apply to many common situations, and regulations have not yet
been issued applying the law to other designated health services. However, the
government has indicated that it will look to the regulations applicable to
clinical laboratories for guidance with respect to the law's application to
other designated health services. Significant monetary penalties and denial of
reimbursement may be assessed for violation of the Stark law, and a provider may
be excluded from the Medicare and state health programs in certain instances. In
addition, violation of the Stark law may result in assertion of a federal false
claim, which could result in civil and criminal penalties. The assertion or
determination that the Company's contractual relationship with the physicians
employed by the Affiliated Groups or the relationship of the physicians within
one or more Affiliated Groups was in violation of the Stark law could have a
material adverse effect on the Company. In addition, there can be no assurance
that, in the event of such assertion, the Company would be able to restructure
its relationships with the Affiliated Groups upon favorable terms or at all.
11
<PAGE>
Fraud and Abuse Laws. Federal law and the laws of many states prohibit
the offer, payment, solicitation or receipt of any form of remuneration in
return for the referral of Medicare or state health program (such as Medicaid)
patients or in return for the purchase or order of items or services that are
covered by Medicare or state health programs. These laws are commonly referred
to as the "fraud and abuse" laws. Violations of the fraud and abuse laws may
result in substantial civil or criminal penalties for individuals or entities,
including large monetary penalties and exclusion from participation in the
Medicare and state health programs. The Company has attempted to structure its
contractual relationships with the Affiliated Groups so as to avoid violating
the fraud and abuse laws, but in view of the broad and ambiguous nature of such
laws and the lack of applicable safe harbor exceptions, there can be no
assurance that the Company's contractual relationships with the Affiliated
Groups comply with such laws. Any allegation or determination that the Company
or the Affiliated Groups have violated the fraud and abuse laws could have a
material adverse effect on the Company.
Healthcare Reform. The United States Congress has considered various
types of healthcare reform, including comprehensive revisions to the current
healthcare system. It is uncertain what legislative proposals will be adopted in
the future, if any, or what actions federal or state legislatures or third party
payors may take in anticipation of or in response to any healthcare reform
proposals or legislation. Healthcare reform legislation adopted by Congress
could, among other things, result in lower payment levels for the services of
physicians managed by the Company and lower profitability for the Affiliated
Groups, which could have a material adverse effect on the operations of the
Company.
Risks of Capitated Contracts
The physician groups with which the Company is affiliated and proposes to
affiliate with are parties to certain capitated contracts with third party
payors, such as insurance companies. The Company intends to seek to expand the
capitated patient base of its Affiliated Groups, particularly for Medicare
enrollees. In general, risk contracts pay a flat dollar amount per enrollee in
exchange for the physician's obligation to provide or arrange for the provision
of a broad range of healthcare services (including in-patient care) to the
enrollee. A significant difference between a full risk capitated contract and
traditional managed care contracts is that the physician is sometimes
responsible for both professional physician services and many other healthcare
services, e.g., hospital, laboratory, nursing home and home health. The
physician is not only the "gatekeeper" for enrollees, but is also financially at
risk for over-utilization and for the actuarial risk that certain patients may
consume significantly more healthcare resources than average for patients of
similar age and sex (such patients are referred to herein as "high risk
patients"). While physicians often purchase reinsurance to cover some of the
actuarial risk associated with high risk patients, such insurance typically does
not apply with respect to the risk of over-utilization until a relatively high
level of aggregate claims has been experienced. If over-utilization occurs with
respect to a given physician's enrollees (or the physician's panel of enrollees
includes a disproportionate share of high risk patients not covered by
reinsurance), the physician is typically penalized by failing to receive some or
all of the physician's compensation under the contract that is contingent upon
the attainment of negotiated financial targets, or the physician may be required
to reimburse the payor for excess costs. In addition, a physician may be liable
for over-utilization by other physicians in the same "risk pool" and for
utilization of ancillary, in-patient hospital and other services when the
physician has agreed contractually to manage the use of those services. Because
the Company's financial results are dependent upon the profitability of such
capitated contracts, the Company's results will reflect the financial risk
associated with such capitated contracts. See "Business -- Industry Overview."
Liabilities or insufficient revenues under capitated and other risk-sharing
arrangements could have a material adverse effect on the Company.
Exposure to Professional Liability; Liability Insurance
In recent years, physicians, hospitals and other participants in the
healthcare industry have become subject to an increasing number of lawsuits
alleging medical malpractice, negligent credentialing of physicians, and related
legal theories. Many of these lawsuits involve large claims and substantial
defense costs. There can be no assurance that the Company will not become
involved in such litigation in the future. Through its management of practice
locations and provision of non-physician healthcare personnel, the Company could
12
<PAGE>
be named in actions involving care rendered to patients by physicians or other
practitioners employed by Affiliated Groups. In addition, to the extent that
affiliated physicians are subject to such claims, the physicians may need to
devote time to defending such claims, adversely affecting their financial
performance for the Company, and potentially having an adverse effect upon their
reputations and client base. The Company and the Affiliated Groups maintain
professional and general liability insurance. Nevertheless, certain types of
risks and liabilities are not covered by insurance, and there can be no
assurance that the limits of coverage will be adequate to cover losses in all
instances.
Certain Federal Income Tax Considerations
Physician groups which operated as professional corporations ("PCs") in
Springfield prior to affiliating with the Company were merged into the
Springfield Affiliated Group, with stockholders of each PC receiving shares of
Common Stock of the Company in exchange for their capital stock in the PC.
Physician groups which operated as professional associations ("PAs") in the
greater Baltimore-Annapolis area prior to affiliating with the Company were
similarly merged into the Flagship Affiliated Group, with stockholders of each
PA receiving shares of Common Stock of the Company in exchange for their capital
stock in the PA. Each such merger is intended to qualify as a "reorganization"
under Section 368(a) of the Internal Revenue Code of 1986, as amended (the
"Code"), in which case no gain or loss would generally be recognized by the PC
or PA or the stockholders of the PC or PA. If a merger were not to so qualify,
the exchange of shares would be taxable to both the PC or PA and the
stockholders of the PC or PA, and the shares of Common Stock issued in
connection with the merger would be taxable to the Affiliated Group into which
such PC or PA was merged. The Company has not sought or obtained a ruling from
the Internal Revenue Service or an opinion of counsel with respect to the tax
treatment of the mergers of PCs or PAs into the Springfield or Flagship
Affiliated Groups. The failure of a merger or mergers to qualify as tax-free
reorganizations could have a material adverse effect on the applicable
Affiliated Group and the Company.
New Management; Dependence on Key Personnel
The current management structure and the senior management team of the
Company have been in place for a relatively short time. The Company's future
success depends, in large part, on the continued service of its key management,
and on its ability to continue to attract, motivate and retain highly qualified
employees. As a development stage company, PQC has experienced some turnover in
staff, including two of the founding officers. The Company and one of the
departed founders are currently in a dispute with respect to the contractual
right of the Company to repurchase certain of the founder's shares and the
founder's right to severance payments. While the Company believes that it will
prevail in such dispute, if litigation were brought and adjudicated adversely to
the Company, the Company would be adversely effected. Although the Company has
entered into employment agreements with certain of its key executives that
contain covenants not to compete with the Company, there can be no assurance
that the Company will be able to retain such key executives or its senior
managers and employees. The inability to hire and retain qualified personnel or
the loss of the services of key personnel could have a material adverse effect
upon the Company's business and future business prospects.
Voting Control
Pursuant to the Company's Restated Certificate of Incorporation (the
"Restated Certificate") and the Stockholders Agreement, affiliates of Bain
Capital (the "Institutional Investors") as the holders of Class B Common Stock
have the right to appoint the Class B Directors, two of the eleven members of
the Board of Directors of the Company and the Institutional Investors have the
right to approve seven of the other directors. The Class B Directors are
entitled to five votes each, giving them a majority of the voting power of the
Board of Directors, (i) with respect to certain actions of the Company,
including public offerings, issuances and redemptions of equity securities,
declarations of dividends, incurrences of debt, mergers, assets sales and
liquidation of the Company and its affiliates, material amendments to the
management agreements between the Company and its affiliates and employment of
the Chief Executive Officer, and (ii) with respect to any matter before the
Board of Directors upon the occurrence of certain events, including the failure
of the Company to meet certain financial objectives. In addition to being
approved by the Board of Directors, certain
13
<PAGE>
actions of the Company, including mergers, material asset sales, liquidation,
certain medical practice affiliation transactions, dividends, material changes
in the business of the Company or its affiliates, retention and dismissal of the
Chief Operating and Financial Officers, transactions with affiliates and
commencement and management of material litigation, must be approved by the
Institutional Investors. See "Business -- Bain Financing" and "Description of
Capital Stock." As a result of those provisions of the Restated Certificate and
"drag-along" rights in the Stockholders Agreement, the Institutional Investors
and Bain Capital have significant control over the actions of the Company
including if and when the Company is sold to a third party or a public market
for the Company's Common Stock is established.
Dilution
The Company expects to continue to issue Class A Common Stock as a
principal component of the consideration for future affiliation transactions. To
the extent that all or a portion of future affiliation transactions are paid in
cash, the Company may need to issue additional equity securities to fund such
payment or to fund anticipated operating losses. If the Company achieves its
goal of affiliating with a significant number of physicians, the number of
shares issued may be substantial. Accordingly, the percentage ownership interest
of each then existing stockholder in the Company will be reduced proportionately
and, depending upon the valuation at which such securities are issued and the
method for determining the value of practices that enter into affiliation
transactions, such issuances may be dilutive to the then existing stockholders.
Certain officers of the Company also acquired their interest in the Company at a
substantially lower cost per share than the value being place upon the Common
Stock in the Affiliations. See "Dilution."
Potential Conflicts of Interest
Certain conflicts of interest are inherent in the structure of the
Company and its contractual and organizational relationships. The President of
the Springfield Affiliated Group (who is also a director of the Company) is a
practicing physician in the Springfield Affiliated Group, the president of the
Flagship Affiliated Group is a practicing physician in the Flagship Affiliated
Group and two directors of the Company, one of whom is also President of the
Company, are practicing physicians in the Flagship Affiliated Group. Two
directors of the Company are affiliated with Bain Capital, Inc. which, through
the Institutional Investors, is the primary financing source for the Company.
From time to time, the interests of such persons, and persons serving in
multiple roles in existing and future affiliation transactions, may conflict
with those of the Company due to such relationships. See also "-- Voting
Control" and "Certain Transactions."
Antitrust Considerations
The Company, its affiliated physicians and other entities with which it
contracts are subject to the United States and state antitrust statutes. Because
the Company will be contracting with third party payors and other entities who
could be deemed to compete with the Company or its Affiliated Groups, and for
other reasons, the Company, its affiliated physicians and other entities with
which it contracts could be subject to public and private investigations and
enforcement actions under such statutes.
Forward-Looking Statements
Certain statements made in this Prospectus are forward-looking, including
without limitation statements with respect to the future affiliations, capital
requirements, future plans for expansion and future success of the Company, and
future development of the healthcare industry. Forward-looking statements made
herein are not guarantees of future performance and are subject to risks and
uncertainties, including without limitation the factors discussed in this "Risk
Factors" section, that could cause actual results to differ materially from
those described in the forward-looking statements.
14
<PAGE>
USE OF PROCEEDS
In exchange for the Common Stock (and other consideration in certain
cases), PQC expects that its Affiliated Groups will receive certain assets of or
ownership interests in the physician practices, as well as certain contractual
rights.
DIVIDEND POLICY
PQC has not declared or paid any dividends on its Common Stock and does
not anticipate paying cash dividends in the foreseeable future. The terms of the
Bain Financing restrict the payment of dividends. It is the present intention of
the Board of Directors to reinvest any earnings in the business of the Company
to support growth of its operations.
15
<PAGE>
Selected Financial Data
(in thousands, except per share data)
The following selected financial data for the Company and the Predecessor
should be read in conjunction with the financial statements and notes thereto,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the pro forma financial statements of the Company and the notes
thereto, included elsewhere in this Prospectus. The selected financial data of
the Predecessor as of December 31, 1993, 1994 and 1995 and for the period from
January 1, 1996 to August 30, 1996, have been derived from the financial
statements of the Predecessor, which have been audited by Ernst & Young LLP,
independent auditors. The selected financial data of the Company for the period
from March 20, 1995 (inception) through December 31, 1995 and for the year ended
December 31, 1996, have been derived from financial statements of the Company
which have been audited by Ernst & Young LLP, independent auditors. Ernst &
Young LLP's report on the financial statements of the Company for the year ended
December 31, 1996 and Note 2 to such financial statements which are included in
this Prospectus describe an uncertainty about the Company's ability to continue
as a going concern. The pro forma selected financial data for the Predecessor
for the year ended December 31, 1996 is unaudited. However, such financial
statements have been derived from the financial statements of the Predecessor
for the period from January 1, 1996 to August 30, 1996, which have been audited
by Ernst & Young LLP, and the unaudited financial statements of the Predecessor
for the period August 31, 1996 to December 31, 1996. These unaudited financial
statements include all adjustments consisting of normal, recurring accruals the
Company considers necessary for a fair presentation of the financial position
and the results of operations for this period.
<TABLE>
<CAPTION>
Predecessor
---------------------------------------------------------------------------
Period from Pro Forma
January 1, 1996 to Year Ended
August 30, December 31,
1993 1994 1995 1996 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net patient service revenue.................. $6,188 $6,664 $7,022 $5,986 $ 8,968
Retained by physicians....................... 2,383 2,470 2,315 1,080 2,010
Management fee revenue....................... - - - - -
Nonphysician salaries and benefits........... 1,616 1,814 1,930 1,215 2,114
Other practice expenses...................... 1,374 1,613 1,921 1,733 2,665
General corporate expenses................... - - - - -
Depreciation and amortization................ 98 97 128 97 139
Provision for bad debts...................... 669 755 885 1,203 1,345
Operating income (loss)...................... 49 (85) (158) 658 695
Other, net................................... (15) (15) 114 78 77
PQC allocation............................... - - - - (71)
Income (loss) before taxes................... 33 (99) (44) 736 701
Income taxes (benefit)....................... (2) (38) (130) 298 280
Net income (loss)............................ $ 35 $ (62) $ 86 $ 438 $ 421
Net income (loss) per common share...........
Weighted average common shares and
common share equivalents outstanding........
</TABLE>
<TABLE>
<CAPTION>
PQC
------------------------------------------
Period from
March 20, 1995 Pro Forma Year
(inception) to Year Ended Ended
December 31, December 31, December 31,
1995 1996(1) 1996
-------- -------- --------
<S> <C> <C> <C>
Statement of Operations Data:
Net patient service revenue.................. $ - $ 6,027 $34,475
Retained by physicians....................... - 2,195 11,968
Management fee revenue....................... - 3,832 22,507
Nonphysician salaries and benefits........... - 1,816 8,618
Other practice expenses...................... - 535 9,439
General corporate expenses................... 2,062 5,953 6,286
Depreciation and amortization................ 6 194 1,216
Provision for bad debts...................... - 214 1,880
Operating income (loss)...................... (2,068) (4,882) (4,933)
Other, net................................... 18 (13) 324
PQC allocation............................... - - -
Income (loss) before taxes................... (2,050) (4,895) (4,609)
Income taxes (benefit)....................... 32 78 -
Net income (loss)............................ $(2,082) $(4,973) $(4,609)
Net income (loss) per common share........... $ (0.27) $(1.80) $(0.86)
Weighted average common shares and
common share equivalents outstanding........ 7,706 10,786 22,047
</TABLE>
<TABLE>
<CAPTION>
Predecessor PQC
-------------------- --------------------
December 31, December 31,
1994 1995 1995 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents................. $ 41 $ 179 $ 3,480 $ 1,275
Net current assets (deficit).............. 259 245 2,651 2,217
Total assets.............................. 1,545 1,892 4,363 39,354
Total current liabilities................. 942 1,257 850 6,488
Long-term obligations..................... 253 199 1,411 1,287
Class A Common Stock, subject to put...... - - - 31,851
Total stockholders' equity (deficiency)... 350 436 2,104 (272)
</TABLE>
(1) Reflects affiliations completed through December 31, 1996 with the
Springfield Affiliated Group and the Flagship Affiliated Group. See page 5.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with "Selected
Financial Data, the Company's Financial Statements and Notes thereto and the
Predecessor's Financial Statements and Notes thereto, included elsewhere in this
Prospectus.
Overview
The Company affiliates with and operates multi-specialty medical practice
groups. The first physician affiliation took place on August 30, 1996, with 32
physicians in the Springfield, Massachusetts and Enfield, Connecticut area,
including the Predecessor. On December 11, 1996, PQC consummated the affiliation
with the Flagship Affiliated Group, which consisted of 59 physicians in
Baltimore and Annapolis, Maryland. PQC is working with these groups of
physicians to improve operating practices and to obtain managed care contracts.
Financial information prior to March 20, 1995 represents the results of
operations of the Predecessor. Because the Springfield Affiliation was
consummated on August 30, 1996 and the Flagship Affiliation was completed on
December 11, 1996, the financial statements of PQC are not directly comparable
to those of the Predecessor. For purposes of comparison, this discussion reviews
the actual results of PQC and the pro forma results of the operations of the
Company as if the affiliation transactions had occurred at the beginning of 1996
and the aggregate results of operations for the Predecessor.
Results of Operations
The Company
Pro Forma Results of Operations for Year Ended December 31, 1996
PQC on a proforma basis, as if the Springfield and Baltimore transactions
had been completed at the beginning of the period for the year ended December
31, 1996, had management fee revenue of approximately $22.5 million. Operating
expenses were $27.4 million, the most significant of which included $18.1
million of non-physician practice expenses and $6.3 million of general corporate
expense. The net loss for the period was $4.6 million.
Year Ended December 31, 1996 and Period from March 20, 1995 to December 31,
1995
Although the completion of the Springfield and Baltimore affiliation
transactions resulted in the Company having revenue of $3.8 million for the year
ended December 31, 1996 as compared to no revenue in the period from March 20,
1995 to December 31, 1995, increases in expense, particularly corporate expense,
exceeded the growth of revenues. The $3.9 million increase in general corporate
expense in fiscal 1996 as compared to the period from inception to December 31,
1995 reflects the increase in corporate and regional office level personnel
necessary to support operations, finance and affiliations. Due to the completion
of the affiliation transactions, depreciation, amortization and the provision
for bad debts are significantly higher. Amortization of goodwill acquired in the
transactions will increase in future periods as it is reflected for a full year
and as future transactions are completed. The profitability of the Company in
future periods will be dependent upon an increase in the revenues of the
affiliated physicians and the Company's ability to control general corporate and
other expenses.
The Predecessor
Year Ended December 31, 1996 (pro forma) and December 31, 1995
The Predecessor's net patient revenue from fiscal 1996 to fiscal 1995
increased by 27.7% from $7.0 million in 1995 to $9.0 million in 1996. Revenue
growth was driven by the maturing practices of new
17
<PAGE>
physicians joining the second Springfield, Massachusetts facility in 1994 and
1995 and increased patient visits and fees generated for sub-speciality services
through the capitated Medicare Risk contract with Tufts Health Plan's Secured
Horizons product. Physician compensation and benefits declined 13.2% from $2.3
million in 1995 to $2.0 million in 1996, but the recorded physician compensation
does not include the distribution of net income to physicians. Physician
compensation and net income combined increased by 1.2% from $2.4 million in 1995
to $2.43 million in 1996. Non-physician salaries and benefits increased by 9.5%
from $1.9 million in 1995 to $2.1 million in 1996 due to a partial year of
increased staffing necessary to support higher practice volume. Other non-salary
practice expenses increased 41.4% from $2.9 million in fiscal 1995 to $4.1
million in fiscal 1996 and as a percentage of revenue increased from 41.8% to
46.3%. The most significant reason for the increase of non-salary practice
expenses was an increased reserve for bad debt expense in the first eight months
of 1996. For the last four months of 1996, the Predecessor paid a management fee
of $71,310 to PQC reflecting the new compensation arrangement as part of the
affiliation. Income taxes were deducted in 1996 at a 40% rate due to the
profitability of the business as compared to a tax benefit in 1995. Net income
in 1996 was $420,548 in 1996 as compared to $86,160 in 1995, an increase of
388%.
Year Ended December 31, 1995 and December 31, 1994
Net patient service revenue increased by 5.4% to $7.02 million for the year
ended December 31, 1995 from $6.66 million for the year ended December 31, 1994.
The increase was driven by continued patient volume growth from the established
physicians plus the full year revenues from a second primary care physician
("PCP") satellite facility and an additional specialist physician. The earnings
retained by physicians declined by 6.3% from $2.47 million in fiscal 1994 to
$2.32 million in fiscal 1995 due primarily to the fact that partner physicians
were subsidizing the start-up of the new PCP facility. Non-physician salaries
and benefits grew 6.4% from $1.81 million in fiscal 1994 to $1.93 million in
fiscal 1995, reflecting a growth of facilities and number of physicians. Other
practice expenses grew 19.1% over this same period from $1.61 million to $1.92
million due to a full year impact of the opening of the PCP satellite facility.
Depreciation and amortization increased 32.0% from $97,000 in the year ended
December 31, 1994 to $128,000 in the year ended December 31, 1995 due to the
increase in fixed assets associated with the satellite PCP facility. Provision
for bad debts increased by 17.2% from $0.76 million to $0.89 to match an
increase in accounts receivable and to reflect different collection assumptions
in the payor base. The net income over this period increased from a loss of
$62,000 to a profit of $86,000 due to lower revenue retained by physicians.
Year Ended December 31, 1994 and December 31, 1993
Net patient service revenue increased by 7.7% to $6.66 million in the year
ended December 31, 1994 from $6.19 million for the year ended December 31, 1993.
The increase was driven by continued growth of patient volume through the group
and its PCP satellite facility in Enfield, Connecticut. The earnings retained by
physicians increased by 3.7% from $2.38 million to $2.47 million due to
increased revenues. Non-physician salaries and benefits grew 12.3% over this
period from $1.62 million to $1.81 million, reflecting the increase in support
cost when two new physicians joined the group in August 1994. The physicians
included one specialist and one PCP who staffed a second PCP satellite facility
at a second site in Springfield, Massachusetts. Other practice expenses grew
17.4% over this period from $1.37 million to $1.61 million due primarily to the
set-up of the second PCP satellite facility. Depreciation and amortization
effectively was flat over this period--$97.000 in 1994 and $98,000 in 1993. The
provision for bad debts increased by 12.9% from $0.67 million to $0.76 million
to match an increase in accounts receivable and to reflect different collection
assumptions given changes in the payor base. The net income over this period
decreased from a profit of $35,000 to a loss of $62,000 due to increased costs
related to the satellite facility opening.
Liquidity and Capital Resources
The Company's principal requirements for capital are payments to physicians
in connection with affiliation transactions with the Company and its Affiliated
Groups, transaction costs associated with such affiliation transactions, working
capital requirements for its Affiliated Groups and the funding of operating
losses. Due to its start-up status, the Company has incurred significant
operating losses to date and does not have operating cash flow to fund growth or
further losses. The Company cannot continue as a going concern
18
<PAGE>
without external capital sources. The Company's principal sources of capital to
date have been the issuance of Class B Common Stock under the Bain Financing,
issuances of Class A Common Stock to Physician Stockholders, other issuances of
Class A Common Stock to private investors and borrowing under a Credit Agreement
with Bankers Trust Company.
During 1996, the Company paid aggregate consideration of approximately
$29.5 million in connection with affiliation transactions. Of such amount,
approximately $5.9 million was paid in cash and approximately $23.6 million was
paid in Class A Common Stock. The majority of such payments were accounted for
as an addition to goodwill, which represented $28 million of the Company's total
assets of $39 million at December 31, 1996. The Company is amortizing the
goodwill over 40 years.
The Company has generally purchased the working capital of practices in
affiliation transactions. Therefore, additional working capital investment is
generally only required to the extent billing processing is slowed during payor
administrative changes after an affiliation and also to fund growth of revenues.
At December 31, 1996, the Company and its affiliated entities had total net
accounts receivable of $5.4 million and the Predecessor had aggregate accounts
receivable of approximately $900,000 at each of December 31, 1995 and 1994.
The Company has executed a contract with HBO and Company that obligates the
Company to purchase $1.1 million worth of equipment and licenses pertaining to
practice management systems. The term of the contract is five years.
At March 31, 1997, Bain Capital had $20 million of unused commitment to
purchase the Company's Class B Common Stock. The Institutional Investors'
obligations to fund such commitments are subject to numerous conditions and
there can be no assurance that such equity capital will be available when
needed. Pursuant to the Bain Financing, the Company has also agreed that it will
not use other sources of equity or debt financing, other than bank financing,
without the consent of the Bain Capital. See "Business -- The Bain Financing."
On January 16, 1997, the Company entered into the Credit Agreement with
Bankers Trust, as Agent, and the lenders from time to time a party thereto,
pursuant to which the lenders have agreed, subject to the terms and conditions
set forth in the Credit Agreement, to provide a revolving credit facility (the
"Facility") to the Company in an aggregate amount of up to $3.5 million (subject
to downward adjustment in the event that the Company and the Affiliated Groups
do not maintain an adequate amount of accounts receivable). On March 31, 1997,
the Company's outstanding borrowings under the Facility were $3.0 million and
the remaining available commitment on such date was $500,000. The Company will
need to repay or refinance the outstanding balance under the Credit Agreement
when the facility terminates in January 1998. While the Company currently
expects to enter into a replacement credit facility there can be no assurance
that the Company will be able to do so or to do so on terms favorable to the
Company. See "Business -- The Credit Agreement."
In addition to the Bain Financing, borrowing under the Credit Agreement and
cash generated by the operations of the Affiliated Groups, the Company has also
obtained capital to fund operating losses and affiliation payments through the
private placement of Common Stock. In August 1996, the Company issued $1.0
million of convertible notes, all of which were converted into Common Stock at a
conversion price of $2.50 per share on August 30, 1996. On December 31, 1996 and
February 12, 1997, the Company issued an aggregate of 614,000 additional shares
of Common Stock at $2.50 per share for a total consideration of $1.535 million.
19
<PAGE>
BUSINESS
The Company
Physicians Quality Care, Inc., which was incorporated in March 1995,
provides practice management services for multi-specialty medical practice
groups. The Company's objective is to establish networks of primary and
specialty care physicians and related diagnostic and therapeutic support
services which can provide comprehensive healthcare services in targeted
geographic areas.
PQC's strategy has four central elements: developing economies of scale and
geographic penetration by affiliating with large numbers of qualified physicians
in targeted geographic areas, assisting the affiliated practices in providing
cost-effective healthcare to special populations, building comprehensive local
healthcare networks by developing contractual or strategic relationships with
providers of, or eventually itself providing, ancillary services such as home
healthcare and weight and health management and improving practice performance
by seeking to maximize the value of each physician encounter. To date, the
Company has focused upon developing its presence in western Massachusetts,
northern Connecticut and Maryland. The Company believes that once the Company
has developed a large base of affiliated physicians its strategy will enable the
Company to generate increased demand for the services and capabilities of its
affiliated physicians, treat patients in lower cost settings and negotiate
favorable managed care contracts. The Company intends to achieve growth through
the recruitment of additional physicians, the expansion of managed care
relationships and the development of contractual or strategic relationships with
providers of ancillary services.
The core of PQC's proposed integrated healthcare delivery system is its
affiliation with groups of physicians who enter into long-term management
agreements with the Company. The Company assumes responsibility for non-medical
aspects of an affiliated physician's practice and focuses its efforts on seeking
to increase revenues and improve operating margins, implementing management
information systems and negotiating managed care contracts. The physicians
remain responsible for, among other things, the medical, professional and
ethical aspects of their practices. By affiliating with the Company, physicians
have increased opportunity to access capital, continue to participate in the
profitability of their individual practices and, through stock ownership, share
a financial interest in the overall performance of the Company.
Industry Overview
Traditionally, health insurance plans reimbursed providers on a fee-for-
service basis, a system that offered very little incentive for efficiency. In
recent years, the healthcare industry has undergone significant changes as both
the private and public sectors seek to slow spending growth. Since the early
1980s, much of the healthcare coverage in the U.S. has shifted to managed care
systems which offer cost savings in exchange for limiting the utilization of
services. Moreover, there has been a shift to prepaid insurance plans that offer
comprehensive healthcare services to enrollees and pay providers a fixed,
prepaid monthly premium. The most prevalent of these prepaid health insurance
alternatives is the health maintenance organization ("HMO"). To remain
competitive, HMOs and other similar payors seek to align themselves with the
most cost- and service-effective providers, generally channeling patient volume
to such providers.
In the managed care environment, doctors must contract or affiliate with
leading insurers or healthcare networks in their practice area. The third-party
payors rely on primary care physicians to play a "gatekeeping" role and to make
important medical decisions for the patient. Many payors look to share the risk
of providing services through capitation arrangements which provide for fixed
payments for patient care over a specified period of time. In general, capitated
contracts pay a flat dollar amount per enrollee in exchange for the physician's
obligation to provide or arrange for the provision of a broad range of
healthcare services (including inpatient care) to the enrollee. A significant
difference between a capitated contract and traditional managed care contracts
is that the physician is sometimes responsible for both professional physician
services and many other healthcare services, e.g., hospital, laboratory, nursing
home and home health. The physician is not only the "gatekeeper" for enrollees,
but is also financially at risk for over-utilization and for the actuarial risk
that certain patients may consume significantly more healthcare resources than
average for patients of similar age and sex (such patients being referred to as
"high risk
20
<PAGE>
patients"). Although physicians often purchase reinsurance to cover some of the
actuarial risk associated with high risk patients, such insurance typically does
not apply with respect to the risk of over-utilization until a relatively high
level of aggregate claims has been experienced. If over-utilization occurs with
respect to a given physician's enrollees (or if the physician's panel of
enrollees includes a disproportionate share of high risk patients not covered by
reinsurance), the physician typically is penalized by failing to receive some or
all of the physician's compensation under the contract that is contingent upon
the attainment of negotiated financial targets, or the physician may be required
to reimburse the payor for excess costs. In addition, a physician may be liable
for over-utilization by other physicians in the same "risk pool" and for
utilization of ancillary, inpatient hospital and other services when the
physician has agreed contractually to manage the use of those services. Under
this payment system, primary care physicians have important economic incentives
to reduce costs by ensuring the efficient utilization of other providers of
care, shifting care to outpatient settings where feasible, monitoring the
progress of patients throughout the course of treatment and encouraging
preventive healthcare.
In this environment, physicians are facing reimbursement pressures, greater
administrative burdens, increasing financial responsibility for the risk of
patient care, and a shift in demand from specialty to primary care. In addition,
legislative changes have substantially limited a physician's ability to maintain
an ownership interest in entities that provide ancillary services such as
outpatient laboratories, infusion centers and diagnostic and rehabilitation
facilities. These factors have all contributed to a moderation, if not
reduction, in the growth of many physicians' incomes. With greater oversight by
third-party payors, physicians are also facing a decrease in control over
medical decisions and the administration of their practices.
In response to these changes in the marketplace, many physicians are
joining together to maintain clinical autonomy, create greater negotiating
leverage vis-a-vis HMOs and other third party payors and reduce escalating
administrative costs. Physicians also are increasingly abandoning traditional
private practice which typically has higher operating costs and little
purchasing power with suppliers and must spread overhead over a relatively small
revenue base in favor of affiliations with larger organizations. Three basic
groups have emerged as managers of physician practices each of which encompasses
several variations in format: hospitals, which may employ physicians directly or
provide support through a management services organization ("MSO"); insurance
companies, which may employ physicians directly through HMOs or may provide
management services through an affiliated MSO; and independent, investor-owned
physician practice management companies.
Company Strategy
The Company believes that physician practice management companies ("PPMs"),
such as PQC, offer physicians significant advantages over other alternatives in
the industry consolidation. PPMs provide physicians with improved practice
management and an opportunity to participate in the growth of the PPM through
stock ownership while maintaining control over medical decisions. The physician
market is currently highly fragmented, and PPMs and other organizations
providing physicians with management alternatives have thus far captured only a
small portion of this potential market. Thus, the Company believes there is a
significant opportunity to expand the number of its affiliated physicians.
In addition, the Company believes that because physicians can serve as
gatekeepers for patient care, they can exercise direct control over healthcare
spending and should be in a position to share in the savings generated by the
cost containment practices they adopt. For a fee or a percentage of the group's
earnings, a PPM provides physician groups with administrative and practice
management services that are needed for a physician group to realize these cost
savings and to seek to optimize contractual relationships with managed care
organizations, thus retaining some or most of the cost savings so generated.
The central elements of the Company's strategy are to develop long-term
affiliations with physicians, focus on cost effective healthcare delivery to
special populations, and build comprehensive local healthcare networks. To date,
the Company has focused upon developing a network of affiliated physicians. The
Company believes that its strategy will enable the Company to generate increased
demand for the services
21
<PAGE>
and capabilities of its affiliated physicians, treat patients in lower cost
settings and negotiate favorable managed care contracts.
Develop long-term affiliations with physicians. PQC seeks to affiliate with
physicians in solo or group practices by entering into contractual arrangements
pursuant to which PQC, or a professional corporation or professional association
affiliated with PQC, assumes management of non-medical aspects of the practices.
Upon affiliation, PQC seeks to provide the physicians with, among other things,
increased opportunity to access capital, management experience, improved
information systems and increased opportunity to participate in favorable
managed care contracts. The Company intends to assist affiliated physicians in
improving clinical outcomes and seeks to keep medical costs down by merging
physicians into Affiliated Groups. The Company's structure allows physicians to
continue to practice in their existing locations with no disruption to patient
flow patterns while providing access to coordinated ancillary services. By
affiliating with PQC, physicians, through the revenue sharing provisions of
their employment agreements and the Services Agreements between the Affiliated
Group and PQC, continue to participate in the profitability of their individual
practices and, through stock ownership, share a financial interest in the
overall performance of the Company. Physicians constitute a majority of the
Board of the Directors of PQC and all local advisory boards, which control such
decisions as clinical protocols and utilization review, payor relations and the
addition of ancillary services.
Balance of Primary Care Physicians and Specialists. PQC believes that a
successful system should be balanced between primary care physicians and
specialists to provide efficient coordination and utilization of the appropriate
levels of care, and PQC intends to seek to develop this balance in the physician
groups with which it affiliates. Of the 98 physicians currently affiliated with
the Company at March 31, 1997, 65 are engaged in primary care practices and 33
are engaged in specialist practices. The Company believes the industry trend
toward integrated delivery systems will result in an increasing demand for
primary care physicians because a higher degree of coordination of care and
risk-sharing will be required than that which can be achieved in a system
controlled by specialists. The Company's strategy is to have the primary care
physician serve as the central manager in the patient system and to develop
effective coordination between specialists and the primary care physicians
within its network.
Focus on special populations. PQC believes that the management of
healthcare costs for certain populations provides significant opportunities that
are not being addressed in the marketplace. Special populations, including the
elderly, the disabled and those with debilitating chronic or high-cost, complex
diseases represent a minority of the population but account for a
disproportionately high percentage of the healthcare costs in the United States.
The Company believes that a significant portion of these costs can be avoided
with effective case management, use of information systems, and coordinated use
of the full continuum of healthcare. At present, a relatively small percentage
of these patients are enrolled under capitated contracts. However, the Company
believes that the cost pressures that fostered the development of managed care
for other segments of the population should have an even more significant impact
on the rapid development of managed care for such patients. Through affiliation
with physicians and academic experts who specialize in geriatrics and medical
conditions that disproportionately affect these population segments, effective
use of case management techniques designed specifically for such populations,
and management information systems, the Company believes that its affiliated
physicians should be able to manage cost effectively the risks of providing care
to these populations on a capitated basis.
Improved Medical Quality and Performance. Over time, the Company intends
that its affiliated physicians will devise medical protocols and the Company
will perform outcome analyses, such that the most effective medical practices in
each network can be shared across physician groups. The Company is in the
process of establishing a quality assurance program that will incorporate peer
review, self-critiquing mechanisms, patient satisfaction surveys, continuing
medical staff development and regular continuing medical education seminars.
Once a large base of affiliated physicians at Affiliated Groups is established,
medical directors of each local care network will participate in the Company's
National Medical Advisory Board that will meet regularly to establish and review
medical standards, policies and procedures for all physicians affiliated with
the Company.
22
<PAGE>
Affiliation Structure
General Affiliation Model. Although the details of each affiliation
transaction may differ, the Company has developed the General Affiliation Model,
designed to capture the benefits of integration while preserving significant
physician autonomy. In the General Affiliation Model, physicians initially
affiliating with the Company in each geographic area who will become
stockholders of the Company transfer their practices by mergers or asset sales
to an Affiliated Group, a newly-formed professional corporation or professional
association permitted to practice medicine under applicable law. These
physicians, along with other physicians in that geographic area who subsequently
become part of an Affiliated Group and become stockholders of the Company, the
Stockholder Physicians, execute an Employment Agreement with the Affiliated
Group at the time that they transfer their practice assets. The Affiliated
Group, in turn, enters into a 40-year Services Agreement with the Company
pursuant to which the Company agrees to provide the physicians in the Affiliated
Group with comprehensive management services in exchange for a fee. As
consideration for transferring their practices to and becoming employed by the
Affiliated Group, Stockholder Physicians receive shares of the Company's Common
Stock and in some cases cash, the amount of which is negotiated on an individual
basis between each Stockholder Physician and the Company. Physicians who are not
stockholders of the Company may also be employed by the Affiliated Group.
All of the outstanding capital stock of each Affiliated Group is held by a
Stockholder Physician designated by the Company (the "Affiliated Group
Stockholder"). At the time of the affiliation, the Affiliated Group Stockholder
enters into an agreement with the Company and the Affiliated Group pursuant to
which he or she agrees to consult with the Company in voting the stock and
agrees to transfer the stock without consideration to another licensed physician
at the direction of the Company (the "Designation Agreement"). The Designation
Agreement provides, however, that the Affiliated Group Stockholder is not
required to consult with the Company as to matters requiring the exercise of
professional medical judgment.
The Employment Agreements contain certain restrictive covenants, including
covenants relating to noncompetition, confidentiality and nonsolicitation of
employees. Under current law, the Company may not be able to enforce the
covenants not to compete. Each Employment Agreement generally is terminable by
the Affiliated Group with respect to any individual Stockholder Physician upon
the death or disability of such Stockholder Physician or upon the occurrence of
certain events that either interfere with the ability of such Stockholder
Physician to practice medicine or significantly diminish the value of such
Stockholder Physician's affiliation to the Affiliated Group. Each Stockholder
Physician may terminate his or her Employment Agreement under certain
circumstances, including without cause upon six months notice to the Affiliated
Group. With respect to the Flagship Stockholder Physicians (as defined below),
such notice may only be given after the first anniversary of the Employment
Agreement. The Employment Agreements also contain terms permitting or requiring
a Stockholder Physician upon certain termination events to repurchase from the
Affiliated Group the restrictive covenants and his or her practice assets upon
termination of employment. The terms of such repurchase provision may not permit
the Company to fully recover its affiliation payments to the physician or
reflect the cost of affiliation transactions at the time of termination.
Pursuant to the Services Agreement, the Company provides (or arranges for
the provision of) a comprehensive package of services to the Affiliated Group
and its physicians, including offices and facilities, equipment, nursing and
other non-physician professional support, administrative personnel, information
systems, comprehensive professional liability insurance and general management
and financial advisory services. The Company, on behalf of the physicians in the
Affiliated Group, supervises the billing of all patients, insurance companies
and third-party payors and negotiates all contracts and relationships with
payors. The physicians remain responsible for, among other things, the medical,
professional and ethical aspects of their practices.
Generally, under a Services Agreement, profits from patient care are first
applied to the payment of the operating expenses of the practices. Any remaining
profits are allocated between a pool from which physician compensation is paid
("Compensation Pool") and the Company. The majority of the profits are initially
allocated to the Compensation Pool until the physicians receive as compensation
a minimum level of income based upon a significant percentage of their
historical compensation. The Company receives a
23
<PAGE>
portion of the profits as the revenues exceed such base levels. Profits from
integrated health services that may be established by the Company or an
Affiliated Group are allocated separately and will be determined based upon the
nature of the integrated health service, or in the absence of such an agreement,
50% of the profit from such services will be allocated to the Company. Because
compensation of Stockholder Physicians is a function of many factors including
the financial performance of such physicians, neither the Company nor an
Affiliated Group can guarantee that a Stockholder Physician will receive any
minimum level of compensation, and the Stockholder Physicians are not entitled
to any compensation other than their allocated share of the Compensation Pool.
The Company believes that its General Affiliation Model offers a number of
advantages. For example, physicians remain in their pre-affiliation locations,
offering their patients the continuity and convenience of decentralized offices.
At the same time, laboratory and administrative services generally are provided
on a centralized basis, allowing the Affiliated Groups to achieve economies of
scale in purchasing and other administrative efficiencies. Moreover, the Company
believes that as it completes its initial affiliation transactions in particular
geographic markets, Affiliated Groups will provide it with both a visible
business presence and a corporate framework for securing additional affiliations
with physicians in those markets.
The Company also believes that the decision making structure that it
establishes in connection with each Affiliated Group facilitates information
sharing and cooperation between the affiliated physicians and the Company. Each
Affiliated Group maintains its own policy making structure, including a Joint
Policy Board and a Medical Advisory Board. The Joint Policy Board is charged
with, among other things, developing certain management and administrative
policies for the Affiliated Group, approving operating and capital expenditure
budgets, approving the establishment of managed care contracts and determining
of the number and type of physicians required for the operation of the
Affiliated Group. Certain decisions that may have a material impact upon the
business, results of operation or financial condition of the Affiliated Group
must also be approved by the Affiliated Group Stockholder. The current Joint
Policy Boards have nine members: the President of the Affiliated Group (selected
by the Affiliated Group Stockholder from physicians nominated by the Stockholder
Physicians), four persons designated by the Company and four persons designated
by the Stockholder Physicians. The Medical Advisory Board, which is responsible
for providing medical input on managed care contracting by the Affiliated Group
and leading the development and dissemination of medical protocols among the
physicians, is chaired by the Medical Director of the Affiliated Group (selected
by the Affiliated Group Stockholder from physicians nominated by the Stockholder
Physicians) and consists of six other physicians elected by the Stockholder
Physicians.
Although the Springfield and Flagship Affiliations generally track the
General Affiliation Model, the Company may depart to some extent or
significantly from it or pursue an altogether different approach in completing
future physician affiliations.
The Springfield Affiliated Group
The Company has entered into affiliation transactions with nine medical
practices located in western Massachusetts, consisting of a total of 39
physicians, 34 of whom are stockholders in the Company (the "Springfield
Stockholder Physicians") and 5 of whom are employed by the Springfield
Affiliated Group as employees (the "Springfield Affiliation"). These physicians
treat patients from 28 towns in western Massachusetts and northern Connecticut,
which area had a total population in 1990 of approximately 650,000. Twenty-four
of the physicians are engaged in primary care practices, including two
physicians with pediatric practices. Fifteen of the physicians are engaged in
specialist practices, including pulmonology, cardiology, oncology/hematology,
infectious disease, rheumatology and gastroenterology. The Springfield
Affiliated Group leases offices in 11 locations, of which 9 are located in
Springfield, Massachusetts. Certain of the offices are leased from Springfield
Stockholder Physicians. The Springfield Affiliated Group had total patient
revenue of approximately $16.5 million for the year ended December 31, 1996. At
December 31, 1996, the Springfield Affiliates Group had a patient base of
approximately 50,000.
The Springfield Affiliated Group has a capitated Medicare Risk contract
with Tufts Health Plan's Secure Horizons product. As of March 31, 1997, there
were 1,975 covered lives. Profitability of the Secure
24
<PAGE>
Horizons contract is dependent upon many factors including regular utilization
review of inpatient, skilled nursing facility, home care and outpatient
services, subcapitations, close collaboration with the partner hospital, primary
care and specialist physician communication, data analysis and review and
physician leadership.
The Springfield Affiliated Group also participates in managed care plans of
Aetna, Blue Cross and Blue Shield of Massachusetts, Cigna, Fallon Health Plan,
Health New England, Pioneer (PPO), and Tufts Health Plan.
Consistent with the General Affiliation Model, the Springfield Stockholder
Physicians, or the professional corporations and other entities with whom they
were affiliated, merged or sold their practice assets to the Springfield
Affiliated Group in exchange for an aggregate of approximately 3,164,738 shares
of Common Stock of the Company and approximately $4.1 million in cash. The 29
initial Stockholder Physicians entered into a three-year employment agreement
with the Springfield Affiliated Group, pursuant to which each physician received
options to purchase 2,500 shares of Common Stock of PQC at an exercise price of
$2.50 per share. The options expire on the earlier of termination of employment
or three years from commencement of employment. The Physicians who subsequently
affiliated with the Springfield Affiliated Group entered into ten-year
employment agreements with the Springfield Affiliated Group. Four of these
Springfield Physician Stockholders each received options to purchase 37,500
shares of Class A Common Stock at an exercise price of $1.00 per share which
options are subject to certain vesting conditions. In addition, up to $2.15
million, payable in Class A Common Stock at $2.50 per share, may be paid in the
future to certain Springfield Stockholder Physicians provided that certain
revenue goals are met. The Springfield Affiliated Group in turn entered into a
40-year services agreement with the Company pursuant to which the Company (on
behalf of the Springfield Affiliated Group) agreed to provide management
services to the Springfield Affiliated Group physicians.
Under the Employment Agreements with the twenty-nine initial Springfield
Stockholder Physicians, revenues from patient care remaining after payment of
operating expenses, including expenses of the Springfield Affiliated Group
("Gross Margin") are allocated first between the Springfield Affiliated Group's
Compensation Pool (the "Springfield Compensation Pool") and the Springfield
Affiliated Group in a 95%/5% proportion until 95% of the base compensation of
the Springfield Stockholder Physicians is achieved, then to payment of certain
non-operating expenses, and then 80% to the Springfield Affiliated Group and 20%
to the Springfield Compensation Pool until the Springfield Affiliated Group has
been allocated $1.5 million, with any remaining Gross Margin being divided
evenly between the Springfield Affiliated Group and the Springfield Compensation
Pool. Under the Employment Agreements with the Springfield Stockholder
Physicians who subsequently affiliated with the Springfield Affiliate Group any
Gross Margin attributable to these physicians are allocated between the
Springfield Compensation Pool and the Springfield Affiliated Group in a 80%/20%
proportion until the physicians receive 80% of their base compensation, and then
to payment of certain non-operating expenses attributable to the Springfield
Affiliated Group, with any remaining Gross Margin being divided evenly between
the Springfield Compensation Pool and the Springfield Affiliated Group. The base
compensation of the Springfield Stockholder Physicians is $6.7 million. The
allocation of Gross Margin to the Springfield Compensation Pool is calculated
separately for each fiscal period. If the Gross Margin for any such period is
negative, such negative amount constitutes an operating expense in the next
fiscal period. Pursuant to the Springfield Services Agreement, all amounts
allocated to the Springfield Affiliated Group in any fiscal period are remitted
to the Company.
Six months prior to the third anniversary of the closing of the initial
Springfield Affiliation, the Springfield Affiliated Group (on behalf of the
Company) or a majority of the Springfield Shareholder Physicians may amend the
financial arrangements, effective as of the third anniversary of such closing,
such that the economic terms of the Springfield Stockholder Physicians'
employment agreements, taken as a whole (and giving effect to any payments or
other compensation received by the Springfield Stockholder Physicians in
connection with their affiliation), are adjusted to reflect the terms being
entered into by independent third parties for similar affiliation and employment
relationships at that time.
25
<PAGE>
The Flagship Affiliation. On December 11, 1996, pursuant to affiliation
transactions with the Company, 15 existing professional practices located in the
greater Baltimore-Annapolis, Maryland area, consisting of a total of 59
physicians, transferred their practice assets to and became employed by the
Flagship Affiliated Group. In exchange for such affiliation, the physicians
received a combination of approximately $2.3 million in cash and 6,842,675
shares of Class A Common Stock (the "Flagship Affiliation") affiliated with
Flagship. Forty-one of the physicians are engaged in primary care practices,
including 20 physicians with pediatric practices. Eighteen of the physicians are
engaged in specialist practices, including pulmonology, cardiology,
oncology/hematology, infectious disease, rheumatology, gastroenterology and
neurology. Fifty-five physicians are stockholders in the Company (the "Flagship
Stockholder Physicians") and 4 physicians are employed by the Flagship
Affiliated Group as employees. The Flagship Affiliated Group leases 15 practice
locations in Maryland, some of which are leased from the Flagship Stockholder
Physicians. The practices included in the Flagship Affiliated Group had total
patient revenue of approximately $25 million for the year ended December 31,
1996. During the year ended December 31, 1996, the Flagship Affiliated Group had
a patient base of approximately 100,000. The majority of patient revenues are
fee-for-service rather than capitated.
In order to effectuate the Flagship Affiliation, the Flagship Stockholder
Physicians, or the professional associations, business corporations and limited
liability partnerships with whom they were affiliated, transferred their
practice assets to the Flagship Affiliated Group by merger or by sale of assets.
The Company entered into a 40-year management services agreement with the
Flagship Affiliated Group (the "Flagship Services Agreement"), which entered
into a five-year Employment Agreement with each Flagship Stockholder Physician.
In addition, the Company entered into an agreement with the Flagship Affiliated
Group pursuant to which the Company agreed to grant options to purchase, subject
to certain conditions, up to 400,000 shares of Common Stock to the Flagship
Stockholder Physicians.
Pursuant to the Flagship Services Agreement and the Employment Agreements
with the Flagship Stockholder Physicians, revenues from patient services
remaining after payment of third-party operating expenses ("Net Margin") will be
allocated between the Flagship Stockholder Physicians' Compensation Pool (the
"Flagship Compensation Pool") and reimbursement of the Company's direct expenses
relating to the Flagship Affiliated Group, based on a ratio of such budgeted
compensation to such budgeted expenses. Once both the Company's direct expenses
and the aggregate base physician compensation have been fully satisfied, any
remaining Net Margin will be divided evenly between the Company and the Flagship
Compensation Pool. The base compensation of the Flagship physicians is $8.15
million.
Future Affiliation Transactions. The Company's current primary focus is on
expanding the Springfield Affiliated Group and the Flagship Affiliated Group,
and developing additional Affiliated Groups in the eastern United States. The
Company will determine which geographic markets to enter in the future based
upon consideration of the following factors (among others): (i) population and
economic profile, (ii) level of managed care penetration and effectiveness of
providers in coping with the managed care environment, (iii) physician practice
density, specialty composition, and average group size, (iv) receptivity of the
medical community to the Company's management philosophy, (v) local competition
in the physician practice management business and (vi) commercial and Medicare
reimbursement rates. The Company also regularly considers the addition of
physicians on an employee, rather than a Stockholder Physician, basis.
Ancillary Services
In general, the Company anticipates that it will obtain access to ancillary
services, such as laboratories, skilled nursing facility services, and home
healthcare, for its Affiliated Groups through contractual relationships or
strategic alliances with other healthcare providers. The Company anticipates
that these services will be closely coordinated with services provided by its
physicians. Over time, the Company, to the extent permitted by federal and state
regulations, may seek to own some of these ancillary services, if cost and
effectiveness considerations indicate that it would be beneficial to do so and
if favorable strategic alliances cannot be entered into. As of the date of this
prospectus, the Company and its affiliated entities do not own any ancillary
services other than the Springfield and Flagship laboratories and do not have
any contractual relationships with respect to any other ancillary services. See
"-- Company Strategy."
26
<PAGE>
Relationship With Other Provider Organizations
The Company may, in the future, contract with other provider organizations
such as independent provider associations ("IPA") and physician hospital
organizations ("PHOs") on a selective basis. Such contracts may provide
management services, including claims processing, member services and
administrative support, for a management fee. In other areas, PQC's role may
include providing policy guidelines, medical management, credentialing and
provider contracting.
The Bain Financing
In order to finance the cash payments made to the Springfield and Flagship
Stockholder Physicians, to fund the Company's operating expenses and to finance
subsequent affiliation and working capital requirements, PQC entered into a
financing transaction with the Institutional Investors, consisting of Bain
Capital Fund V, L.P., Bain Capital Fund V-B, L.P., BCIP Associates and BCIP
Trust Associates, L.P., on August 30, 1996. Pursuant to the Class B Stock and
Warrant Purchase Agreement entered into as of that date (the "Bain Purchase
Agreement"), the Institutional Investors are obligated to purchase and the
Company is required to sell, in each case subject to certain conditions, up to
12,000,000 shares of the Company's Class B Common Stock at a price of $2.50 per
share, together with warrants to purchase 13,000,000 shares of Class B Common
Stock (the "Class B Warrants"), of which 4,000,000 shares of Class B Common
Stock and Class B Warrants to purchase 5,549,500 shares of Class B Common Stock
have been purchased as of March 31, 1997. An additional 600,000 shares of Class
B Common Stock and 865,500 Class B Warrants were acquired on April 18, 1997 for
aggregate consideration of $1.5 million. The Class B Warrants entitle the holder
to purchase the shares of Class B Common Stock at $2.50 per share (the "Exercise
Price"). The Exercise Price is subject to adjustment (i) to reflect any stock
dividends, stock splits, reverse stock splits, reorganizations and
recapitalizations of the Company's capital stock and (ii) to prevent dilution,
on a weighted-average basis, in the event that the Company issues additional
securities at a purchase price less than the applicable Exercise Price (with the
exception of securities issued or reserved for issuance to employees pursuant to
stock option plans approved by the Company's Board of Directors).
Pursuant to the Bain Purchase Agreement, the Company may draw down the
remaining available commitment of $20 million in two additional tranches, each
at any time prior to December 31, 1999, provided that certain conditions are
met, including without limitation the Company having met certain financial
targets, certain representations and warranties of the Company remaining true
and correct, and the Company having performed and complied in all material
respects with the terms of the Bain Purchase Agreement.
The Institutional Investors' commitment to purchase additional Class B
Common Stock is subject to a number of conditions including the attainment of
earning before interest, taxes, depreciation and amortization ("EBITDA") and net
sales (consolidated revenues net of reserves for bad debts) targets. The
Institutional Investors are not required to (but may) purchase additional Class
B Common Stock unless EBITDA and net sales for each of the three month periods
ending on the dates specified below are equal to the minimum set forth below:
<TABLE>
<CAPTION>
Date EBITDA Net Sales
<S> <C> <C>
December 31, 1996 $(1,745,000) $ 3,601,000
March 31, 1997 (336,000) 11,891,000
June 30, 1997 1,050,000 18,257,000
September 30, 1997 2,151,000 26,579,000
December 31, 1997 2,668,000 30,620,000
March 31, 1998 3,288,000 31,997,000
June 30, 1998 3,521,000 33,486,000
September 30, 1998 3,772,000 34,461,000
December 31, 1998 3,907,000 35,261,000
March 31, 1999 3,997,000 36,072,000
June 30, 1999 4,089,000 36,902,000
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
Date EBITA Net Sales
<S> <C> <C>
September 30, 1999 4,183,000 37,751,000
December 31, 1999 4,279,000 38,619,000
</TABLE>
For the three month period ended December 31, 1996, EBITDA was $(1,478,431)
and net sales were $4,932,653. There can be no assurances that the Company will
be able to achieve such EBITDA and net sales levels in the future. The Company's
ability to achieve such level of EBITDA and net sales is dependent upon the
Company increasing the number of physicians who are employed by an affiliate
with its Affiliated Groups.
The Company has also agreed that it will not take certain actions unless
the Company receives the prior approval of the Institutional Investors. Such
actions involving the Company, its subsidiaries or any Affiliated Groups include
mergers, sales of assets, affiliation transactions, declarations of dividends or
other distributions, material changes in business, amendments to the Restated
Certificate or By-laws, the hiring, firing and compensation of the Company's
chief executive and chief financial officers, adoption of annual operating
budget, transactions with affiliates and the commencement or settlement of any
litigation.
The Company's Class A Common Stock and Class B Common Stock are identical
except for certain special voting rights of the directors appointed by the
holders of each class. See "Description of Capital Stock."
In connection with the Bain Financing, the Company entered into a
Management Agreement dated as of August 30, 1996 with Bain Capital Partners, V,
L.P. ("BCP V"). See "Certain Transactions."
The Credit Agreement
On January 16, 1997, the Company entered into the Credit Agreement with
Bankers Trust, as Agent, and the lenders from time to time a party thereto,
pursuant to which the lenders agreed, subject to the terms and conditions set
forth in the Credit Agreement, to provide an aggregate amount of up to $3.5
million to the Company under the Facility. On March 31, 1997, the Company's
outstanding borrowings under the Facility were $3.0 million and the remaining
available commitment at such date was $500,000.
Loans under the Facility (the "Loans") bear interest at (i) the higher of
(A) 0.5% over the "Adjusted Certificate of Deposit Rate" or (B) the prime rate
announced by Bankers Trust Company from time to time, plus 1.5% or (ii) the
"Eurodollar Rate," plus 2.5%, and are payable upon the earlier of a "Change of
Control Event" or January 16, 1998. The Company may use the Facility to provide
financing for general corporate and working capital purposes including, subject
to the terms and conditions set forth in the Credit Agreement, establishment by
the Company of Affiliated Groups and acquisitions by the Affiliated Groups of
physician practice groups.
The Loans are secured by all of the assets of the Company and its
subsidiaries, including subsequently created subsidiaries, and the receivables
of the Affiliated Groups, including the Flagship Affiliated Group and
subsequently created Affiliated Groups. The Loans are guaranteed by the Flagship
Affiliated Group and the Springfield Affiliated Group and must be guaranteed by
any subsequently created Affiliated Group.
The Credit Agreement contains various representations and covenants of the
Company, including a covenant to maintain a minimum amount of accounts
receivable of the Affiliated Groups. Certain other covenants, among other
things, limit the ability of the Company or the Affiliated Groups to (i) amend
or terminate the Stockholders Agreement, the Services Agreements and certain
other agreements set forth in the Credit Agreement, (ii) make capital
expenditures, (iii) sell assets, (iv) incur additional debt, (v) make
investments or loans, (vi) pay dividends or distributions and (vii) issue
capital stock. In addition, the Company is required to maintain a minimum EBITDA
equal or exceeding a loss of $830,000 for the fiscal quarter ended March 31,
1997, a loss of $1.4 million for the six months ended June 30, 1997, a loss of
$1.5 million for the nine-months ended September 30, 1997 and a loss of $1.1
million for the year ended December 31, 1997. Failure to comply with such
covenants, as well as other events, including a payment default, a default under
certain agreements, a change in control, adverse judgments in excess of $25,000
and a default under any security documents constitute events of default under
the loans.
28
<PAGE>
In connection with the Credit Agreement, Bankers Trust received a
commitment fee of $157,500, which fee was converted into 63,000 shares of Class
A Common Stock on February 15, 1997.
Governmental Regulation
As a participant in the healthcare industry, the Company's operations and
relationships, and the business and activities of its affiliated physicians,
will be subject to extensive and increasing regulation by a number of
governmental entities at the federal, state and local levels and by fiscal
intermediates appointed by various payors and other private brokers. The Company
will also be subject to laws and regulations relating to business corporations
in general. Because of the uniqueness of the structure of the relationship with
the physician groups, many aspects of the Company's business operations have not
been the subject of state or federal regulatory interpretation, and there can be
no assurance that a review of the business of the Company or its affiliated
physicians by courts or regulatory authorities will not result in a
determination that could adversely affect the operations of the Company or the
affiliated physicians. In addition, there can be no assurance that the
healthcare regulatory environment will not change so as to restrict the
Company's or the affiliated physicians' existing operations or their expansion.
Prohibition on Corporate Practice of Medicine. The laws of most states,
including Massachusetts and Maryland, prohibit business corporations such as the
Company from practicing medicine or employing physicians to do so. The
contractual relationships the Company has entered into with the Affiliated
Groups attempt to comply with these laws. Because there is very limited judicial
or regulatory interpretation of the scope of the corporate practice of medicine
prohibition in most states, however, there can be no assurance that the
Company's contractual arrangements will be found to comply with such laws. Any
determination that the contractual relationships violate such laws could have a
material adverse effect on the Company, and there can be no assurance that the
Company would be able to restructure its arrangements on favorable terms or at
all.
The BRM has proposed regulations that, if promulgated as proposed, might
prohibit physicians licensed within the Commonwealth of Massachusetts from
entering into management contracts with proprietary business entities unless a
majority of the governing board of those business entities are licensed
physicians and certain other conditions are met. The BRM also indicated that it
may seek to limit significantly the extent to which proprietary business
entities may have control or consultation rights with respect to medical
decisions or business decisions that may affect patient care, such as the amount
of time each physician spends with a patient. Extensive commentary has been
filed in opposition to the proposed regulations, and it is not known when or in
what form final regulations will be promulgated. The final regulations may have
a material adverse effect on the Company's relationship with the Springfield
Affiliated Group and its ability to operate in Massachusetts as currently
contemplated. Comparable regulations have not been proposed in Maryland, but
there can be no assurance that such regulations will not be proposed or adopted.
Restrictions on Referrals and Fee-Splitting. In addition to prohibiting the
practice of medicine, numerous states prohibit entities such as the Company from
engaging in certain healthcare-related activities such as fee-splitting with
physicians or from making referrals to entities in which the referring physician
has an ownership interest. For example, Maryland has enacted legislation that
significantly restricts patient referrals for certain services, and requires
disclosure of ownership in businesses to which patients are referred and places
other regulations on healthcare providers. The Company has structured its
arrangements with the practices in the Flagship Affiliation to fit within the
group practice exemption contained in the Maryland act; however, investments or
contractual relationships with businesses not specifically operated by the
Flagship Affiliated Group would, in some cases, be prohibited. The Company
believes it is likely that other states will adopt similar legislation.
Accordingly, expansion of the operations of the Company to certain jurisdictions
may require it to comply with such jurisdictions' regulations which could lead
to structural and organizational modifications of the Company's anticipated form
of relationships with physician groups. Such changes, if any, could have an
adverse effect on the Company.
Certain provisions of the Social Security Act, commonly referred to as the
"Anti-kickback Statute," prohibit the offer or receipt of any form of
remuneration in return for the referral of Medicare or state health
29
<PAGE>
program (such as Medicaid) patients, or in return for the recommendation,
arrangement, purchase, lease, or order of items or services that are covered by
Medicare or state health programs. The Anti-kickback Statute is broad in scope
and has been broadly interpreted by courts in many jurisdictions. Read
literally, the statute places at risk many customary business arrangements,
potentially subjecting such arrangements to lengthy, expensive investigations
and prosecutions initiated by federal and state governmental officials. Many
states have adopted similar prohibitions against payments intended to induce
referrals of state health program and other third-party payor patients. While
the Company has attempted to structure its contractual relationships so as to
comply with the Anti-kickback Statute, there can be no assurance that such
relationships do in fact comply with the Anti-kickback Statute given the broad
wording of the statute. While the federal government has promulgated or proposed
various "safe harbor" exceptions to the Anti-kickback Statute, the Company does
not expect its operations to fit within any of the safe harbors. Violation of
the Anti-kickback Statute is a felony, punishable by fines up to $25,000 per
violation and imprisonment for up to five years. In addition, the Department of
Health and Human Services may impose civil penalties excluding violators from
participation in Medicare or state health programs.
Significant prohibitions against physician referrals were enacted by
Congress in the Omnibus Budget Reconciliation Act of 1993. These prohibitions,
commonly known as "Stark II," amended prior physician self-referral legislation
known as "Stark I" by dramatically enlarging the field of physician-owned or
physician-interested entities to which the referral prohibitions apply. Stark II
prohibits, subject to certain exemptions, a physician or a member of his or her
immediate family from referring Medicare or state health program patients for
"designated health services" to an entity in which the physician has an
ownership or investment interest or with which the physician has entered into a
compensation arrangement including the physician's own group practice. The
designated health services include radiology and other diagnostic services,
radiation therapy services, physical and occupational therapy services, durable
medical equipment, parenteral and enteral nutrients, equipment, and supplies,
prosthetics, orthotics, outpatient prescription drugs, home health services, and
inpatient and outpatient hospital services. The penalties for violating Stark II
include a prohibition on payment by these government programs for services
rendered pursuant to such references and civil penalties of as much as $15,000
for each violative referral and $100,000 for participation in a "circumvention
scheme." In addition, the provider may be disqualified from participating in the
Medicare and state health care programs based on the submission of a false claim
or participation in a circumventive scheme. The Company has attempted to
structure its activities in compliance with Stark I and Stark II. However, the
Stark legislation is broad and the Stark I regulations are complex and do not
provide clear guidance on how Stark II will be interpreted. A finding that the
Company or its Affiliated Groups has violated Stark could have a material
adverse effect on the Company. In addition, future regulations or clarification
of the existing regulations could require the Company to modify the form of its
relationships with physician groups and may limit the Company's ability to
implement fully its plan for integrated care.
Prohibition on False Claims. There are also state and federal civil and
criminal statutes imposing substantial penalties, including civil and criminal
fines and imprisonment, on healthcare providers who fraudulently or wrongfully
bill governmental or other third-party payors for healthcare services. The
federal law prohibiting false billings allows a private person to bring a civil
action in the name of the United States government for violations of its
provisions. There can be no assurance that the Company's activities will not be
challenged or scrutinized by governmental authorities. Moreover, technical
Medicare and other reimbursement rules affect the structure of physician billing
arrangements. Regulatory authorities might challenge the billing arrangements
with the Affiliated Groups and, in such event, the Company may have to modify
its relationship with physician groups. Noncompliance with such regulations may
adversely affect the operation of the Company and subject the Company and
Affiliated Groups to lost reimbursement, penalties and additional costs.
Direct Provision of Healthcare Services. The Company plans to develop a
network of integrated healthcare services (other than acute care) in the future,
depending on market conditions. If the Company determines that it is
advantageous to provide such services through a wholly-owned subsidiary or other
controlled relationship, it is possible that one or more subsidiaries or
affiliates of the Company could become licensed providers of healthcare
services. Any such provider would have to comply with applicable regulatory
30
<PAGE>
requirements. In addition, the direct provision of healthcare services by a
subsidiary or affiliate might increase the risk to the Company of regulatory or
other investigation or litigation.
Healthcare Reform. A portion of the revenues of the Company's Affiliated
Groups is derived from payments made by governmental sponsored healthcare
programs (principally, Medicare and Medicaid). Government revenue sources are
subject to statutory and regulatory changes, administrative rulings,
interpretations of policy, determinations by fiscal intermediaries, and
government funding restrictions, all of which may materially decrease the rates
of payment and cash flow to physicians and other healthcare providers. The
federal Medicare program adopted a system of reimbursement of physician
services, known as the resource based relative value scale schedule ("RBRVS"),
which took effect in 1992 and is expected to be fully implemented by December
31, 1996. The Company expects that the RBRVS fee schedule and other future
changes in Medicare reimbursement will, in some cases, result in a reduction
from historical levels in the per patient Medicare revenue received by certain
of the Affiliated Groups with which the Company may contract, which in turn may
result in a decrease in revenues to the Company.
In addition to current regulation, the United States Congress has
considered various types of healthcare reform, including comprehensive revisions
to the current healthcare system. It is uncertain what legislative proposals
will be adopted in the future, if any, or what actions federal or state
legislatures or third party payors may take in anticipation of or in response to
any healthcare reform proposals or legislation. Healthcare reform legislation
adopted by Congress could result in lower payment levels for the services of
physicians managed by the Company and lower profitability of the Affiliated
Groups, which could have a material adverse effect on the operations of the
Company.
Insurance Laws. Laws in all states regulate the business of insurance and
the operation of HMOs. Many states also regulate the establishment and operation
of networks of healthcare providers. While these laws do not generally apply to
the hiring and contracting of physicians by other healthcare providers, there
can be no assurance that regulatory authorities of the states in which the
Company operates would not apply these laws to require licensure of the
Company's operations as an insurer, as an HMO or as a provider network.
Antitrust Laws. Because the affiliated practice groups are not subsidiaries
of the Company and thus remain separate legal entities for antitrust purposes,
they may be deemed competitors subject to a range of antitrust laws which
prohibit anti-competitive conduct, including price fixing, concerted refusals to
deal and division of market. The Company intends to comply with such state and
federal laws as they may affect its development of integrated healthcare
delivery networks, but there is no assurance that the review of the Company's
business by courts or regulatory authorities will not result in a determination
that could adversely affect the operation of the Company and its affiliated
physician groups.
Competition
The Company faces competition for both the recruitment and retention of
affiliated physicians. The market for affiliation with physicians is highly
competitive, and the Company expects this competition to increase. The Company
competes for physician affiliations with many other entities, some of whom have
substantially greater resources, greater name recognition and a longer operating
history than the Company and some of whom offer alternative affiliation
strategies which the Company may not be able to offer.
The provision of physician practice management services is a highly
competitive business in which the Company will compete for contracts with
several national and many regional and local providers of such services. Certain
of the Company's competitors will have access to substantially greater resources
than the Company. Although the nature of the competition may vary, competition
is generally based on cost and quality of care.
31
<PAGE>
Facilities
The Company leases a 6,358 square foot facility in Waltham, Massachusetts
for its headquarters and also leases office space in Springfield, Massachusetts
and Baltimore, Maryland. The Company also leases premises used by the
Springfield and Flagship Affiliated Groups.
Employees
As of March 31, 1997, the Company had 34 employees and the Affiliated
Groups had 553 employees, including 98 physicians.
32
<PAGE>
MANAGEMENT
Executive Officers and Directors
The executive officers and directors of the Company and their ages as of
March 31, 1997 are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Jerilyn P. Asher.......... 54 Chief Executive Officer and Chairman of the Board
Alphonse Calvanese, M.D... 45 Director
Leslie Fang, M.D.(1)...... 52 Director
Ira Fine, M.D............. 48 Director
Dana Frank, M.D........... 46 President and Director
Arlan F. Fuller, Jr., M.D. 51 Executive Vice President, Medical Affairs and Director
Stephen G. Pagliuca....... 42 Director
Marc Wolpow............... 38 Director
Samantha J. Trotman....... 29 Chief Financial Officer
</TABLE>
___________________
(1) Member of the Compensation Committee.
Directors, Executive Officers and Other Key Employees
Jerilyn P. Asher is a founder of the Company and has served as Chief
Executive Officer and as Chairman of the Board since its inception. She has over
eighteen years of experience as a healthcare executive in both the public and
private sectors, with broad-based responsibilities for all aspects of
constituency building with physicians and payors, business development, finance,
operations, sales, marketing and federal and state healthcare regulation. From
1994 to 1995, Ms. Asher served as President and a member of the Board of
Directors of Abbey Healthcare Group Incorporated ("Abbey"), a home healthcare
provider. Ms. Asher was a founder and served as President, Chief Executive
Officer and Chairman of the Board of Directors from 1988 to 1995 and Executive
Vice President from 1985 to 1988 of Protocare, Inc., a leading regional provider
of home healthcare products and services. From 1978 to 1984, Ms. Asher served as
Executive Director of United Cerebral Palsy of Western Massachusetts, Inc., a
multi-service agency providing direct care services to persons of all ages with
multiple disabilities.
Alphonse Calvanese, M.D. has been a member of the Board of Directors of the
Company since November 1996 and President of the Springfield Affiliated Group
since August 1996. He has been in the private practice of medicine since 1981.
He received his B.S. from the University of Massachusetts and his M.D. from
Tufts Medical School. He completed his internship and residency at Baystate
Medical Center.
Leslie Fang, M.D. has served as a member of the Board of Directors of the
Company and a member of the Board's compensation committee since its inception.
Dr. Fang has been Associate Director of the Hemodialysis Unit, Massachusetts
General Hospital since 1980 and an Assistant Professor of Medicine at Harvard
University Medical School since 1983. He is also Director of the Charles River
Plaza Dialysis Unit and a nationally recognized expert in the field of
nephrology. Dr. Fang received his B.S., M.S. and Ph.D. in physiology and
biophysics from the University of Illinois and his M.D. from Harvard University
Medical School. He completed his internship and residency at Massachusetts
General Hospital.
Ira Fine, M.D. has been a member of the Board of Directors of the Company
since November 1996. He has been in the private practice of medicine for 16
years and has been the Chief, Division of Rheumatology at Sinai Hospital since
1988 and St. Joseph Medical Center in Baltimore since 1992. He is the Chairman
of the Board of The Physician Group. He is also an Assistant Professor of
Medicine at the University of Maryland School of Medicine and an Assistant
Professor of Medicine at the Johns Hopkins University School of Medicine. He
received his B.S. from the Virginia Polytechnic Institute and his M.D. from
University of Maryland School of Medicine. He completed his internship at
University of Maryland Hospital/Baltimore
33
<PAGE>
Veterans Administration Hospital, his residency at University of Maryland
Hospital and a fellowship in rheumatology at the Johns Hopkins University School
of Medicine.
Dana Frank, M.D. has been President of the Company since March 1997 and the
Flagship Affiliated Group since December 1996 and has served as a member of the
Board of Directors of the Company since November 1996. He has been in the
private practice of medicine since 1981 and is President of Park Medical
Associates, P.A. He is an Assistant Professor at the Johns Hopkins University
School of Medicine and has been a Consulting Internist and Headache Specialist
at the Johns Hopkins University School of Medicine since 1981. He has also
served on the Johns Hopkins Hospital Medical Board. He received his A.B. from
Brown University and his M.D. from George Washington University. He completed
his internship and residency at Johns Hopkins Hospital.
Arlan F. Fuller, Jr., M.D. has served as Executive Vice President of
Medical Affairs and a member of the Board of Directors of the Company since its
inception. He also co-chairs the Company's National Medical Advisory Board, and
is responsible for organizing and directing the company's clinical systems. Dr.
Fuller has been an Associate Professor of Obstetrics and Gynecology at Harvard
University Medical School since 1987 and has been the Director of the
Gynecologic Oncology Service of Massachusetts General Hospital since 1985. Dr.
Fuller maintains a practice in gynecologic surgery and gynecologic oncology at
the Massachusetts General Hospital and is affiliated with the North Shore Cancer
and Medical Centers in Peabody and Salem, Massachusetts. In 1988, Dr. Fuller was
a founder and served as President of Massachusetts General Physicians
Corporation, the first organized physician group at the Massachusetts General
Hospital and a forerunner to the Massachusetts General Physicians Organization,
which manages group practices at the Massachusetts General Hospital. Previously,
Dr. Fuller was a member of the Board of Trustees of Partners Community
Healthcare, Inc., the primary care network and integrated health system which
includes the Massachusetts General Hospital and Brigham and Women's Hospital.
Dr. Fuller received his undergraduate degree from Bowdoin College and his M.D.
from Harvard University Medical School. He completed his internship at
Massachusetts General Hospital, his residencies at the former Boston Hospital
for Women (now the Brigham and Women's Hospital) and a fellowship in
gynecological oncology at Sloan-Kettering Memorial Cancer Center.
Stephen G. Pagliuca has been a member of the Board of Directors of the
Company since August 1996. He has been with Bain Capital, Inc., where he is a
Managing Director, since 1989, and has actively invested in the medical and
information industries. Prior to joining Bain Capital, Inc., he was a partner at
Bain & Company, where he managed client relationships in the healthcare and
information services industries, including assisting clients in developing
acquisition strategies. He is chairman of the board of PhysioControl Corporation
and Dade International, Inc. and a director of Vivra, Inc., Coram Healthcare,
Gartner Group, Executone, Medical Specialities Group and Wesley-Jessen.
Marc Wolpow has been a member of the Board of Directors of the Company
since August 1996. He joined Bain Capital, Inc. in 1990 and has been a Managing
Director since 1993. Previously he was a member of the corporate finance
department of Drexel Burnham Lampert, Inc. He is a director of American Pad &
Paper Corp., Miltex Instruments, Inc., Professional Services Industries, Inc.,
Paper Acquisition Corp. and Waters Corp.
Samantha J. Trotman has served as Chief Financial Officer since December
1996. She is responsible for all financial functions and physician affiliation
activities. She is also a member of the senior management team. Ms. Trotman
joined PQC from Bain Capital, where she was a senior associate. While at Bain
Capital, she managed and completed over a dozen transactions with combined value
of approximately $500 million, including the $30 million capital commitment to
the company. Prior to joining Bain Capital, Ms. Trotman was an analyst with
Wasserstein Perella, a leading mergers and acquisitions advisory firm. Ms.
Trotman holds a BA in Engineering from Cambridge University, England, an MA and
MEng also from Cambridge and an MBA from Harvard Business School.
Ann M. Keehn has served as Vice President of Finance since February 1997.
Prior to joining PQC, Ms. Keehn was Director, Health Services Management
Consulting for John Snow, Inc. ("JSI"), an
34
<PAGE>
international health care consulting firm. During her eight years with JSI, Ms.
Keehn provided management consulting services to a wide array of health care
provider organizations including integrated delivery systems, physician
practices, community health centers, and hospitals. Consulting engagement areas
included strategic planning, affiliation strategies, financial management under
capitation arrangements, and operational effectiveness. From 1988 to 1995, Ms.
Keehn served as the chief financial officer and interim chief executive officer
for Acton Medical Associates, a primary group practice affiliated with Harvard
Pilgrim (formerly Harvard Community Health Plan). Ms. Keehn has also held
financial positions with Children's Hospital and Brigham and Women's Hospital in
Boston. Ms. Keehn worked for Price Waterhouse from 1978 to 1981. She is a
certified public accountant and a member of the Massachusetts Society of CPAs.
Ms. Keehn received her BA in Accounting from Kansas State University and her
Masters in Business Administration from the University of Texas.
Director Compensation
Historically, members of the Board of Directors of the Company have not
received any cash compensation for their services as members of the Board,
although they are reimbursed for reasonable travel expenses while attending
Board and Committee meetings.
Executive Compensation
The following table sets forth compensation earned by (i) the Company's
Chief Executive Officer and (ii) the other executive officer of the Company
whose compensation during 1996 was greater than $100,000 (collectively, the
"Named Executive Officers"):
<TABLE>
<CAPTION>
1996 Annual Compensation Long-Term
----------------------------- Compensation All Other
Name and Principal Position Salary($) Bonus ($) Awards (1) Compensation($)
- ------------------------------------- ------------- ------------- --------------- ---------------
<S> <C> <C> <C> <C>
Jerilyn P. Asher........................... 250,000 -- -- 9,647(2)
Chief Executive Officer
Arlan F. Fuller, Jr., M.D.(3).............. 170,192 -- -- --
Executive Vice President, Medical
Affairs
Jay Greenberg.............................. 220,000 -- -- 6,935(2)
Former Executive Vice President
Samantha J. Trotman........................ 4,808(4) -- -- --
Chief Financial Officer
Nancy J. Kelley (5)........................ 18,333 55,000 -- 216,907(6)
Former Executive Vice President
</TABLE>
- ---------------------
(1) The Company granted Jerilyn P. Asher, Arlan F. Fuller and Jay Greenberg
shares of restricted stock as described below in "--Employment
Agreements." The Company did not grant any stock appreciation rights
during the year ended December 31, 1996. The Company did not grant any
stock options to the Named Executive Officers nor did they exercise any
options during the year ended December 31, 1996. The Company does not have
any long-term incentive plans.
(2) Represents amounts paid in connection with an automobile allowance and
compensatory group life insurance premiums.
(3) Dr. Fuller has advised the Company that he will reduce his base annual
salary to $50,000 beginning in December 1996.
35
<PAGE>
(4) Amount based on annual salary of $125,000 from December 16, 1996.
(5) Ms. Kelley ceased to be an officer of the Company in January 1996.
(6) Represents severance compensation.
Employment Agreements
The Company has entered into the following employment agreements with
Jerilyn P. Asher and Arlan F. Fuller.
The Company is a party to an employment agreement with Ms. Asher pursuant
to which Ms. Asher serves as Chief Executive Officer of the Company for the
three-year period ending June 21, 1998. The term of the agreement will be
automatically extended for successive one-year terms, unless the Company
notifies Ms. Asher to the contrary at least 90 days prior to the expiration of
the then current term. For her services, Ms. Asher is entitled to an initial
base salary of $250,000 per year (subject to periodic increases as determined by
the Board) and is eligible to receive bonuses under the Company's management
incentive program, if such a program is adopted, in an amount up to 100% of her
base pay based upon individual and Company performance. Pursuant to an amendment
to the employment agreement dated August 30, 1996, Ms. Asher waived the right to
receive any unpaid amounts of base salary and bonus to which she was entitled
and had not received as of August 1, 1996. Ms. Asher is also entitled to receive
other benefits available to the Company's senior management generally. Pursuant
to a stock restriction agreement executed as of the date of the employment
agreement, the Company issued 4,162,500 shares of Series A Common Stock to Ms.
Asher at a purchase price of $.01 per share, 693,750 (50% of which vest on June
1997 and 50% in June 1998) of which remain subject to vesting based on duration
of employment, which vesting will be accelerated in the event of a Change in
Control. A Change in Control is defined to include a person or group becoming
the beneficial owner of 50% or more of the outstanding voting securities of the
Company, certain changes to the composition of the Board of Directors, certain
mergers and a liquidation of the Company. A percentage of the vested shares (50%
in the case of termination for cause and 35% in the case of voluntary
termination) are subject to the Company's repurchase rights in certain
circumstances, including termination of Ms. Asher for "cause" or Ms. Asher's
voluntary resignation, at the fair market value at the time of repurchase.
The Company may terminate Ms. Asher's employment at any time without cause
and upon 10 days' written notice with cause. Ms. Asher may terminate her
employment for any reason upon 90 days' written notice. If Ms. Asher's
employment is terminated by the Company without cause, or if Ms. Asher
terminates her employment for good reason, the Company must pay Ms. Asher an
amount equal to two times her annual salary. Cause, for purposes of the
termination provisions, means willful and continued failure to perform her
duties, willful engagement in misconduct materially injurious to the Company or
her conviction for a felony, fraud or embezzlement of the Company's property. In
addition, the Company must also make such payment if Ms. Asher's employment is
terminated at any time within 24 months after a "Change in Control" for any
reason other than (i) death or disability, (ii) by the Company for Cause or
(iii) by Ms. Asher other than for Good Reason.
During the term of the agreement, the Company must nominate Ms. Asher to
and Ms. Asher will be eligible to serve on the Board of Directors. Ms. Asher
also agreed to standard non-competition and non-disclosure terms with the
Company.
The Company is also party to an employment agreement with Dr. Fuller,
pursuant to which Dr. Fuller serves as Executive Vice President, Medical
Information Systems and Academic Development of the Company for the three-year
period ending June 20, 1998. The term of the agreement will be automatically
extended for successive one-year terms, unless the Company notifies Dr. Fuller
to the contrary at least 90 days prior to the expiration of the then current
term. Dr. Fuller was required to devote 40% of his time to the Company and, for
such services, was entitled to an initial base salary of $175,000 per year
(subject to
36
<PAGE>
periodic increases as determined by the Board). Dr. Fuller reduced his base
annual salary to $50,000 beginning in December 1996. Pursuant to a stock
restriction agreement executed as of the date of the employment agreement, the
Company issued 618,750 shares of Common Stock to Dr. Fuller at a purchase price
of $.01 per share. These shares are subject to vesting based on individual
performance and duration of employment, which vesting will be accelerated in the
event of a "Change in Control." The Company may terminate Dr. Fuller's
employment at any time with cause and upon 60 days' notice without cause. Dr.
Fuller may terminate his employment for any reason upon 60 days' written notice.
During the term of the agreement, the Company must nominate Dr. Fuller to
and Dr. Fuller will be eligible to serve on the Board of Directors. Dr. Fuller
also agreed to standard non-competition and non-disclosure terms with the
Company.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of the Board of Directors generally consists of
two non-employee directors, Dr. Fang is currently the only member. The
Compensation Committee makes recommendations to the Board of Directors
concerning salaries and incentive compensation for employees of and consultants
to the Company. No interlocking relationships exists between any member of the
Compensation Committee and any member of any other company's board of directors
or compensation committee.
1995 Equity Incentive Plan
The Company's 1995 Equity Incentive Plan (the "1995 Plan") was adopted by
the Board of Directors and approved by the stockholders of the Company in June
1995. The 1995 Plan provides for the grant of stock options and the issuance of
shares of restricted stock to employees, officers and directors of, and
consultants or advisers to, the Company and its subsidiaries. Under the 1995
Plan, the Company may grant options that are intended to qualify as incentive
stock options within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code") ("incentive stock options"), or options not
intended to qualify as incentive stock options ("non-statutory options").
Incentive stock options may only be granted to employees of the Company.
A total of 1,875,000 shares of Common Stock (adjustable up or down in
response to a change in the number of outstanding shares of Common Stock due to
any merger, consolidation, reorganization, recapitalization, reclassification,
stock dividend, stock split or other similar transaction) may be issued under
the 1995 Plan. In the event that additional securities of the Company are to be
issued in connection with future affiliation transactions, the Company may
initially use such authorized but unissued shares. The maximum number of shares
with respect to which options or awards may be granted to any employee under the
1995 Plan in any calendar year shall not exceed 500,000 shares of Common Stock.
Additionally, for so long as the Code shall so provide, incentive stock options
granted to an employee under the 1995 Plan will not, in any calendar year, have
an aggregate fair market value of more than $100,000. If not previously
terminated, the 1995 Plan will terminate on June 20, 2005 and options still
outstanding at that time will continue to have force and effect in accordance
with the provisions of the instruments evidencing such options.
The 1995 Plan is administered by the Board of Directors whose duties are
delegable to a committee. Subject to the provisions of the 1995 Plan, the Board
of Directors has the authority to select the employees to whom options are
granted and awards of restricted stock are made and determine the terms of each
option or award, including (i) the number of shares subject to the option or
award, (ii) the vesting schedule of the option or award, (iii) the option
exercise price, which, in the case of incentive stock options, must be at least
100% (110% in the case of incentive stock options granted to a shareholder
owning in excess of 10% of the Company's Common Stock) of the fair market value
of the Common Stock as of the date of grant, and (iv) the duration of the option
(which, in the case of incentive stock options, may not exceed five years if
granted to a shareholder owning in excess of 10% of the Company's Common Stock
or ten years for all other recipients). As a condition to the grant of an option
under the 1995 Plan, each recipient of an option must execute an option
agreement, which may differ among recipients. The 1995 Plan may be modified,
amended or terminated at any time by the Board of Directors but such a
modification, amendment or termination will
37
<PAGE>
not, without the consent of the optionee or recipient affect his or her rights
under any option or award previously granted to him or her. In addition, the
Board of Directors may, in its sole discretion (i) include additional provisions
in any option or award granted or made under the 1995 Plan (including
restrictions on transfer, repurchase rights, commitments to pay cash bonuses, to
make or guarantee loans or to transfer other property to optionees upon exercise
of options, or such other provisions as may be determined by the Board of
Directors) so long as such provisions are not inconsistent with the 1995 Plan or
applicable law and (ii) accelerate or extend dates on which options granted
under the 1995 Plan may be exercised.
Payment of the option exercise price may be made in cash and/or Common
Stock or by any other method (including delivery of a promissory note payable on
terms approved by the Board of Directors and consistent with Section 422 of the
Code, Rule 16b-3 under the Securities Exchange Act of 1934, as amended, and
Regulation T promulgated by the Federal Reserve Board). Options are not
assignable or transferable except by will or the laws of descent and
distribution and, in the case of non-statutory options, pursuant to a qualified
domestic relations order (as defined in the Code).
As of March 31, 1997, the Company had 34 employees, all of whom were
eligible to participate in the 1995 Plan. As of March 31, 1997, options to
purchase an aggregate of 574,836 shares of Common Stock were outstanding
pursuant to the 1995 Plan.
CERTAIN TRANSACTIONS
As of March 31, 1997, pursuant to the Bain Financing, the Institutional
Investors purchased an aggregate of 4,000,000 shares of Class B Common Stock and
warrants exercisable for 5,549,500 shares of Class B Common Stock for an
aggregate purchase price of $10,000,000. See "Business -- The Bain Financing."
In connection with the Bain Financing, the Company entered into a Management
Agreement dated as of August 30, 1996 with BCP V, pursuant to which the Company
will pay BCP V (or an affiliate designated by BCP V) a management fee of
$500,000 per year, plus 1% of any financings from parties other than affiliates
of Bain Capital, for services including advice in connection with financings and
financial, managerial and operational advice in connection with day-to-day
operations (the "Management Agreement"). The Company is also obligated to pay
certain expenses, not to exceed $100,000 per year without the Company's consent,
of BCP V, Bain Capital and the Institutional Investors in connection with the
Management Agreement. Each of Stephen G. Pagliuca and Marc Wolpow is a Director
of the Company, a limited partner of BCP V, which is the general partner of Bain
Capital Fund V, L.P. and Bain Capital Fund V-B, L.P., and a general partner of
BCIP Associates, L.P. and BCIP Trust Associates, L.P., and a Managing Director
of Bain Capital, which manages each of the Institutional Investors.
Alphonse Calvanese, M.D., is a director of the Company and transferred his
practice to the Springfield Affiliated Group for which he received his allocable
portion of the $11.8 million total consideration paid to the physicians who
transferred their practices to the Springfield Affiliated Group.
Ira Fine, M.D. and Dana Frank, M.D., each a Director of the Company, are
members of medical practice groups which transferred their practice assets to
the Flagship Affiliated Group in the Flagship Affiliation. Upon consummation of
the Flagship Affiliation, Dr. Fine received his allocable share of the total
consideration of $566,580 payable to his existing practice group, and Dr. Frank
received his allocable share of the total consideration of $3,647,064 payable to
his existing practice group.
PLAN OF DISTRIBUTION
Shares of Common Stock will be offered in connection with PQC's (or a
subsidiary's) acquisition of businesses, properties or equity and/or debt
securities in business combination transactions from time to time. A maximum of
8,000,000 shares of Common Stock may be issued and sold pursuant to this
Prospectus. These shares will ordinarily represent consideration paid directly
upon the acquisition of businesses, properties or securities, in some cases
together with additional consideration consisting of cash, debt or other
securities
38
<PAGE>
(which may be convertible into shares covered by this Prospectus) or assumption
by the Company of liabilities of the businesses being acquired, or a combination
thereof. The shares may also include shares to be delivered upon the exercise or
satisfaction of conversion or purchase rights which are created in connection
with acquisitions or which were previously created or assumed by the companies
whose businesses or properties are acquired by PQC (or a subsidiary).
DILUTION
Jerilyn Asher, the Chief Executive Officer, Arlan Fuller, M.D., a
director, and Jay Greenberg, a former Executive Vice President of the Company,
received restricted stock grants of 4,162,500, 618,750 and 1,012,500 shares,
respectively, in connection with the formation of the Company and their
employment agreements. Such stock is subject to vesting and partial forfeiture
in certain circumstances, including termination of employment with the Company.
The purchase price of the restricted stock was $0.01 per share. Officers and
employees of the Company have also received, as of March 31, 1997, options to
purchase an aggregate of 574,836 shares of Class A Common Stock at a weighted
average exercise price of $0.49 per share. Other non-employees hold additional
options to purchase 17,500 shares of Class A Common Stock with an exercise price
of $0.85 per share. All other options or shares of the Company's outstanding
Class A and Class B Common Stock were issued at prices between $2.40 and $2.50
per share. Since there is no public market for the Class A Common Stock, future
issuance of the Common Stock (except for shares issued pursuant to the Bain
Financing and related warrants which provided for the purchase of shares,
subject to adjustment to prevent dilution, of $2.50 per share) will be issued at
prices negotiated with physicians affiliating with the Company and determined to
reflect fair value at the time of issuance by the Board of Directors. The net
tangible book value per share at December 31, 1996 was $1.31. The offering price
for the Common Stock in the offering has not yet been determined but is expected
to be substantially in excess of the net tangible book value per share before
and immediately after such sale.
39
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth the number of shares of capital stock of
the Company beneficially owned as of March 31, 1997 by (i) each owner who is
known by the Company to beneficially own 5% or more of any class of voting
stock, (ii) each of the Company's directors, (iii) each of the Company's Named
Executive Officers and (iv) all directors and executive officers as a group.
Except as otherwise indicated, the named owner has sole voting and investment
power with respect to all shares beneficially owned.
<TABLE>
<CAPTION>
Class A Common Stock Class B Common Stock(1)
----------------------- -------------------------
Number Percent of Number Percent of
Name and Address of Outstanding of Outstanding
of Beneficial Owner Shares Shares(2) Shares Shares(2)
------------------- ------ --------- ------ ---------
<S> <C> <C> <C> <C>
Bain Funds(3) -- -- 9,549,500 32.2%
c/o Bain Capital, Inc.
Two Copley Place
Boston, Massachusetts 02116
Offshore Health Industries, Inc.(4) 1,582,500 6.3% -- --
Two Park Plaza
Boston, MA 02116
Jerilyn P. Asher (5) 4,318,748 17.9% -- --
Arlan F. Fuller, Jr., M.D. 618,750 2.6% -- --
Samantha J. Trotman (6) -- -- 1,498,978 6.0%
Alphonse Calvanese, M.D. 212,382 * -- --
Leslie Fang, M.D. -- -- -- --
Ira Fine, M.D. 113,316 * -- --
Dana Frank, M.D. 172,904 * -- --
Stephen G. Pagliuca(3)(7) -- -- 9,549,500 32.2%
Marc Wolpow(3)(7) -- -- 9,549,500 32.2%
All directors and executive officers as
a group (9 persons)(5) (14,985,600
(1)(3)(6) shares or 54.8% assuming
conversion of Class B Common Stock
into Class A Common Stock) 5,436,100 22.6% -- --
</TABLE>
- ----------------
*Less than 1%.
(1) Reflects the percentage of shares of both Class A and Class B Common Stock.
The Class B Common Stock of the Company is in all respects equivalent to
the Class A Common Stock, except that the holders of the Class A Common
Stock, voting separately as a single class, are entitled to elect two of
the eleven directors of the Company, the holders of the Class B-1 Common
Stock, voting separately as a single class, are entitled to elect one
director and the holders of the Class B-2 Common Stock, voting separately
as a single class, are entitled to elect one director. See "Description of
Capital Stock." Shares of Class B Common Stock are convertible into shares
of Class A Common Stock at the option of the holder.
40
<PAGE>
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of the Company's capital stock subject to options or warrants held
by that person that are exercisable on or before May 30, 1997 are deemed
outstanding. Such shares, however, are not deemed outstanding for purposes
of computing the ownership of each other person.
(3) Includes an aggregate of 4,000,000 shares of Class B Common Stock held by
the Institutional Investors and 5,549,500 shares of Class B Common Stock
issuable upon outstanding warrants. Does not include 8,000,000 shares of
Class B Common Stock or warrants to purchase 7,450,500 shares of Class B
Common Stock which the Institutional Investors are entitled to purchase
pursuant to the Bain Financing. Also does not include the 600,000 shares of
Class B Common Stock or Warrants to purchase 865,500 shares of Class B
Common Stock that the Institutional Investors acquired on April 18, 1997.
(4) Includes 625,000 shares of Class A Common Stock issuable upon the exercise
of a convertible note and warrants to purchase 332,500 shares of Class A
Common Stock.
(5) Includes warrants to purchase 52,082 shares of Class A Common Stock.
(6) Includes an aggregate of 627,877 shares of Class B Common Stock and 871,101
shares of Class B Common Stock issuable upon outstanding warrants held by
BCIP Associates and BCIP Trust Associates. Ms. Trotman is a general partner
of BCIP Associates and BCIP Trust Associates. As such, Ms. Trotman may be
deemed to own beneficially shares owned by BCIP Associates and BCIP Trust
Associates, although Ms. Trotman disclaims beneficial ownership of any such
shares.
(7) Includes an aggregate of 4,000,000 shares of Class B Common Stock
beneficially owned by the Institutional Investors (9,549,500 shares on a
fully diluted basis). Each of Mr. Pagliuca and Mr. Wolpow is a Managing
Director of Bain Capital, which manages each of the Institutional
Investors. Bain Capital is a limited partner in the partnership which is
the general partner of Bain Capital Fund V, L.P. and Bain Capital Fund V-B,
L.P., and a general partner of BCIP Associates and BCIP Trust Associates.
As such, Messrs. Pagliuca and Wolpow may be deemed to own beneficially
shares owned by the Institutional Investors, although each of Mr. Pagliuca
and Mr. Wolpow disclaims beneficial ownership of any such shares.
41
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 10,000,000 shares
of Preferred Stock, $.01 par value per share, and 100,000,000 shares of common
stock, $.01 par value per share, of which (i) 75,000,000 shares are designated
as Class A Common Stock, (ii) 15,267,915 shares are designated as Class B-1
Common Stock, and (iii) 9,732,085 shares are designated as Class B-2 Common
Stock. As of March 31, 1997, there were issued and outstanding (i) 20,071,614
shares of Class A Common Stock held by approximately 160 stockholders and (ii)
2,442,866 shares of Class B-1 Common Stock and 1,557,134 shares of Class B-2
Common Stock held by 4 stockholders. There were no outstanding Shares of
Preferred Stock.
Class A Common Stock and Class B Common Stock
Except as otherwise provided below, all shares of Class A Common Stock and
Class B Common Stock are identical in all respects and entitle the holders
thereof to the same rights, privileges and preferences and are subject to the
same qualifications, limitations and restrictions. Holders of the Class A Common
Stock and the Class B Common Stock are entitled to one vote per share with
respect to all matters to be voted on by the stockholders of the Company and do
not have cumulative voting rights. There are no sinking fund provisions with
respect to any of the Company's Class A Common Stock or Class B Common Stock. No
distribution (whether in cash, securities or otherwise) may be made in respect
of either the Class A Common Stock or the Class B Common Stock unless an
equivalent distribution is made with respect to each outstanding share of the
other class.
Class B Common Stock. Shares of Class B Common Stock are convertible into
shares of Class A Common Stock at the option of the holder, and automatically
convert into shares of Class A Common Stock upon the earlier of a "Qualified
Public Offering" or a reduction in the number of shares of Class B Common Stock
below certain thresholds. A "Qualified Public Offering" is a public offering (i)
in which the net proceeds of the sale of such shares by the Company and any
stockholder of the Company equal or exceed $50,000,000, provided that the net
proceeds of the sale thereof to the Institutional Investors equal or exceed the
greater of (x) fifty percent of the purchase price paid by the Institutional
Investors in any closing under the Bain Purchase Agreement or (y) $10,000,000;
and (ii) involving a firm commitment underwriting by a nationally recognized
underwriter acceptable to the Class B Directors (as defined below). In any such
conversion, each outstanding share of Class B Common Stock converts into the
number of shares of Class A Common Stock determined by application of the
conversion ratio (the "Class B Conversion Factor") in effect, which was one as
of March 31, 1997, subject to adjustment in order to reflect any stock
dividends, stock splits, reverse stock splits, reorganizations or
recapitalizations of the Company's capital stock.
Subject to the special voting rights of the Class B Directors and the
approval rights of the Institutional Investors described below, the Board of
Directors of the Company may, at any time, without any vote of the holders of
the Company's capital stock, issue all or any part of the unissued capital stock
of the Company from time to time authorized under the Restated Certificate and
may determine, subject to any requirements of law, the consideration for which
such stock is to be issued and the manner of allocating such consideration
between capital and surplus.
Election of Directors. The holders of the Class A Common Stock, voting
separately as a single class, are entitled to elect two of the eleven directors
of the Company (each, a "Class A Director"), there currently being one vacancy.
Any vacancy in the seats held by the Class A Directors shall be filled only by
vote of a majority of the outstanding shares of Class A Common Stock, and no
Class A Director may be removed without the consent of a majority of the holders
of the Class A Common Stock. The Company may not in any manner subdivide or
increase (by stock split, stock dividend or other similar manner) reclassify or
combine in any manner the outstanding shares of Class A Common Stock unless a
proportional adjustment is made to the Class B Conversion Factor.
42
<PAGE>
The holders of the Class B-1 Common Stock, voting separately as a single
class, are entitled to elect one of the eleven directors of the Company, the
Class B-1 Director and the holders of the Class B-2 Common Stock, voting
separately as a single class, are entitled to elect one director of the Company,
the Class B-2 Director. Any vacancy in the seats held by the Class B Directors
shall be filled only by vote of a majority of the outstanding shares of Class B-
1 Common Stock or Class B-2 Common Stock, as applicable, and no Class B Director
may be removed without the consent of a majority of the holders of the Class B-1
Common Stock or Class B-2 Common Stock, as applicable. The Company may not in
any manner subdivide or increase (whether by stock split, stock dividend or
other similar manner), reclassify or combine in any manner the outstanding
shares of the Class B Common Stock unless a proportional adjustment is made to
the Common Stock.
The holders of the Class A Common Stock and the Class B Common Stock,
voting together as a single class, are entitled to elect seven of the eleven
directors of the Company (each, a "Class A/Class B Common Stock Director"). Any
vacancy in the seats held by the Class A/Class B Common Stock Directors shall be
filled only by vote of a majority of the outstanding shares of Common Stock and
Class B Common Stock, and no Class A/Class B Common Stock Director may be
removed without the consent of a majority of the holders of the Class A Common
Stock and Class B Common Stock. Except as provided below, each director of the
Company is entitled to one vote on all matters to be voted on by the directors,
and the directors vote together as a single class on all matters.
Pursuant to the Stockholders Agreement, the Institutional Investors and the
Class A Common Stockholders who are parties to such agreement are required to
elect as Class A Directors two individuals who are employees of the Company and
are selected by the Chief Executive Officer and seven other Directors who are
physicians and are selected by the Chief Executive Officer and approved by the
Institutional Investors. See " -- Stockholders' Agreement."
Special Rights of Class B Directors. The Class B Directors are entitled to
one vote on any matter before the Board of Directors, except that each Class B
Director is entitled to five votes (providing the Class B Directors with a
majority of the voting power of the Board) (i) with respect to any Class B
Director Action and (ii) with respect to all matters in the event that any Class
B Director Control Event remains uncured.
"Class B Director Actions" include (i) the issuance, redemption or similar
disposition of capital stock or securities convertible into capital stock of the
Company or any of its subsidiaries or affiliates (including its Affiliated
Groups), (ii) the declaration of dividends or other distributions in respect of
the capital stock of the Company or any of its subsidiaries or affiliates
(including its Affiliated Groups), (iii) the incurrence of indebtedness by the
Company or any of its subsidiaries or the incurrence of material indebtedness by
any of its affiliates (including its Affiliated Groups), (iv) a merger, sale,
liquidation or similar transfers involving the Company or any of its
subsidiaries or affiliates (including its Affiliated Groups), (v) public
offerings, (vi) material amendments to any management or similar agreement by
the Company or any of its subsidiaries with its affiliates (including its
Affiliated Groups) or with the shareholder of any of its Affiliated Groups and
(vii) the employment, termination and compensation of the Chief Executive
Officer.
"Class B Director Control Event" means any of the following: (i) the
Company fails to achieve earnings before interest, taxes, depreciation and
amortization ("EBITDA") targets, which targets increase quarterly; (ii) the
Company fails to achieve minimum net sales levels, which levels increase
quarterly; (iii) Jerilyn Asher is no longer employed on a full time basis as
Chief Executive Officer for any reason other than her employment having been
terminated without Cause (as defined in the Restated Certificate) or (iv) the
Company shall have taken a "Restricted Action" (as described below) without the
prior approval of the Institutional Investors. The EBITDA and net sales targets
are the same as set forth under "Business -- Bain Financing" as conditions for
the commitments of the Institutional Investors.
Certain "Restricted Actions," in addition to being approved by the Board of
Directors, must be approved by the Institutional Investors. Restricted Actions
include (without limitation) (i) a merger, sale, liquidation or
43
<PAGE>
similar transaction involving disposition of all, substantially all, or a
material part of, the property, business or assets of the Company or any of its
subsidiaries or affiliates (including its Affiliated Groups), (ii) any agreement
by the Company or any of its subsidiaries or affiliates (including its
Affiliated Groups) for an acquisition or affiliation transaction (other than
acquisitions or affiliations not in excess of $1 million in any 12-month
period), (iii) dividends and other distributions by the Company or any of its
subsidiaries, (iv) any material change in the business of the Company or any of
its subsidiaries or affiliates (including its Affiliated Groups), (v) any
amendment to the charter or by-laws of the Company or its subsidiaries, (vi)
retention or dismissal of the Chief Operating Officer or Chief Financial Officer
of the Company, (vii) transactions by the Company or any of its subsidiaries
with affiliates (including its Affiliated Groups) and (viii) commencement and
management of any material litigation.
The Restated Certificate provides that upon conversion of all outstanding
shares of Class B Common Stock into Common Stock, the holders of the Common
Stock will be entitled to elect all the directors, each director will have one
vote on all matters to be voted on by the directors, and the provisions therein
granting the Class B Directors special voting rights will be eliminated.
Other Obligations. Under the Bain Purchase Agreement, the Company has
certain other obligations relating to its capital stock that are not reflected
in the Restated Certificate. Subject to certain conditions, the Bain Purchase
Agreement requires that the Company provide the Institutional Investors with an
opportunity to participate in future financings by the Company involving debt or
equity securities in lieu of and on the same conditions as other potential
investors. The Agreement, independently from the Restated Certificate, also
requires that the Company not engage in any Restricted Action without the prior
approval of the Institutional Investors. Both of these obligations terminate
only upon a Qualified Public Offering.
Certain Corporate Provisions. The Restated Certificate authorizes
10,000,000 shares of Preferred Stock and grants the Board of Directors the
authority to issue series of Preferred Stock with such voting rights and other
powers as the Board of Directors may determine (subject to the special voting
rights of the Class B Directors and the approval rights of the Institutional
Investors). Those provisions, as well as the voting rights of the Class B
Directors and the approval rights of the Institutional Investors, may be deemed
to have an "anti-takeover" effect in that they may delay, defer or prevent a
change of control of the Company.
Preferred Stock
The Board of Directors is authorized, subject to any limitations prescribed
by law, without further stockholder approval, to issue from time to time up to
an aggregate of 10,000,000 shares of preferred stock, in one or more series.
Each such series of preferred stock shall have such number of shares,
designations, preferences, voting powers, qualifications and special relative
rights or privileges as shall be determined by the Board of Directors, which may
include among others, dividend rights, voting rights, redemption and sinking
fund provisions, liquidation preferences, conversion rights and preemptive
rights.
The stockholders of the Company have granted the Board of Directors
authority to issue the preferred stock and to determine its rights and
preferences in order to eliminate delays associated with a stockholder vote on
specific issuances. The rights of the holders of Common Stock will be subject to
the rights of holders of any preferred Stock issued in the future. The issuance
of preferred stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire, or of discouraging a
third party from attempting to acquire, a majority of the outstanding voting
stock of the Company. The Company has no present plans to issue any shares of
preferred stock.
44
<PAGE>
Warrants
At March 31, 1997, the Company has issued Class B Warrants to acquire up to
5,549,500 shares of Class B Common Stock to the Institutional Investors at an
exercise price of $2.50 per share of Class B Common Stock. Pursuant to the Bain
Financing, the Company may be obligated to issue Class B Warrants to purchase an
additional 7,450,500 shares of Class B Common Stock. The Class B Warrants expire
on August 30, 2003. The number of shares of Class B Common Stock issuable upon
exercise and the exercise price are subject to adjustment to prevent dilution,
including adjustment in the event that any Class A Common Stock is issued at a
price less than Exercise Price. The Class B Warrants become warrants to purchase
Class A Common Stock at such time as the Class B Common Stock is converted to
Class A Common Stock. The Company has also issued warrants to purchase 853,076
shares of Class A Common Stock at $2.40 per share, of which 436,538 expire in
2000 and 416,538 expire in 2001, warrants to purchase 50,000 shares of Class A
Common Stock at $3.00 per share, all of which expire in 2003, and 201,150
warrants to purchase Class A Common Stock at $5.00 per share which expire in
2003.
Stockholders Agreement
The Company, the Institutional Investors, management holders of the
Company's equity securities, the Flagship Stockholder Physicians, certain
Springfield physicians and all other holders of the Company's equity securities
(other than the Springfield Stockholder Physicians) are parties to the
Stockholders Agreement dated as of August 30, 1996. The 28 Springfield
Stockholder Physicians are parties to a separate stockholders agreement and
registration rights agreement described below. In addition, approximately 7
Flagship Shareholder Physicians nearing retirement age entered into an
additional agreement containing provisions with respect to the treatment of
Securities (as defined below) held by them at retirement.
The Stockholders Agreement requires each Stockholder (as defined in the
Agreement) to vote his or her shares of the Company to elect as directors of the
Company: (i) two employees designated by the Chief Executive Officer, and (ii)
seven physicians designated by the Chief Executive Officer and approved by the
Institutional Investors. Pursuant to the Company's Restated Certificate, the
Institutional Investors have the right to designate the two other directors of
the Company. See "Description of Capital Stock."
The Stockholders Agreement prohibits the transfer of shares of the Company
held by officers and employees (except shares issuable pursuant to certain
incentive stock options granted to employees) ("Management Shares") and options,
warrants and shares issued in affiliation transactions ("Physician Shares")
(collectively, "Restricted Shares") except under certain limited circumstances,
such as transfer of such Restricted Shares to members of the holder's immediate
family or to the holder's estate and heirs provided that they agree to become
bound by the Stockholders Agreement.
Except with respect to Management Shares held by Ms. Asher, upon
termination of a holder's employment with the Company or an Affiliated Group,
the Company has the right to acquire Restricted Shares held by such holder,
together with any exercisable warrants or options held by such holder (such
warrants, options and Restricted Shares, collectively, "Securities") at fair
market value (or, in the event of termination for cause, at the lower of cost or
fair market value). Upon the death of any officer, employee or affiliated
physician, the estate of such holder has the right, subject to certain
limitations, to sell all or any part of the holder's Securities to the Company
at fair market value. The Stockholders Agreement also provides for certain take
along obligations pursuant to which, at the request of the Institutional
Investors, holders are required to sell a proportionate amount of their shares
to persons who are acquiring shares from the Institutional Investors on the same
terms and conditions. In addition, subject to certain conditions, all holders
have the right to join pro rata in any sale of shares by another holder.
All holders have so-called "piggyback registration rights" which permit
them to cause the Company to use its best efforts to add their shares (subject
to certain limitations) to registration statements filed by the
45
<PAGE>
Company under the Securities Act for any public offering, other than
registration statements pertaining to employee benefit plans or acquisitions.
The Institutional Investors have so-called "demand registration rights" which
permit them, subject to certain conditions, to cause the Company to use its best
efforts to effect a registration under the Securities Act of all or a part of
their shares. These demand registration rights may only be exercised with
respect to three such registrations. Each holder agrees that upon the request of
the underwriters managing any underwritten public offering of the Company's
securities, it will not transfer any shares for a period beginning not more than
seven days immediately preceding and ending not more than 180 days following the
public offering without the prior written consent of the underwriters.
The Stockholders Agreement further provides that the Company shall not,
without the prior written consent of the Institutional Investors, enter into any
agreement with any holder or prospective holder of any securities of the Company
relating to registration rights unless such agreement (to the extent the
agreement would allow such holder or prospective holder to include such
securities in any registration filed under the provisions of the Stockholders
Agreement) includes a provision that such holder or prospective holder may
include such securities in any such registration only to the extent that the
inclusion of its securities will not (i) reduce the amount of the securities
held by the Institutional Investors which would otherwise be included in such
registration and (ii) otherwise diminish the rights provided in the Stockholders
Agreement.
Subject to certain limited exceptions, each holder agrees that it will not
transfer any shares to any person unless such person has delivered to the
Company a written acknowledgment and agreement that the shares to be received
are subject to all of the provisions of the Stockholders Agreement and that such
person agrees to be bound by and party to the Agreement to the same extent as if
it were the original holder and an original signatory thereto.
The Springfield Stockholder Physicians who entered into affiliation
transaction on August 30, 1996, are subject to a separate stockholders agreement
with the Company dated as of August 9, 1996 (the "Springfield Stockholders
Agreement"). The Springfield Stockholders Agreement provides that no Springfield
Stockholder Physician may transfer, assign or pledge his or her rights in shares
of the Company until August 9, 1998, unless the Company concludes that such
transfer will not prevent the merger pursuant to which such physician became
affiliated with the Company from qualifying as a tax free transaction. In
addition to that limitation, the Company has a right of first refusal for 60
days upon a Springfield Stockholder Physician's decision to transfer his or her
shares pursuant to which the Company must purchase all or none of such shares.
The Company's right of first refusal does not extend to transfers (i) pursuant
to a registration statement, (ii) as part of a sale of substantially all shares
of the Company, and (iii) to a family member, heir or entity controlled by the
physician. As a condition to each such exempt transfer, the transferee must
agree to be bound by the terms of the Springfield Stockholders Agreement. The
Company's right of first refusal terminates upon an initial public offering or
merger, sale of the Company, or similar transaction. The Company also has the
right to redeem the shares held by a physician at fair market value upon
termination of his or her employment for any reason prior to August 9, 1999. The
shares subject to the Springfield Stockholders Agreement are held in an escrow
account controlled jointly by the Company and each physician.
The Springfield Stockholder Physicians who entered into affiliation
transaction on August 30, 1996, are also subject to a separate registration
rights agreement with the Company dated as of August 9, 1996 (the "Springfield
Registration Rights Agreement"). The Springfield Registration Rights Agreement
grants the Springfield Stockholder Physicians unlimited piggy-back registration
rights with respect to any registration statement (other than a registration
statement on Form S-8 or Form S-4) filed by the Company for a public offering,
except the registration statement relating to the initial public offering of the
Company's stock. The shares to be registered may be limited by the underwriters,
provided that the physicians who have elected to participate in the offering
will participate pro rata with all other holders registering shares. The
Springfield Registration Rights Agreement terminates on August 9, 1998.
46
<PAGE>
Pursuant to the Stockholders Agreement and the Springfield Registration
Rights Agreement, at March 31, 1997, 4,000,000 Class B Shares are entitled to
demand registration rights and all outstanding shares of Common Stock are
entitled to piggy-back registration rights.
SHARES ELIGIBLE FOR FUTURE SALE
Shares offered hereby may generally be resold by the persons acquiring them
without further registration under the Securities Act, unless such persons are
"affiliates" or "underwriters" within the meaning of the Securities Act.
However, it is expected that each future stockholder, including physicians
entering into affiliation transactions with the Company, will enter into a
Stockholders Agreement which impose certain restrictions upon the resale of
shares of the Company's Common Stock.
At March 31, 1997, the Company had outstanding 24,071,614 shares of Class A
Common Stock and Class B Common Stock (before giving effect to any future
exercise of outstanding warrants and options). 1,666,151 shares of Class A
Common Stock are freely tradeable without restriction under Rule 144(k) of the
Securities Act. None of the outstanding shares of Class A Common Stock and Class
B Common Stock (collectively, the "Restricted Shares"), including Restricted
Shares to be issued in connection with the exercise of outstanding warrants and
options, have been registered under the Securities Act, and they may be resold
publicly only upon registration under the Securities Act or in compliance with
an exemption from the registration requirements of the Securities Act.
At present, Rule 144 provides generally that if one year has elapsed since
the later of the date of the acquisition of Restricted Shares from the Company
or any affiliate of the Company, the acquiror or subsequent holder thereof may
sell, within any three-month period, a number of shares that does not exceed the
greater of 1% of the then outstanding shares of Common Stock or the average
weekly trading volume of the Common Stock during the four calendar weeks
preceding the date on which notice of the sale if filed with the Commission.
Sales under Rule 144 are also subject to certain manner of sale provisions,
notice requirements and the availability of current public information about the
Company. If two years have elapsed since the later of the date of acquisition of
Restricted Shares from the Company or from any affiliate of the Company, and the
acquiror or subsequent holder thereof is deemed not to have been an affiliate of
the Company at any time during the 90 days preceding a sale, such person would
be entitled to sell such shares without regard to the limitations described
above. As of March 31, 1997, holders of 14,313,295, 6,984,676, 440,000 and
667,493 Restricted Shares will be eligible to sell such shares pursuant to Rule
144 under the Securities Act, subject to the manner of sale, volume, notice and
information requirements of Rule 144, beginning in September 1997, December
1997, January 1998 and February 1998, respectively.
LEGAL MATTERS
The validity of the Common Stock offered hereby has been passed upon for
the Company by Hale and Dorr LLP, Boston, Massachusetts. As of the date of this
Prospectus, H&D Investments II, a general partnership in which certain members
of Hale and Dorr LLP are partners, beneficially owns 20,833 shares of the
Company's Class A Common Stock.
47
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
UNAUDITED PRO FORMA STATEMENTS OF PHYSICIANS QUALITY CARE, INC.
Unaudited Pro Forma Combined Statement of Operations ................... F-5
Notes to Unaudited Pro Forma Financial Statements ...................... F-6
PHYSICIANS QUALITY CARE, INC.
Report of Independent Auditors ......................................... F-10
Balance Sheets as of December 31, 1995 and 1996 ........................ F-11
Statements of Operations for the year ended December 31, 1996 and the
period from March 20, 1995 (inception) to December 31, 1995 .......... F-
Statements of Changes in Stockholders' Equity (Deficit) and Common Stock
Subject to Put for the year ended December 31, 1996 and the period
from March 20, 1995 (inception) to December 31, 1995 ................. F-14
Statements of Cash Flows for the year ended December 31, 1996 and the
period from March 20, 1995 (inception) to December 31, 1995 .......... F-15
Notes to Financial Statements .......................................... F-16
SPRINGFIELD MEDICAL ASSOCIATES, INC.
Report of Independent Auditors ......................................... F-34
Consolidated Balance Sheets as of December 31, 1994 and 1995 and
August 31, 1996 ...................................................... F-35
Consolidated Statements of Operations for the year ended December 31,
1993, 1994 and 1995, the period January 1, 1996 through August 30,
1996 and nine months ended September 30, 1995 (unaudited) ............ F-36
Consolidated Statements of Stockholders' Equity for the year ended
December 31, 1993, 1994 and 1995, the period January 1, 1996 through
August 30, 1996 and nine months ended September 30, 1995 (unaudited).. F-37
Consolidated Statements of Cash Flows for the year ended December 31,
1993, 1994 and 1995, the period January 1, 1996 through August 30,
1996 and nine months ended September 30, 1995 (unaudited) ............ F-38
Notes to Consolidated Financial Statements ............................. F-39
ALPHONSE F. CALVANESE, M.D., P.C.
Report of Independent Auditors ......................................... F-48
Balance Sheets as of September 30, 1995 and August 30, 1996 (unaudited). F-49
Statements of Operations for the year ended September 30, 1995 and the
period October 1, 1995 through August 30, 1996 (unaudited) ........... F-50
Statements of Stockholder's Equity for the year ended September 30, 1995
and the period October 1, 1995 through August 30, 1996 (unaudited) ... F-51
Statements of Cash Flows for the year ended September 30, 1995 and the
period October 1, 1995 through August 30, 1996 (unaudited) ........... F-52
Notes to Financial Statements .......................................... F-53
CARDIOLOGY AND INTERNAL MEDICINE ASSOCIATES, INC.
Report of Independent Auditors ......................................... F-59
Balance Sheets as of December 31, 1995 and August 30, 1996 (unaudited).. F-60
Statements of Operations for the years ended December 31, 1994 and 1995
and period January 1, 1996 through August 30, 1996 (unaudited) and
nine months ended September 30, 1995 (unaudited) ..................... F-61
Statements of Stockholder's Equity for the years ended December 31,
1994 and 1995 and period January 1, 1996 through August 30, 1996
(unaudited) and nine months ended September 30, 1995 (unaudited) ..... F-62
Statements of Cash Flows for the years ended December 31, 1994 and 1995
and period January 1, 1996 through August 30, 1996 (unaudited) and
nine months ended September 30, 1995 (unaudited) ..................... F-63
Notes to Financial Statements .......................................... F-64
</TABLE>
<PAGE>
<TABLE>
<S> <C>
JAMES F. HAINES AND WILLIAM J. BELCASTRO, PARTNERSHIP
Report of Independent Auditors ......................................... F-69
Balance Sheets as of December 31, 1995 and August 31, 1996 (unaudited).. F-70
Statements of Operations for the year ended December 31, 1995 and
period January 1, 1996 through August 30, 1996 (unaudited) and nine
months ended September 30, 1995 (unaudited) .......................... F-71
Statements of Partners' Capital for the year ended December 31, 1995
and period January 1, 1996 through August 30, 1996 (unaudited) and
nine months ended September 30, 1995 (unaudited) ..................... F-72
Statements of Cash Flows for the year ended December 31, 1995 and
period January 1, 1996 through August 30, 1996 (unaudited) and nine
months ended September 30, 1995 (unaudited) .......................... F-73
Notes to Financial Statements .......................................... F-74
JAY M. UNGAR, M.D.
Report of Independent Auditors ......................................... F-78
Balance Sheets as of December 31, 1995 and August 30, 1996 (unaudited).. F-79
Statements of Operations for the year ended December 31, 1995 and
period January 1 through August 30, 1996 (unaudited) and nine months
ended September 30, 1995 (unaudited) ................................. F-80
Statements of Cash Flows for the year ended December 31, 1995 and
period January 1 through August 30, 1996 (unaudited) and nine months
ended September 30, 1995 (unaudited) ................................. F-81
Notes to Financial Statements .......................................... F-82
WESTERN MASSACHUSETTS MEDICAL GROUP, INC.
Report of Independent Auditors ......................................... F-85
Balance Sheets as of November 30, 1995 and August 30, 1996 (unaudited).. F-86
Statements of Operations for the year ended November 30, 1995 and the
period December 1, 1995 through August 30, 1996 (unaudited) and nine
months ended August 31, 1995 (unaudited) ............................. F-87
Statements of Stockholder's Equity for the year ended November 30, 1995
and the period December 1, 1995 through August 30, 1996 (unaudited)
and nine months ended August 31, 1995 (unaudited) .................... F-88
Statements of Cash Flows for the year ended November 30, 1995 and the
period December 1, 1995 through August 30, 1996 (unaudited) and nine
months ended August 31, 1995 (unaudited) ............................. F-89
Notes to Financial Statements .......................................... F-90
ANNAPOLIS MEDICAL SPECIALISTS, LLP
Report of Independent Auditors ......................................... F-97
Balance Sheets as of December 31, 1994 and 1995 and September 30, 1996
(unaudited) .......................................................... F-98
Statements of Operations for the years ended December 31, 1993, 1994
and 1995, and nine months ended September 30, 1995 (unaudited) and
nine months ended September 30, 1996 (unaudited) ..................... F-99
Statements of Stockholder's Equity for the years ended December 31,
1993, 1994 and 1995, and nine months ended September 30, 1995
(unaudited) and nine months ended September 30, 1996 (unaudited) ..... F-
Statements of Cash Flows for the years ended December 31, 1993, 1994
and 1995, and nine months ended September 30, 1995 (unaudited) and
nine months ended September 30, 1996 (unaudited) ..................... F-101
Notes to Financial Statements .......................................... F-103
</TABLE>
<PAGE>
<TABLE>
<S> <C>
DRS. FORTIER, LIBBER, CLEMMENS & WEIMER, P.A.
Report of Independent Auditors ......................................... F-108
Balance Sheets as of December 31, 1995 and September 30, 1996
(unaudited) .......................................................... F-109
Statements of Operations for the year ended December 31, 1995 and nine
months ended September 30, 1995 (unaudited) and September 30, 1996
(unaudited) .......................................................... F-110
Statements of Shareholders' Equity for the year ended December 31, 1995
and nine months ended September 30, 1995 (unaudited) and
September 30, 1996 (unaudited) ....................................... F-111
Statements of Cash Flows for the year ended December 31, 1995 and nine
months ended September 30, 1995 (unaudited) and September 30, 1996
(unaudited) .......................................................... F-112
Notes to Financial Statements .......................................... F-113
DRS. GOLDGEIER, LEVINE & FRIEDMAN, P.A.
Report of Independent Auditors ......................................... F-120
Balance Sheets as of December 31, 1995 and September 30, 1996
(unaudited) .......................................................... F-121
Statements of Operations for the year ended December 31, 1995 and nine
months ended September 30, 1995 (unaudited) and September 30, 1996
(unaudited) .......................................................... F-122
Statements of Shareholders' Equity (Deficit) for the year ended
December 31, 1995 and nine months ended September 30, 1995 (unaudited)
and September 30, 1996 (unaudited) ................................... F-123
Statements of Cash Flows for the year ended December 31, 1995 and nine
months ended September 30, 1995 (unaudited) and September 30, 1996
(unaudited) .......................................................... F-124
Notes to Financial Statements .......................................... F-125
KOEPPEL, ROSEN, RUDIKOFF, M.D., P.C.
Report of Independent Auditors ......................................... F-132
Balance Sheets as of December 31, 1995 and September 30, 1996
(unaudited) .......................................................... F-133
Statements of Operations for the year ended December 31, 1995 and nine
months ended September 30, 1995 (unaudited) and September 30, 1996
(unaudited) .......................................................... F-134
Statements of Stockholders' Equity for the year ended December 31,
1995 and nine months ended September 30, 1995 (unaudited) and
September 30, 1996 (unaudited) ....................................... F-135
Statements of Cash Flows for the year ended December 31, 1995 and nine
months ended September 30, 1995 (unaudited) and September 30, 1996
(unaudited) .......................................................... F-136
Notes to Financial Statements .......................................... F-137
DRS. PAKULA, DAVICK & BOGUE, P.A.
Report of Independent Auditors ......................................... F-141
Balance Sheets as of December 31, 1995 and September 30, 1996
(Unaudited) .......................................................... F-142
Statements of Operations for the year ended December 31, 1995 and nine
months ended September 30, 1996 (unaudited) and September 30, 1995
(unaudited) .......................................................... F-143
Statements of Stockholders' Equity for the year ended December 31,
1995 and nine months ended September 30, 1996 (unaudited) and
September 30, 1995 (unaudited) ....................................... F-144
Statements of Cash Flows for the year ended December 31, 1995 and nine
months ended September 30, 1996 (unaudited) and September 30, 1995
(unaudited) .......................................................... F-145
Notes to Financial Statements .......................................... F-147
</TABLE>
<PAGE>
<TABLE>
<S> <C>
PARK MEDICAL ASSOCIATES, P.A. AND PARK MEDICAL LABS, INC.
Report of Independent Auditors ......................................... F-153
Consolidated Balance Sheets as of December 31, 1994 and 1995 and
September 30, 1996 (unaudited) ....................................... F-154
Consolidated Statements of Operations for the years ended December 31,
1993, 1994 and 1995 and nine months ended September 30, 1995
(unaudited) and nine months ended September 30, 1996 (unaudited) ..... F-155
Consolidated Statements of Owners' Equity for the years ended
December 31, 1993, 1994 and 1995 and nine months ended
September 30, 1995 (unaudited) and nine months ended
September 30, 1996 (unaudited) ....................................... F-156
Consolidated Statements of Cash Flows for the years ended December 31,
1993, 1994 and 1995 and nine months ended September 30, 1995
(unaudited) and nine months ended September 30, 1996 (unaudited) ..... F-157
Notes to Consolidated Financial Statements ............................. F-158
DRS. SIGLER, ROSKES, HOLDEN & SCHUBERTH, P.A.
Report of Independent Auditors ......................................... F-166
Balance Sheets as of December 31, 1995 and September 30, 1996
(unaudited) .......................................................... F-167
Statements of Operations for the years ended December 31, 1994 and
1995, and nine months ended September 30, 1995 (unaudited) and
September 30, 1996 (unaudited) ....................................... F-168
Statements of Shareholders' Equity for the years ended December 31,
1994 and 1995, and nine months ended September 30, 1995 (unaudited)
and September 30, 1996 (unaudited) ................................... F-169
Statements of Cash Flows for the years ended December 31, 1994 and
1995, and nine months ended September 30, 1995 (unaudited) and
September 30, 1996 (unaudited) ....................................... F-170
Notes to Financial Statements .......................................... F-171
</TABLE>
<PAGE>
Physicians Quality Care, Inc.
Unaudited Pro Forma Combined Statement of Operations
The Unaudited Pro Forma Combined Statement of Operations for the year ended
December 31, 1996 combine the historical results of PQC with the historical
results of the following entities, giving effect to the affiliation transactions
for each such entity as if it had occurred on January 1, 1996: Springfield
Medical Associates, Inc. ("SMA"); Alphonse F. Calvanese, M.D., Cardiology and
Internal Medicine Associates, Inc., James F. Haines and William J. Belcastro,
Partnership, Jay M. Ungar, M.D. and Western Massachusetts Medical Group, Inc.
(the "Remaining Springfield Practices"), and Annapolis Medical Specialists,
L.L.P., Drs. Fortier, Libber, Clemmens & Weimer, P.A., Drs. Goldgeier, Levine &
Friedman, P.A., Koeppel, Rosen, Rudikoff, M.D., P.C., Drs. Pakula, Davick &
Bogue, P.A., Park Medical Associates and Affiliate, and Drs. Sigler, Roskes,
Holden & Schuberth, P.A. (the "Specified Flagship Practices").
The Specified Flagship Practices are only a portion of the practices that
constitute the Flagship Affiliation, and the Remaining Springfield Practices,
which along with SMA constitute the Springfield Affiliation, exclude one
practice. In accordance with the regulations of the Securities and Exchange
Commission, the other practices which are part of those affiliations have not
been audited and accordingly have not been included in the pro forma financial
information.
The Unaudited Pro Forma Combined Statement of Operations may not be
indicative of the results that actually would have resulted had the above
affiliations occurred as of the date indicated, or of future earnings or of the
future financial position of the Company. The Unaudited Pro Forma Combined
Statement of Operations should be read in conjunction with the accompanying
Notes to the Unaudited Pro Forma Combined Statement of Operations and the
financial statements of the affiliated practices included elsewhere in this
Registration Statement and Prospectus.
<PAGE>
Physicians Quality Care, Inc.
Notes To Unaudited Pro Forma Combined Statement of Operations
1. Basis of Presentation
The Unaudited Pro Forma Combined Statement of Operations for the year ended
December 31, 1996 assumes that the affiliations with SMA, the Remaining
Springfield Practices and the Specified Flagship Practices were consummated on
January 1, 1996.
2. Proforma Adjustments
(A) To adjust amounts retained by physician groups reflecting actual physician
compensation based on employment agreements as if they were entered into on
January 1, 1996.
(B) To reflect amortization of goodwill for the SMA and Remaining Springfield
Practices' Affiliations. The adjustment records amortization expense for
the period January 1, 1996 through August 30, 1996, the Springfield
Affiliation date.
(C) To reflect the annual management fee of $500,000 to Bain Capital. The
adjustment records expense for the period January 1, 1996 through
August 30, 1996, the date of the SMA and Remaining Springfield Affiliations.
(D) To reflect amortization of goodwill for the Specified Flagship Practices.
The adjustment records amortization expense for the period January 1, 1996
through December 11, 1996, the Flagship Affiliation date.
(E) Reversal of income taxes recorded for PQC and the affiliated practices
which include income taxes calculated at individual and corporate tax rates.
No provision for income taxes is recorded in the unaudited pro forma
statements of operations as operating losses from PQC would be significant
to offset taxable income in the affiliated practices.
<PAGE>
3. Net Loss per Share and Supplemental Net Loss per Share
Net loss per share of common stock on a pro forma basis reflects the issuance of
2,592,245 shares of Class A common stock in connection with the SMA and
Remaining Springfield Affiliations, 6,842,675 shares of Class A common stock in
connection with the Specified Flagship Affiliations, and 4,000,000 shares of
Class B common stock in connection with the Bain Financing, all at January 1,
1996. The effect of options and warrants is not considered as their effect
would be antidilutive. Net loss available to common stock reflects an adjustment
to accrete common stock subject to put to fair value at December 31, 1996.
Supplemental net loss per share on a proforma basis for the year ended
December 31, 1996 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Supplemental net loss available for
common stock $18,949,873
===========
Supplemental net loss per share $ (0.79)
===========
Supplemental weighted-average
common shares outstanding 23,842,256
===========
</TABLE>
Supplemental net loss per share assumes the conversion of 1,666,151 shares
of convertible preferred stock to common stock on a one for one basis, the
conversion of a convertible promissory note payable into 625,000 shares of
common stock and the conversion of a convertible bridge loan into 402,301
shares of common stock, all as of January 1, 1996. Supplemental net loss
available to common stock excludes interest expense related to the
convertible promissory note payable and the convertible bridge loan.
<PAGE>
Physicians Quality Care, Inc.
Unaudited Pro Forma Combined Statement of Operations
Year ended December 31, 1996
<TABLE>
<CAPTION>
Historical Springfield
Remaining Affiliation
Historical Historical Springfield Proforma
PQC SMA Practices Adjustments
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Net patient service revenue $ 6,026,452 $ 5,986,482 $ 3,670,619
Less: amounts retained by physician groups 2,194,571 1,080,234 1,899,311 $ 661,799 (A)
- -----------------------------------------------------------------------------------------------------------------------------------
Management fee revenue 3,831,881 4,906,248 1,771,308 (661,799)
- -----------------------------------------------------------------------------------------------------------------------------------
Operating expenses
Nonphysician salaries and benefits 1,816,309 1,214,650 756,927
Other practice expenses 535,479 1,733,145 783,135
General corporate expenses 5,953,117
Depreciation and amortization 194,481 97,378 69,795 174,000 (B)
Provision for bad debts 214,404 1,202,653 79,553
- -----------------------------------------------------------------------------------------------------------------------------------
Total expenses 8,713,790 4,247,826 1,689,410 174,000
- -----------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) (4,881,909) 658,422 81,898 (835,799)
Other income (expense):
Interest income 91,104 422 4,986
Interest expense (104,255) (17,795) (14,537)
Other income 94,940 45,112
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (4,895,060) 735,989 117,459 835,799
Income tax provision (78,128) (298,168) (28,136) 404,432 (E)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (4,973,188) $ 437,821 $ 89,323 $ (431,367)
- -----------------------------------------------------------------------------------------------------------------------------------
Net loss available to common stock
Net loss per share
Weighted-average common shares
and common share equivalents
outstanding
</TABLE>
<TABLE>
<CAPTION>
Proforma
SMA and Historical Specified
Remaining Specified Flagship
Springfield Flagship Practices Proforma
Practices Practices Adjustments Totals
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Net patient service revenue $ 15,683,553 $ 18,791,775 $ 34,475,328
Less: amounts retained by physician groups 5,835,915 6,619,108 $ (486,711) (A) 11,968,312
- ------------------------------------------------------------------------------------------------------------------------------------
Management fee revenue 9,847,638 12,172,667 486,711 22,507,016
- ------------------------------------------------------------------------------------------------------------------------------------
Operating expenses
Nonphysician salaries and benefits 3,787,886 4,830,066 8,617,952
Other practice expenses 3,051,759 6,387,522 9,439,281
General corporate expenses 5,953,117 333,000 (C) 6,286,117
Depreciation and amortization 535,654 258,771 422,000 (D) 1,216,425
Provision for bad debts 1,496,610 383,201 1,879,811
- ------------------------------------------------------------------------------------------------------------------------------------
Total expenses 14,825,026 11,859,560 755,000 27,439,586
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) (4,977,388) 313,107 (268,289) (4,932,570)
Other income (expense):
Interest income 96,512 6,964 103,476
Interest expense (136,587) (35,916) (172,503)
Other income 140,052 252,770 392,822
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (4,877,411) 536,925 (268,289) (4,608,775)
Income tax provision - (24,930) 24,930 (E) -
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (4,877,411) $ 511,995 $ (243,359) $ (4,608,775)
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss available to common stock $(19,045,623)
Net loss per share $ (0.86)
Weighted-average common shares
and common share equivalents
outstanding 22,046,622
</TABLE>
<PAGE>
Physicians Quality Care, Inc.
Audited Financial Statements
Year ended December 31, 1996 and the period from
March 20, 1995 (inception) to December 31, 1995
Contents
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors..............................................1
Audited Financial Statements
Balance Sheets..............................................................2
Statements of Operations....................................................3
Statements of Changes in Stockholders' Equity (Deficit) and Common
Stock Subject to Put........................................................4
Statements of Cash Flows....................................................5
Notes to Financial Statements...............................................6
</TABLE>
<PAGE>
Report of Independent Auditors
The Board of Directors
Physicians Quality Care, Inc.
We have audited the accompanying balance sheets of Physicians Quality Care, Inc.
(the Company) as of December 31, 1995 and 1996, and the related statements of
operations, changes in stockholders' equity (deficit) and common stock subject
to put, and cash flows for the period from March 20, 1995 (inception) to
December 31, 1995 and the year ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Physicians Quality Care, Inc.
as of December 31, 1995 and 1996 and the results of its operations and its cash
flows for the period from March 20, 1995 (inception) to December 31, 1995 and
the year ended December 31, 1996, in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company's ability to continue as a going concern will
be dependent upon obtaining adequate financing and consummating future
affiliations with physician practices. In addition, the recoverability of
assets and payment of liabilities will be dependent upon the Company's ability
to continue as a going concern. These uncertainties raise substantial doubt
about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ Ernst & Young LLP
March 28, 1997
Boston, Massachusetts
1
<PAGE>
Physicians Quality Care, Inc.
Balance Sheets
<TABLE>
<CAPTION>
December 31
1995 1996
-------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 3,479,781 $ 1,275,405
Accounts receivable, less allowance for doubtful accounts
of $1,070,052 in 1996 5,366,647
Prepaid expenses 12,644 698,377
Due from related parties 1,104,317
Other current assets 8,138 260,452
-------------------------
Total current assets 3,500,563 8,705,198
Goodwill, less accumulated amortization of $112,625 in 1996 28,244,274
Deferred affiliation and equity offering costs 772,209 137,831
Property and equipment, net 90,646 1,489,416
Other assets 169,489
Deferred tax asset 608,171
-------------------------
-------------------------
Total assets $ 4,363,418 $39,354,379
=========================
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
December 31
1995 1996
--------------------------
<S> <C> <C>
Liabilities and stockholders' equity (deficit)
Current liabilities:
Accounts payable $ 604,765 $ 2,262,432
Accrued compensation 109,664 2,038,894
Accrued expenses 103,456 1,798,164
Income taxes payable 32,000 69,708
Current portion of note payable - 240,386
Current portion of capital lease obligations - 78,514
--------------------------
Total current liabilities 849,885 6,488,098
Convertible promissory note 1,410,000
Note payable, less current maturities 34,717
Capital lease obligations, less current maturities 179,486
Deferred taxes 1,073,048
Commitments and contingencies
Common stock, subject to put, 12,740,589 shares authorized,
issued and outstanding at December 31, 1996 31,851,473
Stockholders' equity (deficit):
Common stock, $.01 par value, 15,308,333 shares
authorized, 7,706,250 shares issued and outstanding
at December 31, 1995 77,063
Class A common stock, $.01 par value, 75,000,000 shares
authorized, 7,236,033 shares issued and 6,223,533
outstanding at December 31, 1996 72,359
Class B-1 common stock, $.01 par value, 15,267,915
shares authorized, 2,442,866 shares issued and
outstanding at December 31, 1996 24,429
Class B-2 common stock, $.01 par value, 9,732,085 shares
authorized, 1,557,134 shares issued and outstanding
at December 31, 1996 15,571
Series A Convertible Preferred Stock, $.01 par value,
$3,998,762 liquidation value, 1,666,667 shares
authorized 1,666,151 shares issued and outstanding
at December 31, 1995 3,750,609
Preferred stock, $.01 par value, 10,000,000 shares authorized
Additional paid-in capital 420,000 21,117,623
Accumulated deficit (2,082,264) (21,492,300)
Due from stockholders (61,875)
Less treasury stock, at cost, 1,012,500 shares at
December 31, 1996 (10,125)
--------------------------
Total stockholders' equity (deficit) 2,103,533 (272,443)
--------------------------
Total liabilities and stockholders' equity $ 4,363,418 $ 39,354,379
==========================
</TABLE>
See accompanying notes.
<PAGE>
Physicians Quality Care, Inc.
Statements of Operations
<TABLE>
<CAPTION>
Period from
March 20, 1995 Year ended
(inception) to December 31
December 31, 1995 1996
---------------------------------------------------
<S> <C> <C>
Net patient service revenue $ 6,026,452
Less: amounts retained by physician groups 2,194,571
---------------------------------------------------
Management fee revenue 3,831,881
Operating expenses:
Nonphysician salaries and benefits 1,816,309
Other practice expenses 535,479
General corporate expenses $ 2,061,737 5,953,117
Depreciation and amortization 6,704 194,481
Provision for bad debts 214,404
---------------------------------------------------
Total expenses 2,068,441 8,713,790
---------------------------------------------------
Operating loss (2,068,441) (4,881,909)
Other income (expense):
Interest income 108,177 91,104
Interest expense (90,000) (104,255)
---------------------------------------------------
18,177 (13,151)
---------------------------------------------------
Loss before income taxes (2,050,264) (4,895,060)
Income tax provision 32,000 78,128
---------------------------------------------------
Net loss $ (2,082,264) $ (4,973,188)
===================================================
Net loss available to common stock $ (2,082,264) $ (19,410,036)
===================================================
Net loss per common share $ (0.27) $ (1.80)
===================================================
Weighted average common shares
outstanding 7,706,250 10,785,605
===================================================
</TABLE>
See accompanying notes.
3
<PAGE>
Physicians Quality Care, Inc.
Statements of Changes in Stockholders' Equity (Deficit)
and Common Stock Subject to Put
Year ended December 31, 1996 and period
from March 20, 1995 (inception) to December 31, 1995
<TABLE>
<CAPTION>
Common Stock Class A Common Stock Class B-1 Common Stock
----------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock 7,706,250 $ 77,063
Issuance of convertible preferred stock,
net of issuance costs of $98,153
Issuance of warrant
Issuance of warrants in lieu of interest on
convertible promissory note
Issuance of warrants in connection with
convertible preferred stock
Loan to stockholders
Net loss
----------------------------------------------------------------------------
Balance at December 31, 1995 7,706,250 77,063
Purchase of treasury shares
Recapitalization in connection with
restatement of Charter (7,706,250) (77,063) 7,706,250 $ 77,063
Reclassification of common stock in
connection with recapitalization (5,897,914) (58,980)
Accretion of common stock subject to
put to fair value
Issuance of Class A common stock upon
upon conversion of bridge loan 402,301 4,023
Issuance of Class A common stock upon
conversion of Series A convertible
preferred stock 1,666,151 16,662
Issuance of Class A common stock upon
conversion of subordinated note 625,000 6,250
Issuance of Class A common stock in
connection with the Springfield affiliation 2,592,245 25,921
Issuance of Class A common stock in
connection with the Baltimore affiliation 6,842,675 68,426
Reclassification of common stock
subject to put (6,842,675) (68,426)
Issuance of Class B-1 and B-2 common
stock for cash, net of issuance costs
of $1,410,881 1,587,863 $15,879
Issuance of Class B-1 and B-2 common
stock for cash, net of issuance costs
of $640,214 855,003 8,550
Payment received from Stockholder
Issuance of Class A common stock to
Shareholders for cash 142,000 1,420
Net loss
----------------------------------------------------------------------------
Balance at December 31, 1996 -0- $ -0- 7,236,033 $ 72,359 2,442,866 $24,429
============================================================================
<CAPTION>
Series A Convertible Additional
Class B-2 Common Stock Preferred Stock Treasury Stock Paid-in
----------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount Capital
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock
Issuance of convertible preferred stock,
net of issuance costs of $98,153 1,666,151 $ 3,750,609
Issuance of warrant $ 90,000
Issuance of warrants in lieu of interest on
convertible promissory note 180,000
Issuance of warrants in connection with
convertible preferred stock 150,000
Loan to stockholders
Net loss
-------------------------------------------------------------------------------------
Balance at December 31, 1995 1,666,151 3,750,609 420,000
Purchase of treasury shares 1,012,500 $(10,125)
Recapitalization in connection with
restatement of Charter
Reclassification of common stock in
connection with recapitalization (248,958)
Accretion of common stock subject to
put to fair value
Issuance of Class A common stock upon
upon conversion of bridge loan 1,001,727
Issuance of Class A common stock upon
conversion of Series A convertible
preferred stock (1,666,151) (3,750,609) 3,733,947
Issuance of Class A common stock upon
conversion of subordinated note 1,493,750
Issuance of Class A common stock in
connection with the Springfield affiliation 6,454,672
Issuance of Class A common stock in
connection with the Baltimore affiliation 17,038,261
Reclassification of common stock
subject to put (17,038,261)
Issuance of Class B-1 and B-2 common
stock for cash, net of issuance costs
of $1,410,881 1,012,137 $10,121 5,063,119
Issuance of Class B-1 and B-2 common
stock for cash, net of issuance costs
of $640,214 544,997 5,450 2,845,786
Payment received from Stockholder
Issuance of Class A common stock to
Shareholders for cash 353,580
Net loss
-------------------------------------------------------------------------------------
Balance at December 31, 1996 1,557,134 $15,571 -0- $ -0- 1,012,500 $(10,125) $ 21,117,623
=====================================================================================
<CAPTION>
Common
Total Stock
Accumulated Due from Stockholders' Subject
Deficit Stockholders Equity to Put
------------------------------------------------------------
<S> <C> <C> <C> <C>
Issuance of common stock $ 77,063
Issuance of convertible preferred stock,
net of issuance costs of $98,153 3,750,609
Issuance of warrant 90,000
Issuance of warrants in lieu of interest on
convertible promissory note 180,000
Issuance of warrants in connection with
convertible preferred stock 150,000
Loan to stockholders $(61,875) (61,875)
Net loss $ (2,082,264) (2,082,264)
-------------------------------------------------------------
Balance at December 31, 1995 (2,082,264) (61,875) 2,103,533
Purchase of treasury shares 10,125
Recapitalization in connection with
restatement of Charter
Reclassification of common stock in
connection with recapitalization (307,938) $ 307,938
Accretion of common stock subject to
put to fair value (14,436,848) (14,436,848) 14,436,848
Issuance of Class A common stock upon
upon conversion of bridge loan 1,005,750
Issuance of Class A common stock upon
conversion of Series A convertible
preferred stock
Issuance of Class A common stock upon
conversion of subordinated note 1,500,000
Issuance of Class A common stock in
connection with the Springfield affiliation 6,480,593
Issuance of Class A common stock in
connection with the Baltimore affiliation 17,106,687
Reclassification of common stock
subject to put (17,106,687) 17,106,687
Issuance of Class B-1 and B-2 common
stock for cash, net of issuance costs
of $1,410,881 5,089,119
Issuance of Class B-1 and B-2 common
stock for cash, net of issuance costs
of $640,214 2,859,786
Payment received from Stockholder 51,750 51,750
Issuance of Class A common stock to
Shareholders for cash 355,000
Net loss (4,973,188) (4,973,188)
-------------------------------------------------------------
Balance at December 31, 1996 $(21,492,300) $ -0- $ (272,443) $ 31,851,473
=============================================================
</TABLE>
See accompanying notes.
4
<PAGE>
Physicians Quality Care, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Period from
March 20, 1995 Year ended
(inception) to December 31
December 31, 1995 1996
-----------------------------------
<S> <C> <C>
Operating activities
Net loss $(2,082,264) $(4,973,188)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 6,704 194,481
Interest accretion on convertible promissory note 90,000 90,000
Changes in operating assets and liabilities, net of
effects of business acquisitions:
Increase in accounts receivable (2,422,193)
Increase in related party receivable (1,104,317)
Increase in prepaid expenses and other assets (20,782) (274,922)
Increase in accounts payable, accrued 817,885 3,134,911
compensation and accrued expenses
Increase in income taxes payable 32,000 37,708
-----------------------------------
Net cash used in operating activities (1,156,457) (5,317,520)
Investing activities
Purchase of property and equipment (97,350) (123,866)
(Increase) decrease in deferred acquisition costs (315,071) 195,436
Cash paid for affiliation costs (1,839,274)
Cash paid for affiliation (5,102,337)
-----------------------------------
Net cash used in investing activities (412,421) (6,870,041)
Financing activities
Proceeds from issuance of common stock, net of
issuance costs 15,188 8,309,655
Net proceeds from issuance of convertible preferred stock 3,750,609
Proceeds from issuance of warrants 420,000
Proceeds from bridge financing 1,000,000
Proceeds from note payable 200,000
Proceeds from convertible promissory note 1,320,000
Proceeds from repayment of shareholder loan 51,750
(Increase) decrease in deferred financing costs (457,138) 438,942
Payments on capital lease obligations (17,162)
-----------------------------------
Net cash provided by financing activities 5,048,659 9,983,185
-----------------------------------
Net increase (decrease) in cash and cash equivalents 3,479,781 (2,204,376)
Cash and cash equivalents at beginning of period 3,479,781
-----------------------------------
Cash and cash equivalents at end of period $ 3,479,781 $ 1,275,405
-----------------------------------
</TABLE>
Supplemental disclosure of cash flow information:
During the year ended December 31, 1996, the Company entered into capital lease
obligations aggregating $271,000.
On August 30, 1996, the Company converted a bridge loan in the principal amount
of $1,000,000 to 402,301 shares of common stock (see Note 10).
Cash paid for interest was $0 and $14,225 for the year ended December 31, 1995
and 1996, respectively.
Cash paid for income taxes was $0 and $31,800 for the year ended December 31,
1995 and 1996, respectively.
See accompanying notes.
5
<PAGE>
Physicians Quality Care, Inc.
Notes to Financial Statements
December 31, 1996
1. Business and Organization
Formed in March 1995, Physicians Quality Care, Inc. (PQC or the Company)
provides complete practice management for multi-specialty medical practice
groups. The Company's objective is to establish and manage networks of
specialty and primary care physicians and related diagnostic and therapeutic
support services which can provide comprehensive health care services in
targeted geographic areas.
On August 30, 1996, the Company consummated affiliations with seven physician
practices (32 physicians and a physician-owned laboratory) in Springfield,
Massachusetts, and on December 11, 1996, the Company consummated affiliations
with fifteen physician practices (59 physicians and a physician-owned
laboratory) in the Baltimore/Annapolis, Maryland area. As of the date of the
affiliations the Company began providing management services to the physicians
under long-term management agreements and recognizing revenues from these
physician practices (the Physician Practices). Prior to August 30, 1996, the
Company's operations consisted primarily of seeking affiliations with physician
practices and negotiating the terms of the affiliations and management
agreements with such physician practices.
2. Operations and Basis of Presentation
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. Since its inception, the activities of the
Company have been primarily devoted to seeking affiliations with physician
practices, negotiating the terms of the affiliations with and management
agreements with, physician practices. The Company consummated affiliations with
91 physicians during 1996, the terms of which are more fully disclosed in Note
4. Due to the absence of significant revenues prior to the affiliations, the
Company has predictably incurred significant operating losses and currently does
not have working capital available to fund its growth strategy or operating
losses expected during the next year. These conditions raise substantial doubt
about the Company's ability to continue as a going concern.
Management expects to finance its future affiliations with sales of equity
pursuant to existing financing agreements with its Institutional Investors (see
Note 10). In addition, management expects to fund operations in the short term
with proceeds of an equity offering to private investors and a working capital
line of credit (see Note 13) and with management fee income and positive cash
flow from existing physician practices. However, no assurances can be provided
that the Company will successfully complete these financings. Should any of the
planned financing not be completed, management
6
<PAGE>
Physicians Quality Care, Inc.
Notes to Financial Statements (continued)
2. Operations and Basis of Presentation (continued)
will seek financing through other sources; however, there can be no assurance
that other sources of capital will be available on terms and conditions
acceptable to the Company or at all. The financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
3. Summary of Significant Accounting Policies
Basis of Presentation
The financial statements have been prepared on the accrual basis of accounting.
The Company enters into long-term affiliation arrangements with physician
practices, and through mergers and asset purchases, the assets and liabilities
of the physician practices are transferred to a professional corporation
affiliated with the Company. The Company does not consolidate the operating
results and accounts of the physician practices. For display purposes, the
Company has presented the physician practice revenues and amounts retained by
the physician practices in the accompanying statements of operations to arrive
at the Company's gross management fee revenue. See further discussion below.
Net Patient Service Revenue
Net patient service revenue represents the revenue of the physician practices
reported at the estimated realizable amounts from patients, third-party payors
and others for services rendered, net of contractual and other adjustments.
During 1996, the Company estimates that approximately 40% of net patient service
revenue was received under government-sponsored healthcare programs
(principally, the Medicare and Medicaid programs).
The Company has agreements with various Health Maintenance Organizations (HMOs)
to provide medical services to subscribing participants. Under these agreements,
the Company receives monthly capitation payments based on the number of each
HMO's participants.
7
<PAGE>
Physicians Quality Care, Inc.
Notes to Financial Statements (continued)
3. Summary of Significant Accounting Policies (continued)
Management Fee Revenue
Management fee revenue represents net patient service revenue less amounts
retained by physician practices. The amounts retained by physician practices
represents amounts paid to the physicians pursuant to the service agreements
between the Company and the physician practices, consisting of (a) baseline
compensation which is a significant percentage (80% to 95%) of the physicians'
historic compensation levels, and (b) an allocation of the physician practices'
net profits after payment of operating expenses and compensation to physicians.
Under the service agreements, the Company provides each physician practice with
a comprehensive package of services, including office and facilities, equipment,
nursing and other non-physician professional support, administrative support,
information systems, comprehensive professional liability insurance, and general
management and financial advisory services. The Company also bills all
patients, insurance companies and third-party payors and negotiates all
contracts and relationships with payors.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less at the time of purchase to be cash equivalents. The carrying
amount reported in the balance sheet for cash and cash equivalents approximates
its fair value.
Property and Equipment
Property and equipment is carried at cost. Depreciation is calculated using the
straight-line method over the useful lives of the assets.
Professional Liability Insurance
The Company has obtained professional liability coverage for the Physician
Practices through commercial insurance carriers on either a claims-made or
occurrence basis. The Company has purchased additional insurance to cover the
tail portion of the claims made policies. Management believes that there are no
claims that may result in a loss in excess of amounts covered by its existing
insurance.
8
<PAGE>
Physicians Quality Care, Inc.
Notes to Financial Statements (continued)
3. Summary of Significant Accounting Policies (continued)
Goodwill
The cost of the long-term affiliation agreements, which represents the
affiliation consideration over the fair value of identifiable assets acquired,
has been reflected as goodwill and is being amortized over 40 years, the life of
the long-term affiliation agreements.
Impairment of Long-Lived Assets
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of." Under SFAS 121, the carrying
value of long-lived assets are reviewed if the facts and circumstances suggest
they may be impaired. If this review indicates that the affected assets may not
be recoverable, as determined based upon a projection of undiscounted operating
cash flows, the carrying value of the affected assets would be reduced to fair
value.
Capital Leases
Assets and liabilities relating to capital leases are recorded at the present
value of the future minimum rental payments using interest rates appropriate at
the inception of the lease. Capital lease amortization is provided on a
straight-line basis over the initial term of the lease and is included with
depreciation expense.
Deferred Affiliation and Equity Offering Costs
Deferred affiliation costs consist of amounts paid in connection with proposed
affiliations with physician practices and related negotiations to provide
management services to such practices. Costs are capitalized in connection with
affiliations that are considered probable and included in the consideration for
the practices upon consummation of affiliation and management agreements.
Affiliation costs deferred at December 31, 1995 and 1996 amounted to
approximately $315,000 and $113,000, respectively. If a proposed affiliation is
no longer considered to be probable, the related deferred affiliation costs are
written off.
Costs incurred in connection with the Company's equity offerings are deferred
until the offering is consummated, at which time they are netted against the
proceeds of the equity
9
<PAGE>
Physicians Quality Care, Inc.
Notes to Financial Statements (continued)
3. Summary of Significant Accounting Policies (continued)
offering to which they pertain. Equity offering costs deferred at December 31,
1995 and December 31, 1996 amounted to approximately $457,000 and $25,000,
respectively.
Stock Compensation Arrangements
The Company accounts for its stock compensation arrangements under the
provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees",
and intends to continue to do so.
The Company has adopted disclosure-only provisions of Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation".
These provisions require the Company to disclose pro forma net income and
earnings per share amounts as if compensation expense related to grants of stock
options were recognized based on new fair value accounting rules.
Fair Value of Financial Instruments
The Company's financial instruments consist of accounts receivable, accounts
payable, accrued expenses and other liabilities. The Company believes that the
carrying value of its financial instruments approximate fair value.
Net Loss Per Common Share
Net loss per share of common stock is computed by dividing the net loss
available to common stock by the weighted-average number of shares of common and
common equivalent shares outstanding during each period presented. The net loss
available to common stock reflects the accretion of common stock subject to put
to fair value at December 31, 1996 (see Note 10). The effect of options and
warrants is not considered as it would be antidilutive. Fully diluted loss per
share is not presented because the effect would be antidilutive.
Risks and Uncertainties
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
10
<PAGE>
Physicians Quality Care, Inc.
Notes to Financial Statements (continued)
4. Affiliations
Springfield
Effective August 30, 1996, the Company entered into affiliation arrangements
with 7 physician practices (32 physicians) located in Western Massachusetts (the
Springfield Affiliation). In connection with this transaction, through mergers
and asset purchases, the assets and liabilities of the physician practices were
transferred to a newly formed professional corporation affiliated with the
Company, Medical Care Partners, P.C. (MCP) and the physicians became employees
of MCP. The aggregate total consideration paid to the physicians for the
mergers and asset purchases was approximately $9.7 million, of which $3.2
million was paid in cash and $6.5 million was paid by the issuance of 2,592,245
shares of common stock. Up to an additional $2.15 million, payable in common
stock, may be paid in the future to certain of the physicians if revenue goals
are met. Such consideration, if and when paid, would be reflected as an expense
in the statement of operations. In addition, 29 physicians received 2,500
options to purchase common stock at an exercise price of $2.50 per share.
Baltimore
Effective December 11, 1996, the Company entered into affiliation arrangements
with 15 physician practices (59 physicians) located in the Baltimore/Annapolis,
Maryland area (the Flagship Affiliation). In connection with this transaction,
through mergers and sales, the assets and liabilities of the physician practices
were transferred to a newly formed professional corporation affiliated with the
Company, Flagship Health, P.A. (Flagship) and the physicians became employees of
Flagship. The aggregate consideration paid to the physicians at the
consummation of the mergers and asset purchases was approximately $19.8 million,
of which $2.7 million was paid in cash and $17.1 million was paid by the
issuance of 6,842,675 shares of common stock. Final total consideration is
subject to working capital adjustments within 120 days after closing.
The Springfield affiliation and the Flagship affiliation have been accounted for
by the purchase method of accounting and accordingly, the purchase price has
been allocated to the tangible assets acquired and liabilities assumed based on
the estimated fair value at affiliation date.
11
<PAGE>
Physicians Quality Care, Inc.
Notes to Financial Statements (continued)
4. Affiliations (continued)
The following table depicts the calculation of the Company's purchase price,
excess of purchase price over the fair value of the acquired assets and the
preliminary allocation to the acquired assets. The determination of the fair
market value of the acquired assets and the allocation of the purchase price to
both tangible and intangible assets are currently being performed and may vary
from values presented below.
<TABLE>
<CAPTION>
Allocation of purchase price:
Springfield Flagship
------------------------------
<S> <C> <C>
Cash $ 336,000 $ 443,000
Fixed assets 317,000 955,000
Other current assets 1,346,000 4,260,000
Goodwill 9,037,000 16,371,000
Accounts payable (190,000) (677,000)
Other liabilities (1,138,000) (1,592,000)
------------------------------
9,708,000 19,760,000
Other affiliation costs 1,238,000 1,711,000
------------------------------
$10,946,000 $21,471,000
==============================
</TABLE>
The following table presents pro forma financial information reflecting the
effects of the Springfield affiliation and the Flagship affiliation as though
they had occurred at the beginning of each period presented. Supplemental net
loss per common share assumes the conversion of the Series A convertible
preferred stock, the convertible bridge loan, and the convertible promissory
note as of January 1, 1996 (see Note 10).
<TABLE>
<CAPTION>
(Unaudited)
Period from
March 20
1995 (Unaudited)
(inception) to Year ended
December 31 December 31
1995 1996
--------------------------------
<S> <C> <C>
Revenue $35,642,000 $ 39,544,000
===================================
Net loss $(1,713,000) $ (3,340,000)
===================================
Net loss available to common stock $(1,713,000) $(17,776,848)
===================================
Net loss per common share $ (0.08) $ (0.81)
===================================
Supplemental net loss per common share $ (0.08) $ (0.74)
===================================
</TABLE>
12
<PAGE>
Physicians Quality Care, Inc.
Notes to Financial Statements (continued)
5. Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31
1995 1996
-------------------------
<S> <C> <C>
Equipment $74,230 $ 189,458
Furniture and fixtures 7,755 132,946
Office equipment 15,365 935,914
Leasehold improvements 319,658
-------------------------
97,350 1,577,976
Less accumulated depreciation 6,704 88,560
-------------------------
$90,646 $1,489,416
=========================
</TABLE>
Depreciation expense was $6,704 and $81,853 for the period from March 20, 1995
(inception) to December 31, 1995 and for the year ended December 31, 1996,
respectively.
6. Convertible Promissory Note and Warrant
In June 1995, the Company issued a $1,500,000 convertible promissory note to an
investor. In lieu of interest, the Company issued a warrant to purchase 20,000
shares of the Company's common stock at $2.40 per share. The warrant's value of
$180,000 has been reflected in the statements of operations as interest expense.
Effective August 1996, the note was converted into 625,000 shares of the
Company's Class A Common Stock.
7. Leases
The Company maintains operating leases for property and certain office equipment
at its corporate headquarters and a subsidiary site. The property leases
contain renewal options and escalation clauses and require the Company to pay
certain utilities and taxes over established base amounts. In addition, the
Company is obligated under operating lease agreements acquired in connection
with the Springfield and Flagship affiliations (see Note 4).
Operating lease expense amounted to $14,679 and $535,479 for the period from
inception to December 31, 1995 and for the year ended December 31, 1996,
respectively.
13
<PAGE>
Physicians Quality Care, Inc.
Notes to Financial Statements (continued)
7. Leases (continued)
During 1996, the Company entered into capital lease agreements totaling
approximately $271,000. The Company is obligated under capital lease agreements
acquired in connection with the Springfield and Flagship affiliations (see Note
4).
At December 31, 1996, property, plant and equipment amounts included capitalized
lease assets totaling $232,257, net of accumulated depreciation of $160,629.
Future minimum lease payments under noncancelable capital and operating leases
are as follows:
<TABLE>
<CAPTION>
Capital Leases Operating Leases
-------------------------------------
<S> <C> <C>
1997 $102,602 $ 2,973,587
1998 73,830 2,666,713
1999 71,636 2,256,148
2000 39,991 2,084,329
2001 12,452 856,336
Thereafter 741,497
-------------------------------------
300,511 11,578,610
-------------------------------------
Amounts representing interest (42,511)
-------------------------------------
$258,000 $11,578,610
=====================================
</TABLE>
8. Letter of Credit
At December 31, 1996, the Company had a letter of credit outstanding in the
amount of $85,000 securing the Company's payment for office improvements at a
subsidiary site.
9. Transactions with Related Parties
The amounts due from related parties at December 31, 1996 represent working
capital and other adjustments in connection with the affiliations (see Note 4).
Because of the nature of the Company's arrangements with the affiliated
physician groups, substantially all transactions included in net patient service
revenues and amounts retained by physician groups in the accompanying financial
statements are viewed as related-party transactions.
14
<PAGE>
Physicians Quality Care, Inc.
Notes to Financial Statements (continued)
9. Transactions with Related Parties (continued)
During the year ended December 31, 1996, the Company entered into affiliation
transactions with three of its directors who are physicians. The physicians
received 498,602 shares of Class A common stock, 2,500 options to acquire Class
A common stock, with an exercise price of $2.50 per share and cash in the amount
of $315,000 as consideration for the affiliations. These transactions were
entered into on commercially reasonable terms, substantially similar to the
terms of its affiliation transactions with other affiliated physicians (see Note
4), and the consideration paid in connection with such affiliations was based on
the fair market value of the medical practice assets or services acquired.
At December 31, 1996, the Company had a promissory note with a face value of
$200,000 with a director of the Company. The note bears interest at prime plus
2%. This note, along with accrued interest, was paid by the Company on
February 4, 1997.
10. Stockholders' Equity
Common Stock
- ------------
During the period from March 20, 1995 (inception) to December 31, 1995, the
Company issued 7,706,250 shares of $.01 par value common stock to its founders
in exchange for cash of $15,188 and notes of $61,875. During the year ended
December 31, 1996, 1,012,500 shares of common stock were reacquired by the
Company at a cost of $10,125 in the form of cancellation of a like amount of a
note due from the shareholder. These shares are subject to certain restrictions
which lapse in August 1998.
Effective August 30, 1996, the Company recapitalized. All shares of then-
existing common stock were canceled (Old Common Stock) and three new classes of
common stock (Class A, Class B-1 and Class B-2) were authorized. Holders of
Class A, Class B-1 and Class B-2 common shares are entitled to elect two, one
and one members of the Company's Board of Directors, respectively. The
remaining seven directors are elected collectively by the holders of Class A,
Class B-1 and Class B-2 common shares, with each share having a single vote.
15
<PAGE>
Physicians Quality Care, Inc.
Notes to Financial Statements (continued)
10. Stockholders' Equity (continued)
Class A common shares were distributed to holders of Old Common Stock on a one-
for-one basis.
On August 30, 1996, 402,301 of Class A common shares were issued in connection
with the conversion of a bridge loan. The bridge loan, in the amount of $1.0
million, (1) was outstanding during July and August 1996; (2) bore interest at
10.25% and (3) was convertible into Class A common shares at a conversion rate
of $2.50 per share. Warrants to purchase 201,150 shares of common stock at
$5.00 per share were issued in connection with the bridge loan.
During June 1995, the Company issued 1,666,151 shares of Series A Convertible
Preferred Stock (Preferred Stock), par value $.01, which effective August 30,
1996, was converted to Class A common stock on a one-for-one basis. Warrants to
purchase 416,538 shares of Common Stock at $2.40 per share were issued upon the
closing of the sale of the Preferred Stock. Warrants to purchase an additional
416,538 shares of common stock were required to be issued to the holders of the
Preferred Stock in the event that the Company did not complete an initial public
offering on or before June 30, 1996. Accordingly, on August 30, 1996, the
Company issued an additional 416,538 warrants at $2.40 per share. A total value
of $300,000 were assigned to these warrants.
As discussed in Note 6, 625,000 shares of Class A common stock were issued in
connection with the conversion of a promissory note.
As discussed in Note 4, 2,592,245 Class A common shares were issued in
connection with the Springfield Affiliation, and 6,842,675 Class A common shares
were issued in connection with the Baltimore Affiliation.
In connection with the Springfield Affiliation described in Note 4, on
August 30, 1996, the Company issued 1,587,863 Class B-1 common shares, 1,012,137
Class B-2 common shares and warrants to purchase 3,750,500 shares of Class B
common stock at $2.50 per share to the Institutional Investors in exchange for
cash proceeds of $6.5 million, which after issuance costs of approximately $1.4
million, netted to approximately $5.1 million. In connection with the Baltimore
Affiliation described in Note 4, on December 11, 1996, the Company issued
855,003 Class B-1 common shares, 544,997 Class B-2 common shares and warrants to
purchase 1,799,000 shares of Class B common stock at $2.50 per share to the
Institutional Investors in exchange for cash proceeds of $3.5 million, which
after issuance costs of approximately $640,000, netted to approximately $2.9
million.
16
<PAGE>
Physicians Quality Care, Inc.
Notes to Financial Statements (continued)
10. Stockholders' Equity (continued)
Subject to certain conditions, the Institutional Investors are required to
purchase up to 8,000,000 additional shares of Class B common stock, together
with warrants to purchase up to 7,450,500 shares of Class B common stock, for
aggregate consideration of $20,000,000. These shares may be sold no later than
December 31, 1999. The number of shares of common stock issuable upon exercise
of the warrants is subject to adjustment based on the Company's future financial
performance.
During December 1996, the Company issued 142,000 shares of Class A common stock
at $2.50 per share to shareholders for cash.
Puts and Calls
- --------------
Of the Company's outstanding common stock, 12,740,589 shares are subject to a
put option which provides for the put of the shares back to the Company at fair
value upon the death of the holder. In addition, 1,072,285 of such shares are
also subject to a fair value put option back to the Company at the later of the
shareholder's retirement from the Company or 18 months after the date
(December 11, 1996) of the shareholders' agreement. Consequently, these
12,740,589 shares have been recorded at fair value outside of permanent equity
in the accompanying balance sheet.
The Company's shareholder agreements also provide that in connection with
10,053,670 shares of common stock, the Company has the right to purchase such
shares for fair value if the shareholder's termination from the Company is
without cause or is by resignation, and for the lower of cost or fair value if
termination is with cause.
All of the above put and call provisions expire on the date of a Qualified
Public Offering (QPO), defined as a public offering of the Company's common
stock with proceeds to the Company of at least $50 million.
Because the Company's shares are subject to a number of restrictions in the
shareholders' agreements and will not trade until the occurrence of a QPO, the
Company believes it is a nonpublic entity for compensation accounting purposes
and, accordingly, has not recorded any compensation expense for these puts and
calls. As noted above, at the date of the QPO, the put and call provisions of
the shareholder agreements will expire.
Warrants
- --------
In May 1995, the Company issued a stock purchase warrant for consideration of
$90,000, which provided the holder the right to purchase 100,000 shares of
common stock at $20.00 per share. The warrant expired unexercised on
December 31, 1995.
In September 1996, the Company issued a stock purchase warrant for consideration
of $115,000, which provided the holder the right to purchase 50,000 shares of
Class A common stock at $3.00 per share.
At December 31, 1996, warrants to purchase 6,653,726 shares of Class A and Class
B common stock were outstanding as follows:
<TABLE>
<CAPTION>
Number Price Expiration Date
----------------------------------------------------
<S> <C> <C>
20,000 $2.40 2000
201,150 5.00 2003
416,538 2.40 2000
416,538 2.40 2001
3,750,500 2.50 2003
1,799,000 2.50 2003
50,000 3.00 2003
</TABLE>
17
<PAGE>
Physicians Quality Care, Inc.
Notes to Financial Statements (continued)
10. Stockholders' Equity (continued)
Shares Reserved for Future Issuance
- -----------------------------------
At December 31, 1996, the Company has reserved 8,528,726 shares of Common Stock
for future issuance for the following purposes:
<TABLE>
<S> <C>
Equity incentive plan 1,875,000
Warrants 6,653,726
-----------
8,528,726
===========
</TABLE>
Net Loss per Common Share
- -------------------------
Net loss per common share disclosed in the statement of operations is calculated
using the methodology discussed in Note 3. In February 1997, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 128 "Earnings Per Share," which is required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per share,
the dilutive effect of stock options will be excluded. The impact of SFAS 128
on the calculation of net loss per common share for the first quarter ended
March 31, 1997 and March 31, 1996 is not expected to be material.
Supplemental net loss per common share assumes the conversion of 1,666,151
shares of the convertible preferred stock to common stock on a one for one
basis, the conversion of the convertible promissory note payable (see Note 6)
into 625,000 shares of common stock and the conversion of the convertible bridge
loan into 402,301 shares of common stock, all as of January 1, 1996. The
supplemental net loss per common share for the year ended December 31, 1996 is
as follows:
<TABLE>
<CAPTION>
Year ended
December 31,
1996
---------------
<S> <C>
Supplemental net loss per common share $(1.54)
===============
Weighted average common shares
outstanding 12,581,239
===============
</TABLE>
11. Employee Compensation Plans
Equity Incentive Plan
- ---------------------
The Company's 1995 Equity Incentive Plan provides the opportunity for employees,
consultants, officers and directors to be granted options to purchase, receive
awards or make direct purchases of up to 1,875,000 shares of the Company's
common stock. Options granted under the Plan may be "Incentive Stock Options"
or "Nonqualified Options" under the applicable provisions of the Internal
Revenue Code.
18
<PAGE>
Physicians Quality Care, Inc.
Notes to Financial Statements (continued)
11. Employee Compensation Plans (continued)
Incentive Stock Options are granted at the fair market value of the Company's
common stock at the date of the grant as determined by the Board of Directors.
Incentive Stock Options granted to employees who own more than 10% of the voting
power of all classes of stock will be granted at 110% of the fair market value
of the Company's common stock at the date of the grant. Nonqualified options
may be granted at amounts up to the fair market value of the Company's common
stock on the date of the grant, as determined by the Board of Directors.
Although FAS 123 requires the presentation of pro forma information to reflect
the fair value method of accounting for employee stock option grants, such
information has not been presented because the pro forma effects are not
material. The fair value for these options was estimated at the date of grant
using the "minimum value method" prescribed by FAS 123. The following weighted-
average assumptions were used to determine the fair value for 1995 and 1996,
respectively: a risk-free interest rate of 6.0% and 6.2%, an expected dividend
yield of 0% each year, and a weighted-average expected life of the options of
six years.
A summary of the Company's stock option activity and related information is as
follows:
<TABLE>
<CAPTION>
Period from March 20
1995 (inception) to Year ended
December 31, 1995 December 31, 1996
------------------------------------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of 476,086 $0.10
period
Granted 476,086 $0.10 340,500 2.12
Exercised
Forfeited (11,750) (0.08)
------------------------------------------------------
Outstanding at end of period 476,086 $0.10 804,836 $0.95
============ ===========
Exercisable at period end 0 140,487
Weighted-average fair value
of options granted during
period $0.02 $0.69
</TABLE>
19
<PAGE>
Physicians Quality Care, Inc.
Notes to Financial Statements (continued)
11. Employee Compensation Plans (continued)
The following table summarizes information about stock options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
Weighted-Average
Options Remaining Life
Exercise Price Options Outstanding Exercisable (Years)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
$0.01 360,586 111,862 8.48
0.25 102,250 25,750 8.70
0.85 94,000 2,875 9.07
2.50 248,000 0 9.83
</TABLE>
No options were exercised during the period from March 20, 1995 (inception) to
December 31, 1996. All options granted vest equally over a range of three to
four years.
Profit Sharing Plan
- -------------------
The Board of Directors of the Company approved the adoption of a qualified
401(k) profit sharing plan (the Plan) for all employees meeting certain
eligibility requirements. Under the Plan, the participants may make
contributions to the Plan of up to 15% of their compensation, up to the Internal
Revenue Service limitation. Effective December 1, 1996, the Company may make
discretionary contributions to the Plan as determined by the Board of
Directors. Contributions for the year ended December 31, 1996 were
approximately $86,000.
Money Purchase Pension Plan
- ---------------------------
The Board of Directors of the Company approved the adoption of a qualified money
purchase pension plan for the employees of MCP. Effective on August 30, 1996
the Company may provide a contribution on wages up to the Social Security
limitation and up to 9.27% on wages in excess of the Social Security limitation.
The Company contributed approximately $187,000 to the money purchase pension
plan in 1996.
12. Income Taxes
The Company provides for income taxes under the liability method. Deferred
income taxes arise principally from temporary differences related to capitalized
start-up costs, depreciation, net operating losses, certain accruals, and a
change from the cash to accrual method of accounting for tax purposes. The
components of the Company's deferred income taxes are as follows:
20
<PAGE>
Physicians Quality Care, Inc.
Notes to Financial Statements (continued)
12. Income Taxes (continued)
<TABLE>
<CAPTION>
December 31
1995 1996
---------------------------
<S> <C> <C>
Deferred tax liability $(1,073,048)
Deferred tax assets $ 707,000 2,718,155
Less valuation allowance (707,000) (2,109,984)
---------------------------
Deferred tax asset (liability) after valuation allowance $ -0- $ (464,877)
===========================
</TABLE>
For financial reporting purposes, a valuation allowance of $707,000 and
$2,109,984 at December 31, 1995 and 1996, respectively, has been recognized to
offset deferred tax assets since uncertainty exists with respect to future
realization of deferred tax assets.
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
Period from
inception to Year ended
December 31 December 31
1995 1996
----------------------------------
<S> <C> <C>
Current:
Federal $25,500 $22,057
State 6,500 56,071
----------------------------------
$32,000 $78,128
==================================
</TABLE>
The difference between the provision for income taxes and the amount computed by
applying the statutory federal income tax rate is as follows:
<TABLE>
<CAPTION>
Period from
inception to Year ended
December 31 December 31
1995 1996
-------------------------------------------------
<S> <C> <C> <C> <C>
Federal taxes at statutory rates $(717,592) 35% $(1,721,439) 35%
Add (deduct):
State income taxes, net of federal benefit 6,500 (0.3%) (209,474) 4.3%
Change in valuation allowance
attributable to operations 707,000 (34.5%) 1,999,182 (40.6%)
Other 36,092 (1.8%) 9,859 (0.2%)
-------------------------------------------------
$ 32,000 (1.6%) $ 78,128 (1.5%)
=================================================
</TABLE>
21
<PAGE>
Physicians Quality Care, Inc.
Notes to Financial Statements (continued)
12. Income Taxes (continued)
At December 31, 1996, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $4,460,000 which expire through the
year 2011. The utilization of net operating losses may be subject to limitation
under the change in stock ownership rules of the Internal Revenue Code. For
financial reporting purposes, a valuation allowance of approximately $2,109,984
has been recognized to offset the deferred tax assets, including these
carryforwards, since uncertainty exist with respect to future realization of
such carryforwards.
13. Subsequent Events
In January and February 1997, the Company entered into affiliation arrangements
with 6 physicians located in the Springfield, Massachusetts area (the
Springfield II Affiliation). Through mergers and asset purchases, the
Springfield II practices were transferred to MCP and the physicians became
employees of MCP. The aggregate total consideration paid to the physicians or
their practices in connection with the Springfield II Affiliation was
approximately $2.3 million, payable in a combination of cash and common stock.
In January 1997, the Company entered into a $3.5 million line of credit
agreement with a bank. The line carries an interest rate of prime plus 1.5%.
In February 1997, the Company issued 472,000 shares of Class A common stock for
$1,180,000 to shareholders and friends of the Company.
22
<PAGE>
Springfield Medical Associates, Inc.
Audited Consolidated Financial Statements
Years ended December 31, 1993, 1994 and 1995,
the period January 1, 1996 through August 30, 1996
and nine months ended September 30, 1995 (Unaudited)
<TABLE>
<CAPTION>
Contents
<S> <C>
Report of Independent Auditors............................................ 1
Audited Consolidated Financial Statements
Consolidated Balance Sheets............................................... 2
Consolidated Statements of Operations..................................... 3
Consolidated Statements of Stockholders' Equity........................... 4
Consolidated Statements of Cash Flows..................................... 5
Notes to Consolidated Financial Statements................................ 6
</TABLE>
<PAGE>
[LETTERHEAD OF ERNST & YOUNG LLP APPEARS HERE]
Report of Independent Auditors
The Board of Directors
Physicians Quality Care, Inc.
We have audited the accompanying consolidated balance sheets of Springfield
Medical Associates, Inc. (the Company) as of December 31, 1994 and 1995, and
August 30, 1996 and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years ended December
31, 1995 and the period January 1, 1996 through August 30, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Springfield Medical Associates, Inc. at December 31, 1994, 1995, and August 30,
1996 and the consolidated results of its operations and its cash flows for each
of the three years ended December 31, 1995 and the period January 1, 1996
through August 30, 1996, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
November 21, 1996
Boston, Massachusetts 1
<PAGE>
Springfield Medical Associates, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31 August 30
1994 1995 1996
------------------------------------
<S> <C> <C> <C>
Assets
Current assets:
Cash $ 40,888 $ 178,604 $ 112,116
Accounts receivable, less allowance
for doubtful accounts of $754,767 in
1994, $885,013 in 1995 and $1,202,653
in 1996, respectively 920,971 931,212 1,305,046
Prepaid expenses 73,859 74,067 93,195
Deferred income taxes 126,329 294,124 134,902
Income tax receivable 11,127 - -
Other current assets 27,202 24,154 44,164
------------------------------------
Total current assets 1,200,376 1,502,161 1,689,423
Deferred income tax 43,346 48,877 70,746
Property and equipment, net 300,947 340,636 358,856
------------------------------------
Total assets $1,544,669 $1,891,674 $2,119,025
====================================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 185,337 $ 40,599 $ 267,340
Accrued physician bonuses 231,475
Accrued employee benefits 95,254 331,560 340
Accrued expenses, other 35,231 131,676 101,530
Deferred income taxes 397,932 375,458 559,297
Income tax payable 57,991 51,174
Current portion of notes payable 227,840 88,370 78,759
------------------------------------
Total current liabilities 941,594 1,257,129 1,058,440
Notes payable 252,922 198,232 186,451
Stockholders' equity:
Common stock, no par value, 15,000
shares authorized, 1,600 shares issued
and outstanding
Additional paid-in capital 136,030 136,030 136,030
Retained earnings 214,123 300,283 738,104
------------------------------------
Total stockholders' equity 350,153 436,313 874,134
------------------------------------
Total liabilities and stockholders'
equity $1,544,669 $1,891,674 $2,119,025
====================================
</TABLE>
See accompanying notes.
2
<PAGE>
Springfield Medical Associates, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
(Unaudited)
Nine months January 1,
ended 1996 through
Year ended December 31 September 30 August 30
1993 1994 1995 1995 1996
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue:
Net patient service revenue $6,187,800 $6,663,990 $7,021,521 $5,464,744 $5,986,482
Other income 2,573 149,969 113,894 94,940
Interest income 4,036 3,381 892 522 422
-------------------------------------------------------------------------------------
6,191,836 6,669,944 7,172,382 5,579,160 6,081,844
Operating expenses:
Salaries and wages--physicians 1,975,119 2,017,823 1,951,363 1,364,451 995,680
Salaries and wages--staff 1,376,401 1,512,357 1,673,917 1,261,541 1,023,991
Employee benefits--physicians 407,403 452,581 363,598 342,938 84,554
Employee benefits--staff 239,268 301,720 256,425 201,408 190,659
Supplies and other 1,281,638 1,510,779 1,781,480 1,328,356 1,671,820
Insurance 92,730 102,009 139,870 86,168 61,325
Interest 19,490 20,475 36,406 26,859 17,795
Depreciation 97,601 96,691 127,824 89,493 97,378
Provision for bad debts 668,754 754,767 885,013 912,613 1,202,653
-------------------------------------------------------------------------------------
Net operating expenses 6,158,404 6,769,202 7,215,896 5,613,827 5,345,855
-------------------------------------------------------------------------------------
Net income (loss) before income taxes 33,432 (99,258) (43,514) (34,667) 735,989
Income tax benefit (expense) 1,689 37,709 129,674 66,362 (298,168)
-------------------------------------------------------------------------------------
Net income (loss) $ 35,121 $ (61,549) $ 86,160 $ 31,695 $ 437,821
=====================================================================================
</TABLE>
See accompanying notes.
3
<PAGE>
Springfield Medical Associates, Inc.
Consolidated Statements of Stockholders' Equity
<TABLE>
<S> <C>
Balance at December 31, 1992 $356,581
Capital contributions by owners 10,000
Net income 35,121
----------
Balance at December 31, 1993 401,702
Capital contributions by owners 10,000
Net loss (61,549)
----------
Balance at December 31, 1994 350,153
Net loss 86,160
----------
Balance at December 31, 1995 436,313
Net income 437,821
----------
Balance at August 30, 1996 $874,134
==========
</TABLE>
See accompanying notes.
4
<PAGE>
Springfield Medical Associates, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
(Unaudited)
nine months January 1
ended 1996 through
Year ended December 31 September 30 August 30
1993 1994 1995 1995 1996
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating activities
Net income (loss) $ 35,121 $ (61,549) $ 86,160 $ (31,695) $ 437,821
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Depreciation 97,601 96,691 127,824 89,493 97,378
Deferred income taxes (2,145) (26,126) (195,800) (2,972) 843,210
Gain on sale of fixed
assets (400) (2,573) (5,439) (5,439) (30,600)
Changes in operating assets
and liabilities:
Accounts receivable, net (42,715) (68,802) (10,241) (42,175) (373,834)
Prepaid expenses and
other current assets 37,048 (22,247) (208) (160,258) (39,138)
Accounts payable, accrued
expenses and other current
liabilities 19,880 89,722 491,654 727,145 (894,936)
----------------------------------------------------------------------------------------------------
Net cash provided by
operating activities 144,390 5,116 493,950 574,099 39,901
Investing activities
Proceeds from sale of
property and equipment 2,017 9,436 16,000 16,000 30,600
Purchase of property and
equipment (105,163) (149,827) (178,074) (169,709) (115,597)
----------------------------------------------------------------------------------------------------
Net cash used in investing
activities (103,146) (140,391) (162,074) (153,709) (84,997)
Financing activities
Contribution of capital 10,000 10,000
Proceeds from notes payable 36,241 187,575 37,520
Payments on notes payable (104,483) (45,090) (194,160) (172,269) (58,912)
----------------------------------------------------------------------------------------------------
Net cash provided (used) by
financing activities (58,242) 152,485 (194,160) (172,269) (21,392)
----------------------------------------------------------------------------------------------------
Increase (decrease) in cash (16,998) 17,210 137,716 248,121 (66,488)
Cash at beginning of period 40,676 23,678 40,888 40,888 178,604
----------------------------------------------------------------------------------------------------
Cash at end of period $ 23,678 $ 40,888 $ 178,604 $ 289,009 $ 112,116
====================================================================================================
Supplemental disclosure of
cash flow information:
Cash paid during the period
for interest $ 19,490 $ 20,475 $ 36,406 $ 26,859 $ 17,795
====================================================================================================
Cash paid during the
period for income taxes $ 476 $ 456 $ 912 $ - $ 470
====================================================================================================
</TABLE>
See accompanying notes.
5
<PAGE>
Springfield Medical Associates, Inc.
Notes to Consolidated Financial Statements
December 31, 1995
1. Summary of Significant Accounting Policies
Description of Business
Springfield Medical Associates, Inc. (the Company) is a taxable entity organized
under the laws of Massachusetts. The Company offers a variety of medical
services including cardiology, cancer treatment and primary care in Western
Massachusetts.
Principles of Consolidation
The consolidated financial statements of the Company include the accounts of
Springfield Medical Associates and its wholly-owned subsidiaries. All
intercompany transactions have been eliminated in consolidation.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated using the straight-line method over the estimated useful
lives of the assets. Routine maintenance and repairs are charged to expense as
incurred, while costs of betterments and renewals are capitalized.
Income Taxes
Deferred income taxes are provided for temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes.
Professional Liability Insurance
The Company has obtained professional liability coverage through commercial
insurance carriers on the occurrence basis. Management believes that there are
no claims that may result in a loss in excess of amounts covered by its existing
insurance.
6
<PAGE>
Springfield Medical Associates, Inc.
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Net Patient Service Revenue
Net patient service revenue is reported at the estimated realizable amounts from
patients, third-party payors and others for services rendered. The Medicare and
Medicaid programs pay physician services based on fee schedules which are
determined by the related government agency. The Company has negotiated
numerous agreements with managed care organizations to provide physician
services based on fee schedules. No individual managed care contract is
material to the Company.
Risks and Uncertainties
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Unaudited Consolidated Financial Statements
The unaudited consolidated financial statements have been prepared by management
in accordance with generally accepted accounting principles. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results of the
interim periods are not necessarily indicative of the results that may be
expected for a full year.
7
<PAGE>
Springfield Medical Associates, Inc.
Notes to Consolidated Financial Statements (continued)
2. Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31 August 30
1994 1995 1996
------------------------------------
<S> <C> <C> <C>
Furniture, fixtures and equipment $ 817,499 $ 876,375 $ 934,476
Leasehold improvements 228,028 308,437 293,758
------------------------------------
1,045,527 1,184,812 1,228,234
Less accumulated depreciation 744,580 844,176 869,378
------------------------------------
$ 300,947 $ 340,636 $ 358,856
====================================
</TABLE>
3. Notes Payable
The Company has various notes payable with a combined original principal amount
of $575,675, payable in monthly installments of principal and interest at
interest rates ranging from 7.65% to 10.5% and secured by all of the Company's
assets. The principal balance outstanding under these note agreements
aggregated $480,762 and $286,602 at December 31, 1994 and 1995, respectively,
and $265,210 at August 30, 1996.
The following is a schedule of principal maturities on the notes as of
December 31, 1995:
<TABLE>
<CAPTION>
<S> <C>
1996 $ 88,370
1997 89,834
1998 71,263
1999 36,293
2000 842
----------
$286,602
==========
</TABLE>
In April 1996, the Company entered into loan agreements for two vehicles for
$37,520. In September 1996, the vehicles were sold to two of the Company's
physicians.
8
<PAGE>
Springfield Medical Associates, Inc.
Notes to Consolidated Financial Statements (continued)
4. Operating Leases
The Company leases office space and certain equipment from related parties under
operating leases. Total rental expense was $244,095, $280,479 and $295,975 in
1993, 1994 and 1995, respectively, and $196,358, during the period January 1,
1996 through August 30, 1996, and is included in supplies and other in the
accompanying consolidated statements of operations. The following is a schedule
by year of future minimum lease payments under operating leases as of December
31, 1995:
<TABLE>
<CAPTION>
<S> <C>
1996 $228,565
1997 275,122
1998 162,524
1999 41,590
2000 1,558
----------
$709,359
==========
</TABLE>
5. Employee Benefit Plans
The Company has a qualified profit sharing plan covering substantially all
employees. Contributions were determined based upon a percentage of each
eligible employee's compensation, as defined and/or at the discretion of
management. Total contributions were $362,994, $422,293 and $302,174 for the
years ended December 31, 1993, 1994 and 1995, respectively, and $160,000 during
the period January 1, 1996 through August 30, 1996, and are included in employee
benefits in the accompanying consolidated statements of operations.
9
<PAGE>
Springfield Medical Associates, Inc.
Notes to Consolidated Financial Statements (continued)
6. Income Taxes
Deferred income taxes reflect the net effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. The Company is a cash basis tax
payer. Significant components of the Company's deferred tax liabilities and
assets were as follows:
<TABLE>
<CAPTION>
December 31 August 30
1994 1995 1996
-----------------------------------
<S> <C> <C> <C>
Deferred tax liabilities:
Accounts receivable, net $(368,388) $(345,831) $(522,019)
Prepaid expenses, other (29,544) (29,627) (37,278)
-----------------------------------
Total deferred tax liabilities (397,932) (375,458) (559,297)
Deferred tax assets:
Accrued expenses, other 169,675 343,001 205,648
Net operating loss carryover 114,237 548,997
-----------------------------------
283,912 343,001 754,645
Less: valuation allowance 114,237 548,997
-----------------------------------
Net deferred tax assets 169,675 343,001 205,648
-----------------------------------
Net deferred tax liabilities $(228,257) $ (32,457) $(353,649)
===================================
</TABLE>
For financial reporting purposes a valuation allowance of $114,237, $0 and
$548,997 has been recognized at December 31, 1994 and 1995 and August 30, 1996,
respectively, to offset certain deferred tax assets since uncertainty exists
with respect to future realization of these tax assets.
10
<PAGE>
Springfield Medical Associates, Inc.
Notes to Consolidated Financial Statements (continued)
6. Income Taxes (continued)
Significant components of the provision (benefit) for income taxes attributable
to continuing operations are as follows:
<TABLE>
<CAPTION>
The period
January 1
1996
through
Year ended December 31 August 30
----------------------------------- -----------
1993 1994 1995 1996
----------------------------------- -----------
<S> <C> <C> <C> <C>
Current:
Federal $ - $(12,039) $ 50,759 $(545,498)
State 456 456 15,367 456
----------------------------------- -----------
Total current 456 (11,583) 66,126 (545,042)
Deferred:
Federal (1,652) (20,117) (150,766) 649,272
State (493) (6,009) (45,034) 193,938
----------------------------------- -----------
Total deferred (2,145) (26,126) (195,800) 843,210
----------------------------------- -----------
Net provision (benefit) $(1,689) $(37,709) $(129,674) $ 298,168
=================================== ===========
</TABLE>
11
<PAGE>
Springfield Medical Associates, Inc.
Notes to Consolidated Financial Statements (continued)
6. Income Taxes (continued)
The difference between the provision for income taxes and the amount computed by
applying the statutory federal income tax rate to income before taxes is as
follows:
<TABLE>
<CAPTION>
The period
January 1, 1996
through
Year ended December 31 August 30
1993 1994 1995 1996
------------------------------------------------------- -----------------
Amount Rate Amount Rate Amount Rate Amount Rate
------------------------------------------------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Federal taxes at $11,670 35% $(34,740) 35% $(15,230) 35% $257,596 35%
statutory rates
Add (deduct):
State income tax,
net of federal
tax benefit
(37) 0 (3,609) 4 (19,284) 44 126,356 17
Effect of
valuation
allowance (13,322) (40) (95,160) 219
Other 640 (1) (20,658) (3)
------------------------------------------------------- -----------------
$(1,689) (5)% $(37,709) 38% $(129,674) 298% $363,294 (49)%
======================================================= =================
</TABLE>
At December 31, 1995, the Company had net operating loss carryforwards for tax
purposes of approximately $285,000 which expire beginning in 2005.
12
<PAGE>
Springfield Medical Associates, Inc.
Notes to Consolidated Financial Statements (continued)
7. Affiliation
On August 30, 1996, the Company consummated a long-term affiliation arrangement
with Physicians Quality, Inc. (PQC). Under this arrangement, the physicians
transferred their practices to, and became employees of, a newly formed
professional corporation that is affiliated with PQC. The aggregate
consideration paid to the physicians for the asset purchases and affiliations
was in a combination of cash and PQC common stock.
The results of operations for the period January 1, 1996 through August 30, 1996
do not reflect an annual physicians bonus accrual which the Company's physicians
elected not to receive prior to the affiliation arrangement with PQC.
13
<PAGE>
Alphonse F. Calvanese, M.D., P.C.
Audited Financial Statements
Year ended September 30, 1995 and the period
October 1, 1995 through August 30, 1996 (Unaudited)
Contents
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors...............................................1
Audited Financial Statements
Balance Sheets...............................................................2
Statements of Operations.....................................................3
Statements of Stockholder's Equity...........................................4
Statements of Cash Flows.....................................................5
Notes to Financial Statements................................................6
</TABLE>
<PAGE>
[LETTERHEAD OF ERNST & YOUNG LLP APPEARS HERE]
Report of Independent Auditors
The Board of Directors
Physicians Quality Care, Inc.
We have audited the accompanying balance sheet of Alphonse F. Calvanese, M.D.,
P.C. (the Practice) as of September 30, 1995, and the related statements of
operations, stockholder's equity, and cash flows for the year then ended. These
financial statements are the responsibility of management. Our responsibility
is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Alphonse F. Calvanese, M.D.,
P.C. at September 30, 1995, and the results of operations and cash flows for the
year then ended in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
November 21, 1996
Boston, Massachusetts
1
<PAGE>
Alphonse F. Calvanese, M.D., P.C.
Balance Sheets
<TABLE>
<CAPTION>
September 30 (Unaudited)
1995 August 30, 1996
-------------------------------
<S> <C> <C>
Assets
Current assets:
Cash $ 95,529 $127,191
Accounts receivable, less allowance for
doubtful accounts of $4,123 in 1995 and
$4,078 in 1996 (unaudited) 35,899 32,564
Prepaid expenses 10,654
Deferred income taxes 3,857 2,684
-------------------------------
Total current assets 135,285 173,093
Property and equipment, net 2,048
-------------------------------
Total assets $137,333 $173,093
===============================
Liabilities and stockholder's equity
Current liabilities:
Accounts payable $ 4,424 $ 6,710
Deferred income taxes, current 14,380 17,287
Taxes payable 16,210
Accrued expenses, other 5,168
-------------------------------
Total liabilities 23,972 40,207
Common stock, no par value, 1,000 shares
authorized, issued and outstanding 4,000 4,000
Retained earnings 109,361 128,886
Stockholder's equity 113,361 132,886
-------------------------------
Total liabilities and stockholder's equity $137,333 $173,093
===============================
</TABLE>
See accompanying notes.
2
<PAGE>
Alphonse. F. Calvanese, M.D., P.C.
Statements of Operations
<TABLE>
<CAPTION>
(Unaudited)
October 1, 1995
Year ended through
September 30 August 30
1995 1996
-------------------------------------
<S> <C> <C>
Revenue:
Net patient service revenue $586,191 $538,671
Other income 972
Interest income 3,496 3,302
-------------------------------------
589,687 542,945
Operating expenses:
Salaries and wages--physicians 356,800 328,986
Salaries and wages--staff 58,493 53,556
Employee benefits--physicians 31,576 31,397
Employee benefits--staff 13,277 19,684
Supplies and other 80,684 67,071
Insurance 8,970 3,168
Depreciation 18,781 2,048
Provision for bad debts 4,123 4,078
-------------------------------------
Net operating expenses 572,704 509,988
-------------------------------------
Net income before income taxes 16,983 32,957
Income tax benefit expense 372 (13,432)
-------------------------------------
Net income $ 17,355 $ 19,525
=====================================
</TABLE>
See accompanying notes.
3
<PAGE>
Alphonse F. Calvanese, M.D., P.C.
Statements of Stockholder's Equity
<TABLE>
<S> <C>
Balance at September 30, 1994 $ 96,006
Net income 17,355
---------------
Balance at September 30, 1995 113,361
Net income (unaudited) 19,525
---------------
Balance at August 30, 1996 (unaudited) $132,886
===============
</TABLE>
See accompanying notes.
4
<PAGE>
Alphonse F. Calvanese, M.D., P.C.
Statements of Cash Flows
<TABLE>
<CAPTION>
(Unaudited)
October 1, 1995
Year ended through
September 30 August 30
1995 1996
----------------------------------
<S> <C> <C>
Operating activities
Net income $ 17,355 $ 19,525
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 18,781 2,048
Deferred income taxes (828) 4,080
Changes in operating assets and
liabilities:
Accounts receivable, net (3,097) 3,335
Advance to officer 1,334
Prepaid expenses (10,654)
Accounts payable, accrued expenses
and other current liabilities 5,168 13,328
----------------------------------
Net cash provided by operating activities 38,713 31,662
Investing activity
Purchase of property and equipment (14,648)
----------------------------------
Net cash used in investing activity (14,648)
----------------------------------
Increase in cash 24,065 31,662
Cash at beginning of period 71,464 95,529
----------------------------------
Cash at end of period $ 95,529 $127,191
==================================
</TABLE>
See accompanying notes.
5
<PAGE>
Alphonse F. Calvanese, M.D., P.C.
Notes to the Financial Statements
September 30, 1995
1. Summary of Significant Accounting Policies
Description of Business
The medical practice of Alphonse F. Calvanese, M.D. (the Practice) is organized
under the laws of Massachusetts. The practice offers a variety of primary care
medical services in western Massachusetts.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated using the straight-line method over the estimated useful
lives of the assets. Routine maintenance and repairs are charged to expense as
incurred, while costs of betterments and renewals are capitalized.
Income Taxes
Deferred income taxes are provided for temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes.
Professional Liability Insurance
The practice has obtained professional liability coverage through commercial
insurance carriers on the claims-made basis. Management believes that there are
no claims that may result in a loss in excess of amounts covered by its existing
insurance.
Net Patient Service Revenue
Net patient service revenue is reported at the estimated realizable amounts from
patients, third-party payors and others for services rendered. The Medicare and
Medicaid programs pay physician services based on fee schedules which are
determined by the related government agency. The Practice has negotiated
numerous agreements with managed care organizations to provide physician
services based on fee schedules. No individual managed care contract is
material to the Practice.
6
<PAGE>
Alphonse F. Calvanese, M.D., P.C.
Notes to the Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Risks and Uncertainties
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Unaudited Financial Statements
The unaudited financial statements have been prepared by management in
accordance with generally accepted accounting principles. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results of the
interim periods are not necessarily indicative of the results that may be
expected for a full year.
2. Property and Equipment
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
September 30
1995
------------
<S> <C>
Furniture, fixtures and equipment $133,350
Less accumulated depreciation 131,302
------------
$ 2,048
============
</TABLE>
3. Operating Leases
The Practice leases office space from a related party under an operating lease.
Total rental expense was $33,456 at September 30, 1995 and is included in
supplies and other on the statement of operations.
7
<PAGE>
Alphonse F. Calvanese, M.D., P.C.
Notes to the Financial Statements (continued)
4. Income Taxes
Deferred income taxes reflect the net effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. The Company is a cash-basis
taxpayer. Significant components of the Company's deferred tax liabilities and
assets were as follows:
<TABLE>
<CAPTION>
September 30
1995
------------
<S> <C>
Deferred tax liabilities:
Accounts receivable, net $(14,380)
Prepaid expenses, other
------------
Total deferred tax liabilities (14,380)
Deferred tax assets:
Accrued expenses, other 3,857
Net operating loss carryover
------------
Less valuation allowance
Net deferred tax assets 3,857
------------
Net deferred tax assets (liabilities) $(10,523)
============
</TABLE>
8
<PAGE>
Alphonse F. Calvanese, M.D., P.C.
Notes to the Financial Statements (continued)
4. Income Taxes (continued)
Significant components of the provision (benefit) for income taxes attributable
to continuing operations are as follows:
<TABLE>
<CAPTION>
Year ended September 30
1995
-----------------------
<S> <C>
Current:
Federal
State $ 456
-----------------------
Total current 456
Deferred:
Federal (638)
State (190)
-----------------------
Total deferred $(828)
=======================
Net provision (benefit) $(372)
=======================
</TABLE>
The difference between the provision for income taxes and the amount computed by
applying the statutory federal income tax rate to income before taxes is as
follows:
<TABLE>
<CAPTION>
September 30
1995
----------------
Amount Rate
----------------
<S> <C> <C>
Federal taxes at statutory rates $ 5,944 35 %
Add (deduct):
Federal taxes on income (124) (1)
Taxed at shareholder level
Effect of valuation allowance (6,018) (35)
Other (174) (1)
----------------
$ (372) (2)%
================
</TABLE>
9
<PAGE>
Alphonse F. Calvanese, M.D., P.C.
Notes to the Financial Statements (continued)
5. Affiliation
On August 31, 1996, the Practice consummated a long-term affiliation arrangement
with Physicians Quality Care, Inc. (PQC). Under this arrangement, the
physicians transferred their practices to, and became employees of, a newly
formed professional corporation that is affiliated with PQC. The aggregate
consideration paid to the physicians for the assets purchased and affiliations
was in a combination of cash and PQC common stock.
10
<PAGE>
Cardiology and Internal Medicine Associates, Inc.
Audited Financial Statements
Years ended December 31, 1994 and 1995 and
period January 1, 1996 through August 30, 1996 (Unaudited)
and nine months ended September 30, 1995 (Unaudited)
Contents
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors................................................1
Audited Financial Statements
Balance Sheets................................................................2
Statements of Operations......................................................3
Statements of Stockholder's Equity............................................4
Statements of Cash Flows......................................................5
Notes to Financial Statements.................................................6
</TABLE>
<PAGE>
[LETTERHEAD OF ERNST & YOUNG LLP APPEARS HERE]
Report of Independent Auditors
The Board of Directors
Cardiology and Internal Medicine Associates, Inc.
We have audited the accompanying balance sheets of Cardiology and Internal
Medicine Associates, Inc. (the Group) as of December 31, 1995 and 1994, and the
related statements of operations, stockholder's equity, and cash flows for the
years then ended. These financial statements are the responsibility of the
Group's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cardiology and Internal
Medicine Associates, Inc. at December 31, 1995 and 1994, and the results of its
operations and its cash flows for each of the years then ended, in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
November 21, 1996
Boston, Massachusetts
1
<PAGE>
Cardiology and Internal Medicine Associates, Inc.
Balance Sheets
<TABLE>
<CAPTION>
(Unaudited)
December 31 August 30
1994 1995 1996
--------------------------------
<S> <C> <C> <C>
Assets
Current assets:
Cash $ 43,264 $ 42,974 $ 85,681
Accounts receivable, less
allowance for doubtful
accounts of $17,928 in
1994, $28,680 in 1995 and
$26,191 in 1996 (unaudited) 132,713 157,341 139,085
Prepaid expenses 11,448 10,332 18,203
Due from related parties 1,500
Deferred income taxes 23,955 31,881 8,715
--------------------------------
Total current assets 211,380 244,028 251,684
Property and equipment, net 59,558 46,648 41,910
--------------------------------
Total assets $270,938 $290,676 $293,594
================================
Liabilities and owners' equity
Current liabilities:
Accounts payable $ 9,477 $ 22,339 $ 7,999
Accrued employee benefits 48,699 42,555
Accrued expenses, other 1,711 14,808 13,158
Deferred income taxes 57,664 67,070 62,916
Income tax payable 456 912 21,865
Current portion of notes
payable and line of credit 13,000 6,960
--------------------------------
Total current liabilities 131,007 154,644 105,938
Deferred income taxes,
noncurrent 5,448 2,426
Stockholder's equity:
Common stock, no par value,
12,500 shares authorized,
400 shares issued
and outstanding
Additional paid-in capital 1,000 1,000 1,000
Retained earnings 133,483 132,606 186,656
--------------------------------
134,483 133,606 187,656
--------------------------------
Total liabilities and owners'
equity $270,938 $290,676 $293,594
================================
</TABLE>
See accompanying notes.
2
<PAGE>
Cardiology and Internal Medicine Associates, Inc.
Statements of Operations
<TABLE>
<CAPTION>
(Unaudited)
Nine months January 1
ended 1996 through
Year ended December 31 September 30 August 30
1994 1995 1995 1996
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue:
Net patient service revenue $1,823,131 $1,909,307 $1,369,391 $1,211,521
Other income 26,654 24,078 18,339 17,235
Interest income 822 941 763 498
------------------------------------------------------------------
1,850,607 1,934,326 1,388,493 1,229,254
Operating expenses:
Salaries and wages--physicians 988,839 999,650 680,540 556,110
Salaries and wages--staff 303,453 328,573 245,321 220,902
Employee benefits--physicians 127,360 130,104 89,501 71,278
Employee benefits--staff 42,210 45,712 34,124 25,043
Supplies and other 325,514 343,163 236,402 217,411
Insurance 26,948 44,229 24,815 16,175
Interest 1,672 1,042 885 344
Depreciation 15,140 15,136 11,308 18,487
Provision for bad debts 17,928 28,680 25,000 26,191
------------------------------------------------------------------
Net operating expenses 1,849,064 1,936,289 1,347,896 1,151,941
------------------------------------------------------------------
Net income (loss) before income taxes 1,543 (1,963) 40,597 77,313
Income tax benefit (expense) 5,985 1,086 (9,859) (23,263)
------------------------------------------------------------------
Net income (loss) $ 7,528 $ (877) $ 30,738 $ 54,050
==================================================================
</TABLE>
See accompanying notes.
3
<PAGE>
Cardiology and Internal Medicine Associates, Inc.
Statements of Stockholder's Equity
<TABLE>
<CAPTION>
<S> <C>
Balance at December 31, 1993 $126,955
Net income 7,528
--------
Balance at December 31, 1994 134,483
Net income (loss) (877)
--------
Balance at December 31, 1995 133,606
Net income (unaudited) 54,050
--------
Balance at August 30, 1996 (unaudited) $187,656
========
</TABLE>
See accompanying notes.
4
<PAGE>
Cardiology and Internal Medicine Associates, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
(Unaudited)
Nine months January 1
ended 1996 through
Year ended December 31 September 30 August 30
1994 1995 1995 1996
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating activities
Net income (loss) $ 7,528 $ (877) $ 30,738 $ 54,050
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation 15,140 15,136 11,308 18,487
Deferred income taxes (6,441) (1,542) 7,942 16,586
Changes in operating assets and liabilities:
Accounts receivable, net 19,217 (24,628) 9,541 18,256
Prepaid expenses, due from related parties
and other current assets (40) (384) (3,726) 9,905
Accounts payable, accrued expenses and
other current liabilities 5,030 20,271 (29,397) (53,868)
--------------------------------------------------------------
Net cash provided by operating activities 40,434 7,976 26,406 63,416
Investing activities
Purchase of property and equipment (6,943) (2,226) (997) (13,749)
--------------------------------------------------------------
Net cash used in investing activities (6,943) (2,226) (997) (13,749)
Financing activities
Contribution of capital 250
Payments on notes payable and line of credit (9,819) (6,040) (4,500) (6,960)
--------------------------------------------------------------
Net cash used in financing activities (9,569) (6,040) (4,500) (6,960)
--------------------------------------------------------------
Increase (decrease) in cash 23,922 (290) 20,909 42,707
Cash at beginning of period 19,342 43,264 42,974 42,974
--------------------------------------------------------------
Cash at end of period $43,264 $ 42,974 $ 63,883 $ 85,681
==============================================================
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 1,672 $ 1,042 $ 885 $ 344
==============================================================
</TABLE>
See accompanying notes.
5
<PAGE>
Cardiology and Internal Medicine Associates, Inc.
Notes to Financial Statements
December 31, 1995
1. Summary of Significant Accounting Policies
Description of Business
Cardiology and Internal Medicine Associates, Inc. (CIMA) is a taxable entity
organized under the laws of Massachusetts. CIMA offers a variety of medical
services, including cardiology and primary care in Western Massachusetts.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated using the straight-line method over the estimated useful
lives of the assets. Routine maintenance and repairs are charged to expense as
incurred, while costs of betterments and renewals are capitalized.
Income Taxes
CIMA is taxable under the provisions of the Internal Revenue Code. Deferred
income taxes are provided for temporary differences between the carrying amounts
of assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes.
Professional Liability Insurance
CIMA has obtained professional liability coverage through commercial insurance
carriers on an occurrence basis. Management believes that there are no claims
that may result in a loss in excess of amounts covered by its existing
insurance.
Net Patient Service Revenue
Net patient service revenue is reported at the estimated realizable amounts from
patients, third-party payors and others for services rendered. The Medicare and
Medicaid programs pay physician services based on fee schedules which are
determined by the related government agency. CIMA has negotiated several
agreements with managed care organizations to provide physician services based
on fee schedules. No individual managed care contract is material to CIMA.
6
<PAGE>
Cardiology and Internal Medicine Associates, Inc.
Notes to Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Risks and Uncertainties
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Unaudited Financial Statements
The unaudited financial statements as of September 30, 1996 and for the nine
months ended September 30, 1995 and 1996 have been prepared by management in
accordance with generally accepted accounting principles. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results of the
interim periods are not necessarily indicative of the results that may be
expected for a full year.
2. Property and Equipment
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31
1994 1995
-----------------------
<S> <C> <C>
Furniture, fixtures and equipment $ 185,702 $ 187,928
Leasehold improvements 46,832 46,832
-----------------------
232,534 234,760
Less accumulated depreciation (172,976) (188,112)
-----------------------
$ 59,558 $ 46,648
=======================
</TABLE>
3. Line of Credit
CIMA has negotiated a line of credit with a local bank at an interest rate of
9.72%. This line of credit is secured by all of the practice's assets. At
December 31, 1994 and 1995 the outstanding balance on the line of credit was
$13,000 and $6,960, respectively. The available credit under this line was
$5,000 and $11,040 at December 31, 1994 and 1995.
7
<PAGE>
Cardiology and Internal Medicine Associates, Inc.
Notes to Financial Statements (continued)
4. Operating Leases
CIMA leases office space and certain equipment from a related party under
operating leases. Total rental expense was $97,622 in 1994 and 1995, and is
included in supplies and other in the accompanying combined statements of
operations. The following is a schedule by year of future minimum lease
payments under operating leases as of December 31, 1995:
<TABLE>
<S> <C>
1996 $97,622
1997 97,622
1998 97,622
1999 97,622
2000 89,487
</TABLE>
5. Income Taxes
Deferred income taxes reflect the net effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Each member of CIMA is a cash-
basis taxpayer. Significant components of CIMA's deferred tax liabilities and
assets were as follows:
<TABLE>
<CAPTION>
December 31
1994 1995
---------------------
Deferred tax liabilities:
<S> <C> <C>
Accounts receivable, net $(53,085) $(62,937)
Prepaid expenses, other (4,579) (4,133)
---------------------
Total deferred tax liabilities (57,664) (67,070)
Deferred tax assets:
Accrued expenses, other 23,955 31,881
Accumulated depreciation (5,448) (2,426)
Net operating loss carryover 6,443 5,868
---------------------
24,950 35,323
Less valuation allowance (6,443) (5,868)
---------------------
Net deferred tax assets 18,507 29,455
---------------------
Net deferred tax liabilities $(39,157) $(37,615)
=====================
</TABLE>
8
<PAGE>
Cardiology and Internal Medicine Associates, Inc.
Notes to Financial Statements (continued)
5. Income Taxes (continued)
For financial reporting purposes, a valuation allowance of $16,107 and $14,669
at December 31, 1994 and 1995, respectively, has been recognized to offset
certain deferred tax assets since uncertainty exists with respect to future
realization of these tax assets.
Significant components of the provision (benefit) for income taxes attributable
to continuing operations are as follows:
<TABLE>
<CAPTION>
Year ended December 31
1994 1995
---------------------------
<S> <C> <C>
Current:
Federal - -
State $ 456 $ 456
---------------------------
Total current 456 456
Deferred:
Federal (4,960) (1,187)
State (1,481) (355)
---------------------------
Total deferred (6,441) (1,542)
---------------------------
Net provision (benefit) $(5,985) $(1,086)
===========================
</TABLE>
6. Affiliation
On August 30, 1996, CIMA consummated a long-term affiliation arrangement with
Physicians Quality, Inc. (PQC). Under this arrangement, the physicians
transferred their practices to, and became employees of, a newly formed
professional corporation that is affiliated with PQC. The aggregate
consideration paid to the physicians for the asset purchases and affiliations
was in a combination of cash and PQC common stock.
9
<PAGE>
James F. Haines and William J. Belcastro, Partnership
Audited Financial Statements
Year ended December 31, 1995 and period
January 1, 1996 through August 30, 1996 (Unaudited)
and nine months ended September 30, 1995 (Unaudited)
<TABLE>
<CAPTION>
Contents
<S> <C>
Report of Independent Auditors............................................ 1
Audited Financial Statements
Balance Sheets............................................................ 2
Statements of Operations.................................................. 3
Statements of Partners' Capital........................................... 4
Statements of Cash Flows.................................................. 5
Notes to Financial Statements............................................. 6
</TABLE>
<PAGE>
[LETTERHEAD OF ERNST & YOUNG LLP APPEARS HERE]
Report of Independent Auditors
The Board of Directors
Physicians Quality Care, Inc.
We have audited the accompanying balance sheet of James F. Haines and William J.
Belcastro, Partnership as of December 31, 1995, and the related statements of
operations, partners' capital, and cash flows for the year then ended. These
financial statements are the responsibility of management. Our responsibility
is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of James F. Haines and William J.
Belcastro, Partnership at December 31, 1995, and the results of its operations
and its cash flows for the year then ended, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
November 21, 1996
Boston, Massachusetts
1
<PAGE>
James F. Haines and William J. Belcastro, Partnership
Balance Sheets
<TABLE>
<CAPTION>
(Unaudited)
December 31 August 30
1995 1996
-----------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 51,370 $ 68,410
Accounts receivable, less allowance
for doubtful accounts of $19,014
in 1995 and $13,372 in 1996
(unaudited) 60,592 51,144
Prepaid expenses 13,215 30,244
-----------------------------
Total current assets 125,177 149,798
Furniture and equipment, net 222,579 196,426
-----------------------------
Total assets $347,756 $346,224
=============================
Liabilities and owners' equity
Current liabilities:
Accounts payable $ 13,714 $ 9,271
Accrued expenses, other 6,857
Current portion of notes
payable and line of credit 50,032 50,032
-----------------------------
Total current liabilities 63,746 66,160
Notes payable 254,245 212,152
Partner's capital 29,765 67,912
-----------------------------
Total liabilities and partner's capital $347,756 $346,224
=============================
</TABLE>
See accompanying notes.
2
<PAGE>
James F. Haines and William J. Belcastro, Partnership
Statements of Operations
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Nine months January 1,
Year ended ended 1996 through
December 31 September 30 August 30
1995 1995 1996
------------------------------------------------
<S> <C> <C> <C>
Revenue:
Net patient service revenue $1,009,315 $771,080 $688,081
Other income 793 454
------------------------------------------------
1,010,108 771,080 688,535
Operating expenses:
Salaries and wages--physicians 459,386 310,266 307,549
Salaries and wages--staff 162,197 124,761 109,043
Employee benefits--physicians 62,678 47,158 52,646
Employee benefits--staff 12,000 9,003 501
Supplies and other 148,429 98,341 112,641
Insurance 30,262 20,557 15,783
Interest 25,230 23,125 12,600
Depreciation 63,909 48,308 26,153
Provision for bad debts 19,014 18,432 13,472
------------------------------------------------
Net operating expenses 983,105 699,951 650,388
------------------------------------------------
Net income $ 27,003 $ 71,129 $ 38,147
================================================
</TABLE>
See accompanying notes.
3
<PAGE>
James F. Haines and William J. Belcastro, Partnership
Statements of Partners' Capital
<TABLE>
<S> <C>
Balance at December 31, 1994 $ 2,762
Net income 27,003
---------
Balance at December 31, 1995 29,765
Net income (unaudited) 38,147
---------
Balance at August 30, 1996 (unaudited) $67,912
=========
</TABLE>
See accompanying notes.
4
<PAGE>
James F. Haines and William J. Belcastro, Partnership
Statements of Cash Flows
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Nine months January 1, 1996
Year ended ended through
December 31 September 30 August 30
1995 1995 1996
--------------------------------------------
<S> <C> <C> <C>
Operating activities
Net income (loss) $ 27,003 $ 71,129 $ 38,147
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Depreciation 63,909 48,308 26,153
Changes in operating
assets and liabilities:
Accounts receivable, net (10,101) (19,957) 9,448
Prepaid expenses, due from
related parties and
other current assets 5,614 15,335 (17,029)
Accounts payable, accrued
expenses and other
current liabilities 2,604 10,552 2,414
--------------------------------------------
Net cash provided by operating
activities 89,029 125,367 59,133
Investing activity
Purchase of property and equipment (63,462) (61,463) -
--------------------------------------------
Net cash used in investing activity (63,462) (61,463) -
Financing activities
Issuance of debt 58,500 58,500
Payments on notes payable and line
of credit (64,490) (48,876) (42,093)
--------------------------------------------
Net cash provided (used)
by financing activities (5,990) 9,624 (42,093)
--------------------------------------------
Increase in cash 19,577 73,528 17,040
Cash at beginning of period 31,793 31,793 51,370
--------------------------------------------
Cash at end of period $ 51,370 $105,321 $ 68,410
============================================
Supplemental disclosure of
cash flow information:
Cash paid during the
period for interest $ 25,230 $ 23,125 $ 12,600
============================================
</TABLE>
See accompanying notes.
5
<PAGE>
James F. Haines and William J. Belcastro, Partnership
Notes to Financial Statements
December 31, 1995
1. Summary of Significant Accounting Policies
Description of Business
The medical practice of James F. Haines and William J. Belcastro, Partnership
(the Partnership) is a general partnership organized under the laws of
Massachusetts. The practice offers primary care medical services in Western
Massachusetts.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated using the straight-line method over the estimated useful
lives of the assets. Routine maintenance and repairs are charged to expense as
incurred, while costs of betterments and renewals are capitalized.
Income Taxes
The Partnership is a nontaxable entity under the provisions of the Internal
Revenue Code. The taxable income or loss of the Partnership is allocated to the
partners and then is reported on the partners' individual tax returns.
Therefore, no provision for income taxes is included in these financial
statements.
Professional Liability Insurance
The Partnership has obtained professional liability coverage through commercial
insurance carriers on the claims-made basis. Management believes that there are
no claims that may result in a loss in excess of amounts covered by its existing
insurance.
Net Patient Service Revenue
Net patient service revenue is reported at the estimated realizable amounts from
patients, third-party payors and others for services rendered. The Medicare and
Medicaid programs pay physician services based on fee schedules which are
determined by the related government agency. The Partnership has negotiated
agreements with managed care organizations to provide physician services based
on fee schedules. No individual managed care contract is material to the
Partnership.
6
<PAGE>
James F. Haines and William J. Belcastro, Partnership
Notes to Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Risks and Uncertainties
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Unaudited Financial Statements
The unaudited financial statements have been prepared by management in
accordance with generally accepted accounting principles. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results of the
interim periods are not necessarily indicative of the results that may be
expected for a full year.
2. Property and Equipment
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31
1995
-------------
<S> <C>
Furniture and equipment $584,858
Less accumulated depreciation 362,279
-------------
$222,579
=============
</TABLE>
7
<PAGE>
James F. Haines and William J. Belcastro, Partnership
Notes to Financial Statements
3. Notes Payable
The Partnership has various notes payable with a combined original principal
amount of $304,277 at December 31, 1995 payable in monthly installments of
principal and interest at interest rates ranging from 8.75% to 10.5% and secured
by all the Partnership's assets.
The following is a schedule of principal maturities on the notes as of December
31, 1995:
<TABLE>
<CAPTION>
<S> <C>
1996 $ 50,032
1997 30,535
1998 30,989
1999 28,324
2000 14,183
Thereafter 150,214
----------
$304,277
==========
</TABLE>
4. Employee Benefit Plans
The Partnership has a qualified defined contribution plans covering
substantially all employees. Contributions were determined based upon a
percentage of each eligible employee's compensation, as defined, and/or at the
discretion of management. Total contributions were $12,000 at December 31,
1995, and are included in employee benefits in the accompanying statement of
operations.
5. Affiliation
On August 30, 1996, the Partnership consummated a long-term affiliation
arrangement with Physicians Quality Care, Inc. (PQC). Under this arrangement,
the physicians transferred their practices to, and became employees of, a newly
formed professional corporation that is affiliated with PQC. The aggregate
consideration paid to the physicians for the assets purchased and affiliations
was in a combination of cash and PQC common stock.
8
<PAGE>
Jay M. Ungar, M.D.
Audited Financial Statements
Year ended December 31, 1995 and period
January 1 through August 30, 1996 (Unaudited) and
nine months ended September 30, 1995 (Unaudited)
<TABLE>
<CAPTION>
Contents
<S> <C>
Report of Independent Auditors............................................. 1
Audited Financial Statements
Balance Sheets............................................................. 2
Statements of Operations................................................... 3
Statements of Cash Flows................................................... 4
Notes to Financial Statements.............................................. 5
</TABLE>
<PAGE>
[LETTERHEAD OF ERNST & YOUNG LLP APPEARS HERE]
Report of Independent Auditors
The Board of Directors
Physicians Quality Care, Inc.
We have audited the accompanying balance sheet of Jay M. Ungar, M.D. as of
December 31, 1995, and the related statements of operations, and cash flows for
the year then ended. These financial statements are the responsibility of
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Jay M. Ungar, M.D. at December
31, 1995, and the results of operations and cash flows for the year then ended,
in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
November 21, 1996
Boston, Massachusetts
1
<PAGE>
Jay M. Ungar, M.D.
Balance Sheets
<TABLE>
<CAPTION>
December 31 (Unaudited)
1995 August 30, 1996
----------------------------------
<S> <C> <C>
Assets
Current assets:
Cash $ 8,655 $24,645
Accounts receivable, less allowance
for doubtful accounts of $18,982 in
1995 and $16,733 in 1996
(Unaudited) 39,531 24,917
Prepaid expenses 4,500 4,939
Other current assets 18,000 18,000
----------------------------------
Total current assets 70,686 72,501
Property and equipment, net 328
----------------------------------
Total assets $71,014 $72,501
==================================
Liabilities and owners' equity
Current liabilities:
Accounts payable $ 7,700 $10,801
Accrued employee benefits 34,000 34,000
----------------------------------
Total current liabilities 41,700 44,801
Owners' equity 29,314 27,700
----------------------------------
Total liabilities and owners' equity $71,014 $72,501
==================================
</TABLE>
See accompanying notes.
2
<PAGE>
Jay M. Ungar, M.D.
Statements of Operations
<TABLE>
<CAPTION>
(Unaudited)
Nine months (Unaudited)
Year ended ended January 1, 1996
December 31 September 30 through August 30
1995 1995 1996
-------------------------------------------------
<S> <C> <C> <C>
Revenue:
Net patient service revenue $575,448 $422,964 $337,054
Other income 727 26,451
Interest income 639 485 267
-------------------------------------------------
576,087 424,176 363,772
Operating expenses:
Salaries and wages--physicians 305,632 229,668 162,140
Salaries and wages--staff 108,172 81,128 94,957
Employee benefits--physicians 36,675 29,543 22,099
Employee benefits--staff 21,634 17,350 11,900
Supplies and other 66,895 49,012 43,460
Insurance 24,021 3,902 13,769
Depreciation 328
Provision for bad debts 18,982 14,236 16,733
-----------------------------------------------
Net operating expenses 582,011 424,839 365,386
-----------------------------------------------
Net loss $ (5,924) $ (663) $ (1,614)
===============================================
</TABLE>
See accompanying notes.
3
<PAGE>
Jay M. Ungar, M.D.
Statements of Cash Flows
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Nine months January 1
Year ended ended 1996 through
December 31 September 30 August 30
1995 1995 1996
---------------------------------------------------
<S> <C> <C> <C>
Operating activities
Net loss $(5,924) $ (663) $(1,614)
Adjustments to reconcile
net loss to net cash
provided by operating
activities:
Depreciation 328
Changes in operating
assets and liabilities:
Accounts receivable, (258) 18,649 14,614
net
Other current assets 4,500 (439)
Accounts payable 3,101
---------------------------------------------------
Net cash provided (used) by (6,182) 22,486 15,990
operating activities
Cash at beginning of period 14,837 14,837 8,655
---------------------------------------------------
Cash at end of period $ 8,655 $37,323 $24,645
===================================================
</TABLE>
See accompanying notes.
4
<PAGE>
Jay M. Ungar, M.D.
Notes to Financial Statements
December 31, 1995
1. Summary of Significant Accounting Policies
Description of Business
The medical practice of Dr. Jay M. Ungar, M.D. (the Practice) is a sole
proprietorship which offers primary care medical services.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated using the straight-line method over the estimated useful
lives of the assets. Routine maintenance and repairs are charged to expense as
incurred, while costs of betterments and renewals are capitalized.
Professional Liability Insurance
The Practice has obtained professional liability coverage through commercial
insurance carriers on a claims-made basis. Management believes that there are
no claims that may result in a loss in excess of amounts covered by its existing
insurance.
Net Patient Service Revenue
Net patient service revenue is reported at the estimated realizable amounts from
patients, third-party payors and others for services rendered. The Medicare and
Medicaid programs pay physician services based on fee schedules which are
determined by the related government agency. The practice has negotiated
numerous agreements with managed care organizations to provide physician
services based on fee schedules.
Risks and Uncertainties
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
5
<PAGE>
Jay M. Ungar, M.D.
Notes to Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Unaudited Combined Financial Statements
The unaudited financial statements at August 30, 1996 and for the nine months
ended September 30, 1995 and the period January 1, 1996 through August 30, 1996
have been prepared by management in accordance with generally accepted
accounting principles. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results of the interim periods are
not necessarily indicative of the results that may be expected for a full year.
2. Property and Equipment
Property and equipment consisted of the following:
December 31
1995
-------------
Furniture, fixtures and equipment $24,072
Less accumulated depreciation 23,744
-------------
$ 328
=============
3. Affiliation
On August 31, 1996, Jay M. Ungar, M.D. consummated a long-term affiliation
arrangement with Physicians Quality Care, Inc. (PQC). Under this arrangement,
the physician transferred his practices to, and became an employee of, a newly
formed professional corporation that is affiliated with PQC. The aggregate
consideration paid to the physician for the asset purchases and affiliations was
in a combination of cash and PQC common stock.
6
<PAGE>
Western Massachusetts Medical Group, Inc.
Audited Financial Statements
Year ended November 30, 1995 and the period
December 1, 1995 through August 30, 1996 (Unaudited) and
nine months ended August 31, 1995 (Unaudited)
<TABLE>
<CAPTION>
Contents
<S> <C>
Report of Independent Auditors.............................................1
Audited Financial Statements
Balance Sheets.............................................................2
Statements of Operations...................................................3
Statements of Stockholder's Equity.........................................4
Statements of Cash Flows...................................................5
Notes to Financial Statements..............................................6
</TABLE>
<PAGE>
[LETTERHEAD OF ERNST & YOUNG LLP APPEARS HERE]
Report of Independent Auditors
The Board of Directors
Physicians Quality Care, Inc.
We have audited the accompanying balance sheets Western Massachusetts Medical
Group, Inc. as of November 30, 1995, and the related statements of operations,
stockholder's equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Group's management. Our responsibility
is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Western Massachusetts Medical
Group, Inc. at November 30, 1995, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
November 21, 1996
Boston, Massachusetts
1
<PAGE>
Western Massachusetts Medical Group, Inc.
Balance Sheets
<TABLE>
<CAPTION>
(Unaudited)
November 30 August 30
1995 1996
--------------------------
<S> <C> <C>
Assets
Current assets:
Cash $ 83,930 $ 32,358
Accounts receivable, less allowance for doubtful
accounts of $17,328 in 1995 and $19,079 in
1996 (unaudited) 84,601 93,174
Prepaid expenses 14,685 27,437
Due from related parties 1,342
Other current assets 23,839 25,288
Deferred income taxes 13,984 11,266
Income tax receivable 8,371
-------------------------
Total current assets 222,381 197,894
Property and equipment, net 83,426 72,229
-------------------------
Total assets $305,807 $270,123
=========================
Liabilities and stockholder's equity
Liabilities:
Accounts payable $ 34,734 $ 28,165
Deferred income taxes 39,715 48,244
Taxes payable 11,602
Current portion of notes payable and line of credit 8,251 8,730
-------------------------
Total current liabilities 94,302 85,139
Deferred income taxes 13,674 13,840
Notes payable 6,663 761
Stockholder's equity:
Common stock, no par value, 15,000 shares
authorized, 8,000 shares issued and
outstanding
Additional paid-in capital 400 400
Retained earnings 190,768 169,983
-------------------------
Total stockholder's equity 191,168 170,383
-------------------------
Total liabilities and stockholder's equity $305,807 $270,123
=========================
</TABLE>
See accompanying notes.
2
<PAGE>
Western Massachusetts Medical Group, Inc.
Statements of Operations
<TABLE>
<CAPTION>
Nine months December 1,
Year ended ended 1995 through
November 30 August 31 August 30
1995 1995 1996
---------------------------------------------------
<S> <C> <C> <C>
Revenue:
Net patient service
revenue $1,295,882 $ 966,099 $895,292
Interest income 1,909 1,647 919
---------------------------------------------------
1,297,791 967,746 896,211
Operating expenses:
Salaries and
wages--physicians 500,410 445,411 319,106
Salaries and wages--staff 293,891 261,590 189,341
Employee benefits--physicians 95,414 80,329 48,000
Employee benefits--staff 63,610 47,178 32,000
Supplies and other 288,002 205,495 270,770
Insurance 27,718 20,718 22,887
Interest 379 34 1,593
Depreciation 22,259 16,142 22,779
Provision for bad debts 17,328 14,191 19,079
---------------------------------------------------
Net operating expenses 1,309,011 1,091,088 925,555
---------------------------------------------------
Net loss before income taxes (11,220) (123,342) (29,344)
Income tax benefit 6,944 54,801 8,559
---------------------------------------------------
Net loss $ (4,276) $ (68,541) $(20,785)
===================================================
</TABLE>
See accompanying notes.
3
<PAGE>
Western Massachusetts Medical Group, Inc.
Statements of Stockholder's Equity
<TABLE>
<CAPTION>
<S> <C>
Balance at November 30, 1994 $195,444
Net loss (4,276)
----------
Balance at November 30, 1995 191,168
Net loss (unaudited) (20,785)
----------
Balance at August 30, 1996 (unaudited) $170,383
==========
</TABLE>
See accompanying notes.
4
<PAGE>
Western Massachusetts Medical Group, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
(Unaudited)
December 1, 1995
Year ended Nine months ended through
November 30 August 31 August 30
1995 1995 1996
----------------------------------------------------
<S> <C> <C> <C>
Operating activities
Net loss $ (4,276) $(68,541) $(20,785)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 22,259 16,142 22,779
Deferred income taxes (18,546) (55,257) (19,882)
Changes in operating assets and liabilities:
Accounts receivable, net 16,929 21,806 (8,573)
Prepaid expenses due from related parties
and other current assets (6,026) 2,025 (12,859)
Accounts payable, accrued expenses and
other current liabilities 22,787 64,049 4,753
----------------------------------------------------
Net cash provided (used) by operating activities 33,127 (19,776) (34,567)
Investing activity
Purchase of property and equipment (29,608) (23,991) (11,582)
----------------------------------------------------
Net cash provided (used) by investing activity (29,608) (23,991) (11,582)
Financing activities
Principal payments on long-term debt (4,456) (2,500) (5,423)
Issuance of debt 16,870 16,870
----------------------------------------------------
Net cash provided (used) by financing activities 12,414 14,370 (5,423)
----------------------------------------------------
Increase (decrease) in cash 15,933 (29,397) (51,572)
Cash at beginning of period 67,997 67,997 83,930
----------------------------------------------------
Cash at end of period $ 83,930 $ 38,600 $ 32,358
====================================================
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 379 $ 34 $ 1,593
====================================================
</TABLE>
See accompanying notes.
5
<PAGE>
Western Massachusetts Medical Group, Inc.
Notes to Financial Statements
November 30, 1995
1. Summary of Significant Accounting Policies
Description of Business
Western Massachusetts Medical Group, Inc. (the Group) is a taxable entity
organized under the laws of Massachusetts. The Group offers primary medical
services in Western Massachusetts.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated using the straight-line method over the estimated useful
lives of the assets. Routine maintenance and repairs are charged to expense as
incurred, while costs of betterments and renewals are capitalized.
Income Taxes
The Group is taxable under the provisions of the Internal Revenue Code. Deferred
income taxes are provided for temporary differences between the carrying amounts
of assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes.
Professional Liability Insurance
The Group has obtained professional liability coverage through commercial
insurance carriers on the occurrence basis. Management believes that there are
no claims that may result in a loss in excess of amounts covered by its existing
insurance.
Net Patient Service Revenue
Net patient service revenue is reported at the estimated realizable amounts from
patients, third-party payors and others for services rendered. The Medicare and
Medicaid programs pay physician services based on fee schedules which are
determined by the related government agency. The Group has negotiated numerous
agreements with managed care organizations to provide physician services based
on fee schedules. No individual managed care contract is material to the Group.
6
<PAGE>
Western Massachusetts Medical Group, Inc.
Notes to Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Risks and Uncertainties
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Unaudited Financial Statements
The unaudited financial statements have been prepared by management in
accordance with generally accepted accounting principles. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results of the
interim periods are not necessarily indicative of the results that may be
expected for a full year.
2. Property and Equipment
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
November 30
1995
-------------
<S> <C>
Furniture, fixtures and equipment $340,898
Less accumulated depreciation 257,472
-------------
Total $ 83,426
=============
</TABLE>
7
<PAGE>
Western Massachusetts Medical Group, Inc.
Notes to Financial Statements (continued)
3. Notes Payable
The Group has a note payable with an original principal amount of $16,870,
payable in monthly installments of principal and interest at 8.5% secured by the
Groups' respective assets. The principal balance outstanding under the notes
payable agreement is $14,914 at November 30, 1995.
The following is a schedule of principal maturities on the notes and line of
credit as of November 30, 1995:
<TABLE>
<S> <C>
1996 $ 8,251
1997 6,663
---------
Total $14,914
=========
</TABLE>
4. Operating Leases
The Group leases office space and certain equipment under operating leases.
Total rental expense was $66,572 in 1995, and is included in supplies and other
in the accompanying combined statements of operations.
5. Employee Benefit Plans
The Group has a qualified defined contribution plan or profit sharing plans
covering substantially all employees. Contributions were determined based upon
a percentage of each eligible employee's compensation, as defined and/or at the
discretion of management. Total contributions were $153,912 for the year ended
November 30, 1995, and are included in employee benefits in the accompanying
statements of operations.
8
<PAGE>
Western Massachusetts Medical Group, Inc.
Notes to Financial Statements (continued)
6. Income Taxes
Deferred income taxes reflect the net effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Each member of the Group is a
cash-basis taxpayer. Significant components of the Group's deferred tax
liabilities and assets were as follows:
<TABLE>
<CAPTION>
November 30
1995
-------------
<S> <C>
Deferred tax liabilities:
Accounts receivable, net $(33,841)
Prepaid expenses, other (5,874)
-------------
Total deferred tax liabilities (39,715)
Deferred tax assets:
Accrued expenses, other 220
Net operating loss carryover 9,075
-------------
9,295
Less: valuation allowance 9,075
-------------
Net deferred tax assets 220
-------------
Net deferred tax liabilities $(39,495)
=============
</TABLE>
For financial reporting purposes a valuation allowance of $9,075 at November 30,
1995, has been recognized to offset certain deferred tax assets since
uncertainty exists with respect to future realization of these tax assets.
9
<PAGE>
Western Massachusetts Medical Group, Inc.
Notes to Financial Statements (continued)
6. Income Taxes (continued)
Significant components of the provision (benefit) for income taxes attributable
to continuing operations are as follows:
<TABLE>
<CAPTION>
November 30
1995
--------------
<S> <C>
Current:
Federal $ 11,146
State 456
--------------
Total current 11,602
Deferred:
Federal (14,286)
State (4,260)
--------------
Total deferred (18,546)
--------------
Net provision (benefit) $ (6,944)
==============
</TABLE>
The difference between the provision for income taxes and the amount computed by
applying the statutory federal income tax rate to income before taxes is as
follows:
<TABLE>
<CAPTION>
Year ended
November 30, 1995
--------------------------
Amount Rate
--------------------------
<S> <C> <C>
Federal taxes at statutory rates $(3,927) 35%
Add (deduct):
State tax, net of federal benefit (2,451) 22
Other (566) 5
--------------------------
$(6,944) 62%
==========================
</TABLE>
10
<PAGE>
Western Massachusetts Medical Group, Inc.
Notes to Financial Statements (continued)
7. Affiliation
On August 30, 1996, the Western Massachusetts Medical Group, Inc. consummated a
long-term affiliation arrangement with Physicians Quality Care, Inc. (PQC).
Under this arrangement, the physicians transferred their practices to, and
became employees of, a newly formed professional corporation that is affiliated
with PQC. The aggregate consideration paid to the physicians for the asset
purchases and affiliations was in a combination of cash and PQC common stock.
11
<PAGE>
Annapolis Medical Specialists, LLP
Audited Financial Statements
Years ended December 31, 1993, 1994 and 1995, and
nine months ended September 30, 1995 (Unaudited) and
nine months ended September 30, 1996 (Unaudited)
Contents
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors............................................ 1
Audited Financial Statements
Balance Sheet............................................................. 2
Statements of Operations.................................................. 3
Statements of Stockholder's Equity........................................ 4
Statements of Cash Flows.................................................. 5
Notes to Financial Statements............................................. 7
</TABLE>
<PAGE>
[LETTERHEAD OF ERNST & YOUNG LLP APPEARS HERE]
Report of Independent Auditors
The Board of Directors
Physicians Quality Care, Inc.
We have audited the accompanying balance sheets of Annapolis Medical
Specialists, LLP (the Partnership) as of December 31, 1994 and 1995 and the
related statements of operations, partners capital, and cash flows each of the
three years in the period ended December 31, 1995. These financial statements
are the responsibility of management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Annapolis Medical Specialists,
LLP, at December 31, 1994 and 1995 and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
/S/ ERNST & YOUNG LLP
September 20, 1996
Boston, Massachusetts
<PAGE>
Annapolis Medical Specialists, LLP
Balance Sheets
<TABLE>
<CAPTION>
(Unaudited)
December 31 September 30
1994 1995 1996
-------------------------------------
<S> <C> <C> <C>
Assets
Current assets:
Cash $ 46,706 $ 64,280 $203,974
Accounts receivable, less allowance
for doubtful accounts of $130,611
in 1994, $85,081 in 1995 and $98,887
in 1996 (unaudited) 399,774 357,906 362,742
Prepaids and other assets 35,726 40,773 57,267
-------------------------------------
Total current assets 482,206 462,959 623,983
Property and equipment, net 162,526 122,248 94,455
-------------------------------------
Total assets $644,732 $ 585,207 $718,438
=====================================
Liabilities and partners' capital
Current liabilities:
Accounts payable $150,693 $ 168,293 $292,830
Accrued employee benefits 54,821 84,117 73,498
Accrued expenses, other 36,518 46,594 52,264
Current portion of obligation
under capital lease 18,168 20,169 14,288
Current portion of notes payable 70,777 44,869
-------------------------------------
Total current liabilities 330,977 364,042 432,880
Notes payable 45,100
Obligation under capital lease 29,215 9,046
Partners' capital 248,582 334,368 378,393
Due from partners (9,142) (122,249) (92,835)
-------------------------------------
Total liabilities and partners' capital $644,732 $ 585,207 $718,438
=====================================
</TABLE>
See accompanying notes.
2
<PAGE>
Annapolis Medical Specialists, LLP
Statements of Operations
<TABLE>
<CAPTION>
(Unaudited)
Nine months ended
Year ended December 31 September 30
1993 1994 1995 1995 1996
---------------------------------------------------------------
Revenue:
<S> <C> <C> <C> <C> <C>
Net patient service revenue $3,565,656 $4,480,340 $5,190,789 $3,782,202 $4,233,015
Rental income 97,528 139,406 77,872 77,872
Other income 6,205 17,333 33,087 28,029 12,722
---------------------------------------------------------------
3,669,389 4,637,079 5,301,748 3,888,103 4,245,737
Operating expenses:
Salaries and wages--physicians 1,679,221 1,939,649 2,304,117 1,692,307 1,633,578
Salaries and wages--staff 898,693 1,075,985 1,268,605 971,359 1,048,364
Employee benefits--staff 39,616 57,612 73,434 54,053 32,889
Supplies and other 607,503 964,837 1,218,922 938,013 1,147,835
Insurance 57,765 65,505 74,107 56,602 61,427
Interest 22,747 21,825 12,988 10,861 4,657
Rent 222,761 227,663 238,897 171,607 214,321
Depreciation and amortization 63,306 60,686 63,883 47,912 44,835
Provision for bad debts 109,539 130,611 85,081 (27,654) 13,806
---------------------------------------------------------------
Net operating expenses 3,701,151 4,544,373 5,340,034 3,915,060 4,201,712
---------------------------------------------------------------
Net income (loss) $ (31,762) $ 92,706 $ (38,286) $ (26,957) $ 44,025
===============================================================
</TABLE>
See accompanying notes.
3
<PAGE>
Annapolis Medical Specialists, LLP
Statements of Partners' Capital
<TABLE>
<CAPTION>
Total Partners'
Capital
-----------------
<S> <C>
Balance at December 31, 1992 $243,458
Capital contributions by newly admitted partner 25,144
Capital withdrawals by departing partner (24,907)
Net loss (31,762)
-----------------
Balance at December 31, 1993 211,933
Capital withdrawals by partners (56,057)
Net income 92,706
-----------------
Balance at December 31, 1994 248,582
Capital contributions by newly admitted partners 148,655
Capital withdrawals by partners (24,583)
Net loss (38,286)
-----------------
Balance at December 31, 1995 334,368
Net income (unaudited) 44,025
-----------------
Balance at September 30, 1996 (unaudited) $378,393
=================
</TABLE>
See accompanying notes.
4
<PAGE>
Annapolis Medical Specialists, LLP
Statements of Cash Flows
<TABLE>
<CAPTION>
(Unaudited)
Nine months ended
Year ended December 31 September 30
1993 1994 1995 1995 1996
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating activities
Net income (loss) $(31,762) $ 92,706 $(38,286) $(26,957) $ 44,025
Adjustments to reconcile net income
(loss) to net cash provided by operating
activities:
Depreciation and amortization 63,306 60,686 63,883 47,912 44,835
Changes in operating assets and
liabilities:
Accounts receivable 26,782 (123,398) 41,868 (1,134) (4,836)
Other current assets (248) (4,141) (5,047) (4,707) (16,494)
Accounts payable, accrued
expenses and other current
liabilities 69,321 125,249 56,972 45,145 119,588
--------------------------------------------------------
Net cash provided by operating activities 127,399 151,102 119,390 60,259 187,118
Investing activity
Purchase of property and equipment, net (29,460) (24,124) (23,605) (9,110) (17,042)
--------------------------------------------------------
Net cash used in investing activity (29,460) (24,124) (23,605) (9,110) (17,042)
Financing activities
Contribution of capital 16,760 16,002 35,548 18,554 29,414
Withdrawals of capital (56,057) (24,583)
Payments on obligation under capital
lease (14,739) (16,364) (18,168) (13,446) (14,927)
Payments on notes payable (73,333) (77,365) (71,008) (54,108) (44,869)
--------------------------------------------------------
Net cash used in financing activities (71,312) (133,784) (78,211) (49,000) (30,382)
--------------------------------------------------------
Net increase (decrease) in cash 26,627 (6,806) 17,574 2,149 139,694
Cash at beginning of year 26,885 53,512 46,706 46,706 64,280
--------------------------------------------------------
Cash at end of year $ 53,512 $ 46,706 $ 64,280 $ 48,855 $203,974
========================================================
</TABLE>
5
<PAGE>
Annapolis Medical Specialists, LLP
Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
(Unaudited)
Nine months ended
Year ended December 31 September 30
1993 1994 1995 1995 1996
--------------------------------------------------
<S> <C> <C> <C> <C> <C>
Supplemental disclosure of cash
flow information:
Interest paid $23,766 $21,671 $ 12,498 $ 15,494 $4,282
==================================================
Noncash transactions:
Issuance of note payable for
partner withdrawal $24,907 - - - -
==================================================
Issuance of notes receivable
for partner admission $25,144 - $122,249 $148,655 -
==================================================
</TABLE>
See accompanying notes.
6
<PAGE>
Annapolis Medical Specialists, LLP
Notes to Financial Statements
September 30, 1996
1. Summary of Significant Accounting Policies
Description of Business
Annapolis Medical Specialists, LLP (the Partnership) is a limited liability
partnership organized under the laws of Maryland. The Partnership offers a
variety of medical services, including cardiology, hematology/oncology,
infectious disease, pulmonary/critical care and internal medicine, in the
greater Annapolis, Maryland area.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated using the straight-line method over the estimated useful
lives of the assets. Routine maintenance and repairs are charged to expense as
incurred. Amortization of assets recorded under capital lease transactions is
included in depreciation expense.
Income Taxes
For tax purposes, Annapolis Medical Specialists, LLP is treated as a partnership
and a pass-through entity. The taxable income or loss of the practice is
allocated to the partners and reported on the partners' tax returns. Therefore,
no provision for income taxes is included in these financial statements.
Professional Liability Insurance
The Partnership has obtained professional liability coverage through commercial
insurance carriers on a claims-made basis. Management believes that there are
no claims that may result in a loss in excess of amounts covered by its existing
insurance.
Net Patient Service Revenue
Net patient service revenue is reported at the estimated realizable amounts from
patients, third-party payors and others for services rendered. The Medicare and
Medicaid programs pay physician services based on fee schedules which are
determined by the related government agency. The Partnership has negotiated
numerous agreements with managed care organizations to provide physician
services based on fee schedules. No individual managed care contract is
material to the Partnership.
7
<PAGE>
Annapolis Medical Specialists, LLP
Notes to Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Risks and Uncertainties
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Unaudited Financial Statements
The unaudited financial statements as of September 30, 1996 and for the nine
months ended September 30, 1995 and 1996 have been prepared by management in
accordance with generally accepted accounting principles. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results of the
interim periods are not necessarily indicative of the results that may be
expected for a full year.
2. Property and Equipment
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31
1994 1995
--------------------------
<S> <C> <C>
Furniture, fixtures and equipment $460,610 $479,773
Leasehold improvements 9,379 9,379
--------------------------
469,989 489,152
Less accumulated depreciation 307,463 366,904
--------------------------
$162,526 $122,248
==========================
</TABLE>
8
<PAGE>
Annapolis Medical Specialists, LLP
Notes to Financial Statements (continued)
3. Notes Payable
The Partnership has two notes payable with a combined original principal amount
of $324,907, payable in monthly installments of principal and interest at
interest rates ranging from 8.5% to prime plus 1.25%. The principal balance
outstanding of these notes payable was $115,877 and $44,869 at December 31, 1994
and 1995, respectively. The notes payable are scheduled to be paid in 1996.
The assets of the Partnership have been pledged as security interest to one of
the notes payable. The carrying amounts of the notes approximate their fair
value.
4. Capital Leases
The Partnership leases certain medical equipment under long-term leases and has
the option to purchase the equipment for a nominal cost at the termination of
the lease. Property, plant and equipment includes the following amounts for
leases that have been capitalized:
<TABLE>
<CAPTION>
1994 1995
----------------------
<S> <C> <C>
Furniture, fixtures and equipment $84,865 $84,865
Less accumulated depreciation 42,432 59,405
----------------------
Total $42,433 $25,460
======================
Future minimum lease payments for capital leases were as follows at
December 31, 1995:
1996 $22,284
1997 11,142
---------
Total minimum lease payments 33,426
Less amount representing interest 4,211
---------
Present value of net minimum lease payments 29,215
Less current maturities 20,169
---------
Long-term obligation $ 9,046
=========
</TABLE>
9
<PAGE>
Annapolis Medical Specialists, LLP
Notes to Financial Statements (continued)
5. Operating Leases
The Partnership leases office space and certain equipment under operating
leases. Total rental expense was $222,761, $227,663 and $238,897 in 1993, 1994
and 1995, respectively. The following is a schedule by year of future minimum
lease payments under operating leases as of December 31, 1995:
<TABLE>
<CAPTION>
<S> <C>
1996 $243,015
1997 85,954
1998 1,713
1999 1,428
----------
Total future minimum lease payments $332,110
==========
</TABLE>
6. Related Parties
Upon admission to the Partnership, a loan may be extended to new partners for
the value of their partnership interest. The loans have varying maturities with
interest rates set at prime plus 1%. The principal balance outstanding under
these notes receivable agreements were $9,142 and $122,249 at December 31, 1994
and 1995, respectively.
7. Employee Benefit Plans
The Partnership has a defined contribution plan and profit sharing plan covering
substantially all employees, excluding partners. Contributions are determined
based upon a percentage of each eligible employee's compensation, as defined
and/or at the discretion of management. Total contributions were $33,572,
$36,357 and $39,328 for the years ended December 31, 1993, 1994 and 1995,
respectively, and are included in employee benefits in the accompanying
statements of operations.
8. Pending Affiliation
The Partnership expects to enter into a long-term affiliation arrangement with
Physicians Quality Care, Inc. (PQC). Under this arrangement, the Partnership
will sell certain assets to, and the physicians will become employees of, a
newly formed professional corporation that is affiliated with PQC. In addition,
certain professional corporations that are partners of the Partnership may merge
into the newly formed professional corporation that is affiliated with PQC. The
aggregate consideration to be paid to the Partnership, the physicians and the
related professional corporations for the asset purchases and affiliations is
subject to working capital adjustments and is payable in cash and common stock
of PQC.
10
<PAGE>
Drs. Fortier, Libber, Clemmens & Weimer, P.A.
Audited Financial Statements
Year ended December 31, 1995 and nine
months ended September 30, 1995 (Unaudited)
and September 30, 1996 (Unaudited)
Contents
<TABLE>
<S> <C>
Report of Independent Auditors............................................. 1
Audited Financial Statements
Balance Sheets............................................................. 2
Statements of Operations................................................... 3
Statements of Shareholders' Equity......................................... 4
Statements of Cash Flows................................................... 5
Notes to Financial Statements.............................................. 6
</TABLE>
75
<PAGE>
[LETTERHEAD OF ERNST & YOUNG LLP APPEARS HERE]
Report of Independent Auditors
The Board of Directors
Physicians Quality Care, Inc.
We have audited the accompanying balance sheet of Drs. Fortier, Libber, Clemmens
& Weimer, P.A. as of December 31, 1995, and the related statements of
operations, shareholders' equity, and cash flows for the year then ended. These
financial statements are the responsibility of management. Our responsibility
is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Drs. Fortier, Libber, Clemmens
& Weimer, P.A. at December 31, 1995, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
September 20, 1996
Boston, Massachusetts
1
<PAGE>
Drs. Fortier, Libber, Clemmens & Weimer, P.A.
Balance Sheets
<TABLE>
<CAPTION>
(Unaudited)
December 31 September 30
1995 1996
----------------------------
<S> <C> <C>
Assets
Current assets:
Cash $ 18,972 $ 22,021
Accounts receivable, less allowance
for doubtful accounts of $65,062 in
1995 and $63,640 in 1996 (unaudited) 149,264 145,989
Prepaid expenses 19,632 20,110
Deferred income taxes 28,134 35,528
----------------------------
Total current assets 216,002 223,648
Deferred income taxes, noncurrent 4,268 3,352
Property and equipment, net 88,521 69,891
----------------------------
Total assets $ 308,791 $ 296,891
============================
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 47,309 $ 55,769
Accrued employee benefits 15,879 11,872
Accrued salaries and payroll taxes 32,486 21,479
Due to former shareholders, current
portion 27,241 27,955
Income taxes payable 4,393 8,093
Deferred income taxes 67,372 70,788
Line of credit 50,000 87,000
Current portion of obligation under
capital lease 3,005 3,005
Current portion of note payable to bank 17,955
----------------------------
Total current liabilities 265,640 285,961
Deferred income taxes, noncurrent 9,945 3,727
Due to former shareholders, noncurrent 46,120 25,061
Obligation under capital lease, less
current portion 7,664 5,376
Note payable, less current portion
Shareholders' equity:
Common stock, no stated par value,
300 shares outstanding 8,000 8,000
Additional paid-in capital 1,012 1,012
Retained earnings 108,539 105,883
----------------------------
117,551 114,895
Less treasury stock, at cost, 60 shares (138,129) (138,129)
----------------------------
Total shareholders' equity (20,578) (23,234)
----------------------------
Total liabilities and shareholders' equity $ 308,791 $ 296,891
============================
</TABLE>
See accompanying notes.
2
<PAGE>
Drs. Fortier, Libber, Clemmens & Weimer, P.A.
Statements of Operations
<TABLE>
<CAPTION>
(Unaudited)
Year ended Nine months ended
December 31 September 30
1995 1995 1996
---------------------------------------------
<S> <C> <C> <C>
Revenue:
Net patient service revenue $2,107,977 $1,629,704 $1,710,430
Other income 87 33,436 17,671
Interest income 39,594 65 38
---------------------------------------------
2,147,658 1,663,205 1,728,139
Operating expenses:
Salaries and wages--physicians 506,336 340,281 373,649
Salaries and wages--staff 772,305 575,975 674,980
Employee benefits 3,267 2,258 2,070
Supplies and other 383,493 286,385 342,704
Rent 211,644 159,833 170,755
Insurance 116,194 82,542 75,404
Interest 14,191 9,773 11,196
Depreciation 29,303 21,977 21,977
Provision for bad debts 64,062 60,828 63,640
---------------------------------------------
Net operating expenses 2,100,795 1,539,852 1,736,375
---------------------------------------------
Net income (loss) before
income taxes 46,863 123,353 (8,236)
Income tax (provision) benefit (13,987) (55,989) 5,580
---------------------------------------------
Net income (loss) $ 32,876 $ 67,364 $ (2,656)
=============================================
</TABLE>
See accompanying notes.
3
<PAGE>
Drs. Fortier, Libber, Clemmens & Weimer, P.A.
Statements of Shareholders' Equity
<TABLE>
<S> <C>
Balance at December 31, 1994 $ 14,805
Net income 32,876
Purchase of treasury stock (cash) (21,000)
Purchase of treasury stock (noncash) (47,259)
------------
Balance at December 31, 1995 (20,578)
Net loss (unaudited) (2,656)
------------
Balance at September 30, 1996 (unaudited) $(23,234)
============
</TABLE>
See accompanying notes.
4
<PAGE>
Drs. Fortier, Libber, Clemmens & Weimer, P.A.
Statements of Cash Flows
<TABLE>
<CAPTION>
(Unaudited)
Year ended Nine months ended
December 31 September 30
1995 1995 1996
---------------------------------------------
<S> <C> <C> <C>
Operating activities
Net income (loss) $ 32,876 $ 67,364 $ (2,656)
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Depreciation 29,303 21,977 21,977
Deferred income taxes 9,786 (1,952) (9,280)
Loss on sale of fixed assets 744
Changes in operating assets
and liabilities:
Accounts receivable, net (11,459) (3,976) 3,275
Other current assets 2,364 1,000 (478)
Accounts payable and
accrued expense 14,703 41,809 (2,854)
---------------------------------------------
Net cash provided by
operating activities 77,573 126,966 9,984
Investing activity
Purchase of property and
equipment (5,050) (4,836) (3,347)
---------------------------------------------
Net cash used in investing
activity (5,050) (4,836) (3,347)
Financing activities
Payments on lease obligation (2,299) (2,288) (2,288)
Payments on note payable
and line of credit (16,608) (67,955)
Purchase of treasury stock (21,000)
Proceeds from line of credit 87,000
Payments to former shareholders (23,898) (33,251) (20,345)
---------------------------------------------
Net cash used in financing
activities (63,805) (35,539) (3,588)
---------------------------------------------
Increase (decrease) in cash 8,718 86,591 3,049
Cash at beginning of period 10,254 10,254 18,972
---------------------------------------------
Cash at end of period $ 18,972 $ 96,845 $ 22,021
=============================================
Supplemental disclosure of
cash flow information:
Interest paid $ 10,570 $ 5,178 $ 9,810
=============================================
Income taxes paid $ 786 $ 428 $ 4,303
=============================================
Noncash transactions:
Issuance of note payable
for purchase of treasury
stock $ 47,259 - -
==============================================
</TABLE>
See accompanying notes.
5
<PAGE>
Drs. Fortier, Libber, Clemmens & Weimer, P.A.
Notes to Financial Statements
December 31, 1995
1. Summary of Significant Accounting Policies
Description of Business
Drs. Fortier, Libber, Clemmens & Weimer, P.A. (Pediatrics) is a professional
association organized under the laws of Maryland. Pediatrics offers a variety
of medical services, including pediatrics and primary care, in the greater
Annapolis, Maryland area.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated using the straight-line method over the estimated useful
lives of the assets. Routine maintenance and repairs are charged to expense as
incurred. Amortization of assets recorded under capital lease transactions is
included in depreciation expense.
Income Taxes
Pediatrics is taxable under the provisions of the Internal Revenue Code.
Pediatrics files its federal and state income tax return on the cash basis
method of accounting. Deferred income taxes are provided for temporary
differences between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes (see Note 8).
Professional Liability Insurance
Pediatrics has obtained professional liability coverage through commercial
insurance carriers on the claims-made basis. Management believes that there are
no claims that may result in a loss in excess of amounts covered by its existing
insurance.
Net Patient Service Revenue
Net patient service revenue is reported at the estimated realizable amounts from
patients, third-party payors and others for services rendered. The Medicare and
Medicaid programs pay physician services based on fee schedules which are
determined by the related government agency. Pediatrics has negotiated numerous
agreements with managed care organizations to provide physician services based
on fee schedules. No individual managed care contract is material to
Pediatrics.
6
<PAGE>
Drs. Fortier, Libber, Clemmens & Weimer, P.A.
Notes to Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Risks and Uncertainties
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Unaudited Financial Statements
The unaudited financial statements as of September 30, 1996 and for the nine
months ended September 30, 1995 and 1996 have been prepared by management in
accordance with generally accepted accounting principles. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results of the
interim periods are not necessarily indicative of the results that may be
expected for a full year.
2. Property and Equipment
Property and equipment consisted of the following at December 31, 1995:
<TABLE>
<CAPTION>
<S> <C>
Furniture, fixtures and equipment $137,575
Leasehold improvements 59,072
----------
196,647
Less accumulated depreciation 108,126
----------
$ 88,521
==========
</TABLE>
3. Note Payable and Line of Credit
Pediatrics had a note payable with a bank, payable in monthly installments of
principal and interest of $1,590, which matured during 1996. The note carried
interest at a rate of 9%. The principal balance outstanding under the note was
$17,955 at December 31, 1995.
7
<PAGE>
Drs. Fortier, Libber, Clemmens & Weimer, P.A.
Notes to Financial Statements (continued)
3. Note Payable and Line of Credit (continued)
Pediatrics had a $50,000 line of credit with a bank which carried an interest
rate of prime plus 2% (9% at December 31, 1995). The balance outstanding under
the line of credit was $50,000 at December 31, 1995.
In April 1996, Pediatrics entered into a secured demand note with a bank
providing financing up to $100,000. The note carries interest at prime plus 1%
and is secured by Pediatrics' receivables and equipment. The proceeds of the
new note were used to pay off the line of credit and note payable.
4. Capital Leases
Property, plant and equipment includes the following amounts for leases that
have been capitalized at December 31, 1995:
<TABLE>
<CAPTION>
<S> <C>
Equipment $14,430
Less accumulated amortization (3,779)
---------
$10,651
=========
Future minimum lease payments for capital leases were as follows as of
December 31, 1995:
Year ending December 31:
1996 $ 5,920
1997 4,984
1998 4,899
1999 816
---------
Total minimum lease payments 16,619
Less amount representing interest (5,950)
---------
Present value of net minimum lease payments $10,669
=========
</TABLE>
8
<PAGE>
Drs. Fortier, Libber, Clemmens & Weimer, P.A.
Notes to Financial Statements (continued)
5. Operating Leases
Pediatrics leases office space and certain equipment under operating leases.
Total rental expense was $211,644 in 1995. The following is a schedule by year
of future minimum lease payments under operating leases as of December 31, 1995:
<TABLE>
<S> <C>
1996 $ 198,822
1997 190,322
1998 190,322
1999 190,322
2000 190,322
Thereafter 285,483
------------
$1,245,593
============
</TABLE>
6. Related Parties
Pediatrics rents office space from entities owned by stockholders of Pediatrics.
Total rental expense incurred under these rental agreements was $198,549 in
1995. Lease commitments with related parties over the next five years are
included in the minimum lease payment disclosure in Note 5.
7. Employee Benefit Plans
Pediatrics has a qualified profit sharing plan covering substantially all
employees. Contributions are determined based upon a percentage of each
eligible employee's compensation, as defined and/or at the discretion of
management. Total contributions were $3,267 for the year ended December 31,
1995, and are included in employee benefits in the accompanying statements of
operations.
8. Income Taxes
Pediatrics accounts for income taxes using the liability method required by
Financial Accounting Standards Board (FASB) Statement No. 109, "Accounting for
Income Taxes."
9
<PAGE>
Drs. Fortier, Libber, Clemmens & Weimer, P.A.
Notes to Financial Statements (continued)
8. Income Taxes (continued)
Deferred income taxes reflect the net effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of
Pediatrics' deferred tax liabilities and assets were as follows at December 31,
1995:
<TABLE>
<S> <C>
Deferred tax liabilities:
Accounts receivable, net $59,706
Accrued expenses 7,666
Depreciation 9,945
---------
Total deferred tax liabilities 77,317
Deferred tax assets:
Accrued expenses 28,135
Capital lease 4,267
---------
Total deferred tax assets 32,402
---------
Net deferred tax liabilities $44,915
=========
</TABLE>
Significant components of the provision (benefit) for income taxes attributable
to continuing operations are as follows for the year ended December 31, 1995:
<TABLE>
<S> <C>
Current:
Federal $ 3,844
State 549
---------
Total current 4,393
Deferred:
Federal 8,371
State 1,223
---------
Total deferred 9,594
---------
$13,987
=========
</TABLE>
10
<PAGE>
Drs. Fortier, Libber, Clemmens & Weimer, P.A.
Notes to Financial Statements (continued)
8. Income Taxes (continued)
The difference between the provision for income taxes and the amount computed by
applying the statutory federal income tax rate to income before taxes is as
follows for the year ended December 31, 1995:
<TABLE>
<CAPTION>
Amount Rate
----------------
<S> <C> <C>
Federal taxes at statutory rates $16,403 35%
State income tax, net of federal tax benefit 958 2
Accounts receivable (3,374) (7)
----------------
$13,987 30%
================
</TABLE>
9. Pending Affiliation
Pediatrics expects to enter into a long-term affiliation arrangement with
Physicians Quality Care, Inc. (PQC). Under this arrangement, Pediatrics will
merge with and into, and the physicians will become employees of, a newly formed
professional corporation that is affiliated with PQC. The aggregate
consideration to be paid to Pediatrics is subject to working capital adjustments
and is payable in common stock of PQC.
11
<PAGE>
Drs. Goldgeier, Levine & Friedman, P.A.
Audited Financial Statements
Year ended December 31, 1995 and nine months
ended September 30, 1995 (Unaudited) and
September 30, 1996 (Unaudited)
<TABLE>
<CAPTION>
Contents
<S> <C>
Report of Independent Auditors............................................. 1
Audited Financial Statements
Balance Sheets............................................................. 2
Statements of Operations................................................... 3
Statements of Shareholders' Equity (Deficit)............................... 4
Statements of Cash Flows................................................... 5
Notes to Financial Statements.............................................. 6
</TABLE>
<PAGE>
[LETTERHEAD OF ERNST & YOUNG LLP APPEARS HERE]
Report of Independent Auditors
The Board of Directors
Physicians Quality Care, Inc.
We have audited the accompanying balance sheet of Drs. Goldgeier, Levine &
Friedman, P.A. as of December 31, 1995, and the related statements of
operations, shareholders' equity, and cash flows for the year then ended. These
financial statements are the responsibility of management. Our responsibility
is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Drs. Goldgeier, Levine &
Friedman, P.A. at December 31, 1995, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
September 20, 1996
Boston, Massachusetts
1
<PAGE>
Drs. Goldgeier, Levine & Friedman, P.A.
Balance Sheets
<TABLE>
<CAPTION>
(Unaudited)
December 31 September 30
1995 1996
----------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash $ 50,187 $ 50,765
Accounts receivable, less allowance for doubtful
accounts of $78,208 in 1995 and $77,219 in 1996 155,852 156,858
(unaudited)
Prepaid expenses 1,394 1,987
Deferred income taxes 87,274 80,284
----------------------------------------
Total current assets 294,707 289,894
Deferred income taxes 6,593 5,536
Property and equipment, net 35,247 26,309
----------------------------------------
Total assets $ 336,547 $ 321,739
========================================
Liabilities and owners' equity
Current liabilities:
Accounts payable $ 172,207 $ 160,042
Accrued salaries, payroll taxes and employee benefits 57,894 52,462
Deferred income taxes 69,309 69,743
Current portion of obligation under capital lease 3,554 3,773
Current portion of notes payable to former shareholders 6,840
----------------------------------------
Total current liabilities 309,804 286,020
Deferred income taxes 812 2,062
Obligation under capital lease, less current portion 12,926 10,068
Notes payable to former shareholders
Shareholders' equity:
Common stock, par value 50,300 shares authorized,
180 shares issued and outstanding 9,000 9,000
Additional paid-in capital 42,662 42,662
Retained earnings (21,157) (10,573)
----------------------------------------
30,505 41,089
Less treasury stock, at cost, 60 shares (17,500) (17,500)
----------------------------------------
Total shareholders' equity 13,005 23,589
----------------------------------------
Total liabilities and shareholders' equity $ 336,547 $ 321,739
========================================
</TABLE>
See accompanying notes.
2
<PAGE>
Drs. Goldgeier, Levine & Friedman, P.A.
Statements of Operations
<TABLE>
<CAPTION>
(Unaudited)
Year ended Nine months ended
December 31 September 30
1995 1995 1996
---------------------------------------------------
<S> <C> <C> <C>
Revenue:
Net patient service revenue $1,913,452 $1,463,639 $1,464,199
Other income 63,681 37,201 25,610
Interest income 197 158 108
---------------------------------------------------
1,977,330 1,500,998 1,489,917
Operating expenses:
Salaries and wages 1,038,637 772,305 765,316
Employee benefits
Supplies and other 638,466 510,447 496,989
Rent 125,798 73,692 90,997
Insurance 44,194 36,566 28,298
Interest 1,023 1,747 1,175
Depreciation 11,752 8,937 9,609
Provision for bad debts 78,208 77,293 77,219
---------------------------------------------------
Net operating expenses 1,938,078 1,480,987 1,469,603
---------------------------------------------------
Net income (loss) before
income taxes 39,252 20,011 20,314
Income tax benefit
(expense) (17,768) (24,524) (9,730)
---------------------------------------------------
Net income (loss) $ 21,484 $ (4,513) $ 10,584
===================================================
</TABLE>
See accompanying notes.
3
<PAGE>
Drs. Goldgeier, Levine & Friedman, P.A.
Statements of Shareholders' Equity (Deficit)
<TABLE>
<S> <C>
Balance at December 31, 1994 $(8,479)
Net income 21,484
----------
Balance at December 31, 1995 13,005
Net income (unaudited) 10,584
----------
Balance at September 30, 1996 (unaudited) $23,589
==========
</TABLE>
See accompanying notes.
4
<PAGE>
Drs. Goldgeier, Levine & Friedman, P.A.
Statements of Cash Flows
<TABLE>
<CAPTION>
(Unaudited)
Year ended Nine months ended
December 31 September 30
1995 1995 1996
---------------------------------------------
<S> <C> <C> <C>
Operating activities
Net income (loss) $ 21,484 $ (4,513) $ 10,584
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation 11,752 8,937 9,609
Deferred income taxes 17,768 24,524 9,730
Changes in operating assets and
liabilities:
Accounts receivable, net (49,599) (50,756) (1,006)
Other current assets 2,751 2,750 (593)
Accounts payable, accrued expenses
and other current liabilities 28,020 7,879 (17,596)
---------------------------------------------
Net cash provided by (used in) operating
activities 32,176 (11,179) 10,728
Investing activity
Purchase of property and equipment (12,454) (7,701) (671)
---------------------------------------------
Net cash used in investing activity (12,454) (7,701) (671)
Financing activities
Payments on lease obligation (3,149) (2,639)
Payments on long-term note payable (14,129) (11,963) (6,840)
---------------------------------------------
Net cash provided by (used in) financing
activities (17,278) (11,963) (9,479)
---------------------------------------------
Increase (decrease) in cash 2,444 (30,843) 578
Cash at beginning of period 47,743 47,743 50,187
---------------------------------------------
Cash at end of period $ 50,187 $ 16,900 $ 50,765
=============================================
Supplemental disclosure of cash flow
information:
Interest paid $ 1,023 - $ 7,813
=============================================
Noncash transactions:
Capital lease transactions $ 19,629 - -
=============================================
</TABLE>
See accompanying notes.
5
<PAGE>
Drs. Goldgeier, Levine & Friedman, P.A.
Notes to Financial Statements
December 31, 1995
1. Summary of Significant Accounting Policies
Description of Business
Drs. Goldgeier, Levine & Friedman, P.A. (the Company) is a professional
association organized under the laws of Maryland. The Company offers a variety
of medical services including pediatrics and primary care in the greater
Baltimore, Maryland area.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated using the straight-line method over the estimated useful
lives of the assets. Routine maintenance and repairs are charged to expense as
incurred. Amortization of assets recorded under capital lease transactions is
included in depreciation expense.
Income Taxes
The Company is taxable under the provisions of the Internal Revenue Code. The
Company files its federal and state income tax return on the cash basis method
of accounting. Deferred income taxes are provided for temporary differences
between financial and income tax reporting (see Note 8).
Professional Liability Insurance
The Company has obtained professional liability coverage through commercial
insurance carriers on the claims made basis. Management believes that there are
no claims that may result in a loss in excess of amounts covered by its existing
insurance.
Net Patient Service Revenue
Net patient service revenue is reported at the estimated realizable amounts from
patients, third-party payors and others for services rendered. The Medicare and
Medicaid programs pay physician services based on fee schedules which are
determined by the related government agency. The Company has negotiated numerous
agreements with managed care organizations to provide physician services based
on fee schedules. No individual managed care contract is material to the
Company.
6
<PAGE>
Drs. Goldgeier, Levine & Friedman, P.A.
Notes to Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Risks and Uncertainties
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Unaudited Financial Statements
The unaudited financial statements as of September 30, 1996 and for the nine
months ended September 30, 1995 and 1996 have been prepared by management in
accordance with generally accepted accounting principles. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results of the
interim periods are not necessarily indicative of the results that may be
expected for a full year.
2. Property and Equipment
Property and equipment consisted of the following at December 31, 1995:
<TABLE>
<CAPTION>
<S> <C>
Furniture, fixtures and equipment $197,778
Leasehold improvements 87,551
-------------
285,329
Less accumulated depreciation (250,082)
-------------
$ 35,247
=============
</TABLE>
3. Notes Payable to Former Shareholders
The Company has notes payable to former shareholders, payable in monthly
installments of principal and interest of $5,207 at interest rates ranging from
6% to 7%. The principal balance outstanding under these notes payable
agreements aggregated $6,840 at December 31, 1995.
7
<PAGE>
Drs. Goldgeier, Levine & Friedman, P.A.
Notes to Financial Statements (continued)
4. Capital Leases
Property, plant and equipment includes the following amounts for leases that
have been capitalized:
<TABLE>
<CAPTION>
December 31
1995
-------------
<S> <C>
Equipment $19,629
Less accumulated amortization (3,599)
-------------
$16,030
=============
Future minimum lease payments for capital leases were as follows as of
December 31, 1995:
Year ending December 31:
1996 $ 4,744
1997 4,744
1998 4,744
1999 4,744
2000 395
-------------
Net minimum lease payments 19,371
Less amount representing interest (2,891)
-------------
Present value of net minimum lease payments $16,480
=============
</TABLE>
8
<PAGE>
Drs. Goldgeier, Levine & Friedman, P.A.
Notes to Financial Statements (continued)
5. Operating Leases
The Company leases office space and certain equipment under operating leases.
Total rental expense was $125,798 in 1995. The following is a schedule by year
of future minimum lease payments under operating leases as of December 31, 1995:
<TABLE>
<S> <C>
1996 $124,455
1997 120,182
1998 112,654
1999 32,703
2000 2,198
Thereafter 183
--------------
$392,375
==============
</TABLE>
6. Employee Benefit Plans
The Company had a qualified profit sharing plan covering substantially all
employees. Contributions were determined based upon a percentage of each
eligible employee's compensation, as defined and/or at the discretion of
management. This plan was terminated in 1994.
7. Income Taxes
The Company accounts for income taxes utilizing the liability method required by
Financial Accounting Standards Board (FASB) Statement No. 109, "Accounting for
Income Taxes."
9
<PAGE>
Drs. Goldgeier, Levine & Friedman, P.A.
Notes to Financial Statements (continued)
7. Income Taxes (continued)
Deferred income taxes reflect the net effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
Company's deferred tax liabilities and assets were as follows at December 31,
1995:
<TABLE>
<S> <C>
Deferred tax liabilities:
Accounts receivable, net $ 62,309
Capital lease and other 7,000
Depreciation 812
----------------
Total deferred tax liabilities 70,121
Deferred tax assets:
Depreciation -
Accrued expenses 87,274
Capital lease and other 6,593
----------------
Total deferred tax assets 93,867
----------------
Net deferred tax liabilities $(23,746)
================
</TABLE>
Significant components of the provision (benefit) for income taxes attributable
to continuing operations are as follows for the year ended December 31, 1995:
<TABLE>
<S> <C>
Deferred:
Federal $15,547
State 2,221
----------------
Total deferred $17,768
================
</TABLE>
10
<PAGE>
Drs. Goldgeier, Levine & Friedman, P.A.
Notes to Financial Statements (continued)
7. Income Taxes (continued)
The difference between the provision for income taxes and the amount computed by
applying the statutory federal income tax rate to income before taxes is as
follows for the year ended December 31, 1995:
<TABLE>
<CAPTION>
Amount Rate
-----------------
<S> <C> <C>
Federal taxes at statutory rates $13,739 35%
Add (deduct):
State income tax, net of federal tax benefit 1,963 5
Other (404) (1)
Valuation allowance 2,470 6
-----------------
$17,768 45%
=================
</TABLE>
Net operating loss carryforwards available for tax purposes as of December 31,
1995 approximate $10,973, which expire beginning in 2005.
8. Pending Affiliation
The Company expects to enter into a long-term affiliation arrangement with
Physicians Quality Care, Inc. (PQC). Under this arrangement, the Company will
merge with and into, and the physicians will become employees of, a newly formed
professional corporation that is affiliated with PQC. The aggregate
consideration to be paid to the Company is subject to working capital
adjustments and is payable in cash and common stock of PQC.
11
<PAGE>
Koeppel, Rosen, Rudikoff, M.D., P.C.
Audited Financial Statements
Year ended December 31, 1995 and
nine months ended September 30, 1995 (Unaudited)
and September 30, 1996 (Unaudited)
<TABLE>
<CAPTION>
Contents
<S> <C>
Report of Independent Auditors.............................................1
Audited Financial Statements
Balance Sheets.............................................................2
Statements of Operations...................................................3
Statements of Stockholders' Equity.........................................4
Statements of Cash Flows...................................................5
Notes to Financial Statements..............................................6
</TABLE>
<PAGE>
[LETTERHEAD OF ERNST & YOUNG LLP APPEARS HERE]
Report of Independent Auditors
The Board of Directors
Physicians Quality Care, Inc.
We have audited the accompanying balance sheet of Koeppel, Rosen, Rudikoff,
M.D., P.C., as of December 31, 1995, and the related statement of operations,
stockholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Koeppel, Rosen, Rudikoff, M.D.,
P.C. at December 31, 1995, and the results of its operations and its cash flows
for the year then ended, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
November 18, 1996
Boston, Massachusetts
1
<PAGE>
Koeppel, Rosen, Rudikoff, M.D., P.C.
Balance Sheets
<TABLE>
<CAPTION>
(Unaudited)
December 31 September 30
1995 1996
---------------------------
<S> <C> <C>
Assets
Current assets:
Cash $ 15,745 $ 79,457
Accounts receivable, less allowance
for doubtful accounts of $49,373 and
$33,444 in 1995 and 1996 (unaudited),
respectively 121,486 47,295
Prepaids and other assets 9,396 10,308
---------------------------
Total current assets 146,627 137,060
Property and equipment, net 52,178 43,813
---------------------------
Total assets $198,805 $180,873
===========================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 15,583 $ 4,457
Accrued salaries and payroll taxes 4,490 25,090
Accrued employee benefits 20,613 51,948
Accrued expenses, other 14,418 10,719
---------------------------
Total current liabilities 55,104 92,214
Stockholders' equity:
Common stock, $.10 par value, 1,000
shares authorized, 600 shares issued
and outstanding 60 60
Additional paid-in capital 540 540
Retained earnings 143,101 88,059
---------------------------
Total stockholders' equity 143,701 88,659
---------------------------
Total liabilities and stockholders'
equity $198,805 $180,873
===========================
</TABLE>
See accompanying notes.
2
<PAGE>
Koeppel, Rosen, Rudikoff, M.D., P.C.
Statements of Operations
<TABLE>
<CAPTION>
(Unaudited)
Year ended Nine months ended
December 31 September 30
1995 1995 1996
--------------------------------------
<S> <C> <C> <C>
Revenue:
Net patient service revenue $1,566,479 $1,130,194 $1,196,933
Other income 5,821 9,780 8,858
--------------------------------------
1,572,300 1,139,974 1,205,791
Operating expenses:
Salaries and wages--physicians 547,936 459,628 509,102
Salaries and wages--staff 270,611 236,898 220,864
Physician and staff benefits 71,548 9,477 53,410
Supplies and other 485,462 321,788 300,977
Insurance 44,611 26,103 29,903
Rent 23,947 13,890 12,203
Rent to related parties 53,300 45,287 39,975
Depreciation 10,378 5,713 8,455
Provision for bad debts 49,373 48,125 33,444
--------------------------------------
Net operating expenses 1,557,166 1,166,909 1,208,333
--------------------------------------
Net income (loss) $ 15,134 $ (26,935) $ (2,542)
======================================
</TABLE>
See accompanying notes.
3
<PAGE>
Koeppel, Rosen, Rudikoff, M.D., P.C.
Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Total
Stockholders'
Equity
-------------
<S> <C>
Balance at December 31, 1994 $218,567
Net income 15,134
Dividends paid (90,000)
-------------
Balance at December 31, 1995 143,701
Net loss (unaudited) (2,542)
Dividends paid (unaudited) (52,500)
-------------
Balance at September 30, 1996 (unaudited) $ 88,659
=============
</TABLE>
See accompanying notes.
4
<PAGE>
Koeppel, Rosen, Rudikoff, M.D., P.C.
Statements of Cash Flows
<TABLE>
<CAPTION>
(Unaudited)
Year ended Nine months ended
December 31 September 30
1995 1995 1996
-----------------------------------
<S> <C> <C> <C>
Operating activities
Net income (loss) $ 15,134 $(26,935) $ (2,542)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation 10,378 5,713 8,455
Changes in operating assets and
liabilities:
Accounts receivable, net 48,926 91,260 74,191
Other current assets (419) (958) (1,002)
Accounts payable, accrued expenses
and other current liabilities 12,616 34,967 37,110
-----------------------------------
Net cash provided by operating
activities 86,635 104,047 116,212
Investing activity
Purchase of property and equipment (30,194) (23,403) -
-----------------------------------
Net cash used in investing activity (30,194) (23,403) -
Financing activity
Dividends paid (90,000) (60,000) (52,500)
-----------------------------------
Net cash used in financing activity (90,000) (60,000) (52,500)
-----------------------------------
Increase (decrease) in cash (33,559) 20,644 63,712
Cash at beginning of period 49,304 49,304 15,745
-----------------------------------
Cash at end of period $ 15,745 $ 69,948 $ 79,457
===================================
</TABLE>
See accompanying notes.
5
<PAGE>
Koeppel, Rosen, Rudikoff, M.D., P.C.
Notes to Financial Statements
December 31, 1995
1. Summary of Significant Accounting Policies
Description of Business
The medical practice of Koeppel, Rosen, Rudikoff, M.D., P.C, (the Company), is a
professional corporation organized under the laws of Maryland. The Company
offers a variety of medical services including cardiology, pediatrics, cancer
treatment, gastrointestinal and primary care.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated using the straight-line method over the estimated useful
lives of the assets. Routine maintenance and repairs are charged to expense as
incurred.
Income Taxes
The Company has elected, by consent of its shareholders, to be taxed as an S
Corporation under the provisions of the Internal Revenue Code (the Code).
Pursuant to the Code, S Corporations are taxed as pass-through entities. The
taxable income or loss of the Company is allocated to the Company's shareholders
and reported on the shareholders' tax returns. Accordingly, there is no
provision for income taxes included in these financial statements.
Professional Liability Insurance
The Company has obtained professional liability coverage through commercial
insurance carriers on a modified claims made basis, which excludes tail
coverage. Management believes that there are no claims that may result in a
loss in excess of amounts covered by its existing insurance.
6
<PAGE>
Koeppel, Rosen, Rudikoff, M.D., P.C.
Notes to Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Net Patient Service Revenue
Net patient service revenue is reported at the estimated realizable amounts from
patients, third-party payors and others for services rendered. The Medicare and
Medicaid programs pay physician services based on fee schedules which are
determined by the related government agency. The Company has negotiated
numerous agreements with managed care organizations to provide physician
services based on fee schedules. No individual managed care contract is
material to the Company.
Risks and Uncertainties
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Unaudited Financial Statements
The unaudited statements of operations for nine months ended September 30, 1996
and for the nine months ended September 30, 1995 have been prepared by
management in accordance with generally accepted accounting principles. In the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results of the interim periods are not necessarily indicative of the results
that may be expected for a full year.
2. Property and Equipment
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31
1995
-------------
<S> <C>
Furniture, fixtures and equipment $55,550
Leasehold improvements 10,409
-------------
65,959
Less accumulated depreciation (13,781)
-------------
$52,178
=============
</TABLE>
7
<PAGE>
Koeppel, Rosen, Rudikoff, M.D., P.C.
Notes to Financial Statements (continued)
3. Lease Commitments
The Company leases office space and certain equipment under operating leases.
Total rental expense was $77,247 in 1995 which included $53,300 paid to related
parties (Note 5). The following is a schedule by year of future minimum lease
payments under operating leases as of December 31, 1995:
<TABLE>
<CAPTION>
<S> <C>
1996 $67,275
1997 3,575
---------
$70,850
=========
</TABLE>
4. Employee Benefit Plans
The Company has a qualified profit sharing plan covering substantially all
employees. Contributions are determined based upon a percentage of each
eligible employee's compensation, as defined and/or at the discretion of
management. Total contributions were $70,506 for the year ended December 31,
1995, and are included in physician and staff benefits in the accompanying
statement of operations.
5. Related Parties
The Company rents office space from related entities owned by shareholders of
the Company. Total rental expense paid under these rental agreements was
$53,300. Lease commitments over the next five years with related parties are
included in Note 3.
6. Pending Affiliation
The Company expects to enter into a long-term affiliation arrangement with
Physicians Quality Care, Inc. (PQC). Under this arrangement, the Company will
merge with and into, and the physicians will become employees of, a newly formed
professional corporation that is affiliated with PQC. The aggregate
consideration to be paid to the Company is subject to working capital
adjustments and is payable in common stock of PQC.
<PAGE>
Drs. Pakula, Davick & Bogue, P.A.
Audited Financial Statements
Year ended December 31, 1995 and nine months ended
September 30, 1996 (Unaudited) and September 30, 1995 (Unaudited)
Contents
<TABLE>
<S> <C>
Report of Independent Auditors......................................... 1
Audited Financial Statements
Balance Sheets......................................................... 2
Statements of Operations............................................... 3
Statements of Stockholders' Equity..................................... 4
Statements of Cash Flows............................................... 5
Notes to Financial Statements.......................................... 6
</TABLE>
<PAGE>
[LETTERHEAD OF ERNST & YOUNG LLP]
Report of Independent Auditors
The Board of Directors
Physicians Quality Care, Inc.
We have audited the accompanying balance sheet of Drs. Pakula, Davick & Bogue,
P.A. as of December 31, 1995, and the related statements of operations,
stockholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Drs. Pakula, Davick & Bogue,
P.A. at December 31, 1995, and the results of its operations and its cash flows
for the year then ended, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
November 18, 1996
Boston, Massachusetts
1
<PAGE>
Drs. Pakula, Davick & Bogue, P.A.
Balance Sheets
<TABLE>
<CAPTION>
(Unaudited)
December 31 September 30
1995 1996
----------------------------
<S> <C> <C>
Assets
Current assets:
Cash $ 18,863 $ 15,820
Accounts receivable, less allowance for
doubtful accounts of $17,523 and $27,749
in 1995 and 1996 (unaudited), respectively 84,361 98,387
Deferred income taxes 32,927 41,878
Cash surrender value of life insurance policy 57,444 78,927
----------------------------
Total current assets 193,595 235,012
Property and equipment, net 26,438 21,346
----------------------------
Total assets $220,033 $256,358
============================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 48,370 $ 64,344
Accrued salaries and payroll taxes 12,910 13,677
Accrued employee benefits 3,699
Accrued expenses, other 9,992
Deferred income taxes 33,744 39,354
Due to related parties 7,421 11,101
----------------------------
Total current liabilities 106,144 138,468
Deferred income taxes, noncurrent 1,928 2,524
Due to related parties, noncurrent 50,949 42,870
Stockholders' equity:
Common stock, no par value, 5,000 shares
authorized, 300 shares issued and outstanding
Additional paid-in capital 24,217 24,217
Retained earnings 47,749 55,557
----------------------------
Total stockholders' equity 71,966 79,774
Due from shareholders (10,954) (7,278)
----------------------------
61,012 72,496
----------------------------
Total liabilities and stockholders' equity $220,033 $256,358
============================
</TABLE>
See accompanying notes.
2
<PAGE>
Drs. Pakula, Davick & Bogue, P.A.
Statements of Operations
<TABLE>
<CAPTION>
(Unaudited)
Year ended Nine months ended
December 31 September 30
1995 1995 1996
----------------------------------------
<S> <C> <C> <C>
Revenue:
Net patient service revenue $868,084 $652,194 $725,335
Other income 17,912 9,463 39,857
Interest income 832 615 502
----------------------------------------
886,828 662,272 765,694
Operating expenses:
Salaries and wages--physicians 315,606 209,053 221,472
Salaries and wages--staff 241,064 214,556 212,129
Supplies and other 182,105 149,728 157,205
Insurance 89,213 59,069 72,230
Rent 56,215 35,103 73,284
Interest 4,027 2,850 4,334
Depreciation 11,834 9,943 5,532
Provision for bad debts 17,523 18,876 27,749
----------------------------------------
Net operating expenses 917,587 699,178 773,935
----------------------------------------
Net loss before income taxes (30,759) (36,906) (8,241)
Income tax benefit 12,304 8,307 2,746
----------------------------------------
Net loss $(18,455) $(28,599) $ (5,495)
========================================
</TABLE>
See accompanying notes.
3
<PAGE>
Drs. Pakula, Davick & Bogue, P.A.
Statements of Stockholders' Equity
<TABLE>
<CAPTION>
<S> <C>
Balance at December 31, 1994 $ 70,421
Capital contributions 20,000
Net loss (18,455)
-------------
Balance at December 31, 1995 71,966
Capital contributions (unaudited) 13,303
Net income (unaudited) (5,495)
-------------
Balance at September 30, 1996 $ 79,774
=============
</TABLE>
See accompanying notes.
4
<PAGE>
Drs. Pakula, Davick & Bogue, P.A.
Statements of Cash Flows
<TABLE>
<CAPTION>
(Unaudited)
Year ended Nine months ended
December 31 September 30
1995 1995 1996
---------------------------------------
<S> <C> <C> <C>
Operating activities
Net income (loss) $(18,455) $(40,320) $ (5,495)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation 11,834 9,943 5,532
Deferred income taxes (12,304) (8,307) (6,466)
Changes in operating assets and liabilities:
Accounts receivable, net (37,973) (33,383) (14,026)
Other current assets 287 13,105 (21,483)
Accounts payable, accrued expenses and other
current liabilities 35,125 39,062 26,755
---------------------------------------
Net cash used in operating activities (21,486) (19,900) (15,183)
Investing activity
Purchase of property and equipment (19,799) (18,822) (440)
---------------------------------------
Net cash used in investing activity (19,799) (18,822) (440)
Financing activities
Proceeds from issuance of long-term notes payable
from related parties 59,745 59,745
Payments on long-term notes payable to
related parties (1,375) (1,000) (4,399)
Proceeds from issuance of stock 5,000 5,000
Proceeds from notes receivable from shareholders 4,046 3,676
Capital contributions 13,303
---------------------------------------
Net cash provided by financing activities 67,416 63,745 12,580
---------------------------------------
Increase (decrease) in cash 26,131 25,023 (3,043)
Cash at beginning of period (7,268) (7,268) 18,863
---------------------------------------
Cash at end of period $ 18,863 $ 17,755 $ 15,820
=======================================
Noncash investing and financing activities:
Issuance of common stock for note receivable $ 15,000 $ 15,000 $ -
=======================================
Supplemental disclosure of cash flow information:
Interest paid $ 7,665 $ 2,850 $ 4,334
=======================================
</TABLE>
See accompanying notes.
5
<PAGE>
Drs. Pakula, Davick & Bogue, P.A.
Notes to Financial Statements
December 31, 1995
1. Summary of Significant Accounting Policies
Description of Business
The medical practice of Drs. Pakula, Davick & Bogue, P.A. (the Company) is a
professional association organized under the laws of Maryland. The Company
offers a variety of medical services, including cardiology, pediatrics, cancer
treatment, gastrointestinal and primary care.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated using the straight-line method over the estimated useful
lives of the assets. Routine maintenance and repairs are charged to expense as
incurred.
Income Taxes
The Company is taxable under the provisions of the Internal Revenue Code. The
Company files its federal and state income tax return on the cash basis of
accounting. Deferred income taxes are provided for temporary differences
between financial and income tax reporting (see Note 5).
Professional Liability Insurance
The Company has obtained professional liability coverage through commercial
insurance carriers on a claims-made basis. Management believes that there are
no claims that may result in a loss in excess of amounts covered by its existing
insurance.
Net Patient Service Revenue
Net patient service revenue is reported at the estimated realizable amounts from
patients, third-party payors and others for services rendered. The Medicare and
Medicaid programs pay physician services based on fee schedules which are
determined by the related government agency. The Company has negotiated numerous
agreements with managed care organizations to provide physician services based
on fee schedules. No individual managed care contract is material to the
Company.
6
<PAGE>
Drs. Paluka, Davick & Boque, P.A.
Notes to Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Risks and Uncertainties
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from these estimates.
Unaudited Financial Statements
Unaudited statements of operations for nine months ended September 30, 1996 and
for the nine months ended September 30, 1995 have been prepared by management in
accordance with generally accepted accounting principles. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results of the
interim periods are not necessarily indicative of the results that may be
expected for a full year.
2. Property and Equipment
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31
1995
-----------
<S> <C>
Furniture, fixtures and equipment $93,468
Less accumulated depreciation (67,030)
-----------
$26,438
===========
</TABLE>
7
<PAGE>
Drs. Paluka, Davick & Bogue, P.A.
Notes to Financial Statements (continued)
3. Lease Commitments
The Company leases office space and certain equipment under operating leases.
Total rental expense was $56,215 in 1995. The following is a schedule by year of
future minimum lease payments under operating leases as of December 31, 1995:
<TABLE>
<CAPTION>
<S> <C>
1996 $ 93,307
1997 96,737
1998 100,267
1999 103,961
2000 107,782
Thereafter 569,675
--------------
$1,071,729
==============
</TABLE>
4. Employee Benefit Plans
The Company has a qualified profit sharing plan covering substantially all
employees. Contributions are determined based upon a percentage of each eligible
employee's compensation, as defined, and/or at the discretion of management.
8
<PAGE>
Drs. Paluka, Davick & Bogue, P.A.
Notes to Financial Statements (continued)
5. Income Taxes
The Company accounts for income taxes using the liability method required by
Financial Accounting Standards Board (FASB) Statement No. 109, "Accounting for
Income Taxes."
Deferred income taxes reflect the net effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
Company's deferred tax liabilities and assets were as follows:
<TABLE>
<CAPTION>
December 31
1995
-----------
<S> <C>
Deferred tax liabilities:
Accounts receivable $33,744
Depreciation 1,928
-----------
Total deferred tax liabilities 35,672
Deferred tax assets:
Accrued expenses, other 25,992
Net operating loss carryover 6,935
-----------
Total deferred tax assets 32,927
-----------
Net deferred tax liabilities $ 2,745
===========
</TABLE>
Significant components of the provision for income taxes attributable to
continuing operations are as follows:
<TABLE>
<CAPTION>
Year ended
December 31
1995
-----------
<S> <C>
Deferred:
Federal $10,766
State 1,538
-----------
Total deferred $12,304
===========
Net provision
</TABLE>
<PAGE>
Drs. Pakula, Davick & Bogue, P.A.
Notes to Financial Statements (continued)
5. Income Taxes (continued)
The difference between the provision for income taxes and the amount computed by
applying the statutory federal income tax rate to income before taxes is as
follows:
<TABLE>
<CAPTION>
Year ended
December 31, 1995
------------------
Amount Rate
------------------
<S> <C> <C>
Federal taxes at statutory rates $(10,766) 35%
Add (deduct):
State income tax, net of federal
tax benefit (1,538) 5
Other--permanent differences 24,608 (23)
------------------
$ 12,304 17%
==================
</TABLE>
Net operating loss carryforwards available for tax purposes as of December 31,
1995 approximate $17,338, which expire beginning in 2005.
6. Related Parties
During 1995, an additional physician was admitted as an owner to the Company and
issued 100 shares of common stock in consideration of $20,000, paid by a note
in the amount of $15,000, with the remaining $5,000 contributed in cash by the
physician. The remaining balance on the $15,000 loan was $10,954 as of
December 31, 1995.
10
<PAGE>
Drs. Pakula, Davick & Bogue, P.A.
Notes to Financial Statements (continued)
6. Related Parties (continued)
The Company has four notes payable with a combined original principal amount of
$59,745, payable in monthly installments of principal and interest at interest
rates ranging from 6% to 7.2%. The principal balance outstanding of these notes
payable was $58,370 at December 31, 1995. The following is a schedule of
principal maturities on the notes as of December 31, 1995:
<TABLE>
<S> <C>
1996 $ 7,421
1997 10,911
1998 9,892
1999 10,393
2000 11,033
Thereafter 8,720
------------
$58,370
============
</TABLE>
7. Pending Affiliation
The Company expects to enter into a long-term affiliation arrangement with
Physicians Quality Care, Inc. (PQC). Under this arrangement, the Company will
merge with and into, and the physicians will become employees of, a newly formed
professional corporation that is affiliated with PQC. The aggregate
consideration to be paid to the Company is subject to working capital
adjustments and is payable in common stock of PQC.
11
<PAGE>
Park Medical Associates, P.A. and Park Medical Labs, Inc.
Audited Consolidated Financial Statements
Years ended December 31, 1993, 1994 and 1995 and
nine months ended September 30, 1995 (Unaudited) and
nine months ended September 30, 1996 (Unaudited)
<TABLE>
<CAPTION>
Contents
<S> <C>
Report of Independent Auditors.......................................1
Audited Consolidated Financial Statements
Consolidated Balance Sheets..........................................2
Consolidated Statements of Operations................................3
Consolidated Statements of Owners' Equity............................4
Consolidated Statements of Cash Flows................................5
Notes to Consolidated Financial Statements...........................6
</TABLE>
<PAGE>
[LETTERHEAD OF ERNST & YOUNG LLP APPEARS HERE]
Report of Independent Auditors
The Board of Directors
Physicians Quality Care, Inc.
We have audited the accompanying consolidated balance sheets of Park Medical
Associates, P.A. and Park Medical Labs, Inc. (the Companies) as of December 31,
1995 and 1994, and the related consolidated statements of operations, owners'
equity, and cash flows for each of the three years in the period ended December
31, 1995. These financial statements are the responsibility of the Companies'
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Park Medical
Associates, P.A. and Park Medical Labs, Inc. at December 31, 1995 and 1994, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
September 20, 1996
Boston, Massachusetts
1
<PAGE>
Park Medical Associates, P.A. and Park Medical Labs, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(Unaudited)
December 31 September 30
1994 1995 1996
-----------------------------------------
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 95,342 $ 48,537 $ 194,719
Accounts receivable, less allowance
for doubtful accounts of $83,256,
$86,507 and $92,685 in 1994, 1995
and 1996 (unaudited), respectively 659,453 724,890 776,784
Prepaid expenses 38,086 46,286 13,450
Deferred income taxes 50,962 87,859 138,997
-----------------------------------------
Total current assets 843,843 907,572 1,123,950
Property and equipment, net (Note 2) 415,821 558,234 483,411
-----------------------------------------
Total assets $1,259,664 $1,465,806 $1,607,361
=========================================
Liabilities and owners' equity
Current liabilities:
Accounts payable $ 58,373 $ 109,111 $ 163,471
Accrued employee benefits 108,020 107,054 215,367
Accrued expenses, other 112,093 163,850 164,868
Deferred income taxes 196,954 227,615 242,924
Current portion of obligation
under capital leases 28,814 28,814
-----------------------------------------
Total current liabilities 475,440 636,444 815,444
Deferred income taxes, noncurrent 14,120 22,806 22,806
Obligation under capital leases 100,768 79,666
Owners' equity:
Preferred stock: $100 par value; 1,225
shares authorized; 1,020 shares
issued; 918, 918 and 1,020 shares
outstanding in 1994, 1995 and 1996
(unaudited), respectively 92,004 92,004 92,106
Common stock: Associates, $10 par
value; 3,000 shares authorized; 1,000
shares issued; 900, 900 and 1,000
shares outstanding in 1994, 1995 and
1996 (unaudited), respectively 9,200 9,200 9,300
Common stock: Laboratories, $1 par
value; 100,000 shares authorized; 9,000
shares issued and outstanding 9,000 9,000 9,000
Paid-in capital 32,761 32,761 32,761
Retained earnings 651,112 594,873 578,328
-----------------------------------------
794,077 737,838 721,495
Less treasury stock, at cost;
Preferred--204 shares in 1994 and
306 shares in 1995 and 1996; Common
Associates--200 shares in 1994 and
300 shares in 1995 and 1996; Common
Laboratories--0 in 1994, 1,000 in
1995 and 1996 (23,973) (32,050) (32,050)
-----------------------------------------
770,104 705,788 689,445
-----------------------------------------
Total liabilities and owners' equity $1,259,664 $1,465,806 $1,607,361
=========================================
</TABLE>
See accompanying notes.
2
<PAGE>
Park Medical Associates, P.A. and Park Medical Labs, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
(Unaudited)
Nine months ended
Year ended December 31 September 30
1993 1994 1995 1995 1996
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue:
Net patient service revenue $3,479,064 $3,908,278 $4,380,661 $3,269,125 $3,321,600
Interest income 3,818 3,569 4,246 3,599 2,599
Other income 70,000 50,000 7,000
-----------------------------------------------------------------
3,482,882 3,911,847 4,454,907 3,322,724 3,331,199
Operating expenses:
Salaries and wages--physicians 1,057,000 1,158,000 1,423,265 1,158,270 1,092,485
Salaries and wages--staff 693,913 784,153 878,386 662,667 684,414
Physician and staff benefits 440,099 498,258 521,899 384,582 382,546
Supplies and other 774,719 839,965 855,456 623,507 692,363
Insurance 38,932 49,421 42,400 36,641 32,517
Rent 99,324 178,557 295,016 206,675 193,269
Depreciation and amortization 61,822 68,309 114,079 80,872 89,207
Provision for bad debts 169,217 201,366 233,695 175,271 155,485
-----------------------------------------------------------------
Net operating expenses 3,335,026 3,778,029 4,364,196 3,328,485 3,322,286
-----------------------------------------------------------------
Net income before income taxes 147,856 133,818 90,711 (5,761) 8,913
Income tax expense (benefit) 9,614 (25,055) 2,450 (14,689) 3,058
-----------------------------------------------------------------
Net income $ 138,242 $ 158,873 $ 88,261 $ 8,928 $ 5,855
=================================================================
</TABLE>
See accompanying notes.
3
<PAGE>
Park Medical Associates, P.A. and Park Medical Labs, Inc.
Consolidated Statements of Owners' Equity
<TABLE>
<CAPTION>
Common Stock
-------------------------------- Total
Preferred Stock Associates Laboratories Paid-in Retained Treasury Owners'
Shares Amount Shares Amount Shares Amount Capital Earnings Stock Equity
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1993 714 $91,800 700 $9,000 7,000 $7,000 $32,761 $ 446,028 $(23,973) $ 562,616
Distributions (50,031) (50,031)
Net income 138,242 138,242
--------------------------------------------------------------------------------------------------
Balance at December 31, 1993 714 91,800 700 9,000 7,000 7,000 32,761 534,239 (23,973) 650,827
Issuance of preferred stock 204 204 204
Issuance of common stock 200 200 2,000 2,000 2,200
Distributions (42,000) (42,000)
Net income 158,873 158,873
--------------------------------------------------------------------------------------------------
Balance at December 31, 1994 918 92,004 900 9,200 9,000 9,000 32,761 651,112 (23,973) 770,104
Acquisition of treasury stock (8,077) (8,077)
Distributions (144,500) (144,500)
Net income 88,261 88,261
--------------------------------------------------------------------------------------------------
Balance at December 31, 1995 918 92,004 900 9,200 9,000 9,000 32,761 594,873 (32,050) 705,788
Issuance of preferred stock 102 102 102
(unaudited)
Issuance of common stock 100 100 100
(unaudited)
Distributions (unaudited) (22,400) (22,400)
Net income (unaudited) 5,855 5,855
--------------------------------------------------------------------------------------------------
Balance at September 30, 1996
(unaudited) 1,020 $92,106 1,000 $9,300 9,000 $9,000 $32,761 $ 578,328 $(32,050) $ 689,445
==================================================================================================
</TABLE>
See accompanying notes.
4
<PAGE>
Park Medical Associates, P.A. and Park Medical Labs, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
(Unaudited)
Nine months ended
Year ended December 31 September 30
1993 1994 1995 1995 1996
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating activities
Net income $138,242 $ 158,873 $ 88,261 $ 8,928 $ 5,855
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 61,822 68,309 114,079 80,872 89,207
Deferred income taxes 9,614 (25,055) 2,450 74,646 (35,829)
Loss on sale of investments 6,897 5,747
Loss on disposal of fixed assets 3,812
Changes in operating assets
and liabilities:
Accounts receivable, net 4,433 (25,185) (65,437) (12,935) (51,894)
Other current assets (12,445) 4,239 (8,200) 17,478 32,836
Accounts payable and accrued
expenses 22,107 105,103 101,529 128,786 163,691
--------------------------------------------------------
Net cash provided by operating 230,670 295,843 232,682 297,775 203,866
activities
Investing activities
Cash proceeds from sale of 13,007 111,857
investments
Purchase of investments (36,110) (81,342)
Purchase of property and
equipment (14,048) (389,184) (111,530) (88,159) (14,384)
---------------------------------------------------------
Net cash used in investing
activities (37,151) (358,669) (111,530) (88,159) (14,384)
Financing activities
Issuance of stock 2,404 202
Purchase of treasury stock (8,077)
Distributions paid (50,031) (42,000) (144,500) (91,000) (22,400)
Payments on lease obligations (3,080) (3,228) (15,380) (8,018) (21,102)
---------------------------------------------------------
Net cash used in financing
activities (53,111) (42,824) (167,957) (99,018) (43,300)
---------------------------------------------------------
Net increase (decrease) in cash 140,408 (105,650) (46,805) 110,598 146,182
Cash and cash equivalents at
beginning of year 60,584 200,992 95,342 95,342 48,537
---------------------------------------------------------
Cash and cash equivalents at end
of year $200,992 $ 95,342 $ 48,537 $205,940 $194,719
=========================================================
Supplemental disclosure of cash
flow information:
Interest paid $ 692 $ 227 $ 7,962 $ 3,800 $ 7,236
=========================================================
Noncash transactions:
Acquisition of capital
leased equipment - - $ 144,962 $144,962 -
=========================================================
</TABLE>
See accompanying notes.
5
<PAGE>
Park Medical Associates, P.A. and Park Medical Labs, Inc.
Notes to Consolidated Financial Statements
December 31, 1995
1. Summary of Significant Accounting Policies
Description of Business
Park Medical Associates, P.A. and Park Medical Labs, Inc. (the Companies) are
taxable entities organized under the laws of Maryland. The Companies offer a
variety of medical services, including internal medicine, neurology and
obstetrics/gynecology, in the greater Baltimore, Maryland area.
Principles of Consolidation
The accompanying consolidated financial statements reflect the accounts of the
Companies. These Companies are affiliated through, and managed by, common
ownership. All significant intercompany accounts and transactions are
eliminated upon consolidation.
Cash Equivalents
Cash equivalents consist of cash in banks and an interest-bearing money market
accounts.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated using the straight-line method over the estimated useful
lives of the assets. Routine maintenance and repairs are charged to expense as
incurred. Amortization of assets recorded under capital leases is included in
depreciation expense.
Income Taxes
Park Medical Associates, P.A. is taxable under the provisions of the Internal
Revenue Code and files a separate cash-basis federal and state income tax
return, reporting only its own taxable income (loss) for the year. No provision
for federal income tax is required for Park Medical Laboratories since this
entity, with consent of its shareholders, has elected to be taxed as an S
corporation under the provisions of the Internal Revenue Code. Deferred income
taxes are provided for temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes (see Note 7).
6
<PAGE>
Park Medical Associates, P.A. and Park Medical Labs, Inc.
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Professional Liability Insurance
The Companies have obtained professional liability coverage through commercial
insurance carriers on both the occurrence and claims-made basis. Management
believes that there are no claims that may result in a loss in excess of amounts
covered by its existing insurance.
Net Patient Service Revenue
Net patient service revenue is reported at the estimated realizable amounts from
patients, third-party payors and others for services rendered. The Medicare and
Medicaid programs pay physician services based on fee schedules which are
determined by the related government agency. The Companies have negotiated
numerous agreements with managed care organizations to provide physician
services based on fee schedules. No individual managed care contract is
material to the Companies.
Risks and Uncertainties
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Unaudited Financial Statements
The unaudited financial statements as of September 30, 1996 and for the nine
months ended September 30, 1995 and 1996 have been prepared by management in
accordance with generally accepted accounting principles. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results of the
interim periods are not necessarily indicative of the results that may be
expected for a full year.
7
<PAGE>
Park Medical Associates, P.A. and Park Medical Labs, Inc.
Notes to Consolidated Financial Statements (continued)
2. Property and Equipment
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31
1994 1995
------------------------
<S> <C> <C>
Furniture, fixtures and equipment $ 945,132 $ 980,894
Capital leased equipment 144,962
Leasehold improvements 75,768
------------------------
945,132 1,201,624
Less accumulated depreciation and
amortization (529,311) (643,390)
------------------------
$ 415,821 $ 558,234
========================
</TABLE>
3. Capital Leases
The Companies lease certain medical equipment under long-term capital leases.
Future minimum lease payments for capital leases were as follows at December 31,
1995:
<TABLE>
<S> <C>
1996 $ 37,134
1997 37,134
1998 37,134
1999 37,134
2000 9,426
-----------
Total minimum lease payments 157,962
Less amount representing interest (28,380)
-----------
Present value of net minimum
lease payments 129,582
Less current maturities (28,814)
-----------
Long-term obligation $100,768
===========
</TABLE>
8
<PAGE>
Park Medical Associates, P.A. and Park Medical Labs, Inc.
Notes to Consolidated Financial Statements (continued)
4. Operating Leases
The Companies lease office space and certain equipment under operating leases.
The lease of office space includes an annual escalation clause of 3.75% and is
noncancelable for a period of ten years, with two additional five-year renewal
options. Total rental expense was $99,324, $178,557 and $295,016 in 1993, 1994
and 1995, respectively.
The following is a schedule by year of future minimum lease payments under
operating leases as of December 31, 1995:
<TABLE>
<S> <C>
1996 $ 249,373
1997 258,692
1998 268,406
1999 278,495
2000 288,934
Thereafter 1,125,676
------------
Total future minimum lease payments $2,469,576
============
</TABLE>
5. Employee Benefit Plans
The Companies sponsor a profit-sharing plan covering all employees at least 21
years of age and having completed a minimum of one year of service.
Contributions were determined based upon a percentage of each eligible
employee's compensation, as defined, and/or at the discretion of management.
Participants become fully vested in their sixth year of service with the
Companies. Total contributions were $32,969, $41,024 and $57,168 for the years
ended December 31, 1993, 1994 and 1995, respectively, and are included in
employee benefits in the accompanying statement of operations.
6. Distributions
Under the provisions of the Internal Revenue Code, all taxable income of Park
Medical Laboratories is subject to taxation at the shareholder level.
Accordingly, the Company distributes cash to its shareholders in amounts which
equal taxable income reported by the Company. Distributions made in 1994, 1995
and 1996 represent taxable income of prior years.
9
<PAGE>
Park Medical Associates, P.A. and Park Medical Labs, Inc.
Notes to Consolidated Financial Statements (continued)
7. Income Taxes
The Company accounts for income taxes using the liability method required by
Financial Accounting Standards Board (FASB) Statement No. 109, "Accounting for
Income Taxes."
Deferred income taxes reflect the net effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes.
Significant components of the Company's deferred tax liabilities and assets were
as follows:
<TABLE>
<CAPTION>
December 31
1994 1995
---------------------
<S> <C> <C>
Deferred tax liabilities:
Accounts receivable, net $176,796 $195,777
Prepaid expenses, other 20,158 31,838
Accelerated depreciation 14,120 22,806
---------------------
Total deferred tax liabilities 211,074 250,421
Deferred tax assets:
Accrued expenses, other 50,962 87,859
Capital loss carryforward 5,058 5,058
Net operating loss carryover 1,701 1,436
---------------------
57,721 94,353
Less valuation allowance (6,759) (6,494)
---------------------
Net deferred tax assets 50,962 87,859
---------------------
Net deferred tax liabilities $160,112 $162,562
=====================
</TABLE>
10
<PAGE>
Park Medical Associates, P.A. and Park Medical Labs, Inc.
Notes to Consolidated Financial Statements (continued)
7. Income Taxes (continued)
Significant components of the provision (benefit) for income taxes attributable
to continuing operations are as follows:
<TABLE>
<CAPTION>
Year ended December 31
1993 1994 1995
---------------------------------------
<S> <C> <C> <C>
Deferred:
Federal $8,412 $(21,923) $2,144
State 1,202 (3,132) 306
---------------------------------------
Net provision (benefit) $9,614 $(25,055) $2,450
=======================================
</TABLE>
The difference between the provision for income taxes and the amount computed by
applying the statutory federal income tax rate to income before taxes is as
follows:
<TABLE>
<CAPTION>
Year ended December 31
1993 1994 1995
-------------------------------------------------------
Amount Rate Amount Rate Amount Rate
-------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Federal taxes at statutory
rates $ 51,750 35% $ 46,836 35% $ 31,749 35%
Add (deduct):
Federal taxes on income
taxed at shareholder
level (35,191) (24) (69,113) (52) (29,635) (32)
State income tax, net of
federal tax benefit 782 1 (2,036) (2) 199 0
Effect of valuation
allowance (9,550) (6) 134 0 (265) 0
Other 1,823 1 (876) 0 402 0
-------------------------------------------------------
$ 9,614 7% $(25,055) (19)% $ 2,450 3%
=======================================================
</TABLE>
Net operating loss carryforwards for tax purposes available as of December 31,
1995 were $3,590, which expire beginning in 2007.
11
<PAGE>
Park Medical Associates, P.A. and Park Medical Labs, Inc.
Notes to Consolidated Financial Statements (continued)
8. Preferred Stock
Each share of Park Medical Associates' nonvoting preferred stock entitles its
holder to receive an annual cash dividend of $8.00 per share. Dividends on the
preferred stock are noncumulative and must be paid before any distributions are
made to the holders of Park Medical Associates' common stock.
In the event of the dissolution and liquidation of the corporation, the holders
of the preferred stock are entitled to receive out of funds available for
distributions to stockholders $100 for each share of preferred stock issued
before any distributions are made to the holders of Park Medical Associates'
common stock.
The Board of Directors may at any time on thirty days' written notice redeem any
part or all of the preferred stock at the redemption price of $105 per share.
Park Medical Associates has not declared any dividends on its preferred or
common stock since inception of the Company.
9. Pending Affiliation
The Companies expect to enter into a long-term affiliation agreement with
Physicians Quality Care, Inc. (PQC). Under this arrangement, the Companies will
merge with and into, and the physicians will become employees of, a newly formed
professional corporation that is affiliated with PQC. The aggregate
consideration to be paid to the Companies for the merger is subject to working
capital adjustments and is payable in cash and common stock of PQC.
12
<PAGE>
Drs. Sigler, Roskes, Holden & Schuberth, P.A.
Audited Financial Statements
Years ended December 31, 1994 and 1995, and
nine months ended September 30, 1995 (Unaudited)
and September 30, 1996 (Unaudited)
Contents
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors.......................... 1
Audited Financial Statements
Balance Sheets.......................................... 2
Statements of Operations................................ 3
Statements of Shareholders' Equity...................... 4
Statements of Cash Flows................................ 5
Notes to Financial Statements........................... 6
</TABLE>
<PAGE>
[LETTERHEAD OF ERNST & YOUNG LLP APPEARS HERE]
Report of Independent Auditors
The Board of Directors
Physicians Quality Care, Inc.
We have audited the accompanying balance sheets of Drs. Sigler, Roskes, Holden &
Schuberth, P.A. as of December 31, 1994 and 1995, and the related statements of
operations, shareholders' equity, and cash flows for the years then ended.
These financial statements are the responsibility of management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Drs. Sigler, Roskes, Holden &
Schuberth, P.A. at December 31, 1994 and 1995, and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
September 20, 1996
Boston, Massachusetts
1
<PAGE>
Drs. Sigler, Roskes, Holden & Schuberth, P.A.
Balance Sheets
<TABLE>
<CAPTION>
(Unaudited)
December 31 September 30
1994 1995 1996
--------------------------------------
<S> <C> <C> <C>
Assets
Current assets:
Cash $109,949 $ 53,982 $210,458
Accounts receivable, less allowance for
doubtful accounts of $16,470 in 1994,
$15,035 in 1995 and $10,976 in 1996
(unaudited) 237,005 273,132 227,914
Prepaid expenses 29,261 50,201 55,242
Deferred income taxes 53,871 67,354 115,984
--------------------------------------
Total current assets 430,086 444,669 609,598
Deferred income taxes, noncurrent 18,125 20,974 10,262
Property and equipment, net 75,072 51,979 44,120
--------------------------------------
Total assets $523,283 $517,622 $663,980
======================================
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 58,077 $ 79,857 $151,920
Accrued employee benefits 62,005 23,742 50,512
Accrued salaries and payroll taxes 53,796 61,843 31,220
Accrued expenses, other 55,379 52,611 48,998
Deferred income taxes 106,506 129,332 113,263
Accrued physician bonuses 36,396
Escrow fees payable 56,784
Accrued income taxes 50,631
Current portion of obligation under capital lease 14,496 3,798
Current portion of note payable 12,000 12,000 10,000
--------------------------------------
Total current liabilities 362,259 363,183 549,724
Obligation under capital lease, less current portion 3,798 1
Note payable, less current portion 19,000 7,000
Deferred income taxes, noncurrent 210
Shareholders' equity:
Common stock 14,171 14,171 14,171
Additional paid-in capital 56,924 56,924 56,924
Retained earnings 80,826 90,248 57,066
--------------------------------------
151,921 161,343 128,161
Cost of treasury stock (13,905) (13,905) (13,905)
--------------------------------------
Total shareholders' equity 138,016 147,438 114,256
--------------------------------------
Total liabilities and shareholders' equity $523,283 $517,622 $663,980
======================================
</TABLE>
See accompanying notes.
2
<PAGE>
Drs. Sigler, Roskes, Holden & Schuberth, P.A.
Statements of Operations
<TABLE>
<CAPTION>
(Unaudited)
Year ended Nine months ended
December 31 September 30
1994 1995 1995 1996
-----------------------------------------------------
<S> <C> <C> <C> <C>
Revenue:
Net patient service revenue $2,735,139 $2,770,367 $2,093,288 $1,927,947
Other income 114,205 157,128 101,237 97,706
Interest income 29 4,385 2,758 1,646
-----------------------------------------------------
2,849,373 2,931,880 2,197,283 2,027,299
Operating expenses:
Salaries and wages--physicians 1,191,190 1,178,873 927,086 833,519
Salaries and wages--staff 457,581 502,896 456,094 457,331
Employee benefits--staff 208,460 212,182 158,639 150,512
Supplies and other 637,526 724,193 397,320 408,641
Rent 123,280 134,026 122,299 122,299
Insurance 121,314 115,707 59,423 67,906
Interest 4,569 3,312 2,619 1,016
Depreciation 37,049 29,949 22,462 11,638
Provision for bad debts 16,470 15,035 11,276 10,976
-----------------------------------------------------
Net operating expenses 2,797,439 2,916,173 2,157,218 2,063,838
-----------------------------------------------------
Net income (loss) before income taxes 51,934 15,707 40,065 (36,539)
Income tax provision (benefit) 21,264 6,283 11,128 (3,355)
-----------------------------------------------------
Net income (loss) $ 30,670 $ 9,424 $ 28,937 $ (33,184)
=====================================================
</TABLE>
See accompanying notes.
3
<PAGE>
Drs. Sigler, Roskes, Holden & Schuberth, P.A.
Statements of Shareholders' Equity
<TABLE>
<CAPTION>
<S> <C>
Balance at December 31, 1993 $107,346
Net income 30,670
----------
Balance at December 31, 1994 138,016
Net income 9,424
----------
Balance at December 31, 1995 147,440
Net loss (unaudited) (33,184)
----------
Balance at September 30, 1996 (unaudited) $114,256
==========
</TABLE>
See accompanying notes.
4
<PAGE>
Drs. Sigler, Roskes, Holden & Schuberth, P.A.
Statements of Cash Flows
<TABLE>
<CAPTION>
(Unaudited)
Year ended Nine months ended
December 31 September 30
1994 1995 1995 1996
---------------------------------------------------
<S> <C> <C> <C> <C>
Operating activities
Net income (loss) $ 30,670 $ 7,427 $ 28,937 $(31,912)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation 37,049 29,949 22,462 11,638
Deferred income taxes 21,190 6,283 11,128 (55,257)
Changes in operating assets and liabilities:
Accounts receivable, net (46,448) (36,127) (66,466) 45,218
Other current assets (1,701) (20,940) (36,073) (5,041)
Accounts payable and accrued expenses 27,770 (9,207) 234,049 208,408
---------------------------------------------------
Net cash provided (used) by operating
activities 68,530 (22,615) 194,037 173,054
Investing activity
Purchase of property and equipment (26,183) (6,856) (6,859) (3,779)
---------------------------------------------------
Net cash used in investing activity (26,183) (6,856) (6,859) (3,779)
Financing activities
Payments on capital lease obligation (13,452) (14,496) (9,000) (3,799)
Payments on note payable (12,000) (12,000) (12,245) (9,000)
---------------------------------------------------
Net cash used in financing activities (25,452) (26,496) (21,245) (12,799)
---------------------------------------------------
Increase (decrease) in cash 16,895 (55,967) 165,933 156,476
Cash at beginning of period 93,054 109,949 109,949 53,982
---------------------------------------------------
Cash at end of period $109,949 $ 53,982 $275,882 $210,458
===================================================
Supplemental disclosure of cash flow
information:
Interest paid $ 2,645 $ 2,423 $ 2,619 $ 1,016
===================================================
</TABLE>
See accompanying notes.
5
<PAGE>
Drs. Sigler, Roskes, Holden & Schuberth, P.A.
Notes to Financial Statements
December 31, 1995
1. Summary of Significant Accounting Policies
Description of Business
Drs. Sigler, Roskes, Holden & Schuberth, P.A. (the Company) is a taxable entity
organized under the laws of Maryland. The Company offers a variety of medical
services, including pediatrics and primary care, in the greater Baltimore,
Maryland area.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated using the straight-line method over the estimated useful
lives of the assets. Routine maintenance and repairs are charged to expense as
incurred. Amortization of assets recorded under capital lease transactions is
included in depreciation expense.
Income Taxes
The Company is taxable under the provisions of the Internal Revenue Code. The
Company files its federal and state income tax return on the cash-basis method
of accounting. Deferred income taxes are provided for temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes (see Note 7).
Professional Liability Insurance
The Company has obtained professional liability coverage through commercial
insurance carriers on the claims-made basis. Management believes that there are
no claims that may result in a loss in excess of amounts covered by its existing
insurance.
Net Patient Service Revenue
Net patient service revenue is reported at the estimated realizable amounts from
patients, third-party payors and others for services rendered. The Medicare and
Medicaid programs pay physician services based on fee schedules which are
determined by the related government agency. The Company has negotiated
numerous agreements with managed care organizations to provide physician
services based on fee schedules. No individual managed care contract is
material to the Company.
6
<PAGE>
Drs. Sigler, Roskes, Holden & Schuberth, P.A.
Notes to Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Risks and Uncertainties
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Unaudited Financial Statements
The unaudited financial statements as of September 30, 1996 and for the nine
months ended September 30, 1995 and 1996 have been prepared by management in
accordance with generally accepted accounting principles. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results of the
interim periods are not necessarily indicative of the results that may be
expected for a full year.
2. Property and Equipment
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31
1994 1995
--------------------
<S> <C> <C>
Furniture, fixtures and equipment $213,956 $217,093
Leasehold improvements 117,987 121,709
--------------------
331,943 338,802
Less accumulated depreciation (256,871) (286,823)
--------------------
$ 75,072 $ 51,979
====================
</TABLE>
3. Note Payable
The Company has a note payable with a bank payable in monthly installments of
$1,000, plus interest, with a final maturity date of July 10, 1997. The note
carries interest at the prime rate. The principal balance outstanding under the
note was $31,000 and $19,000 at December 31, 1994 and 1995, respectively.
7
<PAGE>
Drs. Sigler, Roskes, Holden & Schuberth, P.A.
Notes to Financial Statements (continued)
3. Note Payable (continued)
The following is a schedule of principal maturities on the notes and line of
credit as of December 31, 1995:
<TABLE>
<S> <C>
1996 $ 12,000
1997 7,000
----------
$ 19,000
==========
</TABLE>
4. Capital Leases
Property, plant and equipment includes the following amounts for leases that
have been capitalized at December 31:
<TABLE>
<CAPTION>
December 31
1994 1995
---------------------
<S> <C> <C>
Equipment $ 64,347 $ 64,347
Less accumulated amortization (48,240) (61,105)
---------------------
$ 16,107 $ 3,242
=====================
</TABLE>
5. Operating Leases
The Group leases office space and certain equipment under operating leases.
Total rental expense was $123,280 and $134,026 in 1994 and 1995, respectively.
The following is a schedule by year of future minimum lease payments under
operating leases as of December 31, 1995:
<TABLE>
<S> <C>
1996 $ 135,625
1997 138,822
1998 143,518
1999 148,540
2000 153,773
Thereafter 337,651
------------
Total future minimum
lease payments $1,057,929
============
</TABLE>
8
<PAGE>
Drs. Sigler, Roskes, Holden & Schuberth, P.A.
Notes to Financial Statements (continued)
6. Employee Benefit Plans
The Company has a qualified profit sharing plan covering substantially all
employees. Contributions are determined based upon a percentage of each
eligible employee's compensation, as defined and/or at the discretion of
management. Total contributions were $208,460 and $212,182 for the years ended
December 31, 1994 and 1995, respectively, and are included in employee benefits
in the accompanying statements of operations.
7. Income Taxes
The Company accounts for income taxes utilizing the liability method required by
Financial Accounting Standards Board (FASB) Statement No. 109, "Accounting for
Income Taxes."
Deferred income taxes reflect the net effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
Company's deferred tax liabilities and assets were as follows:
<TABLE>
<CAPTION>
Year ended December 31
1994 1995
------------------------
<S> <C> <C>
Deferred tax liabilities:
Accounts receivable, net $ 94,802 $109,252
Accrued expenses 11,704 20,080
Depreciation 210
------------------------
Total deferred tax liabilities 106,716 129,332
Deferred tax assets:
Accrued expenses 53,871 67,354
Net operating loss carryover 10,807 12,803
Other 7,318 1,519
Depreciation 6,652
------------------------
Total deferred tax assets 71,996 88,328
------------------------
Net deferred tax liabilities $ 34,720 $ 41,004
========================
</TABLE>
9
<PAGE>
Drs. Sigler, Roskes, Holden & Schuberth, P.A.
Notes to Financial Statements (continued)
7. Income Taxes (continued)
Significant components of the provision for income taxes attributable to
continuing operations are as follows:
<TABLE>
<CAPTION>
Year ended December 31
1994 1995
------------------------
<S> <C> <C>
Current:
Federal
State $ 74
------------------------
Total current 74
Deferred:
Federal 18,451 $5,497
State 2,739 785
------------------------
Total deferred 21,190 6,282
------------------------
$21,264 $6,282
========================
</TABLE>
The difference between the provision for income taxes and the amount computed by
applying the statutory federal income tax rate to income before taxes is as
follows:
<TABLE>
<CAPTION>
Year ended December 31
1994 1995
------------------------------
Amount Rate Amount Rate
------------------------------
<S> <C> <C> <C> <C>
Federal taxes at statutory rates $18,177 35% $5,497 35%
Add (deduct):
State income tax, net of federal
tax benefit 2,597 5 786 5
Other 490 1
------------------------------
$21,264 41% $6,283 40%
==============================
</TABLE>
Net operating loss carryforwards for tax purposes as of December 31, 1995
approximate $32,008, which expire beginning in 2004.
10
<PAGE>
Drs. Sigler, Roskes, Holden & Schuberth, P.A.
Notes to Financial Statements (continued)
8. Pending Affiliation
The Company expects to enter into a long-term affiliation arrangement with
Physicians Quality Care, Inc. (PQC). Under this arrangement, the Company will
merge with and into, and the physicians will become employees of, a newly formed
professional corporation that is affiliated with PQC. The aggregate
consideration to be paid to the Company is subject to working capital
adjustments and is payable in common stock of PQC.
11
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered. All amounts shown are
estimates except for the Securities and Exchange Commission registration fee.
<TABLE>
<CAPTION>
<S> <C>
SEC Registration Fee.................................... $ 4,800
Blue Sky Fees and Expenses.............................. *
Accounting Fees and Expenses............................ *
Legal Fees and Expenses................................. *
Printing, Engraving and Mailing Expenses................ *
Miscellaneous........................................... *
------------
Total............................................ $ *
============
</TABLE>
- -------------------
*To be completed by amendment.
Item 14. Indemnification of Directors and Officers
Section 145 of the General Corporation Law of Delaware provides that a
corporation has the power to indemnify a director, officer, employee or agent of
the corporation and certain other persons serving at the request of the
corporation in related capacities against amounts paid and expenses incurred in
connection with an action or proceedings to which he or she is or is threatened
to be made a party by reason of such position, if such person shall have acted
in good faith and in a manner he or she reasonably believed to be in or not
opposed to the best interest of the corporation, and, in any criminal
proceedings, if such person had no reasonable cause to believe his or her
conduct was unlawful; provided that, in the case of actions brought by or in the
right of the corporation, no indemnification shall be made with respect to any
matter as to which such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the adjudicating court determines
that such indemnification is proper under the circumstances.
Article SIXTH of the Registrant's Restated Certificate of Incorporation
provides that a director or officer of the Registrant (a) shall be indemnified
by the Registrant against all expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement reasonably incurred in connection with any
litigation or other legal proceedings (other than an action by or in the right
of the Registrant) brought against such person by virtue of his or her position
as a director or officer of the Registrant if he or she acted in good faith and
in a manner he or she reasonably believed to be in or not opposed to the best
interests of the Registrant, and, with respect to any criminal action or
proceedings, had no reasonable cause to believe his or her conduct was unlawful
and (b) shall be indemnified by the Registrant against expenses (including
attorneys' fees) and amounts paid in settlement reasonably incurred in
connection with any action by or in the right of the Registrant if such person
acted in a manner he or she reasonably believed to be in or not opposed to the
best interests of the Registrant, except that no indemnification shall be made
with respect to any such matter as to which such director or officer shall have
been adjudged to be liable to the Registrant, unless and only to the extent that
a court determines that, despite the adjudication of liability but in view of
all the circumstances of the case, such person is fairly and reasonably entitled
to indemnity for such expenses as the court deems proper. Notwithstanding the
foregoing, to the extent that a director or officer has been successful, on the
merits or otherwise, such person shall be indemnified against all expenses
(including attorneys' fees) reasonably incurred by him in connection therewith.
Expenses incurred in defending a civil or criminal action, suit or proceedings
shall be advanced by the
II-1
<PAGE>
Registrant to a director or officer, at his or her request, upon receipt of an
undertaking by the director or officer to repay such amount if it is
ultimately determined that he or she is not entitled to indemnification.
Indemnification is required to be made unless the Registrant determines (in
the manner provided in the Restated Certificate of Incorporation) that the
applicable standard of conduct required for indemnification has not been met. In
the event of a determination by the Registrant that the director or officer did
not meet the applicable standard of conduct required for indemnification, or if
the Registrant fails to make an indemnification payment within 60 days after
such payment is claimed by such person, such person is permitted to petition a
court to make an independent determination as to whether such person is entitled
to indemnification. As a condition precedent to the right of indemnification,
the director or officer must give the Registrant notice of the action for which
indemnity is sought and the Registrant has the right to participate in such
action or assume the defense thereof.
Article SIXTH of the Registrant's Restated Certificate of Incorporation
further provides that the indemnification provided therein is not exclusive, and
provides that in the event that the Delaware General Corporation Law is amended
to expand the indemnification permitted to directors or officer, the Registrant
must indemnify those persons to the fullest extent permitted by such law as so
amended.
The Registrant intends to purchase a general liability insurance policy
which covers certain liabilities of directors and officers of the Registrant
arising out of claims based on acts or omissions in their capacity as directors
or officers.
Article FIFTH of the Registrant's Restated Certificate of Incorporation
provides that, except to the extent that the General Corporation Law of Delaware
prohibits the elimination or limitation of liability of directors for breaches
of fiduciary duty, no directors of the Registrant shall be personally liable to
the Registrant or its stockholders for monetary damages for any breach of
fiduciary duty as a director.
Item 15. Recent Sales of Unregistered Securities
The securities issued or sold by the Company since March 20, 1995, the date
of inception, which were not registered under the Securities Act are listed
below:
(i) From June 30, 1995 through March 10, 1997, the Registrant has issued
an aggregate of 726,586 options to purchase shares of Series A Common Stock
under the Registrant's 1995 Equity Incentive Plan (the "1995 Plan") and 90,000
options outside the 1995 Plan. At March 31, 1997, options to purchase 574,836
shares of Class A Common Series are outstanding under the 1995 Plan.
(ii) On June 21, 1995, the Registrant issued an aggregate of 7,706,250
shares of the original common stock of the Company to its founders at a purchase
price of $0.01 per share. In February 1996, 1,012,500 shares were reacquired as
treasury stock and 6,693,750 shares were converted into Series A Common Stock on
August 30, 1996.
(iii) From June 30, 1995 through August 1, 1995, the Registrant issued an
aggregate 1,666,151 shares of Series A Preferred Stock to accredited investors
at a purchase price of $2.40 per share, which shares were subsequently converted
into 1,666,151 shares of Series A Common Stock on August 30, 1996.
(iv) On August 30, 1996, pursuant to an affiliation transaction with seven
medical practices, the Registrant issued 2,592,245 shares of Series A Common
Stock with a value of $2.50 per share, in consideration for such transaction.
(v) Between August 30, 1996 and December 10, 1996, in connection with a
financing transaction with certain institutional investors, the Registrant
issued 2,442,866 shares of Class B-1 Common Stock at a
II-2
<PAGE>
purchase price of $2.50 per share, 1,557,134 shares of the Class B-2 Common
Stock at a purchase price of $2.50 per share, and warrants.
(vi) On August 30, 1996, in connection with the sale of a convertible
promissory note and warrant dated June 30, 1995, the Registrant issued 625,000
shares of Series A Common Stock to Offshore Health Industries, Inc. at a
purchase price of $2.40 per share.
(vii) On August 30, 1996, in connection with a financing, the Registrant
issued 402,300 shares of the Series A Common Stock to accredited investors at
a purchase price of $2.50 per share.
(viii) On December 11, 1996, pursuant to affiliation transactions with
medical practices, the Registrant issued 6,842,675 shares of Series A Common
Stock and 400,000 options to purchase shares of Series A Common Stock, in
consideration for such transactions.
(ix) On December 31, 1996 and February 11, 1997, the Registrant issued a
total of 614,000 shares of Series A Common Stock to investors at a purchase
price of $2.50 per share.
(x) On January 5, 1997, pursuant to an affiliation transaction with a
medical practice, the Registrant issued 440,000 shares of Series A Common
Stock with a value of $2.50 per share, in consideration for such transaction.
(xi) On February 12, 1997, pursuant to affiliation transactions with
medical practices, the Registrant issued 132,493 shares of Series A Common
Stock with a value of $2.50 per share in consideration for such transaction.
(xii) On February 14, 1997, pursuant to a Letter Agreement between the
Registrant and Bankers Trust Investment Partners, Inc. ("BTIP") the Registrant
issued 63,000 shares of Series B Common Stock to BTIP at a purchase price of
$2.50 per share.
(xiii) On April 18, 1997, the Registrant issued 600,000 shares of Series B
Common Stock and warrants to purchase 865,500 shares of Series B Common Stock
to the Bain Funds for $1.5 million in consideration.
The shares of capital stock issued in the above transactions were offered
and sold in reliance upon the exemption from registration under Section 4(2) and
Rule 152 under the Securities Act or Regulation D promulgated thereunder, as
transactions by an issuer not involving any public offering, or Rule 701
promulgated under Section 3(b) of the Securities Act as transactions pursuant to
compensatory benefit plans and compensation as provided under such Rule 701. The
recipients of securities in each such transaction represented their intentions
to acquire the securities for investment only and not with a view to or for sale
in connection with any distribution thereof and appropriate legends were affixed
to the share certificates and warrants issued in such transaction. All
recipients had adequate access, through their relationships with the Company, to
information about the Registrant.
Item 16. Exhibits
<TABLE>
<CAPTION>
(a) Exhibits
Exhibit
No. Description
- ------- -----------
<S> <C>
3.1 Restated Certificate of Incorporation of the Registrant
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<S> <C>
3.2 Amended and Restated By-Laws of the Registrant
4.1 Specimen certificate for shares of Common Stock
4.2 Class B Common Stock and Warrant Purchase Agreement dated August
30, 1996, between the Registrant and each of the Institutional
Investors
4.3 Stockholders Agreement dated August 30, 1996, among the
Registrant, the Institutional Investors, each Management
Stockholder from time to time party thereto, each Physician
Stockholder from time to time party thereto and other existing
stockholders from time to time party thereto
4.4 Stockholders Agreement dated August 9, 1996 between the
Registrant and certain Springfield Stockholder Physicians.
4.5 Registration Rights Agreement dated August 9, 1996, by and among
the Registrant and certain Springfield Stockholder Physicians.
4.6* Amendment dated December 11, 1996, to the Class B Common Stock
and Warrant Purchase Agreement dated August 30, 1996, between the
Registrant and each of the Institutional Investors
5.1* Opinion of Hale and Dorr LLP
10.1 1995 Equity Incentive Plan form of non-statutory stock option
agreement
10.2 Management Agreement dated August 30, 1996, between the
Registrant and Bain Capital Partners V, L.P., a Delaware limited
partnership
10.3 Lease dated November 1995 between Shorenstein Management, Inc. as
trustee for SRI Two Realty Trust and the Registrant
10.4 Lease dated December 9, 1996 between Steven M. Roberts, trustee
of Northernedge/Plant One Realty Trust and the Registrant
10.5 Maryland Full-Service Office Lease of Camden Yards North
Warehouse dated October 12, 1995, by and between the Maryland
Stadium Authority and the Registrant
10.6 Form of Merger Agreement dated December 11, 1996, among the
Registrant, the Flagship Affiliated Group and certain of the
Flagship Stockholder Physicians and their practices.
10.7 Form of Asset Purchase Agreement dated December 11, 1996, among
the Registrant, the Flagship Affiliated Group and certain of the
Flagship Stockholder Physicians and their practices
10.8 Form of Affiliation Agreement dated December 11, 1996, among the
Registrant, the Flagship Affiliated Group and certain of the
Flagship Stockholder Physicians
10.9 Services Agreement dated December 11, 1996, between the
Registrant and the Flagship Affiliated Group
10.10 Form of Employment Agreement dated December 11, 1996, between the
Flagship Affiliated Group and each Flagship Stockholder Physician
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<S> <C>
10.11 Form of Shareholder Designation and Stock Transfer Agreement
dated December 11, 1996, among the Registrant, the Flagship
Affiliated Group and the Flagship Affiliated Group Stockholder,
Laura M. Mumford, M.D.
10.12 Form of Merger Agreement among the Registrant, the Springfield
Affiliated Group and the Springfield Stockholder Physicians and
their practices
10.13 Form of Asset Purchase Agreement among the Registrant, the
Springfield Affiliated Group and certain Springfield Stockholder
Physicians
10.14 Form of Employment Agreement between the Springfield Affiliated
Group and certain Springfield Stockholder Physicians, including
General Terms and Conditions of Employment for the Springfield
Affiliated Group and Form of Addendum thereto relating to the
Springfield Stockholder Physicians
10.15 Form of Affiliation Agreement dated August 30, 1996, among the
Registrant, the Springfield Affiliated Group and the Springfield
Stockholder Physicians
10.16 Services Agreement dated August 30, 1996, among the Registrant
and the Springfield Affiliated Group
10.17 Shareholder Designation and Stock Transfer Agreement dated August
9, 1996, among the Registrant, the Springfield Affiliated Group
and the Springfield Affiliated Group Stockholder, Jay Ungar, M.D.
10.18 Credit Agreement dated January 16, 1997 among the Registrant,
Banker's Trust Company, as Agent, and various lending
institutions
10.19 Employment Agreement dated June 21, 1995 between the Registrant
and Jerilyn P. Asher, as amended in January 1996 and on August
30, 1996
10.20 Employment Agreement dated June 21, 1995 between the Registrant
and Arlan F. Fuller, M.D., as amended in January 1996
10.21 Office Building Lease dated March 18, 1997, by and between Harbor
Court Associates and the Registrant
11.1 Statement regarding computation of earnings per share
21.1 Subsidiaries of the Registrant
23.1 Consent of Hale and Dorr LLP (contained in Exhibit 5.1)
23.2 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney (See Page II-7)
27 Financial Data Schedule
</TABLE>
- -----------------
* To be filed by amendment.
Item 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions contained in the
II-5
<PAGE>
Restated Certificate of Incorporation and Amended and Restated By-Laws of the
Registrant and the laws of the State of Delaware, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high
end of the estimated maximum offering range may be reflected
in the form of prospectus filed with the Commission pursuant
to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration
statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, in the City of Waltham, Commonwealth of
Massachusetts, on the 28th day of April, 1997.
PHYSICIANS QUALITY CARE, INC.
By: /s/Jerilyn P. Asher
-------------------------------------------
Jerilyn P. Asher
Chief Executive Officer, Secretary and
Chairman of the Board
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Jerilyn P. Asher as such person's true
and lawful attorney-in-fact and agent, with the full power of substitution and
resubstitution, for such person in any and all capacities, to sign any and all
amendments to this Registration Statement (including post-effective amendments),
and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
each said attorney-in-fact and agent full power and authority to do and perform
each and every act and thing requisite and necessary to be done in connection
therewith, as fully to all intents and purposes as she might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or any of them, or their or her substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/Jerilyn P. Asher Chief Executive Officer, April 28, 1997
- --------------------------- Secretary and Chairman of the
Jerilyn P. Asher Board (Principal Executive
Officer)
/s/Samantha J. Trotman Chief Financial Officer April 28, 1997
- --------------------------- (Principal Financial and
Samantha J. Trotman Accounting Officer)
/s/Dana Frank President and Director April 28, 1997
- ---------------------------
Dana Frank, M.D.
/s/Arlan F. Fuller Executive Vice President, April 28, 1997
- --------------------------- Medical Affairs and Director
Arlan F. Fuller, Jr., M.D.
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Director __________, 1997
- --------------------------
Ira Fine M.D.
/s/Alphonse Calvanese Director April 28, 1997
- ---------------------------
Alphonse Calvanese, M.D.
/s/Leslie Fang Director April 28, 1997
- ---------------------------
Leslie Fang, M.D.
/s/Stephen Pagliuca Director April 28, 1997
- ---------------------------
Stephen G. Pagliuca
/s/Marc Wolpow Director April 28, 1997
- ---------------------------
Marc Wolpow
</TABLE>
II-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<S> <C>
3.1 Restated Certificate of Incorporation of the Registrant
3.2 Amended and Restated By-Laws of the Registrant
4.1 Specimen certificate for shares of Common Stock
4.2 Class B Common Stock and Warrant Purchase Agreement dated August
30, 1996, between the Registrant and each of the Institutional
Investors
4.3 Stockholders Agreement dated August 30, 1996, among the
Registrant, the Institutional Investors, each Management
Stockholder from time to time party thereto, each Physician
Stockholder from time to time party thereto and other existing
stockholders from time to time party thereto
4.4 Stockholders Agreement dated August 9, 1996 between the
Registrant and certain Springfield Stockholder Physicians.
4.5 Registration Rights Agreement dated August 9, 1996, by and among
the Registrant and certain Springfield Stockholder Physicians.
4.6* Amendment dated December 11, 1996, to the Class B Common Stock
and Warrant Purchase Agreement dated August 30, 1996, between the
Registrant and each of the Institutional Investors
5.1* Opinion of Hale and Dorr LLP
10.1 1995 Equity Incentive Plan form of non-statutory stock option
agreement
10.2 Management Agreement dated August 30, 1996, between the
Registrant and Bain Capital Partners V, L.P., a Delaware limited
partnership
10.3 Lease dated November 1995 between Shorenstein Management, Inc. as
trustee for SRI Two Realty Trust and the Registrant
10.4 Lease dated December 9, 1996 between Steven M. Roberts, trustee
of Northernedge/Plant One Realty Trust and the Registrant
10.5 Maryland Full-Service Office Lease of Camden Yards North
Warehouse dated October 12, 1995, by and between the Maryland
Stadium Authority and the Registrant
10.6 Form of Merger Agreement dated December 11, 1996, among the
Registrant, the Flagship Affiliated Group and certain of the
Flagship Stockholder Physicians and their practices.
10.7 Form of Asset Purchase Agreement dated December 11, 1996, among
the Registrant, the Flagship Affiliated Group and certain of the
Flagship Stockholder Physicians and their practices
10.8 Form of Affiliation Agreement dated December 11, 1996, among the
Registrant, the Flagship Affiliated Group and certain of the
Flagship Stockholder Physicians
10.9 Services Agreement dated December 11, 1996, between the
Registrant and the Flagship Affiliated Group
10.10 Form of Employment Agreement dated December 11, 1996, between the
Flagship Affiliated Group and each Flagship Stockholder Physician
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<S> <C>
10.11 Form of Shareholder Designation and Stock Transfer Agreement
dated December 11, 1996, among the Registrant, the Flagship
Affiliated Group and the Flagship Affiliated Group Stockholder,
Laura M. Mumford, M.D.
10.12 Form of Merger Agreement among the Registrant, the Springfield
Affiliated Group and the Springfield Stockholder Physicians and
their practices
10.13 Form of Asset Purchase Agreement among the Registrant, the
Springfield Affiliated Group and certain Springfield Stockholder
Physicians
10.14 Form of Employment Agreement between the Springfield Affiliated
Group and certain Springfield Stockholder Physicians, including
General Terms and Conditions of Employment for the Springfield
Affiliated Group and Form of Addendum thereto relating to the
Springfield Stockholder Physicians
10.15 Form of Affiliation Agreement dated August 30, 1996, among the
Registrant, the Springfield Affiliated Group and the Springfield
Stockholder Physicians
10.16 Services Agreement dated August 30, 1996, among the Registrant
and the Springfield Affiliated Group
10.17 Shareholder Designation and Stock Transfer Agreement dated August
9, 1996, among the Registrant, the Springfield Affiliated Group
and the Springfield Affiliated Group Stockholder, Jay Ungar, M.D.
10.18 Credit Agreement dated January 16, 1997 among the Registrant,
Banker's Trust Company, as Agent, and various lending
institutions
10.19 Employment Agreement dated June 21, 1995 between the Registrant
and Jerilyn P. Asher, as amended in January 1996 and on August
30, 1996
10.20 Employment Agreement dated June 21, 1995 between the Registrant
and Arlan F. Fuller, M.D., as amended in January 1996
10.21 Office Building Lease dated March 18, 1997, by and between Harbor
Court Associates and the Registrant
11.1 Statement regarding computation of earnings per share
21.1 Subsidiaries of the Registrant
23.1 Consent of Hale and Dorr LLP (contained in Exhibit 5.1)
23.2 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney (See Page II-7)
27 Financial Data Schedule
</TABLE>
- -----------------
* To be filed by amendment.
<PAGE>
RESTATED CERTIFICATE OF INCORPORATION
OF
PHYSICIANS QUALITY CARE, INC.
Physicians Quality Care, Inc., a corporation organized and existing under
the General Corporation Law of the State of Delaware, hereby certifies as
follows:
1. The name of this corporation is Physicians Quality Care, Inc. This
corporation's original name was Physicians Quality Care Network, Inc. The date
of filing of the corporation's original Certificate of Incorporation in the
Office of the Secretary of State of the State of Delaware was March 20, 1995. A
Certificate of Amendment to the Certificate of Incorporation was filed with the
Office of the Secretary of State of the State of Delaware on each of April 27,
1995 and on June 21, 1995, and an Amended and Restated Certificate of
Incorporation was filed therewith on June 30, 1995.
2. This Restated Certificate of Incorporation restates and integrates and
further amends the provisions of the Corporation's Amended and Restated
Certificate of Incorporation, which amendments have been approved by the
stockholders of the Corporation by written consent dated August 9, 1996. This
Restated Certificate of Incorporation has been adopted by the Board of Directors
and the stockholders of the Corporation in accordance with Sections 245(b) and
242 of the General Corporation Law of the State of Delaware, and written notice
of consent has been given to all stockholders who have not consented in writing
to this Restated Certificate of Incorporation.
3. The text of this Restated Certificate of Incorporation is as follows:
FIRST: The name of the Corporation is Physicians Quality Care, Inc. (The
"Corporation").
SECOND: The address of the Corporation's registered office in the State of
Delaware is Corporation Trust Center, 1209 Orange Street in the City of
Wilmington, Country of New Castle. The name of the registered agent of the
Corporation at such address is The Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.
<PAGE>
FOURTH: Capital Stock.
4.
4.1 Authorized Shares. The total number of shares of capital stock that
the Corporation has authority to issue is one hundred and ten million
(110,000,000) shares consisting of:
(a) seventy-five million (75,000,000) shares of Class A Common Stock,
par value $0.01 per share ("Class A Common Stock");
(b) fifteen million two hundred sixty-seven thousand nine hundred and
fifteen (15,267,915) shares of Class B-1 Common Stock, par value
$0.01 per share ("Class B-1 Common Stock");
(c) nine million seven hundred thirty two thousand and eighty-five
(9,732,085) shares of Class B-2 Common Stock, par value $0.01 per
share (Class B-2 Common Stock"); and
(d) ten million (10,000,000) shares of Preferred Stock, par value
$0.01 per share ("Preferred Stock").
The Class B-1 Common Stock and the Class B-2 Common Stock are referred to
collectively as the "Class B Common Stock"; the Class B Common Stock and the
Class A Common Stock are referred to collectively as the "Common Stock"; and
each class shall be referred to as a class of Common Stock. As of the Effective
Time of this Restated Certificate of Incorporation, each share of every class
and series of capital stock of the Corporation authorized immediately prior to
the effective time of this Restated Certificate of Incorporation shall be
automatically converted into one share of Class A Common Stock of the
Corporation.
The Board of Directors of this Corporation may, at any time, and subject to the
provisions in Section 4.5 below, without any vote of the holders of this
Corporation's capital stock, issue all or any part of the unissued capital stock
of this Corporation from time to time authorized under this Restated Certificate
of Incorporation and may determine, subject to any requirements of law, the
consideration for which stock is to be issued and the manner of allocating such
consideration between capital and surplus.
The powers, designations, voting rights, preferences and relative,
participating, optional or other rights, and the qualifications, limitations and
restrictions of each class and series of the Corporation's stock are as follows:
-2-
<PAGE>
4.2 Definitions. As used in this Article Fourth, the following terms have
the following definitions:
4.2.1 "Affiliate" shall mean, with respect to any Person, any other
Person directly or indirectly controlling, controlled by or
under common control with such Person, including effective
control by virtue of a contractual relationship such as a
management agreement or stockholder transfer or designation or
similar agreement other than a management or similar agreement
which does not, alone or together with related agreements,
result in the control of such Person.
4.2.2 "Bain Capital Investor" shall mean Bain Capital Fund V, L.P.,
Bain Capital Fund V-B, L.P., BCIP Associates, BCIP Trust
Associates, L.P. and their Affiliates.
4.2.3 "Board of Directors" shall mean the Board of Directors of the
Corporation.
4.2.4 "Cause" shall mean with respect to any Person (i) any act of
fraud, embezzlement or other material dishonesty, (ii)
conviction of, or plea of nolo contendere to, any felony or any
other crime involving fraud, dishonesty or moral turpitude, or
(iii) conduct that causes criminal or material civil
liabilities to the Corporation, its Subsidiaries or any of
their Affiliates.
4.2.5 "Class B Conversion Factor" shall mean, at any time as of which
it is to be determined, one (1), adjusted as provided in
Article 4.6 below.
4.2.6 "Class B Director Action" shall mean any authorization,
approval, ratification, consent, commitment, agreement, or
other action (whether contingent or otherwise) in respect of or
relating to the Corporation or any Subsidiary or Affiliate
thereof with respect to or relating to:
(a) the issuance, reclassification, exchange, redemption,
retirement, purchase or acquisition of, rights to subscribe
for, securities exchangeable for or convertible into or any
agreement providing for the issuance (contingent or
otherwise) of, or any call, commitment or claim relating
to, capital stock of the Corporation or any Subsidiary or
Affiliate thereof or stock appreciation, phantom stock,
-3-
<PAGE>
profit participation or similar rights with respect to the
Corporation or any Subsidiary or Affiliate thereof;
(b) dividends or distributions on or in respect of capital
stock of the Corporation or any Subsidiary or Affiliate
thereof (including stock dividends or other assets,
property or securities), return of any capital to such
entity's stockholders as such, recapitalization, or stock
split;
(c) incurrence of Indebtedness of the Corporation or any
Subsidiary or incurrence of material Indebtedness by an
Affiliate thereof;
(d) merger, consolidation, amalgamation, liquidation, winding
up, dissolution, or sale, transfer, or other action
otherwise disposing of or voluntarily parting with the
control of (whether in one transaction or a series of
transactions) all or substantially all of the property,
business or assets of the Corporation or any Subsidiary or
Affiliate thereof (other than such merger, consolidation or
other action pursuant to which the stockholders of this
Corporation or any Subsidiary thereof constitute the
stockholders of any surviving corporation directly or
indirectly or otherwise retain the same control after such
transaction whether by voting or otherwise, over such
entity that such stockholders had prior to such
transaction);
(e) any Public Offering or Public Event;
(f) the material amendment or modification of any material
management agreement between the Corporation, its
Subsidiaries and any Affiliate thereof or material
physician affiliation agreement or the substitution or
replacement of any nominee stockholder under any
stockholder designation or similar agreement; and
(g) the employment, termination and compensation (including
benefits) of the Chief Executive Officer of the
Corporation.
In no event shall any such action in respect of a transaction involving the
provision of capital or sale to any of the Bain Capital Investors or any
Affiliate thereof under paragraphs (a)-(e) constitute a Class B Direction
Action. All Class B Director Actions shall be taken in compliance with Section
2.8 of the Corporation's by-laws.
-4-
<PAGE>
4.2.7 "Class B Director Control Event" shall mean any of the following
events:
(a) The EBITDA for any two consecutive Test Periods ending on a date
set forth below is less than the amount set opposite such date.
<TABLE>
<CAPTION>
Date Minimum EBITDA
---- ---------------
<S> <C>
December 31, 1996 $(1,745,000)
March 31, 1997 (336,000)
June 30, 1997 1,050,000
September 30, 1997 2,151,000
December 31, 1997 2,668,000
March 31,1998 3,288,000
June 30, 1998 3,521,000
September 30, 1998 3,772,000
December 31, 1998 3,907,000
March 31, 1999 3,997,000
June 30, 1999 4,089,000
September 30, 1999 4,183,000
December 31, 1999 4,279,000
</TABLE>
(b) The Net Sales for any two consecutive Test Periods ending on a
date set forth below is less than the amount set opposite such
date.
<TABLE>
<CAPTION>
Date Minimum Net Sales
---- -----------------
<S> <C>
December 31, 1996 $ 3,601,000
March 31, 1997 11,891,000
June 30, 1997 18,257,000
September 30, 1997 26,579,000
December 31, 1997 30,620,000
March 31, 1998 31,997,000
June 30,1998 33,486,000
September 30, 1998 34,461,000
December 31, 1998 35,261,000
March 31, 1999 36,072,000
June 30, 1999 36,902,000
September 30, 1999 37,751,000
December 31, 1999 38,619,000
</TABLE>
-5-
<PAGE>
(c) Jerilyn Asher is no longer employed on a full-time basis as Chief
Executive Officer by the Corporation for any reason other than her
employment having been terminated without Cause; or
(d) the Corporation has not received the prior written consent of the
Bain Investors in respect of any Restricted Action.
4.2.8 "Closing Date" shall mean the first date on which the
Corporation issues any shares of Class B Common Stock.
4.2.9 "EBIT" shall mean consolidated Net Income (i) before (a)
interest expense, whether cash or noncash of the Corporation,
its Subsidiaries and other consolidated entities determined on
a consolidated basis and, (b) provisions for taxes based upon
income and (ii) determined without giving effect to
extraordinary gains or losses, nonrecurring or unusual gains or
losses from sales of assets other than from inventory sold in
the ordinary course of business, and without giving effect to
any increases in Net Income which may arise from changes in the
accounting policies or methodologies used to establish the
allowances for doubtful accounts and contractual adjustments
for consolidated entities from those in effect at the time of
the most recent audited financial statements for the year ended
immediately preceding the year in which such entity becomes
acquired by or affiliated with the Corporation.
4.2.10 "EBITDA" shall mean, for any period, EBIT, adjusted by adding
thereto the amount of all depreciation expense and
amortization expense that were deducted in determining EBIT
for such period and the amount of all management fees and
expenses paid to Bain Capital, Inc. and fees of Robertson
Stephens & Co. in connection with the issuance and sale of
Class B Common Stock that were deducted in determining Net
Income for such period and all as determined in accordance
with GAAP.
4.2.11 "Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended.
4.2.12 "GAAP" shall mean the generally accepted accounting principles
as in effect in the United States of America as of the Closing
Date.
-6-
<PAGE>
4.2.13 "Indebtedness" shall mean all (i) indebtedness for borrowed
money, (ii) obligations evidenced by notes, bonds, debentures
or similar instruments, (iii) obligations for the deferred
purchase price of assets or services (other than trade
payables or accruals therefor incurred in the ordinary course
of business), (iv) capitalized lease obligations, (v) letters
of credit, and (vi) in the nature of guarantees of the
obligations described in (i) through (v) above.
4.2.14 "Interest Expense"shall mean, for any period, total interest
expense of the Corporation, its Subsidiaries or other
consolidated entities determined on a consolidated basis with
respect to all Indebtedness of the Corporation, its
Subsidiaries and other consolidated entities, including,
without limitation, all commissions, discounts and other fees
and charges owed with respect to letters of credit and
banker's acceptance financing but excluding amortization of
original issue discount, deferred financing costs, any
interest expense on deferred compensation arrangements and
other non-cash interest expense, as determined in accordance
with GAAP.
4.2.15 "Net Income" shall mean the consolidated net income (or loss)
after provision for taxes of the Corporation, its Subsidiaries
and other consolidated entities on a consolidated basis as
determined in accordance with GAAP.
4.2.16 "Net Sales" shall mean consolidated revenues of the
Corporation, its Subsidiaries and other consolidated entities
after the provision for doubtful accounts, contractual
adjustments, returns and any other setoffs or counterclaims,
as determined in accordance with GAAP, excluding any increases
in Net Sales which may arise from changes in the accounting
policies or methodologies used to establish the allowances for
doubtful accounts and contractual adjustments for patient
accounts receivable of any consolidated entity from those in
effect at the time of the most recent audited financial
statements for the year ended immediately preceding the year
in which such entity becomes acquired by or affiliated with
the Corporation.
4.2.17 "Person" shall mean any individual, partnership, corporation,
association, trust, joint venture, unincorporated organization
or other entity.
-7-
<PAGE>
4.2.18 "Public Event" shall mean any transaction or other event
(including, without limitation, a merger with a public
company) after or in connection with which shares of capital
stock of the Corporation or any of its Subsidiaries or any
successor are registered under the Securities Act or listed on
a "national securities exchange" as defined in the Exchange
Act or the subject of a price quotation through the National
Association of Securities Dealers' Automated Quotation System.
4.2.19 "Public Offering Time" shall mean the time of the initial sale
of shares of Class A Common Stock of the Corporation pursuant
to an initial Public Offering of such shares registered with
the Securities and Exchange Commission and immediately prior
to any transfer of beneficial ownership of such shares in such
offering.
4.2.20 "Public Offering" shall mean the closing of a public offering
of the Corporation's capital stock registered under the
Securities Act.
4.2.21 "Qualified Public Offering" shall mean the closing of a Public
Offering with (i) the net proceeds of the sale of such Shares
by the Company and any stockholder of the Company to equal or
exceed $50,000,000 provided that the net proceeds of the sale
thereof to the Bain Capital Investors shall equal or exceed
the greater of (x) fifty percent of the purchase price paid by
the Investors in any Closing under the Class B Common Stock
and Warrant Purchase Agreement dated August 30, 1996 between
the Bain Investors and the Corporation or (y) $10,000,000 and
(ii) subject to a firm commitment underwriting conducted by a
nationally recognized underwriter acceptable to the Class B
Directors.
4.2.22 "Subsidiary" shall mean any corporation with respect to which
a specified Person (or a Subsidiary thereof) owns a majority
of the common stock or has the power to vote or direct the
voting of sufficient securities to elect a majority of the
directors.
4.2.23 "Restricted Action" shall mean any of the following:
(a) A merger, consolidation, amalgamation, liquidation,
winding up, dissolution or sale, transfer or other action
otherwise disposing of or voluntarily parting with the
control of (whether in one transaction or a series of
transactions) of all or substantially all of the property,
-8-
<PAGE>
business or assets of the Corporation, its Subsidiaries or
any Affiliate thereof other than a merger or consolidation
of a Subsidiary with the Corporation or any other
Subsidiary of the Corporation provided that, in the case
of any such merger or consolidation, the person formed by
such merger or consolidation shall be a wholly-owned
Subsidiary of the Corporation.
(b) A sale, lease, transfer or other disposition of or grant
or any option or other right to purchase, lease or
otherwise acquire all or a material part of the assets of
the Corporation, the Subsidiaries and any Affiliates on a
consolidated basis (other than pursuant to an agreement in
effect on the Closing Time); or
(c) Any agreement, contract, commitment or understanding with
any Person for the acquisition or affiliation entered into
by the Corporation or, its Subsidiaries or any Affiliate
thereof of any business or assets including, without
limitation any management agreement, and the terms of any
securities or other consideration to be issued in
connection therein or acquired any business or assets
other than acquisitions not in excess of $1,000,000 in any
12 month period.
(d) Any dividends, distributions, repurchase, redemption,
retirement, defeasance or similar transaction for capital
stock or any warrants, rights or options to acquire such
capital stock, now or hereafter outstanding, return any
capital to its stockholders as such, make any distribution
of assets, capital stock, warrants, rights, options,
obligations or securities to its stockholders as such, or
issue or sell any capital stock or any warrants, rights or
options to acquire such capital stock, or permit the
Corporation, its Subsidiaries or any Affiliate thereof to
do any of the foregoing.
(e) Any material change in the nature of its business of this
Corporation, its Subsidiaries and Affiliates, taken as a
whole on a consolidated basis as described in the
principal business plan of the Corporation as carried on
at the date hereof and reasonable extensions thereof.
-9-
<PAGE>
(f) Any amendment or restatement of organizational documents
(including the Certificate of Incorporation) or Bylaws of
this Corporation or its Subsidiaries.
(g) Retain or dismiss the services of the Chief Operating
Officer or the Chief Financial Officer of the Corporation;
(h) Any transaction between (i) the Corporation or its
Subsidiaries and any Affiliate thereof and (ii) an
officer, director or holder of more than 5% of the
outstanding capital stock of the Corporation which is not
on terms comparable to an arms-length transaction.
(i) The commencement, management, defense, prosecution or
settlement of any material action, suit, investigation or
proceeding before any court or governmental department,
commission, board, agency or instrumentality, domestic or
foreign, affecting the Corporation, the Subsidiaries and
any Affiliate thereof other than any such action, suit, or
proceeding initiated and instituted by the holders of
Class B Common Stock against the Company.
4.2.24 "Test Period" shall mean for any determination, the fiscal
quarter then last ended and taken as one accounting period.
4.3 Shares Identical. Except as otherwise provided in this Article Fourth,
for purposes of this Article Fourth, all shares of Common Stock shall,
to the fullest extent permitted by applicable law, be identical in all
respects and shall entitle the holders thereof to the same rights,
privileges and preferences and shall be subject to the same
qualifications, limitations and restrictions. Without limiting the
foregoing, no distribution (whether in cash, securities or otherwise)
shall be made in respect of any class of Common Stock unless an
equivalent distribution is made with respect to each outstanding share
of each class of Common Stock.
4.4 Stockholder Voting Rights. Subject to the powers, preferences and
rights of any class of stock (or any series thereof) having any
preference or priority over, or rights superior to, the Common Stock
that the Corporation may hereafter become authorized to issue, to the
fullest extent permitted by applicable law, except as otherwise
provided in this Article Fourth, the holders of the Common Stock shall
have and possess all powers and voting and other rights pertaining to
the stock of the Corporation. Except as otherwise provided in this
Article Fourth or as
-10-
<PAGE>
otherwise required by applicable law, all holders of Common Stock
shall vote together as a single class.
4.5 Directors. The number of directors constituting the entire Board of
Directors (the "Number of Directors") shall be eleven. The directors
shall be divided into classes, elected as follows:
(a) Class A Directors. The holders of record of outstanding shares of
Class A Common Stock, voting separately as a single class, shall
be entitled to elect two directors of the Corporation (such
directors to be designated and referred to herein as the "Class A
Directors");
(b) Class B-1 Directors. The holders of record of outstanding shares
of Class B-1 Common Stock, voting separately as a single class,
shall be entitled to elect one director of the Corporation (such
director to be designated and referred to herein as the "Class B-1
Director");
(c) Class B-2 Directors. The holders of record of outstanding shares
of Class B-2 Common Stock, voting separately as a single class,
shall be entitled to elect one director of the Corporation (such
director to be designated and referred to herein as the "Class B-2
Director," together with the Class B-1 Director, the "Class B
Directors"); and
(d) Common Stock Directors. The holders of record of outstanding
shares of Common Stock, voting together as a single class, shall
be entitled to elect seven directors of the Corporation (such
directors to be designated and referred to herein as the "Common
Stock Directors").
4.5.1 Except as otherwise provided in this Article Fourth, each Class A
Director, Class B Director and Common Stock Director shall be entitled
to one vote on all matters to be voted on by the directors. The
Directors shall vote together as a single class on all matters to
which the Board of Directors shall be entitled to vote.
4.5.2 Any vacancy in the Board of Directors shall be filled only by vote of
the holders of a majority of the outstanding shares of the class or
classes of Common Stock which was entitled to elect the director whose
office is vacant. The Board of Directors shall be deemed to be duly
constituted notwithstanding one or more vacancies in its membership,
whether because of the failure of
-11-
<PAGE>
any class of stockholders to elect the full number of directors
of which such class is entitled or otherwise. Any such vacancy
shall automatically reduce the Number of Directors pro tanto
until such time as the holders of the class of Common Stock
which was entitled to elect the director whose office is vacant
shall have exercised their right to elect a director to fill
such vacancy, whereupon the Number of Directors shall be
automatically increased pro tanto.
4.5.3 No Class A Director, Class B Director or Common Stock Director
may be removed without the consent of the holders of such class
or classes of Common Stock entitled to elect such director.
4.5.4 With respect to each Class B Director Action, each of the Class
B Directors shall be entitled to five votes.
4.5.5 Upon the occurrence of any Class B Director Control Event and
for so long as such Class B Director Control Event or any other
Class B Director Control Event shall continue in effect, each
Class B Director shall be entitled to five votes.
4.6 Stock Splits and Stock Dividends. The Corporation shall not in any
manner subdivide or increase (by stock split, stock dividend or other
similar manner) reclassify or combine in any manner the outstanding
shares of Class A Common Stock unless a proportional adjustment is
made to the Class B Conversion Factor. The Corporation shall not in
any manner subdivide or increase (whether by stock split, stock
dividend or other similar manner), reclassify or combine in any manner
the outstanding shares of the Class B Common Stock unless a
proportional adjustment is made to the Class A Common Stock.
4.7 Mandatory Conversion of Class B Common Stock. Upon the earlier to
occur of (i) a Qualified Public Offering, and (ii) the date on which
the number of outstanding shares of Class B Common Stock equals the
lesser of (a) 30% of the number of shares of Class B Common Stock
issued and outstanding and (b)(1) 1,200,000, in the event the number
of shares of Class B Common Stock issued equals or exceeds 4,000,000
and is less than 8,000,000, (2) 1,600,000, in the event the number of
shares of Class B Common Stock issued and equals or exceeds 8,000,000
and is less than 12,000,000 and (3) 2,000,000 in the event the number
of shares of Class B Common Stock issued equals or exceeds 12,000,000.
Each outstanding share of Class B Common Stock shall automatically
convert into the number of shares of Class A Common Stock determined
by application of the Class B Conversion Factor. Fractional shares
shall be converted
-12-
<PAGE>
into equivalent fractional shares of Class A Common Stock (or, at the
discretion of the Board of Directors, eliminated in return for payment
therefor in cash at the fair market value thereof, as determined in
good faith by the Board of Directors). From and after such conversion,
(a) such shares of Class B Common Stock shall be retired and shall not
be reissued, (b) notwithstanding anything to the contrary in this
Article Fourth, the holders of the Class A Common Stock shall be
entitled to elect the entire Number of Directors consisting of the
full Board of Directors and each such director shall have one vote on
all matters to be voted on by the directors, (c) the Restated
Certificate of Incorporation shall automatically be amended to
eliminate Sections 4.2.6, 4.2.7, 4.2.23, 4.5.4, and 4.5.5 and (d) upon
the filing of a certificate in accordance with Section 243 of the
General Corporation Law of the State of Delaware, the authorized
shares of Class B Common Stock shall be eliminated.
4.8 Optional Conversion of Class B Common Stock. At the option of any
holder of the shares of Class B Common Stock, exercisable at any time,
in whole or in part, each outstanding share of Class B Common Stock
held by such holder shall convert into the number of shares of Class A
Common Stock as determined by application of the Class B Conversion
Factor. From and after such optional conversion, such shares of Class
B Common Stock shall be retired and shall not be reissued, and upon
the conversion of all outstanding shares of Class B Common Stock and
upon the filing of a certificate in accordance with Section 243 of the
General Corporation Law of the State of Delaware, the authorized
shares of Class B Common Stock shall be eliminated.
4.9 Effect of Conversion. Upon conversion of any share of Class B Common
Stock, the holder shall surrender the certificate evidencing such
shares to the Corporation at its principal place of business. Promptly
after receipt of such certificate, the Corporation shall issue and
send to such holder a new certificate, registered in the name of such
holder, evidencing the number of shares of Class A Common Stock into
which such share has been converted. From and after the time of
conversion of any share of Class B Common Stock, the rights of the
holder thereof as such shall cease; the certificate formerly
evidencing such share shall, until surrendered and reissued as
provided above, evidence the applicable number of shares of Class B
Common Stock; and such holder shall be deemed to have become the
holder of record of the same number of shares of the Class A Common
Stock.
4.10 Replacement. Upon receipt of an affidavit of the registered owner of
one or more shares of any class of Common Stock (or such other
evidence as may be reasonably satisfactory to the Corporation) with
respect to the
-13-
<PAGE>
ownership and the loss, theft, destruction or mutilation of any
certificate evidencing such shares of Common Stock, and in the case of
any such loss, theft or destruction, upon receipt of indemnity
reasonably satisfactory to the Corporation (it being understood that
if the holder is a Bain Capital Investor, or any other holder of
shares of Common Stock of the Corporation which is an entity regularly
engaged in the business of investing in companies and meets such
requirements of creditworthiness as may reasonably be imposed by the
Corporation in connection with the provisions of this paragraph, its
own agreement will be satisfactory), or, in the case of any such
mutilation upon surrender of such certificate, the Corporation shall
execute and deliver in lieu of such certificate a new certificate of
like kind representing the number of shares of such class represented
by such lost, stolen, destroyed or mutilated certificate and dated the
date of such lost, stolen, destroyed or mutilated certificate.
4.11 Amendment; Waiver. No amendment or waiver of any provision of this
Article Fourth shall be effective without the prior written consent of
the holders of a majority of the then outstanding shares of the Class
B Common Stock voting as a single class and no amendment or waiver of
any provision of this Article Fourth which adversely affects the
holders of Class A Common Stock or increased the rights of the Class B
Common Stock shall be effective without the prior written consent of
the holders of a majority of the then outstanding shares of the Class
A Common Stock voting as a single class; provided, however, that as
stipulated in Section 242(b)(2) of the Delaware General Corporation
Law no amendment to any class of Common Stock that alters or changes
the powers, preferences or special rights of such class of Common
Stock so as to affect them adversely shall be effective without the
prior consent of the holders of a majority of the then outstanding
shares of such class of Common Stock.
FIFTH: Except to the extent that the General Corporation Law of Delaware
prohibits the elimination or limitation of liability of directors for breaches
of fiduciary duty, no director of the Corporation shall be personally liable to
the Corporation or its stockholders for monetary damages for any breach of
fiduciary duty as a director, notwithstanding any provision of law imposing such
liability. No amendment to or repeal of this provision shall apply to or have
any effect on the liability or alleged liability of any director of the
Corporation for or with respect to any acts or omissions occurring prior to such
amendment.
-14-
<PAGE>
SIXTH:
6.1 Actions, Suits and Proceedings Other than by or in the Right of the
-------------------------------------------------------------------
Corporation. The Corporation shall indemnify each person who was or is
-----------
a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the
right of the Corporation), by reason of the fact that such person is
or was, or is or was serving, or has agreed to serve, at the request
of the Corporation, as a director, officer of trustee of, or in a
similar capacity with, another corporation, partnership, joint
venture, trust or other enterprise (including any employee benefit
plan) (all such persons being referred to hereafter as an
"Indemnitee"), or by reason of any action alleged to have been taken
or omitted in such capacity, against all expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person or on such person's
behalf in connection with such action, suit or proceeding and any
appeal therefrom, if such person acted in good faith and in a manner
such person reasonably believed to be in, or not opposed to, the best
interests of the Corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe such person's
conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement, conviction or upon a plea
of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner
which such person reasonably believed to be in, or not opposed to, the
best interest of the Corporation, and, with respect to any criminal
action or proceeding, had reasonable cause to believe that such
person's conduct was unlawful. Notwithstanding anything to the
contrary in this Article, except as set forth in Section 6.7 below,
the Corporation shall not indemnify an Indemnitee seeking
indemnification in connection with a proceeding (or part thereof)
initiated by the Indemnitee unless the initiation thereof was approved
by the Board of Directors of the Corporation. Notwithstanding anything
to the contrary in this Article, the Corporation shall not indemnify
an Indemnitee to the extent such Indemnitee is reimbursed from the
proceeds of insurance, and in the event the Corporation makes any
indemnification payments to an Indemnitee and such Indemnitee is
subsequently reimbursed from the proceeds of insurance, such
Indemnitee shall promptly refund such indemnification payments to the
Corporation to the extent of such insurance reimbursement.
6.2 Actions or Suits by or in the Right of the Corporation. The
------------------------------------------------------
Corporation shall indemnify any Indemnitee who was or is a party or is
threatened
-15-
<PAGE>
to be made a party to any threatened, pending or completed action or
suit by or in the right of the Corporation to procure a judgment in
its favor by reason of the fact that such person is or was, or has
agreed to become, a director or officer of the Corporation, or is or
was serving, or has agreed to serve, at the request of the
Corporation, as a director, officer or trustee of, or in a similar
capacity with, another corporation, partnership, joint venture, trust
or other enterprise (including any employee benefit plan), or by
reason of any action alleged to have been taken or omitted in such
capacity, against all expenses (including attorneys' fees) and, to the
extent permitted by law, amounts paid in settlement actually and
reasonably incurred by such person or on such person's behalf in
connection with such action, suit or proceeding and any appeal
therefrom, if such person acted in good faith and in a manner
reasonably believed to be in, or not opposed to, the best interests of
the Corporation, except that no indemnification shall be made in
respect of any claim, issue or matter as to which such person shall
have been adjudged to be liable to the Corporation unless and only to
the extent that the Court of Chancery of Delaware shall determine upon
application that, despite the adjudication of such liability but in
view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnify for such expenses (including
attorneys' fees) which the Court of Chancery of Delaware shall deem
proper.
6.3 Indemnification for Expenses of Successful Party. Notwithstanding the
------------------------------------------------
other provisions of this Article, to the extent than an Indemnitee has
been successful, on the merits or otherwise, in defense of any action,
suit or proceeding referred to in Sections 6.1 and 6.2 of this
Article, or in defense of any claim, issue or matter therein, or on
appeal from any such action, suit or proceeding, the Indemnitee shall
be indemnified against all expenses (including attorneys' fees)
actually and reasonably incurred by the Indemnitee or on the
Indemnitee's behalf in connection therewith. Without limiting the
foregoing, if any action, sit or proceeding is disposed of, on the
merits or otherwise (including a disposition without prejudice),
without (i) the disposition being adverse to the Indemnitee, (ii) an
adjudication that the Indemnitee was liable to the Corporation, (iii)
a plea of guilty or nolo contendere by the Indemnitee, (iv) an
adjudication that the Indemnitee did not act in good faith and in a
manner the Indemnitee reasonably believed to be in or not opposed to
the best interests of the Corporation, and (v) with respect to any
criminal proceeding, an adjudication that the Indemnitee had
reasonable cause to believe the Indemnitee's conduct was unlawful, the
Indemnitee shall be considered for the purposes hereof to have been
wholly successful with respect thereto.
-16-
<PAGE>
6.4 Notification and Defense of Claim. As a condition precedent to the
---------------------------------
right to be indemnified, the Indemnitee must notify the Corporation in
writing as soon as practicable of any action, suit, proceeding or
investigation involving the Indemnitee for which indemnity will or
could be sought. With respect to any action, suit, proceeding or
investigation of which the Corporations is so notified, the
Corporation will be entitled to participate therein at is own expense
and/or to assume the defense thereof at its own expense, with legal
counsel reasonably acceptable to the Indemnitee. After notice from the
Corporation to the Indemnitee of its election so to assume such
defense, the Corporation shall not be liable to the Indemnitee for any
legal or other expenses subsequently incurred by the Indemnitee in
connection with such claim, other than as provided below in this
Section 6.4. The Indemnitee shall have the right to employ the
Indemnitee's own counsel in connection with such claim, but the fees
and expenses of such counsel incurred after notice from the
Corporation or its assumption of the defense thereof shall be at the
expense of the Indemnitee unless (i) the employment of counsel by the
Indemnitee has been authorized by the Corporation, (ii) counsel to the
Indemnitee shall have reasonably concluded that there may be a
conflict of interest or position on any significant issue between the
Corporation and the Indemnitee in the conduct of the defense of such
action or (iii) the Corporation shall not in fact have employed
counsel to assume the defense of such action, in each of which cases
the fees and expenses of counsel for the Indemnitee shall be at the
expense of the Corporation, except as otherwise expressly provided by
this Article. The Corporation shall not be entitled, without the
consent of the Indemnitee, to assume the defense of any claim brought
by or in the right of the Corporation or as to which counsel for the
Indemnitee shall have reasonably made the conclusion provided for in
clause (ii) above.
6.5 Advance of Expenses. Subject to the provisions of Section 6.6 below,
-------------------
in the event that the Corporation does not assume the defense pursuant
to Section 6.4 of this Article of any action, suit, proceeding or
investigation of which the Corporation receives notice under this
Article, any expenses (including attorneys' fees) incurred by an
Indemnitee in defending a civil or criminal action, suit, proceeding
or investigation or any appeal therefrom shall be paid by the
Corporation in advance of the final disposition of such matter;
provided, however, that the payment of such expenses incurred by an
-------- -------
Indemnitee in advance of the final disposition of such matter shall be
made only upon receipt of an undertaking by or on behalf of the
Indemnitee to repay all amounts so advanced in the event that it shall
ultimately be determined that the Indemnitee is not entitled to be
indemnified by the Corporation as
-17-
<PAGE>
authorized in this Article. Such undertaking shall be accepted without
reference to the financial ability of the Indemnitee to make such
repayment.
6.6 Procedure for Indemnification. In order to obtain indemnification or
-----------------------------
advancement of expenses pursuant to Section 6.1, 6.2, 6.3 or 6.5 of
this Article, the Indemnitee shall submit to the Corporation a written
request, including in such request such documentation and information
as is reasonably available to the Indemnitee and is reasonably
necessary to determine whether and to what extent the Indemnitee is
entitled to indemnification or advancement of expenses. Any such
indemnification or advancement of expenses shall be made promptly, and
in any event within 60 days after receipt by the Corporation of the
written request of the Indemnitee, unless with respect to requests
under Section 6.1, 6.2 or 6.5 the Corporation determines within such
60-day period that the Indemnitee did not meet the applicable standard
of conduct set forth in Section 1 or 2, as the case may be. Such
determination shall be made in each instance by (a) a majority vote of
the directors of the Corporation consisting of persons who are not at
that time parties to the action, suit or proceeding in question
("disinterested directors"), whether or not a quorum, (b) a majority
vote of a quorum of the outstanding shares of stock of all classes
entitled to vote for directors, voting as a single class, which quorum
shall consist of stockholders who are not at that time parties to the
action, suit or proceeding in question, (c) independent legal counsel
(who may, to the extent permitted by law, be regular legal counsel to
the Corporation), or (d) a court of competent jurisdiction.
6.7 Remedies. The right to indemnification or advances as granted by this
--------
Article shall be enforceable by the Indemnitee in any court of
competent jurisdiction if the Corporation denies such request, in
whole or in part, or if no disposition thereof is made within the 60-
day period referred to above in Section 6.6. Unless otherwise required
by law, the burden of proving that the Indemnitee is not entitled to
indemnification or advancement of expenses under this Article shall be
on the Corporation. Neither the failure of the Corporation to have
made a determination prior to the commencement of such action that
indemnification is proper in the circumstances because the Indemnitee
has met the applicable standard of conduct, nor an actual
determination by the Corporation pursuant to Section 6.6 that the
Indemnitee has not met such applicable standard of conduct, shall be a
defense to the action or create a presumption the Indemnitee has not
met the applicable standard of conduct. The indemnitee's expenses
(including attorney' fees) incurred in connection with successfully
establishing the Indemnitee's right to
-18-
<PAGE>
indemnification, in whole or in part, in any such proceeding shall
also be indemnified by the Corporation.
6.8 Subsequent Amendment. No amendment, termination or repeal of this
--------------------
Article or of the relevant provisions of the General Corporation Law
of Delaware or any other applicable laws shall affect or diminish in
any way the rights of any Indemnitee to indemnification under the
provisions hereof with respect to any action, suit, proceeding or
investigation arising out of or relating to any actions, transactions
or facts occurring prior to the final adoption of such amendment,
termination or repeal.
6.9 Other Rights. The indemnification and advancement of expenses
------------
provided by this Article shall not be deemed exclusive of any other
rights to which an Indemnitee seeking indemnification or advancement
of expenses may be entitled under any law (common or statutory),
agreement or vote of stockholders or disinterested directors or
otherwise, both as to action in such person's official capacity and as
to action in any other capacity while holding office for the
Corporation, and shall continue as to an Indemnitee who has ceased to
be a director or officer, and shall inure to the benefit of the
estate, heirs, executors and administrators of the Indemnitee. Nothing
contained in this Article shall be deemed to prohibit, and the
Corporation is specifically authorized to enter into, agreements with
officers and directors providing indemnification rights and procedures
different from those set forth in this Article. In addition, the
Corporation may, to the extent authorized from time to time by its
Board of Directors, grant indemnification rights to other employees or
agents of the Corporation or other persons serving the Corporation and
such rights may be equivalent to, or greater or less than, those set
forth in this Article.
6.10 Partial Indemnification. If an Indemnitee is entitled under any
-----------------------
provision of this Article to indemnification by the Corporation for
some or a portion of the expenses (including attorneys' fees),
judgments, fines or amounts paid in settlement actually and reasonably
incurred by such person or on such person's behalf in connection with
any action, suit, proceeding or investigation and any appeal therefrom
but not, however, for the total amount thereof, the Corporation shall
nevertheless indemnify the Indemnitee for the portion of such expenses
(including attorneys' fees), judgments, fines or amounts paid in
settlement to which the Indemnitee is entitled.
6.11 Insurance. The Corporation may purchase and maintain insurance, at
---------
its expenses, to protect itself and any director, officer, employee or
agent
-19-
<PAGE>
of the Corporation or another corporation, partnership, joint venture,
trust or other enterprise (including any employee benefit plan)
against any expense, liability or loss incurred by such person in any
such capacity, or arising out of such person's status as such, whether
or not the Corporation would have the power to indemnify such person
against such expense, liability or loss under the General Corporation
Law of Delaware.
6.12 Merger or Consolidation. If the Corporation is merged into or
-----------------------
consolidated with another corporation and the Corporation is not the
surviving corporation, the surviving corporation shall assume the
obligations of the Corporation under this Article with respect to any
action, suit, proceeding or investigation arising out of or relating
to any actions, transactions or facts occurring prior to the date of
such merger or consolidation.
6.13 Savings Clause. If this Article or any portion hereof shall be
--------------
invalidated on any ground by any court of competent jurisdiction, then
the Corporation shall nevertheless indemnity each Indemnitee as to any
expenses (including attorneys' fees), judgements, fines and amounts
paid in settlement in connection with any action, suit, proceeding or
investigation, whether civil, criminal or administrative, including an
action by or in the right of the Corporation, to the fullest extent
permitted by any applicable portion of this Article that shall not
have been invalidated and to the fullest extent permitted by
applicable law.
6.14 Definitions. Terms used herein and defined in Section 145(h) and
-----------
Section 145(i) of the General Corporation Law of Delaware shall have
the respective meanings assigned to such terms in such Section 145(h)
and Section 145(i).
6.15 Subsequent Legislation. If the General Corporation Law of Delaware is
----------------------
amended after adoption of this Article to expand further the
indemnification permitted to Indemnities, then the Corporation shall
indemnify such persons to the fullest extent permitted by the General
Corporation Law of Delaware, as so amended.
SEVENTH: The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute and this Certificate of
Incorporation, and all rights conferred upon stockholders herein are granted
subject to this reservation.
-20-
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be
affixed hereto and this Restated Certificate of Incorporation to be signed by
its President and attested by its Secretary this 30th day of August, 1996.
PHYSICIANS QUALITY CARE, INC.
By: /s/ Jerilyn P. Asher
-------------------------
Jerilyn P. Asher
President
ATTEST:
/s/ Virginia Lyons de Neufville
- -------------------------------
Name of Assistant Secretary
[Corporate Seal]
-21-
<PAGE>
AMENDED AND RESTATED
BY-LAWS
OF
PHYSICIANS QUALITY CARE, INC.
<PAGE>
AMENDED AND RESTATED
BY-LAWS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
ARTICLE 1 Stockholders............................. 1
1.1. Place of Meetings........................ 1
1.2. Annual Meeting........................... 1
1.3. Special Meetings......................... 1
1.4. Notice of Meetings....................... 1
1.5. Voting List.............................. 1
1.6. Quorum................................... 2
1.7. Adjournments............................. 2
1.8. Voting and Proxies....................... 2
1.9. Acting at Meeting........................ 2
1.10. Action without Meeting................... 3
ARTICLE 2 Directors................................ 3
2.1. General Powers........................... 3
2.2. Number, Election and Qualification....... 3
2.3. Tenure................................... 4
2.4. Vacancies................................ 4
2.5. Resignation.............................. 4
2.6. Regular Meetings......................... 4
2.7. Special Meetings......................... 5
2.8. Notice of Special Meetings............... 5
2.9. Meetings by Telephone Conference Calls... 5
2.10. Quorum................................... 5
2.11. Action at Meeting........................ 6
2.12. Action by Consent........................ 6
2.13. Removal.................................. 6
2.14. Committees............................... 6
2.15. Compensation of Directors................ 7
ARTICLE 3 Officers................................. 7
3.1. Enumeration.............................. 7
3.2 Election................................. 7
3.3. Qualification............................ 7
3.4. Tenure................................... 7
3.5 Duties................................... 7
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C> <C>
3.6. Resignation and Removal.................. 7
3.7. Vacancies................................ 8
3.8. Chairman of the Board and Vice-Chairman
of the Board............................. 8
3.9. President................................ 8
3.10. Vice Presidents.......................... 8
3.11. Secretary and Assistant Secretaries...... 9
3.12 Treasurer and Assistant Treasurers....... 9
3.13. Salaries................................. 9
ARTICLE 4 Capital Stock............................ 10
4.1. Issuance of Stock........................ 10
4.2. Certificates of Stock.................... 10
4.3. Transfers................................ 10
4.4. Lost, Stolen or Destroyed Certificates... 11
4.5. Record Date.............................. 11
ARTICLE 5 General Provision........................ 12
5.1. Fiscal Year.............................. 12
5.2. Corporate Seal........................... 12
5.3. Waiver of Notice......................... 12
5.4. Voting of Securities..................... 12
5.5. Evidence of Authority.................... 12
5.6. Certificate of Incorporation............. 12
5.7. Transactions with Interested Parties..... 12
5.8. Severability............................. 13
5.9. Pronouns................................. 13
ARTICLE 6 Amendments............................... 13
6.1. By the Board of Directors................ 13
6.2. By the Stockholders...................... 13
</TABLE>
-ii-
<PAGE>
BY-LAWS
OF
PHYSICIANS QUALITY CARE, INC.
ARTICLE 1 - Stockholders
--------------------------
1.1. Place of Meetings. All meetings of stockholders shall be held at
-----------------
such place within or without the State of Delaware as may be designated from
time to time by the Board of Directors or the President or, if not so
designated, at the registered office of the corporation.
1.2. Annual Meeting. The annual meeting of stockholders for the election
--------------
of directors and for the transaction of such other business as may properly be
brought before the meeting shall be held on a date to be fixed by the Board of
Directors or the President (which date shall not be a legal holiday in the place
where the meeting is to be held) at the time and place to be fixed by the Board
of Directors or the President and stated in the notice of the meeting. If no
annual meeting is held in accordance with the foregoing provisions, the Board of
Directors shall cause the meeting to be held as soon thereafter as convenient.
If no annual meeting is held in accordance with the foregoing provisions, a
special meeting may be held in lieu of the annual meeting, and any action taken
at that special meeting shall have the same effect as if it had been taken at
the annual meeting, and in such case all references in these By-laws to the
annual meeting of the stockholders shall be deemed to refer to such special
meeting.
1.3. Special Meetings. Special meetings of stockholders may be called
----------------
at any time by the President or by the Board of Directors. Business transacted
at any special meeting of stockholders shall be limited to matters relating to
the purpose or purposes stated in the notice of the meeting.
1.4. Notice of Meetings. Except as otherwise provided by law, written
------------------
notice of each meeting of stockholders, whether annual or special, shall be
given not less than 10 nor more than 60 days before the date of the meeting to
each stockholder entitled to vote at such meeting. The notices of all meetings
shall state the place, date and hour of the meeting. The notice of a special
meeting shall state, in addition, the purpose or purposes for which the meeting
is called. If mailed, notice is given when deposited in the United States mail,
postage prepaid, directed to the stockholder at his address as it appears on the
records of the corporation.
1.5. Voting List. The officer who has charge of the stock ledger of the
-----------
corporation shall prepare, at least 10 days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during
<PAGE>
ordinary business hours, for a period of at least 10 days prior to the meeting,
at a place within the city where the meeting is to be held. The list shall also
be produced and kept at the time and place of the meeting during the whole time
of the meeting, and may be inspected by any stockholder who is present.
1.6. Quorum. Except as otherwise provided by law, the Certificate of
------
Incorporation or these By-laws, the holders of a majority of the shares (or, if
there are two or more classes of stock entitled to vote as separate classes, the
holders of a majority of the shares of such class) of the capital stock of the
corporation issued and outstanding and entitled to vote at the meeting, present
in person or represented by proxy, shall constitute a quorum for the transaction
of business.
1.7. Adjournments. Any meeting of stockholders may be adjourned to any
------------
other time and to any other place at which a meeting of stockholders may be held
under these By-laws by the stockholders present or represented at the meeting
and entitled to vote, although less than a quorum, or, if no stockholder is
present, by any officer entitled to preside at or to act as Secretary of such
meeting. It shall not be necessary to notify any stockholder of any adjournment
of less than 30 days if the time and place of the adjourned meeting are
announced at the meeting at which adjournment is taken, unless after the
adjournment a new record date is fixed for the adjourned meeting. At the
adjourned meeting, the corporation may transact any business which might have
been transacted at the original meeting.
1.8. Voting and Proxies. Each stockholder shall have one vote for each
------------------
share of stock entitled to vote held of record by such stockholder and a
proportionate vote for each fractional share so held, unless otherwise provided
in the Certificate of Incorporation. Each stockholder of record entitled to vote
at a meeting of stockholders, or to express consent or dissent to corporate
action in writing without a meeting, may vote or express such consent or dissent
in person or may authorize another person or persons to vote or act for him by
written proxy executed by the stockholder or his authorized agent and delivered
to the Secretary of the corporation. No such proxy shall be voted or acted upon
after three years from the date of its execution, unless the proxy expressly
provides for a longer period.
1.9. Acting at Meeting. When a quorum is present at any meeting, the
-----------------
holders of shares of stock representing a majority of the votes cast on a matter
(or if there are two or more classes of stock entitled to vote as separate
classes, then in the case of each such class, the holders of shares of stock of
that class representing a majority of the votes cast on a matter) shall decide
any matter to be voted upon by the stockholders at such meeting, except when a
different vote is required by express provision of law, the Certificate of
Incorporation or these By-Laws. When a quorum is present at any meeting, any
election of directors by stockholders shall be determined by a majority of the
votes cast on the election.
-2-
<PAGE>
1.10. Action without Meeting. Any action required or permitted to be
----------------------
taken at any annual or special meeting of stockholders of the corporation may be
taken without a meeting, without prior notice and without a vote, if a consent
in writing, setting forth the action so taken, is signed by the holders of
outstanding stock (or, if there are two or more classes of stock entitled to
vote as separate classes, by the holders of outstanding stock of that class
entitled to vote on such action) having not less than the minimum number of
votes that would be necessary to authorize or take such action at a meeting at
which all shares entitled to vote on such action were present and voted. Prompt
notice of the taking of corporate action without a meeting by less than
unanimous written consent shall be given to those stockholders who are entitled
to vote on such action and have not consented in writing.
ARTICLE 2 - Directors
-----------------------
2.1. General Powers. The business and affairs of the corporation shall be
--------------
managed by or under the direction of a Board of Directors, who may exercise all
of the powers of the corporation except as otherwise provided by law or the
Certificate of Incorporation. In the event of a vacancy in the Board of
Directors, the remaining directors, except as otherwise provided by law, may
exercise the powers of the full Board until the vacancy is filled.
2.2. Number, Election and Qualification.
----------------------------------
2.2.1. The number of directors which shall constitute the whole
Board of Directors shall be eleven. The number of directors may be
decreased at any time and from time to time either by the stockholders or
by a majority of the directors then in office, but only to eliminate
vacancies existing by reason of the death, resignation, removal or
expiration of the term of one or more directors. The directors shall be
elected at the annual meeting of stockholders by such stockholders as have
the right to vote on such election. Directors need not be stockholders of
the corporation.
2.2.2. As used in these By-laws, the term Class B Directors shall
mean directors of the corporation who are elected directors in manner
specified in Sections 2.2.3(b) and 2.2.3(c), the term Class A Directors
shall mean directors of the corporation who are elected directors in the
manner specified in Sections 2.2.3.(a) and the term Common Stock Directors
shall mean directors of the corporation who are elected directors in the
manner specified in Section 2.2.3.(d).
2.2.3. So long as there are issued and outstanding shares of Class B-
1 and Class B-2 Common Stock, the number of directors shall be set at
eleven and the directors shall be divided into classes and elected as
follows:
-3-
<PAGE>
(a) Class A Directors. The holders of record of outstanding shares of
Class A Common Stock, voting separately as a single class, shall be
entitled to elect two directors of the Corporation;
(b) Class B-1 Directors. The holders of record of outstanding shares of
Class B-1 Common Stock, voting separately as a single class, shall be
entitled to elect one director of the Corporation;
(c) Class B-2 Directors. The holders of record of outstanding shares of
Class B-2 Common Stock, voting separately as a single class, shall be
entitled to elect one director of the Corporation; and
(d) Common Stock Directors. The holders of record of outstanding shares
of Common Stock, voting together as a single class, shall be entitled
to elect seven directors of the Corporation.
2.3. Tenure. Each director shall hold office until the next annual
------
meeting and until his successor is elected and qualified, or until his earlier
death, resignation or removal.
2.4. Vacancies. Any vacancy in the Board of Directors, however occurring,
---------
including a vacancy resulting from an enlargement of the Board, shall be filled
by vote of the holders of a majority of the outstanding shares of the class or
classes of Common Stock which was entitled to elect the director whose office is
vacant. Any such vacancy shall automatically reduce the number of directors
constituting the entire Board of Directors pro tanto, until such time as the
holders of the class of Common Stock which was entitled to elect the director
whose office is vacant shall have exercised their right to elect a director to
fill the vacancy, whereupon the number of directors constituting the entire
Board of Directors shall be automatically increased pro tanto.
2.5. Resignation. Any director may resign by delivering his written
-----------
resignation to the corporation at its principal office or to the President or
Secretary. Such resignation shall be effective upon receipt unless it is
specified to be effective at some other time or upon the happening of some other
event.
2.6. Regular Meetings. Regular meetings of the Board of Directors may be
----------------
held without notice at such time and place, either within or without the State
of Delaware, as shall be determined from time to time by the Board of Directors;
provided that any director who is absent when such a determination is made shall
be given notice of the determination. A regular meeting of the Board of
Directors may be held without notice immediately after and at the same place as
the annual meeting of stockholders.
-4-
<PAGE>
2.7. Special Meetings. Special meetings of the Board of Directors may be
----------------
held at any time and place, within or without the State of Delaware, designated
in a call by the Chairman of the Board, President, two or more directors, or by
one director in the event that there is only a single director in a particular
class then in the office.
2.8. Notice of Special Meetings. Notice of any special meeting of
--------------------------
directors shall be given to each director by the Secretary or by the officer or
one of the directors calling the meeting. Notice shall be duly given to each
director (i) by giving notice to such director in person or by telephone at
least 48 hours in advance of the meeting, (ii) by sending a telegram or telex,
or delivering written notice by hand, to his last known business or home address
at least 48 hours in advance of the meeting, or (iii) by mailing written notice
to his last known business or home address at least 72 hours in advance of the
meeting. A notice or waiver of notice of a meeting of the Board of Directors
need not specify the purposes of the meeting; provided, however, notice of any
meeting of the Board of Directors called for the purpose of voting on a Class B
Director Action (as defined in the Certificate of Incorporation) shall specify
that a Class B Director Action will be voted on at the meeting. Such a notice
shall constitute notice to the Class A Directors and Common Stock Directors that
such meeting shall be the sole opportunity for the Class A Directors and the
Common Stock Directors to consult with the Class B Directors about such proposed
Class B Director Action.
2.9. Meetings by Telephone Conference Calls. Directors or any members of
--------------------------------------
any committee designated by the directors may participate in a meeting of the
Board of Directors or such committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and participation by such means shall constitute
presence in person at such meeting.
2.10. Quorum. A majority of the total number of the whole Board of
------
Directors shall constitute a quorum at all meetings called in accordance with
Section 2.8 of the Board of Directors, provided, however, a majority of the
Class B Directors shall constitute a quorum at meetings of the Board of
Directors called for the purpose of voting on a Class B Director Action and at
meetings held while a Class B Director Control Event, as defined in the
Certificate of Incorporation) is in effect. In the event one or more of the
directors shall be disqualified to vote at any meeting, then the required quorum
shall be reduced by one for each such director so disqualified; provided,
however, that in no case shall less than one-third (1/3) of the number so fixed
constitute a quorum. In the absence of a quorum at any such meeting, a majority
of the directors present may adjourn the meeting from time to time without
further notice other than announcement at the meting, until a quorum shall be
present.
-5-
<PAGE>
2.11. Action at Meeting. At any meeting of the Board of Directors at
-----------------
which a quorum is present, a majority of all votes cast shall be sufficient to
take any action, unless a different vote is specified by law, the Certificate of
Incorporation or these By-Laws. Except as provided otherwise herein or in the
Certificate of Incorporation, each director shall be entitled to one vote on all
matters to be voted on by the directors and the directors shall vote together as
a single class on all matters to which the Board of Directors is entitled to
vote.
2.12. Action by Consent. Any action required or permitted to be taken at
-----------------
any meeting of the Board of Directors or of any committee of the Board of
Directors may be taken without a meeting, if all members of the Board or
committee, as the case may be, consent to the action in writing, and the written
consents are filed with the minutes of proceedings of the Board or committee
provided that no Class B Director Action shall be taken by written consent.
2.13. Removal. Except as otherwise provided by the General Corporation
-------
Law of Delaware, any one or more or all of the directors may be removed, with or
without cause, by the holders of a majority of the shares then entitled to vote
at an election of directors, except that the directors elected by the holders of
a particular class or series of stock may be removed, with or without cause,
only by vote of the holders of a majority of the outstanding shares of such
class or series.
2.14. Committees. The Board of Directors may, by resolution passed by a
----------
majority of the whole Board, designate one or more committees, each committee to
consist of one or more of the directors of the corporation. The Board may
designate one or more directors as alternate members of any committee, who may
replace any absent of disqualified member at any meeting of the committee. In
the absence or disqualification of a member of a committee, the member or
members of the committee present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in the place of
any such absent or disqualified member. Any such committee, to the extent
provided in the resolution of the Board of Directors and subject to the
provisions of the General Corporation Law of the State of Delaware, shall have
and may exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of the corporation and may authorize the
seal of the corporation to be affixed to all papers which may require it
provides that no Class B Director Action or a Restricted Action shall be
assigned to any Committee. Each such committee shall keep minutes and make such
reports as the Board of Directors may from time to time request. Except as the
Board of Directors may otherwise determine, any committee may make rules for the
conduct of its business, but unless otherwise provided by the directors or in
such rules, its business shall be conducted as nearly as possible in the same
manner as is provided in these By-laws for the Board of Directors.
-6-
<PAGE>
2.15. Compensation of Directors. Directors may be paid such compensation
-------------------------
for their services and such reimbursement for expenses of attendance at meetings
as the Board of Directors may from time to time determine. No such payment
shall preclude any director from servicing the corporation or any of its parent
or subsidiary corporations in any other capacity and receiving compensation for
such service.
ARTICLE 3 - Officers
----------------------
3.1. Enumeration. The officers of the corporation shall consist of a
-----------
Chief Executive Officer, a President, a Secretary, a Treasurer and such other
officers with such other titles as the Board of Directors shall determine,
including a Chairman of the Board, a Vice-Chairman of the Board, and one or more
Vice Presidents, Assistant Treasurers, and the Assistant Secretaries. The Board
of Directors may appoint such other officers as it may deem appropriate.
3.2. Election. The President, Treasurer and Secretary shall be elected
--------
annually by the Board of Directors at its first meeting following the annual
meeting of stockholders. Other officers may be appointed by the Board of
Directors at such meeting or at any other meeting.
3.3. Qualification. No officer need be a stockholder. Any two or more
-------------
offices may be held by the same person.
3.4. Tenure. Except as otherwise provided by law, by the Certificate of
------
Incorporation or by these By-laws, each officer shall hold office until his
successor is elected and qualified, unless a different term is specified in the
vote choosing or appointing him, or until his earlier death, resignation or
removal.
3.5. Duties. Each officer shall take all reasonable, necessary and
------
desirable measures to implement the decisions and actions of the Board of
Directors, including Class B Director Action or actions, authorizations or
directives of the Class B Directors following a Class B Director Control Event.
3.6. Resignation and Removal. Any officer may resign by delivering his
-----------------------
written resignation to the corporation at its principal office or to the
President or Secretary. Such resignation shall be effective upon receipt unless
it is specified to be effective at some other time or upon the happening of some
other event.
Any officer may be removed at any time, with or without cause, by vote of a
majority of the entire number of directors then in office.
-7-
<PAGE>
Except as the Board of Directors may otherwise determine, no officer who
resigns or is removed shall have any right to any compensation as an officer for
any period following his resignation or removal, or any right to damages on
account of such removal, whether his compensation be by the month or by the year
or otherwise, unless such compensation is expressly provided in a duly
authorized written agreement with the corporation.
3.7. Vacancies. Subject to the Certificate of Incorporation, the Board of
---------
Directors may fill any vacancy occurring in any office for any reason and may,
in its discretion, leave unfilled for such period as it may determine any
offices other than those of President, Treasurer, and Secretary. Each such
successor shall hold office for the unexpired term of his predecessor and until
his successor is elected and qualified, or until his earlier death, resignation
or removal.
3.8. Chairman of the Board and Vice-Chairman of the Board. The Board of
----------------------------------------------------
Directors may appoint a chairman of the Board and may designate the Chairman of
the Board as Chief Executive Officer. If the Board of Directors appoints a
Chairman of the Board, he shall perform such duties and possess such powers as
are assigned to him by the Board of Directors. If the Board of Directors
appoints a Vice-Chairman of the Board, he shall, in the absence or disability of
the Chairman of the Board, perform the duties and exercise the powers of the
Chairman of the Board and shall perform such other duties and possess such other
powers as may from time to time be vested in him by the Board of Directors.
3.9. President. The President shall, subject to the direction of the
---------
Board of Directors, have general charge and supervision of the business of the
corporation. Unless otherwise provide by the Board of Directors, he shall
preside at all meetings of the stockholders and, if he is a director, at all
meetings of the Board of Directors, unless the Board of Directors has designated
the Chairman of the Board or another officer as Chief Executive Officer, the
President shall be the Chief Executive Officer of the corporation. The
President shall perform such other duties and shall have such other powers as
the Board of Directors may from time to time prescribe.
3.10. Vice Presidents. Any Vice President shall perform such duties and
---------------
possess such powers as the Board of Directors or the President may from time to
time prescribe. In the event of the absence, inability or refusal to act of the
President, the Vice President (or if there shall be more than one, the Vice
Presidents in the order determined by the Board of Directors) shall perform the
duties of the President and when so performing shall have all the powers of and
be subject to all the restrictions upon the President. The Board of Directors
may assign to any Vice President the title of Executive Vice President, Senior
Vice President or any other title selected by the Board of Directors.
-8-
<PAGE>
3.11. Secretary and Assistant Secretaries. The Secretary shall perform
-----------------------------------
such duties and shall have such powers as the Board Directors or the President
may from time to time prescribe. In addition, the Secretary shall perform such
duties and have such powers as are incident to the office of the secretary,
including without limitation the duty and power to give notices of all meetings
of stockholders and special meetings of the Board of Directors, to attend all
meetings of stockholders and the Board of Directors and keep a record of the
proceedings, to maintain a stock ledger and prepare lists of stockholders and
their addresses as required, to be custodian of corporate records and the
corporate seal and to affix and attest to the same on documents.
Any Assistant Secretary shall perform such duties and possess such powers
as the Board of Directors, the President or the Secretary may from time to time
prescribe. In the event of the absence, inability or refusal to act of the
Secretary, the Assistant Secretary, (or if there shall be more than one, the
Assistant Secretaries in the order determined by the Board of Directors) shall
perform the duties and exercise the powers of the Secretary.
In the absence of the Secretary or any Assistant Secretary at any meeting
of stockholders or directors, the person presiding at the meeting shall
designate a temporary secretary to keep a record of the meeting.
3.12. Treasurer and Assistant Treasurers. The Treasurer shall perform such
----------------------------------
duties and shall have such powers as may from time to time be assigned to him
by the Board of Directors or the President. In addition, the Treasurer shall
perform such duties and have such powers as are incident to the office of
treasurer, including without limitation the duty and power to keep and be
responsible for all funds and securities of the corporation, to deposit funds of
the corporation in depositories selected in accordance with these By-laws, to
disburse such funds as ordered by the Board of Directors, to make proper
accounts of such funds, and to render as required by the Board of Directors
statements of all such transactions and of the financial condition of the
corporation.
The Assistant Treasurers shall perform such duties and possess such powers
as the Board of Directors, the President or the Treasurer may from time to time
prescribe. In the event of the absence, inability or refusal to act of the
Treasurer, the Assistant Treasurer (or if there shall be more than one, the
Assistant Treasurers in the order determined by the Board of Directors) shall
perform the duties and exercise the powers of the Treasurer.
3.13. Salaries. Officers of the corporation shall be entitled to such
--------
salaries, compensation or reimbursement as shall be fixed or allowed from time
to time by the Board of Directors and as may be provided in the Certificate of
Incorporation.
-9-
<PAGE>
ARTICLE 4 - Capital Stock
---------------------------
4.1. Issuance of Stock. Unless otherwise voted by the stockholders and
-----------------
subject to the provisions of the Certificate of Incorporation, the whole or any
part of any unissued balance of the authorized capital stock of the corporation
or the whole or any part of any unissued balance of the authorized capital stock
of the corporation held in its treasury may be issued, sold, transferred or
otherwise disposed of by vote of the Board of Directors in such manner, for such
consideration and on such terms as the Board of Directors may determine.
4.2. Certificates of Stock. Every holder of stock of the corporation
---------------------
shall be entitled to have a certificate, in such form as may be prescribed by
law and by the Board of Directors, certifying the number and class of shares
owned by him in the corporation. Each such certificate shall be signed by, or in
the name of the corporation by, the Chairman or Vice-Chairman, if any, of the
Board of Directors, or the President or a Vice President, and the Treasurer or
an Assistant Treasurer, or the Secretary or an Assistant Secretary of the
corporation. Any or all of the signatures on the certificate may be a facsimile.
Each certificate for shares of stock which are subject to any restrictions
on transfer pursuant to the Certificate of Incorporation, the By-laws,
applicable securities laws or any agreement among any number of shareholders or
among such holders and the corporation shall have conspicuously noted on the
face or back of the certificate either the full text of the restriction or a
statement of the existence of such restriction.
If the corporation shall be authorized to issue more than one class of
stock or more than one series of any class, the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of each certificate representing shares of such
class or series of stock, provided that in lieu of the foregoing requirements
there may be set forth on the face or back of each certificate representing
shares of such class or series of stock a statement that the corporation will
furnish without charge to each stockholder who so requests a copy of the full
text of the powers, designations, preferences and relative, participating,
option or other special rights of each class of stock or series thereof and the
qualifications, limitations or restrictions of such preferences and/or rights.
4.3. Transfers. Except as otherwise established by rules and regulations
---------
adopted by the Board of Directors, and subject to applicable law and any
agreement among the Company and any number of Shareholders, shares of stock may
be transferred on the books of the corporation by the surrender to the
corporation or its transfer agent of the certificate representing such shares
properly endorsed or
-10-
<PAGE>
accompanied by a written assignment or power of attorney properly executed, and
with such proof of authority or the authenticity of signature as the corporation
or its transfer agent may reasonably require. Except as may be otherwise
required by law, by the Certificate of Incorporation or by these By-laws, the
corporation shall be entitled to treat the record holder of stock as shown on
its books as the owner of such stock for all purposes, including the payment of
dividends and the right to vote with respect to such stock, regardless of any
transfer, pledge or other disposition of such stock until the shares have been
transferred on the books of the corporation in accordance with the requirements
of these By-laws.
4.4. Lost, Stolen or Destroyed Certificates. The corporation may issue
--------------------------------------
a new certificate of stock in place of any previously issued certificate alleged
to have been lost, stolen, or destroyed, upon such terms and conditions as the
Board of Directors may prescribe, including the presentation of reasonable
evidence of such loss, theft or destruction and the giving of such indemnity as
the Board of Directors may require for the protection of the corporation or any
transfer agent or registrar.
4.5. Record Date. The Board of Directors may fix in advance a date as a
-----------
record date for the determination of the stockholders entitled to notice of or
to vote at any meeting of stockholders or to express consent (or dissent) to
corporate action in writing without a meeting, or entitled to receive payment of
any dividend or other distribution or allotment of any rights in respect of any
change, conversion or exchange of stock, or for the purpose of any other lawful
action. Such record date shall not be more than 60 no less than 10 days before
the date of such meeting, nor more than 10 days after the date of adoption of a
record date for a written consent without a meeting, nor more than 60 days prior
to any other action to which such record date relates.
If no record date is fixed, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day before the day on which notice is given, or, if
notice is waived, at the close of business on the day before the day on which
the meeting is held. The record date for determining stockholders entitled to
express consent to corporate action in writing without a meeting, when no prior
action by the Board of Directors in necessary, shall be the day on which the
first written consent is properly delivered to the corporation. The record date
for determining stockholders for any other purpose shall be at the close of
business son the day on which the Board of Directors adopts the resolution
relating to such purpose.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
-11-
<PAGE>
ARTICLE 5 - General Provision
-------------------------------
5.1. Fiscal Year. Except as from time to time otherwise designated by the
-----------
Board of Directors, the fiscal year of the corporation shall begin on the first
day of January in each year and end on the last day of December in each year.
5.2. Corporate Seal. The corporate seal shall be in such form as shall be
--------------
approved by the Board of Directors.
5.3. Waiver of Notice. Whenever any notice whatsoever is required to be
----------------
given by law, by the Certificate of Incorporation or by these By-laws, a waiver
of such notice either in writing signed by the person entitled to such notice or
such person's duly authorized attorney, or by telegraph, cable or any other
available method, whether before, at or after the time stated in such waiver, or
the appearance of such person or persons at such meeting in person or by proxy,
shall be deemed equivalent to such notice.
5.4. Voting of Securities. Except as the directors may otherwise
--------------------
designate, the President or Treasurer may waive notice of, and act as, or
appoint any person or persons to act as, proxy or attorney-in-fact for this
corporation (with or without power of substitution) at, any meeting of
stockholders or shareholders of any other corporation or organization, the
securities of which may be held by this corporation.
5.5. Evidence of Authority. A certificate by the Secretary, or an
---------------------
Assistant Secretary, or a temporary Secretary, as to any action taken by the
stockholders, directors, a committee or any officer or representative of the
corporation shall as to all persons who rely on the certificate in good faith be
conclusive evidence of such action.
5.6. Certificate of Incorporation. All references in these By-laws to the
----------------------------
Certificate of Incorporation shall be deemed to refer to the Certificate of
Incorporation of the corporation, as amended and in effect from time to time.
5.7. Transactions with Interested Parties. No contract or transaction
------------------------------------
between the corporation and one or more of the directors or officers, or between
the corporation and any other corporation, partnership, association, or other
organization in which one or more of the directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the Board of Directors or a committee of the
Board of Directors which authorized the contract or transaction or solely
because his or their votes are counted for such purpose, if:
(1) The material facts as to this relationship or interest and as to
the contract or transaction are disclosed or are known to the
Board
-12-
<PAGE>
of Directors or the committee, and the Board or committee in good
faith authorizes the contract or transaction by the affirmative
votes of a majority of the disinterested directors, even though
the disinterested directors be less than a quorum;
(2) The material facts as to his relationship or interest and as to
the contract or transaction are disclosed or are known to the
stockholders entitled to vote thereon, and the contract or
transaction is specifically approved in good faith by vote of the
stockholders; or
(3) The contract or transaction is fair as to the corporation as of
the time it is authorized, approved or ratified, by the Board of
Directors, a committee of the Board of Directors, or the
stockholders.
Common or interested directors may be counted in determining the presence
of a quorum at a meeting of the Board of Directors or of a committee which
authorizes the contract or transaction.
5.8. Severability. Any determination that any provision of these By-laws
------------
is for any reason inapplicable, illegal or ineffective shall not affect or
invalidate any other provision of these By-laws.
5.9. Pronouns. All pronouns used in these By-laws shall be deemed to
--------
refer to the masculine, feminine or neuter, singular or plural, as the identity
of the person or persons may require.
ARTICLE 6 - Amendments
------------------------
6.1. By the Board of Directors. These By-laws may be altered, amended or
-------------------------
repealed or new by-laws may be adopted by the affirmative vote of a majority of
the directors present at any regular or special meeting of the Board of
Directors at which a quorum is present.
6.2. By the Stockholders. These By-laws may be altered, amended or
-------------------
repealed or new by-laws may be adopted by the affirmative vote of the holders of
a majority of the shares of the capital stock of the corporation issued and
outstanding and entitled to vote at any regular meeting of stockholders, or at
any special meeting of stockholders, provided notice of such alteration,
amendment, repeal or adoption of new by-laws shall have been stated in the
notice of such special meeting.
-13-
<PAGE>
RESTRICTED SECURITIES SEE LEGENDS ON REVERSE SIDE
Delaware
No. -X- [ARTWORK APPEARS HERE] -X- Shares
PHYSICIANS QUALITY CARE, INC.
FULLY PAID NON-ASSESSABLE
Class A Common Stock
$0.01 Par Value Per Share
THIS CERTIFIES THAT XXX SPECIMEN XXX is the owner of
------------------------------------------
--Zero-- Shares of the Capital Stock of
- ----------------------------------------------
Physicians Quality Care, Inc.
transferable only on the books of the Corporation by the holder hereof in person
or by Attorney upon surrender of this Certificate properly endorsed.
IN WITNESS WHEREOF, the said Corporation has caused this Certificate to be
signed by its duly authorized officers and its Corporate Seal to be hereunto
affixed this XXxx day of XX A.D. 19 XX
----------- ----------------- ---
------------------------ ---------------------
President Treasurer
SHARES $0.01 EACH
<PAGE>
The securities represented by this certificate were issued in a private
placement, without registration under the Securities Act of 1933, as amended
(the "Act"), and may not be sold, assigned, pledged or otherwise transferred
in the absence of an effective registration under the Act covering the transfer
or an opinion of counsel, satisfactory to the issuer, that the registration
under the Act is not required.
The shares of stock represented by this certificate are subject to restrictions
on transfer and requirements of sale set forth in the Stockholders Agreement
dated as of August 1996, as amended and in effect from time to time. The Company
will furnish a copy of such agreement to the holder of this certificate without
charge upon written request.
CERTIFICATE
FOR
0
SHARES
of the
Capital Stock
PHYSICIANS QUALITY CARE, INC.
ISSUED TO
XXX SPECIMEN XXX
DATE
XXXX XX 19XX
For Value Received,_____ hereby sell, assign, and transfer unto _______
__________________________________________________________________________
Shares of the Capital Stock represented by the within Certificate, and do
hereby irrevocably constitute and appoint __________________________________
Attorney to transfer the said Stock on the books of the within named Company
with full power of substitution in the premises.
Dated _____________19__
In presence of ____________________________
__________________________
NOTICE. THE SIGNATURE OF THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE CERTIFICATE, IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATEVER.
<PAGE>
EXECUTION COPY
--------------
- --------------------------------------------------------------------------------
PHYSICIANS QUALITY CARE, INC.
CLASS B COMMON STOCK AND WARRANT
PURCHASE AGREEMENT
August 30, 1996
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
1. Authorization of Class B Common Stock: Purchase and Sale of Class B
Common Stock..............................................................5
1.1. Authorization of Class B Common Stock...............................5
1.2. Purchase and Sale of the Class B Common Stock and Warrants..........5
1.3. The Closings........................................................6
2. Representations and Warranties of the Company.............................9
2.1. Organization and Corporate Power....................................9
2.2. Authorization.......................................................9
2.3. Capitalization......................................................9
2.4. Subsidiaries.......................................................11
2.5. Financial Statements...............................................12
2.6. Absence of Undisclosed Liabilities.................................13
2.7. Absence of Certain Developments....................................13
2.8. Title to Properties................................................14
2.9. Tax Matters........................................................15
2.10. Contracts and Commitments..........................................15
2.11. No Defaults........................................................15
2.12. Intellectual Property..............................................16
2.13. Effect of Transactions.............................................16
2.14. No Governmental Consent or Approval Required.......................16
2.15. Litigation.........................................................17
2.16. Securities Laws....................................................17
2.17. Business...........................................................17
2.18. Brokerage..........................................................18
2.19. Employees..........................................................18
2.20. Insurance..........................................................18
2.21. Environmental and Safety Laws......................................19
2.22. Benefit Plans......................................................22
2.23. Transactions with Affiliates.......................................23
2.24. Books and Records..................................................23
2.25. Initial Acquisition................................................24
2.26. Regulatory Matters.................................................24
2.27. Material Facts.....................................................25
3. Representations and Warranties and other Agreements of the Investors.....26
3.1. Representations and Warranties.....................................26
3.2. Further Limitations on Disposition.................................27
3.3. Legends............................................................28
4. Conditions to the Investors' Obligations at the Initial Closing A........28
4.1. Representations and Warranties.....................................28
4.2. Performance........................................................29
4.3. Compliance Certificate.............................................29
4.4. Restated Certificate of Incorporation..............................29
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C> <C>
4.5. Qualifications; Consents...........................................29
4.6. Proceedings and Documents..........................................29
4.7. Stockholders Agreement.............................................29
4.8. Opinion of Company Counsel.........................................29
4.9. Secretary's Certificate............................................29
4.10. Due Diligence......................................................30
4.11. Material Adverse Change............................................30
4.12. Initial Acquisition................................................30
4.13. MCP Agreements.....................................................30
4.14. Conversion Series A Preferred Stock................................30
4.15. Key Employees......................................................30
4.16. Management Fees....................................................30
4.17. Amendment to By-Laws...............................................31
4.18. Termination of Existing Arrangements...............................31
5. Conditions of the Company's Obligations at any Closings..................31
5.1. Representations and Warranties.....................................31
5.2. Payment of Purchase Price..........................................31
5.3. Other Agreements...................................................31
5.4. Qualifications; Consents...........................................31
6. Conditions to the Investors, Obligations at the Initial B, Second, Third
and Option Closings......................................................32
6.1. Representations and Warranties.....................................32
6.2. Performance........................................................32
6.3. Compliance Certificate.............................................32
6.4. Qualifications; Consents...........................................32
6.5. Proceedings and Documents..........................................33
6.6. Other Agreements...................................................33
6.7. Opinion of Company Counsel.........................................33
6.8. Secretary's Certificate............................................33
6.9. EBITDA.............................................................33
7. Covenants and Agreements.................................................35
7.1. Financial and Other Information....................................35
7.2. Confidentiality....................................................37
7.3. Insurance..........................................................37
7.4. Use of Proceeds....................................................38
7.5. Payment of Taxes; Corporate Existence, Regulatory Compliance.......38
7.6. Dealings with Affiliates and Others................................39
7.7. Change in Nature of Business.......................................39
7.8. Payment of Expenses................................................39
7.9. Cooperation and Access.............................................39
7.10. Allocation of Purchase Price.......................................40
7.11. Conduct of Business................................................40
7.12. Reservation of Shares..............................................40
7.13. Compliance Program.................................................40
7.14. Future Financings..................................................41
7.15. Services Agreement.................................................43
7.16. Payment of Employee Notes..........................................43
</TABLE>
-ii-
<PAGE>
<TABLE>
<S> <C> <C>
7.17. Period............................................................43
8. Negative Covenants.......................................................43
9. Definitions..............................................................43
9.1. Certain Defined Terms.............................................43
9.2. Certain Matters of Construction...................................51
9.3. Cross Reference Table.............................................51
10. Miscellaneous............................................................53
10.1. Survival of Covenants; Assignability of Rights....................53
10.2. Incorporation by Reference........................................53
10.3. Parties in Interest...............................................54
10.4. Amendments and Waivers............................................54
10.5. Governing Law.....................................................54
10.6. Effect of Investigations..........................................54
10.7. Notices...........................................................54
10.8. Effect of Headings................................................55
10.9. Entire Agreement..................................................55
10.10. Severability......................................................55
10.11. Counterparts......................................................55
List of Exhibits and Schedules...........................................56
</TABLE>
-iii-
<PAGE>
PHYSICIANS QUALITY CARE, INC.
CLASS B COMMON STOCK AND WARRANT
PURCHASE AGREEMENT
This CLASS B COMMON STOCK PURCHASE AGREEMENT (the "Agreement") is made
----------
this 30th day of August, 1996 by and among PHYSICIANS QUALITY CARE, INC. a
Delaware corporation (the "Company") and each of BAIN CAPITAL FUND V, L.P., a
Delaware limited partnership, BAIN CAPITAL FUND V-B, L.P., a Delaware limited
partnership, BCIP ASSOCIATES, a Delaware partnership, and BCIP TRUST ASSOCIATES,
L.P., a Delaware limited partnership (each of whom individually is referred to
herein as an "Investor" and collectively they are referred to as the
--------
"Investors").
THE PARTIES HERETO AGREE AS FOLLOWS:
1. Authorization of Class B Common Stock; Purchase and Sale of Class B Common
--------------------------------------------------------------------------
Stock.
-----
1. 1. Authorization of Class B Common Stock. The Company has authorized
-------------------------------------
the issue and sale of up to 7,328,599 shares of Class B-1 Common Stock, $.01 par
value per share (the "Class B-1 Common Stock"), 4,671,401 shares of Class B-2
------------------------
Common Stock, $.01 par value per share (the "Class B-2 Common Stock", and
----------------------
together with the Class B-1 Common Stock, the Class B Common Stock") to be
---------------------
issued under this Agreement and has authorized that number of shares of Class B
Common Stock issuable, from time to time, under the Warrants defined below. The
rights, privileges, and preferences of the Class B Common Stock are as set forth
in the Restated Certificate of Incorporation, as amended and restated in the
form attached to this Agreement as Exhibit B (the "Restated Certificate)".
---------------------
1.2. Purchase and Sale of the Class B Common Stock and Warrants. Subject
----------------------------------------------------------
to the terms and conditions of this Agreement and on the basis of the
representations and warranties set forth herein, the Company agrees to sell to
the Investors and each such Investor, severally and not jointly, agrees to
purchase from the Company (a) the number of shares of Class B-1 Common Stock or
Class B-2 Common Stock, as the case may be (the "Shares") set forth opposite
------
such Investor's name on Exhibit A hereto under the heading "Total Shares" and
(b) the number of warrants to purchase shares of Class B Common Stock (the
"Warrants") set forth opposite such Investor's name on Exhibit A hereto under
the heading "Total Warrants," in the form therefor attached hereto as Exhibit C,
and subject to adjustment as provided herein. For purposes of this Agreement,
shares of Class B Common Stock issued pursuant to the exercise of the Warrants
shall be "Reserved Shares." The Warrants shall have an initial exercise price
---------------
of $2.50 per share. Such initial exercise price shall be subject to adjustment
in accordance with the terms of the Warrants.
1.3. The Closings. The purchase and sale of the Shares and Warrants will
------------
be made in installments (the "Installments") and the purchase of each
------------
Installment will take place at one or more closings (the "Closings") at the
--------
offices of Ropes & Gray, One International Place, Boston, Massachusetts or at
such other place as the parties shall mutually agree. At each Closing, the
Company will deliver to each of the Investors (a) a certificate or certificates,
registered in such Investor's name, representing the number of Shares to be
acquired by such Investor pursuant to this Agreement at such Closing and (b) the
number of Warrants to be acquired by such Investor pursuant to this Agreement at
such Closing, upon receipt from the
<PAGE>
Investors of payment in an amount equal to the amount set forth opposite such
Investor's name on Exhibit A hereto under the heading "Initial A Closing
Payment," "Second Closing Payment", "Third Closing Payment," or "Option Closing
Payment," as the case may be, in lawful money of the United States of America by
wire transfer of immediately available funds to the Company.
(a) The Initial Closings. The initial Closing (the "Initial Closing A")
-------------------- -----------------
shall take place at 10:00 a.m. Boston time on August 30, 1996 or at such
other time as the parties shall mutually agree. Upon the fulfillment of the
conditions set forth in Sections 4 and 5 hereof, the Company shall sell and
each Investor shall purchase the number of Shares set forth opposite such
Investor's name on Exhibit A hereto under the heading "Initial A Closing
Number of Shares" and the number of Warrants set forth opposite such
Investor's name on Exhibit A hereto under the heading "Initial A Warrants."
At Initial Closing A upon receipt from each Investor of a payment equal to
the amount set forth opposite such Investor's name on Exhibit A hereto
under the heading "Initial A Closing Payment," the Company shall deliver to
each Investor one or more certificates representing the total number of
Shares set forth opposite such Investor's name on Exhibit A hereto under
the heading "Initial A Closing Number of Shares" and the Company shall
deliver to the Investors Warrants to purchase the total number of shares of
the Company's Class B Common Stock, as set forth opposite such Investor's
name on Exhibit A under the heading "Initial A Warrants"; provided, however
-------- -------
that in the event that on or prior to the Closing of the planned
affiliation by the Company with a group of physicians in Baltimore,
Maryland (the "Flagship Transaction") T. Rowe Price Threshold Fund (the
"Threshold Fund") does not purchase 800,000 shares of Class A Common Stock
at a purchase price of $2.50 per share, (which issuance to the Threshold
Fund is hereby approved by the Investors) concurrently with the Closing of
the Flagship Transaction, the Company shall sell and the Investors shall
purchase, upon the fulfillment of the conditions set forth in Sections 5
and 6 hereof, 800,000 shares of Class B Common Stock and Warrants to
purchase 1,154,000 shares of Class B Common Stock, each such Warrants
issued on a proportionate basis to their ownership of the Initial A Closing
Number of Shares and Initial A Warrants, at "Initial Closing B" at such
Closings.
(b) The Second Closing. The second Closing (the "Second Closing") shall
------------------ --------------
take place if requested by the Company on or prior to December 31, 1999, at
such time and place as the parties shall mutually agree no earlier than 10
days after the date on which the Company's request is received by the
Investors. Upon the fulfillment of the conditions set forth in Sections 5
and 6 hereof, at the Second Closing the Company shall sell and each
Investor shall purchase the number of Shares set forth opposite such
Investor's name on Exhibit A hereto under the heading "Second Closing
Number of Shares" and the number of Warrants set forth opposite such
Investor's name on Exhibit A hereto under the heading "Second Closing
Warrants." At the Second Closing upon receipt from each Investor of a
payment equal to the amount set forth opposite such Investor's name on
Exhibit A hereto under the heading "Second Closing Payment," the Company
shall deliver to each Investor one or more certificates representing the
total number of Shares set forth opposite such Investor's name on Exhibit A
hereto under the heading "Second Closing Number of
-2-
<PAGE>
Shares" and the Company shall deliver to the Investors Warrants to purchase the
number of shares of the Company's Class B Common Stock as set forth opposite
such Investor's name on Exhibit A under the heading "Second Closing Warrants,"
subject to adjustment as follows: in the event that as of the date of the Second
Closing, (x) Net Sales for the immediately preceding Test Period exceed the
Minimum Net Sales Target for the immediately preceding Test Period; and (y)
---
EBITDA for the immediately preceding Test Period exceeds the Minimum EBITDA
Target for the immediately preceding Test Period, the aggregate number of shares
issuable upon exercise of such Warrants shall be reduced by a number equal to
the product obtained by multiplying (i) 3,000,000, subject to adjustment in
accordance with Section 2 of the Warrant as if such Warrants had been issued on
the date of the Initial Closing A, by (ii) the Applicable Percentage.
(c) The Third Closing. The third Closing (the "Third Closing") shall take
----------------- -------------
place if requested by the Company on or prior to December 31, 1999, at such time
and place as the parties shall mutually agree no earlier than 10 days after the
date on which the Company's request is received by the Investors. Upon the
fulfillment of the conditions set forth in Sections 5 and 6 hereof, at the Third
Closing the Company shall sell and each Investor shall purchase the number of
shares set forth opposite such Investor's name on Exhibit A hereto under the
heading "Third Closing Number of Shares" and the number of Warrants set forth
opposite such Investor's name on Exhibit A hereto under the heading "Third
Closing Warrants." At the Third Closing upon receipt from each Investor of a
payment equal to the amount set forth opposite such Investor's name on Exhibit A
hereto under the heading "Third Closing Payment," the Company shall deliver to
each Investor one or more certificates representing the total number of Shares
set forth opposite such Investor's name on Exhibit A hereto under the heading
"Third Closing Number of Shares" and the Company shall deliver to the Investors
Warrants to purchase the number of shares of the Company's Class B Common Stock
as set forth opposite such Investor's name on Exhibit A under the heading "Third
Closing Warrants," subject to adjustment as follows: in the event that as of the
date of the Third Closing, (x) Net Sales for the immediately preceding Test
Period exceed the Minimum Net Sales Target for the immediately preceding Test
Period; and (y) EBITDA for the immediately preceding Test Period exceeds the
---
Minimum EBITDA Target for the immediately preceding Test Period, the aggregate
number of shares issuable upon exercise of such Warrants shall be reduced by a
number equal to the product obtained by multiplying (i) 2,000,000, subject to
adjustment in accordance with Section 2 of the Warrant as if such Warrants had
been issued on the date of the Initial Closing A, by (ii) the Applicable
Percentage.
(d) The Option Closing. An additional closing (the "Option Closing") shall
------------------ --------------
take place, if requested by the Investors, at any time prior to an initial
public offering of the Company's securities, at such time and place as the
parties shall mutually agree no earlier than 10 days after the date on which the
Investor's request is received by the Company. Upon the fulfillment of the
conditions set forth in Sections 5 and 6 hereof, at the Option Closing the
Company shall sell and each Investor shall purchase the percentage of the total
number of shares to be purchased at the Option Closing set forth opposite such
Investor's name on Exhibit A hereto under the heading "Option
--------- ------
-3-
<PAGE>
Closing Number of Shares" and the number of Warrants set forth opposite
------------------------
such Investor's name on Exhibit A hereto under the heading "Option Closing
Warrants." At the Option Closing, upon receipt from each Investor of a
payment equal to the amount set forth opposite such Investor's name on
Exhibit A hereto under the heading "Option Closing Payment," the Company
shall deliver to each Investor one or more certificates representing the
total number of Shares set forth opposite such Investor's name on Exhibit A
under the heading "Option Closing Number of Shares" and the Company shall
deliver to the Investors Warrants to purchase the number of shares of the
Company's Class B Common Stock as set forth opposite such Investor's name
on Exhibit A under the heading "Option Closing Warrants"; provided, that if
-------- ----
Initial Closing B has occurred, the Company shall deliver to the Investors
the number of shares set forth opposite such Investor's name on Exhibit A
hereto under the heading "Option Closing Number of Shares" less the number
----
of shares issued to such Investor at Initial Closing B, Warrants to
purchase the aggregate number of shares of the Company's Class B Common
Stock equal to the amounts set forth opposite such Investor's name on
Exhibit A under the heading "Option Closing Warrants" less the number of
----
Warrants issued to such Investor at Initial Closing B; and the Option
Closing Payment shall be reduced for each Investor by the amount paid by
such Investor at Initial Closing B.
2. Representations and Warranties of the Company.
---------------------------------------------
In order to induce the Investors to enter into this Agreement and to
purchase the Shares hereunder, the Company hereby represents and warrants to
each Investor that:
2.1. Organization and Corporate Power. Each of the Company and Medical
--------------------------------
Care Partners, P.C., a professional corporation organized under the laws of The
Commonwealth of Massachusetts ("MCP"), is a corporation duly organized, validly
---
existing and in good standing under the laws of its jurisdiction of
incorporation and is qualified to do business as a foreign corporation in each
jurisdiction where such qualification is required. Each of the Company and MCP
has all required corporate power and authority to own its property, to carry on
its business as presently conducted or contemplated to be conducted and to carry
out the transactions contemplated hereby. The copies of the Amended and Restated
Certificate of Incorporation and By-laws of the Company, and the Articles of
Organization and By-laws of MCP, each as amended to date, which have been
furnished to the counsel for the Investors by the Company, are correct and
complete.
2.2. Authorization. This Agreement, the Stockholders Agreement to be
-------------
delivered pursuant to Section 4.7 among the Company, the Stockholders named
therein and the Investors (the "Stockholders Agreement"), and any other
----------------------
agreements, instruments, or documents entered into by the Company pursuant to
this Agreement or the Stockholders Agreement (the "Transaction Agreements") have
----------------------
been duly executed and delivered by the Company and are the legal, valid and,
assuming due execution and delivery by the other parties hereto and thereto,
binding obligations of the Company, enforceable in accordance with their terms.
The execution, delivery and performance of this Agreement, the Stockholders
Agreement and the Transaction Agreements and the issuance of the Shares, the
-4-
<PAGE>
Warrants, the Reserved Shares and the Conversion Shares have been duly
authorized by all necessary corporate action of the Company.
2.3. Capitalization. (a) Upon the filing of the Restated Certificate,
--------------
the entire authorized capital stock of the Company will consist of 10,000,000
shares of Preferred Stock, $.01 par value per share, of which no shares are
outstanding, 100,000,000 shares of Common Stock, $.01 par value per share (the
"Common Stock") of which 75,000,000 shares are designated as Class A Common
- -------------
Stock, of which 8,359,901 shares are issued and outstanding (after giving effect
to the conversion of the Company's Series A Convertible Preferred Stock, $.01
par value per share (the "Series A Preferred Stock"), but prior to the issuance
of shares of (i) Common Stock to the Investors hereunder, (ii) up to 3,466,245
shares of Class A Common Stock in connection with the Initial Acquisition, (iii)
833,075.5 shares of Class A Common Stock issuable upon exercise of the Warrants
and the warrant issued in connection with the conversion of the Convertible
Subordinated Note or (iv) 402,300 shares of Class A Common Stock issuable upon
conversion of the Mandatory Convertible Notes issued in the bridge financing
described in Schedule 2.3A and 201,150 shares of Class A Common Stock issuable
upon conversion of the warrants of such Mandatory Convertible Notes); of which
15,267,915 shares are designated as Class B-1 Common Stock, of which no shares
are issued and outstanding; and of which 9,732,085 shares are designated as
Class B-2 Common Stock, of which no shares are issued and outstanding. The
Company holds 1,021,500 shares of Class A Common Stock in its treasury. The
Company has reserved (i) 1,875,000 shares of Class A Common Stock for issuance
to certain employees upon exercise by such employees of options granted or to be
granted pursuant to the Company's Equity Incentive Plan, which plan is described
in Schedule 2.3A attached hereto, (ii) up to 3,466,245 shares of Class A Common
Stock for issuance in connection with the Initial Acquisition, (iii) 1,666,151
shares of Class A Common Stock for issuance in connection with the conversion of
the Company's Series A Convertible Preferred Stock, $.01 value per share, as
required by Section 4.14 of this Agreement, (iv) 7,939,316 shares of Class B-1
Common Stock and 5,060,684 shares of Class B-2 Common Stock as Reserved Shares
for issuance upon exercise of the Warrants, (v) 625,000 shares of Class A Common
Stock for issuance upon conversion of the Convertible Subordinated Note, (vi)
25,000,000 shares of Class A Common Stock for issuance upon conversion of the
Class B Common Stock in accordance with the terms of the Restated Certificate
(the "Conversion Shares"), (vii) 853,075.5 shares of Class A Common Stock for
-----------------
issuance upon exercise of the Series A Warrants and the Warrants (in Lieu of
Interest) referred to in Schedule 2.3A and (viii) 402,300 shares of Class A
Common Stock for issuance upon conversion of the Mandatory Convertible
Promissory Notes issued in the bridge financing described in Schedule 2.3A, plus
201,150 shares of Class A Common Stock issuable upon exercise of the Warrants to
be issued upon conversion of such notes. The Company has reserved 7,328,599
shares of Class B-1 Common Stock and 4,671,401 shares of Class B-2 Common Stock
for issuance pursuant to the Initial Closing A, Initial Closing B, the Second
Closing, the Third Closing and the Option Closing under Section 1.3 hereof. When
issued in accordance with the terms of this Agreement, the Shares will be duly
authorized, validly issued and outstanding, fully paid and nonassessable, and
the Reserved Shares and Conversion Shares will, each upon issuance in accordance
with the terms of the Company's Restated Certificate, be duly authorized,
validly issued and outstanding, fully paid and nonassessable and free and clear
of all liens, charges or encumbrances of any kind. All outstanding capital stock
of the Company has been duly authorized, validly paid and is
-5-
<PAGE>
nonassessable. Except as set forth in Schedule 2.3A, there are no outstanding
warrants, options or other rights to purchase or subscribe for or acquire from
the Company, or exchangeable for or convertible into, any shares of capital
stock or any call, commitment or claim relating to capital stock, or stock
appreciation, phantom stock, profit participation or similar rights. Except as
provided herein or as set forth in Schedule 2.3A attached hereto and in the
Stockholders Agreement, there are no preemptive rights with respect to the
issuance or sale by the Company of the Shares, the Reserved Shares or the
Conversion Shares. Except as provided in the Stockholders Agreement, or as set
forth on Schedule 2.3A or as imposed by applicable securities laws, upon the
Closing there will be no restrictions on the transfer or voting of any shares of
the Company's capital stock. Other than as set forth in the Stockholders'
Agreement or as set forth in Schedule 2.3A, there are no existing rights
with respect to registration under the Securities Act of 1933, as amended (the
"Securities Act"), of any of the Company's capital stock. The Company has not
- ---------------
violated the Securities Act or any state Blue Sky or securities laws in
connection with the issuance of any of its securities.
(b) The entire authorized capital stock of MCP consists of 10,000 shares of
Common Stock $.01 par value per share, of which 1,000 shares are issued and
outstanding and owned of record by Jay Ungar, M.D. (the "Sole Stockholder") and
----------------
no other shares are issued and outstanding. MCP holds no shares of Common Stock
in its treasury. All capital stock of MCP has been duly authorized, validly paid
and is nonassessable and free and clear of all liens, charges or encumbrances of
any kind. Other than as set forth in the Designation Agreement or as set forth
in Schedule 2.3B, there are no outstanding warrants, options or other rights to
purchase or acquire from MCP, or exchangeable for or convertible into, any
shares of the capital stock of MCP or any call, commitment or claim relating to
capital stock, or stock appreciation, phantom stock, profit participation or
similar rights. There are no preemptive rights with respect to the issuance or
sale by MCP of any shares of its capital stock. There are no existing rights
with respect to registration under the Securities Act of any of the capital
stock of MCP. MCP has not violated the Securities Act or any state Blue Sky or
securities laws in connection with the issuance of any of its securities. The
Sole Stockholder, MCP and the Company have executed and delivered that certain
Shareholder Designation and Stock Transfer Agreement (the "Designation
-----------
Agreement"), dated as of August 9, 1996, a true and complete copy of which has
been provided to the Investors' counsel. The Company and MCP have executed and
delivered that certain Services Agreement (the "Services Agreement") dated as of
------------------
July 9, 1996, a true and complete copy of which has been provided to the
Investors' counsel. The Designation Agreement and the Services Agreement are
collectively referred to herein as the "MCP Agreements." Each of the MCP
--------------
Agreements is the legal, valid and binding obligation of the parties thereto,
enforceable in accordance with its terms. No breach or default by any party to
any of the MCP Agreements has occurred and is continuing, and no event has
occurred which with notice or lapse of time or both would constitute a breach or
default.
2.4. Subsidiaries. Except for (i) the Subsidiaries of the Company listed
------------
on Schedule 2.4A and (ii) MCP, the Company has no Subsidiaries and has no
investments in, or affiliations with, any other corporation or business
organization. All capital stock of MCP and each Subsidiary has been duly
authorized and is validly issued, fully paid, nonassessable and free and clear
of all liens. All such stock was issued in compliance with all applicable state
and federal laws concerning the issuance of securities. Each of MCP and the
Subsidiaries is
-6-
<PAGE>
duly organized, validly existing and in good standing under the laws of its
respective jurisdiction of incorporation as set forth in Schedule 2.4 and is
duly qualified to do business as a foreign corporation in each jurisdiction
where such qualification is required except where the failure to so qualify
would not have a material adverse effect on the Company or the Consolidated
Entities taken as a whole. Each of MCP and the Subsidiaries has all required
corporate power and authority to own its property and to carry on its business
as presently conducted or contemplated to be conducted.
2.5. Financial Statements.
---------------------
2.5.1. Attached hereto as Schedule 2.5A are (a) the Company's (i)
audited consolidated balance sheet as of March 31, 1996 and its unaudited
consolidated statements of income and cash flows for the three month period
then ended (the "1996 Company Financials") and (ii) audited consolidated
-----------------------
balance sheet, and consolidated statement of income and cash flows for the
Company for the period from March 20, 1995 (inception) to December 31, 1995
(the "1995 Company Financials" and together with the 1996 Company
-----------------------
Financials, the "Company Financials"); (b) each of Springfield Medical
------------------
Associates, Inc. and PQC Affiliation Group I's (together, the "Springfield
-----------
Physician Groups") (i) unaudited consolidated balance sheet as of March 31,
----------------
1996 and each of their unaudited consolidated statements of income and cash
flows for the three month period then ended (the "1996 Initial Acquisition
------------------------
Financials" and together with the 1996 Company Financials, the "1996
---------- ----
Financial") and (ii) audited consolidated balance sheet, and consolidated
---------
statement of income and cash flows for the Springfield Physician Groups for
the years ended December 31, 1993, 1994 and 1995 (the "1995 Initial
------------
Acquisition Financials" and together with the 1996 MCP Financials, the
----------------------
"Initial Acquisition Financials"). The Company Financials and the Initial
------------------------------
Acquisition Financials are herein collectively referred to as the
"Financials." The Financials are complete and correct in all material
----------
respects, have been prepared in accordance with GAAP, and fairly present,
in all material respects, the financial position of the Company or the
Springfield Physician Groups, respectively, as of each such date and the
results of operations for each such period then ended.
2.5.2. The combined pro forma financial statements of the Company
and the Springfield Physician Groups certified by the Treasurer of the
Company and attached as Schedule 2.5B hereto (the "Pro Forma Financials"),
--------------------
are derived from the Financial Statements and based upon the adjustments
and assumptions set forth in the Notes to the Pro Forma Financials.
2.5.3. Except as set forth on Schedule 2.5C, each of MCP and each
Springfield Physician Group are, and each physician practice group acquired
by or affiliated with (whether by management agreement or stockholder
transfer or designation or similar agreement or otherwise) the Company or
any of its Affiliates will be, (unless consented to by the Investors) able
to be consolidated in the financial statements of the Company in accordance
with GAAP, including without limitation consensuses as in effect or
expressed on the date hereof of the Emerging Issues Task Force of the
Financial Accounting Standards Board, and in accordance with rules,
regulations and views of the Securities and Exchange Commission as in
effect or expressed on the
-7-
<PAGE>
date hereof. For purposes of this Agreement, each consolidated entity
referred to in the foregoing sentence shall be a "Consolidated Entity" and
-------------------
collectively, the "Consolidated Entities."
---------------------
2.6. Absence of Undisclosed Liabilities. Except as and to the extent
----------------------------------
reflected or reserved against in the Financials or as set forth on Schedule 2.6,
neither the Company nor, to the Knowledge of the Company, any of its
Consolidated Entities has incurred any accrued or contingent liability which is
material to the Company and its Consolidated Entities taken as a whole, arising
out of any transaction, event or state of facts existing on or prior to the date
hereof, which liability exists on the date hereof, except for liabilities which
have arisen after the date of the Financials in the ordinary course of business
and which do not result from, arise out of, relate to, is in the nature of or
was caused by any breach of contract, breach of warranty, tort, infringement or
violation of law.
2.7. Absence of Certain Developments. Since March 31, 1996, except as
-------------------------------
reflected in the 1996 Financials or on Schedule 2.7, there has been no material
adverse change in the condition, financial or otherwise, of the Company and its
Consolidated Entities, taken as a whole or in the assets, liabilities,
properties, business or prospects of the Company and its Consolidated Entities,
taken as a whole. Without limiting the generality of the foregoing, since that
date there has been no:
(i) declaration, setting aside or payment of any dividend or
other distribution with respect to the capital stock of
the Company;
(ii) loss, destruction or damage to any property of the Company
or any of its Consolidated Entities, whether or not
insured, which loss would have a material adverse affect
on the Company and its Consolidated Entities taken as a
whole;
(iii) (x) labor trouble involving the Company or, to the
Knowledge of the Company any of its Consolidated Entities
or (y) any material change in any of their respective
personnel or the terms and conditions of employment of
such personnel with respect to clause (y) other than in
connection with the consummation of the Initial
Acquisition;
(iv) waiver of any valuable right by the Company or, to the
Knowledge of the Company, any of its Consolidated
Entities;
(v) loan or extension of credit to any officer or employee of
the Company or, to the Knowledge of the Company, any of
its Consolidated Entities;
(vi) disposition of any material assets (or any contract or
arrangement therefor) by the Company or, to the Knowledge
of the Company, any of its Consolidated Entities other
than for fair value in the ordinary course of business
other than in connection with the consummation of the
Initial Acquisition;
-8-
<PAGE>
(vii) merger, consolidation, amalgamation, liquidation, winding
up, or dissolution of the Company or, to the Knowledge of
the Company, any of its Consolidated Entities other than
in connection with the consummation of the Initial
Acquisition;
(viii) investment in, acquisition of, or affiliation with any
business or assets of, (other than the purchase of
supplies, equipment and similar assets by physician
practice groups in the ordinary course of business) other
than the Initial Acquisition, any Person by the Company
or, to the Knowledge of the Company, any of its
Consolidated Entities;
(ix) material change in the nature of the business conducted by
the Company or, to the Knowledge of the Company, any of
its Consolidated Entities:
(x) commencement or settlement of any action, suit,
investigation or proceeding before any court or
governmental department, commission, board, agency or
instrumentality, domestic or foreign, affecting the
Company or, to the Knowledge of the Company, any of its
Consolidated Entities;
(xi) incurrence of Indebtedness by the Company or, to the
Knowledge of the Company, any of its Consolidated
Entities; or
(xii) any commitment with respect to any of the foregoing.
2.8. Title to Properties. Except as disclosed in Schedule 2.8, each of the
-------------------
Company and, to the Knowledge of the Company, each of its Consolidated Entities
has good and marketable title or valid leasehold interest to all material
properties and assets necessary to the business of the Company and its
Consolidated Entities, taken as a whole, as presently conducted and as proposed
to be conducted and to all of its material properties and assets, free and clear
of all mortgages, security interests, liens, restrictions or encumbrances other
than Permitted Liens. All material personal property included in such properties
which is necessary to the business of the Company and its Consolidated Entities
taken as a whole is in good condition and repair except for reasonable wear and
tear, and all leases of real or personal property to which the Company or any of
its Consolidated Entities is a party and which are material to the business of
the Company and its Consolidated Entities taken as a whole are fully effective
and afford the Company or such Consolidated Entity, as the case may be, peaceful
and undisturbed possession of the subject matter of the lease. Neither the
Company nor to the Knowledge of the Company any Consolidated Entity is in
material violation of any zoning, building or safety ordinance, regulation or
requirement or other law or regulation applicable to the operation of owned or
leased properties likely to impede the normal operation of the business of the
Company and its Consolidated Entities, taken as a whole, and neither the Company
nor to the Knowledge of the Company any Consolidated Entity has received any
written notice of violation with which such recipient has not complied.
-9-
<PAGE>
2.9. Tax Matters. There are no material federal, state, county or local
-----------
Taxes due and payable by the Company or any Consolidated Entity which have not
been paid. The provisions for taxes in the Financial Statements are sufficient
for the payment of all accrued and unpaid federal, state, county and local Taxes
of the Company and each Consolidated Entity, whether or not assessed or disputed
as of the date of each such balance sheet. There have been no material
examinations or audits of any Tax Returns or reports by any applicable federal,
state or local governmental agency. The Company and to the Knowledge of the
Company each Consolidated Entity have duly and timely filed all federal, state,
county and local Tax Returns required to have been filed by them for any period
ending on or before the date hereof, all such returns are accurate in all
material respects and there are in effect no waivers of applicable statutes of
limitations with respect to Taxes for any year.
2.10. Contracts and Commitments. Except for the contracts described in
-------------------------
Schedule 2.10 (the "Contracts"), true and complete copies of which have been
---------
made available to counsel for the Investors, neither the Company nor to the
Knowledge of the Company, any Consolidated Entity has any contract, obligation
or commitment which involves by its terms a commitment in excess of $25,000 or
any employment contracts (including contracts with any common law employee,
agent or independent contractor), stock redemption, designation or purchase
agreements, financing agreements, managed care contracts and other contracts
with third-party payors, distribution right agreements, royalty agreements,
licenses under which either the Company or, to the Knowledge of the Company, any
Consolidated Entity is licensee or licensor, leases of real property, pension,
profit-sharing, retirement or stock option plans. Each of the Contracts is the
legal, valid and binding obligation of the Company or to the Knowledge of the
Company, the Consolidated Entity party thereto, enforceable against the Company
in accordance with its terms. No breach or default under any Contract by the
Company or the Consolidated Entity that is a party thereto or, to the Knowledge
of the Company, by any other party thereto, has occurred and is continuing and
no event has occurred which with notice or lapse of time or both would
constitute a breach or default thereunder except, in each case, for breaches or
defaults which would not have a material adverse effect upon the Company and its
Consolidated Entities, taken as a whole.
2.11. No Defaults. Neither the Company nor any Consolidated Entity is in
-----------
default (a) under its organizational documents or its By-Laws or any note,
indenture, mortgage, lease, agreement, contract, purchase order or other
instrument, document or agreement to which it is a party or by which it or any
of its property is bound or affected or (b) with respect to any order, writ,
injunction or decree of any court or any federal, state, municipal or other
governmental department, commission, board, bureau, agency or instrumentality,
domestic or foreign except, in each case, for defaults which would not have a
material adverse effect upon the Company and its Consolidated Entities, taken as
a whole. To the Knowledge of the Company, there exists no condition, event or
act which after notice, lapse of time, or both, could constitute a default by
the Company or any Consolidated Entity under any of the foregoing except, in
each case, for breaches or defaults which would not have a material adverse
effect upon the Company and its Consolidated Entities, taken as a whole.
2.12. Intellectual Property. Schedule 2.12 contains a list of all
---------------------
patents, trademarks, trade names, brand names and copyrights (in each case,
whether issued or pending), and all licenses or rights with respect to any of
the foregoing, owned or possessed by the Company
-10-
<PAGE>
or any Consolidated Entity on the date of this Agreement, all of which are in
good standing and are free and clear of all liens and encumbrances of any
nature. To the knowledge of the Company, neither the Company nor any
Consolidated Entity infringes any patent, copyright, or trademark rights of
others. All trade secrets, know how, technical processes and procedures
developed and belonging to the Company or, to the Knowledge of the Company, any
Consolidated Entity which are material to the business of the Company or its
Consolidated Entities taken as a whole and which have not been patented have
been kept confidential. The Company and, to the Knowledge of the Company, each
Consolidated Entity has the right to use, free and clear of claims or rights of
others, all trade secrets, customer lists, processes, computer software,
patents, copyrights and trademarks required for, incident to or included in its
products and its proposed products.
2.13. Effect of Transactions. The execution, delivery and performance of
----------------------
this Agreement, the Stockholders Agreement and the Transaction Agreements,
compliance with the provisions hereof and thereof by the Company, and the
issuance, sale and delivery of the Shares, the Warrants, the Reserved Shares and
the Conversion Shares, do not and will not, with or without the passage of time
or the giving of notice or both, (a) violate any provision of law, statute, rule
or regulation or any ruling, writ, injunction, order, judgment or decree of any
court, administrative agency or other governmental body or (b) conflict with or
result in any breach of any of the terms, conditions or provisions of, or
constitute a default (or give rise to any right of termination, cancellation or
acceleration) under, or result in the creation of any lien, security interest,
charge or encumbrance upon any of the properties or assets of the Company or
those of any Consolidated Entity under its respective organizational documents
or Bylaws or under any material note, indenture, mortgage, lease, agreement,
contract, purchase order or other instrument, document or agreement to which the
Company or any Consolidated Entity is a party or by which any of them or any of
their property is bound or affected, including without limitation, the MCP
Agreements, the Initial Acquisition Documents and the Contracts.
2.14. No Governmental Consent or Approval Required. Based in part on the
--------------------------------------------
representations made by the Investors in Section 3 of this Agreement, other than
federal or state securities law filings which have been made or which will be
made in a timely manner and other than the filing of the Company's Restated
Certificate which, as of the Initial Closing, will have been filed, no
authorization, consent, approval or other order of, declaration to, or filing
with, any governmental agency or body is required for or in connection with the
valid and lawful authorization, execution and delivery by the Company of this
Agreement, the Stockholders Agreement, the Transaction Agreements, the MCP
Agreements or the Initial Acquisition Documents or for or in connection with the
valid and lawful authorization, issuance, sale and delivery of the Shares and
the issuance of the Warrants or for or in connection with the valid and lawful
authorization, reservation, issuance, sale and delivery of the Reserved Shares
or the Conversion Shares.
2.15. Litigation. There is no action, suit, proceeding or investigation
----------
pending against the Company, or, to the Knowledge of the Company, any
Consolidated Entity, or, to the Knowledge of the Company, threatened against the
Company or any Consolidated Entity which questions the validity of this
Agreement, the Stockholders Agreement, the Transaction Documents, the MCP
Agreements or the Initial Acquisition Documents or the right of the
-11-
<PAGE>
Company or MCP to enter into them or to consummate the transactions contemplated
hereby or thereby, or which might result, either individually or in the
aggregate, in any material adverse change in the business, assets, conditions,
operations, affairs, or prospects of the Company and its Consolidated Entities
taken as a whole, financial or otherwise, or any change in the current equity
ownership of the Company or of any Consolidated Entity, nor is the Company aware
that there is any basis for the foregoing. None of the Company or any of its
officers or directors or, to the Knowledge of the Company, any Consolidated
Entity or, to the Knowledge of the Company, any of its officers or directors, is
a party to, or subject to the provisions of, any judgment or decree of any
court. There is no action, suit or proceeding by the Company or, to the
Knowledge of the Company any Consolidated Entity currently pending or which the
Company or any Consolidated Entity presently intends to initiate.
2.16. Securities Laws. Assuming that the Investors' representations and
---------------
warranties contained in Section 3 of this Agreement are true and correct, the
offer, issuance and sale by the Company to the Investors of the Shares, the
Warrants, the Reserved Shares and the Conversion Shares are, and will be as of
each Closing, exempt from the registration and prospectus delivery requirements
of the Securities Act, and have been, or will be as of each Closing, registered
or qualified (or are, or will be as of each Closing, exempt from registration
and qualification) under the registration, permit or qualification requirements
of all applicable state Blue Sky and securities laws.
2.17. Business. Each of the Company and, to the Knowledge of the Company,
--------
each Consolidated Entity has all their material franchises, permits, licenses
and other rights and privileges necessary to permit them to own their material
property and to conduct their present business taken as a whole. Neither the
Company nor, to the Knowledge of the Company, any Consolidated Entity, is in
violation of any law, regulation, authorization or order of any public authority
relevant to the ownership of its properties or the carrying on of its present
business except for such violations that do not have a material adverse effect
on the Company and its Consolidated Entities, taken as a whole.
2.18. Brokerage. Except as disclosed on Schedule 2.18, there are no
---------
claims for brokerage commissions or finder's fees or similar compensation in
connection with the transactions contemplated by this Agreement based on any
arrangement made by or on behalf of the Company or any Consolidated Entity, and
the Company agrees to pay any such brokerage commissions, finder's fees or
similar compensation whether or not listed on Schedule 2.18 and to indemnify and
hold the Investors harmless against any damages incurred as a result of any such
claim.
2.19. Employees. There are no controversies or labor troubles pending,
---------
or to the best knowledge of the Company, threatened between it and its employees
or, to the Knowledge of the Company, the employees of any Consolidated Entity
and the Company's employees or the employees of any Consolidated Entity. To the
Knowledge of the Company: (a) no employee of the Company or any Consolidated
Entity is in violation of any term of any employment contract, patent or other
proprietary information disclosure agreement or any other contract or agreement
relating to the right of any such employee to be employed by the Company or such
Consolidated Entity because of the nature of the business conducted or proposed
to be conducted by the Company or such Consolidated Entity or for any other
-12-
<PAGE>
reason, and the continued employment by the Company or each Consolidated Entity
of its respective present employees will not result in any such violation; (b)
no officer or key employee of the Company or, to the Knowledge of the Company,
any Consolidated Entity has any present intention of terminating his employment
therewith nor does the Company or, to the Knowledge of the Company, any
Consolidated Entity have any present intention of terminating any such
employment; and (c) the Company and each Consolidated Entity has complied in all
respects material to the Company and its Consolidated Entities taken as a whole
with all applicable state and federal laws and regulations respecting employment
and employment practices, terms and conditions of employment, wages and hours
and other laws related to employment, and there are no arrears in the payments
of wages, withholding or social security taxes, unemployment insurance premiums
or other similar obligations. Except as set forth in Schedule 2.10, and for such
agreements entered into in connection with any affiliation transaction approved
by the Investors after the date of this Agreement neither the Company nor, to
the Knowledge of the Company, any Consolidated Entity is a party to any
agreement with any of its respective officers or employees with respect to such
person's employment.
2.20. Insurance. Schedule 2.20 contains a complete and accurate list of
---------
all policies or binders of fire, liability, title, worker's compensation,
malpractice, professional liability and other forms of insurance (showing as to
each policy or binder the carrier, policy number, coverage limits, expiration
dates, annual premiums and a general description of the type of coverage
provided) to be in effect with respect to the Company or any Consolidated Entity
on the date of the Initial Closing (giving effect to the consummation of the
Initial Acquisition). Such insurance provides coverage to the extent and in the
manner (a) to the extent applicable, customary for a medical practice and (b) as
may be required by applicable law and by any and all Contracts to which the
Company or any Consolidated Entity and any physician employed by any
Consolidated Entity is a party. Neither the Company nor any Consolidated Entity
is in default under any of such policies or binders, and neither the Company nor
any Consolidated Entity has failed to give any notice or to present any claim
under any such policy or binder in a due and timely fashion except, in each
case, for such failure or defaults that do not have a material adverse effect on
the Company and its Consolidated Entities taken as a whole. No insurer has
advised the Company or, to the Knowledge of the Company, any Consolidated Entity
or any physician employed by any Consolidated Entity that it intends to reduce
coverage, increase premiums or fail to renew an existing policy or binder. There
are no outstanding unpaid claims under any such policies or binders. All
policies and binders provide sufficient coverage for the risks insured against
and are in full force and effect.
2.21. Environmental and Safety Laws.
-----------------------------
(a) As used in this Agreement, the terms "Removal," "Remedial
Action," "Release," "Hazardous Substance" and "National Priorities List"
shall have the same meaning as those terms are given in the Comprehensive
Environmental Response Compensation and Liability Act ("CERCLA") and its
------
implementing regulations, and the terms "Hazardous Waste" and "Solid Waste"
shall have the same meaning as those terms are given in the Resource
Conservation and Recovery Act, as amended ("RCRA") and its implementing
----
regulations.
-13-
<PAGE>
(b) The ownership, use and operation by the Company or, to the
Knowledge of the Company, any Consolidated Entity of each facility used in
its business has been and, to the Knowledge of the Company, all ownership,
use and operation of each such facility by any Person has been, in
compliance in all material respects with all Federal, state and local
environmental, safety and anti-pollution laws, including without limitation
RCRA, its implementing regulations and all applicable state hazardous waste
laws; the Clean Water Act, as amended, its implementing regulations and all
applicable state and local effluent discharge laws; the Clean Air Act, as
amended, its implementing regulations and all applicable state and local
air emission laws; the Toxic Substances Control Act, as amended, its
implementing regulations and all applicable state and local toxic substance
laws; CERCLA, its implementing regulations and all applicable state and
local environmental response, compensation and liability laws; the National
Environmental Policy Act of 1969 and its implementing regulations; the
Occupational Safety and Health Act, its implementing regulations and all
applicable state and local worker safety and health laws; and all such laws
concerning particulate emissions, hazard communication, surface water
pollution, groundwater pollution, air pollution, solid wastes, hazardous
wastes, hazardous substances, medical wastes, toxic substances, storage,
handling, treatment, transportation, spills or other releases, and disposal
of any Hazardous Substances, and exposure to or notification regarding any
Hazardous Substances, and neither the Company nor, to the Knowledge of the
Company, any Consolidated Entity has reason to believe that any claim,
action, lawsuit, proceeding, complaint or charge exists or may be brought
for violation of any such laws.
(c) Neither the Company nor, to the Knowledge of the Company, any
Consolidated Entity has any liability arising out of its own actions or
inactions or, to the Knowledge of the Company, any other liability, whether
fixed, unliquidated, absolute, contingent or otherwise, under any federal,
state or local environmental, safety or anti-pollution laws, including any
liability, responsibility or obligation for investigation, removal,
Remedial Action or any fines, penalties, costs or expenses to effect
compliance with or discharge any duty, obligation or claim under any such
laws except for liabilities which would not have a material adverse effect
upon the Company and its Consolidated Entities, taken as a whole, and
neither the Company nor, to the Knowledge of the Company, any Consolidated
Entity has reason to believe that any claims, actions, suits, proceedings
or investigations under such laws exist or may be brought or threatened.
(d) There has not been, and is not occurring, at any facility owned
or operated or previously owned or operated by the Company or, to the
Knowledge of the Company, any Consolidated Entity any Release or threatened
Release of any Hazardous Substance, Hazardous Waste, Solid Waste or
petroleum, including crude oil or any fraction thereof, nor has the Company
or, to the Knowledge of the Company, any Consolidated Entity any reason to
believe such a Release either is occurring or has occurred at any time in
the past. Neither the Company nor, to the Knowledge of the Company, any
Consolidated Entity has applied or disposed of any Hazardous Substance,
Hazardous Waste, Solid Waste or petroleum, including crude oil or any
fraction thereof, in any manner which may form the basis for any present
-14-
<PAGE>
or future claim, demand or action seeking investigation, Removal, or
Remedial Action at any facility, site, location or body of water, surface
or subsurface, including groundwater or any costs or expenses related
thereto.
(e) Neither the Company nor, to the Knowledge of the Company, any
Consolidated Entity has sent, arranged for disposal or treatment, arranged
with a transporter for transport for disposal or treatment, transported, or
accepted for transport any Hazardous Substance, Hazardous Waste, Solid
Waste or petroleum, including crude oil or any fraction thereof, to a
facility, site or location, which, pursuant to CERCLA or any similar state
or local law, (a) has been placed or is proposed to be placed, on the
National Priorities List or its state equivalent or (b) which is subject to
a claim, administrative order or other request to take clean up action,
Removal or Remedial Action by any person or entity (including any
governmental entity) or which is subject to a claim for damages by any
person or entity (including any governmental entity).
(f) Neither the Company nor, to the Knowledge of the Company, any
Consolidated Entity stores, generates or produces any Hazardous Substance,
Hazardous Waste, or petroleum in material violation of any law. There has
not been any contamination of groundwater, surface waters, soils or
sediments, as a result of the manufacture, storage, processing, loss, leak,
escape, spillage, disposal or other handling or disposition by or on behalf
of the Company or by or on behalf of, to the Knowledge of the Company, any
Consolidated Entity of any product or substance on or prior to the Closing.
All Hazardous Substances, Hazardous Wastes and petroleum stored by or on
behalf of the Company by or on behalf of, to the Knowledge of the Company,
any Consolidated Entity have been stored in all material respects in
compliance with all Federal, state and local environmental, safety and
anti-pollution laws.
(g) All facilities located on owned or leased real estate of the
Company, and those of, to the Knowledge of the Company, any Consolidated
Entity have been approved by all necessary governmental authorities, and,
to the Knowledge of the Company, each of the Company and each Consolidated
Entity has obtained and is in possession of all material environmental and
safety permits and licenses necessary for its business including permits
required by local zoning laws. There have not been any environmental audits
or assessments or occupational health studies undertaken by or on behalf of
the Company by or on behalf of, to the Knowledge of the Company, any
Consolidated Entity or governmental agencies with respect to the Company
or, to the Knowledge of the Company, any Consolidated Entity or the
Company's or, to the Knowledge of the Company, any such Consolidated
Entity's assets, employees, facilities or properties, the results of
groundwater and soil testing, the results of underground fuel, waste or
waste tank tests and soil samples, written communications with Federal,
state or local governments on environmental, safety or anti-pollution
matters, and Occupational Safety and Health Administration citations.
2.21.1. There have been no Hazardous Substances, Hazardous Wastes,
Solid Wastes, petroleum, tanks, containers, cylinders, drums, bottles or
cans buried, stored
-15-
<PAGE>
or deposited in violation of any law in or on any real property currently
or formerly owned or operated by the Company or, to the Knowledge of the
Company, any Consolidated Entity while owned or operated by the Company or,
to the Knowledge of the Company, any Consolidated Entity, or to the
Knowledge of the Company, before owned or operated by the Company or any
Consolidated Entity.
2.22. Benefit Plans.
-------------
(a) Except as set forth in Schedule 2.22, neither the Company nor,
to the Knowledge of the Company, any Consolidated Entity is a party to any
written or unwritten (i) "employee benefit plan" (as that term is described
in Section 3(3) of the Employment Retirement Income Security Act of 1974,
as amended ("ERISA"), including but not limited to any pension, retirement,
profit sharing, savings, bonus, incentive, deferred compensation, group
health insurance or group life insurance plan or obligation, or (ii) any
"fringe benefit" plan or vacation pay or policy. The Company does not have
any obligations to provide to its active employees or current retirees any
post-retirement non-pension benefits. Any or all of the plans listed on
Schedule 2.22 may be terminated by the Company or the Consolidated Entity,
as the case may be, without restriction or limitation.
(b) Except as set forth in Schedule 2.22, no employee has any
claims threatened or pending against the Company or, to the Knowledge of
the Company, any Consolidated Entity (whether under any law, any employment
agreement or otherwise) on account of or for (i) overtime pay, other than
overtime pay for the current payroll period or with respect to which
accruals or reserves are reflected in the Financials, or, with respect to
the Company after the date of such Financials and with respect to any
Consolidated Entity, on the books and records thereof, (ii) wages or salary
(excluding bonuses and amounts accruing under pension and profit sharing
plans) for any period other than the current payroll period or with respect
to which accruals or other reserves are reflected in the Financials, or,
after the date of such Financials and with respect to any Consolidated
Entity on the books and records of thereof, (iii) vacation, time off or pay
in lieu of vacation or time off, other than that earned in respect of the
current fiscal year or with respect to which accruals or reserves are
reflected in the Financials, or, with respect to the Company after the date
of such Financials and with respect to any Consolidated Entity, on the
books and records, (iv) any violation of any statute, ordinance or
regulation relating to minimum wages or maximum hours of work or (v) ERISA.
(c) All plans listed on Schedule 2.22 that are intended to qualify
(the "Qualified Plans") under Section 401(a) of the Internal Revenue Code
of 1986, as amended (the "Code") have been determined by the Internal
Revenue Service to be so qualified, and copies of such determination
letters are included as part of Schedule 2.22. No such plan has incurred an
accumulated funding deficiency, as defined in Section 412(a) of the Code
and Section 302(1) of ERISA, and the Company has not incurred any resulting
liability for excise tax or penalty due to the Internal Revenue Service nor
any liability to the Pension Benefit Guaranty Corporation. There has been
-16-
<PAGE>
no termination, partial termination or discontinuance of any contributions
to any such Qualified Plan without notice to and approval by the Internal
Revenue Service.
(d) With respect to all Employee Benefit Plans for which any
employee is or was eligible to participate in, the Company or, to the
Knowledge of the Company, any Consolidated Entity or any entity which,
within the last six (6) years, has been under common control or affiliated
with the Company or, to the Knowledge of the Company, any Consolidated
Entity (an "ERISA Affiliate") within the meaning of Section 414(b), (c) or
---------------
(m) of the Code, is in compliance in all material respects with the
requirements prescribed by any and all statutes, orders or governmental
rules or regulations currently in effect, including, but not limited to,
ERISA and the Code, applicable to such employee benefit plans and each of
the Company and each Consolidated Entity is in compliance in all material
respects with its obligations under the terms of such plans. Except as
disclosed on Schedule 2.22, all reports and other documents required by law
or contract to be filed with any governmental agency or distributed to plan
participants have been timely filed or distributed. None of the employee
benefit plans are subject to Title IV of ERISA. Neither the Company nor any
ERISA Affiliate has ever been obligated to contribute to any "multi-
employer plan" as such term is defined in Section III(37) of ERISA. No
employee benefit plan of the Company or any ERISA Affiliate has engaged in
any prohibited transaction as such term is defined in Section 4975 of the
Code or Section 406 of ERISA.
2.23. Transactions with Affiliates. Except as disclosed in Schedule 2.23,
no stockholder, officer or director of the Company or those of any Consolidated
Entity nor any "affiliate or associate" of such persons (as such terms are
defined in the rules and regulations promulgated under the Securities Act)
(herein, a "Related Party") is a party to any material transaction with the
-------------
Company or any Consolidated Entity (other than pursuant to the Initial
Acquisition Documents with respect to the Springfield Practice Groups and their
Affiliates), including, without limitation, any contract, agreement or other
arrangement providing for the rental of real or personal property from, or
otherwise requiring payments to, any Related Party. Except as set forth in
Schedule 2.23, no employee of the Company or, to the Knowledge of the Company,
of any Consolidated Entity nor any Related Party is indebted in an amount
greater than $1,000 to the Company or any Consolidated Entity and neither the
Company nor, to the Knowledge of the Company, any Consolidated Entity is
indebted to any such employee or Related Party other than reimbursement in the
ordinary course of business and travel expenses not exceeding, in the aggregate,
$5,000 and accrued and unpaid salary and vacation from the most recent regularly
scheduled payroll period.
2.24. Books and Records. The minute books of the Company and, to the
-----------------
Knowledge of the Company, those of each of the Consolidated Entities contain
complete and accurate records of all meetings and other corporate actions of
each of their respective stockholders, Boards of Directors and all committees,
if any, appointed by their respective Boards of Directors. The stock ledger of
the Company and, to the Knowledge of the Company, that of each of the
Consolidated Entities are complete and correct and reflect all issuances,
transfers, repurchases and cancellations of shares of capital stock of each of
the Company and, to the Knowledge of the Company, such Consolidated Entities.
-17-
<PAGE>
2.25. Initial Acquisition. Set forth on Schedule 2.25 is a complete and
-------------------
accurate list of all agreements (the "Initial Acquisition Documents") relating
-----------------------------
to the planned affiliation by MCP and the Company with the Springfield Physician
Groups (the "Initial Acquisition") to be consummated concurrently with the
-------------------
Initial Closing. True and complete copies of the Initial Acquisition Documents
have been provided to the Investors and their counsel. An aggregate of no more
than 3,466,245 shares of Class A Common Stock have been, or shall be, issued to
the sellers in connection with the Initial Acquisition. Except as set forth in
the Initial Acquisition Documents, neither the Company nor MCP nor any
Subsidiary or Affiliate of the Company or MCP has committed, whether orally or
in writing, to provide any other shares of capital stock or rights in connection
therewith. Set forth on Schedule 2.25 is a list of each entity from whom any
asset has been or will be transferred to, directly or indirectly, MCP in
connection with the Initial Acquisition. Upon consummation of the Initial
Acquisition, MCP will have such right, title and interest to the properties,
rights and assets used in or necessary to carry on the business of the
Springfield Physician Groups as currently conducted and as contemplated by the
Confidential Private Placement Memorandum dated as of July 29, 1996. The Initial
Acquisition has been or will be consummated, in all material respects, in
accordance with the Initial Acquisition Documents. Each of the Initial
Acquisition Documents is the legal, valid and binding obligation of the Company,
MCP and, to the knowledge of the Company, the other parties thereto, enforceable
in accordance with its terms. No breach or default by the Company, MCP and, to
the Knowledge of the Company, the other parties to any of the Initial
Acquisition Documents has occurred and is continuing, and no event has occurred
which with notice or lapse of time or both would constitute such a breach or
default. No waiver of any material right under or amendment to any provision of
any of the Initial Acquisition Documents has occurred. Upon consummation of the
Initial Acquisition, under the Employment Agreements with the physician
employees of MCP, all revenues from medical services shall be assigned to or
billed by the Company and MCP. The Initial Acquisition has been, or shall be
prior to the consummation thereof, duly authorized by all necessary corporate
action of the Company, MCP and, if applicable, any Subsidiary or Affiliate of
the Company or MCP party thereto. To the knowledge of the Company, the
representations and warranties provided to the Company and MCP in connection
with the Initial Acquisition are true and correct in all material respects.
2.26. Regulatory Matters.
------------------
(a) The Company, and, to the Knowledge of the Company, each of the
Consolidated Entities and all physicians employed by such Consolidated
Entities have all licenses, permits, franchises, approvals, authorizations,
consents or orders of, or filings with ("Permits") any federal, state,
-------
local, foreign or other governmental agency, instrumentality, commission,
authority, board or any other Person, necessary or desirable to conduct
their business as now being conducted except where the failure to have any
such Permit does not have a material adverse effect on the Company or its
Consolidated Entities, taken as a whole. All Permits of the Company and, to
the Knowledge of the Company, the Consolidated Entities and all physicians
employed by the Consolidated Entities are valid and in full force and
effect except where the failure to have any such Permit does not have a
material adverse effect on the Company and its Consolidated Entities, taken
as a whole. No notice to, declaration, filing or registration with, or
material Permit or material consent from, any
-18-
<PAGE>
governmental or regulatory body or authority, or any other Person or
entity, is required to be made or obtained by the Company or, to the
Knowledge of the Company, any Consolidated Entity in connection with the
execution, delivery or performance of this Agreement and the consummation
of the transactions contemplated hereby.
(b) Neither the Company nor, to the Knowledge of the Company, any
of the Consolidated Entities, nor any other persons or, to the Knowledge of
the Company, entities providing professional services for the Consolidated
Entities, have engaged in any activities which are prohibited under 42
U.S.C. (S) 1320a-7b, or the regulations promulgated thereunder pursuant to
such statutes, or related state or local statutes or regulations, or which
are prohibited by rules of professional conduct, including but not limited
to the following: (i) knowingly and willfully making or causing to be made
a false statement or representation of a material fact in any application
for any benefit or payment; (ii) knowingly and willfully making or causing
to be made any false statement or representation of a material fact for use
in determining rights to any benefit or payment; (iii) failure to disclose
knowledge by a claimant of the occurrence of any event affecting the
initial or continued right to any benefit or payment on its own behalf or
on behalf of another, with intent to fraudulently secure such benefit of
payment; and (iv) knowingly and willfully soliciting or receiving any
remuneration (including any kickback, bribe or rebate), directly or
indirectly, overtly or covertly, in cash or in kind or offering to pay or
receive such remuneration (a) in return for referring an individual to a
person for the furnishing or arranging for the furnishing of any item or
service for which payment may be made in whole or in part by Medicare or
Medicaid, or (b) in return for purchasing, leasing, or ordering or
arranging for or recommending purchasing, leasing, or ordering any good,
facility, service, or item for which payment may be made in whole or in
part by Medicare or Medicaid.
(c) The representations and warranties contained in this Section
2.26 are hereby qualified by Schedule 2.26.
2.27. Material Facts. This Agreement, the Schedules hereto and furnished
--------------
contemporaneously herewith, and each other agreement, document, certificate or
written statement furnished or to be furnished to the Investors through the
Closings by or on behalf of the Company or any Consolidated Entity in connection
with the transactions contemplated hereby, taken as a whole, do not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements contained therein or herein in light of the circumstances
in which they were made not misleading. To the Knowledge of the Company, there
is no fact which has not been disclosed herein or otherwise by the Company to
the Investors and which may materially adversely affect the business,
properties, assets or condition, financial or otherwise, of the Company or of
the Company, of any Consolidated Entity.
-19-
<PAGE>
3. Representations and Warranties and other Agreements of the Investors.
--------------------------------------------------------------------
3.1. Representations and Warranties. Each Investor severally and not
------------------------------
jointly hereby represents and warrants that:
(a) Authorization. Such Investor has full power and authority to
-------------
execute, deliver and perform this Agreement, the Stockholders' Agreement
and the Transaction Agreements to which it is a party and to acquire the
Shares and, each of this Agreement, the Stockholders Agreement and the
Transaction Agreements constitute the valid and legally binding obligation
of such Investor, enforceable against such Investor in accordance with
their respective terms.
(b) Purchase Entirely for Own Account. The Shares and Warrants to
---------------------------------
be received by such Investor and the Reserved Shares received upon exercise
of the Warrants and the Conversion Shares received upon conversion of the
Shares (collectively, the "Securities") will be acquired for investment for
----------
such Investor's own account, not as a nominee or agent and not with a view
to the distribution of any part thereof. Such Investor has no present
intention of selling, granting any participation in, or otherwise
distributing the same. Such Investor does not have any contract,
undertaking, agreement or arrangement with any person to sell, transfer, or
grant participations to such person or to any third person, with respect to
any of the Securities.
(c) Restricted Securities. Such Investor understands that the
---------------------
Securities may not be sold, transferred, or otherwise disposed of without
registration under the Securities Act, or an exemption therefrom, and that
in the absence of an effective registration statement covering the Shares,
the Warrants, the Reserved Shares or the Conversion Shares or an available
exemption from registration under the Securities Act, the Securities must
be held indefinitely. In the absence of an effective registration statement
covering the Securities such Investor will sell, transfer, or otherwise
dispose of the Securities only in a manner consistent with its
representations and agreements set forth herein and the terms and
conditions set forth in the Stockholders Agreement.
(d) Formation. Such Investor represents that it was not organized
---------
for the purpose of making an investment in the Company.
(e) Suitability. Such Investor is an Accredited Investor as such
-----------
term is defined in Rule 501(a) promulgated pursuant to the Securities Act.
(f) Financial Condition. Such Investor's financial condition is
-------------------
such that it is able to bear the risk of holding the Shares for an
indefinite period of time and can bear the loss of its entire investment in
its Shares.
(g) Experience. Such Investor has such knowledge and experience in
----------
financial and business matters and in making high risk investments of this
type that it is capable of evaluating the merits and risks of the purchase
of the Shares.
-20-
<PAGE>
(h) Brokerage. There are no claims for brokerage commissions or
---------
finder's fees or similar compensation in connection with the transactions
contemplated by this Agreement based on any arrangement or agreement made
by or on behalf of such Investor, and such Investor agrees to indemnify and
hold the Company and the other Investors harmless against any damages
incurred as a result of any such claims.
(i) Massachusetts. Each of the Investors which was within the
-------------
jurisdiction of The Commonwealth of Massachusetts at the time it received
the offer to purchase the Shares and/or consummated the sale of the Shares,
represents and warrants that (i) it is a corporation or other entity not
formed for the purpose of acquiring the Shares being purchased by it, (ii)
it has total assets in excess of $5,000,000, (iii) a substantial part of
its business activities consists of investing, purchasing, selling or
trading in securities issued by others and (iv) its investment decisions
are made by persons who have such knowledge and experience in financial and
business matters as to be capable of evaluating the merits and risks of an
investment in the Shares.
3.2. Further Limitations on Disposition.
----------------------------------
(a) Each Investor further agrees not to make any disposition of all
or any portion of the Shares, the Warrants or the Reserved Shares unless
and until:
(i) There is then in effect a registration statement under the
Securities Act covering such proposed disposition and such
disposition is made in accordance with such registration
statement and all applicable state securities laws; or
(ii) (A) Such Investor shall have notified the Company of the
proposed disposition and shall have furnished the Company with
a statement of the circumstances surrounding the proposed
disposition, and (B) such Investor shall have furnished the
Company with a reasonably satisfactory opinion from counsel,
reasonably satisfactory to the Company, that such disposition
will not require registration of such shares under the
Securities Act and that all requisite action has been or will,
on a timely basis, be taken under any applicable state
securities laws in connection with such disposition.
(b) Notwithstanding the provisions of paragraphs (i) and (ii)
above, no such registration statement or opinion of counsel shall be
necessary for a transfer by any Investor pursuant to Rule 144A or Rule
144(k) promulgated under the Securities Act or a transfer by an Investor to
a partner, subsidiary, shareholder or affiliate of such Investor or to an
Affiliated Fund or to any director, officer or employee of the Company or
MCP, if the transferee agrees in writing to be subject to the terms hereof
to the same extent as if such transferee were an original Investor
hereunder.
3.3. Legends. It is understood that the certificates evidencing the
-------
Shares (and the certificates evidencing the Conversion Shares) may bear
substantially the following legends:
-21-
<PAGE>
(a) "These securities have not been registered under the Securities
Act of 1933. They may not be sold, offered for sale, pledged or
hypothecated in the absence of a registration statement in effect with
respect to the securities under such Act or an opinion of counsel
satisfactory to the Company that such registration is not required or
unless sold pursuant to Rule 144A or Rule 144(k) of such Act."
(b) Any legend required by the Stockholders Agreement or the laws of
any other applicable jurisdiction.
4. Conditions to the Investors' Obligations at the Initial Closing A.
-----------------------------------------------------------------
The obligations of the Investors under Section 1.3(a) of this Agreement to
purchase shares at the Initial Closing A are subject to the fulfillment on or
before the Initial Closing A of each of the following conditions unless waived
by the Investors in accordance with Section 9.5 hereof:
4.1. Representations and Warranties. The representations and warranties
------------------------------
of the Company contained in Section 2 (i) that contain a materiality
qualification shall be true and correct, and (ii) that do not contain a
materiality qualification shall be true and correct in all material respects on
and as of the date of such Closing with the same effect as though such
representations and warranties had been made on and as of the date of such
Closing.
4.2. Performance. The Company shall have performed and complied with all
-----------
agreements, obligations, and conditions contained in this Agreement that are
required to be performed or complied with by it on or before such Closing.
4.3. Compliance Certificate. The Chief Executive Officer of the Company
----------------------
shall deliver to the Investors at such Closing a certificate certifying that the
conditions specified in Sections 4.1, 4.2, 4.4, 4.5, 4.7, 4.11, 4.12, 4.13, 4.14
and 4.17 have been fulfilled and stating that except as disclosed on Schedule
2.7 there has been no material adverse change in the business affairs,
operations, properties, assets, or condition or prospects of the Company and its
Consolidated Entities, taken as a whole since March 31, 1996.
4.4. Restated Certificate of Incorporation. The Company shall have filed
-------------------------------------
with the Secretary of State of Delaware the Restated Certificate of
Incorporation which is attached hereto as Exhibit B.
4.5. Qualifications; Consents. All consents, authorizations, approvals,
------------------------
or Permits, if any, of any governmental authority or regulatory body of the
United States or of any state or of any third party that are necessary in
connection with the consummation of the transactions contemplated hereby and the
lawful issuance and sale of the Shares and the issuance of the Warrants to the
Investors pursuant to this Agreement shall have been duly obtained and shall be
effective on and as of such Closing other than those which are not required to
be obtained before such Closing.
4.6. Proceedings and Documents. All corporate and other proceedings in
-------------------------
connection with the transactions contemplated at such Closing and all documents
incident
-22-
<PAGE>
thereto shall be satisfactory in form and substance to the Investors and the
Investors' counsel, and they shall have received all such counterpart original
and certified or other copies of such documents as they may request.
4.7. Stockholders Agreement. The Stockholders Agreement substantially in
----------------------
the form of Exhibit D attached hereto shall have each been executed and
delivered by the parties (other than the Investors) thereto.
4.8. Opinion of Company Counsel. The Investors shall have received from
--------------------------
Hale and Dorr, counsel for the Company, an opinion dated as of such Closing in
substantially the form attached hereto as Exhibit E.
4.9. Secretary's Certificate. The Secretary of the Company shall deliver
-----------------------
to the Investors at such Closing a Certificate, dated as of such Closing,
certifying: (a) that attached thereto is a true and complete copy of the By-Laws
of the Company as in effect on the date of such certification; (b) that attached
thereto is a true and complete copy of all resolutions adopted by the Board of
Directors and the stockholders of the Company authorizing the execution,
delivery and performance of this Agreement, the Stockholders Agreement and the
Transaction Agreements, the issuance, sale and delivery of the Shares, the
issuance of the Warrants, and reservation, issuance and delivery of the Reserved
Shares and the Conversion Shares, and that all such resolutions are in full
force in effect and are all the resolutions adopted in connection with the
transactions contemplated by this Agreement, the Stockholders Agreement and the
Transaction Agreements; (c) that attached thereto is a true and complete copy of
the Restated Certificate of Incorporation as in effect on the date of such
certification; and (d) to the incumbency and specimen signature of certain
officers of the Company.
4.10. Due Diligence. The Investors shall have completed to their
-------------
satisfaction their remaining business, accounting and legal due diligence
review.
4.11. Material Adverse Change. Since March 31, 1996 there shall have
-----------------------
been, in the judgment of the Investors, (i) no material adverse change in the
business affairs, operations, properties, assets or condition or prospects of
the Company or MCP or the Springfield Physician Groups and (ii) no material
change in the ability of the Company and the Consolidated Entities to operate in
compliance with the EBITDA and Net Sales Tests set forth in Sections 4.2.7(a)
and (b) of the Restated Certificate of Incorporation, respectively.
4.12. Initial Acquisition. All conditions to the Initial Acquisition
-------------------
contained in the Initial Acquisition Documents (other than the consummation of
the Initial Closing A) shall have been satisfied.
4.13. MCP Agreements. The MCP Agreements shall be in full force and
--------------
effect and no amendments to or waivers thereunder shall have occurred.
4.14. Conversion Series A Preferred Stock. All outstanding shares of the
-----------------------------------
Company's Series A Preferred Stock shall have been converted into Class A Common
Stock in accordance with the terms of the Restated Certificate of Incorporation
of the Company.
-23-
<PAGE>
4.15. Key Employees. The Employment Agreement between the Company and
-------------
Jerilyn Asher shall be revised to affirmatively state that the transactions
contemplated by this Agreement, the Stockholders Agreement and the Transaction
Agreements shall not constitute a "Change of Control" thereunder and that
Schedule I of such Agreements and such other revisions in form and substance
reasonably satisfactory to the Investors and their counsel. Each of Jay
Greenberg and Arlan Fuller shall execute a writing stating that the transactions
contemplated by this Agreement, the Stockholders Agreement and the Transaction
Agreements shall not constitute a "Change of Control" under his Employment
Agreement with the Company.
4.16. Management Fees. The Management Agreement substantially in the
---------------
form of Exhibit F hereto shall have been executed and delivered by the Company
and Bain Capital, Inc.
4.17. Amendment to By-Laws. The Company shall have amended its By-laws
--------------------
as provided in Exhibit G hereto.
4.18. Termination of Existing Arrangements. The Company shall have
------------------------------------
caused (a) each of (x) the Registration Rights Agreement dated as of June 30,
1995 among the Company and the Purchasers referred to therein; and (y) the
Company Right of First Refusal Agreement dated as of June 30, 1995 between the
Company and the Investor (as defined therein) to be terminated; (b) the
Convertible Subordinated Note (and related documents) dated June 30, 1995 issued
to Offshore Health Industries, Inc. shall have been converted into an aggregate
of 625,000 shares of Class A Common Stock; and (c) all corporate action to be
taken which is necessary to change all existing applicable references in any
agreement, instrument or other document with respect to rights of holders of the
Company's "Common Stock" to "Class A Common Stock".
5. Conditions of the Company's Obligations at any Closings.
-------------------------------------------------------
The obligations of the Company under Section 1 of this Agreement are
subject to the fulfillment on or before any such Closing of each of the
following conditions:
5.1. Representations and Warranties. The representations and warranties
------------------------------
of the Investors contained in Section 3 shall be true and correct on and as of
the date of such Closing with the same effect as though such representations and
warranties had been made on and as of the date of such Closing.
5.2. Payment of Purchase Price. The Investors shall have delivered
-------------------------
payment of the applicable aggregate purchase price of the Shares to be purchased
by them at such Closing as set forth in Section 1.3.
5.3. Other Agreements. The Stockholders Agreement substantially in the
----------------
form of Exhibit D attached hereto shall have been executed and delivered by the
parties other than the Company and the Management Stockholders and the Physician
Stockholders thereto.
-24-
<PAGE>
5.4. Qualifications; Consents. All consents, authorizations, approvals,
------------------------
or Permits, if any, of any governmental authority or regulatory body of the
United States or of any state or of any third party that are necessary in
connection with the consummation of the transactions contemplated hereby and the
lawful issuance and sale of the Shares and the issuance of the Warrants to the
Investors pursuant to this Agreement shall have been duly obtained and shall be
effective on and as of such Closing other than those which are not required to
be obtained before such Closing.
6. Conditions to the Investors, Obligations at the Initial B, Second, Third
------------------------------------------------------------------------
and Option Closings.
-------------------
The obligations of the Investors under Section 1 hereof to purchase shares
at the Initial B Closing, Second Closing, Third Closing and Option Closing are
subject to the fulfillment on or before each such Closing of each of the
following conditions; provided, that satisfaction of conditions contained in
--------
Section 6.9 shall not be required for the consummation of Initial Closing B:
6.1. Representations and Warranties. The representations and warranties
------------------------------
in Sections 2.1, 2.2, 2.8, 2.13, 2.14, 2.15, 2.16, 2.17, 2.18, 2.22, 2.24 and
2.26 shall be true and correct in all material respects as if made on the date
of such closing. The representations in Section 2.3 shall be true and correct in
all material respects except for changes in the capitalization and the issuances
of stock, option, warrants and other securities approved by the Board of
Directors of the Company in accordance with the Restated Certificate after the
Initial Closing Date and the Investors in accordance with Section 8 of this
Agreement. The representations in Section 2.4 shall be correct in all material
respects except for changes with respect to the Company's Subsidiaries and
Consolidated Entities approved by the Board of Directors of the Company in
accordance with the Restated Certificate after the Initial Closing Date and the
Investors in accordance with Section 8 of this Agreement. The audited financial
statements for the most recent fiscal year and the unaudited financial
statements for the most recent interim period provided to the Investors (the
"Most Recent Financial Statements") shall be complete and correct, shall have
been prepared in accordance with GAAP and shall fairly present, in all material
respects, the financial position of the Company and its Consolidated Entities.
The representations in Sections 2.6 and 2.7 shall be true and correct in all
material respects except that references therein to the Financials shall be the
Most Recent Financial Statements and references to March 31, 1996 shall be to
the date of the Most Recent Financial Statements.
6.2. Performance. The Company shall have performed and complied in all
-----------
material respects with all agreements, obligations, and conditions contained in
this Agreement that are required to be performed or complied with by it on or
before such Closing; and prior to the first such Closing occurring after the
Initial Closing A the Company shall have complied with the covenant set forth in
Section 7.15.
6.3. Compliance Certificate. The Chief Executive Officer of the Company
----------------------
shall deliver to the Investors at such Closing a certificate certifying that the
conditions specified in Sections 6.1, 6.2, 6.4, 6.6 and 6.9 have been fulfilled
and stating that there has been no
-25-
<PAGE>
material adverse change in the business affairs, operations, properties, assets,
or condition or prospects of the Company and its Consolidated Entities since
March 31, 1996.
6.4. Qualifications; Consents. All consents, authorizations, approvals,
------------------------
or Permits, if any, of any governmental authority or regulatory body of the
United States or of any state or of any third party that are necessary in
connection with the consummation of the transactions contemplated hereby and the
lawful issuance and sale of the Shares to the Investors pursuant to this
Agreement shall have been duly obtained and shall be effective on and as of such
Closing other than those which are not required to be obtained before such
Closing. Without limiting the generality of the foregoing, all applicable
waiting periods (any extensions thereof) under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act") shall have expired or
-------
otherwise been terminated.
6.5. Proceedings and Documents. All corporate and other proceedings in
-------------------------
connection with the transactions contemplated at such Closing and all documents
incident thereto shall be satisfactory in form and substance to the Investors
and the Investors' counsel, and they shall have received all such counterpart
original and certified or other copies of such documents as they may request.
6.6. Other Agreements. Neither the Company nor the Management
----------------
Shareholders shall have breached or failed to perform its obligations under the
Stockholders Agreement and no party shall have breached or failed to perform its
obligations under the MCP Agreements.
6.7. Opinion of Company Counsel. The Investors shall have received from
--------------------------
Hale and Dorr LLP, counsel for the Company, or such other counsel reasonably
satisfactory to the Investors an opinion dated as of such Closing in form
reasonably satisfactory to the Investors and their counsel.
6.8. Secretary's Certificate. The Secretary of the Company shall deliver
-----------------------
to the Investors at such Closing a Certificate, dated as of such Closing,
certifying: (a) that attached thereto is a true and complete copy of the By-Laws
of the Company as in effect on the date of such certification; (b) that attached
thereto is a true and complete copy of all resolutions adopted by the Board of
Directors and the stockholders of the Company authorizing the execution,
delivery and performance of this Agreement, the Stockholders Agreement and the
Transaction Agreements, the issuance, sale and delivery of the Shares, the
issuance of the Warrants, and reservation, issuance and delivery of the Reserved
Shares and the Conversion Shares, and that all such resolutions are in full
force in effect and are all the resolutions adopted in connection with the
transactions contemplated by this Agreement, the Stockholders Agreement and the
Transaction Agreements; (c) that attached thereto is a true and complete copy of
the Restated Certificate of Incorporation as in effect on the date of such
certification; and (d) to the incumbency and specimen signature of certain
officers of the Company.
6.9. EBITDA. The Company shall have satisfied the requirements for
------
EBITDA and Net Sales set forth below in subsections (a) and (b) of this Section
6.9.
-26-
<PAGE>
(a) The EBITDA for the most recent Test Period prior to such Closing
and ending on a date set forth below is equal to or greater than the amount set
opposite such date:
<TABLE>
<CAPTION>
Date Minimum EBITDA
---- --------------
<S> <C>
September 30, 1996 N/A
December 31, 1996 $(1,745,000)
March 31, 1997 (336,000)
June 30, 1997 1,050,000
September 30, 1997 2,151,000
December 31, 1997 2,668,000
March 31, 1998 3,288,000
June 30, 1998 3,521,000
September 30, 1998 3,772,000
December 31, 1998 3,907,000
March 31, 1999 3,997,000
June 30, 1999 4,089,000
September 30, 1999 4,183,000
December 31, 1999 4,279,000
</TABLE>
(b) The Net Sales for the most recent Test Period ending on a date set
forth below is equal to or greater than the amount set opposite such date:
<TABLE>
<CAPTION>
Date Minimum Net Sales
---- -----------------
<S> <C>
September 30, 1996 N/A
December 31, 1996 $ 3,601,000
March 31, 1997 11,891,000
June 30, 1997 18,257,000
September 30, 1997 26,579,000
December 31, 1997 30,620,000
</TABLE>
-27-
<PAGE>
<TABLE>
<S> <C>
March 31, 1998 31,997,000
June 30, 1998 33,486,000
September 30, 1998 34,461,000
December 31, 1998 35,261,000
March 31, 1999 36,072,000
June 30, 1999 36,902,000
September 30, 1999 37,751,000
December 31, 1999 38,619,000
</TABLE>
7. Covenants and Agreements.
------------------------
7.1. Financial and Other Information.
-------------------------------
(a) Accounts and Reports. The Company will maintain a standard
--------------------
system of accounts in accordance with generally accepted accounting
principles consistently applied.
(b) Annual and Quarterly Financial Statements. The Company will
-----------------------------------------
deliver toeach Investor: (i) within ninety (90) days after the end of each
fiscal year a copy of the consolidated balance sheet of the Company and the
Consolidated Entities as of the end of such year, together with
consolidated and consolidating statements of income and of cash, flows of
the Company and the Consolidated Entities for such year, all in reasonable
detail, prepared in accordance with generally accepted accounting
principles, consistently applied, and certified in an audit report by
independent public accountants of national standing selected by the Board
of Directors of the Company, and (ii) copies of all financial statements
and reports which the Company and each Consolidated Entity shall send to
its stockholders or file with the Securities and Exchange Commission or any
stock exchange on which any securities of the Company or any Consolidated
Entity may be listed. The Company shall also deliver to each Investor,
within forty-five (45) days after the end of each of the first three
quarters of each fiscal year, a copy of the consolidated balance sheet of
the Company and each Consolidated Entity as of the end of such quarter and
consolidated statements of income and of cash flows of the Company and each
Consolidated Entity for the fiscal quarter and for the portion of the
fiscal year ending on the last day of such quarter, each of the foregoing
balance sheets and statements to set forth in comparative form the
corresponding figures for the same period of the prior fiscal year, and
actual versus budgeted amounts, to be in reasonable detail provided,
--------
however, such financials are subject to year-end adjustments and may not
-------
contain all footnotes required under generally accepted accounting
principles and to be certified, subject to normal year-end audit
adjustments, by the principal financial officer of the Company that they
are true and accurate in all material respects as of their dates.
-28-
<PAGE>
(c) Monthly Financial Statements and Budgets. The Company will
----------------------------------------
furnish to each Investor: within thirty (30) days after the end of each month,
other than the last month of any fiscal quarter or of the fiscal year of the
Company and each Consolidated Entity, a copy of the consolidated balance sheet
of each of the Company and the Consolidated Entities as of the end of such month
and consolidated statements of income and of cash flows of each of the Company
and the Consolidated Entities for such month, each of the foregoing balance
sheets and statements to set forth in comparative form the corresponding figures
for the prior fiscal period, to be in reasonable detail, to be prepared in
accordance with generally accepted accounting principles, consistently applied,
and to be certified, subject to normal year-end audit adjustments, by the
principal financial officer of the Company that they are true and accurate in
all material respects as of their dates; and, to the extent provided to the
Board of Directors, as soon as possible, but in any event at least thirty (30)
days prior to the beginning of each fiscal year, a budget, prepared on a period
by period basis with each period including four or five weeks. and operating
plan for such fiscal year, each approved by the Company's Board of Directors,
including projected balance sheets and statements of income and changes in
financial condition of the Company and the Consolidated Entities for such
months.
(d) Visits and Discussions. The Company will permit each Investor
----------------------
and the authorized representatives of each such Investor, at all reasonable
times during normal business hours upon reasonable notice and as often as
reasonably requested, to visit and inspect, at the expense of such Investor, any
of the properties of the Company and any Consolidated Entity, including their
respective books and records and, subject to reasonable arrangements with any
transfer agents of the Company and any Consolidated Entity, lists of security
holders, and to make extracts therefrom and to discuss the affairs, finances,
and accounts of the Company and each Consolidated Entity with their respective
officers.
(e) Adverse Change: Litigation. The Company will promptly advise
--------------------------
each Investor in writing of each suit or proceeding commenced or threatened
against the Company or any Consolidated Entity which, if adversely determined,
would result in a material adverse change in the condition or business,
financial or otherwise, of the Company and its Consolidated Entities taken as a
whole and of any facts that come to the Company's attention which question in
any material respect the accuracy or completeness of the representations and
warranties contained herein when made.
(f) Consolidation. The Company will promptly advise each Investor in
-------------
writing if, in the Company's judgment, it is reasonably likely that any
physician practice group acquired by or affiliated with or to be acquired by, or
affiliated with the Company will not be eligible to be consolidated in the
financial statements of the Company.
(g) Other Information. The Company will also furnish to each
-----------------
Investor with reasonable promptness, such other information and data with
respect to the Company or any Consolidated Entity as such Investor may from time
to time reasonably request.
-29-
<PAGE>
7.2. Confidentiality. Each of the Investors further covenants and agrees
---------------
that any person or entity receiving information under Section 7.1 or exercising
rights of visitation or inspection granted hereunder shall maintain the
confidentiality of all financial, confidential and proprietary information of
the Company or any Consolidated Entity acquired by them in exercising such
rights. Notwithstanding the preceding sentence, each Investor may (1) disclose
such information when required by law or governmental order or regulation, or
when required by a subpoena or other process, (2) disclose such information to
the extent necessary to enforce this Agreement, (3) disclose such information to
its attorneys, accountants, consultants and other professionals to the extent
necessary to obtain their services in connection with its investment in the
Company, provided that the requirements of this subsection shall in turn be
binding on any such attorney, accountant, consultant or other professional, or
(4) disclose such information as may be required by any prospective purchaser of
any Shares, Warrants, Reserved Shares or Conversion Shares from such Investor,
provided that such prospective purchaser agrees in writing to be bound by the
provisions of this subsection. An Investor may also disclose such information to
any affiliate of such Investor provided that the requirements of this subsection
shall in turn be binding on any such affiliate, or, to a partner, shareholder or
subsidiary of such Investor if such partner, shareholder or subsidiary agrees in
writing to be bound by the provisions of this subsection.
7.3. Insurance. Each of the Company and each Consolidated Entity will
---------
maintain a commercially reasonable amount of insurance with respect to all its
insurable properties against loss or damage by fire and other risks; maintain
public liability insurance against claims for personal injury, death or property
damage suffered by others upon or in or about any premises occupied by it or
arising from equipment owned by the Company or any Consolidated Entity and
leased to and located upon or in or about any premises occupied by any other
person; maintain all such worker's compensation or similar insurance as may be
required under the laws of any state or jurisdiction in which it may be engaged
in business; and maintain malpractice, professional liability, stop-loss
insurance relating to capitated contracts, and all such other insurance as is
usually maintained by persons engaged in the same or similar business as is the
Company and the Consolidated Entities. All such insurance shall be maintained
against such risks and in at least such amounts as such insurance is usually
carried by persons engaged in the same or similar businesses, and all insurance
herein provided for shall be effected and maintained in force under a policy or
policies issued by insurers of recognized responsibility, except that the
Company and the Consolidated Entities may effect worker's compensation or
similar insurance in respect of operations in any state or other jurisdiction
either through an insurance fund operated by such state or other jurisdiction or
by causing to be maintained a system or systems of self-insurance which is in
accord with applicable laws.
7.4. Use of Proceeds. The Company will use the proceeds of the sale of
---------------
the Shares in the Initial Closing in order to finance the Initial Acquisition
and, if consummated, the Flagship Transaction on the terms and conditions
previously disclosed to the Investors and approved by the Board of Directors
and, if applicable, the Investors pursuant to Section 8 hereof, and for
information systems and working capital. In addition, the Company will use the
proceeds of the sale of the Shares in connection with acquisitions of, and
affiliations with, physician practice groups, the material terms of which shall
be subject to the approval of the
-30-
<PAGE>
Investors, and working capital. Pending such uses, the Company shall invest any
such proceeds in short- term, investment grade securities.
7.5. Payment of Taxes; Corporate Existence. Regulatory Compliance. Each
-------------------------------------------------------------
of the Company and each Consolidated Entity (unless the Company has no ownership
or management responsibility for or liability in respect of Taxes for such
Consolidated Entity) will:
(a) pay and discharge promptly, or cause to be paid and discharged
promptly, when due and payable, all Taxes, assessments and governmental
charges or levies imposed upon it or upon its income or upon any of its
property, real, personal and mixed, or upon any part thereof, as well as
all claims of any kind (including claims for labor, materials and supplies)
which, if unpaid might by law become a lien or charge upon its property;
provided, however, that neither the Company nor any Consolidated Entity
-----------------
shall be required to pay any Tax, assessment, charge, levy or claim if the
amount, applicability or validity thereof shall currently be contested in
good faith by appropriate proceedings and if the Company or any
Consolidated Entity, as the case may be, shall have set aside on its books
reserves (classified to the extent required by generally accepted
accounting principles) deemed by it adequate with respect thereto; and
provided further, that neither the Company nor any Consolidated Entity
shall have any obligation to make any payments under this paragraph (a)
with respect to property subject to leases pursuant to the terms of which
the lessees thereof have undertaken to make such payments;
(b) do or cause to be done all things necessary to preserve and keep
in full force and effect its corporate existence, rights and franchises,
provided, however, that nothing in this paragraph (b) shall (i) prevent the
abandonment or termination of the Company's or any Consolidated Entity's
authorization to do business in any foreign state or jurisdiction if, in
the opinion of its Board of Directors, such abandonment or termination is
in the interest of the Company and not disadvantageous in any material
respect to the holders of the Shares or (ii) require compliance with any
law so long as the validity or applicability thereof shall be disputed or
contested in good faith;
(c) maintain and keep, or cause to be maintained and kept, its
properties in good repair, working order and condition in all material
respects, and from time to time make, or cause to be made, all repairs,
renewals and replacements which in the opinion of the Company are necessary
and proper so that the business carried on in connection therewith may be
properly and advantageously conducted at all times; and
(d) comply in all material respects with all applicable statutes,
regulations and orders of, and all applicable restrictions imposed by, all
governmental bodies in respect of the conduct of the business conducted by
the Company and the Consolidated Entities.
7.6. Dealings with Affiliates and Others. Neither the Company nor any
-----------------------------------
Consolidated Entity shall enter into any transaction, including, without
limitation, any loans
-31-
<PAGE>
or extensions of credit or royalty agreements, with any officers or directors of
the Company or any Consolidated Entity, nor shall it enter into any transaction,
on terms less favorable to the Company or any Consolidated Entity than the
Company or any Consolidated Entity would be able to obtain in a transaction with
a person or entity unaffiliated with the Company or any Consolidated Entity,
with a holder of at least one percent (1%) or more of the capital stock of the
Company or any Consolidated Entity, or any member of their respective families
or any Affiliate thereof.
7.7. Change in Nature of Business. Neither the Company nor any
----------------------------
Consolidated Entity shall make any material change in the nature of its business
as carried on at the date hereof or as contemplated in the Confidential Private
Placement Memorandum of the Company dated July 29, 1996 unless approved by the
Investors.
7.8. Payment of Expenses. The Company shall pay at each Closing, the
-------------------
costs incurred to such Closing Date by the Investors and Bain Capital, Inc. in
connection with the transactions contemplated hereby and such Closing which
shall be an adjustment to purchase price, including without limitation, the fees
and expenses of Ropes & Gray, counsel to the Investors and Price Waterhouse LLP,
accountants to the Investors.
7.9. Cooperation and Access. The Company shall, and shall cause each
----------------------
Consolidated Entity to (a) use its reasonable best efforts, as promptly as
practicable to obtain all consents, approvals or actions of, to make all filings
with and to give all notices to governmental or regulatory authorities or any
other third party required to consummate the transactions contemplated hereby
including, without limitation, the expiration or earlier termination of all
applicable waiting periods under the HSR Act, and (b) provide such other
information and communications to such governmental or regulatory authorities or
other third parties as such governmental or regulatory authorities or other
third parties may reasonably request in connection therewith. The Company and
the Investors shall cooperate with each other to satisfy the conditions to each
of the Closings contained in this Agreement and neither of them shall take, nor
will the Company permit any Consolidated Entity to take any action (other than
an action required by any law) that could reasonably be expected to result in
the nonfulfillment of any such condition. The Company shall, and shall cause
each Consolidated Entity to, provide the Investors and their respective
officers, employees, counsel, accountants, financial advisors, consultants,
environmental engineers and other representatives (together, "Representatives")
---------------
with full access, upon 24 hours' prior notice and during normal business hours,
to all officers, employees, agents and accountants of the Company and each
Consolidated Entity and to its assets and properties and its books and records,
including without limitation any documents or properties related to any
potential acquisition or affiliation by the Company or any Consolidated Entity
with any physician practice group. No investigation by the Investors or their
Representatives shall limit or otherwise affect the Company's representations
and warranties hereunder.
7.10. Allocation of Purchase Price. The Company and the Investors agree
----------------------------
that for Tax and financial reporting and all other purposes the purchase price
paid by the Investors shall be allocated among the Shares and Warrants purchased
in the various Closings in proportion to their relative fair market values at
the time of each Closing to the extent consistent with applicable law, as
determined in good faith by the Investors.
-32-
<PAGE>
7.11. Conduct of Business. Prior to the Initial Closing, except as
-------------------
otherwise contemplated by this Agreement, the Company shall cause each
Consolidated Entity to carry on its business in the usual and ordinary course.
Without limiting the foregoing, except as otherwise contemplated by this
Agreement, the Company shall not and shall cause or not permit any Consolidated
Entity, other than in the ordinary course of business, to incur any capital
expenditures, issue stock, declare dividends, adopt benefit plans, change
accounting methods, sell or purchase material assets or incur liabilities or do
any other thing that could have the effect of rendering the representations and
warranties contained herein to become untrue or incomplete in any respect.
7.12. Reservation of Shares. The Company shall at all times reserve and
---------------------
make available (a) sufficient Reserved Shares for issuance upon exercise of the
Warrants; and (b) sufficient Conversion Shares for issuance upon conversion of
the Shares or the Reserved Shares.
7.13. Compliance Program. The Company will implement procedures designed
------------------
to detect and deter violations of applicable health care and other laws,
including without limitation establishment of a Compliance Committee of the
board of directors comprised solely of physician and management representatives
including Arnold Zeigler and engagement of qualified professional advisers to
review operations and acquisitions.
7.14. Future Financings.
-----------------
7.14.1. Exclusivity. Other than with respect to shares of Class A
-----------
Common Stock issued in connection with the Initial Acquisition, as
permitted by this Section 7.14.2 and other than the up to $1 million of
Mandatory Convertible Notes issued by the Company dated July/August, 1996
the issuance to the Threshold Fund as contemplated by Section 1.3 and the
issuance up to an aggregate of 200,000 shares of Class A Common Stock to
physicians from the Springfield Practice Group, physicians from the
physician practice groups in the Flagship Transaction and certain of the
Company's existing shareholders, which subject to approval by the Board of
Directors as provided in the Restated Certificate of Incorporation, is
hereby approved, until the earlier of December 31, 1999 and the
consummation of the Third Closing, the Company hereby agrees that it will
not, and it will cause the Consolidated Entities and each of their
respective affiliates, directors, officers, employees, representatives and
agents not to, directly or indirectly, solicit or initiate or enter into
discussions, agreements or transactions with, or encourage, or provide any
information to, any corporation, partnership or other entity or group
(other than the Investors and their designees) concerning any debt or
equity investment other than the investments contemplated hereby (subject
to the terms and conditions hereof) by the Investors.
7.14.2. Participation Rights. In the event that either of the
--------------------
Second Closing or the Third Closing shall not occur because of the failure
of any condition to such closing of the Investors to be satisfied or
waived, then the Company agrees that neither the Company nor any
Consolidated Entity shall issue or sell any of their respective equity and
debt securities (including but not limited to capital stock or securities
convertible into, exchangeable for, or options, warrants, or other rights
to
-33-
<PAGE>
purchase such capital stock and indebtedness for money borrowed, promissory
notes, demand notes, bonds, debentures, letters of credit, or similar
instruments and guarantees of the foregoing obligations) (collectively, the
"Future Securities") to any person without first providing each Investor the
- ------------------
right to subscribe for such Future Securities at a price and on such other terms
(including the method of purchase; provided, however, that each Investor shall
-------- -------
have the option of purchasing Future Securities with cash, regardless of the
method of purchase offered to such Person) which are no less favorable as shall
be offered to such third party and which shall have been specified by the
Company in a writing delivered to each Investor (the "Proposal"). The Proposal
--------
by its terms shall remain open and irrevocable for a period of 20 days from the
date it is delivered by the Company to each Investor (the "Future Securities
-----------------
Exercise Period"). The Proposal shall also certify that the Company intends in
- ---------------
good faith to make an offering of its securities at the price and on the terms
set forth in such certification.
7.14.3. Notice. Notice of an Investor's intention to accept, in whole or
------
in part, the Proposal made pursuant to Section 7.14.2 shall be made in writing
signed by the Investor and delivered to the Company prior to the end of the
Future Shares Exercise Period, setting forth that portion of the Future Shares,
which the Investor elects to purchase (the "Notice of Purchase").
------------------
7.14.4. Sale to Third Parties. In the event that the Investors elect not
---------------------
to purchase all (or any part) of the Future Securities, the Company shall have
120 days from the expiration of the Future Securities Exercise Period to offer
and sell all or any part of such Future Securities not purchased by the
Investors (the "Refused Future Securities") to any other Person(s), but only
-------------------------
upon terms and conditions in all respects (including, without limitation, unit
price and interest rates) which are no more favorable to such other Person(s) or
less favorable to the Company than those set forth in the Proposal; provided
--------
that such Sale be to the same Person(s) or their affiliates identified in the
Proposal, if so identified pursuant to Section 7.14.2. In the event that the
Company so sells the Refused Future Securities to such other Person(s), the sale
to each Investor of the Future Securities in respect of which a Notice of
Purchase was delivered to the Company by such Investor shall occur upon the
closing of the sale to such other Person(s) of Refused Future Securities (which
closing shall include full payment to the Company). If there are no Refused
Future Securities, the sale to such Investor of such Future Securities shall
occur within 20 days of the expiration of the Future Securities Exercise Period.
If such offering or sale of Refused Future Securities shall be terminated, the
Company shall promptly give such Investor written notice of such termination and
such Investor may, but shall not be required to, purchase such Future
Securities, in which case such purchase shall occur within 30 days of the date
of such termination. In any event, the sale to such Investor of such Future
Securities shall be on the terms specified in the Proposal. Any Refused Future
Securities not purchased by such other Person(s) within such 120-day period
shall remain subject to this Section 7.
7.14.5. Exceptions. Notwithstanding anything to the contrary stated
----------
above, the provisions of, and the rights of the Investors under, this Section
7.14 shall not apply to
-34-
<PAGE>
(i) Future Securities issued in connection with stock splits or other
stock dividends, issued on a pro rata basis to the holders of all
shares of Common Stock outstanding and securities issuable for
Underlying Shares, in accordance with the number of shares of Common
Stock and held by such holder or issuable upon conversion or
otherwise, as applicable, (ii) any sale of Future Securities pursuant
to a Public Offering, (iii) any sale or grant of Future Securities by
the Company to its employees, consultants, advisory committee members
or directors (or employees of any Consolidated Entity eligible to
participate in such plan), pursuant to a bona fide employee stock
purchase, option or similar benefit plan or other arrangement approved
by the Company's Board of Directors, (iv) Future Securities issued
upon exchange or exercise of warrants outstanding as of the date of
this Agreement including the Warrants, (v) Future Securities issued in
connection with an acquisition of assets or other business combination
permitted under the terms of the Purchase Agreement, and (vi) Future
Securities issued to lender which is a bank under the Bank Holding
Company Act which has an interest rate payable in cash at such
lender's rate charged generally for corporate loans and which does not
have any equity securities or securities convertible or exchangeable
or exercisable for equity securities of the Company or any
Consolidated Entity issued in connection therewith or any commitments
to issue the foregoing.
7.15. Services Agreement. Promptly after Initial Closing A, the
------------------
Company and MCP shall have entered into a Services Agreement in form
reasonably satisfactory to the Investors.
7.16. Payment of Employee Notes. Each of Jerilyn Asher and Jay N.
-------------------------
Greenberg shall pay in full their respective outstanding notes payable to
the Company within thirty days after the Initial Closing A.
7.17. Period. The foregoing provisions of this Section 7 (other than
------
Sections 7.1, 7.10, 7.12 and 7.16) shall terminate on a Qualified Public
Offering.
8. Negative Covenants.
------------------
So long as the Investors hold in the aggregate at least the lesser of
(x) 30% of the shares of Class B Common Stock issued and outstanding and
(y)(1) 1,200,000, in the event the number of shares of Class B Common Stock
issued and outstanding equals or exceeds 4,000,000 and is less than
8,000,000, (2)1,600,000, in the event the number of shares of Class B
Common Stock issued and equals or exceeds 8,000,000 and is less than
12,000,000 and (3) 2,000,000 in the event the number of shares of Class B
Common Stock issued and outstanding equals or exceeds 12,000,000,
collectively, neither the Company nor any Consolidated Entity will, at any
time, without the prior written consent of the Investors, take any
Restricted Action. The obligations under this Section 8 shall terminate on
a Qualified Public Offering.
9. Definitions.
-----------
9.1. Certain Defined Terms. As used in this Agreement, the following
---------------------
terms have the following definitions:
-35-
<PAGE>
9.1.1. "Affiliate" shall mean, with respect to any Person, any other
---------
Person directly or indirectly controlling, controlled by or under common
control with such Person, including effective control by virtue of a
contractual relationship such as a management agreement or stockholder
transfer or designation or similar agreement.
9.1.2. "Affiliated Fund" shall mean any limited partnership or other
---------------
Person formed for the purpose of investing in other companies or businesses
and for which (a) Bain Capital Investors V, Inc., a Delaware corporation,
or any of its Affiliates, acts as a general partner or otherwise has the
right to direct the voting of shares of corporations in which such limited
partnership or other Person invests or (b) Bain Capital, Inc. or Bain
Capital Partners V, L.P. or any of their respective Affiliates provides
management services.
9.1.3. "Applicable Percentage." As of a Test Period, the lesser of
---------------------
(i) the percentage (not to exceed 100%) expressed by (x) the difference
between Net Sales and Minimum Net Sales Target divided by (y) the
difference between the Maximum Net Sales Target and the Minimum Net Sales
Target; or (ii) the percentage (not to exceed 100%) expressed by (x) the
difference of EBITDA and the Minimum EBITDA Target divided by (y) the
----------
difference between Maximum EBITDA Target and Minimum EBITDA Target.
9.1.4. "EBIT" shall mean consolidated Net Income (i) before (a)
----
interest expense, whether cash or noncash of the Company and the
Consolidated Entities determined on a consolidated basis and, (b)
provisions for taxes based upon income and (ii) determined without giving
effect to extraordinary gains or losses, nonrecurring or unusual gains or
gains or losses from sales of assets other than from inventory sold in the
ordinary course of business, and without giving effect to any increases in
Net Income which may arise from changes in the accounting policies or
methodologies used to establish the allowances for doubtful accounts and
contractual adjustments for MCP, each Springfield Physician Group or any
other Consolidated Entity from those in effect at the time of the most
recent audited financial statements for the year ended immediately
preceding the year in which such entity becomes acquired by or affiliated
with the Company.
9.1.5. "EBITDA" shall mean, for any period, EBIT, adjusted by adding
------
thereto the amount of all depreciation expense and amortization expense
that were deducted in determining EBIT for such period and the amount of
all management fees and expenses paid to Bain Capital, Inc. and fees of
Robertson Stephens & Co. in connection with the issuance and sale of Class
B Common Stock that were deducted in determining Net Income for such period
and all as determined in accordance with GAAP.
9.1.6. "Employee Benefit Plan" shall mean any (a) nonqualified
---------------------
deferred compensation or retirement plan or arrangement, (b) qualified
defined contribution retirement plan or arrangement, (c) qualified defined
benefit retirement plan or arrangement or (d) "employee welfare benefit
plan" (as such term is defined in Section 3(1) of ERISA) or material fringe
benefit plan or program.
-36-
<PAGE>
9.1.7. "GAAP" shall mean the generally accepted accounting principles as
----
in effect in the United States of America as of the Closing Date.
9.1.8. "Knowledge" shall mean with respect to any Person if (a) such
---------
Person is actually aware of such fact or other matter; or (b) a reasonable
Person would be expected to discover or otherwise become aware of such fact or
other matter in the course of conducting a reasonable investigation. The Company
will be deemed to have "Knowledge" of a particular fact or matter if any
individual who is serving as a senior member of management of the Company (or in
any similar capacity) has Knowledge of such fact or other matter.
9.1.9. "Indebtedness" shall mean all (i) indebtedness for borrowed money,
------------
(ii) obligations evidenced by notes, bonds, debentures or similar instruments,
(iii) for the deferred purchase price of assets or services (other than trade
payables and accruals therefor incurred in the ordinary course of business),
(iv) capitalized lease obligations, (v) letters of credit, and (vi) in the
nature of guarantees of the obligations described in (i) through (v) above.
9.1.10. "Interest Expense" shall mean, for any period, total interest
----------------
expense of the Company and the Consolidated Entities determined on a
consolidated basis with respect to all Indebtedness of the Company and the
Consolidated Entities. including, without limitation, all commissions, discounts
and other fees and charges owed with respect to letters of credit and bankers'
acceptance financing but excluding amortization of original issue discount,
deferred financing costs, any interest expense on deferred compensation
arrangements and other non-cash interest expense, as determined in accordance
with GAAP.
9.1.11. "Maximum EBITDA Target". For each Test Period, the amount set
---------------------
forth opposite such date:
<TABLE>
<CAPTION>
Testing Period Ending Target
- --------------------- ------
<S> <C>
September 30, 1996 $ N/A
December 31, 1996 3,557,000
March 31, 1997 4,384,000
June 30, 1997 4,696,000
September 30, 1997 6,453,000
December 31, 1997 8,003,000
March 31, 1998 9,864,000
June 30, 1998 10,562,000
September 30, 1998 11,315,000
December 31, 1998 11,720,000
March 31, 1999 11,990,000
June 30, 1999 12,266,000
September 30, 1999 12,548,000
December 31, 1999 12,836,000
</TABLE>
-37-
<PAGE>
9.1.12. "Maximum Net Sales Target." For each Test Period, the amount set
-------------------------
forth opposite such date:
<TABLE>
<CAPTION>
Testing Period Ending Target
- --------------------- ------
<S> <C>
September 30, 1996 $ N/A
December 31, 1996 40,827,000
March 31, 1997 42,662,000
June 30, 1997 61,544,000
September 30, 1997 79,738,000
December 31, 1997 91,861,000
March 31, 1998 95,990,000
June 30, 1998 100,458,000
September 30, 1998 103,383,000
December 31, 1998 105,784,000
March 31, 1999 108,217,000
June 30, 1999 110,706,000
September 30, 1999 113,252,000
December 31, 1999 115,857,000
</TABLE>
9.1.13. "Minimum EBITDA Target." For each Test Period, the amount set
----------------------
forth opposite such date:
<TABLE>
<CAPTION>
Testing Period Ending Target
- --------------------- ------
<S> <C>
September 30, 1996 N/A
December 31, 1996 $1,050,000
March 31, 1997 1,974,000
June 30, 1997 2,868,000
September 30, 1997 3,585,000
December 31, 1997 4,446,000
March 31, 1998 5,480,000
June 30, 1998 5,868,000
September 30, 1998 6,286,000
December 31, 1998 6,511,000
March 31, 1999 6,661,000
June 30, 1999 6,814,000
September 30, 1999 6,971,000
December 31, 1999 7,131,000
</TABLE>
9.1.14. "Minimum Net Sales Target". For each Test Period, the amount set
------------------------
forth opposite such date:
<TABLE>
<CAPTION>
Testing Period Ending Target
- --------------------- ------
<S> <C>
September 30, 1996 N/A
December 31, 1996 $18,257,000
March 31, 1997 27,353,000
</TABLE>
-38-
<PAGE>
<TABLE>
<S> <C>
June 30, 1997 35,439,000
September 30, 1997 44,299,000
December 31, 1997 51,034,000
March 31, 1998 53,328,000
June 30, 1998 55,810,000
September 30, 1998 57,435,000
December 31, 1998 58,769,000
March 31, 1999 60,120,000
June 30, 1999 61,504,000
September 30, 1999 62,918,000
December 31, 1999 64,365,000
</TABLE>
9.1.15. "Net Income" shall mean the consolidated net income (or loss)
----------
after provision for taxes of the Company and the Consolidated Entities on a
consolidated basis.
9.1.16. "Net Sales" shall mean consolidated revenues of the Company and
---------
the Consolidated Entities after the provision for doubtful accounts, contractual
adjustments, returns and any other setoffs or counterclaims, as determined in
accordance with GAAP, excluding any increases in Net Sales which may arise from
changes in the accounting policies or methodologies used to establish the
allowances for doubtful accounts and contractual adjustments for patient
accounts receivable of MCP, each Springfield Physician Group, or any other
Consolidated Entity from those in effect at the time of the most recent audited
financial statements for the year ended immediately preceding the year in which
such entity becomes acquired by or affiliated with the Company.
9.1.17. "Permitted Liens" shall mean such of the following as to which no
---------------
enforcement, collection, execution, levy or foreclosure proceeding shall have
been commenced: (a) liens for taxes, assessments and governmental charges or
levies to the extent required to be paid and for which adequate reserves are
reflected on the Financials; (b) liens imposed by law, such as materialmen's
mechanics', carriers', workmen's and repairmen's liens and other similar liens
arising in the ordinary course of business securing obligations that (i) are not
overdue and (ii) either individuals or when aggregated with all other Permitted
Liens outstanding on any date of determination, do not materially affect the use
or value of the property to which they relate; (c) pledges or deposits to secure
obligations under workers' compensation laws or similar legislation or to secure
public or statutory obligations; and (d) easements, rights of way and other
encumbrances on title to real property that do not render title to the property
encumbered thereby unmarketable or materially adversely affect the use of such
property for its present purposes.
9.1.18. "Person" shall mean any individual, partnership, corporation,
------
association, trust, joint venture, unincorporated organization or other entity.
9.1.19. "Qualified Public Offering" shall mean the closing of an offering
-------------------------
of the Company's Common Stock registered under the Securities Act with (a) the
net
-39-
<PAGE>
proceeds of the sale of such Common Stock by the Company and any
stockholder of the Company to equal or exceed $50,000,000; provided that
the net proceeds thereof to the Investors shall equal or exceed the
greater of (x) fifty percent of the total purchase price paid by the
Investors in any Closing hereunder and (y) $10,000,000, and (b) subject to
a firm commitment underwriting conducted by a nationally recognized
underwriter acceptable to the Investors.
9.1.20. "Restricted Action" shall mean any of the following:
-----------------
(a) A merger, consolidation amalgamation, liquidation, winding
up, or dissolution of the Company or any Consolidated Entity thereof with
any Person other than a merger or consolidation of a Subsidiary with the
Company or any other Subsidiary of the Company provided that, in the case
of any such merger or consolidation, the person formed by such merger or
consolidation shalt be a wholly-owned Subsidiary of the Company.
(b) A sale, lease, transfer or other disposition of or grant or
any option or other right to purchase, lease or otherwise acquire all or a
material part of the assets of the Company, the Subsidiaries or any
Affiliates (other than pursuant to an agreement in effect on the Closing
Date); or
(c) Any agreement, contract, commitment or understanding with any
Person for the acquisition or affiliation entered into by the Company, or
any of its Consolidated Entities of any business or assets including,
without limitation any management agreement, and the terms of any
securities or other consideration to be issued in connection therein or
acquired any business or assets other than acquisitions not in excess of
$1,000,000 in any 12 month period.
(d) Any dividends, distributions, repurchase, redemption,
retirement, defeasance or similar transaction for capital stock or any
warrants, rights or options to acquire such capital stock, now or hereafter
outstanding, return any capital to its stockholders as such, make any
distribution of assets, capital stock, warrants, rights, options,
obligations or securities to its stockholders as such, or issue or sell any
capital stock or any warrants, rights or options to acquire such capital
stock, or permit the Company, its Subsidiaries or any Consolidated Entity
to do any of the foregoing.
(e) Any material change in the nature of its business of this
Company and its Consolidated Entities, taken as a whole, as carried on at
the date hereof and reasonable extensions thereof.
(f) Any amendment or restatement of organizational documents
(including the Certificate of Incorporation) or Bylaws of the Company or
any Consolidated Entity.
(g) Retain or dismiss the services of the Chief Operating Officer
or the Chief Financial Officer of the Company; or grant any increase in
compensation to its employees as a class, or to its officers or directors,
except in accordance with past
-40-
<PAGE>
practice and as required by law; effect any change in retirement benefits to
any class of employees or officers other than in connection with
affiliations with physician practice groups approved by the Class B
Directors, except as may be required by law, or enter into any benefit plans
or similar agreements or arrangements;
(h) Adopt or approve an annual operating budget for the Company
and the Consolidated Entities, including the budget for capital
expenditures;
(i) Any transaction between the Company and its Consolidated
Entities between an officer, director, or holder of more than 5 % of the
outstanding capital stock of the Corporation which is not in all material
respects upon terms consistent with an arms-length transaction between
unaffiliated parties.
(j) The commencement, management, defense, prosecution or
settlement of any material action, suit, investigation or proceeding before
any court or governmental department, commission, board, agency or
instrumentality, domestic or foreign, affecting the Company, the
Subsidiaries and any Affiliate thereof other than any such action, suit or
proceeding initiated and instituted by the holders of Class B Common Stock
against the Company.
9.1.21. "Subsidiary" shall mean any corporation with respect to which
----------
a specified Person (or a Subsidiary thereof) owns a majority of the capital
stock or has the power to vote or direct the voting of sufficient
securities to elect a majority of the directors.
9.1.22. "Taxes" shall mean all federal, state, county, local, foreign
-----
and other taxes (including, without limitation, income, gross income,
profits, premium, estimated, excise, sales, services, use, occupancy, gross
receipts, franchise, license, ad valorem, severance, capital levy,
production, stamp, transfer, withholding, employment, unemployment, social
security, payroll and property taxes, customs duties and other governmental
charges and assessments), together with any interest, additions to tax or
penalties.
9.1.23. "Tax Return" shall mean all returns, amended returns,
----------
declarations, reports, estimates, information returns and statements
required or permitted to be filed in respect of Taxes.
9.1.24. "Test Period" shall mean for any determination, the fiscal
-----------
quarter then last ended and taken as one accounting period.
9.2. Certain Matters of Construction. In addition to the definition
-------------------------------
referred to as set forth in Section 9.1:
(a) The words "hereof", "herein", "hereunder" and words of similar
import shall refer to this Agreement as a whole and not to any particular
Section or provision of this Agreement, and reference to a particular
Section of this Agreement shall include all subsections thereof;
-41-
<PAGE>
(b) Definitions shall be equally applicable to both the singular
and plural forms of the terms defined; and
(c) The masculine, feminine and neuter genders shall each include
the other.
9.3. Cross Reference Table. The following terms defined elsewhere in
---------------------
this Agreement in the Sections set forth below shall have the respective
meanings therein defined:
<TABLE>
<CAPTION>
Term Definition
- ---- ----------
<S> <C>
"Agreement" Preamble
"CERCLA" Section 2.21
"Class B Common Stock" Section 1.1
"Class B-1 Common Stock" Section 1.1
"Class B-2 Common Stock" Section 1.1
"Closings" Section 1.3
"Code" Section 2.22(c)
"Common Stock" Section 2.3(a)
"Company" Preamble
"Company Financials" Section 2.5.1
"Consolidated Entity" Section 2.5.3
"Contracts" Section 2.10
"Convertible Subordinated Note" Section 4.18
"Conversion Shares" Section 2.3(a)
"Designation Agreement" Section 2.3(b)
"ERISA" Section 2.22(b)
"ERISA Affiliate" Section 2.22(c)
"Financials" Section 2.5.1
"Future Securities" Section 7.14.2
Future Securities Exercise Period" Section 7.14.2
"HSR Act" Section 6.4
"Initial Acquisition" Section 2.25
"Initial Acquisition Documents" Section 2.25
"Initial Acquisition Financials" Section 2.5.1
"Initial Closing A" Section 1.3(a)
"Initial Closing B" Section 1.3
"Installments" Section 1.3
"Investor" Preamble
"Investors" Preamble
"Key Employees" Section 4.15
"Management Agreement" Section 2.3(b)
"MCP" Section 2.1
"MCP Agreements" Section 2.3(b)
"MCP Financials" Section 2.5.1
"Notice of Purchase" Section 7.14.3
"1995 Company Financials" Section 2.5.1
</TABLE>
-42-
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
"1995 Initial Acquisition Financials" Section 2.5.1
"1996 Company Financials" Section 2.5.1
"1996 Financials" Section 2.5.1
"1996 Initial Acquisition Financials" Section 2.5.1
"Option Closing" Section 1.3
"Outstanding Reimbursement Amount" Section 7.13
"Permits" Section 2.26(a)
"Pro Forma Financials" Section 2.5.2
"Proposal" Section 7.14.2
"RCRA" Section 2.21
"Refused Future Securities" Section 7.14.4
"Related Party" Section 2.23
"Representatives" Section 7.9
"Reserved Shares" Section 1.3(d)
"Restated Certificate" Section 1.1
"Second Closing" Section 1.3(b)
"Securities" Section 3.1(b)
"Securities Act" Section 2.3(a)
"Shares" Section 1.2
"Sole Stockholder" Section 2.3(b)
"Springfield Physician Groups" Section 2.5.1
"Stockholders Agreement" Section 2.2
"Third Closing" Section 1.3(c)
"Transaction Agreements" Section 2.2
"Warrants" Section 1.3(d)
</TABLE>
10. Miscellaneous.
--------------
10.1. Survival of Covenants: Assignabilitv of Rights. All covenants,
----------------------------------------------
agreements, representations and warranties of the Company made herein and in the
certificates, lists, exhibits, schedules or other written information delivered
or furnished to any Investor in connection herewith shall be deemed material and
to have been relied upon by such Investor, and shall survive the delivery of the
Shares and the Warrants, and shall bind the Company's successors and assigns,
whether so expressed or not, and, except as provided otherwise in this
Agreement, all such covenants, agreements, representations and warranties shall
inure to the benefit of the Investors' successors and assigns and to transferees
of the Shares and the Warrants, whether so expressed or not.
10.2. Incorporation by Reference. All exhibits and schedules appended to
--------------------------
this Agreement are herein incorporated by reference and made a part hereof.
10.3. Parties in Interest. All covenants, agreements, representations,
-------------------
warranties and undertakings in this Agreement made by and on behalf of any of
the parties hereto shall bind and inure to the benefit of the respective
successors and assigns of the parties hereto whether so expressed or not.
-43-
<PAGE>
10.4. Amendments and Waivers. Except as set forth in this Agreement,
----------------------
changes in or additions to this Agreement may be made, or compliance with any
term, covenant, agreement, condition or provision set forth herein may be
omitted or waived (either generally or in a particular instance and either
retroactively or prospectively), or representatives to act on behalf of the
holders of all of the Shares may be designated, upon the written consent of the
Company and a majority of the voting power of the Shares.
10.5. Governing Law. This Agreement shall be deemed a contract made
-------------
under the laws of The Commonwealth of Massachusetts and, together with the
rights of obligations of the parties hereunder, shall be construed under and
governed by the laws of such Commonwealth.
10.6. Effect of Investigations. No investigation by the parties hereto
------------------------
made heretofore or hereafter, whether pursuant to this Agreement or otherwise,
shall affect the representations and warranties of the parties which are
contained herein and each such representation and warranty shall survive such
investigation.
10.7. Notices. All notices, requests, consents and demands shall be in
-------
writing and shall be personally delivered, mailed, postage prepaid, telecopied
or telegraphed, to the Company at:
Physicians Quality Care, Inc.
950 Winter Street
Suite 2410
Waltham, Massachusetts 02154
Attn: Jerilyn Asher
with a copy to:
Jeffrey N. Carp, Esq.
Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109
or to each Investor at its address set out on Exhibit A hereto with a copy
to:
Lauren I. Norton, Esq.
Ropes & Gray
One International Place
Boston, Massachusetts 02110
or such other address as may be furnished in writing to the other parties
hereto. All such notices, requests, demands and other communication shall, when
mailed (registered or certified mail, return receipt requested, postage
prepaid), personally delivered, or telegraphed, be effective four days after
deposit in the mails, when personally delivered, or when delivered to the
telegraph company, respectively, addressed as aforesaid, unless otherwise
provided herein and, when telecopied, shall be effective upon actual receipt.
-44-
<PAGE>
10.8. Effect of Headings. The section and paragraph headings herein are
------------------
for convenience only and shall not affect the construction hereof.
10.9. Entire Agreement. This Agreement and the Exhibits and Schedules
----------------
hereto together with the Stockholders Agreement and the Transaction Agreements
constitute the entire agreement among the Company and the Investors with respect
to the subject matter hereof. This Agreement, the Stockholders Agreement and
such Transactions Agreements supersede all prior agreements between the parties
with respect to the shares purchased hereunder and the subject matter hereof.
10.10. Severability. The invalidity or unenforceability of any provision
------------
hereof shall in no way affect the validity or enforceability of any other
provision.
10.11. Counterparts. This Agreement may be executed in counterparts, all
------------
of which together shall constitute one and the same instrument.
[The rest of this page has been intentionally left blank.]
-45-
<PAGE>
IN WITNESS WHEREOF, each of the undersigned has duly executed this
Agreement (or caused this Agreement to be executed on its behalf by its officer
or representative thereunto duly authorized) under seal as of the date first
above written.
PHYSICIANS QUALITY CARE, INC.
By: /s/ Jerilyn P. Asher
--------------------
Title:
BAIN CAPITAL FUND V, L.P.
By Bain Capital Partners V, L.P., a
Delaware limited partnership, its
general partner
By Bain Capital Investors V, Inc.,
its general partner
By: /s/ Stephen Pagliuca
--------------------
Title: Managing Director
BAIN CAPITAL FUND V-B, L.P.
By Bain Capital Partners V, L.P., a
Delaware limited partnership, its
general partner
By Bain Capital Investors V, Inc.,
its general partner
By: /s/ Stephen Pagliuca
--------------------
Title: Managing Director
BCIP ASSOCIATES
By: /s/ Stephen Pagliuca
--------------------
Title: A general partner
BCIP TRUST ASSOCIATES, L.P.
By: /s/ Stephen Pagliuca
--------------------
Title: A general partner
-46-
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT A
---------
Initial A Second Third
Class Closing Initial A Closing Second Second Closing
of Number Initial A Closing Number Closing Closing Number
Investor Stock of Shares Warrants Payment of Shares Warrants Payment of Shares
-------- ----- --------- --------- -------- --------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Bain Capital B-2 604,017 871,294 $1,510,042.14 929,257 998,951 $ 2,323,141.75 929,257
Fund V, L.P.
Bain Capital B-1 1,587,863 2,290,493 $3,969,657.86 2,442,866 2,626,081 $ 6,107,165.94 2,442,866
Fund V-B
BCIP Associates B-2 265,772 383,376 $ 664,430.00 408,880 439,546 $ 1,022,200.00 408,880
BCIP Trust B-2 142,348 205,337 $ 355,870.00 218,997 235,422 $ 547,492.31 218,997
Associates
Total 2,600,000 3,750,500 $6,500,000.00 4,000,000 4,300,000 $10,000,000.00 4,000,000
</TABLE>
<TABLE>
<CAPTION>
Option
Third Closing Option Option
Closing Third Closing Number of Closing Closing Total Total
Investor Warrants Payment Shares Warrants Payment Shares Warrants
-------- -------- ------------- --------- -------- ------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Bain Capital 680,681 $ 2,323,141.75 325,420 469,158 $ 813,099.61 2,787,770 3,020,084
Fund V, L.P.
Bain Capital 1,789,400 $ 6,107,165.94 855,003 1,233,342 $2,137,508.08 7,328,599 7,939,316
Fund V-B
BCIP Associates 299,505 $ 1,022,220.00 143,108 206,433 $ 357,770.00 1,226,640 1,328,860
BCIP Trust 160,415 $ 547,492.31 76,649 110,566 $ 191,622.31 656,991 711,740
Associates
Total 2,930,000 $10,000,000.00 1,400,000 2,019,500 $3,500,000.00 12,000,000 13,000,000
</TABLE>
<PAGE>
EXECUTION COPY
--------------
- --------------------------------------------------------------------------------
PHYSICIANS QUALITY CARE, INC.
----------------------
STOCKHOLDERS AGREEMENT
----------------------
Dated as of August 30, 1996
- --------------------------------------------------------------------------------
<PAGE>
STOCKHOLDERS AGREEMENT
This Stockholders Agreement (the "Agreement") is made as of August 30, 1996
---------
by and among (i) Physicians Quality Care, Inc., a Delaware corporation (the
"Company"), (ii) each of Bain Capital Fund V, L.P., a Delaware limited
-------
partnership, Bain Capital Fund V-B, L.P., a Delaware limited partnership, BCIP
Associates, a Delaware partnership, BCIP Trust Associates, L.P., a Delaware
limited partnership (collectively, the "Bain Initial Investors," and each a
----------------------
"Bain Initial Investor") and each of the other Additional Bain Investors from
---------------------
time to time party hereto, (iii) each Management Stockholder from time to time
party hereto, (iv) each Physician Stockholder from time to time party hereto and
(v) other stockholders from time to time party hereto. The Bain Investors, the
Management Stockholders and the Physician Stockholders and such other
stockholders are sometimes referred to herein collectively as the
"Stockholders".
------------
Recitals
--------
1. Pursuant to a Purchase Agreement dated as of August 30, 1996 by and
among the Company and the Initial Bain Investors (the "Purchase Agreement"), the
------------------
Initial Bain Investors will acquire up to an aggregate of 12,000,000 shares of
Class B Common Stock, $.01 par value per share ("Class B Common") of the Company
--------------
and Warrants to purchase an aggregate of 13,000,000 shares of Class B Common,
subject to adjustment.
2. It is anticipated that one or more individuals serving or who will
serve as officers of the Company will acquire or have acquired shares of Class A
Common Stock, $.01 par value per share ("Class A Common") of the Company.
--------------
3. It is anticipated that one or more individual or professional
corporations have or will enter into agreements with the Company pursuant to
which an affiliate of the Company will acquire the group practices of certain
physicians (the "Physicians") and will enter into various agreements in
----------
connection therewith and pursuant to which the Physicians will acquire capital
stock of the Company (the "Physician Stockholders").
----------------------
4. It is a condition to the Closing under the Purchase Agreement that the
Company and certain Stockholders of the Company enter into this Agreement in
substitution for certain existing agreements with the Company.
5. The parties believe that it is in the best interests of the Company and
the Stockholders to: (i) provide that certain shares of common stock shall be
transferable only upon compliance with the terms hereof; (ii) provide the Bain
Investors with certain rights with respect to the purchase of shares of common
stock under certain circumstances; and (iii) set forth their agreements on
certain other matters.
Agreement
---------
Now therefore, in consideration of the foregoing and the mutual agreements
set forth below, the parties hereto, each intending to be legally bound, hereby
agree as follows:
-2-
<PAGE>
1. DEFINITIONS. For purposes of this Agreement:
1.1. Certain Definitions. The following terms shall have the following
-------------------
meanings:
1.1.1. "Affiliate" shall mean, with respect to any specified Person,
---------
any Person that, directly or indirectly, through one or more
intermediaries, controls, is controlled by or is under common control with,
the Person specified including effective control by virtue of a contractual
relationship such as a management agreement or a stockholder transfer or
designation or similar agreement other than a management or similar
agreement which does not, alone or together with related agreements, result
in control of such Person.
1.1.2. "Affiliated Fund" shall mean any limited partnership or other
---------------
Person formed for the purpose of investing in other companies or businesses
and for which (a) Bain Capital Investors V, Inc., a Delaware corporation,
or any of its Affiliates, acts as a general partner or otherwise has the
right to direct the voting of shares of corporations in which such limited
partnership or other Person invests or (b) Bain Capital, Inc. or Bain
Capital Partners V, L.P. or any of their respective Affiliates provides
management services.
1.1.3. "Bain Investor" shall mean (i) any Bain Initial Investor and
-------------
(ii) any Affiliated Fund which, from time to time, acquires Shares or
Warrants and becomes party to this Agreement by executing and delivering to
the Company an instrument in form satisfactory to the Company pursuant to
which such stockholder agrees to be bound by the terms of this Agreement to
the same extent as a Bain Initial Investor.
1.1.4. "Bain Investor Initial Shares" shall mean all Shares
----------------------------
originally issued to the Bain Investors at the Effective Time.
1.1.5. "Bain Investor Majority Holders" shall mean, as of any date,
------------------------------
the holders of a majority of the Bain Investor Shares outstanding on such
date.
1.1.6. "Bain Investor Shares" shall mean all Shares originally
--------------------
issued to (or issued upon conversion of or otherwise with respect to
Shares, Warrants or Options issued to) or held by the Bain Investors
whenever issued.
1.1.7. "Board" shall mean the Board of Directors of the Company.
-----
1.1.8. "Cause" shall mean, (a) in the context of termination of the
-----
employment of any Management Stockholders, any of the following events or
conditions: (i) such person's significant failure to perform (other than by
reason of disability) his or her duties and responsibilities to the Company
and its Affiliates which failure causes material injury to the Company and
is not cured within fourteen (14) days after written notice by the Company
to such person, (ii) any act of fraud, embezzlement or other material
dishonesty, (iii) conviction of, or plea of nolo contendere to, any felony
or any other crime involving fraud, dishonesty or moral turpitude, or (iv)
conduct which causes criminal or material civil liabilities to the Company,
its Subsidiaries or Affiliates thereof; and (b) shall
-3-
<PAGE>
mean, in the context of a Physician, any of the following events or
conditions: (i) fraud or dishonesty with respect to the Company, its
Affiliates or their employees, patients or visitors; (ii) suspension or
termination from Medicare, Medicaid or any third-party reimbursement
program, for cause other than by reason of the fact of employment by the
Company or its Affiliates; (iii) ceases to be licensed to practice medicine
without restriction under the laws of any state in which the Physician is
licensed; (iv) ceases to maintain a current and valid Federal Drug
Enforcement Agency license; or (v) conviction of, or plea of nolo contendre
to, any felony or any other crime involving fraud, dishonesty or moral
turpitude, (vi) conduct causes criminal or material civil liabilities to
the Company, its Subsidiaries or Affiliates thereof or (vii) breach of
noncompetition agreement with the Company or any of its Subsidiaries or
Affiliates thereof.
1.1.9. "Class A Director" shall have the meaning set forth in the
----------------
Company's Restated Certificate of Incorporation.
1.1.10. "Common Stock" shall mean the Class A Common and the Class B
------------
Common of the Company.
1.1.11. "Common Stock Director" shall have the meaning set forth in
---------------------
the Company's Restated Certificate of Incorporation.
1.1.12. "Cost" shall mean, in the context of the Cost of securities
----
subject to the provisions of Section 4, (i) in the case of Shares, the
amount (in the form of subscription price or exercise price or otherwise)
paid to the Company upon issuance of such Shares and (ii) in the case of
Warrants or Options, an amount equal to the value of the consideration paid
therefor as determined by the Board; in each case adjusted appropriately to
take account of any stock splits, stock dividends, conversions or
consolidations of stock or substantially similar reorganizations of the
Company's capital stock.
1.1.13. "Effective Time" shall mean the time of the Initial Closing
--------------
A (as defined in the Purchase Agreement).
1.1.14. "Exchange Act" shall mean the Securities Exchange Act of
------------
1934, as amended.
1.1.15. "Executive" shall mean Jerilyn Asher or Jay Greenberg.
---------
1.1.16. "Fair Market Value" shall mean, as of any date, the fair
-----------------
value of any Share as of the applicable date, as determined pursuant to
Section 5.5.
1.1.17. "Majority Stockholders" shall mean, as of any date, the
---------------------
holders of a majority of the Shares outstanding on such date.
1.1.18. "Management Majority Holders" shall mean, as of any date,
---------------------------
the holders of a majority of the Management Shares outstanding on such
date.
-4-
<PAGE>
1.1.19. "Management Shares" shall mean all Shares originally issued
-----------------
to (or issued upon conversion of or otherwise with respect to Shares
originally issued to) or held by the Management Stockholders, whenever
issued, including without limitation all Shares issued pursuant to the
exercise of any Warrants or Options, whenever issued; provided, however,
that for purposes of this Agreement Management Shares shall not include
Shares issued upon exercise of Options (i) outstanding on the Effective
Time (ii) which are exercisable as of the Effective Time or on or prior to
December 31, 1997 anniversary of the Effective Time, (iii) which Shares
shall not exceed 303,057 in the aggregate and (iv) are held by such
Management Stockholders listed on Schedule A hereto in the amounts
specified therein.
1.1.20. "Management Stockholder" shall mean any officer or employee
----------------------
of the Company or any of its subsidiaries who, from time to time, acquires
Shares or Options and becomes party to this Agreement by executing and
delivering to the Company an instrument in form satisfactory to the Company
and the Bain Investors pursuant to which such stockholder agrees to be
bound by the terms of this Agreement applicable to Management Stockholders.
1.1.21. "Members of the Immediate Family" shall mean, with respect
-------------------------------
to any individual, each spouse, parent, brother, sister or child of such
individual, each spouse of any such Person, each child of any of the
aforementioned Persons, each trust created solely for the benefit of one or
more of the aforementioned Persons and each custodian or guardian of any
property of one or more of the aforementioned Persons in his capacity as
such custodian or guardian.
1.1.22. "Non-Bain Investor Options" shall mean all Options held by
-------------------------
any Stockholder other than Options held by Bain Investors.
1.1.23. "Non-Bain Investor Shares" shall mean all Shares other than
------------------------
Bain Investor Shares, whenever issued.
1.1.24. "Non-Bain Investor Warrants" shall mean all Warrants held by
--------------------------
Stockholders other than Warrants held by Bain Investors.
1.1.25. "Options" shall mean any options to subscribe for, purchase
-------
or otherwise acquire Shares, including, without limitation, any and all
options issued pursuant to the Company's Equity Incentive Plan or any
similar plan.
1.1.26. "Permitted Transferee" shall mean as to each Management
--------------------
Share and Physician Share, a transferee of such Management Share or
Physician Share in compliance with Section 3.1 or 3.2.
1.1.27. "Person" shall mean any individual, partnership,
------
corporation, company, association, trust, joint venture, unincorporated
organization or other entity, or any government, governmental department or
agency or political subdivision thereof.
-5-
<PAGE>
1.1.28. "Physician Shares" shall mean Shares, Warrants or Options
----------------
issued pursuant to the acquisition by an Affiliate of the Company of group
practices of certain physicians which are held by Persons who become
parties to this Agreement by executing and delivering to the Company an
instrument in form satisfactory to the Company and the Bain Investors
pursuant to which such stockholder agrees to be bound by the terms of this
Agreement applicable to Physician Stockholders.
1.1.29. "Prime Rate" shall mean the rate of interest as announced
----------
from time to time by Fleet Bank, at its principal office in Boston,
Massachusetts as its prime lending rate, the Prime Rate to change when and
if such prime lending rate changes.
1.1.30. "Public Event" shall mean any transaction or other event
------------
(including, without limitation, a merger with a public company) after or in
connection with which shares of common stock of the Company or any
successor are registered under the Securities Act or listed on a "national
securities exchange" as defined in the Exchange Act or the subject of price
quotation through the National Association of Securities Dealers' Automated
Quotation System.
1.1.31. "Public Offering" shall mean the closing of an offering of
---------------
Shares registered under the Securities Act of Shares of the Company.
1.1.32. "Qualified Public Offering" shall mean the closing of a
-------------------------
Public Offering with (i) the net proceeds of the sale of such Shares by the
Company and any stockholder of the Company to equal or exceed $50,000,000
provided that the Bain Investors shall have sold fifty percent (50%) of the
Shares then held by the Bain Investors and the net proceeds of the sale
thereof to the Bain Investors shall equal or exceed $10,000,000 and (ii)
subject to a firm commitment underwriting conducted by a nationally
recognized underwriter acceptable to the Bain Investors.
1.1.33. "Second Closing" shall have the meaning set forth in the
--------------
Purchase Agreement.
1.1.34. "Securities Act" shall mean the Securities Act of 1933, as
--------------
amended, and the rules and regulations of the Securities and Exchange
Commission promulgated thereunder, all as from time to time in effect.
1.1.35. "Shares" shall mean shares of Common Stock of the Company.
------
1.1.36. "Third Closing" shall have the meaning set forth in the
-------------
Purchase Agreement.
1.1.37. "Transfer" shall mean to sell, assign, pledge, grant a
--------
participation interest in, encumber, or otherwise dispose of any Shares to
any other Person whether directly, indirectly, voluntarily, involuntarily,
by operation of law, pursuant to judicial process (including, without
limitation, divorce decree) or otherwise.
-6-
<PAGE>
1.1.38. "Underlying Shares" shall mean the (i) Shares issuable upon
-----------------
exercise of any Option or Warrant, (ii) without duplication, any Shares
issued upon the conversion of such Shares referred to in clause (i) above
and (iii) any Shares issued or issuable with respect to the securities
referred to in clauses (i) or (ii) above by way of stock dividend or stock
split or in connection with a combination of shares, recapitalization,
merger, consolidation or other reorganization. For purposes of this
Agreement, any Person who holds Options or Warrants shall be deemed to be
the holder of the Underlying Shares obtainable upon exercise of the Options
or Warrants in connection with the transfer thereof or otherwise regardless
of any restriction or limitation on the exercise of the Options or
Warrants; provided, however, that such Underlying Shares shall not be
deemed to be outstanding for purposes of Section 3 hereof. As to any
particular Underlying Shares, such shares shall cease to be Underlying
Shares when they have been (a) registered under the Securities Act and
disposed of in accordance with the registration statement covering them or
(b) distributed to the public through a broker, dealer or market maker
pursuant to Rule 144 under the Securities Act or any similar provision then
in force as the requirements of which may be modified by Rule 701 ("Rule
144"), in each case in compliance with any applicable provisions of this
Agreement.
1.1.39. "Warrants" shall mean any warrants to subscribe for,
--------
purchase or otherwise acquire Shares, including, without limitation, any
and all warrants issued pursuant to the Purchase Agreement.
1.2. Certain Matters of Construction. In addition to the definitions
-------------------------------
referred to as set forth in Section 1.1:
(a) The words "hereof," "herein," "hereunder" and words of
similar import shall refer to this Agreement as a whole and not to any
particular Section or provision of this Agreement, and reference to a
particular Section of this Agreement shall include all subsections thereof;
(b) Definitions shall be equally applicable to both the
singular and plural forms of the terms defined; and
(c) The masculine, feminine and neuter genders shall each
include the other.
1.3. Cross Reference Table. The following terms defined elsewhere in this
---------------------
Agreement in the Sections set forth below shall have the respective meanings
therein defined:
<TABLE>
<CAPTION>
Term Definition
---- ----------
<S> <C>
"Agreement" Preamble
"Bain Initial Investor" Preamble
"Call Option" Section 5.1
"Call Stockholder Group" Section 5.1
"Class A Common" Recitals
"Class B Common" Recitals
</TABLE>
-7-
<PAGE>
<TABLE>
<S> <C>
"Come Along Notice" Section 6.1
"Company" Preamble
"Designated Physician Directors" Section 3.1
"Initiating Holders" Section 9.2
"Majority Requesting Holders" Section 9.2
"Management Designated Directors" Section 2.1
"Material Loan Agreement" Section 4.2
"Non-Complying Stockholder" Section 9.2
"Participating Seller" Section 6.1; 7.1
"Physicians" Recitals
"Physician Stockholders" Recitals
"Purchase Agreement" Recitals
"Proposed Seller" Section 6; 6.1
"Proposed Buyer" Section 6; 7.1
"Proposed Initial Management Subscription" Recitals
"Public Offering" Section 9.1
"Purchase Agreement" Recitals
"Registrable Securities" Section 9.2
"Registrable Bain Investor Securities" Section 7.2
"Rule 144" Section 1.1.35
"Sale" Section 7; 7.1
"Sale Percentage" Section 7; 7.1
"Stockholders" Preamble
"Tag Along Notice" Section 7.1
"Tag Along Offerees" Section 7.1
</TABLE>
2. TERMINATION OF PRIOR STOCKHOLDERS AGREEMENT AND REGISTRATION RIGHTS
AGREEMENT. By the execution and delivery hereof by certain parties hereto, the
Stockholders Voting Agreement dated June 30, 1995 among the Company, Jerilyn
Asher, Nancy Kelley and the Investor (as defined therein), the Registration
Rights Agreement dated as of June 30, 1995 among the Company and the Purchasers
named therein and any agreement pursuant to which any Stockholder hereto is a
party which provides for the right to register any securities of the Company
under the Securities Act and related rights are terminated and superseded by
this Agreement.
3. VOTING AGREEMENT; OBSERVER RIGHTS; RIGHT TO ACCESS.
3.1. Election of Directors. Each holder of Shares hereby agrees to cast
---------------------
all votes to which such holder is entitled in respect of the Shares now or
hereinafter owned by such holder, whether at any annual or special meeting of
stockholders, by written consent or otherwise to: (i) elect as a Class A
Director of the Company any two individuals who are employees of the Company
(the "Management Designated Directors") designated to serve on the Board by the
-------------------------------
Chief Executive Officer of the Company for election at any election of
directors; (ii) elect as Common Stock Directors any seven individuals who shall
be physicians (the "Designated Physician Directors") designated by the Chief
------------------------------
Executive Officer of the Company and approved by the Bain Investors.
-8-
<PAGE>
3.2. Removal. No Management Designated Director or Designated Physician
-------
Director may be removed without the consent of the Majority Stockholders except
for cause as determined in good faith by a majority of all directors other than
the director to be so removed.
3.3. Vacancy. Any vacancy in the Board of Directors shall be filled by
-------
the nominee of the Persons who would be entitled to designate a director
pursuant to Section 3.1. Each holder of Shares shall, upon receipt of notice
identifying such nominee, promptly take all action necessary to cause the
appointment of such nominee to the Board of Directors pursuant to the Company's
Restated Certificate of Incorporation and By-laws.
3.4. Observer Rights. The Company agrees to permit the holders of Bain
---------------
Investor Shares to have two representatives to attend meetings of the Board of
Directors of the Company. The Company agrees to permit Robert Sullivan as
representative of Offshore Health Industries, Inc. to attend meetings of the
Board of Directors of the Company until the first anniversary of the Effective
Time. The Company may, upon the approval of the Board of Directors of the
Company, permit up to two additional representatives of Physician Stockholders
who agree to be bound by this Agreement to attend meetings of the Board of
Directors of the Company. The Company agrees to provide such representatives
with such notice of and other information with respect to such meetings or
action by written consent as are delivered to the directors of the Company.
3.5. Access, etc. From time to time upon request of any partner,
-----------
designee or officer of any Bain Investor so long as it holds any equity
securities of the Company representing at least 30% of the Bain Investor Initial
Shares, the Company will furnish to such partner, designee or officer, and their
representatives (including without limitation their accountants and legal
counsel), such information regarding the business of the Company and its
Subsidiaries (including materials furnished to the directors of the Company and
its subsidiaries at or in connection with board meetings) as such partner,
designee or officer may reasonably request. Each such partner, designee or
officer, and their representatives (including without limitation their
accountants and legal counsel), shall have the right during normal business
hours and upon reasonable notice to make an independent examination of the books
and records of the Company and any of its subsidiaries, to make copies, notes
and abstracts therefrom, and to discuss their business, affairs and financial
condition with the officers, employees and accountants of the Company. Each
such partner, designee or officer shall have the right during normal business
hours to consult with the directors and executive officers of the Company and
its subsidiaries and to advise such directors and officers on corporate issues;
provided, however, that no such partner, designee or officer shall thereby have
- -----------------
any right to direct the management or policies of the Company or any of its
subsidiaries.
3.6. Period. (a) The provisions of Sections 3 shall expire upon the date
------
of Qualified Public Offering.
4. CERTAIN TRANSFER RIGHTS AND RESTRICTIONS. No holder of Management Shares
or Physician Shares shall Transfer any of such Shares to any other Person,
except as permitted by Sections 4.1, 4.2, 7 and 9.1, as permitted or required by
Section 5 or as required by Section 6. Any attempted Transfer of Management
Shares or Physician Shares not so permitted or required by such Sections shall
be null and void, and the Company shall not in any way give effect to any
-9-
<PAGE>
such impermissible Transfer. All permitted transfers shall be further subject
to the requirements of Section 8. Notwithstanding any contrary provision of this
Agreement, any Management Stockholder or Physician Stockholder may Transfer any
or all Options, Warrants or Shares held by such Stockholder: (i) to the Company
or any subsidiary of the Company in one or more transactions approved by the
Board, (ii) to any Bain Investor, or (iii) on the terms and subject to the
conditions of Section 5, 6, 7 or 9.
4.1. Transfers of Management Shares and Physician Shares to Immediate
----------------------------------------------------------------
Family. Any holder of Management Shares or Physician Shares may Transfer any or
- ------
all of such Shares to a Member of the Immediate Family of such holder; provided,
--------
however, that no such Transfer shall be effective until such Member of the
- -------
Immediate Family has delivered to the Company a written acknowledgment and
agreement in form and substance reasonably satisfactory to the Company that such
Shares to be received by such Member of the Immediate Family are subject to all
the provisions of this Agreement applicable thereto prior to such Transfer and
that such Member of the Immediate Family is bound hereby and a party hereto to
the same extent as a Management Stockholder or Physician Stockholder, as the
case may be.
4.2. Transfer of Management Shares or Physician Shares Upon Death. Upon
------------------------------------------------------------
the death of any holder of Management Shares or Physician Shares such Shares
held by such holder may be distributed by will or other instrument taking effect
at death or by applicable laws of descent and distribution to such holder's
estate, executors, administrators and personal representatives, and then to such
holder's heirs, legatees or distributees, whether or not such recipients are
Members of the Immediate Family of such holder; provided, however, that no such
-----------------
Transfer shall be effective until the recipient has delivered to the Company a
written acknowledgment and agreement in form and substance reasonably
satisfactory to the Company that such Shares to be received by such recipient
are subject to all the provisions of this Agreement applicable thereto prior to
such Transfer and that such recipient is bound hereby and a party hereto to the
same extent as a Management Stockholder or Physician Stockholder, as the case
may be.
4.3. Period. The foregoing provisions of Section 4 shall terminate and
------
be of no further force or effect on the date of a Qualified Public Offering.
5. OPTIONS TO PURCHASE MANAGEMENT SHARES AND PHYSICIAN SHARES.
5.1. Call Options. Upon any termination of the employment by the
------------
Company, its Subsidiaries or any Affiliate thereof of a holder of Management
Shares (other than Management Shares held by an Executive) or Physician Shares,
the Company (or its designee) shall have the right to purchase Shares held by
such holder or originally issued to such holder but held by one or more
Permitted Transferees of such holder (collectively, the "Call Stockholder
----------------
Group") and Warrants and Options held by the Call Stockholder Group and
- -----
exercisable at the time of such termination on the following terms (the "Call
----
Option"); it being understood that all Options not exercisable at the time of
- ------
such termination of employment will be terminated pursuant to the option plan
pursuant to which such Option was issued.
5.1.1. Termination by the Company Without Cause. If such
----------------------------------------
termination is the result of termination of such holder's employment by the
Company, its Subsidiaries or any Affiliate thereof without Cause or as a
result of the death or disability of such holder,
-10-
<PAGE>
the Company (or its designee), upon written notice delivered within 90 days
of termination, may purchase all or any portion of the Shares, Warrants and
Options then held by the applicable Call Stockholder Group at a price equal
to the Fair Market Value of such securities.
5.1.2. Termination by Company for Cause. If such termination is the
--------------------------------
result of termination of such holder's employment by the Company, its
Subsidiaries or any Affiliate thereof for Cause, the Company (or its
designee) may, upon written notice delivered within 90 days of termination,
purchase all or any portion of the Shares, Warrants and Options then held
by the applicable Call Stockholder Group at a price equal to the lower of
the Cost (without any rate of return) or the then Fair Market Value of such
securities.
5.1.3. Termination by Holder through Resignation. If such
-----------------------------------------
termination is the result of holder's resignation, the Company (or its
designee) may, upon written notice delivered within 90 days of termination,
purchase all or any portion of the Shares, Warrants and Options then held
by the applicable Call Stockholder Group at a price equal to the then Fair
Market Value of such securities.
5.2. Termination of Executives. Upon the termination of either of the
-------------------------
Executives as contemplated in Section 5.1, the rights of the Company and the
Executives in respect of Shares, Warrants and Options held by Executives shall
each be governed by the applicable agreement among such parties dated as of the
Effective Time.
5.3. Put Right. Upon the death of any Management Stockholder or
---------
Physician Stockholder, the estate of such holder (or the heirs, legatees or
distributees of such holder to whom such Shares have been transferred upon
death) shall have the right to sell to the Company, and upon exercise of such
right the Company (or its designee) shall have the obligation to purchase, all
or any portion of the Management Shares or Physician Shares or Warrants issued
to such Management Stockholder or Physician Stockholder held by such estate (or
other specified Person) on the following terms (the "Put Option").
----------
5.3.1. Notice. Notice of an intention to sell securities pursuant
------
to this Section 5.2 must be delivered to the Company within six (6) months
of the death of the holder of such Shares.
5.3.2. Price. Shares will be purchased pursuant to this Section 5.3
-----
at a price per Share equal to the then Fair Market Value of such
securities.
5.3.3. Senior Lenders. The Company shall have no obligation to
--------------
purchase any Shares pursuant to this Section 5.3 if such purchase is
prohibited by or would give rise to any default or event of default under
any Material Loan Agreement; provided, however, that in such circumstances
-----------------
the obligation to purchase Shares pursuant to this Section 4.2 shall be
extended until such time as such circumstances no longer exist.
5.4. Closing; Assignability of Company Purchase Rights; Related Matters.
------------------------------------------------------------------
The closing of any purchase pursuant to the exercise of any Call Options or Put
Options pursuant to this
-11-
<PAGE>
Section 5 shall take place as soon as reasonably practicable at the principal
office of the Company, or at such other time and location as the parties to such
purchase may mutually determine. In the event the price of any securities to be
purchased pursuant to this Section 5 is specified to be Fair Market Value, such
Fair Market Value shall be determined as of the date of the applicable
Termination Event. At the closing of any purchase and sale pursuant to this
Section 5, the holder of securities to be sold shall deliver to the Company a
certificate or certificates representing the Shares, Warrants and Options to be
purchased by the Company duly endorsed, or with stock powers or other
appropriate instruments duly endorsed, for transfer with signature guaranteed,
free and clear of any lien or encumbrance, with any necessary stock transfer tax
stamps affixed, and the Company shall pay to such holder by Company check or
wire transfer of immediately available or next day funds or a note the purchase
price of the securities being purchased by the Company. The payment of the
purchase price under this Section 5 may be paid in the form of a three year note
issued by the Company, bearing interest at the Prime Rate, all such interest and
principal to be payable at maturity and subordinated on such terms as may be
required by any agreement (a "Material Loan Agreement") to which the Company or
-----------------------
any of subsidiaries may be or hereafter become a party relating to indebtedness
for borrowed money in a principal amount outstanding (including, without
limitation, unused availability under a line of credit) in excess of $5,000,000,
which note shall be prepayable without premium or penalty. The delivery of a
certificate or certificates for Shares, Warrants or Options by any Person
selling securities pursuant to this Section 5 shall be deemed a representation
and warranty by such Person that: (i) such Person has full right, title and
interest in and to such securities; (ii) such Person has all necessary power and
authority and has taken all necessary action to sell such securities as
contemplated; and (iii) such securities are free and clear of any and all liens
or encumbrances. The Company shall have the right, but no obligation, to assign
to any holder of Bain Investor Shares all or any portion of its right to
purchase any securities pursuant to this Section 5.
5.5. Determination of Fair Market Value. (a) For purposes of this
----------------------------------
Section 5, the term "Fair Market Value" shall mean, as of any date, the fair
value of any Share as of the applicable date on the basis of a sale of such
Share in an arms length private sale between a willing buyer and a willing
seller, neither acting under compulsion (or, in the case of a Warrant or Option,
the fair value of the Shares that may then be purchased by the holder of such
Warrant or Option upon exercise thereof, determined as described in this Section
5.5, minus the exercise price applicable thereto), as determined by the Board;
(b) at any time when more than 15% of the Shares then outstanding has been
offered and sold pursuant to one or more Public Offerings, the Fair Market Value
of any Share shall be equal to the average of the sum of the closing prices of
the Shares for the 30 trading days immediately prior to the date on which Share
becomes subject to repurchase under this Section 5. In determining Fair Market
Value, the Board shall (a) consider, in addition to other factors that it
determines in good faith to be relevant, the purchase price of the Shares in
recent (i) arms-length sales of Shares by the Company, (ii) transfers of Shares
by a Stockholder in an arms-length transaction and (b) not give effect to any
discount which may otherwise be attributable to the fact that such Shares which
are the subject of such valuation constitute less than a majority of the Shares
outstanding.
5.6. Period. The foregoing provisions of this Section 5 shall expire on
------
the date of a Qualified Public Offering.
-12-
<PAGE>
5.7. Construction. The foregoing provisions of this Section 5 are not
------------
intended, and shall not be construed, to eliminate, waive or otherwise affect
the restrictions on transfer, vesting requirements or termination provisions
which may apply to any Share or Option by its terms or under provisions of the
Company's 1995 Restricted Stock Plan, Equity Incentive Plan or other equity or
option plan pursuant to which such Share or Option was granted or other
governing documentation.
6. "TAKE ALONG" RIGHTS. Each holder of Shares, Warrants or Options hereby
agrees, if requested by the Bain Investor Majority Holders (which request shall
be made to all holders of shares), to Transfer for value (for purposes of this
Section 6, a "Sale") a specified percentage (for purposes of this Section 6, the
----
"Sale Percentage") of the securities then owned by such holder to a third party
---------------
which is not a Bain Investor or an Affiliate of any Bain Investor Majority
Holder (for purposes of this Section 6, the "Proposed Buyer") in the manner and
--------------
on the terms set forth in this Section 6 in connection with the Sale by such
Bain Investor (collectively, the "Proposed Bain Investor Seller") of the Sale
-----------------------------
Percentage of the total number of Bain Investor Shares held by all holders of
Bain Investor Shares on a fully diluted basis to the Proposed Buyer.
6.1. Procedure. If the Bain Investor Majority Holders elect to exercise
---------
their rights under this Section 6, a notice (the "Come Along Notice") shall be
-----------------
furnished by the Proposed Bain Investor Seller to each holder of Shares,
Warrants and Options. The Come Along Notice shall set forth the principal terms
of the proposed Sale insofar as it relates to the Shares, including the Sale
Percentage and the purchase price. No fee or additional consideration shall be
paid to a Bain Investor in connection with such Sale which is not contemplated
or permitted by the Management Agreement (as defined in Section 13) and relates
to services rendered by such Bain Investor or its Affiliates in connection
therewith. If the Bain Investor Majority Holders consummate the Sale referred
to in the Come Along Notice, each other holder of Shares, Warrants or Options
(each a "Participating Seller") shall be bound and obligated to Sell the Sale
--------------------
Percentage of the Shares, Warrants and Options in the Sale on the same terms and
conditions with respect to each Share sold, as the Bain Investor shall Sell each
Bain Investor Share in the Sale, and, in the case of Warrants or Options, have
the opportunity to either (i) exercise such Warrants or Options (if then
exercisable) and participate in such sale as holders of Shares issuable upon
such exercise or (ii) upon the consummation of the Sale, receive in exchange for
such Warrants or Options (to the extent exercisable at the time of such Sale)
consideration equal to the amount determined by multiplying (1) the same amount
of consideration per Share received by the holders of the Shares of the same
class of common stock for which the Warrants or Option is exercisable in
connection with the Sale less the exercise price per share of such Warrants or
Option by (2) the number of Shares of such class represented by such rights. If
at the end of the one hundred eightieth (180th) day following the date of the
effectiveness of the Come Along Notice the Proposed Bain Investor Seller has not
completed the Sale, each Participating Seller shall be released from his
obligation under the Come Along Notice, the Come Along Notice shall be null and
void, and it shall be necessary for a separate Come Along Notice to have been
furnished and the terms and provisions of this Section 6 separately complied
with, in order to consummate such Sale pursuant to this Section 6, unless the
failure to complete such Sale resulted from any failure by any Participating
Seller to comply in any material respect with the terms of this Section 6.
-13-
<PAGE>
6.2. Certain Legal Requirements. In the event the consideration to be
--------------------------
paid in exchange for Shares in the proposed Sale pursuant to Section 6.1
includes any securities and the receipt thereof by any Stockholder as a
Participating Seller would require under applicable law (i) the registration or
qualification of such securities or of any person as a broker or dealer or agent
with respect to such securities or (ii) the provision to any participant in the
Sale of any information other than such information as would be required under
Regulation D of the Securities and Exchange Commission or similar rule then in
effect in an offering made pursuant to said Regulation D solely to "accredited
investors" as defined in said Regulation D, the Proposed Bain Investor Seller
may, but shall not be obligated to, cause to be paid to such Participating
Seller in lieu of such Securities, against surrender of the Shares, Warrants and
Options (in accordance with Section 6.4 hereof) which would have otherwise been
Sold by such Participating Seller to the Proposed Buyer in the Sale, an amount
in cash equal to the fair market value of the securities which such
Participating Seller would otherwise receive, as determined in good faith by the
Board. Any attempt by the Proposed Bain Investor Seller to permit a
Participating Seller to receive such securities may be conditioned on such
Participating Seller executing such documents and instruments, and taking such
other actions (including without limitation, if required by the Proposed Bain
Investor Seller, agreeing to be represented during the course of such
transaction by a "purchaser representative" (as defined in Regulation D) in
connection with evaluating the merits and risks of the prospective investment
and acknowledging that he was so represented), as the Proposed Bain Investor
Seller shall reasonably request in order to permit such legal requirements to
have been complied with.
6.3. Further Assurances. Each Participating Seller and each Stockholder
------------------
to whom the Shares held by such Participating Seller (or Warrants or Options to
purchase such Shares) were originally issued, shall, whether in his capacity as
a Participating Seller, stockholder, officer or director of the Company, or
otherwise, take or cause to be taken all such actions as may be reasonably
requested in order expeditiously to consummate each Sale pursuant to Section
6.1. Each such Participating Seller or Stockholder agrees (i) to vote all Shares
with respect to which he holds power to vote in favor of any proposal to
stockholders in connection with the Sale which is approved by the holders of a
majority of the outstanding Shares entitled to vote with respect to such matter
and (ii) to execute and deliver such agreements as may be necessary for the
Participating Seller to be subject to the same terms and conditions with respect
to the Sale as apply to the Proposed Bain Investor Seller, including without
limitation, an agreement by such Participating Seller to be subject to such
purchase price escrow or adjustment provisions as may apply to Stockholders
generally and to be liable in respect of any individual representations,
warranties, agreements and indemnities to be given by selling Stockholders in
the Sale.
6.4. Closing. The closing of a Sale pursuant to Section 6.1 shall take
-------
place at such time and place as the Bain Investor Majority Holders shall specify
by notice to each Participating Seller. At the closing of any Sale under this
Section 6, each Participating Seller shall deliver the certificates evidencing
the Shares, Warrants or Options to be sold by such Participating Seller, duly
endorsed, or with stock powers or other appropriate instruments duly endorsed,
for transfer with signature guaranteed, free and clear of any liens or
encumbrances, with any stock transfer tax stamps affixed, against delivery of
the applicable consideration.
6.5. Period. The foregoing provisions of this Section 6 shall expire on
------
the date of a Qualified Public Offering.
-14-
<PAGE>
7. CO-SALE RIGHTS.
7.1. Tag Along. No holder or holders of Shares (for purposes of this
---------
Section 7, collectively, the "Proposed Seller") shall Transfer (for purposes of
---------------
this Section 7, a "Sale") any Shares to any other Person (the "Proposed Buyer")
---- --------------
except in the manner and on the terms set forth in this Section 7 and attempted
Transfers in violation of this Section 7 shall be null and void.
7.1.1. Offer. A written notice (the "Tag Along Notice") shall be
----- ----------------
furnished by the Proposed Seller to each holder of Shares or Warrants or
Options (collectively, the "Tag Along Offerees") at least 30 days prior
------------------
to a Transfer. The Tag Along Notice shall include:
(a) The principal terms of the proposed Sale insofar as
it relates to the Shares, including the percentage of the total
number of Shares held by all Proposed Seller holders of Shares which
are proposed to be sold (for purposes of this Section 7, the "Sale
----
Percentage") and the purchase price; and
----------
(b) An offer by the Proposed Seller to include, at the
option of each Tag Along Offeree, in the Sale to the Proposed Buyer
such number of Shares and Underlying Shares (not in any event to
exceed the Sale Percentage of the total number of Shares and
Underlying Shares held by such Tag Along Offeree) owned by each Tag
Along Offeree determined in accordance with Section 7.1.2 hereof, on
the same terms and conditions, with respect to each Share Sold, as
the Proposed Seller shall Sell each of his, her or its Shares. No
fee or additional consideration shall be paid to a Bain Investor in
connection with such Sale which is not contemplated or permitted by
the Management Agreement and relates to services rendered by such
Bain Investor or its Affiliates in connection therewith.
7.1.2. Exercise. Each Tag Along Offeree desiring to accept the
--------
offer contained in the Tag Along Notice shall send a written commitment
to the Proposed Seller specifying the number of Shares and Underlying
Shares (not in any event to exceed the Sale Percentage of the total
number of Shares and Underlying Shares held by such Tag Along Offeree)
which such Tag Along Offeree desires to have included in the Sale within
30 days after the effectiveness of the Tag Along Notice (each a
"Participating Seller"). Each Tag Along Offeree who has not so accepted
--------------------
such offer shall be deemed to have waived all of his or her rights with
respect to the Sale, and the Proposed Seller and the Participating
Sellers shall thereafter be free to Sell to the Proposed Buyer, at a
price no greater than 105% of the price set forth in the Tag Along Notice
and otherwise on terms not more favorable in any material respect to them
than those set forth in the Tag Along Notice, without any further
obligation to such non-accepting Tag Along Offerees. If, prior to
consummation, the terms of such proposed Sale shall change with the
result that the price shall be greater than 105% of the price set forth
in the Tag Along Notice or the other terms shall be more favorable in any
material respect than as set forth in the Tag Along Notice, it shall be
necessary for a separate Tag Along Notice to have been furnished, and the
terms and provisions of this Section 7 separately complied with, in order
to consummate such proposed Sale pursuant to this Section 7.
-15-
<PAGE>
The acceptance of each Participating Seller shall be irrevocable
except as hereinafter provided, and each such Participating Seller shall
be bound and obligated to Sell in the Sale, on the same terms and
conditions specified in the Tag Along Notice with respect to each of the
Shares to be sold (including Underlying Shares), and on the same terms
and conditions as apply to each of the Shares sold by the Proposed
Seller, such number of Shares (including any Underlying Shares) as such
Participating Seller shall have specified in such Participating Seller's
written commitment. In the event the Proposed Seller shall be unable
(otherwise than by reason of the circumstances described in Section 7.2)
to obtain the inclusion in the Sale of all Shares (including Underlying
Shares) which the Proposed Seller and each Participating Seller desires
to have included in the Sale (as evidenced in the case of the Proposed
Seller by the Tag Along Notice and in the case of each Participating
Seller by such Participating Seller's written commitment), the number of
Shares (including Underlying Shares) to be sold in the Sale by the
Proposed Seller and each Participating Seller shall be reduced on a pro
rata basis according to the proportion which the number of Shares
(including Underlying Shares) which each such Seller desires to have
included in the Sale bears to the total number of Shares desired
(including Underlying Shares) by all such Sellers to have included in the
Sale.
If at the end of the ninetieth (90th) day following the date of the
effectiveness of the Tag Along Notice the Proposed Seller has not
completed the Sale as provided in the foregoing provisions of this
Section 7.1, each Participating Seller shall be released from his
obligations under his written commitment, the Tag Along Notice shall be
null and void, and it shall be necessary for a separate Tag Along Notice
to have been furnished, and the terms and provisions of this Section 7
separately complied with, in order to consummate such Sale pursuant to
this Section 7, unless the failure to complete such Sale resulted from
any failure by any Tag Along Offeree to comply in any material respect
with the terms of this Section 7.
7.2. Excluded Transactions. Notwithstanding the preceding provisions of
---------------------
this Section 7 and subject to the provisions of Section 7 and Section 8 below,
the preceding provisions of this Section 7 shall not restrict any Transfer
pursuant to the provisions of Section 6 or 7 of this Agreement, and no holder of
Shares shall have pursuant to the provisions of this Section 7 any right of
participation or otherwise with respect to any Transfer of Shares:
(a) to a Bain Investor;
(b) to an Affiliated Fund which exists as of the date of
this Agreement or with respect to which the investment in such Bain
Investor Shares does not represent more than 10% of assets under
management provided;
(c) by a Bain Investor or an Affiliated Fund: (i) to any
director, officer or employee of the Company or its principal
subsidiary; or (ii) to any trust established for the benefit of its
partners or pro rata to its partners;
(d) in a Public Offering or other Public Event or to the
public under Rule 144;
-16-
<PAGE>
(e) to a Transfer permitted by Section 4; or
(f) to a Transfer by a holder of Shares in an amount less
than 1% of the aggregate capital stock outstanding at such time;
provided (except with respect to Section 7.2(d)) that such transferee shall have
- --------
executed and delivered to the Company an agreement to be bound by this Agreement
to the same extent as the transferor and provided that no such transfer shall
result in the Company being required to register the transfer of such Shares or
other securities under the Securities Act or Exchange Act or any similar state
law.
7.3. Termination. The foregoing provisions of this Section 7 shall
-----------
terminate immediately following the closing of a Qualified Public Offering.
8. CERTAIN ISSUANCES AND TRANSFERS, ETC. Each holder of Shares agrees that
it will not transfer any Shares to any Person unless the transferee has
delivered to the Company a written acknowledgment and agreement that the Shares
to be received by such transferee are subject to all of the provisions of this
Agreement (as Bain Investor Shares in the case of a transfer from a holder of
Bain Investor Shares, as Management Shares in the case of a transfer from a
holder of Management Shares, and as Physician Shares in the case of a transfer
from a holder of Physician Shares) and that such transferee is bound by and a
party to this Agreement to the same extent as if it were an original signatory
hereto as a Stockholder hereunder; provided, however, notwithstanding any other
-----------------
provision of this Agreement, (i) Shares transferred pursuant to and in
accordance with Section 6 or 7 to any Proposed Buyer (as defined in such
Sections) hereof or in a Public Offering or to the public under Rule 144 shall
be conclusively deemed thereafter not to be Shares under this Agreement and not
to be subject to any of the provisions hereof or entitled to the benefit of any
of the provisions hereof, and (ii) any Shares acquired by a holder of Bain
Investor Shares shall upon such acquisition be deemed for all purposes hereof to
be Bain Investor Shares, of like kind with the other Shares held by such holder.
Without limiting the generality of the foregoing, in the event that a Bain
Investor transfers Shares, in accordance with the provisions of this Section 8,
to any Affiliated Fund, such Affiliated Fund shall be deemed for all purposes
hereunder to be a Bain Investor with all of the rights and obligations of an
Initial Bain Investor hereunder.
9. REGISTRATION RIGHTS. The Company will perform and comply, and cause each
of its subsidiaries to perform and comply, with such of following provisions as
are applicable to it. Each holder of Shares will perform and comply with such of
the following provisions as are applicable to such holder.
9.1. Piggyback Registration Rights.
-----------------------------
9.1.1. Election. Whenever the Company proposes to register any
--------
shares of its Common Stock for its own or others' account under the
Securities Act for a public offering (each a "Public Offering"), the
---------------
Company shall furnish each holder of Shares prompt written notice of its
intent to do so. Upon the request of any such holder given by notice to
the Company within twenty (20) days after the effectiveness of such
notice from the Company, the Company will use its best efforts to cause
to be included in such
-17-
<PAGE>
registration all of the Shares which such holder requests. Notwithstanding the
foregoing provisions of this Section 9.1.1, if the Company is advised in writing
in good faith by any managing underwriter of the securities being offered
pursuant to any Public Offering under this Section 9.1 (including, without
limitation, Sections 9.2.1 and 9.2.2) that the number of shares to be sold by
Persons other than the Company in such Public Offering is greater than the
number of such shares which can be included in such Public Offering without
adversely affecting such Public Offering, the Company may reduce pro rata (based
upon the number of Shares requested to be included by such Persons other than
the Company) the number of Shares offered for the accounts of such Persons other
than the Company to a number of Shares deemed satisfactory by such managing
underwriter; provided, however, that (i) the number of Shares offered for the
-----------------
account of the Bain Investors pursuant to Section 9.1.1 shall not be reduced to
an amount less than the percentage of the number of Shares offered equal to the
percentage of Shares outstanding owned by the Bain Investors and (ii) the number
of Shares offered for the account of the Bain Investors pursuant to Section
9.2.1 shall not be reduced unless and until all other Shares held by such
Persons other than the Bain Investors have been reduced.
9.1.2. Further Assurances. Holders of Shares participating in any
------------------
Public Offering shall take all such actions and execute all such documents and
instruments that are reasonably requested by the Company to effect the sale of
their Shares in such Public Offering, including without limitation being parties
to the underwriting agreement entered into by the Company and any other selling
stockholders in connection therewith (and being liable in respect of the
representations and warranties made by such holder in respect of its legal
capacity or due organization, authority to sell Shares being registered by such
holder and ownership (free and clear of liens) of such Shares), and any
indemnification agreements or "lock-up" agreements for the benefit of the
underwriters in such underwriting agreement; provided, however, that the
-----------------
aggregate amount of such liability shall not exceed the net proceeds to such
holder from the disposition of such Shares.
9.1.3. Expenses. The Company shall pay all expenses of the holders of
--------
Shares participating in any Public Offering pursuant to this Section 9.1, other
than underwriting discounts and commissions, if any, applicable transfer taxes,
if any, and fees and charges of any attorneys or other advisors (other than
attorneys and advisors retained by the Company to advise it in connection with
such Public Offering) retained by any such holders.
9.1.4. Excluded Transactions. Notwithstanding the preceding
---------------------
provisions of this Section 9.1, no holder of Shares shall have any right of
participation or otherwise with respect to the following Public Offerings:
(a) Any Public Offering relating to employee benefit plans on
Form S-8 or any similar form then in effect.
(b) Any Public Offering relating to the acquisition after the
date hereof by the Company or any of its subsidiaries of any acquired
businesses.
-18-
<PAGE>
9.2. Demand Registration Rights.
--------------------------
9.2.1. Registration on Request of Holders of Bain Investor
---------------------------------------------------
Shares. One or more holders of Bain Investor Shares that wish to register
------
securities representing at least twenty-five percent (25%) of the sum of
the total number of Bain Investor Shares then outstanding requested to be
registered pursuant to this Section 9.2.1 ("Initiating Holders") may, by
------------------
notice to the Company specifying the intended method or methods of
disposition, request that the Company effect the registration under the
Securities Act of all or a specified part of the Registrable Securities
held by such Initiating Holders. For purposes of this Agreement, the term
"Registrable Securities" shall mean, at any time, Shares that have not
----------------------
previously been sold in a Public Offering or in a "brokers transaction"
within the meaning of Rule 144 and "Registrable Bain Investor Securities"
------------------------------------
shall mean Registrable Securities constituting Bain Investor Shares. The
Company will then use its best efforts to effect the registration under
the Securities Act of the Registrable Securities which the Company has
been requested to register by such Initiating Holders.
9.2.2. Form. Each registration requested pursuant to this
----
Section 9.2 shall be effected by the filing of a registration statement
on Form S-1 (or any other form which includes substantially the same
information as would be required to be included in a registration
statement on such form as currently constituted), unless the use of a
different form has been agreed to in writing by holders of at least a
majority of the Registrable Securities initially requesting such
registration (the "Majority Requesting Holders").
---------------------------
9.2.3. Registrations Pursuant to Section 9.2. In the case of a
-------------------------------------
registration pursuant to Section 9.2 hereof, whenever the Majority
Requesting Holders shall request that such registration shall be effected
pursuant to an underwritten offering, such registration shall be so
effected, and all Registrable Bain Investor Securities to be included in
such registration shall be included in such underwritten offering. If
requested by such underwriters, the Company will enter into an
underwriting agreement with such underwriters for such offering
containing such representations and warranties by the Company and such
other terms and provisions as are customarily contained in underwriting
agreements with respect to secondary distributions, including, without
limitation, customary indemnity and contribution provisions.
9.2.4. Number. The Company is obligated to effect only three
------
such registrations pursuant to this Section 9.2.
9.3. Obligations of the Company. Whenever required under this Section 9
--------------------------
to use its best efforts to effect the registration of any Registrable
Securities, the Company shall, as expeditiously as reasonably possible: Prepare
and file with the SEC a registration statement with respect to such Registrable
Securities and use its best efforts to cause such registration statement to
become effective, and, upon the request of the holders of a majority of the
Registrable Securities registered thereunder, keep such registration statement
effective until the Holders have informed the Company in writing that the
distribution of their securities has been completed provided that the Company
shall not be required to keep any registration statement which is not
-19-
<PAGE>
a shelf registration or similar registration (including any successor thereto
such as a Company registration) effective for a period of more than 30 days; and
shall:
(a) Prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection with
such registration statement, and use its best efforts to cause each such
amendment to become effective, as may be necessary to comply with the
provisions of the 1933 Act with respect to the disposition of all
securities covered by such registration statement.
(b) Furnish to the Holders such reasonable number of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the 1933 Act, and such other documents as they may
reasonably request in order to facilitate the public offering of
Registrable Securities owned by them.
(c) Use its best efforts to register or qualify the securities
covered by such registration statement under such securities or Blue Sky
laws of such jurisdictions as shall be reasonably requested by the
Holders provided that the Company shall not be required to register in
any jurisdictions which require it, in connection therewith or as a
condition thereto, to qualify to do business or to file a general consent
to service of process or to subject itself to taxation in any such states
or jurisdiction.
(d) In the event of any underwritten public offering, enter into and
perform its obligations under an Underwriting Agreement, in which the
Company addresses its representations and warranties to the underwriters
and the Holders participating in such offering, with the managing
underwriter of such offering. Each Holder participating in such
underwriting shall also enter into and perform its obligations under such
Underwriting Agreement, including furnishing any opinion of counsel or
entering into a lock-up and indemnification agreement reasonably
requested by the managing underwriter.
(e) Notify each Holder of Registrable Securities covered by such
registration statement, at any time when a prospectus relating thereto
covered by such registration statement is required to be delivered under
the 1933 Act, of the happening of any event as a result of which the
prospectus included in such registration statement, as then in effect,
includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing and promptly file such amendments and supplements which may be
required pursuant to subparagraph (b) of this Section 9.3 on account of
such event and use its best efforts to cause each such amendment and
supplement to become effective.
(f) Furnish, at the request of any Holder requesting registration of
Registrable Securities pursuant to this Section 9, on the date that such
Registrable
-20-
<PAGE>
Securities are delivered to the underwriters for sale in connection with
a registration pursuant to this Section 9, if such securities are being
sold through underwriters, or, if such securities are not being sold
through underwriters on the date that the registration statement with
respect to such securities becomes effective, (i) an opinion or opinions,
dated such date, of the counsel representing the Company for the purposes
of such registration, in form and substance as is customarily given by
company counsel to the underwriters in an underwritten public offering,
addressed to the underwriters, if any, and to the Holders requesting
registration of Registrable Securities and (ii) a letter dated such date,
from the independent certified public accountant of the Company, in form
and substance as is customarily given by independent certified public
accountants to underwriters in an underwritten public offering, addressed
to the underwriters, if any, and to the Holders requesting registration
of Registrable Securities.
(g) Apply for listing and use its best efforts to list the
Registrable Securities being registered on any national securities
exchange on which a class of the Company's equity securities is listed
or, if the Company does not have a class of equity securities listed on a
national securities exchange, apply for qualification and use its best
efforts to qualify the Registrable Securities being registered for
inclusion on the NASDAQ National Market System.
(h) Without in any way limiting the types of registrations to which
this Section 9 shall apply, in the event that the Company shall effect a
"shelf registration" under Rule 415 promulgated under the 1933 Act, the
Company shall take all necessary action, including, without limitation,
the filing of post-effective amendments, to permit the Holders, who have
exercised their rights under Section 9. 1, to maintain the inclusion of
their Registrable Securities in such registration in accordance with the
terms of this Section 9.
9.4. Indemnification and Contribution.
--------------------------------
9.4.1. Indemnities of the Company. In the event of any registration
--------------------------
of any Registrable Securities under the Securities Act pursuant to this Section
9, and in connection with any registration statement or any other disclosure
document produced by or on behalf of the Company pursuant to which securities of
the Company are sold (whether or not for the account of the Company), the
Company will, and hereby does, indemnify and hold harmless each seller of
Registrable Securities, any other holder of securities who is or might be deemed
to be a controlling Person of the Company within the meaning of Section 15 of
the Securities Act, their respective direct and indirect partners, advisory
board members, directors, officers and stockholders, and each other Person, if
any, who controls any such seller or any such holder within the meaning of
Section 15 of the Securities Act (each such person being referred to herein as a
"Covered Person"), against any losses, claims, damages or liabilities, joint or
--------------
several, and reasonable expenses (including, without limitation, reasonable
legal and other fees and expenses incurred by any Covered Person in defending or
investigating any action or claim in respect thereof) to which such Covered
Person may be or become subject under the Securities Act, any other securities
or other law of any jurisdiction, common law or
-21-
<PAGE>
otherwise, insofar as such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) arise out of or are based upon (i) any untrue
statement or alleged untrue statement of any material fact contained or
incorporated by reference in any registration statement under the Securities
Act, any preliminary prospectus or final prospectus included therein, or any
related summary prospectus, or any amendment or supplement thereto, or any
document incorporated by reference therein, or any other such disclosure
document, or (ii) any omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, and will reimburse such Covered Person for any legal or any
other expenses incurred by it in connection with investigating or defending any
such loss, claim, damage, liability, action or proceeding; provided, however,
-----------------
that the Company shall not be liable to any Covered Person in any such case to
the extent that any such loss, claim, damage, liability, action or proceeding
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in such registration statement, any such
preliminary prospectus, final prospectus, summary prospectus, amendment or
supplement, incorporated document or other such disclosure document in reliance
upon and in conformity with written information furnished to the Company through
an instrument duly executed by such Covered Person specifically stating that it
is for use in the preparation thereof. The indemnities of the Company and of its
subsidiaries contained in this Section 9.4.1 shall remain in full force and
effect regardless of any investigation made by or on behalf of such Covered
Person and shall survive any transfer of securities.
9.4.2. Indemnities to the Company. The Company may require, as a
--------------------------
condition to including any securities in any registration statement filed
pursuant to this Section 9, that the Company shall have received an undertaking
satisfactory to it from each prospective seller of such securities, to indemnify
and hold harmless the Company, each director of the Company, each officer of the
Company who shall sign such registration statement and each other Person (other
than such seller), if any, who controls the Company within the meaning of
Section 15 of the Securities Act, with respect to any statement in or omission
from such registration statement, any preliminary prospectus or final prospectus
included therein, or any amendment or supplement thereto, or any document
incorporated therein, if such statement or omission was made in reliance upon
and in conformity with written information furnished to the Company through an
instrument executed by such seller specifically stating that it is for use in
the preparation of such registration statement, preliminary prospectus, final
prospectus, summary prospectus, amendment or supplement, or incorporated
document. Such indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of the Company or any such director, officer
or controlling Person and shall survive any transfer of securities.
9.4.3. Third Party Claims. Each party entitled to indemnification
------------------
under this Agreement (the "Indemnified Party") shall give notice to the party
required to provide indemnification (the "Indemnifying Party") promptly after
such Indemnified Party has actual knowledge of any claim as to which indemnity
may be sought, and shall permit the Indemnifying Party to assume the defense of
any such claim or any litigation resulting therefrom; provided, that counsel for
--------
the Indemnifying Party, who shall conduct
-22-
<PAGE>
the defense of such claim or litigation, shall be approved by the Indemnified
Party (whose approval shall not be unreasonably withheld); and, provided,
--------
further, that the failure of any Indemnified Party to give notice as provided
- -------
herein shall not relieve the Indemnifying Party of its obligations under this
Section 9. The Indemnified Party may participate in such defense at such party's
expense; provided, however, that the Indemnifying Party shall pay such expense
-----------------
if representation of such Indemnified Party by the counsel retained by the
Indemnifying Party would be inappropriate due to actual or potential differing
interests between the Indemnified Party and any other party represented by such
counsel in such proceeding. In Indemnifying Party, in the defense of any such
claim or litigation shall, except with the consent of each Indemnified Party,
consent to entry of any judgment or enter into any settlement which does not
include as an unconditional term thereof the giving by the claimant or plaintiff
to such Indemnified Party of a release from all liability in respect of such
claim or litigation, and no Indemnified Party shall consent to entry of any
judgment or settle such claim or litigation without the prior written consent of
the Indemnifying Party.
9.4.4. Contribution. If the indemnity provided for in Sections 9.4.1
------------
or 9.4.2 is available, each Indemnified Party will be indemnified thereunder to
the full extent provided in such section without regard to the relative fault of
the Indemnifying Party or the Indemnified Party or the other equitable
considerations referenced in this Section 9.4.4. If the indemnification provided
for in Sections 9.4.1 or 9.4.2 hereof is unavailable to a party that would have
been an Indemnified Party under any such Section in respect of any losses,
claims, damages or liabilities (or actions or proceedings in respect thereof)
referred to therein, then each party that would have been an Indemnifying Party
thereunder shall, in lieu of indemnifying such Indemnified Party, contribute to
the amount paid or payable by such Indemnified Party as a result of such losses,
claims, damages or liabilities (or actions or proceedings in respect thereof) in
such proportion as is appropriate to reflect the relative fault of such
Indemnifying Party on the one hand and such Indemnified Party on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities (or actions or proceedings in respect thereof).
The relative fault shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by such Indemnifying Party or such Indemnified Party and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The parties agree that it would not be just
or equitable if contribution pursuant to this Section 9.4.4 were determined by
pro rata allocation or by any other method of allocation which does not take
account of the equitable considerations referred to in the preceding sentence.
The amount paid or payable by a contributing party as a result of the losses,
claims, damages or liabilities (or actions or proceedings in respect thereof)
referred to above in this Section 9.4.4 shall include any legal or other
expenses reasonably incurred by such Indemnified Party in connection with
investigating or defending any such action or claim. No Person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any Person who was not
guilty of such fraudulent misrepresentation.
-23-
<PAGE>
9.4.5. Limitation on Liability of Holders of Registrable Securities.
------------------------------------------------------------
The liability of each holder of Registrable Securities in respect of any
indemnification or contribution obligation of such holder arising under
this Section 9.4 shall not in any event exceed an amount equal to the net
proceeds to such holder (after deduction of all underwriters' discounts
and commissions and all other expenses paid by such holder in connection
with the registration in question) from the disposition of the
Registrable Securities disposed of by such holder pursuant to such
registration.
9.5. Selection of Underwriter. Any and all underwriters to be engaged in
------------------------
connection with any public offering of Shares pursuant to a registration
effected pursuant to Section 9.2 shall be selected by the Bain Investors and
shall be reasonably acceptable to the Company.
9.6. Lock-up. Each holder of Shares (including Underlying Shares) agrees
-------
that upon the request of the underwriters managing any underwritten Public
Offering, it shall not Transfer any Shares (including Underlying Shares) for a
period beginning not more than seven days immediately preceding and ending not
more than 180 days following any Public Offering without the prior written
consent of the underwriters, if any, managing the offering.
9.7. Limitations on Other Registration Rights. From and after the date of
----------------------------------------
this Agreement, the Company shall not, without the prior written consent of the
holders of a majority of the Bain Investor Shares then outstanding, enter into
any agreement with any holder or prospective holder of any securities of the
Company relating to registration rights unless such agreement includes to the
extent the agreement would allow such holder or prospective holder to include
such securities in any registration filed under Section 9.1 or 9.2 hereof, a
provision that such holder or prospective holder may include such securities in
any such registration only to the extent that the inclusion of its securities
will not reduce the amount of the Registrable Securities, and the amount of the
Registrable Bain Investor Securities of the Holders and the Bain Investors which
would otherwise be included and does otherwise not diminish the rights provided
in this Section 9 above.
In the event of any conflict between this Section 9 and any
agreement to which the Company or its subsidiaries is a party or by which
any of them are bound, the provisions of this Section 9 shall govern.
9.8. Availability of Information. If the Company shall have filed a
---------------------------
registration statement pursuant to the requirements of Section 12 of the
Exchange Act or a registration statement pursuant to the requirements of the
Securities Act, the Company shall comply with the reporting requirements of
Sections 13 and 15(d) of the Exchange Act and shall comply with all other public
information reporting requirements of the Commission (including Rule 144
promulgated by the Commission under the Securities Act) from time to time in
effect and relating to the availability of an exemption from the Securities Act
for the sale of any Shares. The Company shall also cooperate with each holder of
any Shares in supplying such information as may be necessary for such holder to
complete and file any information reporting forms presently or hereafter
required by the Commission as a condition to the availability of an exemption
from the Securities Act for the sale of any Shares.
-24-
<PAGE>
10. REMEDIES.
10.1. Generally. The Company, the holders of Bain Investor Shares, the
---------
holders of the Management Shares, the holders of Physician Shares and all other
Stockholders shall have all remedies available at law, in equity or otherwise in
the event of any breach or violation of this Agreement or any default hereunder
by the Company or any holder of Shares, Warrants or Options. The parties
acknowledge and agree that in the event of any breach of this Agreement, in
addition to any other remedies which may be available, each of the parties
hereto shall be entitled to specific performance of the obligations of the other
parties hereto and, in addition, to such other equitable remedies (including,
without limitation, preliminary or temporary relief) as may be appropriate in
the circumstances.
10.2. Deposit. Without limiting the generality of Section 10.1, if any
-------
Stockholder (a "Non-Complying Stockholder") fails to deliver any certificate or
-------------------------
certificates evidencing Shares, Warrants or Options that may be required to be
sold pursuant to any provision of this Agreement in accordance with the terms
hereof, the Company or other Person entitled to purchase such securities may, at
its option, in addition to all other remedies it may have, deposit the purchase
price for such Shares with any national bank or trust company having combined
capital, surplus and undivided profits in excess of one hundred million dollars
($100,000,000) and which has agreed to act as escrow agent in the manner
contemplated by this Section 10.2 and shall furnish or make available to all
interested Persons satisfactory evidence of such deposit and thereupon the
Company shall cancel on its books the certificate or certificates representing
such securities and, in the case of any such purchase of securities by a Person
other than the Company issue, in lieu thereof and in the name of such Person, a
new certificate or certificates representing such securities, and thereupon all
of the Non-Complying Stockholder's rights in and to such securities shall
terminate. Thereafter, upon delivery to the Company by such Non-Complying
Stockholder of the certificate or certificates evidencing such securities (duly
endorsed, or with stock powers or other appropriate instruments of transfer duly
endorsed, for transfer, with signature guaranteed, free and clear of any liens
or encumbrances, and with any stock transfer tax stamps affixed), the Company
shall instruct the escrow agent referred to above to deliver the purchase price
(without any interest from the date of the closing to the date of such delivery,
any such interest to accrue to the Person who deposited the purchase price for
such securities) to such Non-Complying Stockholder.
11. LEGENDS. Each certificate representing Shares shall have the following
legend endorsed conspicuously thereupon:
"The securities represented by this certificate were issued in a
private placement, without registration under the Securities Act of 1933,
as amended (the "Act"), and may not be sold, assigned, pledged or
otherwise transferred in the absence of an effective registration under
the Act covering the transfer or an opinion of counsel, satisfactory to
the issuer, that registration under the Act is not required.
The shares of stock represented by this certificate are subject to
restrictions on transfer and requirements of sale set forth in the
Stockholders Agreement dated as of _________ 1996, as amended and in
effect from time to time. The Company will furnish a copy of such
agreement to the holder of this certificate without charge upon written
request."
-25-
<PAGE>
Each certificate representing Management Shares shall have the following
legend endorsed conspicuously thereupon:
"The shares of stock represented by this certificate were originally
issued to, or issued with respect to shares originally issued to, the
following Management Stockholders: _________________________."
Each certificate representing Physician Shares shall have the following
legend endorsed conspicuously thereupon:
"The shares of stock represented by this certificate were originally
issued to, or issued with respect to shares originally issued to the
following Physician Stockholder: _______."
Any person who acquires Shares which are not subject to all or part of
the terms of this Agreement shall have the right to have such legends (or the
applicable portion thereof) removed from certificates representing such Shares.
The Company shall have the right to waive any requirement of delivery of a legal
opinion with respect to exemption from registration requirements under the Act.
12. AMENDMENT, TERMINATION, ETC.
12.1. No Oral Modifications. This Agreement may not be orally amended,
---------------------
modified, extended or terminated, nor shall any oral waiver of any of its terms
be effective.
12.2. Written Modifications. This Agreement may be amended, modified,
---------------------
extended or terminated, and the provisions hereof may be waived, by an agreement
in writing signed by holders of a majority of all Shares then outstanding and
subject to this Agreement; and each such amendment, modification, extension,
termination and waiver shall be binding upon each party hereto and each holder
of Shares subject hereto; provided, however, that no such amendment,
-----------------
modification, extension, termination or waiver which amends, modifies, extends,
terminates or waives any of the provisions of Sections 5, 6, 7, 9 or 12 hereof
will be effective with respect to the Non-Bain Investor Stockholders unless and
until the consent of the Non-Bain Investor Majority Holders has been obtained.
In addition, each party hereto and each holder of Shares subject hereto may
waive any of its rights hereunder by an instrument in writing signed by such
party or holder.
12.3. Automatic Partial Termination. The provisions of Sections 3, 4, 5,
-----------------------------
6 and 7 of this Agreement shall terminate and be of no further force or effect
at the termination times specified in such sections; provided, however, that no
such termination shall relieve any Person of liability for any breach of such
sections prior to such termination.
13. CERTAIN FEES AND EXPENSES.
13.1. Certain Fees and Expenses. Pursuant to a Management Agreement
-------------------------
dated on or about the date hereof (the "Management Agreement") between the
Company and Bain Capital Partners V, L.P. ("BCP-V"), the Company shall pay to
BCP-V fees and expenses on the terms and subject to the conditions of such
Management Agreement.
-26-
<PAGE>
14. MISCELLANEOUS.
14.1. Authority; Effect. Each party hereto represents and warrants to
-----------------
and agrees with each other party that the execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby have been
duly authorized on behalf of such party and do not violate any agreement or
other instrument applicable to such party or by which its assets are bound. This
Agreement does not, and shall not be construed to, give rise to the reaction of
a partnership among any of the parties hereto, or to constitute any of such
parties members of a joint venture or other association.
14.2. Notices. Notices and other communications provided for in this
-------
Agreement shall be in writing and shall be effective (i) when one full day shall
have elapsed (exclusive of Saturdays, Sundays and banking holidays in the City
of Boston) from their deposit for overnight delivery with Federal Express or
other bonded courier (charges prepaid), addressed to the party or parties sought
to be charged with notice of the same at the respective addresses set forth or
referred to below, subject to written notice of change of address given by any
party to each other party, or (ii) if earlier, upon receipt.
If to the Company, to it at:
Physicians Quality Care, Inc.
950 Winter Street, Suite 2410
Waltham, MA 02154
Attention: President
with a copy to:
Bain Capital, Inc.
Two Copley Place, 7th Floor
Boston, Massachusetts 02116
Attention: Mr. Stephen G. Pagliuca
If to the Bain Investors, to them at:
c/o Bain Capital, Inc.
Two Copley Place, 7th Floor
Boston, Massachusetts 02116
Attention: Mr. Stephen G. Pagliuca
with a copy to:
Ropes & Gray
One International Place
Boston, Massachusetts 02110
Attention: Lauren I. Norton, Esq.
-27-
<PAGE>
If to a Stockholder other than a Bain Investor, to him or her at the
address set forth in the stock record book of the Company.
Notice to the holder of record of any shares of capital stock shall be
deemed to be notice to the holder of such shares for all purposes hereof.
14.3. Binding Effect, etc. This Agreement constitutes the entire
-------------------
agreement of the parties with respect to its subject matter, supersedes all
prior or contemporaneous oral or written agreements or discussions with respect
to such subject matter, and shall be binding upon and inure to the benefit of
the parties hereto and their respective heirs, representatives, successors and
assigns.
14.4. Descriptive Headings. The descriptive headings of this Agreement
--------------------
are for convenience of reference only, are not to be considered a part hereof
and shall not be construed to define or limit any of the terms or provisions
hereof.
14.5. Counterparts. This Agreement may be executed in multiple
------------
counterparts, each of which shall be deemed an original, but all of which taken
together shall constitute one instrument.
14.6. Severability. If in any judicial proceedings a court shall refuse
------------
to enforce any provision of this Agreement, then such unenforceable provision
shall be deemed eliminated from this Agreement for the purpose of such
proceedings to the extent necessary to permit the remaining provisions to be
enforced. To the full extent, however, that the provisions of any applicable law
may be waived, they are hereby waived to the end that this Agreement be deemed
to be valid and binding agreement enforceable in accordance with its terms, and
in the event that any provision hereof shall be found to be invalid or
unenforceable, such provision shall be construed by limiting it so as to be
valid and enforceable to the maximum extent consistent with and possible under
applicable law.
14.7. Governing Law. Except to the extent that any provision of this
-------------
Agreement is contrary to any mandatory provision of the General Corporation Law
of the State of Delaware (in which case such mandatory statutory provision shall
apply), this Agreement shall be governed by and construed in accordance with the
domestic substantive laws of The Commonwealth of Massachusetts without giving
effect to any choice or conflict of laws provision or rule that would cause the
application of the domestic substantive laws of any other jurisdiction.
-28-
<PAGE>
IN WITNESS WHEREOF, each of the undersigned has duly executed this
Agreement (or caused this Agreement to be executed on its behalf by its officer
or representative thereunto duly authorized) under seal as of the date first
above written.
THE COMPANY: PHYSICIANS QUALITY CARE, INC.
By /s/ Jerilyn Asher
--------------------------------------
Title
THE INITIAL BAIN INVESTORS: BAIN CAPITAL FUND V, L.P.
By Bain Capital Partners V, L.P.,
a Delaware limited partnership, its
general partner
By Bain Capital Investors V,
Inc., its general partner
By /s/ Stephen Pagliuca
-------------------------------
Title: Managing Director
BAIN CAPITAL FUND V-B, L.P.
By Bain Capital Partners V, L.P.,
a Delaware limited partnership, its
general partner
By Bain Capital Investors V,
Inc., its general partner
By /s/ Stephen Pagliuca
-------------------------------
Title: Managing Director
BCIP ASSOCIATES
By /s/ Stephen Pagliuca
--------------------------------------
Title: a general partner
BCIP TRUST ASSOCIATES, L.P.
By /s/ Stephen Pagliuca
--------------------------------------
Title: a general partner
-29-
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE PAGES FOR STOCKHOLDERS' AGREEMENT
<S> <C>
/s/ Jerilyn Asher /s/ Chesapeake Osteoporosis Center, Inc.
- ------------------------------------------ ---------------------------------------------------
Jerilyn P. Asher Chesapeake Osteoporosis Center, Inc.
/s/ Jay N. Greenberg /s/ Gerald W. Faust
- ------------------------------------------ --------------------------------------------------
Jay N. Greenberg Gerald W. Faust, Ph.D
/s/ Barbara T. Faust /s/ Gerald W. Faust
- ------------------------------------------ --------------------------------------------------
Barbara T. Faust, Rollover IRA Gerald W. Faust, Rollover IRA
/s/ Arlan Fuller, Jr. /s/ Shaukat Ashai
- ------------------------------------------- --------------------------------------------------
Arlan Fuller, Jr. Shaukat Ashai, IRA
/s/ Marshall Bedine /s/ Eugene Boling
- ------------------------------------------ --------------------------------------------------
Marshall Bedine Eugene Boling
/s/ David Borenstein /s/ Michael Bourque
- ------------------------------------------ --------------------------------------------------
David Borenstein Michael Bourque
/s/ Sami Brahim /s/ KCB Services & Co.
- ----------------------------------------- ---------------------------------------------------
Sami Brahim KCB Services & Co.
FBO Sami Brahim
/s/ Albert B. Briccetti /s/ Albert B. Briccetti
- ------------------------------------------ ---------------------------------------------------
Albert B. Bricett Beaver Medical Clinic 401(k)
and Profit Sharing Plan for Albert B. Bricett
/s/ Torrey C. Brown /s/ Dennis Ginsberg
- ------------------------------------------ ---------------------------------------------------
Torrey C. Brown Dennis Ginsberg
/s/ David Hungerford /s/ Andrew Klipper
- ----------------------------------------- ---------------------------------------------------
David Hungerford Andrew Klipper
/s/ Carl Lentz /s/ C. Douglas Lord
- ------------------------------------------ ---------------------------------------------------
Carl Lentz III C. Douglas Lord
</TABLE>
-30-
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
/s/ Michael Mont /s/ James Jordan
- ------------------------------------------ --------------------------------------------------
Michael Mont Retirement Accounts, Inc.
FBO James Jordan
/s/ Michael P. Coppola, Partner /s/ Thomas Zizic
- ------------------------------------------ --------------------------------------------------
SMA Enterprises Thomas Zizic
/s/ Thomas Zizic /s/ Thomas Zizic
- ------------------------------------------- --------------------------------------------------
H.C. Associates Murray Electronics Assoc.
/s/ Thomas Zizic, trustee /s/ Thomas Zizic
- ------------------------------------------ --------------------------------------------------
T.Z. Assoc. Pension Trust Thomas Zizic Keough Plan
/s/ Thomas Zizic, trustee /s/ Kristine Zizic
- ------------------------------------------ ---------------------------------------------------
T.Z. Assoc. Profit Sharing Trust Kristine Zizic
/s/ Lara Zizic /s/
- ------------------------------------------ ---------------------------------------------------
Lara Zizic Arthritis Center of Northeast Ohio,
Inc. Pension and Profit Sharing Plan
/s/ Vivia L. Chang /s/ Paul Chang
- ------------------------------------------ ---------------------------------------------------
Vivia L. Chang Paul Chang
/s/ Richard T. Chiroff, Trustee /s/
- ------------------------------------------ ---------------------------------------------------
Richard T. Chiroff Living Trust ESEN Associates XLVII
/s/ H&D Investments II
/s/ Susan V. Fried By Paul P. Brountas, Partner
- ------------------------------------------ ---------------------------------------------------
Susan V. Fried H&D Investments II
/s/ Frank J. Mazzei, Jr. /s/
- ------------------------------------------ ---------------------------------------------------
Frank J. Mazzei, Jr. Therapy Management Corp.
/s/
- ------------------------------------------
Offshore Health Industries, Inc.
</TABLE>
-31-
<PAGE>
By /s/ Sossi Aroyan
-----------------------------------------
Sossi Aroyan
By /s/ Torrey Brown, M.D.
-----------------------------------------
Dr. Torrey Brown
By
-----------------------------------------
Faust Management Corporation
By /s/ Robin Hunter
-----------------------------------------
Robin Hunter
By /s/ Maria C. Johnson
----------------------------------------
Maria Johnson
By /s/ Kathleen Kaminski
-----------------------------------------
Kathleen Kaminski
By /s/ Maria Kofakis
-----------------------------------------
Maria Kofakis
By /s/ Susan M. Kyriakides
-----------------------------------------
Susan M. Kyriakides
By /s/ Warren Kosterman
-----------------------------------------
Warren Kosterman
By /s/ Amy Landry
-----------------------------------------
Amy Landry
By /s/ Virginia Lyons de Neufville
-----------------------------------------
Virginia Lyons de Neufville
By /s/ Mark Mazak
-----------------------------------------
Mark Mazak
By /s/ Edward Morrissey
-----------------------------------------
Edward Morrissey
By /s/ Charles Popkin
-----------------------------------------
Charles Popkin
By /s/ Mariah Smith
-----------------------------------------
Mariah Smith
-32-
<PAGE>
By /s/ Anne Sullivan
----------------------------------------
Anne Sullivan
By /s/ James Souliotis
----------------------------------------
James Souloitis
By
----------------------------------------
Zurick, Davis & Co.
By /s/ Charles Goheen
----------------------------------------
Charles Goheen
-33-
<PAGE>
Schedule A
----------
Physicians Quality Care, Inc.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Vested
through
Total Options Type Exercise Price 12/31/97
- --------------------------------------------------------------------
<S> <C> <C> <C> <C>
C. Popkin 140,586 ISO $0.01 93,724
- --------------------------------------------------------------------
A. Sullivan 120,000 ISO $0.01 80,000
- --------------------------------------------------------------------
T. Brown 50,000 ISO $0.01 25,000
- --------------------------------------------------------------------
M. Mazak 50,000 ISO $0.01 33,333
- --------------------------------------------------------------------
T. Morrissey 50,000 ISO $0.25 25,000
- --------------------------------------------------------------------
M. Smith 50,000 ISO $0.85 12,500
- --------------------------------------------------------------------
R. Hunter 25,000 ISO $0.85 6,250
- --------------------------------------------------------------------
S. Kyriakides 20,000 ISO $0.25 10,000
- --------------------------------------------------------------------
G. Lyons 15,000 ISO $0.25 7,500
- --------------------------------------------------------------------
J. Soliotis 10,000 ISO $0.25 5,000
- --------------------------------------------------------------------
W. Kosterman 5,000 ISO $0.25 2,500
- --------------------------------------------------------------------
S. Aroyan 1,000 ISO $0.25 500
- --------------------------------------------------------------------
M. Johnson 1,000 ISO $0.25 500
- --------------------------------------------------------------------
K. Kaminski 1,000 ISO $0.25 500
- --------------------------------------------------------------------
M. Kefakis 1,000 ISO $0.85 500
- --------------------------------------------------------------------
A. Landry 500 ISO $0.85 250
------- -------
- --------------------------------------------------------------------
Total 540,086 303,057
======= =======
- --------------------------------------------------------------------
</TABLE>
<PAGE>
STOCKHOLDERS' AGREEMENT
-----------------------
AGREEMENT made this 9th day of August, 1996, between Physicians Quality
Care, Inc., a Delaware corporation (the "Company"), and the Stockholders of the
Company named on the signature page of this Agreement (the "Physicians").
WHEREAS, the Company and the Physicians are parties to either (i) a merger
agreement or (ii) an asset purchase agreement and an affiliation agreement (the
"Agreements") that, among other things, provide for the issuance of shares of
common stock, par value $0.01 per share (the "Common Stock"), of the Company
(any Common Stock beneficially owned by such Physicians whether now or
hereinafter acquired being referred to herein as the "Shares").
WHEREAS, the Company and the Physicians agree that the Shares shall be
subject to the restrictions on transfer set forth herein.
NOW THEREFORE, for valuable consideration, receipt and sufficiency of which
is hereby acknowledged, the parties hereto agree as follows:
1. Restrictions on Transfer.
------------------------
(a) Until August 9, 1998, no Physician shall, directly or indirectly,
offer, sell, assign, transfer, grant a participation in, pledge, or otherwise
dispose of, or encumber any of the Shares, or any interest therein (each, a
"Transfer"); unless and until such Transfer has been approved by the Company (it
being understood that the Company intends to consent to such Transfer (subject
to the Company's rights under Sections 2 and 3 hereof) unless the Company
reasonable concludes that the Transfer, together with the Transfers by other
shareholders of the Company, may cause any merger pursuant to which such
Physician becomes a stockholder of the Company not to qualify as a tax-free
reorganization pursuant to Section 365 of the Internal Revenue Code of 1986, as
amended).
(b) Subject to Section 1(a), a Physician may Transfer Shares (i) only
in accordance with Section 2 below or (ii) to (A) an individual, partnership,
joint venture, corporation, company, trust, estate, unincorporated association
or other entity of whatever nature which is directly or indirectly controlled by
such Physician, (B) any family member of such Physician or such Physician's
family members, and (C) a third party granted an interest in the Shares in the
will of such Physician or by the laws of descent or distribution (each
transferee as set forth in clauses (A)-(C), a "Permitted Transferee"); provided
--------
that, such Shares shall remain subject to this Agreement (including without
- ----
limitation the restrictions on transfer set forth in this Section 1) and such
Permitted Transferee shall, as a condition to such Transfer, deliver to the
Company a written instrument confirming that such Permitted Transferee shall be
bound by all of the terms and conditions of this Agreement.
<PAGE>
2. Right of First Refusal.
----------------------
(a) If a Physician proposes to Transfer any Shares other than as set
forth in paragraph 2(d) below, then the Physician shall first give written
notice of the proposed transfer (the "Transfer Notice") to the Company. The
Transfer Notice shall name the proposed transferee and state the number of such
Shares the Physician proposes to transfer the ("Offered Shares"), the price per
share and all other material terms and conditions of the Transfer.
(b) For sixty (60) days following its receipt of such Transfer Notice,
the Company shall have the option to purchase all (but not less than all) of the
Offered Shares at the price and upon the terms set forth in the Transfer Notice.
In the event the Company elects to purchase all of the Offered Shares, it shall
give written notice of such election to the Physician within such sixty (60) day
period. Within ten (10) days after receipt of such notice, the Physician shall
tender to the Company at its principal offices the certificate or certificates
representing the Offered Shares, duly endorsed in blank by the Physician or with
duly endorsed stock powers attached thereto, all in form suitable for transfer
of the Offered Shares to the Company. Upon receipt of such certificate or
certificates, the Company shall deliver or mail to the Physician a check in
payment of the purchase price for the Offered Shares; provided that if the terms
-------------
of payment set forth in the Transfer Notice were other than cash against
delivery, the Company may pay for the Offered Shares on the same terms and
conditions as were set forth in the Transfer Notice.
(c) If the Company does not elect to acquire all of the Offered Shares,
the Physician may, within the sixty (60) day period following the expiration of
the rights granted to the Company under subsection (b) above, transfer the
Offered Shares to the proposed transferee or any other transferee, provided that
-------------
such transfer shall not be on terms and conditions more favorable to the
transferee than those contained in the Transfer Notice. Notwithstanding any of
the above, all Offered Shares transferred pursuant to this Section 2 shall
remain subject to this Agreement (including without limitation the restrictions
on transfer set forth in Section 1 and the right of first refusal set forth in
this Section 2) and such transferee shall, as a condition to such transfer,
deliver to the Company a written instrument confirming that such transferee
shall be bound by all of the terms and conditions of this Agreement.
(d) The following transactions shall be exempt from the provisions of
this Section 2:
(i) A Transfer of Shares to or for the benefit of a Permitted
Transferee;
-2-
<PAGE>
(ii) Any Transfer pursuant to an effective registration statement
filed by the Company under the Securities Act of 1933, as amended (the
"Securities Act"); and
(iii) The sale of all or substantially all of the shares of capital
stock of the Company (including pursuant to a merger or consolidation);
provided, however, that in any such case, unless the provisions of this Section
- -------- -------
2 shall be thereby terminated pursuant to subsection (f) below, such Shares
shall remain subject to this Agreement (including without limitation the
restrictions on transfer set forth in Section 1 and the right of first refusal
set forth in this Section 2) and such transferee shall, as a condition to such
Transfer, deliver to the Company a written instrument confirming that such
transferee shall be bound by all of the terms and conditions of this Agreement.
(e) The Company may assign its rights to purchase Shares in any
particular transaction under this Section 2 to one or more persons or entities.
(f) The provisions of this Section 2 shall terminate upon the earlier
of the following events:
(i) The closing of the sale of shares of Common Stock in a public
offering pursuant to an effective registration statement filed by the Company
under the Securities Act; or
(ii) upon the sale of all or substantially all of the capital
stock, assets or business of the Company, by merger, consolidation, sale of
assets or otherwise.
3. Right of the Company to Reacquire The Shares. In the event that a
--------------------------------------------
Physician ceases to be an employee of Medical Care Partners, P.C. or another
professional corporation affiliated with the Company at any time prior to August
9, 1999, the Company shall have the right, exercisable within 30 days of such
termination, to require such Physician to sell all Shares then held by such
Physician to the Company at their Fair Market Value. For purposes of the
foregoing, the Fair Market Value of the Shares shall mean: (a) if the Shares are
listed on a national securities exchange or the National Association of
Securities Dealers, Inc.'s National Market System, the last sales price on the
date of termination and (b) if the Shares are not listed on a national
securities exchange or the National Market System at the fair value thereof as
determined by an independent financial advisor reasonably satisfactory to the
Company and the Physician based upon recent sale of shares of the Company's
Common Stock, or in the absence of any such sale, sales of the equity securities
of comparable companies. The Company's rights pursuant to this Section 3
-3-
<PAGE>
shall not otherwise restrict the Physician's ability to Transfer the Share and
shall not be binding upon any subsequent holder of the Shares.
4. Effect of Prohibited Transfer. The Company shall not be required (a)
-----------------------------
to transfer on its books any of the Shares which shall have been sold or
transferred in violation of any of the provisions set forth in this Agreement,
or (b) to treat as owner of such Shares or to pay dividends to any transferee to
whom any such Shares shall have been so sold or transferred.
5. Restrictive Legend.
------------------
(a) All certificates representing Shares shall have affixed thereto a
legend in substantially the following form, in addition to any other legends
that may be required under federal or state securities laws:
"The shares of stock represented by this certificate are subject to
restrictions on transfer and an option to purchase set forth in a
certain Stock Restriction Agreement between the corporation and the
registered owner of these shares (or his predecessor in interest), and
such Agreement is available for inspection without charge at the office
of the Secretary of the corporation."
(b) An original copy of this Agreement, duly executed by each of the
parties hereto, shall be delivered to the Secretary of the Company and
maintained at the principal executive office of the Company and made available
for inspection by any person requesting it.
6. Escrow. Each Physician shall, upon the execution of this Agreement,
------
execute Joint Escrow Instructions in the form appended hereto as Exhibit A. The
---------
Joint Escrow Instructions shall be delivered to the Secretary of the Company, as
escrow agent thereunder. Each Physician shall deliver to such escrow agent a
stock assignment duly endorsed in blank and hereby instructs the Company to
deliver to such escrow agent, on behalf of such Physician, the certificate(s)
evidencing the Shares. Such materials shall be held by such escrow agent
pursuant to the terms of such Joint Escrow Instructions.
7. Severability. The invalidity or unenforceability of any provision of
------------
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, and each other provision of this Agreement shall be
severable and enforceable to the extent permitted by law.
8. Waiver. Any provision contained in this Agreement may be waived,
-------
either generally or in any particular instance, by the Board of Directors of the
Company.
-4-
<PAGE>
9. Binding Effect. This Agreement shall be binding upon and inure to the
--------------
benefit of the Company and the Physician and their respective heirs, executors,
administrators, legal representatives, successors and assigns, subject to the
restrictions on transfer set forth in Section 1 of this Agreement.
10. Termination. This Agreement shall terminate upon the later to occur
-----------
of the following: (a) August 9, 1999 or (b) the termination of the provisions of
Section 2 pursuant to Section 2(f).
11. Notice. All notices, requests, demands, claims, and other
------
communications hereunder shall be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly delivered two
business days after it is sent by registered or certified mail, return receipt
requested, postage prepaid, or one business day after it is sent via a reputable
nationwide overnight courier service, in each case to the intended recipient as
set forth below:
If to the Company, at 950 Winter Street, Suite 2410, Waltham, MA 02154, or
at such other address or addresses as may have been furnished in writing by the
Company to the Physician; or
If to a Physician, at such Physician's address set forth on Exhibit B
---------
attached hereto, or at such other address or addresses as may have been
furnished to the Company in writing by such Physician.
Any party hereto may give any notice, request, demand, claim, or other
communication hereunder using any other means (including personal delivery,
expedited courier, messenger service, telecopy, telex, ordinary mail, or
electronic mail), but no such notice, request, demand, claim, or other
communication shall be deemed to
12. Pronouns. Whenever the context may require, any pronouns used in this
--------
Agreement shall include the corresponding masculine, feminine or neuter forms,
and the singular form of nouns and pronouns shall include the plural, and vice
versa.
13. Entire Agreement. This Agreement constitutes the entire agreement
----------------
between the parties, and supersedes all prior agreements and understandings,
relating to the subject matter of this Agreement.
14. Amendment. This Agreement may be amended or modified only by a
---------
written instrument executed by both the Company and the Physician.
15. Governing Law. This Agreement shall be construed, interpreted and
-------------
enforced in accordance with the laws of the Commonwealth of Massachusetts.
-5-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
PHYSICIANS QUALITY CARE, INC.
By:/s/ Jerilyn Asher
---------------------------------------------
Name:
Title:
PHYSICIANS:
/s/ Kevin Beck
------------------------------------------------
Kevin Beck, M.D.
/s/ Alphonse Calvanese
------------------------------------------------
Alphonse Calvanese, M.D.
/s/ William Belcastro
------------------------------------------------
William Belcastro, M.D.
/s/ James Haines
------------------------------------------------
James Haines, M.D.
/s/ Jay Ungar
------------------------------------------------
Jay Ungar, M.D.
/s/ Neal Lakritz
by Mark Mullan, Attorney in Fact
------------------------------------------------
Neal Lakritz, M.D.
/s/ Mark Mullan
------------------------------------------------
Mark Mullan, M.D.
/s/ Francis Murray
------------------------------------------------
Francis Murray, M.D.
/s/ P.J. Ramaswamy
------------------------------------------------
P.J. Ramaswamy, M.D.
-6-
<PAGE>
/s/ Jay Burton
------------------------------------------------
Jay Burton, D.D.
/s/ Kathleen Carlson
------------------------------------------------
Kathleen Carlson, M.D.
/s/ Victoria Cook
------------------------------------------------
Victoria Cook, M.D.
/s/ Michael Coppola
------------------------------------------------
Michael Coppola, M.D.
/s/ Paul Hetzel
------------------------------------------------
Paul Hetzel, M.D.
/s/ Robert Hoffman
------------------------------------------------
Robert Hoffman, M.D.
/s/ Thomas Keenan
------------------------------------------------
Thomas Keenan, M.D.
/s/ Bruce Meth
------------------------------------------------
Bruce Meth, M.D.
/s/ Jeffrey Ochs
------------------------------------------------
Jeffrey Ochs, M.D.
/s/ David Pierangelo
------------------------------------------------
David Pierangelo, M.D.
/s/ David Pleet MD
by Paul Hetzel, Attorney in Fact
------------------------------------------------
David Pleet, M.D.
/s/ Thomas Race MD
by Paul Hetzel, Attorney in Fact
------------------------------------------------
Thomas Race, M.D.
/s/ Michael Rosen MD
------------------------------------------------
Michael Rosen, M.D.
/s/ Roy Stillerman MD
------------------------------------------------
Roy Stillerman, M.D.
-7-
<PAGE>
/s/ John Zeroogian, MD
------------------------------------------------
John Zeroogian, M.D.
/s/ Patrick Coughlan
------------------------------------------------
Patrick Coughlan, M.D.
/s/ Ronald Kanagaki
------------------------------------------------
Ronald Kanagaki, M.D.
/s/ Bernard Oddi MD
------------------------------------------------
Bernard Oddi, M.D.
/s/ Anthony Sobey, by ___ Attorney in Fact
------------------------------------------------
Anthony Sobey, M.D.
-8-
<PAGE>
Exhibit A
---------
PHYSICIANS QUALITY CARE, INC.
JOINT ESCROW INSTRUCTIONS
-------------------------
_____________, 1996
Physicians Quality Care, Inc.
950 Winter Street
Suite 2410
Waltham, MA 02154
Attention: Secretary
Ladies and Gentlemen:
As Escrow Agent for Physicians Quality Care, Inc., a Delaware corporation
(the "Corporation"), and the undersigned physician ("Holder"), you are hereby
authorized and directed to hold the documents delivered to you pursuant to the
terms of that certain Stockholders' Agreement (the "Agreement") of even date
herewith, to which a copy of these Joint Escrow Instructions is attached, in
accordance with the following instructions:
1. Holder irrevocably authorizes the Corporation to deposit with you any
certificates evidencing Shares (as defined in the Agreement) to be held by you
hereunder and any additions and substitutions to said Shares. Holder does
hereby irrevocably constitute and appoint you as the Holder's attorney-in-fact
and agent for the term of this escrow to execute with respect to such Shares all
documents necessary or appropriate to make such Shares negotiable and to
complete any transaction herein contemplated. Subject to the provisions of this
paragraph 1 and the terms of the Agreement, Holder shall exercise all rights and
privileges of a stockholder of the Corporation while the Shares are held by you.
2. Upon any purchase by the Corporation of the Shares pursuant to Section
2 of the Agreement, the Corporation shall give to Holder and you a written
notice specifying the purchase price for the Shares, as determined pursuant to
the Agreement, and the time for a closing hereunder (the "Closing") at the
principal office of the Corporation. Holder and the Corporation hereby
irrevocably authorize and direct you to close the transaction contemplated by
such notice in accordance with the terms of said notice.
3. At the Closing, you are directed (a) to date the stock assignment form
or forms necessary for the transfer of the Shares, (b) to fill in on such form
or forms the
<PAGE>
number of Shares being transferred, and (c) to deliver same, together with the
certificate or certificates evidencing the Shares to be transferred, to the
Corporation against the simultaneous delivery to you of the purchase price for
the Shares being purchased pursuant to the Agreement.
4. The Holder shall have the right to withdraw from this escrow any Shares
upon the termination of the Corporation's right of first refusal pursuant to
Section 2 of the Agreement or in connection with a transfer permitted by Section
1 of the Agreement.
5. Your duties hereunder may be altered, amended, modified or revoked only
by a writing signed by all of the parties hereto.
6. You shall be obligated only for the performance of such duties as are
specifically set forth herein and may rely and shall be protected in relying or
refraining from acting on any instrument reasonably believed by you to be
genuine and to have been signed or presented by the proper party or parties.
You shall not be personally liable for any act you may do or omit to do
hereunder as Escrow Agent or as attorney-in-fact of Holder while acting in good
faith and in the exercise of your own good judgment, and any act done or omitted
by you pursuant to the advice of your own attorneys shall be conclusive evidence
of such good faith.
7. You are hereby expressly authorized to disregard any and all warnings
given by any of the parties hereto or by any other person or corporation,
excepting only orders or process of courts of law, and are hereby expressly
authorized to comply with and obey orders, judgments or decrees of any court.
In case you obey or comply with any such order, judgment or decree of any court,
you shall not be liable to any of the parties hereto or to any other person,
firm or corporation by reason of such compliance, notwithstanding any such
order, judgment or decree being subsequently reversed, modified, annulled, set
aside, vacated or found to have been entered without jurisdiction.
8. You shall not be liable in any respect on account of the identity,
authority or rights of the parties executing or delivering or purporting to
execute or deliver the Agreement or any documents or papers deposited or called
for hereunder.
9. You shall be entitled to employ such legal counsel and other experts as
you may deem necessary properly to advise you in connection with your
obligations hereunder and may rely upon the advice of such counsel.
10. Your responsibilities as Escrow Agent hereunder shall terminate if you
shall cease to be Secretary of the Corporation or if you shall resign by written
notice to each party. In the event of any such termination, the Corporation
shall appoint any officer of the Corporation as successor Escrow Agent.
-2-
<PAGE>
11. If you reasonably require other or further instruments in connection
with these Joint Escrow Instructions or obligations in respect hereto, the
necessary parties hereto shall join in furnishing such instruments.
12. It is understood and agreed that should any dispute arise with respect
to the delivery and/or ownership or right of possession of the securities held
by you hereunder, you are authorized and directed to retain in your possession
without liability to anyone all or any part of said securities until such
dispute shall have been settled either by mutual written agreement of the
parties concerned or by a final order, decree or judgment of a court of
competent jurisdiction after the time for appeal has expired and no appeal has
been perfected, but you shall be under no duty whatsoever to institute or defend
any such proceedings.
13. Any notice required or permitted hereunder shall be given in writing
and shall be deemed effectively given upon personal delivery or upon deposit in
the United States Post Office, by registered or certified mail with postage and
fees prepaid, addressed to each of the other parties thereunto entitled at the
following addresses, or at such other addresses as a party may designate by ten
days' advance written notice to each of the other parties hereto.
CORPORATION: Physicians Quality Care, Inc.
950 Winter Street
Suite 2410
Waltham, MA 02154
Attention: Jerilyn P. Asher
HOLDER: Notices to Holder shall be sent to the address set
forth below Holder's signature below.
ESCROW AGENT: Physicians Quality Care, Inc.
950 Winter Street
Suite 2410
Waltham, MA 02154
Attention: Jerilyn P. Asher
14. By signing these Joint Escrow Instructions, you become a party hereto
only for the purpose of said Joint Escrow Instructions, and you do not become a
party to the Agreement.
-3-
<PAGE>
15. This instrument shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted assigns.
Very truly yours,
PHYSICIANS QUALITY CARE, INC.
By:_________________________________
Name:
Title:
HOLDER:
____________________________________
(Signature)
____________________________________
Name
Address:
Date Signed:
ESCROW AGENT:
________________________________
-4-
<PAGE>
Exhibit B
---------
Kevin Beck, M.D.
307 Prospect Street
East Longmeadow, MA 01028
Alphonse Calvanese, M.D.
393 Green Hill Road
Longmeadow, MA 01106
William Belcastro, M.D.
33 Pleasant View
Wilbraham, MA 01095
James Haines, M.D.
575 Mapleton Avenue
Suffield, CT 06078
Jay Ungar, M.D.
11 Brookside Drive
Longmeadow, MA 01106
Neal Lakritz, M.D.
142 Blueberry Hill road
Longmeadow, MA 01106
Mark Mullan, M.D.
82 Green Lane
Springfield, MA 01095
Francis Murray, M.D.
248 Blueberry Hill Road
Longmeadow, MA 01106
P. J. Ramaswamy, M.D.
60 Exeter Avenue
Longmeadow, MA 01106
Jay Burton, O.D.
396 Inverness Lane
Longmeadow, MA 01106
-5-
<PAGE>
Kathleen Carlson, M.D.
183 Maple Ridge Road
Northampton, MA 01060
Victoria Cook, M.D.
246 Colony Road
Longmeadow, MA 01106
Michael Coppola, M.D.
33 Western Drive
Longmeadow, MA 01106
Paul Hetzel, M.D.
47 Bellevue Avenue
Springfield, MA 01108
Robert Hoffman, M.D.
703 Frank Smith Road
Longmeadow, MA 01106
Thomas Keenan, M.D.
8 Crescent Hill
Springfield, MA 01105
Bruce Meth, M.D.
108 Canterbury Lane
Longmeadow, MA 01106
Andrew Moskovitz, M.D.
82 Woodbridge Street
South Hadley, MA 01075
Jeffrey Ochs, M.D.
101 Academy Drive
Longmeadow, MA 01106
David Pierangelo, M.D.
12 Milbrook Drive
Wilbraham, MA 01095
David Pleet, M.D.
70 Bellevue Avenue
Springfield, MA 01108
-6-
<PAGE>
Thomas Race, M.D.
9 Conifer Drive
Wilbraham, MA 01095
Michael Rosen, M.D.
190 Forest Park Avenue
Springfield, MA 01108
Jeffrey Stein, M.D.
164 Wenonah Road
Longmeadow, MA 01106
Roy Stillerman, M.D.
101 Morningside Drive
Longmeadow, MA 01106
Salvatore Tassone
33 Debra Lane
Agawam, MA 01001
John Zeroogian, M.D.
Bigelow Commons, Apt. 1315
Enfield, CT 06082
Patrick Coughlan, M.D.
55 Allen Street
East Longmeadow, MA 01028
Ronald Kanagaki, M.D.
119 Valley View Circle
West Springfield, MA 01089
Bernard Oddi, M.D.
10 Becker Street
Wilbraham, MA 01095
Anthony Sobey, M.D.
22 Longview Drive
Wilbraham, MA 01095
-7-
<PAGE>
Joseph Mitchell
Ayco Company
Executive Woods, Suite 120
855 Route 146
Clifton Park, NY 12065
-8-
<PAGE>
REGISTRATION RIGHTS AGREEMENT
-----------------------------
This Agreement dated as of August 9, 1996 is entered into by and among
Physicians Quality Care, Inc., a Delaware corporation (the "Company"), and the
shareholders of the Company listed on the signature page of this Agreement (the
"Physicians").
WHEREAS, the Company and each Physician have entered into either (1) a
merger agreement or (ii) an asset purchase agreement and an affiliation
agreement of even date herewith (the "Agreements"); and
WHEREAS, the Company and the Physicians desire to provide for certain
arrangements with respect to the registration of shares of capital stock of the
Company under the Securities Act of 1933;
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained in this Agreement, the parties hereto agree as follows:
1. Certain Definitions. As used in this Agreement, the following terms
-------------------
shall have the following respective meanings:
"Commission" means the Securities and Exchange Commission, or any
----------
other Federal agency at the time administering the Securities Act.
"Common Stock" means the common stock, $0.01 par value per share, of
------------
the Company.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
------------
or any similar Federal statute, and the rules and regulations of the Commission
issued under such Act, as they each may, from time to time, be in effect.
"Registration Statement" means a registration statement filed by the
----------------------
Company with the Commission for a public offering and sale of Common Stock
(other than a registration statement on Form S-B or Form S-4, or their
successors, or any other form for a similar limited purpose, or any registration
statement covering only securities proposed to be issued in exchange for
securities or assets of another corporation).
"Registration Expenses" means the expenses described in Section 4.
---------------------
"Registrable Shares" means (i) the shares of Common Stock issued or
------------------
issuable upon conversion of the capital stock of the Company issued to the
Physicians pursuant to the Affiliation Agreements and (ii) any other shares of
Common Stock issued in respect of such shares (because of stock splits, stock
dividends, reclassifications, recapitalizations, or similar events); provided,
---------
however,
- -------
<PAGE>
that shares of Common Stock which are Registrable Shares shall cease to be
Registrable Shares upon any sale or transfer whether pursuant to a Registration
Statement, Rule 144 under the Securities Act or otherwise.
"Securities Act" means the Securities Act of 1933, as amended, or any
--------------
similar Federal statute, and the rules and regulations of the Commission issued
under such Act, as they each may, from time to time, be in effect.
"Shares" shall mean the Shares of Common Stock issued upon conversion
------
of the capital stock of the Company issued to the Physicians pursuant to the
Agreements.
"Stockholders" means the Physicians and any persons or entities to
------------
whom the rights granted under this Agreement are transferred by a Stockholder
pursuant to Section 11 of this Agreement.
2. Registration.
------------
(a) Whenever the Company proposes to file a Registration Statement
registering shares of its Common Stock under the Securities Act at any time and
from time to time, it will, prior to such filing, give written notice to all
Stockholders of its intention to do so and, upon the written request of a
Stockholder or Stockholders given within twenty (20) days after the Company
provides such notice (which request shall state the intended method of
disposition of such Registrable Shares), the Company shall use its best efforts
to cause all Registrable Shares which the Company has been requested by such
Stockholder or Stockholders to register to be registered under the Securities
Act to the extent necessary to permit their sale or other disposition in
accordance with the intended methods of distribution specified in the request of
such Stockholder or Stockholders; provided that the Company shall have the right
to postpone or withdraw any registration effected pursuant to this Section 2
without obligation to any Stockholder; provided, further, that a Physician's
rights under this Agreement shall not apply to a Registration Statement filed in
connection with the Company's initial public offering of its Common Stock
registered under the Securities Act.
(b) In connection with any registration under this Section 2
involving an underwriting, the Company shall not be required to include any
Registrable Shares in such registration unless the holders thereof accept the
terms of the underwriting as agreed upon between the Company and the
underwriters selected by it. If in the opinion of the managing underwriter it is
appropriate because of marketing factors to limit the number of Registrable
Shares to be included in the offering, then the Company shall be required to
include in the registration only that number of Registrable Shares, if any,
which the managing underwriter believes should be included therein; provided
that if the number of Registrable Shares to be included in the offering in
accordance with the foregoing is less than the total number of shares which the
holders of Registrable Shares have requested to be
<PAGE>
included, then the holders of Registrable Shares who have requested registration
and other holders of securities entitled to include them in such registration
shall participate in the registration pro rata based upon their total ownership
of shares of Common Stock (giving effect to the conversion into Common Stock of
all securities convertible thereinto). If any holder would thus be entitled to
include more securities than such holder requested to be registered, the excess
shall be allocated among other requesting holders pro rata in the manner
described in the preceding sentence.
3. Registration Procedures. If and whenever the Company is required by
-----------------------
the provisions of this Agreement to use its best efforts to effect the
registration of any of the Registrable Shares under the Securities Act, the
Company shall:
(a) file with the Commission a Registration Statement with respect to
such Registrable Shares and use its best efforts to cause that Registration
Statement to become and remain effective;
(b) as expeditiously as possible prepare and file with the Commission
any amendments and supplements to the Registration Statement and the prospectus
included in the Registration Statement as may be necessary to keep the
Registration Statement effective, in the case of a firm commitment underwritten
public offering, until each underwriter has completed the distribution of all
securities purchased by it and, in the case of any other offering, until the
earlier of the sale of all Registrable Shares covered thereby or one hundred
twenty (120) days after the effective date thereof;
(c) as expeditiously as possible furnish to each selling Stockholder
such reasonable numbers of copies of the prospectus, including a preliminary
prospectus, in conformity with the requirements of the Securities Act, and such
other documents as the selling Stockholder may reasonably request in order to
facilitate the public sale or other disposition of the Registrable Shares owned
by the selling Stockholder; and
(d) as expeditiously as possible use its best efforts to register or
qualify the Registrable Shares covered by the Registration Statement under the
securities or Blue Sky laws of such states as the selling Stockholders shall
reasonably request, and do any and all other acts and things that may be
necessary or desirable to enable the selling Stockholders to consummate the
public sale or other disposition in such states of the Registrable Shares owned
by the selling Stockholder; provided, however, that the Company shall not be
-----------------
required in connection with this paragraph (d) to qualify as a foreign
corporation or execute a general consent to service of process in any
jurisdiction.
If the Company has delivered preliminary or final prospectuses to the
selling Stockholders and after having done so the prospectus is amended to
comply with the requirements of the Securities Act, the Company shall promptly
notify the selling Stockholders and, if requested, the selling Stockholders
shall immediately cease
<PAGE>
making offers of Registrable Shares and return all prospectuses to the Company.
The Company shall promptly provide the selling Stockholders with revised
prospectuses and, following receipt of the revised prospectuses, the selling
Stockholders shall be free to resume making offers of the Registrable Shares.
4. Allocation of Expenses. The Company will pay all Registration
----------------------
Expenses of all registrations under this Agreement. For purposes of this Section
4, the term "Registration Expenses" shall mean all expenses incurred by the
Company in complying with this Agreement, including, without limitation, all
registration and filing fees, exchange listing fees, printing expenses, fees and
expenses of counsel for the Company, state Blue Sky fees and expenses, and the
expense of any special audits incident to or required by any such registration.
Registration Expenses shall not include any underwriting discounts, selling
commissions or the fees and expenses of selling Stockholders' own counsel.
5. Indemnification and Contribution.
--------------------------------
(a) In the event of any registration of any of the Registrable Shares
under the Securities Act pursuant to this Agreement, the Company will indemnify
and hold harmless the seller of such Registrable Shares, each underwriter of
such Registrable Shares, and each other person, if any, who controls such seller
or underwriter within the meaning of the Securities Act or the Exchange Act
against any losses, claims, damages or liabilities, joint or several, to which
such seller, underwriter or controlling person may become subject under the
Securities Act, the Exchange Act, state securities or Blue Sky laws or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any Registration Statement
under which such Registrable Shares were registered under the Securities Act,
any preliminary prospectus or final prospectus contained in the Registration
Statement, or any amendment or supplement to such Registration Statement, or
arise out of or are based upon the omission or alleged omission to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading; and the Company will reimburse such seller, underwriter
and each such controlling person for any legal or any other expenses reasonably
incurred by such seller, underwriter or controlling person in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that the Company will not be liable in any such case to the
- -----------------
extent that any such loss, claim, damage or liability arises out of or is based
upon any untrue statement or omission made in such Registration Statement,
preliminary prospectus or final prospectus, or any such amendment or supplement,
in reliance upon and in conformity with information furnished to the Company, in
writing, by or on behalf of such seller, underwriter or controlling person
specifically for use in the preparation thereof.
(b) In the event of any registration of any of the Registrable Shares
under the Securities Act pursuant to this Agreement, each seller of Registrable
Shares,
<PAGE>
severally and not jointly, will indemnify and hold harmless the Company, each of
its directors and officers and each underwriter (if any) and each person, if
any, who controls the Company or any such underwriter within the meaning of the
Securities Act or the Exchange Act, against any losses, claims, damages or
liabilities, joint or several, to which the Company, such directors and
officers, underwriter or controlling person may become subject under the
Securities Act, Exchange Act, state securities or Blue Sky laws or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement of a material fact contained in any Registration Statement under which
such Registrable Shares were registered under the Securities Act, any
preliminary prospectus or final prospectus contained in the Registration
Statement, or any amendment or supplement to the Registration Statement, or
arise out of or are based upon any omission or alleged omission to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading, if the statement or omission was made in reliance upon
and in conformity with information relating to such seller furnished in writing
to the Company by or on behalf of such seller specifically for use in connection
with the preparation of such Registration Statement, prospectus, amendment or
supplement; provided, however, that the obligations of such Stockholders
-----------------
hereunder shall be limited to an amount equal to the proceeds to each
Stockholder of Registrable Shares sold in connection with such registration.
(c) Each party entitled to indemnification under this Section 5 (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom; provided, that counsel for the Indemnifying
--------
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not be unreasonably
withheld); and, provided, further, that the failure of any Indemnified Party to
-----------------
give notice as provided herein shall not relieve the Indemnifying Party of its
obligations under this Section 5. The Indemnified Party may participate in such
defense at such party's expense; provided, however, that the Indemnifying Party
-----------------
shall pay such expense if representation of such Indemnified Party by the
counsel retained by the Indemnifying Party would be inappropriate due to actual
or potential differing interests between the Indemnified Party and any other
party represented by such counsel in such proceeding. No Indemnifying Party, in
the defense of any such claim or litigation shall, except with the consent of
each Indemnified Party, consent to entry of any judgment or enter into any
settlement which does not include as an unconditional term thereof the giving by
the claimant or plaintiff to such Indemnified Party of a release from all
liability in respect of such claim or litigation, and no Indemnified Party shall
consent to entry of any judgment or settle such claim or litigation without the
prior written consent of the Indemnifying Party.
<PAGE>
(d) In order to provide for just and equitable contribution to joint
liability under the Securities Act in any case in which either (i) any holder of
Registrable Shares exercising rights under this Agreement, or any controlling
person of any such holder, makes a claim for indemnification pursuant to this
Section 5 but it is judicially determined (by the entry of a final judgment or
decree by a court of competent jurisdiction and the expiration of time to appeal
or the denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 5 provides for
indemnification in such case, or (ii) contribution under the Securities Act may
be required on the part of any such selling Stockholder or any such controlling
person in circumstances for which indemnification is provided under this Section
5; then, in each such case, the Company and such Stockholder will contribute to
the aggregate losses, claims, damages or liabilities to which they may be
subject (after contribution from others) in such proportions so that such holder
is responsible for the portion represented by the percentage that the public
offering price of its Registrable Shares offered by the Registration Statement
bears to the public offering price of all securities offered by such
Registration Statement, and the Company is responsible for the remaining
portion; provided, however, that, in any such case, (A) no such holder will be
-----------------
required to contribute any amount in excess of the proceeds to it of all
Registrable Shares sold by it pursuant to such Registration Statement, and (B)
no person or entity guilty of fraudulent misrepresentation, within the meaning
of Section 11(f) of the Securities Act, shall be entitled to contribution from
any person or entity who is not guilty of such fraudulent misrepresentation.
6. Information by Holder. Each Stockholder including Registrable Shares
---------------------
in any registration shall furnish to the Company such information regarding such
Stockholder and the distribution proposed by such Stockholder as the Company may
reasonably request in writing and as shall be required in connection with any
registration, qualification or compliance referred to in this Agreement.
7. "Stand-Off" Agreement. Each Stockholder, if requested by the Company
--------------------
and the managing underwriter of an offering by the Company of Common Stock or
other securities of the Company pursuant to a Registration Statement, shall
agree not to sell publicly or otherwise transfer or dispose of any Registrable
Shares or other securities of the Company held by such Stockholder for a
specified period of time (not to exceed one hundred and eighty (180) days)
following the effective date of such Registration Statement.
8. Rule 144 Requirements. After the earliest of (i) the closing of the
---------------------
sale of securities of the Company pursuant to a Registration Statement, (ii) the
registration by the Company of a class of securities under Section 12 of the
Exchange Act, or (iii) the issuance by the Company of an offering circular
pursuant to Regulation A under the Securities Act, the Company agrees to:
(a) comply with the requirements of Rule 144(c) under the Securities
Act with respect to current public information about the Company;
<PAGE>
(b) use its best efforts to file with the Commission in a timely
manner all reports and other documents required of the Company under the
Securities Act and the Exchange Act (at any time after it has become subject to
such reporting requirements); and
(c) furnish to any holder of Registrable Shares upon request (i) a
written statement by the Company as to its compliance with the requirements of
said Rule 144(c), and the reporting requirements of the Securities Act and the
Exchange Act (at any time after it has become subject to such reporting
requirements), (ii) a copy of the most recent annual or quarterly report of the
Company, and (iii) such other reports and documents of the Company as such
holder may reasonably request to avail itself of any similar rule or regulation
of the Commission allowing it to sell any such securities without registration.
9. Mergers, Etc. The Company shall not, directly or indirectly, enter
------------
into any merger, consolidation or reorganization in which the Company shall not
be the surviving corporation unless the proposed surviving corporation shall,
prior to such merger, consolidation or reorganization, agree in writing to
assume the obligations of the Company under this Agreement, and for that purpose
references hereunder to "Registrable Shares" shall be deemed to be references to
the securities which the Stockholders would be entitled to receive in exchange
for Registrable Shares under any such merger, consolidation or reorganization;
provided, however, that the provisions of this Section 9 shall not apply in the
- -----------------
event of any merger, consolidation or reorganization in which the Company is not
the surviving corporation if all Stockholders are entitled to receive in
exchange for their Registrable Shares consideration consisting solely of (i)
cash, (ii) securities of the acquiring corporation which may be immediately sold
to the public without registration under the Securities Act, or (iii) securities
of the acquiring corporation which the acquiring corporation has agreed to
register within ninety (90) days of completion of the transaction for resale to
the public pursuant to the Securities Act.
10. Termination. All of the Company's obligations to register Registrable
-----------
Shares under this Agreement shall terminate on the second anniversary of this
Agreement.
11. Transfers of Rights. This Agreement, and the rights and obligations
-------------------
of each Stockholder hereunder, may not be assigned by such Stockholder to any
person or entity except to a person or entity to whom the Shares are transferred
in accordance with the Stockholders Agreements dated the date hereof, between
the Company and each of the shareholders.
12. General.
-------
(a) Notices. All notices, requests, consents, and other
-------
communications under this Agreement shall be in writing and shall be delivered
by
<PAGE>
hand or mailed by first class certified or registered mail, return receipt
requested, postage prepaid:
If to the Company, at 950 Winter Street, Waltham, Massachusetts 02154,
Attention: Secretary, or at such other address or addresses as may have been
furnished in writing by the Company to the Physicians; or
If to a Stockholder, at his or its address set forth on Exhibit A or at
---------
such other address or addresses as may have been furnished to the Company in
writing by such Stockholder.
Notices provided in accordance with this Section 12(a) shall be deemed
delivered upon personal delivery or two business days after deposit in the mail.
(b) Entire Agreement. This Agreement embodies the entire agreement
----------------
and understanding between the parties hereto with respect to the subject matter
hereof and supersedes all prior agreements and understandings relating to such
subject matter.
(c) Amendments and Waivers. Any term of this Agreement may be
----------------------
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), with the written consent of the Company and the holders of at
least a majority of the Registrable Shares; provided, that this Agreement may be
--------
amended with the consent of the holders of less than all Registrable Shares only
in a manner which affects all Registrable Shares in the same fashion. No waivers
of or exceptions to any term, condition or provision of this Agreement, in any
one or more instances, shall be deemed to be, or construed as, a further or
continuing waiver of any such term, condition or provision.
(d) Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed to be an original, but all of which
shall be one and the same document.
(e) Severability. The invalidity or unenforceability of any
------------
provision of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement.
(f) Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the laws of the Commonwealth of Massachusetts.
<PAGE>
Executed as of the date first written above.
PHYSICIANS QUALITY CARE, INC.:
By: /s/ Jerilyn Asher
------------------------------------
Jerilyn Asher
President
PHYSICIANS:
/s/ Kevin Beck MD
----------------------------------------
Kevin Beck, M.D.
/s/ Alphonse Calvanese
----------------------------------------
Alphonse Calvanese, M.D.
/s/ William Belcastro
----------------------------------------
William Belcastro, M.D.
/s/ James Haines
----------------------------------------
James Haines, M.D.
/s/ Jay Ungar
----------------------------------------
Jay Ungar, M.D.
/s/ Neil Lakritz
by Mark Mullan, Attorney in Fact
----------------------------------------
Neal Lakritz, M.D.
/s/ Mark Mullan
----------------------------------------
Mark Mullan, M.D.
/s/ Francis Murray MD
----------------------------------------
Francis Murray, M.D.
/s/ P.J. Ramaswamy
----------------------------------------
P. J. Ramaswamy, M.D.
/s/ Jay Burton
----------------------------------------
Jay Burton, D.O.
/s/ Kathleen Carlson
----------------------------------------
Kathleen Carlson, M.D.
<PAGE>
/s/ Victoria Cook MD
----------------------------------------
Victoria Cook, M.D.
/s/ Michael Coppola MD
----------------------------------------
Michael Coppola, M.D.
/s/ Paul Hetzel MD
----------------------------------------
Paul Hetzel, M.D.
/s/ Robert Hoffman
----------------------------------------
Robert Hoffman, M.D.
/s/ Thomas Keenan
----------------------------------------
Thomas Keenan, M.D.
/s/ Bruce Meth
----------------------------------------
Bruce Meth, M.D.
/s/ Jeffrey Ochs
----------------------------------------
Jeffrey Ochs, M.D.
/s/ David Pierangelo
----------------------------------------
David Pierangelo, M.D.
/s/ David Pleet
by Paul Hetzel, Attorney in Fact
----------------------------------------
David Pleet, M.D.
/s/ Thomas Race
by Paul Hetzel, Attorney in Fact
----------------------------------------
Thomas Race, M.D.
/s/ Michael Rosen
----------------------------------------
Michael Rosen, M.D.
/s/ Roy Stillerman
----------------------------------------
Roy Stillerman, M.D.
/s/ John Zeroogian
----------------------------------------
John Zeroogian, M.D.
/s/ Patrick Coughlan
----------------------------------------
Patrick Coughlan, M.D.
<PAGE>
/s/ Ronald Kanagaki
----------------------------------------
Ronald Kanagaki, M.D.
/s/ Bernard Oddi
----------------------------------------
Bernard Oddi, M.D.
/s/ Anthony Sobey by __ as Attorney in Fact
-------------------------------------------
Anthony Sobey, M.D.
<PAGE>
Exhibit A
---------
Kevin Beck, M.D.
307 Prospect Street
East Longmeadow, MA 01028
Alphonse Calvanese, M.D.
393 Green Hill Road
Longmeadow, MA 01106
William Belcastro, M.D.
33 Pleasant View
Wilbraham, MA 01095
James Haines, M.D.
575 Mapleton Avenue
Suffield, CT 06078
Jay Ungar, M.D.
11 Brookside Drive
Longmeadow, MA 01106
Neal Lakritz, M.D.
142 Blueberry Hill Road
Longmeadow, MA 01106
Mark Mullan, M.D.
82 Green Lane
Springfield, MA 01095
Francis Murray, M.D.
248 Blueberry Hill Road
Longmeadow, MA 01106
P. J. Ramaswamy, M.D.
60 Exeter Avenue
Longmeadow, MA 01106
Jay Burton, O.D.
396 Inverness Lane
Longmeadow, MA 01106
Kathleen Carlson, M.D.
183 Maple Ridge Road
Northhampton, MA 01060
<PAGE>
Victoria Cook, M.D.
246 Colony Road
Longmeadow, MA 01106
Michael Coppola, M.D.
33 Western Drive
Longmeadow, MA 01106
Paul Hetzel, M.D.
47 Bellevue Avenue
Springfield, MA 01108
Robert Hoffman, M.D.
703 Frank Smith Road
Longmeadow, MA 01106
Thomas Keenan, M.D.
8 Crescent Hill
Springfield, MA 01105
Bruce Meth, M.D.
108 Canterbury Lane
Longmeadow, MA 01106
Andrew Moskovitz, M.D.
82 Woodbridge Street
South Hadley, MA 01075
Jeffrey Ochs, M.D.
101 Academy Drive
Longmeadow, MA 01106
David Pierangelo, M.D.
12 Milbrook Drive
Wilbraham, MA 01095
David Pleet, M.D.
70 Bellevue Avenue
Springfield, MA 01108
Thomas Race, M.D.
9 Conifer Drive
Wilbraham, MA 01095
<PAGE>
Michael Rosen, M.D.
190 Forest Park Avenue
Springfield, MA 01108
Jeffrey Stein, M.D.
164 Wenonah Road
Longmeadow, MA 01106
Roy Stillerman, M.D.
101 Morningside Drive
Longmeadow, MA 01106
Salvatore Tassone
33 Debra Lane
Agawam, MA 01001
John Zeroogian, M.D.
Bigelow Commons, Apt. 1315
Enfield, CT 06082
Patrick Coughlan, M.D.
55 Allen Street
East Longmeadow, MA 01028
Ronald Kanagaki, M.D.
119 Valley View Circle
West Springfield, MA 01089
Bernard Oddi, M.D.
10 Becker Street
Wilbraham, MA 01095
Anthony Sobey, M.D.
22 Longview Drive
Wilbraham, MA 01095
Joseph Mitchell
Ayco Company
Executive Woods, Suite 120
855 Route 146
Clifton Park, NY 12065
<PAGE>
THIS OPTION AND ANY SHARES ACQUIRED UPON THE EXERCISE OF THIS OPTION HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE
TRANSFERRED, SOLD OR OTHERWISE DISPOSED OF EXCEPT WHILE SUCH A REGISTRATION IS
IN EFFECT OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER SAID ACT.
THIS OPTION AND ANY SHARES ACQUIRED UPON THE EXERCISE OF THIS OPTION ARE SUBJECT
TO CERTAIN RESTRICTIONS ON TRANSFER AND REQUIREMENTS OF SALE CONTAINED IN THE
STOCKHOLDERS AGREEMENT DATED AS OF AUGUST 30,1996, BY AND AMONG THE COMPANY, THE
OPTIONEE NAMED HEREIN AND CERTAIN STOCKHOLDERS OF THE COMPANY [AND THE RETIREE
STOCKHOLDERS AGREEMENT DATED AS OF THE DATE HEREOF, BY AND BETWEEN THE COMPANY
AND THE OPTIONEE NAMED HEREIN, EACH SUCH AGREEMENT] AS AMENDED AND IN EFFECT
FROM TIME TO TIME. COPIES OF THE STOCKHOLDERS AGREEMENT [AND THE RETIREE
STOCKHOLDERS AGREEMENT] ARE ON FILE AT THE OFFICES OF THE COMPANY. THIS OPTION
AND ANY SHARES ACQUIRED UPON THE EXERCISE OF THIS OPTION MAY BE SOLD OR
OTHERWISE TRANSFERRED ONLY IN COMPLIANCE WITH THE STOCKHOLDERS AGREEMENT [AND
THE RETIREE STOCKHOLDERS AGREEMENT]. COPIES OF THE STOCKHOLDERS AGREEMENT [AND
THE RETIREE STOCKHOLDERS AGREEMENT] MAY BE INSPECTED AT THE PRINCIPAL OFFICE OF
THE COMPANY OR OBTAINED FROM THE COMPANY WITHOUT CHARGE.
PHYSICIANS QUALITY CARE, INC.
1995 Equity Incentive Plan
FORM OF NON-STATUTORY STOCK OPTION AGREEMENT
--------------------------------------------
1. Grant of Option. Physicians Quality Care, Inc., a Delaware corporation
---------------
(the "Company"), hereby grants to ______________ (the "Optionee") an option,
pursuant to the Company's 1995 Equity Incentive Plan (the "Plan"), to purchase
up to an aggregate of _____ shares (the "Shares") of the Company's Class A
Common Stock, $.01 par value per share ("Common Stock"), purchasable as set
forth in and subject to the terms and conditions of this option and the Plan.
Except where the context otherwise requires, the term "Company" shall include
the parent and all present and future subsidiaries of the Company as defined in
Sections 424(e) and 424(f) of the Internal Revenue Code of 1986, as amended or
replaced from time to time (the "Code").
2. Definition of Affiliates. The term "Affiliates" shall mean all persons
------------------------
and entities directly or indirectly controlling, controlled by or under common
control with
<PAGE>
the Company, where control may be by either equity interest or management
authority (including pursuant to any management or similar agreement between the
Company and a professional corporation or association), or which otherwise is
party to a management services agreement, consulting agreement or similar
agreement with the Company. For purposes of this Agreement and without
limitation, Medical Care Partners, P.C., a Massachusetts professional
corporation, and Flagship Health, P.A., a Maryland professional association
("Flagship"), shall constitute Affiliates.
3. Non-Statutory Stock Option. This option is intended not to qualify as
--------------------------
an "incentive stock option" within the meaning of Section 422 of the Code.
4. Exercise of Option and Provisions for Termination.
-------------------------------------------------
(a) Vesting Schedule. This option shall become exercisable as follows:
----------------
(i) This option shall become exercisable with respect to 25 % of the
Shares (the "First Tranche") in the event that 20 licensed physicians
previously unaffiliated with the Company and its Affiliates execute binding
agreements to transfer their practices to and become employed by Flagship
on or before the first anniversary of the date set forth below on the
signature page hereof (the "Date of Grant"), all as reasonably acceptable
to the Company in its sole discretion. The exercise price for the First
Tranche of Shares shall be the Fair Market Value (as determined pursuant to
Section 4(g) below) of the Shares on the date that this option becomes
exercisable with respect to such Shares.
(ii) This option shall become exercisable with respect to an
additional 25 % of the Shares (the "Second Tranche") in the event that an
additional 20 licensed physicians previously unaffiliated with the Company
and its Affiliates execute binding agreements to transfer their practices
to and become employed by Flagship on or before the first anniversary of
the Date of Grant, all as reasonably acceptable to the Company in its sole
discretion. The exercise price for the Second Tranche of Shares shall be
the Fair Market Value (as determined pursuant to Section 4(g) below) of the
Shares on the date that this option becomes exercisable with respect to
such Shares.
(iii) This option shall become exercisable with respect to an
additional 25% of the Shares (the "Third Tranche") in the event that an
additional 20 licensed physicians previously unaffiliated with the Company
and its Affiliates execute binding agreements to transfer their practices
to and become employed by Flagship on or before the first anniversary of
the Date of Grant, all as reasonably acceptable to the Company in its sole
discretion. The exercise price for the Third Tranche of Shares shall be the
Fair Market Value (as determined pursuant to Section 4(g) below) of the
Shares on the date that this option becomes exercisable with respect to
such Shares.
-2-
<PAGE>
(iv) This option shall become exercisable with respect to the
remaining 25% of the Shares (the "Fourth Tranche") in the event that an
additional 20 licensed physicians previously unaffiliated with the Company
and its Affiliates execute binding agreements to transfer their practices
to and become employed by Flagship on or before the first anniversary of
the Date of Grant, all as reasonably acceptable to the Company in its sole
discretion. The exercise price for the Fourth Tranche of Shares shall be
the Fair Market Value (as determined pursuant to Section 4(g) below) of the
Shares on the date that this option becomes exercisable with respect to
such Shares.
Except as otherwise provided in this Agreement, this option may not be exercised
at any time on or after the fifth anniversary of the Date of Grant (the
"Expiration Date").
(b) Exercise Procedure. Subject to the conditions set forth in this
------------------
Agreement, this option shall be exercised by the Optionee's delivery of written
notice of exercise to the Treasurer of the Company, specifying the number of
Shares to be purchased and the purchase price to be paid therefor and
accompanied by payment in full in accordance with Section 5. Such exercise
shall be effective upon receipt by the Treasurer of the Company of such written
notice together with the required payment. The Optionee may purchase less than
the number of Shares covered hereby, provided that no partial exercise of this
option may be for any fractional share or for fewer than ten whole Shares.
(c) Continuous Relationship with the Company or its Affiliate Required.
-----------------------------------------------------------------
Except as otherwise provided in this Section 4, this option may not be exercised
unless the Optionee, at the time he or she exercises this option, is, and has
been at all times since the Date of Grant, an employee of the Company or its
Affiliate (an "Eligible Optionee").
(d) Termination of Relationship with the Company or its Affiliate.
-------------------------------------------------------------
If the Optionee ceases to be an Eligible Optionee for any reason, then, except
as provided in paragraphs (e) and (f) below, the right to exercise this option
shall terminate three months after such cessation (but in no event after the
Expiration Date), provided that this option shall be exercisable only to the
-------- ----
extent that the Optionee was entitled to exercise this option on the date of
such cessation. Notwithstanding the foregoing, if the Optionee, prior to the
Expiration Date, materially violates the non-competition or confidentiality
provisions of any employment contract, confidentiality and nondisclosure
agreement or other agreement between the Optionee and the Company or its
Affiliate, the right to exercise this option shall terminate immediately upon
such violation.
(e) Exercise Period Upon Death or Disability. If the Optionee's
----------------------------------------
employment agreement with Flagship dated as of the date hereof (the "Employment
Agreement") is terminated as a result of death or disability pursuant to Section
8(a)
-3-
<PAGE>
or Section 8(b) thereof prior to the Expiration Date while he or she is an
Eligible Optionee, or if the Optionee dies within thee months after the Optionee
ceases to be an Eligible Optionee (other than as the result of termination of
Optionee's employment agreement by Flagship for "Cause" pursuant to Section 8(c)
of the Employment Agreement), this option shall be exercisable, within the
period of three months following the date of such termination of the Optionee
(whether or not such exercise occurs before the Expiration Date), by the
Optionee or by the person to whom this option is transferred by will or by the
laws of descent and distribution, provided that this option shall be exercisable
-------- ----
only to the extent that this option was exercisable by the Optionee on the date
of his or her termination. Except as otherwise indicated by the context, the
term "Optionee," as used in this option, shall be deemed to include the estate
of the Optionee or any person who acquires the right to exercise this option by
bequest or inheritance or otherwise by reason of the death of the Optionee.
(f) Discharge for Cause. If the Optionee's Employment Agreement is
-------------------
terminated by Flagship for "Cause" pursuant to Section 8(c) thereof prior to the
Expiration Date, the right to exercise this option shall terminate immediately
upon such cessation of employment.
(g) Calculation of Fair Market Value. On any date specified herein,
--------------------------------
the term "Fair Market Value" shall mean the amount per share of Common Stock
equal to (a) the last sale price of Common Stock on such date or, if no such
sale takes place on such date, the average of the closing bid and asked prices
thereof on such date, in each case as officially reported on the principal
national securities exchange on which Common Stock is then listed or admitted to
trading, or (b) if Common Stock is not then listed or admitted to trading on any
national securities exchange but is designated as a national market system
security by the NASD, the last trading price of Common Stock on such date, or
(c) if there shall have been no trading on such date or if Common Stock is not
so designated, the average of the closing bid and asked prices of Common Stock
on such date as shown by the NASD automated quotation system, or (d) if Common
Stock is not then listed or admitted to trading on any national exchange or
quoted in the over-the-counter market, the fair value thereof determined in good
faith by the Board of Directors of the Company as of a date which is within 15
days of the date as of which the determination is to be made.
5. Payment of Purchase Price; Method of Payment. Payment of the purchase
--------------------------------------------
price for the Shares shall be made (i) by delivery to the Company of cash or a
check to the order of the Company in an amount equal to the purchase price of
such Shares, (ii) by any other means which the Board of Directors determines are
consistent with the purpose of the Plan and with applicable laws and regulations
(including without limitation, the provisions of Rule 16b-3 under the Securities
Exchange Act of 1934 and Regulation T promulgated by the Federal Reserve Board),
or (iii) by any combination of such methods of payment.
-4-
<PAGE>
6. Nontransferability of Option. This option is personal and no rights
----------------------------
granted hereunder may be transferred, assigned, pledged or hypothecated in any
way (whether by operation of law or otherwise) nor shall any such rights be
subject to execution, attachment or similar process, except that this option may
be transferred (i) by will or the laws of descent and distribution or (ii)
pursuant to a qualified domestic relations order as defined in Section 414(p) of
the Code. Upon any attempt to transfer, assign, pledge, hypothecate or
otherwise dispose of this option or of such rights contrary to the provisions
hereof, or upon the levy of any attachment or similar process upon this option
or such rights, this option and such rights shall, at the election of the
Company, become null and void.
7. Delivery of Shares: Compliance With Securities Laws, Etc.
--------------------------------------------------------
(a) General. The Company shall, upon payment of the option price for
-------
the number of Shares purchased and paid for, make prompt delivery of such Shares
to the Optionee, provided that if any law or regulation requires the Company to
take any action with respect to such Shares before the issuance thereof, then
the date of delivery of such Shares shall be extended for the period necessary
to complete such action.
(b) Listing Qualification, Etc. This option shall be subject to the
--------------------------
requirement that if, at any time, counsel to the Company shall determine that
the listing, registration or qualification of the Shares subject hereto upon any
securities exchange or under any state or federal law, or the consent or
approval of any governmental or regulatory body, or that the disclosure of non-
public information or the satisfaction of any other condition is necessary as a
condition of, or in connection with, the issuance or purchase of Shares
hereunder, this option may not be exercised, in whole or in part, unless such
listing, registration, qualification, consent or approval, disclosure or
satisfaction of such other condition shall have been effected or obtained on
terms acceptable to the Board of Directors. Nothing herein shall be deemed to
require the Company to apply for, effect or obtain such listing, registration,
qualification or disclosure, or to satisfy such other condition.
8. Stockholders Agreement. This option and any Shares acquired upon the
----------------------
exercise of this option are subject to certain restrictions on transfer and
requirements of sale contained in the Stockholders Agreement dated as of August
30, 1996, by and among the Company, the Optionee and certain stockholders of the
Company (the "Stockholders Agreement") [and the Retiree Stockholders Agreement
dated as of the date hereof, by and between the Company and the Optionee (the
"Retiree Stockholders Agreement"), each such agreement] as amended and in effect
from time to time. The Optionee Copies of the Stockholders Agreement [and the
Retiree Stockholders Agreement] are on file at the offices of the Company. Such
Shares and this option may be sold or otherwise transferred only in compliance
with the Stockholders Agreement [and the Retiree Stockholders Agreement].
-5-
<PAGE>
9. No Special Employment or Similar Rights. Nothing contained in the
---------------------------------------
Plan or this option shall be construed or deemed by any person under any
circumstances to bind the Company or its Affiliate to continue the employment or
other relationship of the Optionee with the Company or its Affiliate for the
period within which this option may be exercised.
10. Rights as a Stockholder. The Optionee shall have no rights as a
-----------------------
stockholder with respect to any Shares which may be purchased by exercise of
this option (including, without limitation, any rights to receive dividends or
non-cash distributions with respect to such Shares) unless and until a
certificate representing such Shares is duly issued and delivered to the
Optionee. No adjustment shall be made for dividends or other rights for which
the record date is prior to the date such stock certificate is issued.
11. Adjustment Provisions.
---------------------
(a) General. If, through or as a result of any merger, consolidation,
-------
sale of all or substantially all of the assets of the Company, reorganization,
recapitalization, reclassification, stock dividend, stock split, reverse stock
split or other similar transaction, (i) the outstanding shares of Common Stock
are increased or decreased or are exchanged for a different number or kind of
shares or other securities of the Company, or (ii) additional shares or new or
different shares or other securities of the Company or other non-cash assets are
distributed with respect to such shares of Common Stock or other securities, the
Optionee shall, with respect to this option or any unexercised portion hereof,
be entitled to the rights and be subject to the limitations, set forth in
Section 16(a) of the Plan.
(b) Board Authority to Make Adjustments. Any adjustments under this
-----------------------------------
Section 11 will be made by the Board of Directors, whose determination as to
what adjustments, if any, will be made and the extent thereof will be final,
binding and conclusive. No fractional shares will be issued pursuant to this
option on account of any such adjustments.
12. Mergers, Consolidation Distributions, Liquidations Etc. In the event
------------------------------------------------------
of a merger or consolidation or sale of all or substantially all of the assets
of the Company in which outstanding shares of Common Stock are exchanged for
securities, cash or other property of any other corporation or business entity,
or in the event of a liquidation of the Company, prior to the Expiration Date or
termination of this option, the Optionee shall, with respect to this option or
any unexercised portion hereof, be entitled to the rights and benefits, and be
subject to the limitations, set forth in Section 17(a) if the Plan.
13. Withholding Taxes. The Company's obligation to deliver Shares upon
-----------------
the exercise of this option shall be subject to the Optionee's satisfaction of
all
-6-
<PAGE>
applicable federal, state and local income and employment tax withholding
requirements.
14. Investment Representations; Legends.
-----------------------------------
(a) Representations. The Optionee represents, warrants and
---------------
covenants that:
(i) Any Shares purchased upon exercise of this option shall be
acquired for the Optionee's account for investment only, and not with
a view to or for the sale in connection with any distribution of the
Shares in violation of the Securities Act of 1933 (the "Securities
Act"), or any rule or regulation under the Securities Act.
(ii) The Optionee has had such opportunity as he or she has
deemed adequate to obtain from representatives of the Company such
information as is necessary to permit the Optionee to evaluate the
merits and risks of his or her investment in the Company.
(iii) The Optionee is able to bear the economic risk of holding
such Shares acquired pursuant to the exercise of this option for an
indefinite period.
(iv) The Optionee understands that (A) the Shares acquired
pursuant to the exercise of this option will not be registered under
the Securities Act and are "restricted securities" within the meaning
of Rule 144 under the Securities Act; (B) such Shares cannot be sold,
transferred or otherwise disposed of unless they are subsequently
registered under the Securities Act or an exemption from registration
is then available; (C) in any event, an exemption from registration
under Rule 144 or otherwise under the Securities Act may not be
available for at least two years and even then will not be available
unless a public market then exists for the Common Stock, adequate
information concerning the Company is then available to the public,
and other terms and conditions of Rule 144 are complied with; and (D)
there is now no registration statement on file with the Securities and
Exchange Commission with respect to any stock of the Company and the
Company has no obligation or current intention to register any Shares
acquired pursuant to the exercise of this option under the Securities
Act.
(v) The Optionee agrees, that, if the Company offers any of its
Common Stock for sale pursuant to a registration statement under the
Securities Act, the Optionee will not, without the prior written
consent of the Company, offer, sell, contract to sell or otherwise
dispose of,
-7-
<PAGE>
directly or indirectly (a "Disposition"), any Shares purchased upon
exercise of this option for a period of 90 days after the effective
date of such registration statement.
By making payment upon exercise of this option, the Optionee shall be deemed to
have reaffirmed, as of the date of such payment, the representations made in
this Section 14.
(b) Legends on Stock Certificate. All stock certificates representing
----------------------------
Shares of Common Stock issued to the Optionee upon exercise of this option shall
have affixed thereto legends substantially in the following forms, in addition
to any other legends required by applicable state law:
"The shares of stock represented by this certificate were issued
in a private placement, without registration under the Securities Act
of 1933, as amended (the "Act"), and may not be sold, assigned,
pledged or otherwise transferred in the absence of an effective
registration under the Act covering the transfer or an opinion of
counsel, satisfactory to the issuer, that registration under the Act
is not required."
"The shares of stock represented by this certificate are subject
to restrictions on transfer and requirements of sale contained set
forth in the Stockholders Agreement dated as of August 30, 1996, as
amended and in effect from time to time. The Company will furnish a
copy of such agreement to the holder of this certificate without
charge upon written request."
["The shares of stock represented by this certificate are subject
to restrictions on transfer and requirements of sale contained set
forth in the Retiree Stockholders Agreement dated as of the date
hereof, as amended and in effect from time to time. The Company will
furnish a copy of such agreement to the holder of this certificate
without charge upon written request."]
"The shares of stock represented by this certificate were
originally issued to, or issued with respect to shares originally
issued to the following Physician Stockholder:
-------------------
15. Miscellaneous.
-------------
(a) Except as provided herein, this option may not be amended or
otherwise modified unless evidenced by writing and signed by the Company and the
Optionee.
-8-
<PAGE>
(b) All notices under this option shall be mailed or delivered by hand
to the parties at their respective addresses set forth beneath their names below
or at such other address as may be designated in writing by either of the
parties to one another.
(c) This option shall be governed by and construed in accordance with
the laws of the Commonwealth of Massachusetts.
PHYSICIANS QUALITY CARE, INC.
By:
-----------------------
Name: Jerilyn P. Asher
Title: Chief Executive Officer
Address: 950 Winter Street, Suite 2410
Waltham, MA 02154
Date of Grant:
- -------------
_______________, 1996
-9-
<PAGE>
OPTIONEE'S ACCEPTANCE
The undersigned hereby accepts the foregoing option and agrees to the terms
and conditions thereof. The undersigned hereby acknowledges receipt of a copy
of the Company's 1995 Equity Incentive Plan.
OPTIONEE
----------------------------
-10-
<PAGE>
EXECUTION COPY
--------------
MANAGEMENT AGREEMENT
This Management Agreement (this "Agreement") is entered into as of the 30th
day of August 1996 by and between Physicians Quality Care, Inc., a Delaware
corporation (the "Company") and Bain Capital Partners V, L.P., a Delaware
limited partnership ("Bain").
Whereas, subject to the terms and conditions of this Agreement, the
Company desires to retain Bain to provide certain management and advisory
services to the Company, and Bain desires to provide such services;
Now, therefore, in consideration of the mutual covenants contained herein,
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto, intending to be legally
bound, hereby agree as follows:
1. Services. Bain hereby agrees to, during the term of this Agreement
(the "Term"):
a. provide the Company with advice in connection with the negotiation and
consummation of agreements, contracts, documents and instruments
necessary to provide the Company with financing from banks or other
financial institutions or other entities on terms and conditions
satisfactory to the Company; and
b. provide the Company with financial, managerial and operational advice in
connection with its day-to-day operations, including, without
limitation:
i. advice with respect to the investment of funds;
ii. advice with respect to the development and implementation of
strategies for improving the operating, marketing and financial
performance and the capitalization of the Company;
iii. advice with respect to the development, structuring and
implementation of strategic acquisitions and physician practice
affiliations; and
iv. advice in respect of telecommunications and information system and
accounting and administration.
2. Payment of Fees. The Company hereby agrees to:
a. during the Term, pay to Bain (or an affiliate of Bain designated by it)
a management fee of $500,000 per annum in exchange for the services
provided to the Company by Bain, as more fully described in Section 1 of
this Agreement, such fee being payable by the Company quarterly in
advance, the first such payment to be made at the closing of the first
Equity Investment; and
-1-
<PAGE>
b. during the Term, allow Bain to participate in the negotiation and
consummation of financing for the Company or any of its direct or
indirect subsidiaries or affiliates, and pay to Bain (or an affiliate of
Bain designated by it) a fee in connection therewith equal to one
percent (1%) of the gross amount of such financings, such fee to be due
and payable for the foregoing services at the closing of such financing;
provided, however, that the foregoing fee shall not be payable in
-------- -------
respect of the following financings: (i) debt facilities provided by a
lender which is a bank under the Bank Holding Company Act to satisfy
working capital and other similar requirements; (ii) capital lease
obligations; (iii) equipment lease financings; (iv) letters of credit;
(v) financing provided by the Bain Funds, Bain or Bain Capital, Inc;
(vi) up to an aggregate of [800,000] shares of capital stock to T. Rowe
Price Threshold Fund; and (vii) shares of capital stock issued to the
owners of physician group practices in connection with the affiliations
thereto or acquisitions therewith by the Company.
Each payment made pursuant to this Section 2 shall be paid by wire transfer
of immediately available federal funds to the account specified on Schedule
1 hereto, or to such other account(s) as Bain may specify to the Company in
writing prior to such payment.
3. Term. This Agreement shall continue in full force and effect, unless and
until terminated by mutual consent of the parties, for so long as Bain (or
any successor or permitted assign, as the case may be) continues to carry
on the business of providing services of the type described in Section 1
above; provided, however, that (i) this Agreement shall terminate on the
later to occur of (a) the five year anniversary of the date hereof and (b)
twelve (12) months after the date of a Qualified Public Offering (as
defined in the Restated Certificate of Incorporation of the Company); and
provided further either party may terminate this Agreement following a
material breach of the terms of this Agreement by the other party hereto
and a failure to cure such breach within 30 days following written notice
thereof; and provided further that each of (i) the obligations of the
Company under Section 4 below, (ii) any and all accrued and unpaid
obligations of the Company owed under Section 2 above and (iii) the
provisions of Section 7 shall survive any termination to the maximum extent
permitted under applicable law.
4. Expenses; Indemnification.
a. Expenses. Whether any of the transactions contemplated by this Agreement
or any other agreement executed in connection herewith shall be
consummated, the Company agrees to pay on demand all expenses incurred
by Bain, the Bain Funds and Bain Capital, Inc. (or any of them) in
connection with this Agreement and such other transactions and all
operations hereunder or otherwise incurred in connection with the
Company, including but not limited to (i) the fees and disbursements of:
(A) Ropes & Gray, special counsel to Bain Capital, Inc. and the Bain
Funds, (B) Price Waterhouse LLP, accountant to Bain
-2-
<PAGE>
Capital, Inc. and the Bain Funds, and (C) any other third party
consultants or advisors retained by Bain, Bain Capital, Inc., the Bain
Funds or either of the parties identified in clauses (A) and (B) arising
in connection therewith (including but not limited to the preparation,
negotiation and execution of this Agreement and any other agreement
executed in connection herewith or the consummation of the other
transactions contemplated hereby (and any and all amendments,
modifications, restructurings and waivers, and exercises and
preservations of rights and remedies hereunder or thereunder) and the
operations of the Company and any of its subsidiaries), and (ii) any out
of-pocket expenses incurred by Bain in connection with the provision of
services hereunder or the attendance at any meeting of the board of
directors (or any committee thereof) of the Company or any of its
affiliates, such fees and disbursements in (i) and (ii) above not to
exceed $100,000 per annum without the consent of the Company.
b. Indemnity and Liability. In consideration of the execution and delivery
of this Agreement by Bain, the Company hereby agrees to indemnify,
exonerate and hold each of Bain, Bain Capital, Inc. and each Bain Fund,
and each of their respective partners, shareholders, affiliates,
directors, officers, fiduciaries, employees and agents and each of the
partners, shareholders, affiliates, directors, officers, fiduciaries,
employees and agents of each of the foregoing (collectively, the
"Indemnitees") free and harmless from and against any and all actions,
causes of action, suits, losses, liabilities and damages, and expenses
in connection therewith, including without limitation attorneys' fees
and disbursements (collectively, the "Indemnified Liabilities"),
incurred by the Indemnitees or any of them as a result of, or arising
out of, or relating to the execution, delivery, performance, enforcement
or existence of this Agreement, except for any such Indemnified
Liabilities arising on account of such Indemnitee's gross negligence,
bad faith or willful misconduct, and if and to the extent that the
foregoing undertaking may be unenforceable for any reason, the Company
hereby agrees to make the maximum contribution to the payment and
satisfaction of each of the Indemnified Liabilities which is permissible
under applicable law. None of the Indemnitees shall be liable to the
Company or any of its affiliates, agents, advisors, representatives, or
accountants for any act or omission suffered or taken by such Indemnitee
that does not constitute gross negligence, bad faith or willful
misconduct. The Indemnitees agree that none of them will enter into a
settlement agreement for any Indemnified Liabilities without the prior
Consent of the Company. The Company shall have the right to participate
in any action which shall be the subject of this paragraph 4(b) at its
own cost and expense.
5. Assignment, etc. Neither party shall have the right to assign this
Agreement. Bain acknowledges that its services under this Agreement are
unique. Accordingly, any purported assignment by Bain shall be void.
Notwithstanding the foregoing, (a) Bain may assign all or part of its
rights and obligations hereunder to any affiliate of Bain which provides
services similar to those called for by this Agreement which shall be
acceptable to the Company in its reasonable discretion, in which event Bain
shall
-3-
<PAGE>
be released of all of its rights and obligations hereunder, and (b) the
provisions hereof for the benefit of the Bain Funds shall inure to the
benefit of their successors and assigns.
6. Amendments and Waivers. No amendment or waiver of any term, provision or
condition of this Agreement shall be effective, unless in writing and
executed by each of Bain and the Company. No waiver on any one occasion
shall extend to or effect or be construed as a waiver of any right or
remedy on any future occasion. No course of dealing of any person nor any
delay or omission in exercising any right or remedy shall constitute an
amendment of this Agreement or a waiver of any right or remedy of any party
hereto.
7. Additional Services. Nothing contained herein shall limit the right of the
Bain Funds, Bain or Bain Capital, Inc. to provide for consideration to any
person, including the Company, any additional services and advice in
connection with the sale or merger of the Company, its subsidiaries or any
affiliates thereof or any securities of such entities.
8. Miscellaneous.
a. Choice of Law. This Agreement shall be governed by and construed in
accordance with the domestic substantive laws of The Commonwealth of
Massachusetts without giving effect to any choice or conflict of law
provision or rule that would cause the application of the domestic
substantive laws of any other jurisdiction.
b. Consent to Jurisdiction. Each of the parties agrees that all actions,
suits or proceedings arising out of or based upon this Agreement or the
subject matter hereof shall be brought and maintained exclusively in the
federal and state courts of The Commonwealth of Massachusetts. Each of
the parties hereto by execution hereof (i) hereby irrevocably submits to
the jurisdiction of the federal and state courts in The Commonwealth of
Massachusetts for the purpose of any action, suit or proceeding arising
out of or based upon this Agreement or the subject matter hereof and
(ii) hereby waives to the extent not prohibited by applicable law, and
agrees not to assert, by way of motion, as a defense or otherwise, in
any such action, suit or proceeding, any claim that it is not subject
personally to the jurisdiction of the above-named courts, that it is
immune from extraterritorial injunctive relief or other injunctive
relief, that its property is exempt or immune from attachment or
execution, that any such action, suit or proceeding may not be brought
or maintained in one of the above-named courts, that any such action,
suit or proceeding brought or maintained in one of the above-named
courts should be dismissed on grounds of forum non conveniens, should be
--------------------
transferred to any court other than one of the above-named courts,
should be stayed by virtue of the pendency of any other action, suit or
proceeding in any court other than one of the above-named courts, or
that this Agreement or the subject matter hereof may not be enforced in
or by any of the above-named courts. Each of the parties hereto hereby
consents to service of process in any such suit, action or
-4-
<PAGE>
proceeding in any manner permitted by the laws of The Commonwealth of
Massachusetts, agrees that service of process by registered or certified
mail, return receipt requested, at the address specified in or pursuant
to Section 9 is reasonably calculated to give actual notice and waives
and agrees not to assert by way of motion, as a defense or otherwise, in
any such action, suit or proceeding any claim that service of process
made in accordance with Section 9 does not constitute good and
sufficient service of process. The provisions of this Section 7(b) shall
not restrict the ability of any party to enforce in any court any
judgment obtained in a federal or state court of The Commonwealth of
Massachusetts.
c. Waiver of Jury Trial. To THE EXTENT NOT PROHIBITED BY APPLICABLE LAW
WHICH CANNOT BE WAIVED, EACH OF THE PARTIES HERETO HEREBY WAIVES, AND
COVENANTS THAT IT WILL NOT ASSERT (WHETHER AS PLAINTIFF, DEFENDANT, OR
OTHERWISE), ANY RIGHT TO TRIAL BY JURY IN ANY FORUM IN RESPECT OF ANY
ISSUE, CLAIM, DEMAND, CAUSE OF ACTION, ACTION, SUIT OR PROCEEDING
ARISING OUT OF OR BASED UPON THIS AGREEMENT OR THE SUBJECT MATTER
HEREOF, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING AND
WHETHER IN CONTRACT OR TORT OR OTHERWISE. Each of the parties hereto
acknowledges that it has been informed by each other party that the
provisions of this Section 7(c) constitute a material inducement upon
which such party is relying and will rely in entering into this
Agreement and the transactions contemplated hereby. Any of the parties
hereto may file an original counterpart or a copy of this Agreement with
any court as written evidence of the consent of each of the parties
hereto to the waiver of its right to trial by jury.
9. Merger/Entire Agreement. This Agreement contains the entire understanding
of the parties with respect to the subject matter hereof and supersedes any
prior communication or agreement with respect thereto.
10. Notice. All notices, demands, and communications of any kind which any
party may require or desire to serve upon any other party under this
Agreement shall be in writing and shall be served upon such other party and
such other party's copied persons as specified below by personal delivery
to the address set forth for it below or to such other address as such
party shall have specified by notice to each other party or by mailing a
copy thereof by certified or registered mail, or by Federal Express or any
other reputable overnight courier service, postage prepaid, with return
receipt requested, addressed to such party and copied persons at such
addresses. In the case of service by personal delivery, it shall be deemed
complete on the first business day after the date of actual delivery to
such address. In case of service by mail or by overnight courier, it shall
be deemed complete, whether or not received, on the third day after the
date of mailing as shown by the registered or certified mail receipt or
courier service receipt. Notwithstanding the foregoing, notice to any party
or copied person of change of address shall be deemed complete only upon
actual receipt by an officer or agent of such party or copied person.
-5-
<PAGE>
If to the Company, to it at:
Physicians Quality Care, Inc.
950 Winter Street
Suite 2410
Waltham, MA 02154
Attention: Chief Executive Officer
If to Bain, to it at:
Two Copley Place, 7th Floor
Boston, Massachusetts 02116
Attention: Stephen Pagliuca and Marc Wolpow
With a Copy to:
Ropes & Gray
One International Place
Boston, Massachusetts 02110
Attention: Lauren I. Norton
11. Severability. If in any judicial or arbitral proceedings a court or
arbitrator shall refuse to enforce any provision of this Agreement, then
such unenforceable provision shall be deemed eliminated from this Agreement
for the purpose of such proceedings to the extent necessary to permit the
remaining provisions to be enforced. To the full extent, however, that the
provisions of any applicable law may be waived, they are hereby waived to
the end that this Agreement be deemed to be valid and binding agreement
enforceable in accordance with its terms, and in the event that any
provision hereof shall be found to be invalid or unenforceable, such
provision shall be construed by limiting it so as to be valid and
enforceable to the maximum extent consistent with and possible under
applicable law.
12. Counterparts. This Agreement may be executed in any number of counterparts
and by each of the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which
together shall constitute one and the same agreement.
-6-
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf as an instrument under seal as of the date first above
written by its officer or representative thereunto duly authorized.
THE COMPANY: PHYSICIANS QUALITY CARE, INC.
By: /s/ Jerilyn P. Asher
----------------------------------------------
Title
BAIN: BAIN CAPITAL PARTNERS V, L.P.
By: Bain Capital Investors V, Inc.,
its general partner
By /s/ Stephen Pagluica
----------------------------------------------
Title:
-7-
<PAGE>
Schedule 1 to
Management Agreement
--------------------
Wire Transfer Instructions for
Bain Capital Partners V, L.P.
Bankers Trust Company, NY
ABA # 021 001 033
For: Brown Brothers Harriman
Account # 015 01 026
Account Name: Bain Capital Partners V, L.P.
Acct. # 810512-4
<PAGE>
STANDARD OFFICE LEASE
950 WINTER STREET
BAY COLONY CORPORATE CENTER
WALTHAM, MASSACHUSETTS
TABLE OF CONTENTS
ARTICLE
NUMBER CAPTION
I BASIC LEASE PROVISIONS............................................ 1
II PREMISES AND APPURTENANT RIGHTS................................... 3
III BASIC RENT; TENANT'S ELECTRICAL CHARGE............................ 5
IV TERM OF LEASE..................................................... 5
V REAL ESTATE TAXES................................................. 7
VI OPERATING EXPENSES................................................ 9
VII USE OF PREMISES................................................... 12
VIII ASSIGNMENT AND SUBLETTING......................................... 14
IX RESPONSIBILITY FOR REPAIRS AND CONDITION OF PREMISES;
SERVICES TO BE FURNISHED BY LANDLORD 16
X INDEMNITY AND INSURANCE........................................... 20
XI LANDLORD'S ACCESS TO PREMISES..................................... 22
XII FIRE, EMINENT DOMAIN, ETC......................................... 22
XIII DEFAULT........................................................... 24
XIV MISCELLANEOUS PROVISIONS.......................................... 26
14.1 Extra Hazardous Use...................................... 26
14.2 Waiver................................................... 27
14.3 Covenant of Quiet Enjoyment.............................. 27
14.4 Landlord's Liability..................................... 28
14.5 Rules and Regulations.................................... 28
14.6 Additional Charges....................................... 28
14.7 Invalidity of Particular Provisions...................... 28
14.8 Provisions Binding, Etc.................................. 28
14.9 Recording................................................ 29
14.10 Notices.................................................. 29
14.11 When Lease Becomes Binding............................... 29
14.12 Paragraph Headings....................................... 29
14.13 Subordination; Attornment................................ 30
14.14 Assignment of Rents and Transfer of Title................ 31
14.15 Status Report............................................ 31
14.16 Remedying Defaults....................................... 32
14.17 Holding over............................................. 32
14.18 Waiver of Subrogation.................................... 32
14.19 Surrender of Premises.................................... 33
14.20 Brokerage................................................ 33
<PAGE>
14.21 Substitute Space......................................... 33
14.22 Waiver of Jury Trial..................................... 33
14.23 Governing Law............................................ 34
(EXHIBITS). The Exhibits listed below are incorporated in this Lease by
reference and are to be construed as part of this Lease.
Exhibit A: Plan(s) Showing Leased Premises
Exhibit B: Rules and Regulations
Exhibit C: [INTENTIONALLY OMITTED.]
Exhibit D: [INTENTIONALLY OMITTED.]
Exhibit E: Building Services
Exhibit F: Description of Land
Exhibit G: Description of Office Park
<PAGE>
LEASE
THIS INSTRUMENT IS A LEASE, dated as of November __, 1995, in which
Landlord and Tenant are the parties hereafter named, and which relates to space
in a building (the "Building") known as 950 Winter Street, located in Bay Colony
Corporate Center, Waltham, Massachusetts. The parties to this instrument hereby
agree as follows:
ARTICLE I
BASIC LEASE PROVISIONS
1.1 INTRODUCTION. Each reference in this Lease to any of the following
subjects referred to in Section 1.2 or 1.3 shall be construed to incorporate the
data stated for that subject in this Article.
1.2 BASIC DATA.
Landlord: Shorenstein Management, Inc., as Trustee for SRI Two Realty
Trust
Landlord's Address: c/o The Shorenstein Company
200 Park Avenue
New York, NY 10166
Attn: Glenn Shannon, Executive Vice President
with a copy to: I. Aaron Cohen, P.C.
c/o Kassler & Feuer, P.C.
101 Arch Street
Boston, MA 02110
-and-
c/o The Shorenstein Company
Legal Department
555 California Street, 49th Floor
San Francisco, CA 94104
Attn: Legal Department
Tenant: Physician's Quality Care, Inc., a Delaware corporation
Tenant's Original Address: 950 Winter Street
Waltham, MA 02154
Building Rentable Area: 268,584 square feet
Tenant's Rentable Area: 6,358 square feet
Leased Premises or Premises: See Exhibit A
-1-
<PAGE>
Anticipated Term Commencement Date: December 1, 1995.
Initial Term: 36 months
Basic Rent: $171,672.00 per annum
Operating Expense Base: Operating Expenses incurred on account of
calendar 1996
Tax Base: Taxes incurred on account of the July 1, 1995 - June 30, 1996
fiscal tax year
Tenant's Tax and Operating Percentage: 2.32% (See Section 5.1.)
Tenant's Electrical Charge: $5,404.30 per annum
($0.85 per rentable sq. ft.)
Public Liability Insurance: Combined single limit for bodily injury and
property damage of $3,000,000.00.
Permitted Uses: Administrative offices, clerical offices and
statistical offices.
Broker(s): The Shorenstein Company, Inc.
Construction Representatives: For Landlord: William Elder
For Tenant: Edward J. Morrissey
1.3 ADDITIONAL DEFINITIONS.
Building: The building erected on the Land, and all alterations and
additions thereto and replacements thereof.
Business Days: All days except Sundays and legal holidays.
Commencement Date: As defined in Section 4.1.
Common Property: All of the land and improvements in the Office Park, as
from time to time constituted (including land owned by
any entity affiliated with Landlord), which is used or
enjoyed by, or made available to, Tenant and other
lessees of the Office Park for access, parking or other
purposes. The term Common Property shall include all
retention ponds, drainage facilities, electric
substations, utility lines, pumping stations and other
facilities and structures which serve the Office Park;
provided, however, that Common Property shall not include
(a) any office building located in the Office Park except
the Building, (b) land reserved exclusively to provide
parking for other buildings within the Office Park and
(c) property reserved for future development
-2-
<PAGE>
by Landlord, except to the extent the same is reserved
for, made available to or used by all lessees of the
Office Park.
Default Rate: As defined in Section 14.16.
Escalation Charges: The amounts prescribed in Sections 5.1, 5.2 and 6.2
plus Tenant's Electrical Charge.
Land: The lot or parcel of land on which the Building is located as more
particularly set forth on Exhibit F, subject to adjustments of the
Lot boundaries from time to time.
Leased Premises or Premises: A portion of the Building as shown on
Exhibit A annexed hereto.
Office Park: Bay Colony Corporate Center, which includes all of the land
described in Exhibit G (subject to adjustments of the
boundaries thereof and/or the boundaries of each lot thereof)
plus such additional land as may be added thereto from time
to time.
Operating Expenses: As determined in accordance with Section 6.1.
Property: The Building and the Land.
Taxes: As determined in accordance with Section 5.1.
Tax Year: As defined in Section 5.1.
Tenant's Removable Property: As defined in Section 7.2.
Term of this Lease: The Initial Term and any proper extension thereof
exercised in accordance with the provisions of this
Lease. The Initial Term shall commence on the
Commencement Date and expire at the close of the day on
which the Initial Term ends, except that if the
Commencement Date shall be other than the first day of
a calendar month, the expiration of the Initial Term
shall be at the close of the day on the last day of the
calendar month in which the end of the Initial Term
shall fall.
ARTICLE II
PREMISES AND APPURTENANT RIGHTS
2.1 LEASE OF PREMISES. Landlord hereby demises and leases to Tenant for
the Term of this Lease and upon the terms and conditions hereinafter set forth,
and Tenant hereby accepts from Landlord, the Premises and all appurtenant areas.
-3-
<PAGE>
2.2 APPURTENANT RIGHTS AND RESERVATIONS.
(a) Tenant shall have, as appurtenant to the Premises, the non-
exclusive right to use and permit its invitees to use, in common with others,
public or common lobbies, hallways, stairways, elevators and common walkways
necessary for access to the Building, and if the portion of the Premises on any
floor includes less than the entire floor, the common toilets, corridors and
elevator lobby of such floor; but such rights shall always be subject to the
rules and regulations from time to time established by Landlord pursuant to
Section 14.5 and to the right of Landlord to designate and change from time to
time areas and facilities so to be used.
(b) Tenant shall have, as appurtenant to the Premises, the non-
exclusive right, in common with others entitled thereto, to use the portions of
the Land in such other locations thereon as are designated from time to time by
Landlord, for parking by its customers, employees, suppliers and visitors.
Landlord reserves the right from time to time, and at Landlord's sole
discretion, to alter or redesign the parking area, to temporarily close portions
of the parking area and/or to relocate the ingress and egress to and from the
parking area and Building provided, however, that Landlord will use reasonable
efforts to minimize interference with Tenant's use and enjoyment of the
Premises. Tenant and its employees shall also have the right to use, in common
with others entitled thereto, such other common areas and facilities in or
appurtenant to the Building as Landlord may from time to time designate and
provide.
(c) Tenant shall also have, as appurtenant to the Premises, the non-
exclusive right, in common with others entitled thereto from time to time,
subject to such regulations as Landlord shall from time to time impose, to use
the roads of the Office Park located within the Common Property for access to
the Property and the Premises.
(d) Excepted and excluded from the Premises are exterior faces of
exterior walls, the common stairways and stairwells, elevators and elevator
shafts; but the entry doors to the Premises are a part thereof. Landlord
reserves the right from time to time (a) to install, use, maintain, replace and
relocate for service to the Premises and other parts of the Building, or either,
pipes, ducts, conduits, wires and appurtenant fixtures, wherever located in the
Premises or Building, and (b) to alter or relocate any other common facility,
provided that substitutions are substantially equivalent or better. However,
with respect to any such activities within the Premises, Landlord shall act
diligently to minimize interference with Tenant's activities, so as to assure
that there will be no material interference with Tenant's use and enjoyment of
the Premises. Landlord reserves the exclusive use of all fan rooms, electric
and telephone closets, janitor closets, freight elevator vestibules, pipes,
ducts, conduits, wires and appurtenant fixtures located within the Premises
which serve exclusively or in common other parts of the Building.
-4-
<PAGE>
ARTICLE III
BASIC RENT; TENANT'S ELECTRICAL CHARGE
3.1 BASIC RENT.
(a) Tenant agrees to pay to Landlord, or as directed by Landlord,
without offset, abatement (except as provided in Section 12.1), deduction or
demand, Basic Rent and Tenant's Electrical Charge. Basic Rent and Tenant's
Electrical Charge shall be payable in equal monthly installments, in advance, on
the first day of each and every calendar month during the Term of this Lease, at
Landlord's Address, or at such other place as Landlord shall from time to time
designate by notice.
(b) Basic Rent and Tenant's Electrical Charge for any partial month
shall be prorated on a daily basis, and if the Initial Term commences on a day
other than the first day of a calendar month, the first payment which Tenant
shall make to Landlord shall be payable on the Commencement Date and shall be
equal to a proportionate part of the monthly installment of Basic Rent and
Tenant's Electrical Charge for the partial month from the Commencement Date to
the last day of the month in which the Commencement Date occurs plus the
installment of Tenant's Electrical Charge and Basic Rent for the succeeding
calendar month. In addition to any charges pursuant to Section 14.16, Tenant
shall pay a late charge equal to 5% of the amount of any Basic Rent payment or
Escalation Charge not paid when due (unless such late charge is prohibited by
any applicable law).
ARTICLE IV
TERM OF LEASE
4.1 COMMENCEMENT DATE. The Commencement Date shall be the date on which
Landlord tenders the Premises to Tenant for Tenant's possession; provided,
however, that if the date of tender is earlier than December 1, 1995, then the
Commencement Date shall be the earlier of (a) the date on which Tenant accepts
possession of the Premises and (b) December 1, 1995. At such time as the
Commencement Date has occurred, Landlord and Tenant shall enter into a written
instrument, confirming the exact date of the Commencement Date.
If Landlord shall be unable to give possession of the Premises on the
Anticipated Term Commencement Date because the previous occupant of the Premises
has not vacated the Premises, Landlord shall not be subject to any liability for
failure to give possession on said date, nor shall such failure affect the
validity of this Lease.
4.2 INITIAL CONDITION OF THE PREMISES. Tenant expressly agrees that it
will accept possession of the Premises in a totally "as-is" condition; that
Landlord has made no representation or warranty concerning the fitness of the
Premises for Tenant's intended use of the Premises; and that Landlord shall have
no obligation to alter, renovate or improve the Premises in any way.
4.3. [INTENTIONALLY OMITTED.]
-5-
<PAGE>
4.4 [INTENTIONALLY OMITTED.]
4.5 GENERAL PROVISIONS APPLICABLE TO CONSTRUCTION. All of Tenant's
alterations, additions and installation of furnishings shall be coordinated with
any work being performed by Landlord and in such manner as to maintain
harmonious labor relations and not damage the Property or interfere with
Building construction or operation and, except for installation of furnishings,
shall, at Landlord's option, be performed by Landlord's general contractor or by
contractors or workmen first approved by Landlord. If Landlord shall require
that Tenant retain Landlord's contractor, Landlord's contractor shall provide
its services at costs reasonably comparable to the charges imposed by other
reputable contractors in the Metropolitan Boston area; and Landlord shall
provide supervisory services (for which Tenant shall pay to Landlord a
reasonable supervisory fee). If Landlord shall not require that Tenant retain
Landlord's contractor, Landlord shall not unreasonably withhold or delay its
approval of contractors and workmen chosen by Tenant. Except for work by
Landlord's general contractor, Tenant before its work is started shall: secure
all licenses and permits necessary therefor; deliver to Landlord a statement of
the names of all of its contractors and subcontractors and the estimated cost of
all labor and material to be furnished by them; and cause each contractor to
carry workmen s compensation insurance in statutory amounts covering all of the
contractor's and subcontractor's employees and comprehensive public liability
insurance and property damage insurance with such limits as Landlord may
reasonably require but in no event less than, with respect to public liability
insurance, the amount specified in Section 1.2 (all such insurance to be written
in companies approved by Landlord and insuring Landlord and Tenant as well as
the contractors), and to deliver to Landlord certificates of all such insurance.
Tenant agrees to pay promptly when due the entire cost of any work done on the
Premises by Tenant, its agents, employees, or independent contractors, and not
to cause or permit any liens for labor or materials performed or furnished in
connection therewith to attach to the Premises or the Property and immediately
to discharge any such liens which may so attach and, at the request of Landlord,
to deliver to Landlord security satisfactory to Landlord against liens arising
out of the furnishing of such labor and materials. Upon completion of any work
done on the Premises by Tenant, its agents, employees or independent
contractors, Tenant shall promptly deliver to Landlord original lien releases
and waivers executed by each contractor, subcontractor, supplier, materialman,
architect, engineer or other party which furnished labor, materials or other
services in connection with such work and pursuant to which all liens, claims
and other rights of such party with respect to labor, material or services
furnished in connection with such work are unconditionally released and waived.
No material or equipment shall be incorporated in the Premises by Tenant which
is subject to any lien, charge, mortgage or other encumbrance of any kind
whatsoever, or subject to any conditional sale, or other similar or dissimilar
title retention agreement. If Tenant fails to comply with any of the foregoing
obligations, then, in addition to all other rights and remedies hereunder,
Landlord may by notice to Tenant require Tenant to cease the performance of any
alteration, addition or installation until the offending condition has been
remedied.
All construction work required or permitted by this Lease shall be done in
a good and workmanlike manner and in compliance with all applicable laws and
lawful ordinances, regulations and orders of governmental authority and insurers
of the Property. Each party may inspect the work of the other at reasonable
times (and without causing interference with
-6-
<PAGE>
on-going construction activities) and shall promptly give notice of observed
defects. Each party authorizes the other to rely, in connection with design and
construction, upon approval and other actions on the party's behalf by the
Construction Representative of the party, if any, named in Article I or any
person named in substitution or addition by notice to the party relying.
The foregoing provisions of this Section 4.5 shall apply from and after the
execution of this Lease, and thereafter for so long as this Lease shall remain
in force and effect.
4.6 CHANGES IN THE OFFICE PARK. Landlord expressly reserves the right to
change the layout, design and plans for the Office Park and the Common Property
at any time and to add to or reduce the size of the Land; provided that no
reduction in the size of the Land may result in a permanent material adverse
effect upon the Building or the parking areas, streets or sidewalks serving the
Building. Landlord hereby expressly reserves the right to dedicate the roads
within the Office Park for public use.
ARTICLE V
REAL ESTATE TAXES
5.1 PAYMENTS ON ACCOUNT OF REAL ESTATE TAXES.
(a) For the purpose of this Article, the term "Tax Year" shall mean
the twelve-month period commencing on the July 1 immediately preceding the
Commencement Date and each twelve-month period thereafter occurring wholly or
partially during the Term, and the term "Taxes" shall mean all taxes and special
assessments of every kind and nature assessed by any governmental authority upon
or against the Land and/or the Building and/or the Property or any part thereof,
or payments in lieu thereof, or which Landlord shall become obligated to pay
because of or in connection with the ownership, leasing and operation of the
Land and/or the Building and/or the Property and reasonable expenses of any
proceedings for abatement of Taxes. "Taxes" shall also include, if any, such
portion of any taxes and special assessments assessed against the remainder of
the Office Park as may be allocated to Landlord as owner of the Land and/or the
Building and/or the Property, pursuant to any joint operating agreement or other
similar arrangement between Landlord and the owner(s) of the remaining portions
of the Office Park. The amount of special taxes or special assessments to be
included shall be limited to the amount of the installment (plus any interest,
other than penalty interest, payable thereon) of such special tax or special
assessment required to be paid during the year in respect of which such taxes
are being determined. There shall be excluded from Taxes (i) any federal, state
or local income, profit, franchise, privilege, capital levy, excise,
inheritance, estate, succession, gift, deed, conveyance or transfer taxes, and
(ii) so long as Tenant has satisfied its obligations under this Article V on a
timely basis, any penalties or interest resulting from the late payment of
Taxes: provided, however, that if at any time during the Term the present system
of ad valorem tax on real property shall be changed so that, in lieu of the
whole or any part of the ad valorem tax on real property, there shall be
assessed to Landlord a capital levy or other tax on the gross rents received
with respect to the Property, or a federal, state, county, municipal, or other
local income, franchise, excise or similar tax, assessment, levy or charge
(distinct from any now in effect in the jurisdiction in which the Property is
located) measured by or based,
-7-
<PAGE>
in whole or in part, upon any such gross rents, then any and all of such capital
levy or taxes shall be included within the term "Taxes", but only to the extent
that the same would be payable if the Property were the only property of
Landlord.
(b) In the event that, for any reason, Taxes shall be greater during
any Tax Year than the Tax Base, Tenant shall pay to Landlord, as an Escalation
Charge, an amount (the "Tax Excess") equal to the excess of Taxes over the Tax
Base multiplied by Tenant's Tax and Operating Percentage, such amount to be
apportioned for any fraction of a Tax Year in which the Commencement Date falls
or the Term ends.,
(c) Payment of Tenant's Tax Excess shall be made to Landlord within
twenty (20) days from the date Landlord shall give written notice to Tenant
that, based upon a bill received for Taxes (or partial Taxes), or other form of
notice received from any governmental authority responsible for Taxes, there is
due from Tenant any Tax Excess (which collection notice shall set forth the
manner of computation of any Tax Excess due from Tenant). At Landlord's
election, simultaneously with Tenant's monthly payments of Basic Rent, Tenant
shall remit to Landlord one-twelfth of Landlord's estimate of the Tax Excess for
the then-current Tax Year. If the total of such monthly remittances is greater
than the Tax Excess for such Tax Year, Landlord shall credit the difference
against the next installment of Tax Excess due to Landlord hereunder (except,
that, upon Tenant's request, and so long as Tenant is not then in default in the
performance of its obligations hereunder, Landlord shall pay such excess
directly to Tenant, in cash); and if the total of such remittances is less than
the Tax Excess for such Tax Year, Tenant shall pay the difference at the time
any Tax Excess becomes due and payable as hereinabove provided.
(d) If Landlord shall receive any refund of Taxes as to which Tenant
has paid Tax Excess, Tenant shall be entitled to receive a refund from Landlord
in an amount equal to the smaller of (i) the amount of Tax Excess paid by Tenant
with respect to the Tax Year as to which the refund was obtained by Landlord and
(ii) Tenant's Tax and Operating Percentage multiplied by the amount (if any) by
which the amount of the refund received by Landlord exceeds the costs and
expenses incurred by Landlord in obtaining such refund.
5.2 ALTERNATE TAXES. If some method of taxation shall replace the current
method of assessment of real estate taxes, or the type thereof, Tenant agrees
that Tenant shall pay an equitable share of the same computed in a fashion
consistent with the method of computation herein provided, to the end that
Tenant's share thereof shall be, to the maximum extent practicable, comparable
to that which Tenant would bear under the foregoing provisions.
5.3 PERSONAL PROPERTY TAXES. Tenant shall pay, promptly when due, all
taxes which may be imposed upon personal property (including, without
limitation, fixtures and equipment) in the Premises to whomever assessed.
-8-
<PAGE>
ARTICLE VI
OPERATING EXPENSES
6.1 DEFINITIONS. For the purpose of this Article, the following terms
shall have the following respective meanings:
Operating Year: Each calendar year in which any part of the Term
shall fall.
Operating Expenses: All costs and expenses incurred with respect to
the operation, administration, cleaning, repair, management, maintenance
and upkeep of (i) the Property and (ii) the Common Property (including the
amount (if any) of any Operating Expenses incurred by other parties with
respect to the remainder of the Office Park and allocated to Landlord as
owner of the Land and/or the Building and/or the Property), including
without limiting the generality of the foregoing:
(a) all salaries, wages, fringe benefits, payroll taxes and
workmen's compensation insurance premiums related thereto with respect
to any employees of Landlord engaged in security, operation,
management and maintenance of the Property and the Common Property,
exclusive, however, of the allocable share of all management personnel
expenses not related to the operation, maintenance or upkeep of the
Property and the Common Property;
(b) all utilities and other costs related to provision of
heat (including oil and/or gas), air-conditioning, lighting, and water
(including sewer charges) and other utilities to the Property and the
Common Property;
(c) all costs, including, without limitation, material and
equipment costs, for cleaning, maintenance, replacement, repair and
upkeep of the Property (including without limitation window cleaning
of the Building) and/or the Common Property, and of all parking areas,
roads and landscaping located on the Property and the Common Property;
(d) all costs of any insurance carried by Landlord relating
to the Property and/or the Common Property;
(e) all costs of operating and maintaining the Property
and/or the Common Property in good working order, appearance and
condition (including, but not limited to, snow removal, security,
operation and repair of heating and air-conditioning equipment,
elevators, and any other common Building equipment or system), as well
as the cost of all repairs and replacements other than repairs for
which Landlord has received full reimbursement from contractors, other
tenants of the Building or others;
-9-
<PAGE>
(f) all legal, accounting, management and other fees and
charges directly related to the operation, management and
administration of the Property and the Common Property (including any
management fee charged by Landlord for its services in connection with
the operation, management and administration of the Property);
(g) all costs for electricity supplied to the Property
and/or the Common Property after deducting (i) Tenant's Electrical
Charge paid by Tenant for such period and (ii) all payments of
electricity charges from other tenants in the Property for such period
which are separately stated in such other tenant leases as "Tenant's
Electrical Charge". The cost of electricity supplied to Tenant and to
other tenants of the Building which is separately metered shall not be
included in Operating Expenses (but, in such case, the Operating
Expense Base shall be reduced as and to the extent such Operating
Expense includes sums attributable to the electricity being metered);
(h) all costs of disposal of refuse from the Property and/or
the Common Property;
(i) all license, permit and inspection fees relating to the
Property, the Common Property or any part thereof,
(j) all capital expenses incurred for the purpose of
reducing Operating Expenses (even if no such reduction in fact
results) or required to be made by federal, state or local regulation
or ordinance not in effect as of the Commencement Date;
(k) if during the Term, Landlord shall add or replace a
capital item other than as provided in Item (j), there shall be
included in Operating Expenses for that and each succeeding calendar
year the amount of the annual charge-off (determined as hereinafter
provided) of such capital expenditure together with interest at an
annual rate equal to 2% over the "prime rate" of Bank of Boston in
effect at the time of making such capital expenditure (less insurance
or other proceeds, if any, collected by Landlord by reason of damage
to, or destruction of' any capital item so replaced). (Annual charge-
off shall be determined by dividing the original cost of a capital
item or a capital expenditure made during the Term by the number of
years of useful life of the item acquired, and the useful life shall
be determined by Landlord's accountants in accordance with generally
accepted accounting principles and practices in effect at the time of
acquisition of the capital item.); and
(1) all costs and fees payable under service and management
contracts relating to matters referred to in Items (a) through (i)
hereof.
-10-
<PAGE>
There shall not be included in Operating Expenses:
(i) Painting, decoration or other work which Landlord
performs for any other tenant or prospective tenant of the Building
other than painting, decoration or other work which is standard for
the Building and performed for tenants subsequent to their initial
occupancy;
(ii) Leasing commissions and expenses of procuring tenants,
including lease concessions and lease takeover obligations;
(iii) Legal fees incurred in connection with the execution
or enforcement of any other lease concerning premises in the Building;
(iv) Depreciation;
(v) Interest on and amortization of debt;
(vi) Wages or salaries of employees over the rank of
building manager;
(vii) Taxes; and
(viii) Rents payable under any ground lease affecting the
Property.
If, during any portion of the Operating Year for which Operating Expenses
are being computed, less than 95% of Building Rentable Area was occupied by
tenants, actual Operating Expenses incurred shall be reasonably extrapolated by
Landlord on an item by item basis to the estimated Operating Expenses that would
have been incurred if the Building were 95% occupied for such year, and such
extrapolated amount shall, for the purpose hereof be deemed to be Operating
Expenses for such Year.
Tenant acknowledges that Landlord's formula for sharing of Operating
Expenses stated in this Lease is based on the assumption that Landlord will be
providing substantially similar services to all tenants in the Property from
year to year. If this assumption is not, in fact, correct (that is, if Landlord
is not furnishing any particular work or service (the cost of which, if
performed by Landlord, would be included in Operating Expenses) to a tenant who
has undertaken to perform such work or service in lieu of the performance
thereof by Landlord), Operating Expenses shall be deemed, for purposes of this
paragraph, to be increased by an amount equal to the additional Operating
Expenses which would reasonably have been incurred during such period by
Landlord if it had, at its own expense, furnished such work or service to such
tenant.
6.2 TENANT'S PAYMENTS. In the event that Operating Expenses for any
Operating Year shall exceed the Operating Expense Base, Tenant shall pay to
Landlord, as an Escalation Charge, an amount (the "Operating Expense Excess")
equal to Tenant's Tax and
-11-
<PAGE>
Operating Percentage multiplied by the sum of (i) 100% of such increase in
Operating Expenses related to the Property plus (ii) the percentage of any such
increase in Operating Expenses related to the Common Property which Landlord
fairly allocates to the Property, such amount to be apportioned for any
Operating Year in which the Commencement Date falls or the Term ends.
Payment of any Operating Expense Excess shall be made to Landlord within
twenty (20) days from the date Landlord shall furnish to Tenant an itemized
statement of Tenant's share of any such excess, prepared, allocated and computed
in accordance with generally accepted accounting principles. At Landlord's
election, simultaneously with Tenant's monthly payments of Basic Rent, Tenant
shall remit to Landlord one-twelfth (1/12th) of Landlord's estimate of the
Operating Expense Excess for the then-current Operating Year. If the total of
such monthly remittances is greater than the Operating Expense Excess for such
year, Landlord shall credit any such excess payments against the next
installment of Operating Expense Excess due to Landlord hereunder (except that,
upon Tenant's request, and so long as Tenant is not then in default in the
performance of its obligations hereunder, Landlord shall pay such excess
directly to Tenant, in cash); and if the total of such remittances is less than
the Operating Expense Excess for such year, Tenant shall pay the difference to
Landlord at the time the first monthly installment of Operating Expense Excess
with respect to the next succeeding Operating Year becomes due and payable as
hereinabove provided.
ARTICLE VII
USE OF PREMISES
7.1 PERMITTED USES.
(a) Tenant agrees that the Premises shall be used and occupied by
Tenant only for the Permitted Uses and for no other purposes.
(b) Tenant agrees to conform to the following provisions during the
Term:
(i) Tenant shall cause all freight and other property to be
delivered to or removed from the Building and the Premises in
accordance with reasonable rules and regulations established by
Landlord therefor. Tenant shall not receive or ship articles of any
kind except through loading and receiving facilities, if any, provided
for those purposes by Landlord; and
(ii) Tenant will not place on the exterior of the Premises
(including both interior and exterior surfaces of windows and
door(s)), or on any part of the Land or Building outside the Premises,
any sign, symbol, advertisement or the like visible to public view
outside of the Premises. Landlord will not unreasonably withhold
consent for signs or lettering on the entry doors to the Premises
provided such signs conform to Building standards adopted by Landlord
and Tenant has submitted to Landlord a plan or sketch of the sign to
be placed on such entry doors. Landlord agrees, however, to maintain
a
-12-
<PAGE>
tenant directory in the lobby of the Building in which will be
placed Tenant's name and the location of the Premises in the Building;
and
(iii) Tenant shall not perform any act or carry on any practice
which may injure the Premises, or any other part of the Property or
the Office Park, or cause any offensive odors or loud noise or
constitute a nuisance or a menace to any other tenant or tenants or
other persons in the Building or the Office Park. Tenant shall not
overload or otherwise misuse the plumbing, electrical and other
utilities systems serving the Premises and the Building. Tenant shall
not use or devote the Premises or any part thereof for any use which
is inconsistent with the maintenance of the Building as an office
building of first class quality in maintenance, use and occupancy, or
which is improper, offensive, contrary to law or ordinance or liable
to render necessary any alteration or addition to the Building; and
(iv) Tenant shall not operate any cooking apparatus (except for
coffee making equipment, a microwave oven and a refrigerator), or
locate any vending machines in the Premises without Landlord's prior
written consent; and
(v) Tenant shall continuously, throughout the Term of this
Lease, occupy the Premises for the Permitted Uses; and
(vi) Tenant will comply with all laws, ordinances, rules and
regulations of governmental authorities and recommendations of the
Fire Underwriters Rating Bureau or any similar entity with respect to
the condition, use or occupancy of the Premises and the use or
occupancy of the Building; and
(vii) Tenant shall not obstruct in any manner any portion of the
Building not hereby leased or of the Property or the Common Property
used by Tenant in common with others.
7.2 INSTALLATIONS AND ALTERATIONS BY TENANT.
(a) Tenant shall make no alterations, additions (including, for the
purposes hereof, wall-to-wall carpeting), or improvements (including Tenant's
initial improvements) in or to the Premises without Landlord's prior written
consent (Landlord agreeing hereby that such consent shall not be unreasonably
withheld or delayed with respect to any proposed alteration or addition which
will not affect (i) the structural elements or utilities systems of the
Building, (ii) the exterior appearance of the Building or (iii) the appearance
of any common area of the Building or the Office Park). Any such alterations,
additions or improvements shall (i) be performed in a good and workmanlike
manner and in compliance with Building standards, the applicable provisions of
Article IV, and all applicable laws (Without limitation, if, because of
alterations, additions or improvements undertaken (or proposed to be undertaken)
by or on behalf of Tenant, applicable laws require additional alterations,
additions or improvements to the Premises or the Building which would not have
-13-
<PAGE>
been required but for Tenant's additions, etc. (or proposed additions, etc.),
Tenant shall be obligated, at its sole cost and expense, to undertake and
complete all such additional alterations, additions or improvements.), (ii) be
made only by Landlord's contractor or by contractors or mechanics approved by
Landlord (all as provided in subsection 4.3(d), above), (iii) be made at
Tenant's sole expense and at such times as Landlord may designate, and (iv)
become part of the Premises and the property of Landlord. Tenant agrees not to
employ or permit the use of any labor or otherwise take any action which might
result in a labor dispute involving personnel providing services, labor or
material in the Building or the Office Park pursuant to arrangements made by
Landlord or Landlord's contractor. Furthermore, Tenant agrees that it will not
permit any contractors or other persons retained by Tenant to make alterations,
additions or improvements on the Premises to commence their activities until
such time as Landlord has received Certificates of Insurance confirming that
such persons maintain public liability, automobile liability, workmen's
compensation and other insurance required by Landlord, in amounts satisfactory
to Landlord.
(b) All articles of personal property and all business fixtures,
machinery, equipment and furniture owned or installed by Tenant solely at its
expense in the Premises ("Tenant's Removable Property") shall remain the
property of Tenant and may be removed by Tenant at any time prior to the
expiration of the Term, provided that Tenant, at its expense, shall repair, to
the satisfaction of Landlord, any damage to the Property caused by such removal.
(c) Notice is hereby given that Landlord shall not be liable for any
labor or materials furnished or to be furnished to Tenant upon credit, and that
no mechanic's or other lien for any such labor or materials shall attach to or
affect the reversion or other estate or interest of Landlord in and to the
Premises. Whenever and as often as any mechanic's lien shall have been filed
against the Property based upon any act or interest of Tenant or of anyone
claiming through Tenant, Tenant shall forthwith take such action by bonding,
deposit or payment as will remove or satisfy the lien.
ARTICLE VIII
ASSIGNMENT AND SUBLETTING
8.1 PROHIBITION.
(a) Subject to the remaining provisions of this subsection (a), Tenant
covenants and agrees that neither this Lease nor the term and estate hereby
granted, nor any interest herein or therein, will be assigned, mortgaged,
pledged, encumbered or otherwise transferred, and that neither the Premises nor
any part thereof will be encumbered in any manner by reason of any act or
omission on the part of Tenant, or used or occupied or permitted to be used or
occupied by anyone other than Tenant, or for any use or purpose other than a
Permitted Use, or be sublet (which term, without limitation, shall include
granting of concessions, licenses and the like) in whole or in part, without in
each case having first obtained the express written consent of Landlord. A
transfer or assignment of 50% (computed on a cumulative aggregate basis) or more
of the stock, equity or other indicia of ownership of Tenant shall be deemed to
constitute an assignment in breach of this Section 8.1; provided, however, that
the sale of corporate treasury stock in order to increase the
-14-
<PAGE>
capital of Tenant shall not be restricted. The foregoing restrictions shall not
be applicable to an assignment of this Lease or a subletting of the Premises by
Tenant to a subsidiary wholly-owned by Tenant or to a controlling corporation,
the stock of which is wholly-owned by the stockholders of Tenant. It shall be a
condition of the validity of any assignment, whether with the consent of
Landlord or to a subsidiary or controlling corporation, that the assignee agrees
directly with Landlord, by written instrument in form satisfactory to Landlord,
to be bound by all the obligations of Tenant hereunder including, without
limitation, the covenant against further assignment and subletting. No
assignment or subletting shall relieve Tenant from its obligations hereunder and
Tenant shall remain fully and primarily liable therefor.
Landlord agrees that its consent to a proposed assignment or sublease shall
not be unreasonably withheld or delayed, and Tenant agrees to provide to
Landlord such information as Landlord may reasonably require in order to reach
an informed decision. Without limitation, Landlord shall not be deemed to be
unreasonable in withholding its consent to a proposed assignment or sublease
unless each of the following criteria has been satisfied: (i) the proposed
assignee or subtenant is of good reputation and character and is of sound
financial condition, (ii) the proposed assignee or subtenant is not otherwise a
tenant of the Office Park, (iii) the proposed assignee or subtenant will use the
Premises solely for the Permitted Uses, (iv) the proposed assignee or subtenant
does not intend to use the Premises for a "Prohibited Activity" (as hereinafter
defined), (v) the intended use of the Premises by the proposed assignee or
subtenant is consistent with the maintenance of the Building as a first-class
office building, and will not interfere with the business activities of other
occupants of the Office Park, and (vi) the rental and other economic terms of
the proposed assignment or sublease are not inconsistent with or deleterious to
the economic interests of Landlord as owner of the Building. (Without
limitation, Tenant shall not advertise or otherwise offer any portion (or all)
of the Premises at a rental rate which is lower than the rental rate then being
quoted by Landlord for equivalent space in the Building.)
For the purposes of the immediately preceding paragraph, a "Prohibited
Activity" is a use which will, in Landlord's reasonable judgment, (i) introduce
undue amounts of public traffic in the Building (in excess of average traffic
which Landlord reasonably believes is generated by other tenants in the
Building), or (ii) place a strain on the existing plumbing, electrical and
mechanical systems of the Building or (iii) generate unusually high densities of
employees or invitees per square foot of rentable space.
(b) If this Lease be assigned, or if the Premises or any part thereof
be sublet or occupied by anyone other than Tenant, Landlord may, whether or not
it has consented to any such assignment, subletting or occupancy, at any, time
and from time to time collect rent and other charges from the assignee,
subtenant or occupant, and apply the net amount collected to the rent and other
charges herein reserved, but no such assignment, subletting, occupancy or
collection shall be deemed a waiver of any breach of Section 8.1 (a), or the
acceptance of the assignee, subtenant or occupant as a tenant or a release of
Tenant from the further performance by Tenant of its obligations hereunder. In
the event that Basic Rent and other charges payable to Tenant under any
assignment or sublease exceed Basic Rent and other charges payable hereunder,
Basic Rent hereunder shall automatically be deemed to be increased by 75% of the
amount of such excess. (If only a portion of the
-15-
<PAGE>
Premises is subleased, determination of any excess shall be computed by
allocating Basic Rent and other charges hereunder on a per square foot basis,
between the portion of the Premises which is subject to the sublease and the
remainder of the Premises.) The consent by Landlord to an assignment or
subletting shall in no way be construed to relieve Tenant or any successor from
obtaining the express written consent of Landlord to any further assignment or
subletting. No assignment or subletting and no use of the Premises by a
subsidiary wholly-owned by Tenant or controlling corporation of Tenant shall
affect the Permitted Uses.
(c) In the event of any request by Tenant for any consent to a
proposed assignment or sublease, Landlord shall have the option instead to
terminate this Lease. In the case of a proposed sublease concerning only a
portion of the Premises, at Landlord's option, such termination shall apply only
to that portion of the Premises which is intended to be the subject of the
sublease. In such event, Basic Rent and other charges hereunder shall be
reduced proportionately, to take account of the reduction in the size of the
Premises which will be occupied by Tenant following such termination.
Furthermore, in the case of a sublease which is intended to apply to only a
portion of the Term, at Landlord's option, this Lease shall be terminated only
for the period of the proposed sublease, and shall be reinstated upon the
expiration of the term of the proposed sublease. Upon any termination, as
provided above, the Premises (or the portion of the Premises to which the
termination relates) shall be delivered to Landlord in the condition in which
the Premises are required to be delivered to Landlord upon the expiration of the
Term as provided herein. Following any such termination, Landlord shall be
entitled to enter into any lease or occupancy arrangement concerning the
Premises (or portion of the Premises, as the case may be) with any party,
including, without limitation, the assignee or subtenant proposed by Tenant.
ARTICLE IX
RESPONSIBILITY FOR REPAIRS AND CONDITION OF PREMISES;
SERVICES TO BE FURNISHED BY LANDLORD
9.1 LANDLORD REPAIRS. Except as otherwise provided in this Lease,
Landlord agrees to make such repairs to the roof exterior walls, floor slabs,
common areas and common electrical, heating, air conditioning and other common
mechanical systems and facilities of the Building as may be necessary to keep
them in serviceable condition, all insofar only as they affect the Premises,
except that Landlord shall in no event be responsible to Tenant for the
condition of glass in and about the Premises or the doors leading to the
Premises, or for any condition in the Premises or the Building caused by any act
or neglect of Tenant, its invitees or contractors. Landlord shall also perform
snow removal and resurfacing, repairs and replacements to the surface parking
areas and sidewalks of the Property. Landlord shall not be responsible to make
any improvements or repairs to the Building, the Land or the Office Park other
than as expressly in this Section 9.1 provided, unless expressly provided
otherwise in this Lease.
-16-
<PAGE>
9.2 TENANT'S AGREEMENT.
(a) Tenant will keep neat and clean and maintain in good order,
condition and repair the Premises and every part thereof excepting only those
repairs for which Landlord is responsible under the terms of this Lease,
reasonable wear and tear of the Premises, and damage by fire or other casualty
and as a consequence of the exercise of the power of eminent domain excepted;
and shall surrender the Premises, at the end of the Term, in such condition.
Without limitation, Tenant shall maintain and use the Premises in accordance
with all directions, rules and regulations of all governmental agencies having
jurisdiction, and shall, at Tenant's own expense, obtain all permits, licenses
and the like required by applicable law. Tenant shall be responsible for the
cost of repairs which may be made necessary by reason of damage to common areas
in the Building and the parking areas, sidewalks, paved areas, landscaping,
lighting and other facilities on the Land or in the Office Park by Tenant,
Tenant's independent contractors, or Tenant's invitees.
(b) If repairs are required to be made by Tenant pursuant to the terms
hereof Landlord may demand that Tenant make the same forthwith, and if Tenant
refuses or neglects to commence such repairs and complete the same with
reasonable dispatch, after such demand, Landlord may (but shall not be required
to do so) make or cause such repairs to be made and shall not be responsible to
Tenant for any loss or damage that may accrue to Tenant's stock or business by
reason thereof. In the case of emergency (that is, any condition which, if not
remedied promptly, would result in additional damage or risk of damage to
persons or property), Landlord shall be permitted to act immediately, without
the requirement of demand or notice to Tenant. If Landlord makes or causes such
repairs to be made, Tenant agrees that Tenant shall forthwith, on demand, pay to
Landlord the cost thereof with interest thereon at the Default Rate, as an
additional charge.
9.3 FLOOR LOAD - HEAVY MACHINERY.
(a) Tenant shall not place a load upon any floor in the Premises
exceeding 50 pounds (live load) per square foot of usable floor area of the
Premises. Landlord reserves the right to prescribe the position of all heavy
business machines and mechanical equipment, including safes, which shall be
placed so as to distribute the weight thereof. Business machines and mechanical
equipment shall be placed and maintained by Tenant at Tenant's expense in
settings sufficient, in Landlord's judgement, to absorb and prevent vibration,
noise and annoyance. Tenant shall not move any safe, heavy machinery, heavy
equipment, freight, furniture, bulky matter or fixtures into or out of the
Building without Landlord's prior consent, which consent may include a
requirement to provide insurance in such amounts as Landlord may deem
reasonable. Tenant shall protect all elevators, sidewalks and other areas of
the Property from possible damage prior to moving any such items and shall
comply with all requirements of Landlord in connection therewith.
(b) If any such safe, machinery, equipment, freight, bulky matter or
fixture requires special handling, Tenant agrees to employ only persons holding
a Master Rigger's License to do such work, and all work in connection therewith
shall comply with applicable laws and regulations. Any such moving shall be at
the sole risk and hazard of Tenant, and
-17-
<PAGE>
Tenant will exonerate, indemnify and save Landlord harmless against and from any
liability, loss, injury, claim or suit resulting directly or indirectly from
such moving.
9.4 BUILDING SERVICES.
(a) Landlord shall, on Business Days (except Saturdays) from 8:00 a.m.
to 6:00 p.m. (and on Saturdays from 9:00 a.m. to 1:00 p.m.), furnish heating
and cooling as normal seasonal changes may require to provide reasonably
comfortable space temperature and ventilation for occupants of the Premises
under normal business operation at an occupancy of not more than one person per
150 square feet of usable floor space. If Tenant shall require air
conditioning, heating or ventilation outside the hours and days above specified,
Landlord shall furnish such service and Tenant shall pay to Landlord therefor
such charges as may from time to time be in effect. In the event Tenant
introduces into the Premises personnel or equipment which overloads the capacity
of the Building system or in any other way interferes with the system's ability
to perform adequately its proper functions, or which affects the temperature
otherwise maintained by the air conditioning system, supplementary systems may,
if and as needed, at Landlord's option, be provided by Landlord, at Tenant's
expense.
(b) Landlord shall also provide:
(i) Hot water for lavatory purposes and cold water (at
temperatures supplied by the utility service supplying same) for
drinking, lavatory and toilet purposes. If Tenant uses water for any
purposes other than for ordinary lavatory and drinking purposes,
Landlord may assess a reasonable charge for the additional water so
used, or install a water meter and thereby measure Tenant's water
consumption for all purposes. In the latter event, Tenant shall pay
the cost of the meter and the cost of installation thereof and shall
keep such meter and equipment in good working order and repair.
Tenant agrees to pay for water consumed, as shown on such meter,
together with the sewer charge based on such meter charges, as and
when bills are rendered, and in the event of any default in making
such payment Landlord may pay such charges and collect the same from
Tenant as an additional charge.
(ii) Cleaning and janitorial services to the Premises, provided
the same are kept in order by Tenant, in accordance with the cleaning
standards set forth in Exhibit E attached hereto.
(iii) Passenger elevator service from the existing passenger
elevator system, for use by Tenant in common with Landlord and other
tenants of the Building.
9.5 ELECTRICITY.
(a) Landlord, in its sole discretion, will either (i) furnish
electricity to the Premises sufficient to operate normal lighting and business
machines approved by Landlord (exclusive, however, of Tenant's electrical needs
for computers and similar equipment having
-18-
<PAGE>
special power or environmental requirements), charging Tenant's Electrical
Charge for such service, to be paid by Tenant in equal monthly installments on
the same day in each month that rental payments are due and payable hereunder
(but in no event shall Landlord be obligated to furnish electricity to supply a
requirement in excess of 3.0 watts per square foot of the usable area of the
Premises), or (ii) elect, at any time during the Term, to cause electricity
furnished to the Premises to be separately metered, in which event all charges
for electricity consumed on the Premises will be billed directly to, and paid
for by, Tenant. The cost of any such electrical meter as well as the cost of
installation, repair and replacement shall be borne by Tenant, who shall
reimburse Landlord for the cost thereof within 30 days after receipt of written
demand therefor.
(b) Whether or not Landlord is furnishing electricity to Tenant, if
Tenant shall require electricity in excess of the quantity which is to be
furnished as provided in Section 9.5(a), Tenant shall, upon demand, reimburse
Landlord for the cost of such excess electricity. Further, if (i) in Landlord's
judgement, Landlord's facilities are inadequate for such excess requirements, or
(ii) such excess shall result in an additional burden on the Building's or the
Office Park's utility systems or additional cost on account thereof, as the case
may be, Tenant shall, upon demand, reimburse Landlord for all additional costs
related thereto. Further, if Tenant requires electricity in excess of the
quantity which is to be furnished as provided in Section 9.5(a) above, Landlord,
at the sole cost and expense of Tenant, will furnish and install such additional
wires, conduits, feeders, switchboards and appurtenances as Landlord may require
to supply such additional requirements of Tenant (if electricity therefor is
then available to Landlord without affecting the Office Park or Landlord's plans
therefor); provided that Landlord shall have no obligation to furnish any such
excess electricity unless the same shall be permitted by applicable laws and
insurance regulations and shall not cause or threaten permanent damage or injury
to the Building or the Premises or cause or create a dangerous or hazardous
condition or entail excessive or unreasonable alterations or repairs, or
interfere with or disturb other tenants or occupants of the Building or the
Office Park or interfere with Landlord's plans for the Office Park.
(c) Landlord shall furnish and install the bulbs required within the
Premises as of the Commencement Date. Thereafter, Landlord, at Tenant's
expense, shall replace and install all ballasts, lamps and bulbs (including, but
not limited to, incandescent and fluorescent) used in the Premises. All such
replacements shall be of such type, color and size as are approved by Landlord.
(d) Landlord shall not in any way be liable or responsible for any
loss, damage or expense which Tenant may sustain or incur if the quantity,
character, or supply of electricity is changed or is no longer available or
suitable for Tenant's requirements.
(e) Landlord shall have the right to discontinue furnishing electric
power to the Premises at any time upon not less than thirty (30) days' notice to
Tenant, provided Landlord shall first have arranged for the supply of power for
Tenant's use to be provided to the Premises by the public utility company
furnishing electric service to the Building and shall, at Tenant's expense,
separately meter the Premises. If Landlord exercises such right, from and after
the effective date of such termination, Landlord shall not be obligated to
-19-
<PAGE>
furnish electricity to the Premises, and Tenant shall have no obligation to pay
any portion of Tenant's Electrical Charge.
9.6 PARKING. Landlord shall make available to Tenant parking on a
nonexclusive basis on the Land as provided in Section 2.2 of this Lease, except
that Tenant shall not have the right to make use of parking spaces (if any)
marked for visitor or handicapped parking or which are otherwise regulated by
Landlord.
9.7 ADDITIONAL SERVICES. In the event Tenant wishes to provide outside
services for the Premises over and above those services to be provided by
Landlord as set forth herein, Tenant shall obtain the prior written approval of
Landlord for the installation and/or utilization of such services. ("Outside
services" shall include, but shall not be limited to, cleaning services,
television, so-called "canned music," security services, catering and the like.)
In the event Landlord approves the installation and/or utilization of such
services, such installation and utilization shall be at Tenant's sole cost, risk
and expense and subject to such requirements as Landlord may from time to time
elect to impose in connection therewith.
9.8 INTERRUPTION OF SERVICES. Landlord reserves the right to curtail,
suspend, interrupt and/or stop the supply of water, sewage, electricity,
cleaning, parking and other services, and to curtail, suspend, interrupt and/or
stop the use of the roads providing access to the Building, without thereby
incurring any liability to Tenant, when necessary by reason of accident or
emergency, or for repairs, alterations, replacements or improvements in the
judgment of Landlord desirable or necessary, or when prevented from supplying
such services or use by strikes, lockouts, difficulty of obtaining materials,
accidents or any other cause beyond Landlord's reasonable control, or by laws,
orders or inability, by exercise of reasonable diligence, to obtain electricity,
water, gas, steam, coal, oil or other suitable fuel or power, or by any other
condition not reasonably within the control of Landlord. Except as expressly
provided below, no diminution or abatement of rent or other compensation, nor
any direct, indirect or consequential damages shall or will be claimed by Tenant
as a result of' nor shall this Lease or any of the obligations of Tenant be
affected or reduced by reason of' any such interruption, curtailment or
suspension. Failure or omission on the part of Landlord to furnish any of the
foregoing services or use shall not be construed as an eviction of Tenant,
actual or constructive, nor, except as expressly provided below, entitle Tenant
to an abatement of rent, nor render Landlord liable in damages, nor release
Tenant from prompt fulfillment of any of its covenants under this Lease. If
there shall occur any interruption or reduction of service(s), and if (i) such
interruption or reduction materially interferes with Tenant's use and enjoyment
of the Premises, and (ii) such interruption or reduction shall continue for ten
(10) days, then, commencing with the eleventh (11th) day of such interruption or
reduction and continuing until such time as such service(s) have been restored
to the extent necessary to avoid material interference with Tenant's use and
enjoyment of the Premises, Tenant shall be entitled to a reasonable reduction or
abatement of rent (consistent with the extent of interference with Tenant's
activities); provided, however, that Tenant shall not be entitled to such an
abatement or reduction if the interruption or reduction of service(s) results
from any condition not reasonably within Landlord's control.
-20-
<PAGE>
ARTICLE X
INDEMNITY AND INSURANCE
10.1 TENANT'S INDEMNITY. TO the maximum extent this agreement may be made
effective according to law, Tenant agrees to indemnify and save harmless
Landlord from and against all loss, costs, penalties and liability damage claims
of whatever nature arising from any act, omission or negligence of Tenant or
Tenant's contractors, licensees, agents, servants or employees or arising from
any death, accident, injury or damage whatsoever caused to any person, or to the
property of any person, occurring after the date of this Lease until the end of
the Term of this Lease and thereafter, so long as Tenant is in occupancy of any
part of the Premises, in or about the Premises; or arising from any death,
accident, injury or damage occurring outside of the Premises but on the Property
or the Office Park, where such accident, damage or injury results or is claimed
to have resulted from any act or omission on the part of Tenant or Tenant's
agents or employees or independent contractors or invitees or suppliers. This
indemnity shall, to the maximum extent this agreement may be made effective
according to law, also extend to all loss, costs, penalties, damage and claims
of whatever nature asserted against Landlord arising out of the use or occupancy
of, passage or travel over or upon, the Property or the Office Park by Tenant or
by any person claiming by, through or under Tenant (including, without
limitation, all employees, agents, contractors and customers of Tenant), or
arising out of any delivery to or service supplied to the Premises, or on
account of or based on anything whatsoever done on the Premises, except if the
same was caused by the negligence, fault or misconduct of Landlord, its agents,
servants or employees. This indemnity and hold harmless agreement shall include
indemnity against all costs, expenses and liabilities incurred in or in
connection with any such claim or proceeding brought thereon, and the defense
thereof with counsel approved by Landlord.
10.2 LIABILITY INSURANCE. Tenant shall keep in force, at its own expense,
so long as this Lease remains in effect and during such other times as Tenant
occupies the Premises or any part thereof, comprehensive general liability
insurance including broad form endorsement contractual liability, with respect
to the Premises, with combined single limits in an amount not less than the
amount specified in Section 1.2 (and in such higher amounts as may reasonably be
required by Landlord from time to time), and so-called "All Risk" insurance on
(and in an amount not less than the full replacement value of) Tenant's personal
property, including trade fixtures, floor coverings, furniture and other
property removable by Tenant. All such insurance shall be written by companies
and on forms acceptable to Landlord. Tenant will further deposit the policy or
policies of such insurance or certificates thereof with Landlord, which policies
shall name Landlord and/or its designee(s) as additional named insured, and
shall also contain a provision stating that such policy or policies shall not be
cancelled or amended except after thirty (30) days written notice to Landlord.
If the nature of Tenant's business is such as to place all or any of its
employees under the coverage of local workmen's compensation or similar
statutes, Tenant shall also keep in force, at its expense, so long as this Lease
remains in effect and during such other times as Tenant occupies the Premises or
any part thereof, workmen's compensation or similar insurance affording
statutory coverage and containing statutory limits. If Tenant shall not comply
with its covenants made in this Section 10.2, Landlord may cause insurance as
-21-
<PAGE>
aforesaid to be issued, and, in such event, Tenant agrees to pay, as additional
rent and charge, the premium for such insurance upon Landlord's demand.
10.3 TENANT'S RISK. To the maximum extent this agreement may be made
effective according to law, Tenant agrees to use and occupy the Premises and to
use such other portions of the Building, the Property and the Common Property as
Tenant is herein given the right to use at Tenant's own risk; and Landlord shall
have no responsibility or liability for any loss of or damage to Tenant's
Removable Property (including, without limitation, damage resulting from the
breaking, bursting, or leaking of pipes, conduits, electrical lines and the like
or from any other cause or condition). The provisions of this Section shall be
applicable from and after the execution of this Lease and until the end of the
Term, and during such further period as Tenant may use or be in occupancy of any
part of the Premises or the Building.
10.4 INJURY CAUSED BY THIRD PARTIES. To the maximum extent this agreement
may be made effective according to law, Tenant agrees that Landlord shall not be
responsible or liable to Tenant, or to those claiming by, through or under
Tenant, for any loss or damage that may be occasioned by or through the acts or
omissions of persons occupying adjoining premises or any part of the premises
adjacent to or connecting with the Premises or any part of the Property or the
Office Park or otherwise.
10.5 LANDLORD'S NEGLIGENCE. Notwithstanding anything to the contrary set
forth in the foregoing provisions of this Article X, Landlord agrees to
indemnify and hold harmless Tenant from and against all loss, cost and expense
resulting from Landlord's negligence, or from any other tortious act of
Landlord.
ARTICLE XI
LANDLORD'S ACCESS TO PREMISES
11.1 LANDLORD'S RIGHTS. Landlord shall have the right to enter the
Premises at all reasonable hours for the purpose of inspecting or making repairs
to the same, and Landlord shall also have the right to make access available at
all reasonable hours to prospective or existing mortgagees, purchasers or
tenants of any part of the Property.
ARTICLE XII
FIRE, EMINENT DOMAIN, ETC.
12.1 ABATEMENT OF RENT. If the Premises shall be damaged by fire or
casualty, Basic Rent payable by Tenant shall abate proportionately for the
period in which, by reason of such damage, there is substantial interference
with Tenant's uses of the Premises, having regard to the extent to which Tenant
may be required to discontinue Tenant's use of all or a portion of the Premises,
but such abatement or reduction shall end if and when Landlord shall have
substantially restored the Premises to the condition which they were in prior to
such damage (subject, however, to the provisions of applicable zoning and
building regulations). If the Premises shall be affected by any exercise of the
power of eminent domain, Basic Rent payable by Tenant shall be justly and
equitably abated and reduced according to the nature and extent of the loss of
use thereof suffered by Tenant.
-22-
<PAGE>
12.2 LANDLORD'S RIGHT OF TERMINATION. If (a) the Premises or (b) the
Building or (c) the parking area serving the Building or (d) any roadway or
other facility within the Common Property necessary for the use and enjoyment of
the Premises (hereinafter referred to as "Critical Common Facilities") are
substantially damaged by fire or casualty (the term "substantially damaged"
meaning damage of such a character that the same cannot reasonably be expected
to be repaired within sixty (60) days from the time that repair work would
commence), or if access to the Property through the Common Property is, or if
(i) any part of the Building or (ii) a substantial part of the parking area
serving the Building or (iii) Critical Common Facilities are, taken by any
exercise of the right of eminent domain, then Landlord shall have the right to
terminate this Lease (even if Landlord's entire interest in the Premises may
have been divested) by giving notice of Landlord's election so to do within 90
days after the occurrence of such casualty or the effective date of such taking,
whereupon this Lease shall terminate 30 days after the date of such notice with
the same force and effect as if such date were the date originally established
as the expiration date hereof.
12.3 RESTORATION. IF this Lease shall not be terminated pursuant to
Section 12.2, Landlord shall thereafter use due diligence to restore the
Premises to proper condition for Tenant's use and occupation, provided that
Landlord's obligation shall be limited to the amount of insurance proceeds or
condemnation awards made available to Landlord therefor. If, for any reason,
such restoration shall not be substantially completed within six (6) months
after the occurrence of the casualty or taking (which six-month period may be
extended for such periods of time as Landlord is prevented from proceeding with
or completing such restoration for any cause beyond Landlord's reasonable
control). Tenant shall have the right to terminate this Lease by giving notice
to Landlord thereof within thirty (30) days after the expiration of such period
(as so extended). Upon the giving of such notice, this Lease shall cease and
come to an end without further liability or obligation on the part of either
party unless, within such 30-day period, Landlord substantially completes such
restoration. Such right of termination shall be Tenant's sole and exclusive
remedy at law or in equity for Landlord's failure to complete such restoration.
12.4 AWARD. Landlord shall have and hereby reserves and excepts, and
Tenant hereby grants and assigns to Landlord, all rights to recover for damages
to the Property and the leasehold interest hereby created, and to compensation
accrued or hereafter to accrue by reason of taking, damage or destruction, and
by way of confirming the foregoing, Tenant hereby grants and assigns, and
covenants with Landlord to grant and assign to Landlord, all rights to such
damages or compensation. Nothing contained herein shall be construed to prevent
Tenant from prosecuting in any separate condemnation proceedings a claim for the
value of any of Tenant's Removable Property installed in the Premises by Tenant
at Tenant's expense and for relocation expenses, provided that such action shall
not affect the amount of compensation otherwise recoverable by Landlord from the
taking authority and shall be prosecuted in a proceeding separate and apart from
Landlord.
12.5 TEMPORARY TAKING. In the event of taking of the Premises or any part
thereof for temporary use (that is, for a use which is expected to end prior to
the expiration of the Term), (i) this Lease shall be and remain unaffected
thereby and rent shall not abate, and (ii) Tenant shall be entitled to receive
for itself such portion or portions of any award
-23-
<PAGE>
made for such use with respect to the period of the taking which is within the
Term, provided that if such taking shall remain in force at the expiration or
earlier termination of this Lease, Tenant shall then pay to Landlord a sum equal
to the reasonable cost of performing Tenant's obligations under this Lease with
respect to surrender of the Premises and upon such payment shall be excused from
such obligations.
ARTICLE XIII
DEFAULT
13.1 TENANT'S DEFAULT.
(a) If at any time subsequent to the date of this Lease any one or
more of the following events (each herein referred to as a "Default of Tenant")
shall happen:
(i) Tenant shall fail to pay the Basic Rent, Escalation
Charges or other charges hereunder when due and such failure shall
continue for three (3) full business days after notice to Tenant from
Landlord; or
(ii) Tenant shall neglect or fail to perform or observe any
other covenant herein contained on Tenant's part to be performed or
observed and Tenant shall fall to remedy the same within thirty (30)
days after written notice to Tenant specifying such neglect or failure
(or, if such failure is of such a nature that Tenant cannot reasonably
remedy the same within such thirty (30) day period, Tenant shall fail
to commence promptly to remedy the same and to prosecute such remedy
to completion with diligence and continuity); or
(iii) Tenant's leasehold interest in the Premises shall be
taken on execution or by other process of law directed against Tenant;
or
(iv) Tenant shall make an assignment for the benefit of
creditors or shall file a voluntary petition in bankruptcy or shall be
adjudicated bankrupt or insolvent, or shall file any petition or
answer seeking any reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar relief for itself
under any present or future Federal, State or other statute, law or
regulation for the relief of debtors, or shall seek or consent to or
acquiesce in the appointment of any trustee, receiver or liquidator of
Tenant or of all or any substantial part of its property, or shall
admit in writing its inability to pay its debts generally as they
become due; or
(v) A petition shall be filed against Tenant in bankruptcy
or under any other law seeking any reorganization, arrangement,
composition, readjustment, liquidation, dissolution, or similar relief
under any present or future Federal, State or other statute, law or
regulation and shall remain undismissed or unstayed for an aggregate
-24-
<PAGE>
of Sixty (60) days (whether or not consecutive), or if any debtor in
possession (whether or not Tenant), trustee, receiver, or liquidator
of Tenant or of all or any substantial part of its property or of the
Premises shall be appointed without the consent or acquiescence of
Tenant and such appointment shall remain unvacated or unstayed for an
aggregate of sixty (60) days (whether or not consecutive); or
(vi) Tenant shall abandon or vacate the Premises, or shall
otherwise indicate its unwillingness to continue to perform its
obligations hereunder;
then in any such case (1) if such Default of Tenant shall occur prior to the
Commencement Date, this Lease shall ipso facto, and without further act on the
part of Landlord, terminate, and (2) if such Default of Tenant shall occur after
the Commencement Date, Landlord may terminate this Lease by notice to Tenant,
and this Lease shall come to an end on the date of such notice, as fully and
completely as if such date were the date herein originally fixed for the
expiration of the Term; and Tenant will then quit and surrender the Premises to
Landlord, but Tenant shall remain liable as hereinafter provided.
(b) If this Lease shall have been terminated as provided in this
Article, or if any execution or attachment shall be issued against Tenant or any
of Tenant's property whereupon the Premises shall be taken or occupied by
someone other than Tenant, then Landlord may, without notice, re-enter the
Premises, either by force, summary proceedings, ejectment or otherwise, and
remove and dispossess Tenant and all other persons and any and all property from
the same, as if this Lease had not been made, and Tenant hereby waives the
service of notice of intention to re-enter or to institute legal proceedings to
that end.
(c) In the event of any termination, Tenant shall pay the Basic Rent,
Escalation Charges and other sums payable hereunder up to the time of such
termination, and thereafter Tenant, until what would have been the end of the
Term in the absence of such termination, and whether or not the Premises shall
have been relet, shall be liable to Landlord for, and shall pay to Landlord, as
liquidated current damages, the Basic Rent, Escalation Charges and other sums
which would be payable hereunder if such termination had not occurred, less the
net proceeds, if any, of any reletting of the Premises for the corresponding
period, after deducting all expenses in connection with such reletting,
including, without limitation, all repossession costs, brokerage commissions,
legal expenses, attorneys' fees, advertising costs, expenses of employees,
alteration costs and expenses of preparation for such reletting. Tenant shall
pay such current damages to Landlord monthly on the days on which Basic Rent
would have been payable hereunder if this Lease had not been terminated.
(d) At any time after such termination, whether or not Landlord shall
have collected any such current damages, as liquidated final damages and in lieu
of all such current damages beyond the date of such demand, Tenant shall pay to
Landlord upon demand an amount equal to the excess, if any, of the Basic Rent,
Escalation Charges and other sums as hereinbefore provided which would be
payable hereunder from the date of such demand (assuming that, for the purposes
of this paragraph, annual payments by Tenant
-25-
<PAGE>
on account of Taxes and Operating Expenses would be the same as the payments
required for the immediately preceding Operating or Tax Year) for what would be
the then unexpired Term if the same remained in effect, over the then fair net
rental value of the Premises for the same period.
(e) In case of any Default by Tenant, following any re-entry,
termination and dispossession by summary proceedings or otherwise, Landlord may
(i) re-let the Premises or any part or parts thereof either in the name of
Landlord or otherwise, for a term or terms which may at Landlord's option be
equal to or less than or exceed the period which would otherwise have
constituted the balance of the Term of this Lease and may grant concessions or
free rent to the extent that Landlord considers advisable and necessary to re-
let the same and (ii) may make such alterations, repairs and decorations in the
Premises as Landlord in its sole judgment considers advisable and necessary for
the purpose of re-letting the Premises; and the making of such alterations,
repairs and decorations shall not operate or be construed to release Tenant from
liability hereunder as aforesaid. Landlord shall in no event be liable in any
way whatsoever for failure to re-let the Premises, or, in the event that the
Premises are re-let, for failure to collect the rent under such re-letting.
Tenant hereby expressly waives any and all rights of redemption granted by or
under any present or future laws in the event of Tenant being evicted or
dispossessed, or in the event of Landlord obtaining possession of the Premises,
by reason of the violation by Tenant of any of the conditions of this Lease.
(f) If a Guarantor of the Lease is named in Section 1.2, the happening
of any of the events described in paragraphs (a)(iv) or (a)(v) of this Section
13.1 with respect to the Guarantor shall constitute a Default of Tenant
hereunder.
(g) The specified remedies to which Landlord may resort hereunder are
not intended to be exclusive of any remedies or means of redress to which
Landlord may at any time be entitled lawfully, and Landlord may invoke any
remedy (including the remedy of specific performance) allowed at law or in
equity as if specific remedies were not herein provided for.
(h) All costs and expenses incurred by or on behalf of Landlord
(including, without limitation, attorneys' fees and expenses) in enforcing its
rights hereunder or occasioned by any Default of Tenant shall be paid by Tenant.
13.2 LANDLORD'S DEFAULT. Landlord shall in no event be in default in the
performance of any of Landlord's obligations hereunder unless and until Landlord
shall have failed to perform such obligation within thirty (30) days, or such
additional time as is reasonably required to correct any such default, after
notice by Tenant to Landlord specifying wherein Landlord has failed to perform
any such obligations. After receipt of any such notice, Landlord shall commence
the curing of any such default with reasonable promptness.
-26-
<PAGE>
ARTICLE XIV
MISCELLANEOUS PROVISIONS
14.1 EXTRA HAZARDOUS USE. Tenant covenants and agrees that Tenant
will not do or permit anything to be done in or upon the Premises, or bring in
anything or keep anything therein, which shall invalidate or increase the rate
of property or liability insurance on the Premises or the Property above the
standard rate applicable to premises being occupied for the Permitted Uses; and
Tenant agrees that, in the event that Tenant shall do any of the foregoing,
Tenant will promptly pay to Landlord, on demand, any such increase resulting
therefrom, which shall be due and payable as an additional charge hereunder.
14.2 WAIVER.
(a) Failure on the part of Landlord or Tenant to complain of any
action or non-action on the part of the other, no matter how long the same may
continue, shall never be a waiver by Tenant or Landlord, respectively, of any of
the other's rights hereunder. Further, no waiver at any time of any provisions
hereof by Landlord or Tenant shall be construed as a waiver of any of the other
provisions hereof' and a waiver at any time of any of the provisions hereof
shall not be construed as a waiver at any subsequent time of the same
provisions. The consent or approval of Landlord or Tenant to or of any action
by the other requiring such consent or approval shall not be construed to waive
or render unnecessary Landlord's or Tenant's consent or approval to or of any
subsequent similar act by the other.
(b) No payment by Tenant, or acceptance by Landlord, of a lesser
amount than shall be due from Tenant to Landlord shall be treated otherwise than
as a payment on account. The acceptance by Landlord of a check for a lesser
amount with an endorsement or statement thereon, or upon any letter accompanying
such check, that such lesser amount is payment in full, shall be given no
effect, and Landlord may accept such check without prejudice to any other rights
or remedies which Landlord may have against Tenant. The delivery of keys to any
employee of Landlord or to Landlord's agent or any employee thereof shall not
operate as a termination of this Lease or a surrender of the Premises.
14.3 COVENANT OF QUIET ENJOYMENT. Tenant, subject to the terms and
provisions of this Lease, on payment of the Basic Rent and Escalation Charges
and other sums and charges due hereunder and observing, keeping and performing
all of the other terms and provisions of this Lease on Tenant's part to be
observed, kept and performed, shall peaceably and quietly have, hold and enjoy
the Premises for the Term without hindrance or molestation by anyone claiming
by, through or under Landlord, subject, however, to the rights of the holders of
all mortgages affecting the property from time to time; provided, however,
Landlord may at any time and from time to time, without the same constituting a
breach of Landlord's covenant of quiet enjoyment or an actual or constructive
eviction, and without incurring any liability to Tenant or otherwise affecting
any of Tenant's obligations under this Lease, make such changes, alterations,
additions, improvements, repairs or replacements in or to the interior and
exterior of the Building (including the Premises) and the fixtures and equipment
thereof, and in or to the Property and the Office Park (including, without
limitation, landscaping, the construction of additional structures, signs and
buildings,
-27-
<PAGE>
the relocation of access roads situated within the Office Park and the redesign
or temporary closing of parking areas and other common facilities and roads
serving the Building and the Office Park) as Landlord may deem necessary or
desirable, and change the arrangement and/or location of entrances or
passageways, doors and doorways, corridors, elevators, or other public parts of
the Building, provided further, however, that there be no unreasonable
interference with the conduct of Tenant's business or obstruction of access to
the Premises by Tenant. Nothing contained in this Section 14.3 shall be deemed
to relieve Tenant of any duty, obligation or liability with respect to making
any repair, replacement or improvement or complying with any law, order or
requirement of any governmental or other authority. Landlord reserves the right,
at any time and from time to time, to change the name and address of the
Building and the Office Park.
14.4 LANDLORD'S LIABILITY.
(a) Tenant specifically agrees to look solely to Landlord's then
equity interest in the Property at the time owned by Landlord, for recovery of
any judgment from Landlord; it being specifically agreed that neither Landlord
(original or successor) nor any partner, beneficiary, shareholder, officer,
director, employee or any other party holding any interest in or being
affiliated with Landlord shall ever be personally liable for any such judgment,
or for the payment of any monetary obligation to Tenant. The provision
contained in the foregoing sentence is not intended to, and shall not, limit any
right that Tenant might otherwise have to obtain injunctive relief against
Landlord or Landlord's successors in interest, or to take any action not
involving the personal liability of Landlord (original or successor) to respond
in monetary damages from Landlord's assets other than Landlord's equity interest
in the Property.
(b) In no event shall Landlord ever be liable for any indirect or
consequential damages suffered by Tenant from whatever cause.
14.5 RULES AND REGULATIONS. Tenant shall abide by rules and
regulations from time to time established by Landlord (including, without
limitation, the Rules and Regulations annexed hereto as Exhibit B), it being
agreed that such rules and regulations will be established and applied by
Landlord in a non-discriminatory fashion, such that all rules and regulations
shall be generally applicable to other tenants of the Building of similar nature
to the Tenant named herein (having in mind the location and nature of the
Premises and the nature of Tenant's business activities). Landlord agrees to
use reasonable efforts to insure that any such rules and regulations are
uniformly enforced, but Landlord shall not be liable to Tenant for violation of
the same by any other tenant or occupant of the Building, or persons having
business with them. Landlord expressly reserves the right to waive application
of any rule or regulation as to any tenant.
14.6 ADDITIONAL CHARGES. If Tenant shall fail to pay when due any
sums under this Lease designated as an additional charge, additional rent or
Escalation Charge or any other charge hereunder, Landlord shall have the same
rights and remedies as Landlord has hereunder for failure to pay Basic Rent.
-28-
<PAGE>
14.7 INVALIDITY OF PARTICULAR PROVISIONS. If any term or provision of
this Lease, or the application thereof to any person or circumstance, shall, to
any extent, be invalid or unenforceable, the remainder of this Lease, or the
application of such term or provision to persons or circumstances other than
those as to which it is held invalid or unenforceable, shall not be affected
thereby, and each term and provision of this Lease shall be valid and shall be
enforced to the fullest extent permitted by law.
14.8 PROVISIONS BINDING, ETC. Except as herein provided, the terms
hereof shall be binding upon and shall inure to the benefit of the successors
and assigns, respectively, of Landlord and Tenant, and, if Tenant shall be an
individual, upon and to his heirs, executors, administrators, successors and
assigns. Each term and each provision of this Lease to be performed by Tenant
shall be construed to be both a covenant and a condition. The reference
contained to successors and assigns of Tenant is not intended to constitute a
consent to assignment by Tenant, but has reference only to those instances in
which Landlord may later give consent to a particular assignment (or as to which
Landlord's consent is not required), pursuant to Article VIII hereof.
14.9 RECORDING. Tenant agrees not to record this Lease, but each
party hereto agrees, on the request of the other, to execute a so-called notice
of lease in recordable form and complying with applicable law and reasonably
satisfactory to Landlord's attorneys. In no event shall such document set forth
the rent or other charges payable by Tenant under this Lease; and any such
document shall expressly state that it is executed pursuant to the provisions
contained in this Lease, and is not intended to vary the terms and conditions of
this Lease.
14.10 NOTICES. Whenever, by the terms of this Lease, notice shall or
may be given either to Landlord or to Tenant, such notice shall be in writing
and shall be sent by registered mail, return receipt requested, postage prepaid,
or by prepaid Federal Express or other similar overnight delivery service:
If intended for Landlord, addressed to Landlord at Landlord's Address (or
to such other address or addresses as may from time to time hereafter be
designated by Landlord by like notice); and
If intended for Tenant, addressed to Tenant at the Premises (or to such
other address or addresses as may from time to time hereafter be designated
by Tenant by like notice); provided, however, that, prior to the
Commencement Date, notices intended for Tenant shall be addressed to
Tenant's Original Address.
All such notices shall be effective upon receipt by or tender for delivery
to the intended recipient thereof.
14.11 WHEN LEASE BECOMES BINDING. The submission of this document for
examination and negotiation does not constitute an offer to lease, or a
reservation of' or option for, the Premises, and this document shall become
effective and binding only upon execution and delivery by both Landlord and
Tenant. Except for the provisions of any written instrument or agreement
executed substantially concurrently herewith by Landlord
-29-
<PAGE>
and Tenant, all negotiations, considerations, representations and understandings
between Landlord and Tenant are incorporated herein and this Lease expressly
supersedes any proposals or other written documents executed prior hereto. This
Lease may be modified or altered only by written agreement between Landlord and
Tenant, and no act or omission of any employee or agent of Landlord shall alter,
change or modify any of the provisions hereof.
14.12 PARAGRAPH HEADINGS. The paragraph headings in this instrument
are for convenience and reference only, and the words contained therein shall in
no way be held to explain, modify, amplify or aid in the interpretation,
construction or meaning of the provisions of this Lease.
14.13 SUBORDINATION; ATTORNMENT.
(a) Tenant's rights under this Lease are and shall always be
subordinate to the operation and effect of any lease of land only or of land and
buildings in a sale-leaseback transaction, and any mortgage, deed of trust or
other security instrument now or hereafter placed upon the Property, or any part
or parts thereof' by Landlord. This clause shall be self-operative, and no
further instrument of subordination shall be required. In confirmation thereof
Tenant shall execute such further assurances as may be requisite. In addition,
Tenant agrees to attorn to any successor in interest to Landlord whether by
purchase, foreclosure, sale in lieu of foreclosure, power of sale, termination
of any lease of land only or land and buildings in a sale-leaseback transaction
or otherwise, if so requested or required by such successor in interest, and
Tenant agrees, upon demand, to execute such agreement or agreements in
confirmation of such attornment as may be requested by Landlord. However,
Tenant's obligation of subordination and attornment with respect to any mortgage
hereafter encumbering the Property shall be conditioned upon the execution by
the holder of such mortgage of an agreement, in the form then commonly used by
such holder, to the effect that, notwithstanding any foreclosure of such
mortgage or other exercise by the holder of its rights thereunder, Tenant shall
be permitted to continue to occupy the Premises and exercise its rights
hereunder, so long as there shall occur no condition which, pursuant to the
terms of this Lease, would have permitted Landlord to terminate this Lease or
otherwise interfere with Tenant's rights hereunder. Landlord or its mortgagee,
any ground lessor or other similar secured party, may, at its option, make this
Lease superior to any such mortgage, ground lease or other security instrument
by giving Tenant ten (10) days prior written notice and no other documentation
shall be necessary to effect such change.
(b) If any person shall succeed to all or part of Landlord's
interest in the Premises upon the exercise of any remedy provided for in any
mortgage of the Premises now or hereafter recorded, (i) Tenant shall attorn to
and recognize such person as Tenant's landlord as above provided and this Lease
shall continue in full force and effect as a direct lease between such person
and Tenant as fully and with the same force and effect as if this Lease had
originally been entered into by such person and Tenant, except that such person
shall not be liable for any act or omission of Landlord occurring prior to such
person's succession to title nor be subject to any offset, defense or
counterclaim accruing prior to such person S succession to title, nor be bound
by any modification of this Lease or any waiver, compromise, release or
discharge of any obligation of Tenant hereunder unless such
-30-
<PAGE>
modification, waiver, compromise, release or discharge shall have been
specifically consented to in writing by the mortgagee under said mortgage, nor
be bound by any payment of Basic Rent or Escalation Charges which Tenant has
paid more than one month in advance (other than deposits in the nature of
security deposits), and (ii) such person and each person succeeding to its
interest in the Premises shall not be liable for any warranty or guaranty of
Landlord under this Lease and shall be liable for the performance and observance
of the other covenants and conditions to be performed and observed by Landlord
under this Lease only with respect to the period during which such person shall
own such interest.
(c) Concurrently with any notification from Tenant to Landlord
concerning any default by Landlord in the performance of its obligations
hereunder, Tenant shall provide a copy of such notice to any mortgagee or ground
lessor of the Property of which Tenant has received notice. Thereafter, Tenant
will not exercise any right to terminate this Lease on account of such default
unless such mortgagee or ground lessor has failed, within a reasonable time
after its receipt of such notice from Tenant, to remedy such default on behalf
of Landlord.
(d) Neither receipt of a collateral assignment of Landlord's
interest hereunder nor receipt of transfer of title to the Property when
followed by a ground lease back to Landlord shall be deemed to constitute an
assumption by the mortgagee or transferee (as the case may be) of the
obligations of Landlord hereunder, unless such obligations shall be expressly
assumed, in writing, by such mortgagee or transferee.
(e) If, in connection with obtaining construction, interim or
permanent financing for the Property, the lender shall request reasonable
modifications in this Lease as a condition to such financing, Tenant will not
unreasonably withhold, delay or defer its consent thereto, provided that such
modifications do not increase the obligations of Tenant hereunder, or affect
Tenant's rental and other monetary obligations hereunder, the Term or any of the
other "business" terms contained herein, or materially adversely affect the
leasehold interest hereby created or Tenant's rights hereunder.
14.14 ASSIGNMENT OF RENTS AND TRANSFER OF TITLE.
(a) With reference to any assignment of Landlord's interest in this
Lease, or the rents payable hereunder, conditional in nature or otherwise, which
assignment is made to the holder of a mortgage on property which includes the
Premises, Tenant agrees that the execution thereof by Landlord, and the
acceptance thereof by the holder of such mortgage shall never be treated as an
assumption by such holder of any of the obligations of Landlord hereunder unless
such holder shall, by notice sent to Tenant, specifically otherwise elect, and
that, except as aforesaid, such holder shall be treated as having assumed
Landlord's obligations hereunder only upon foreclosure of such holder's mortgage
and the taking of possession of the Premises.
(b) In the event of any transfer of title to the Property by
Landlord, Landlord shall thereafter be entirely freed and relieved from the
performance and observance of all covenants and obligations hereunder.
Furthermore, Landlord and each succeeding holder of Landlord's interest under
this Lease shall be responsible only for defaults
-31-
<PAGE>
hereunder arising during or prior to the period during which such party holds
Landlord's interest hereunder.
14.15 STATUS REPORT. Tenant agrees that, at any time and from time to
time at reasonable intervals, within ten (10) days after written request by
Landlord, Tenant will execute, acknowledge and deliver to Landlord and/or to
Landlord's designee, mortgagee or other similar secured party as may be
designated by Landlord, a certificate stating that this Lease is unmodified and
in full force and effect (or that the same is in full force and effect as
modified, listing the instruments of modification), the dates to which rent and
other charges have been paid, and whether or not, to the best of Tenant's
knowledge, Landlord is in default hereunder (and if so, specifying the nature of
the default), and containing such other statements as to the status of matters
under this Lease as Landlord may require, it being intended that any such
statement delivered pursuant to this paragraph may be relied upon by any
mortgagee, ground lessor or assignee of Landlord's interest in the Premises.
The failure of Tenant to execute and deliver such certificate shall
constitute a default hereunder, in which event, in addition to any other
remedies which Landlord may have under this Lease as a result of Tenant's
default, Landlord is hereby authorized, as attorney and agent of Tenant, to
execute such certificate; and in such event Tenant hereby confirms and ratifies
any such certificate executed by virtue of the power of attorney hereby granted.
14.16 REMEDYING DEFAULTS. Landlord shall have the right, but shall not
be required, to pay such sums or do any act which requires the expenditure of
monies which may be necessary or appropriate by reason of the failure or neglect
of Tenant to perform any of the provisions of this Lease, and in the event of
the exercise of such right by Landlord, Tenant agrees to pay Landlord forthwith
upon demand all such sums, together with interest thereon at a rate (the
"Default Rate") equal to the greater of (i) 3% over the "prime rate" in effect
from time to time at Bank of Boston and (ii) 18% per annum, as an additional
charge. (However, in no event shall the Default Rate be greater than the highest
rate of interest which may lawfully be charged.) Any payment of Basic Rent,
Escalation Charges or other sums payable hereunder not paid when due shall, at
the option of Landlord, bear interest at the Default Rate from the due date
thereof which interest shall be payable forthwith upon demand by Landlord.
14.17 HOLDING OVER. Any holding over by Tenant after the expiration or
earlier termination of the Term shall be treated as a daily tenancy at
sufferance at a rate equal to 1 1/2 times the sum of the Basic Rent and
Escalation Charges herein provided (prorated on a daily basis), and shall
otherwise be on the terms and conditions set forth in this Lease as far as
applicable.
14.18 WAIVER OF SUBROGATION. Landlord shall cause each insurance
policy carried by it insuring the Building against loss by fire or any of the
casualties covered by standard extended coverage to be written in such a manner
as to provide that the insurer waives all right of recovery by way of
subrogation against Tenant in connection with any loss or damage covered by the
policy. Tenant shall cause each insurance policy carried by it insuring the
Premises as well as the contents thereof' including trade fixtures and personal
property, against loss by fire or any of the casualties covered by standard
extended coverage
-32-
<PAGE>
to be written in such a manner as to provide that the insurer waives all right
of recovery by way of subrogation against Landlord in connection with any loss
or damage covered by the policy. Neither party hereto shall be liable to the
other for any loss or damage caused by fire or any of the casualties covered by
standard extended coverage, which loss or damage is covered by the insurance
policies maintained by the other party, provided that such policies are not
invalidated by such waiver; and provided further that, if either party shall be
unable to obtain the waiver of subrogation required by this Section without
additional premium therefor, then unless the party claiming the benefit of such
waiver shall agree to pay such party for the cost of such additional premium
within thirty (30) days after notice of the statement setting forth such
requirement and the amount of additional premium, such waiver shall be of no
force and effect between such party and the claiming party; and provided further
that neither party hereto shall be freed of liability to the extent of any
deductible under the other party's insurance, or to the extent to which such
other party's loss is greater than the coverage provided by the insurance policy
to which the waiver of subrogation required by this Section applies.
14.19 SURRENDER OF PREMISES. Upon the expiration or earlier
termination of the Term, Tenant shall peaceably quit and surrender to Landlord
the Premises in neat and clean condition and in good order, condition and
repair, together with all alterations, additions and improvements which may have
been made or installed in, on or to the Premises prior to or during the Term,
excepting only ordinary wear and use and damage by fire or other casualty for
which, under other provisions of this Lease, Tenant has no responsibility of
repair or restoration. Tenant shall remove all of Tenant's Removable Property
and, to the extent specified by Landlord, all alterations and additions made by
Tenant and all partitions wholly within the Premises unless installed initially
by Landlord in preparing the Premises for Tenant's occupancy pursuant to Article
IV; and shall repair, to the satisfaction of Landlord, any damage to the
Premises or the Building (or any other portion of the Office Park) caused by
such removal. Any of Tenant's Removable Property which shall remain in the
Building or on the Premises after the expiration or termination of the Term
shall be deemed conclusively to have been abandoned, and either may be retained
by Landlord as its property or may be stored by Landlord or disposed of in such
manner as Landlord may see fit, at Tenant's sole cost and expense.
14.20 BROKERAGE. Tenant warrants and represents that Tenant has dealt
with no broker in connection with the consummation of this Lease other than the
Broker(s) (if any) specified in Section 1.2 (the "Broker"), and, in the event of
any brokerage claims against Landlord predicated upon prior dealings with
Tenant, Tenant agrees to defend the same and indemnify Landlord against any such
claim, provided that Landlord shall be solely responsible for the payment of
brokerage commissions to the Broker.
14.21 SUBSTITUTE SPACE. In the event that another tenant or occupant
of the Building desires to expand its premises into the Premises (or any portion
thereof), or if a proposed tenant desires to lease space which includes the
Premises, if Landlord so requests, Tenant shall vacate the Premises and
relinquish its rights with respect to the same provided that Landlord shall
provide to Tenant substitute space in the Building or in another building in the
Office Park, such space to be reasonably comparable in size, layout, finish and
utility to the Premises, and further provided that Landlord shall, at its sole
cost and expense, move
-33-
<PAGE>
Tenant and Tenant's Removable Property from the Premises to such new space in
such manner as will minimize, to the greatest extent practicable, undue
interference with the business or operations of Tenant. Any such substitute
space shall, from and after such relocation, be treated as the Premises demised
under this Lease, and shall be occupied by Tenant under the same terms,
provisions and conditions as are set forth in this Lease. In the event that
Tenant occupies substitute space, any notice of lease or short form of lease
shall be amended appropriately, so as to reflect accurately the premises then
occupied by Tenant.
14.22 WAIVER OF JURY TRIAL. Landlord and Tenant hereby waive trial by
jury in any action, proceeding or counter claim brought by either of the parties
hereto against the other, on or in respect to any matter whatsoever arising out
of or in any way connected with this Lease, the relationship of Landlord and
Tenant hereunder, Tenant's use or occupancy of the Premises and/or any claim of
injury or damages.
14.23 GOVERNING LAW. This Lease shall be governed exclusively by the
provisions hereof and by the laws of the Commonwealth of Massachusetts.
IN WITNESS WHEREOF, Landlord and Tenant have caused this Lease to be duly
executed, under seal, by persons hereunto duly authorized, in multiple copies,
each to be considered an original hereof' as of the date first set forth above.
TENANT: LANDLORD:
Physicians Quality Care, Inc. Shorenstein Management, Inc., As
Trustee
for SRI Two Realty Trust
By: /s/ Nancy Kelley By:
_______________________________ ____________________________
Nancy Kelley
Its Executive Vice President of Its:
Business Development Hereunto duly authorized
Hereunto duly authorized
-34-
<PAGE>
EXHIBIT B
CORPORATE CENTER OFFICE LEASE
FOR
WINTER STREET, WALTHAM, MASSACHUSETTS
RULES AND REGULATIONS
RULES AND REGULATIONS. Tenant agrees to observe the rights reserved to
Landlord in the Lease and agrees, for itself its employees, agents, clients,
customers, invitees, contractors and guests, to comply with the following rules
and regulations and with such reasonable modifications thereof and additions
thereto as Landlord may make, from time to time, for the Building.
(a) Any sign, lettering, curtain, picture, notice, or advertisement within
Tenant's Premises (including but not limited to Tenant identification signs
on doors to the Premises) which is visible outside of the Premises shall be
installed at Tenant's cost and in such manner, character and style as
Landlord may approve in writing. No sign, lettering, picture, notice or
advertisement shall be placed on any outside window or in any position so
as to be visible from outside the Building or from any atrium or lobbies of
the Building.
(b) Tenant shall not use the name of the Building or use pictures or
illustrations of the Building in advertising or other publicity, without
prior written consent of Landlord.
(c) Tenant, its customers, invitees, licensees, and guests shall not
obstruct sidewalks, entrances, passages, courts, corridors, vestibules,
halls, elevators and stairways in and about the Building. Tenant shall not
place objects against glass partitions or doors or windows or adjacent to
any open common space which would be unsightly from the Building corridors
or from the exterior of the Building, and will promptly remove the same
upon notice from Landlord.
(d) Tenant shall not make noises, cause disturbances, create vibrations,
odors or noxious fumes or use or operate any electrical or electronic
devises or other devices that emit sound waves or are dangerous to other
tenants and occupants of the Building or that would interfere with the
operation of any device or equipment or radio or television broadcasting or
reception from or within the Building or elsewhere, or with the operation
of roads or highways in the vicinity of the Building and shall not place or
install any projections, antennae, aerials or similar devices inside or
outside of the Premises.
(e) Tenant shall not make any room-to-room canvass to solicit business from
other tenants in the Building and shall not exhibit, sell or offer to sell,
use, rent or exchange any item or services in or from the Premises unless
ordinarily embraced within Tenant's use of the Premises as specified in its
Lease.
-35-
<PAGE>
(f) Tenant shall not waste electricity or water and agrees to cooperate
fully with Landlord to assure the most effective operation of the
Building's heating and air conditioning and shall refrain from attempting
to adjust any controls. Tenant shall keep public corridor doors closed.
(g) Door keys for doors in the Premises will be furnished at the
commencement of the Lease by Landlord. Tenant shall not affix additional
locks on doors and shall purchase duplicate keys only from Landlord. When
the Lease is terminated, Tenant shall return all keys to Landlord and will
provide to Landlord the means of opening any safes, cabinets or vaults left
in the Premises.
(h) Tenant assumes full responsibility for protecting its space from theft,
robbery and pilferage, which includes keeping doors locked and other means
of entry to the Premises closed and secured.
(i) Peddlers, solicitors and beggars shall be reported to the office of the
Building or as Landlord otherwise requests.
(j) Tenant shall not install nor operate machinery or any mechanical
devices of a nature not directly related to Tenant's ordinary use of the
Premises without the written permission of Landlord.
(k) No person or contractor not employed or approved by Landlord shall be
used to perform window washing, cleaning, decorating, repair or other work
in the Premises.
(l) Tenant may not (without Landlord's approval therefor, which approval
will be signified on Tenant Plans submitted pursuant to the Lease) and
Tenant shall not permit or suffer anyone to:
(1) Cook in the Premises.
(2) Place vending or dispensing machines of any kind in or about the
Premises;
(3) At any time sell, purchase or give away, or permit the sale,
purchase or gift of' food in any form;
(m) Tenant shall not:
(1) Use the Premises for lodging, manufacturing or for any immoral or
illegal purposes.
(2) Use the Premises to engage in the manufacture or sale of' or
permit the use of any spirituous, fermented, intoxicating or
alcoholic beverages on the Premises.
(3) Use the Premises to engage in the manufacture or sale of or permit
the use of any illegal drugs on the Premises.
-36-
<PAGE>
(n) In no event shall any person bring into the Building inflammables such
as gasoline, kerosene, naphtha and benzene or explosives or firearms
(except as may be used in normal security procedures) or any other article
of intrinsically dangerous nature. If by reason of the failure of Tenant
to comply with the provisions of this paragraph any insurance premium
payable by Landlord for all or any part of the Building shall at any time
be increased above normal insurance premiums for insurance not covering the
items aforesaid, Landlord shall have the option to either terminate the
Lease or to require Tenant to make immediate payment for the whole of the
increased insurance premium.
(o) Tenant shall comply with all applicable federal, state and municipal
laws, ordinances and regulations and building rules, and shall not directly
or indirectly make any use of the Premises which may be prohibited thereby
or which shall be dangerous to person or property or shall increase the
cost of insurance or require additional insurance coverage.
(p) If Tenant desires signal, communication, alarm or other utility or
service connection installed or changed, the same shall be made at the
expense of Tenant, with approval and under direction of Landlord.
(q) Bicycles shall not be permitted in the Building in other than Landlord-
designated locations.
(r) Tenant shall cooperate and participate in all security programs
affecting the Building.
(s) In any event Landlord allows one or more tenants in the Building to do
any act prohibited herein, Landlord shall not be precluded from denying any
other tenant the right to do any such act.
(t) Tenant, or the employees, agents, servants, visitors or licensees of
Tenant shall not at any time place, leave or discard any rubbish, paper,
articles, or objects of any kind whatsoever outside the doors of the
Premises or in the corridors or passageways of the Building. No animals or
birds shall be brought or kept in or about the Building.
(u) Landlord shall have the right to prohibit any advertising by Tenant
which in Landlord's opinion, tends to impair the reputation of the Building
or its desirability for offices, and, upon written notice from Landlord,
Tenant will refrain from or discontinue such advertising.
(v) Tenant shall not mark, paint or drill into, or in any way deface any
part of the Building or the Premises. No boring, driving of nails or
screws, cutting or stringing wires shall be permitted, except with the
prior written consent of Landlord and as Landlord may direct. Tenant shall
not install any resilient tile or similar floor covering in the Premises
except with the prior approval of Landlord. The use of cement or other
similar adhesive materials is expressly prohibited.
-37-
<PAGE>
(w) Landlord shall have the right to limit or control the number and format
of listings on the main Building directory.
(x) Tenant's use of delivery areas, loading areas and freight elevators
shall be scheduled in advance with Landlord and shall be subject to the
reasonable approval of Landlord.
(y) Entry and exiting to and from the office Park and use of all roads,
driveways and walkways in the office Park shall be subject to such traffic
and use rules and regulations as Landlord may promulgate and provide to
Tenant from time to time.
-38-
<PAGE>
EXHIBIT E
BAY COLONY CORPORATE CENTER
BUILDING SERVICES/CLEANING SPECIFICATIONS
I. PREMISES
A. Daily (Monday thru Friday, Holidays excluded)
1) Empty and clean all waste receptacles and ashtrays and remove
waste material from the premises.
2) Sweep and dust mop all uncarpeted areas using a dust-treated mop.
3) Hand dust and wipe clean with treated cloths all furniture,
telephones, files, fixtures and window sills as necessary.
4) Spot vacuum or sweep all carpeted areas.
5) Upon completion of cleaning, all lights will be turned off and
doors locked leaving the premises in an orderly condition.
B. Weekly
1) Vacuum all rugs and carpeted areas.
2) Remove finger marks from entrance doors and light switches.
3) Wipe clean and polish bright metal work as necessary.
C. Quarterly - All high dusting not reached in daily cleaning to include:
1) Dusting of all pictures, frames, charts, graphs and similar wall
hangings.
2) Dusting of all vertical surfaces such as walls, doors and ducts.
3) Dusting of all exposed pipes, air conditioning louvres and high
moldings.
II PUBLIC LOBBIES & ELEVATORS
A. Daily (Monday thru Friday) Holidays excluded)
1) All stone, ceramic tile and other unwaxed flooring swept and or
damp mopped.
-39-
<PAGE>
2) Vacuum and spot clean all carpeted areas.
3) Wash or sweep clean all floor entry mats.
4) Empty and clean all ashtrays urns.
5) Wash and clean all water fountains and coolers.
6) Wipe clean all metal work and glass as required.
7) Clean elevators, wash or vacuum floors and wipe clean all metal,
glass and/or wood.
8) Check and clean all building stairwells as required.
B. Monthly
1) Wax and or spray buff all non-carpeted flooring areas.
2) Dust and clean all lobby walls and ventilating louvres.
-40-
<PAGE>
EXHIBIT F
DESCRIPTION OF LAND
All that certain tract, piece or parcel of land situate in the City of
Waltham, County of Middlesex, Commonwealth of Massachusetts, more particularly
described as follows:
Lot 2 as shown on Plan 41218-B on file with the Engineer's Office of the
Middlesex South Registry District of the Land Court.
-41-
<PAGE>
EXHIBIT G
DESCRIPTION OF OFFICE PARK
All those certain tracts, pieces or parcels of land situate in the City of
Waltham, County of Middlesex, Commonwealth of Massachusetts, more particularly
described as follows:
Lots 1, 2, 3 and 4 as shown on Plan 41218-B on file with the Engineer's
office of the Middlesex South Registry District of the Land Court.
-42-
<PAGE>
LEASE
THIS Lease is between STEVEN M. ROBERTS, TRUSTEE OF NORTHERNEDGE/PLANT ONE
REALTY TRUST, under Declaration of Trust dated December 20, 1988, recorded with
the Hampden County Registry of Deeds at Book 7065, Page 1, with a usual place of
business at 93 West Broad Street, Springfield, Massachusetts, hereinafter
referred to as the "Lessor," and PHYSICIANS QUALITY CARE, INC., a Massachusetts
corporation with a usual place of business at 950 Winter Street, Suite 2410,
Waltham, Massachusetts, hereinafter referred to as the "Lessee."
The Lessor and the Lessee agree as follows:
1. Leased Premises.
(a) The Lessor hereby leases to the Lessee, and the Lessee hereby
leases from the Lessor, for the term and upon the conditions contained in this
Lease, that portion of the second floor of the building located at 354 Birnie
Avenue, Springfield, Massachusetts (the "Building") outlined in blue and labeled
as "Area #2" on Exhibit A, which is attached hereto and made a part hereof (the
"Leased Premises"). The Leased Premises consist of approximately 2,410 rentable
square feet of space. The Building is located within and comprises part of
NorthernEdge Condominium (the "Project").
(b) The Lessor leases the Leased premises to the Lessee together with
the following:
(i) The nonexclusive right in favor of the Lessee, its agents,
servants, employees and invitees, to park their automobiles within the
common areas of the project which are identified as "Permitted Parking
Areas" on Exhibit B. All such parking rights are granted by the
Lessor to the Lessee in common with all others entitled thereto and
only to the extent available and on an equitable basis. The Lessor
agrees that it shall not change the Permitted Parking Areas in any
manner that materially reduces the number of parking spaces available
to the Lessee or in any manner that materially interferes with access
to the Leased
<PAGE>
Premises from the Permitted Parking Areas or results in a substantial
variation in the location of the Permitted Parking Areas; and
(ii) The right of access, in common with all others entitled
thereto, to the Leased Premises through the common areas located
within the Buildings and the entrances to the Buildings, as more
particularly described on Exhibit A.
(c) Except as otherwise expressly provided in this Lease, the Lessor
hereby reserves to itself (i) the right to maintain, use, repair and replace
pipes, ducts, wires, meters and any other equipment, machinery, apparatus, and
fixtures located within or without the Leased Premises which service other parts
of the Building; (ii) the right to make changes, alterations, and additions to
the Building, common areas, and common facilities provided that any such
changes, alterations or additions do not unreasonably structurally change the
interior of the Leased Premises and provided that reasonable access and service
to the Leased Premises is provided; and (iii) the right to enter the Leased
Premises for repair and maintenance purposes upon reasonable prior notice to
Lessee, and for emergency purposes at any time, without notice. The Lessor and
the Lessee agree that the requirement that the Lessor provide the Lessee with
reasonable prior notice in connection with the exercise by the Lessor of its
right of entry with respect to the Leased Premises shall be satisfied if the
Lessor provides the Lessee with prior notice at least twenty-four (24) hours
prior to the exercise by the Lessor of its right of entry, except in the event
of an emergency.
2. Use by Lessee.
The Lessee agrees that it will use the Leased Premises only for general
office purposes. The Lessee shall not use or occupy the Leased Premises for any
other purpose or business without the prior written consent of the Lessor. The
Lessee shall observe and comply with the Lessor's reasonable Rules and
Regulations as promulgated from time to time
-2-
<PAGE>
by the Lessor with respect to the Buildings and/or the Project. The Rules and
Regulations shall be generally applicable to all tenants or other occupants of
the Buildings and/or the Project.
3. Commencement Date; Tenant Improvement Allowance.
(a) The term of this Lease and the Lessee's obligation to pay rent
hereunder shall commence upon December 1, 1996 (the "Commencement Date"). The
Lessee agrees to accept possession of the Leased Premises on the Commencement
Date "AS IS, WHERE IS," without any requirement that the Lessor perform any work
or make any alterations with respect to the Leased Premises or any portion
thereof, subject to the Lessor's obligations pursuant to Paragraph 3(b) below.
(b) The Lessor and the Lessee acknowledge that the Lessee intends to
make certain improvements to the Leased Premises (the "Lessee's Improvements").
The Lessee's Improvements shall be subject to the prior approval of the Lessor,
which shall not be unreasonably withheld or delayed. The Lessor agrees to
reimburse the Lessee for the cost of the Lessee's Improvements, up to a total
reimbursement amount of Sixteen Thousand Eight Hundred Seventy ($16,870.00)
Dollars (the "Allowance"). The Allowance shall be paid by the Lessor to the
Lessee upon presentation by the Lessee to the Lessor of invoices confirming the
payment by the Lessee of costs and expenses incurred in connection with the
performance of the work required to complete the Lessee's Improvements. The
Lessee shall make such payments to the Lessor within five (5) days from the date
of receipt by the Lessor of a request for payment from the Lessee, provided that
the Lessee shall not make any such request more frequently than every two (2)
weeks.
-3-
<PAGE>
4. Term.
The Lessee shall hold the Leased Premises for a term of five (5) lease
years, beginning upon the Commencement Date and ending on November 30, 2001.
The phrase "lease year" as used herein shall mean a period of twelve (12)
consecutive calendar months.
5. Rent.
(a) The Lessor and the Lessee agree that the annual rent payable by
the Lessee during the term of this Lease shall be Thirty-Two Thousand Five
Hundred Sixty-Five ($32,565.00) Dollars, which is an amount equal to the product
of Thirteen ($13.00) Dollars times 2,505, the total number of rentable square
feet of space included within the Leased Premises.
(b) The annual rent payable by the Lessee to the Lessor pursuant to
Paragraph 5(a) above shall be payable in equal monthly installments at the
office of the Lessor or of the Lessor's agent, in advance, upon the first day of
each calendar month during the term of this Lease.
(c) The Lessee agrees to pay the rent provided for in this Lease as
and when due including any additional rent, as well as all sums of money,
charges or other amounts required to be paid by the Lessee to the Lessor or to
another person designated by the Lessor under this Lease, all of which shall be
deemed to be "rent" in addition to the rent expressly provided for herein. All
payments of rent and additional rent shall be due and payable without demand
therefor unless otherwise expressly provided in this Lease. Nonpayment of
additional rent when due shall constitute a default under this Lease to the same
extent, and shall entitle the Lessor to the same remedies, as nonpayment of
rent.
-4-
<PAGE>
6. Additional Rent.
(a) The Lessee shall pay to the Lessor as additional rent its
Proportionate Share, as hereinafter defined, of any increase in "operating
expenses" for the Building and the common areas of the Project attributable to
the Building, as identified on Exhibit B (the "Building Common Areas") over the
Lessor's actual operating expenses for Calendar Year 1996. The Lessor and the
Lessee agree that the Lessee's proportionate share of operating expenses for
purposes of this Paragraph 6(a) and real estate taxes for purposes of Paragraph
6(b) below shall be 12.91 percent. Operating expenses shall include all
charges, costs and expenses incurred by the Lessor in connection with the
operation, maintenance and repair of the Building and the Building Common Areas,
including without limitation (i) the cost of maintenance, electricity and heat
for the common areas of the Building and the Building Common Areas; (ii) the
cost of property management for the Building and the Building Common Areas;
(iii) the cost of insurance for the Building and the Building Common Areas; (iv)
the cost of sewer and water charges for the Building; and (v) the cost of
furnishing utilities to the Leased Premises, all other rentable areas of the
Building, the common areas of the Building and the Building Common Areas.
Operating expenses shall not, however, include (A) the cost of equipment,
repairs or improvements properly treated as capital expenditures under generally
accepted accounting principles, (B) any charges for depreciation of the cost of
construction at the Building and any improvements, equipment or repairs thereto,
(C) any interest paid on any debt of the Lessor, (D) any cost resulting to the
Lessor as a result of alterations, upgrades or installations in the Building or
any mechanical or other system in or servicing the Building to the extent
required by statute, regulation, ordinance adopted or other implemented after
the Commencement Date, (E) any rental commissions or brokerage fees paid or
payable by the Lessor, (F) any costs or expenses incurred by the
-5-
<PAGE>
Lessor solely for the benefit of other tenants of the Building, and (G) any
salaries, compensation, fringe benefits or other personnel costs of the Lessor,
its partners or other direct or indirect holders of any equity interest in the
Lessor, except for the cost of property management for the Building and the
Building Common Areas. Within ninety (90) days following the end of each
calendar year during the term of this Lease the Lessor shall furnish to the
Lessee the Lessor's calculation of the amount of operating expenses during the
immediately preceding calendar year and the Lessee's share of such operating
expenses. The Lessor's calculations shall be conclusive and binding upon the
Lessee in the event that the Lessee fails to object to such calculations within
one hundred eighty (180) days following the receipt by the Lessee of the
Lessor's calculations, specifying with reasonable specificity in any such
objection the reason or reasons why the Lessee objects to the Lessor's
calculations. The Lessor and the Lessee agree that during the one hundred eighty
(180) day period following the date of delivery by the Lessor to the Lessee of
the Lessor's calculation of the amount of operating expenses during the
immediately preceding calendar year and the Lessee's share of such operating
expenses, the Lessee and its authorized representatives shall have the right to
review the Lessor's books and records relating to the calculation of the
Lessor's operating expenses at any reasonable time upon reasonable prior notice
thereof.
(b) The Lessee shall pay to the Lessor as additional rent the Lessee's
Proportionate Share of any increase in real estate taxes levied against the
Building over the real estate taxes payable during the 1996 fiscal tax year
ending June 30, 1996.
(c) The Lessee shall pay to the Lessor as additional rent monthly in
advance, an amount equal to one-twelfth (1/12) of Lessee's proportionate share
of increases in operating expenses and real estate taxes as reasonably estimated
by the Lessor in accordance with Paragraphs 6(a) and (b) above. In the event
that the additional rent paid by
-6-
<PAGE>
the Lessee as the Lessee's proportionate share of operating expenses and real
estate taxes based on the Lessor's estimates is greater or less than the amount
actually due (the "Difference") either the Lessor shall pay the Lessee the
Difference, or the Lessee shall pay the Lessor the Difference, each within
thirty (30) days after the receipt of a request therefor, as appropriate.
(d) The additional rent payments described in this Paragraph 6 shall
be prorated in the event that this Lease commences or terminates before the end
of any calendar year or fiscal tax year.
7. Condition of Leased Premises, Improvements, Maintenance and Repairs;
Surrender.
(a) The Lessor has not made and the Lessee has not relied upon any
representations or warranties, whether express or implied, as to the condition
of the Leased Premises or their suitability for the Lessee's use other than
those which may be specifically set forth in this Lease. The Lessee accepts the
Leased Premises in the condition existing upon the date of execution of this
Lease except for latent defects.
(b) The Lessor agrees that during the term of this Lease it shall, at
its own expense, make all necessary structural repairs and replacements to the
Leased Premises and the Building and it shall maintain the concealed plumbing,
concealed electrical and air conditioning and heating systems which are
installed or furnished by the Lessor except as otherwise expressly provided
herein or unless necessitated by the negligent or tortious acts of the Lessee,
its agents, servants, employees, invitees or licensees, with damage by fire or
other casualty excepted. The Lessor assumes limited responsibility for the
replacement of mechanical equipment when, in its reasonable judgment, repairs
cannot be made in a reasonable manner or at a reasonable cost. The Lessor shall
not be obligated to make any
-7-
<PAGE>
such repairs until the expiration of a reasonable period of time after its
receipt of verbal or written notice from the Lessee that such repairs are
required. Notwithstanding the foregoing, however, the Lessor shall use
reasonable efforts to repair immediately any equipment or other condition that
the Lessor is required to repair pursuant to this Lease to the extent that the
Lessor's failure to repair any such equipment or other condition substantially
impairs the use and enjoyment by the Lessee of the Leased Premises. The Lessor
shall be responsible for the reasonable removal of snow and ice and shall clean
and maintain the Project's common areas, including all landscaped areas and all
parking areas, and shall keep them reasonably illuminated throughout all periods
of darkness.
(c) The Lessee agrees that during the term of this Lease it shall, at
all times, keep the Leased Premises in a good, clean condition and in good order
and repair and it shall make all necessary repairs and perform all necessary
maintenance for such purposes, except to the extent that the Lessor is required
to make any such repairs or provide any maintenance as described in this
Paragraph 7 and in Paragraphs 8, 16 and 17 of this Lease. The Lessee shall be
responsible for all necessary repairs, replacements and maintenance of all
interior glass, floors and walls within or part of the Leased Premises. If the
Lessee fails, refuses or neglects to make such repairs or fails to prosecute
diligently such repairs to completion within thirty (30) days after written
notice from the Lessor of the necessity therefor, the Lessor may make such
repairs at the expense of the Lessee, and such expenses shall be collectible as
additional rent. The Lessee shall not permit the Leased Premises to be
overloaded, damaged, stripped or defaced, nor suffer any waste.
(d) The Lessor shall not be liable for any injury to or interference
with the Lessee's business arising from or caused by the Lessor's reasonably
making any repairs, alterations, additions or improvements in or to the Leased
Premises or the Building or to any
-8-
<PAGE>
appurtenances thereto or equipment therein. The Lessor agrees to use reasonable
efforts to minimize any interference with the Lessee's business in connection
with the making of any such repairs, alterations, additions or improvements in
or to the Leased Premises or the Building. There shall be no abatement of rent
because of such repairs, alterations, additions or improvements, except as
otherwise expressly provided herein. The Lessor agrees that if the Leased
Premises are rendered substantially untenantable as a result of or in connection
with the making of any such repairs, alterations, additions or improvements by
the Lessor for a period of five (5) consecutive business days the rent payable
by the Lessee shall be abated for the remainder of any such period during which
the Leased Premises are rendered substantially untenantable.
(e) The Lessee shall, at the end of the term of this Lease or upon the
earlier termination of this Lease, surrender the Leased Premises to the Lessor,
together with all signs and all alterations, additions and improvements thereto,
in broom clean condition and in good order and repair except for ordinary wear
and tear and damage for which the Lessee is not obligated to make repairs under
this Lease. The Lessee shall have the right at the end of the term hereof to
remove any equipment, furniture, trade fixtures, telephone system and security
systems or other personal property placed in the Leased Premises by the Lessee,
and the Lessee shall promptly repair any damage to the Leased Premises caused by
such removal and restore the Leased Premises to the condition existing upon the
date of execution of this Lease, reasonable wear and tear excepted. In the
event that the Lessee fails to repair and restore the Leased Premises as
provided herein, the Lessor may perform or cause such repairs and restoration to
be performed at the Lessee's expense. In the event of the Lessee's failure to
remove any of the Lessee's property from the Leased Premises, the Lessor is
hereby authorized, without liability to the Lessee for loss or damage thereto,
and at the sole risk of
-9-
<PAGE>
the Lessee, to remove and store any of the property at the Lessee's expense, or
to retain same under the Lessor's control or to sell at public or private sale,
any or all of the property not so removed and to apply the net proceeds of such
sale to the payment of any sum due hereunder, or to destroy such property. The
Lessor shall provide the Lessee with written or verbal notice twenty-four (24)
hours prior to taking any of the actions described in this Paragraph 7(e) with
respect to the Lessee's property.
8. Building Services.
(a) The Lessor shall provide the following services and facilities:
(i) Air conditioning, ventilation and heating, through the air
conditioning and heating systems of the Building, in
amounts generally agreed upon as sufficient in first class
office Building, on business days Monday through Friday
from 8:00 a.m. to 8:00 p.m., and on Saturdays from 8:00
a.m. to 1:00 p.m. The Lessee agrees to cooperate fully with
the Lessor and to abide by all the regulations and
requirements which the Lessor may reasonably prescribe for
the proper functioning and protection of the air
conditioning and heating systems;
(ii) Electric current for Building standard level of
illumination using fixtures acceptable to the Lessor and
all other purposes requiring electricity. The Lessee agrees
that the Lessee shall be responsible for the replacement of
all light bulbs, globes, fluorescent tubes and ballast with
respect to all light fixtures located within the Leased
Premises, regardless of whether or not such light fixtures
are installed by the Lessor or the Lessee. The Lessor's
obligation to furnish electricity for lighting does not,
however, include electricity for reproduction machinery,
other than normal 110 volt, 30 amp circuits. Such
additional electrical service will be furnished, if
reasonably available, upon the payment by the Lessee of all
costs of installation, including wiring and separate
metering, and agreeing in writing to pay the costs of
current as additional rent;
(iii) Maintenance and service of the public lavatories in the
Building;
(iv) Cleaning and maintenance of the Leased Premises and the
common areas in the Building. The cleaning and maintenance
services to be provided by the Lessor with respect to the
Leased
-10-
<PAGE>
Premises are more particularly described upon Exhibit C,
which is attached hereto and made a part hereof. The Lessor
agrees to maintain the common areas in the Building in a
condition consistent with a first class office building;
(v) Hot and cold water for lavatories, air conditioning and
sinks within the Leased Premises. If the Lessee requires
water for additional purposes the Lessee shall pay the cost
thereof as shown on a meter to be installed and maintained
at the Lessee's expense to measure such consumption;
(vi) Elevator service and maintenance; and
(vii) Parking lot and landscape maintenance, including snow
removal from the Permitted Parking Areas and related
walkways.
(b) The Lessor shall not be liable in damages or otherwise for any delay
or failure in furnishing any of the foregoing services or facilities where such
delay or failure is excusable pursuant to the provision of Paragraph 27 hereof.
In no event shall such delay or failure, regardless of cause, constitute an
eviction of the Lessee, termination of this Lease or other interference with the
Lessee's use and enjoyment of the Leased Premises, provided that such delay or
failure is excusable pursuant to Paragraph 27 below.
9. Indemnity and Liability Insurance.
(a) The Lessee agrees that, unless caused by the negligent or tortious
acts or omissions of the Lessor, its agents, servants or employees, it will:
(1) indemnify the Lessor against any injury, loss, claim or damage to any person
or property, wherever located, if caused by the negligent or tortious acts or
omissions of the Lessee or its agents or servants; and (2) without limiting the
generality of the foregoing, the Lessee specifically agrees that it will not
make any claims against the Lessor based on the leakage of water, gas or other
substance from any pipes, sprinklers or equipment, or by reason of the
existence, use or misuse of water or plumbing, heating, electrical, gas or other
fixtures or equipment, unless due to the negligence of the Lessor.
-11-
<PAGE>
If the Lessor shall, without fault on its part, be made a party to any
litigation commenced by or against the Lessee, the Lessee shall protect and hold
the Lessor harmless and indemnified from and against any loss or damage
sustained by the Lessor as a result thereof, and the Lessee shall pay all costs
and expenses, including reasonable attorneys' fees, incurred or paid by the
Lessor in connection with such litigation. The Lessor agrees that the Lessee
shall have the right to select counsel to defend the Lessor for purposes of this
paragraph, provided that any such counsel is reasonably acceptable to the
Lessor. The Lessor agrees that counsel approved by the Lessee's insurer shall
be acceptable to the Lessor for purposes of this Paragraph.
(b) The Lessee shall procure and maintain in full force a "Comprehensive
Commercial Liability" insurance policy under which the Lessor shall be named as
an Additional Insured. Under such policy Bodily Injury limits shall not be less
than $2,000,000 per person, per occurrence and property damage limits shall not
be less than $500,000 each occurrence. Certificates of the insurance affected
under this paragraph, and certificates of any and all renewals or replacements
of this policy, shall be delivered to the Lessor as soon as possible after the
effective date of this Lease. The policy or certificate shall provide that the
insurance shall not be cancelled or reduced in amounts of limits, or reduced in
breadth of coverage without ten (10) days' prior written notice to the Lessor,
and that no act or omission on the part of the Lessee shall invalidate such
policies as they apply to the Lessor.
10. Compliance with Law.
The Lessee agrees that it shall, at its own expense, comply with all state
and federal statutes, municipal regulations, and all regulations and orders of
any public authority (the "Governmental Requirements") with respect to the use
and occupancy of the Leased Premises or with respect to such improvements,
alterations or repairs of the Leased Premises by the
-12-
<PAGE>
Lessee as may be required to comply therewith. The Lessee specifically agrees
that if any improvements, alterations or repairs are required by the
Governmental Requirements as a direct result of the Lessee's use of the Leased
Premises the Lessee shall make all such improvements, alterations or repairs, at
its sole cost and expense. The Lessor represents and warrants to the Lessee that
to the best knowledge of the Lessor the Leased Premises and the use of the
Leased Premises by the Lessee comply with the Governmental Requirements as of
the date of this Lease. The Lessor agrees that the Lessee shall not have any
obligation pursuant to this Lease with respect to the compliance of the Building
Common Areas with the Governmental Requirements.
11. Assignment and Sublease.
The Lessee shall not assign this Lease or make any sublease for the whole
or any part of the Leased Premises to any entity, without the prior written
consent of the Lessor, which shall not be unreasonably withheld or delayed. The
Lessee agrees to give the Lessor written notice of any such assignment or
sublease within thirty (30) days after the effective date thereof. The Lessor
and the Lessee agree that in the event of any assignment or sublease to a
person, firm or entity that is approved by the Lessor pursuant to Paragraph 11
of this Lease, the Lessor shall be entitled to collect and the Lessee shall pay
to the Lessor promptly following its receipt from any such assignee or subtenant
fifty (50%) percent of all payments of rent, additional rent or other charges
payable by any such assignee or subtenant in excess of the rent, additional rent
and other charges payable by the Lessee pursuant to the terms of this Lease.
The Lessee shall include in its request for the Lessor's consent to any proposed
assignment or sublease a reasonably detailed summary of the terms of any such
proposed assignment or sublease. If this Lease is assigned or if the Leased
Premises or any part thereof are occupied by anybody other than the Lessee, the
Lessor may collect rent from the
-13-
<PAGE>
assignee or occupant and apply the net amount collected to the rent reserved,
but no such assignment, underletting, occupancy or collection shall be deemed a
waiver of this provision or the acceptance of the assignee, undertenant or
occupant as lessee. Nothing herein contained shall relieve the Lessee from its
covenants and obligations for the term of this Lease. The Lessee agrees to
reimburse the Lessor for the Lessor's reasonable attorneys' fees incurred in
conjunction with the processing and documentation of any such requested
transfer, assignment, subletting, license or concession agreement, change of
ownership, mortgage or hypothecation of this Lease or the Lessee's interest in
and to the Leased Premises, excluding any attorneys' fees incurred by the Lessor
in connection with the review by the Lessor of the form of any proposed sublease
by the Lessee.
12. Alterations and Additions.
The Lessee shall not make any alterations or additions to the Leased
Premises without the prior written consent of the Lessor, which shall not be
unreasonably withheld or delayed. Notwithstanding anything contained herein to
the contrary, the Lessor's prior consent shall not be required with respect to
any nonstructural alteration which does not affect the Building systems or any
other part of the Building (other than the Leased Premises), provided that the
estimated cost of the labor and materials for any such alteration or alterations
shall not exceed Ten Thousand ($10,000.00) Dollars in the aggregate within any
twelve (12) month period during the term of this Lease. The Lessor and the
Lessee agree that the Lessor may, in its discretion, condition its approval of
any alterations or additions proposed to be made by the Lessee to the Leased
Premises upon the Lessee agreeing to restore the Leased Premises to the
condition existing prior to the installation of any alterations or additions, at
the Lessee's sole cost and expense, upon the expiration of the term
-14-
<PAGE>
of this Lease. The Lessor expressly reserves the right to make its own
alterations, additions or improvements to the Building.
13. Fire Insurance.
The Lessor shall carry fire insurance with extended coverage on the
Building in an amount not less than the full insurable value of the Building,
exclusive of the foundations. The Lessee shall carry fire insurance with
extended coverage on all of the Lessee's fixtures, furniture, furnishings,
equipment and stock in trade to the extent of their full replacement value. Fire
insurance will be carried with companies qualified to do business in
Massachusetts, and the Lessee agrees to furnish the Lessor with certificates
evidencing such insurance upon the request of the Lessor therefor. The Lessee
also agrees that all such insurance policies shall provide that they shall not
be cancelled or materially changed without at least ten (10) days' prior written
notice thereof to the Lessor and that no act or omission by the Lessee shall
invalidate such policies as they apply to the Lessor.
14. Access by Lessor.
The Lessor shall have the right to enter the Leased Premises at reasonable
times during the Lessee's business hours for the purpose of inspection, making
such repairs as the Lessor may be obligated to make or may reasonably deem
necessary for curing any default of the Lessee. The Lessor agrees that, except
in the event of an emergency, it shall provide the Lessor with twenty-four (24)
hours' prior notice of any exercise by the Lessor of the right of entry reserved
hereby. The Lessor shall have the right of access to the Leased Premises at any
time in the event of an emergency, without prior notice, without liability to
the Lessee and without such entry constituting an eviction of the Lessee or
termination of the Lease. The Lessor agrees to use reasonable efforts to
minimize any interference with the Lessee's business in connection with the
exercise by the Lessor of the right of access reserved hereby.
-15-
<PAGE>
15. Utilities.
The Lessor agrees to provide and pay for electricity, heat and air
conditioning used or consumed by the Lessee in connection with its use and
occupancy of the Leased Premises during the entire term of this Lease, subject
to the Lessee's obligation to pay additional rent for increases in Operating
Expenses pursuant to Paragraph 6(a) above. The Lessee agrees to take reasonable
steps to conserve energy during the entire term of this Lease.
16. Destruction of Leased Premises.
(a) If the Leased Premises are damaged by fire, the elements,
unavoidable accident or other casualty, but are not thereby rendered
untenantable in whole or in part, the Lessor shall at its own expense cause such
damage to be repaired within one hundred fifty (150) days from the occurrence
thereof, or within such longer period of time as may be required exercising due
diligence, and the rent shall not be abated. If by reason of such occurrence,
the Leased Premises are rendered untenantable only in part, the Lessor shall at
its own expense cause the damage to be repaired within one hundred fifty (150)
days from the occurrence thereof, and the rent shall be abated proportionately
as to the portion of the Leased Premises rendered untenantable. If the Leased
Premises are rendered wholly untenantable, the Lessor shall at its own expense
cause such damage to be repaired as soon as practicable and the rent shall abate
until the Leased Premises have been restored and rendered tenantable, or the
Lessor or the Lessee may, at their election, terminate this Lease and the
tenancy hereby created by giving to the other, within the thirty (30) days
following the date of such occurrence, written notice of their election to
terminate this Lease and in that event the rent shall be adjusted as of the date
of such occurrence.
(b) In the event that fifty (50%) percent or more of the rentable area
of the Leased Premises is damaged or destroyed the Lessor may terminate this
Lease and the
-16-
<PAGE>
tenancy hereby created by giving the Lessee ninety (90) days' prior written
notice of the Lessor's election to so terminate this Lease, with such notice
given, if at all, within the ninety (90) days following the date of said
occurrence. Rent shall be adjusted as of the effective date of such termination.
In the event that the Lessor does not exercise the right of termination set
forth herein the Lessor shall cause the damage to be repaired and rent shall be
abated as provided in Paragraph 16(a) above.
17. Eminent Domain.
(a) If the whole of the Leased Premises or the Building are acquired
or condemned by eminent domain for any public or quasi-public use or purpose,
then the term of this Lease shall cease and terminate as of the date of title
vesting in such proceeding, all rentals shall be paid up to that date and the
Lessee shall have no claim against the Lessor or the condemning authority for
the value of any unexpired term of this Lease.
(b) If any part of the Leased Premises or the Building is acquired or
condemned as aforesaid, and in the event that such partial taking or
condemnation shall render the Leased Premises unsuitable for the business of the
Lessee, as reasonably determined by the Lessee, then the term of this Lease
shall cease and terminate as of the date of title vesting in such proceeding.
The Lessee shall have no claim against the Lessor or the condemning authority
for the value of any unexpired term of this Lease and rent shall be adjusted to
the date of such termination. In the event of a partial taking or condemnation
which is not extensive enough to render the Leased Premises unsuitable for the
business of the Lessee, as reasonably determined by the Lessee, then the Lessor
shall promptly restore the Leased Premises to a condition comparable to its
condition at the time of such condemnation less the portion lost in the taking,
and this Lease shall continue in full force
-17-
<PAGE>
and effect with a proportionate reduction in rent and additional rent based upon
the nature and extent of any such taking.
(c) In the event of any condemnation or taking as aforesaid, whether
whole or partial, the Lessee shall not be entitled to any part of the award paid
for such condemnation and the Lessor shall receive the full amount of such
award. The Lessee hereby expressly waives any right to claim any part thereof.
(d) Although all damages in the event of any condemnation are to
belong to the Lessor regardless of whether such damages are awarded as
compensation for diminution in value of the leasehold or to the fee of the
Leased Premises, the Lessee shall have the right to claim and recover from the
condemning authority, but not from the Lessor, such compensation as may be
separately awarded or recoverable by the Lessee in the Lessee's own right on
account of any and all damage to the Lessee's business by reason of the
condemnation and for or on account of any relocation allowance or any other cost
or loss to which the Lessee might be put in removing the Lessee's merchandise,
furniture, fixtures, leasehold improvements and equipment.
18. Lessee's Default.
The occurrence of any of the following shall constitute an event of default
and breach of this Lease by the Lessee:
(a) The vacation or abandonment of the Leased Premises by the Lessee
or the failure of the Lessee to continue in its regular business on a day-to-day
basis during the term of this Lease, subject to the Lessee's rights pursuant to
Paragraph 33(c) below;
(b) The failure of the Lessee to pay, within ten (10) days of the date
when due, any installment of rent or any recurring payment of additional rent
due hereunder, any other sum required to be paid by the Lessee or any part of
any of the foregoing.
-18-
<PAGE>
(c) The failure of the Lessee to observe or perform any other
provisions, covenants or obligations of this Lease to be observed or performed
by the Lessee, where such failure continues for thirty (30) days after the
receipt by the Lessee of written notice thereof from the Lessor, unless the
Lessee begins promptly after the receipt of written notice thereof from the
Lessor to cure any such default and proceeds diligently and conscientiously to
cure such default; or
(d) The making by the Lessee of any assignment for the benefit of
creditors; the adjudication that the Lessee is bankrupt, insolvent or unable to
pay its debts; the filing by or against the Lessee of a petition to have the
Lessee adjudged a bankrupt or a petition for reorganization or arrangement under
any law relating to bankruptcy unless, in the case of a petition filed against
the Lessee, such petition is dismissed within sixty (60) days after the filing
thereof; the appointment of a trustee or receiver to take possession of
substantially all of the Lessee's assets located in the Leased Premises or of
the Lessee's interest in this Lease, unless possession is restored to the Lessee
within thirty (30) days after such appointment; or the attachment, execution or
levy against, or other judicial seizure of, substantially all of the Lessee's
assets located in the Leased Premises or of the Lessee's interest in this Lease,
unless discharged within thirty (30) days after issuance thereof.
19. Lessor's Remedies.
Upon the occurrence of any event of default as described in Paragraph 18:
(a) The Lessor may perform for the account of the Lessee any
obligation with respect to which the Lessee is in default and immediately
recover as additional rent any expenditures made and the amount of any
obligations incurred in connection therewith plus interest at the Prime Rate
published in The Wall Street Journal plus three (3%) percent per
-19-
<PAGE>
annum for such expenditures from the date of any such expenditures, together
with a late charge for payments of rent past due at the same rate of interest;
(b) The Lessor may accelerate all rent and additional rent due for the
balance of the term of this Lease and declare all such rent to be immediately
due and payable;
(c) The Lessor, at its option, may serve notice upon the Lessee that
this Lease and the then unexpired term hereof shall cease and expire and become
absolutely void on the date specified in such notice, which shall be not less
than five (5) days after the date of such notice without any right on the part
of the Lessee to save forfeiture by payment of any sum due or by the performance
of any term, provision, covenant, agreement or condition broken. This Lease and
the term hereof, as well as the right, title and interest of the Lessee
hereunder shall, upon the effective date of such notice, wholly cease and expire
and become void in the same manner and with the same force and effect, except as
to the Lessee's liability, as if the date fixed in such notice were the date
provided herein for the expiration of the term of this Lease. Thereupon the
Lessee shall immediately quit and surrender to the Lessor the Leased Premises
and in any event, the Lessor may forcefully remove the property of the Lessee
without being liable either in damages or in a criminal prosecution. No such
expiration or termination of this Lease shall relieve the Lessee of its
liability and obligations under this Lease, whether or not the Leased Premises
shall be relet. If the Lessee fails to remove any equipment, furniture, trade
fixtures or other property prior to any such repossession by the Lessor such
equipment, furniture, fixtures and other property shall be deemed abandoned by
the Lessee and shall become the property of the Lessor;
(d) The Lessor may, at any time after written notice of the occurrence
of any event of default and the expiration of any applicable cure and/or notice
periods, re-enter
-20-
<PAGE>
and repossess the Leased Premises or any part thereof and attempt, in its own
name as agent for the Lessee if this Lease has not been terminated or on its own
behalf if this Lease has been terminated, to relet all or any part of such
Leased Premises for and upon such terms and to such persons, firm or corporation
and for such period or periods as the Lessor, in its sole discretion, shall
determine, including a term beyond the termination of this Lease. The Lessor
shall not be required to accept any tenant offered by the Lessee or observe any
instruction given by the Lessee with respect to such reletting. The cost of
reasonable brokerage and legal fees expended by the Lessor in connection with
the reletting of the Leased Premises as well as the reasonable cost of repairing
or restoring the Leased Premises arising out of damage caused by the Lessee or
improvements made by the Lessee to the Leased Premises that the Lessee is
required to remove pursuant to this Lease and failed to remove shall be charged
to and be payable by the Lessee as additional rent hereunder, and any sums
collected by the Lessor from any new tenant shall be credited against the
balance of the rent due hereunder for the remainder of the term of this Lease.
The Lessee shall pay to the Lessor monthly, on the date when the rent would have
been payable under this Lease, the amount of rent and additional rent due
hereunder less the amount obtained by the Lessor from any such new tenant; and
(e) The rights and remedies given to the Lessor in this Lease are
distinct, separate and cumulative remedies, and no one of them, whether or not
exercised by the Lessor, shall be deemed in exclusion of any of the others.
20. Signs and Advertising.
The Lessee agrees that it shall not erect, install or otherwise display any
signs, displays, advertisements or other means of identifying the Leased
Premises and the products and services available therein to the public on the
Leased Premises, or the Building without
-21-
<PAGE>
the prior written consent of the Lessor, which shall not be unreasonably
withheld or delayed. All signs erected or installed by the Lessee in accordance
with this Paragraph 20 shall be removed by the Lessee at its expense upon the
expiration of the initial or any extended term of this Lease and the Lessee
shall repair any damage caused by any such removal at the time that the Lessee
removes any such sign or signs.
21. Rules and Regulations.
The Lessor shall have the right to make such reasonable rules and
regulations as, in the judgment of the Lessor are advisable for the safety, care
and preservation of the Leased Premises, the Building and the Project (the
"Rules and Regulations"). The Rules and Regulations shall be deemed to be
covenants of this Lease running with the land and any breach or violation
thereof shall be deemed a breach or default hereunder, subject to the thirty
(30) day notice required pursuant to Paragraph 18(c) above and subject to the
requirement that the Lessor deliver to the Lessee a written copy of the Rules
and Regulations at least fifteen (15) days prior to the date when the Rules and
Regulations shall be applicable to the Lessee's use and occupancy of the Leased
Premises. The Lessor agree to enforce the Rules and Regulations in a non-
discriminatory manner with respect to all tenants occupying any portion of the
Project.
22. Mutual Subrogation Waiver.
The Lessor and the Lessee agree that any claim by either of them against
the other for damages arising out of any peril, insured under any property
damage or earnings policy carried by either shall not be assignable, nor the
subject of a subrogation action by any third party. Each of the parties agrees
to release the other party from any and all liability for damages for any claim
or claims arising out of any peril insured under any property damage or earnings
policy carried by either the Lessor or the Lessee.
-22-
<PAGE>
23. Notice of Claims.
In the event that any claim, cause of action or suit is made or brought
against the Lessee, or the Lessor, of which the Lessee shall have knowledge,
arising from the occupancy of the Lessee of or pertaining to the Leased
Premises, the Lessee shall immediately notify the Lessor thereof in writing. In
the event that any claim, cause of action or suit is made or brought against the
Lessor, or the Lessee, of which the Lessor shall have knowledge, arising from
the occupancy of the Lessee of or pertaining to the Leased Premises, the Lessor
shall immediately notify the Lessee thereof in writing.
24. Quiet Enjoyment.
The Lessor covenants and agrees that upon the Lessee's paying the rent
herein reserved and performing and observing all the other covenants to be
performed and observed on the part of the Lessee, the Lessee may use and occupy
the Leased Premises throughout the full term of this Lease and any renewals or
extensions thereof without any disturbance by any person whatsoever.
25. Subordination and Attornment.
The Lessee accepts this Lease subject and subordinate to any mortgage or
mortgages, including without limitation the notes or other obligations secured
thereby and any and all renewals, modifications, consolidations, replacements or
extensions of any such mortgages or the notes or other obligations secured
thereby, any easement or restriction of record now in existence or hereafter
made from time to time, affecting the fee title or the leasehold estate to the
Building or premises which the Leased Premises are a part or any part thereof of
the Lessor's interest therein. The Lessee also accepts this Lease subject and
subordinate to all instruments in the chain of fee title, including any and all
renewals, modifications, consolidations, replacements or extensions of such
instruments. The Lessee shall execute,
-23-
<PAGE>
acknowledge and deliver to the holder of any such mortgage or to any of the
parties to such instruments, at any time upon demand by such holder or by any
such party, any release, certificates or other documents that may be required by
such holder or by any such party, for the purpose of evidencing the
subordination of this Lease to such mortgages or other instruments or to any
renewals, modifications, consolidations, replacements or extensions thereof. The
Lessor is authorized to execute any such documents as the Lessee's attorney-in-
fact if the Lessee fails or refuses to execute any such instruments or documents
within ten (10) days following the request of the Lessor therefor unless the
Lessee's failure or refusal is reasonable taking into account the circumstances
that exist at the time of any such request. In the event of a sale under any
mortgage or any note or other obligations secured thereby, to which this Lease
is subordinate, or a taking of possession of the Leased Premises by the
Mortgagee or other person acting for or through the Mortgagee under any mortgage
to which this Lease is subordinate, the Lessee agrees that it shall attorn to
and recognize as the Lessor hereunder the party who, but for this Lease, would
be entitled to possession of the Leased Premises, provided that any such party
recognizes this Lease and the Lessee's rights hereunder.
26. Estoppel Certificates.
The Lessee and the Lessor shall, at any time and from time to time, within
twenty (20) days following its receipt of a written request from the other party
or any mortgagee, execute, acknowledge and deliver to such other party or
mortgagee a written statement certifying that this Lease is in full force and
effect and unmodified or, if modified, stating the nature of such modification,
certifying the date to which the rent reserved hereunder has been paid, and
certifying that there are not, to the knowledge of the party signing such
statement, any uncured defaults on the part of the other party or specifying
such defaults if
-24-
<PAGE>
any are claimed. Any such statement may be relied upon by any prospective
purchaser or mortgagee of all or any part of the Building or real property on
which the Building is located. The failure of the Lessor or the Lessee to
deliver such statement within such twenty (20) day period shall be conclusive
upon the other party that this Lease is in full force and effect and unmodified,
and that there have not been made any advance payments of rent except that may
have been made as security hereunder and that there are no uncured defaults with
respect to the other party's performance hereunder.
27. Unforeseen Delay.
The provisions of this paragraph shall be applicable if there shall occur,
during the term hereof, or any renewal or extension thereof, any strike,
lockout, or labor dispute; inability to obtain labor or materials or reasonable
substitute thereof; inability in obtaining fuel, electricity, services or
supplies from the sources from which they are normally obtained or from
reasonably comparable substitute sources; or act of God, governmental
restriction, regulation, or control, enemy or hostile governmental action, civil
commotion, insurrection, revolution, sabotage, or fire or other casualty or any
other condition or cause beyond the reasonable control of the Lessor. If the
Lessor shall, as the result of any such event, fail reasonably to perform any
obligation required hereunder, then such obligation shall be reasonably
performed as soon as practicable after such event abates. If the Lessor shall,
as a result of such event, be unable to exercise any right or option within any
time limit provided thereof or in this Lease, such time limit shall be deemed
extended for a period equal to the duration of such event.
28. Holding Over.
If the Lessee retains possession of the Leased Premises or any part thereof
after the termination of the term, the Lessee shall pay the Lessor rent at one
and one-half (1 1/2) times
-25-
<PAGE>
the monthly rate specified herein as the last month of the term hereof for the
time the Lessee remains in possession. The provisions of this paragraph do not
exclude the Lessor's right to summary process or any other rights hereunder. The
Lessee shall indemnify and hold the Lessor harmless from and against any and all
loss or liability resulting from the failure of the Lessee to surrender
possession of the Leased Premises in accordance with the term and conditions of
this Lease.
29. Brokers.
The Lessor and the Lessee hereby represent and warrant to each other that
no broker's commission or finder's fee is due in connection with the
consummation of this transaction except a broker's fee due to Colebrook Realty
Services, Inc. and R. J. Greeley & Company, L.L.C. (collectively, the "Broker"),
and that no real estate broker, agent or other third party has or will be
engaged to represent it in this transaction except the Broker. The Lessor shall
be responsible for the payment of all fees due the Broker arising out of this
transaction.
30. Waiver, Notices.
No consent or waiver, express or implied by the Lessor to or of any breach
of any covenant, condition or duty of the Lessee shall be construed as a consent
or waiver to or of any other breach of the same or any other covenant, condition
or duty. All notices, statements, demands, requests, consents, communications
and certificates from either party hereto to the other shall be made in writing
unless specified to the contrary herein and sent by certified mail, return
receipt requested, hand delivered or by Federal Express or similar overnight
delivery service for which a receipt is made to the parties, addressed as
follows:
-26-
<PAGE>
(a) If intended for the Lessor:
Steven M. Roberts, Trustee
NorthernEdge/Plant One Realty Trust
93 West Broad Street
Springfield, MA 01107
With a copy to:
A. Craig Brown, Esquire
Doherty, Wallace, Pillsbury and Murphy, P.C.
One Monarch Place - 19th Floor
Springfield, MA 01144-1002
(b) If intended for the Lessee:
Physicians Quality Care, Inc.
950 Winter Street, Suite 2410
Waltham, MA 02154
With a copy to:
or such other addresses as either party hereto may from time to time direct by
service of notice to the other party as provided above. Any such notices,
statements, demands, requests, consents, communications or certificates shall be
deemed given on the date if the same are sent in accordance with this
Paragraph 30.
31. Notice of Lease.
The Lessor and the Lessee agree to execute and record a Notice of Lease in
statutory form upon the request of either the Lessor or the Lessee. The Notice
of Lease shall be recorded in the Hampden County Registry of Deeds, and the cost
of recording shall be paid for by the requesting party.
32. Expressions.
The expressions "Lessor" and "Lessee" or the pronoun "it," referring either
to the Lessor or the Lessee, shall be deemed to refer to the actual Lessor or
Lessee for the time
-27-
<PAGE>
being as the case may be, and the context hereof may admit or require,
regardless of whether such Lessor or Lessee is a natural person, a corporation,
the trustees of a trust or some other firm or entity.
33. Miscellaneous.
(a) Authority to Sign. The Lessor and the Lessee represent and
warrant to each other that they have full right, power and authority to enter
into this Lease without the consent or approval of any other entity or person.
The Lessor and the Lessee make this representation and warranty knowing that the
other party will rely thereon. The individuals signing on behalf of the Lessor
and the Lessee each represent and warrant that they have full right, power and
authority to act for and on behalf of the Lessor and the Lessee in entering into
this Lease.
(b) Limitation on Lessor's Liability. The Lessee agrees that neither
the individual trustees of the Lessor nor the individual beneficiaries of the
Lessor shall have any personal liability pursuant to this Lease, and the sole
recourse of the Lessee against the Lessor shall be against the Project and any
insurance proceeds paid to the Lessor. The Lessee agrees that in the event that
it obtains any judgment against the Lessor, neither the individual trustees of
the Lessor nor the individual beneficiaries of the Lessor shall have any
personal liability with respect to any such judgment.
34. Entire Agreement, Construction.
This Lease contains the entire agreement of the parties hereto with respect
to the subject matter hereof, and no change or modifications hereof shall be
valid unless made in writing, signed by all of the parties hereto. This Lease
shall be governed by and construed in accordance with the laws of the
Commonwealth of Massachusetts, and it shall be binding
-28-
<PAGE>
upon the parties hereto and their respective heirs, legal representatives,
successors and assigns.
IN WITNESS WHEREOF, the Lessor and the Lessee have signed this Lease as a
sealed instrument as of this 9th day of December, 1996.
LESSOR
NORTHERNEDGE/PLANT ONE REALTY TRUST
By /s/
_______________________________
Its Partner
LESSEE
PHYSICIANS QUALITY CARE, INC.
By /s/ Edward J. Morrisey
_______________________________
Its Vice President-Finance
-29-
<PAGE>
SCHEDULE OF EXHIBITS
Exhibit A - Outline of Leased Premises
Exhibit B - Site Plan of Project and Permitted Parking Areas
Exhibit C - Janitorial and Cleaning Specifications
-30-
<PAGE>
MARYLAND FULL-SERVICE OFFICE LEASE
CAMDEN YARDS NORTH WAREHOUSE
by and between
MARYLAND STADIUM AUTHORITY
Landlord
and
PHYSICIANS QUALITY CARE, INC.
<PAGE>
TABLE OF CONTENTS
Page
----
1. SUMMARY OF TERMS....................................................... 1
2. DEFINITIONS............................................................ 3
3. LEASED PREMISES........................................................ 4
4. TERM AND COMMENCEMENT OF TERM.......................................... 4
5. TENANT IMPROVEMENTS AND ACCEPTANCE OF PREMISES......................... 5
6. RENT................................................................... 7
7. OPERATING COSTS; TAXES................................................. 8
8. USE, CARE AND REPAIR OF PREMISES BY TENANT............................. 11
9. RULES AND REGULATIONS.................................................. 13
10. COMMON AREA............................................................ 13
11. SERVICES AND UTILITIES................................................. 15
12. PARKING................................................................ 16
13. LOSS, DAMAGE AND INJURY................................................ 17
14. REPAIRS BY LANDLORD.................................................... 17
15. ALTERATIONS, TITLE AND PERSONAL PROPERTY.............................. 18
16. INSURANCE.............................................................. 20
17. DAMAGE AND DESTRUCTION................................................. 22
18. CONDEMNATION........................................................... 24
19. BANKRUPTCY............................................................. 25
20. DEFAULT PROVISIONS AND REMEDIES........................................ 27
21. LANDLORD'S LIEN........................................................ 31
22. INDEMNITY.............................................................. 32
23. LIMITATION ON LANDLORD LIABILITY....................................... 32
24. LANDLORD OBLIGATIONS................................................... 33
25. ASSIGNMENT AND SUBLETTING.............................................. 33
26. HOLDING OVER........................................................... 35
27. SUBORDINATION AND ATTORNMENT........................................... 36
28. ESTOPPEL CERTIFICATES.................................................. 37
29. PEACEFUL AND QUIET POSSESSION.......................................... 37
30. LANDLORD'S ACCESS TO PREMISES.......................................... 37
31. BROKERS, COMMISSIONS, ETC.............................................. 38
32. RECORDATION............................................................ 38
33. MANDATORY STATE CLAUSES................................................ 38
34. MISCELLANEOUS.......................................................... 40
i
<PAGE>
SCHEDULES
A - Plat showing location of the Premises
B - Pilot Agreement
C - Work Letter: Base Building Improvements; Tenant Improvements; Schedule
D - Tenant Improvement Financing Schedule
E - Rules and Regulations
F - Cleaning Specifications
G - Contract Affidavit
ii
<PAGE>
MARYLAND FULL-SERVICE OFFICE LEASE
CAMDEN YARDS NORTH WAREHOUSE
THIS LEASE is made and entered into as of the ______day of October, 1995,
by and between the MARYLAND STADIUM AUTHORITY, an instrumentality of the State
of Maryland ("Landlord") and PHYSICIANS QUALITY CARE, INC., a Delaware
corporation ("Tenant").
In consideration of the rents hereinafter reserved and the agreements
hereinafter set forth, Landlord and Tenant mutually agree as follows:
1. SUMMARY OF TERMS.
The following is a summary of the principal terms of the Lease. Any
capitalized term set forth below shall, for the purposes of this Lease, have the
meaning ascribed to it in this Section 1.
A. Description of Premises
(1) Building: The northern portion of the Camden Yards Warehouse
Building located at 323 W. Camden Street, Baltimore, Maryland, being the
northern part of the Camden Yards Warehouse Building.
(2) Premises: The approximately 2,600 square feet of Rental Area on
the 6th floor of the Building as shown on Schedule A.
B. Rent
(1) Annual Basic Rent: The product of fifteen dollars ($15.00)
multiplied by the agreed rental area for purposes of rent calculation ("Agreed
Rental Area") of Two Thousand Two Hundred and Fifty (2,250) square feet. The
Annual Basic Rent includes the Base PILOT and the Base Operating Costs. The
foregoing rates are subject to adjustment pursuant to Section 7.
(2) Advance Rent: None.
(3) Security Deposit: None.
C. Adjustments to Rent and Other Charges:
(1) Annual Payment in Lieu of Real Estate Taxes ("PILOT"): For the
first Rental Year, the product of One Dollar and Twenty-nine Cents ($1.29)
multiplied by the Agreed Rental Area of the Premises, which amount is included
in the Annual Basic Rent ("Base PILOT"). The PILOT for each succeeding Rental
Year during the initial Term shall be
<PAGE>
increased by the product of three percent (3%) multiplied by the PILOT for the
immediately preceding Rental Year ("PILOT Increase"), but in no event shall the
PILOT plus the PILOT Increase exceed the amount of real property taxes otherwise
payable to Baltimore City under the Tax-Property Article by Tenant under TP
(S)6-102(e), all as set forth in the Pilot Agreement between the Maryland
Stadium Authority and The Mayor and City Council of Baltimore dated May 18,
1994, a copy of which is attached as Schedule B.
(2) Base Operating Costs: Five Dollars ($5.00) per square foot of
Agreed Rental Area, which amount is included in the Annual Basic Rent.
(3) Monthly Parking Fee: The monthly parking fees calculated in
accordance with Section 12.
D. Term
(1) Term: Five (5) years, plus any Renewal Terms for which Tenant has
properly exercised its option.
(2) Lease Commencement Date: The date on which the Term shall
commence, as determined pursuant to Section 4.1.
(3) Termination Date: The date on which the Term shall expire, as
determined pursuant to either Section 4.1 or Section 4.3.
E. Notice and Payment
(1) Tenant Notice
Address: Physicians Quality Care, Inc.
950 Winter Street, Suite 2410
Waltham, Massachusetts 02154
Attention: Nancy Kelly
(2) Landlord Notice
Address: Maryland Stadium Authority
Suite 500, The Warehouse at
Camden Yards
333 West Camden Street
Baltimore, MD 21201
Attention: Bruce H. Hoffinan, P.E.
Executive Director
(3) Landlord Payment
Address: Maryland Stadium Authority
Suite 500, The Warehouse at
Camden Yards
333 West Camden Street
Baltimore, MD 21201
2
<PAGE>
2. DEFINITIONS.
For purposes of this Lease, the Schedules attached and made a part hereof
and all agreements supplemental to this Lease, unless otherwise defined in such
supplemental agreements, the following terms shall have the respective meanings
as set forth in the following Section, subsection, paragraph and Schedule
references:
Reference
Additional Rent.................................................. 6.2
Alterations...................................................... 15.1
Annual Basic Rent................................................ 1.B.(1)
Bankruptcy Code.................................................. 19.1
Base Operating Costs............................................. 7.1a
Casualty......................................................... 17.1
Common Area...................................................... 10.1
Default Rate..................................................... 6.3
Event of Default................................................. 20.1
Event of Tenant's Bankruptcy..................................... 19.1
Fractional Share................................................. 7.1b
Insolvency Laws.................................................. 19.1
Initial Parking Spaces........................................... 12
Land............................................................. 7.I.e
Landlord Notice Address.......................................... 1.E.(2)
Landlord Payment Address......................................... 1.E.(3)
Lease Commencement Date.......................................... 1.D.(2)
Mortgage......................................................... 27
Mortgagee........................................................ 27
Operating Costs.................................................. 7.1.a
Public Areas..................................................... Schedule E
Renewal Term..................................................... 4.3
Rental Area...................................................... 1.A.(2)
Rental Year...................................................... 6.1
Rules and Regulations............................................ 9
Stock Transfer................................................... 25.2
Tax Year......................................................... 7.1.d
Taxes............................................................ 7.1.c
Tenant Improvements.............................................. 5.2
Tenant Notice Address............................................ 1.E.(1)
Tenant's Personal Property....................................... 15.3
Term............................................................. 4.1
Termination Date................................................. 1.D.(3)
3
<PAGE>
3. LEASED PREMISES.
Landlord hereby leases to Tenant, and Tenant hereby leases from Landlord,
the Premises as shown on the plan attached hereto as Schedule A, together with
the non-exclusive easement, during the Term, for use of the Common Area and the
pedestrian walkways providing access to the Building.
Tenant acknowledges that portions of the walkways surrounding the Building
constitute public right-of-way as well as part of the pedestrian access and
circulation system for the Oriole Park at Camden Yards and that during baseball
games, baseball-related events and events sponsored by Landlord, such walkways
shall be used by members of the public entering and leaving the Oriole Park at
Camden Yards.
4. TERM AND COMMENCEMENT OF TERM.
4.1 Term. The term of this Lease (the "Term") shall commence on the
earlier of:
a. the date on which Tenant shall take possession of all or any
portion of the Premises, for the purpose of commencing the operation of its
business therein, provided that such possession shall be only with the written
approval of the Landlord, which shall not be unreasonably withheld, or
b. fifteen (15) days following the date the Premises are Ready for
Occupancy, subject to further provisions of this Section 4.1, (the earlier of a
or b being hereinafter referred to as the "Lease Commencement Date") and shall
be for the period of time set forth in Section 1.D.(1), plus the part of the
month, if any, from the Lease Commencement Date to the first fill month of the
Term, unless earlier terminated pursuant to any other provision of this Lease or
pursuant to law.
Notwithstanding anything contained in this Lease to the contrary, in the
event the Lease Commencement Date has not occurred by March 31.1995, this Lease
shall terminate and be of no further force and effect.
4.1 Ready for Occupancy. For purposes hereof, the Premises shall be
deemed conclusively ready for occupancy ("Ready for Occupancy") when Landlord
has substantially completed its work on the Tenant's Improvements. Substantial
completion means that the Premises can be used for their intended purpose as
professional offices with only Punchlist Items not affecting use outstanding.
4.2 Options to Renew. Provided Tenant or an approved subtenant is in
possession of the Premises and an Event of Default does not exist under this
Lease, Tenant shall have one (1) option to renew the Term of this Lease for one
(1) additional period of five (5) years ("Renewal Term") to commence immediately
upon the expiration of the initial Term, or the immediately preceding Renewal
Term, as the case may be, upon the same terms, covenants and conditions as
contained in this Lease, except that (i) the rate of Annual Basic Rent payable
by Tenant during such Renewal Term shall be the amount agreed upon in writing by
4
<PAGE>
Landlord and Tenant; which rate shall be based upon fair market rents of other
singular tenants at that time.
In order to exercise the option granted herein, Tenant shall so notify
Landlord, in writing, not less than three (3) months prior to the expiration of
the initial Term, and if no such notice of exercise of the option is received,
the option shall be deemed waived. In the event Tenant exercises its option,
Landlord and Tenant shall execute a modification to this Lease acknowledging
such renewal and setting forth the new Annual Basic Rent.
An option shall be void if, at the time of exercise of such option, Tenant
or an approved subtenant is not in possession of the Premises, an Event of
Default exists under this Lease, or Tenant fails to deliver the requisite notice
thereof within the time period specified above. The options granted herein
shall not be severed from this Lease, exercised collectively, or separately
sold, assigned or transferred.
5. TENANT IMPROVEMENTS AND ACCEPTANCE OF PREMISES.
5.1 Base Building Improvements. Landlord shall, at its sole cost and
expense, provide the base building improvements ("Base Building Improvements")
described under the heading "Base Building Improvements" in the work letter
attached as Schedule C ("Work Letter").
5.2 Tenant Improvements. Prior to the Lease Commencement Date, Landlord
shall make the improvements to the Premises described in the Plans and
Specifications to be developed under the heading "Tenant Improvements" ("Tenant
Improvements") in the Work Letter attached as Schedule C, in accordance with the
then-current Baltimore City building, health, fire, and other codes, rules and
ordinances applicable to office buildings in downtown Baltimore City regardless
of the applicability of such codes generally to real property owned by the State
of Maryland or its agencies or instrumentalities. Landlord shall bear the cost
of the Tenant Improvements in an amount not to exceed Eighty-five Thousand
Dollars ($85,000.00). Any cost in Tenant Improvements in excess of $85,000
shall be the sole responsibility of Tenant.
Landlord and Tenant have agreed that Landlord shall finance the Tenant
Improvements ("Tenant Improvement Financing") in an amount not to exceed Eighty-
five Thousand Dollars ($85,000.00) at an interest rate of seven percent (7%) per
annum in accordance with the schedule for repayment attached hereto as Schedule
D. The Tenant Improvement Financing shall be secured by a letter of credit, in
an amount equal to the unamortized portion of the Tenant Improvement Financing,
which letter of credit shall be obtained by Tenant from a lender and on terms
satisfactory to Landlord. The Tenant Improvement Financing shall be prepaid
upon the occurrence of an Event of Default under this Lease or in the event this
Lease is terminated and Landlord has not otherwise been paid the full
outstanding amount of the Tenant Improvement Financing from insurance proceeds
or taking awards.
Landlord and Tenant acknowledge the desirability of limiting the costs of
the Tenant Improvements to $85,000 (the "Budget"), thereby limiting Tenant's
exposure for excess costs.
5
<PAGE>
Landlord and Tenant shall use all reasonable efforts to cause the architect
designing the Tenant Improvements to produce Plans and Specifications describing
Tenant Improvements which can be constructed within the Budget. Landlord shall
keep Tenant informed during the process of soliciting and reviewing bids from
contractors for performing the Tenant Improvements. In the event the contractor
submitting the best bid acceptable to both Landlord and Tenant estimates the
total cost of constructing the Tenant Improvements in accordance with the Plans
and Specifications to exceed the Budget, Landlord and Tenant shall cooperate in
good faith to reduce the total cost to Budget through value engineering. Tenant
covenants and agrees to promptly pay to Landlord upon receipt of invoice any
excess of the cost of Tenant Improvements over the Budget. If the cost of the
Tenant Improvements is less than the Budget, the Tenant Improvement Financing
shall be appropriately adjusted.
5.3. Completion Schedule. A schedule with time lines for completion of the
Base Building Improvements and Tenant Improvements is attached hereto as a part
of Schedule C and made a part hereof ("Completion Schedule"). Landlord and
Tenant shall use all reasonable efforts, and shall cause the architects,
designers and contractors to use all reasonable efforts, to adhere to the
Completion Schedule.
5.4. Acceptance of Premises. Landlord shall notice Tenant in writing at
least thirty (30) days prior to the date the Premises are expected to be Ready
for Occupancy so that Tenant may schedule its move to the Premises. Within the
first ten (10) days after Landlord's notice, Landlord shall furnish Tenant with
a punchlist of items to be completed by Landlord ("Punchlist Items") and a
schedule for their completion, and shall make the Premises available for
inspection. Tenant shall comment in writing upon the Punchlist Items and the
schedule within five (5) days following Landlord's submission, and in the
absence of such commentary within said five-day period Tenant shall be deemed to
have concurred with the Punchlist Items and schedule as submitted by Landlord.
Landlord and Tenant shall cooperate in good faith to resolve any disagreements
between them regarding the Punchlist Items and the schedule. Occupancy of the
Premises by Tenant for the purpose of commencing operation of its business shall
be deemed to constitute acceptance of the Premises and acknowledgement by Tenant
that Landlord has fully complied with its obligations hereunder to construct and
deliver the Premises to Tenant, except the Punchlist Items, which shall be
completed by Landlord in accordance with the approved schedule. Landlord, its
agents, employees and contractors shall have the right to enter the Premises
before or after normal business hours, as set forth in Section 11, to complete
or repair any such Punchlist Items and such entry for such purpose shall not
constitute an actual or constructive eviction, in whole or in part, or entitle
Tenant to any abatement or diminution of rent or relieve Tenant of any of its
obligations under this Lease.
6. RENT.
6.1. Annual Basic Rent. Tenant shall pay to Landlord during each Rental
Year of the Term fixed rent equal to the Annual Basic Rent as set forth in
Section 1.B.(l). Annual Basic Rent shall be payable in advance on the first day
of each month of the Term in equal monthly installments, without notice, demand,
abatement (except as otherwise specifically provided in this Lease), deduction
or set-off. If the Term of this Lease shall commence on a day other than the
first day of a month, the first payment shall include any prorated Annual
6
<PAGE>
Basic Rent for the period from the Lease Commencement Date to the first day of
the first full calendar month of the Term.
"Rental Year" shall mean each successive twelve (12) calendar month period
occurring during the Term of this Lease, or portion of such a period, with the
first Rental Year commencing as of the Lease Commencement Date and ending on the
last day of the twelfth full calendar month thereafter. For any Rental Year of
less or more than twelve full months, Annual Basic Rent shall be adjusted
accordingly. All Annual Basic Rent and Additional Rent shall be paid to
Landlord at the Landlord Payment Address.
6.2. Additional Rent. Tenant shall pay to Landlord as additional rent
("Additional Rent") all other sums of money which shall become due and payable
hereunder, including, but not limited to, the payment of the Tenant Improvement
Financing as set forth on Schedule D hereto and Monthly Parking Fees pursuant to
Section 12 hereof. Unless a date for payment is otherwise specified herein, all
Additional Rent shall be due and payable within thirty (30) days of receipt of
invoice from Landlord. Additional Rent shall be payable without notice, demand,
abatement (except as otherwise specifically provided in this Lease), deduction
or set-off.
6.3. Late Charge. If Tenant fails to make any payment of Annual Basic
Rent, Additional Rent, or other sums required to be paid hereunder on or before
the date when payment is due, Tenant shall pay to Landlord, as Additional Rent,
a late charge to cover extra administrative costs and loss of use of funds equal
to (a) two percent (2%) of the amount due for the first month or portion thereof
that such amount is past due plus (b) interest on the amount remaining unpaid
thereafter at the annual rate of two percent (2%) above the prime rate charged
by Citibank, N.A., as of the due date of such amount; provided, however, that
should such late charge at any time violate any applicable law, the late charge
shall be reduced to the highest rate permitted by law (the foregoing rate being
herein referred to as the "Default Rate"). Landlord's acceptance of any rent
after it has become due and payable shall not excuse any delays with respect to
future rental payments or constitute a waiver of any of Landlord's rights under
this Lease.
7. OPERATING COSTS; TAXES.
7.1. Definitions. For purposes of this Lease, the following definitions
shall apply:
a. "Base Operating Costs" has the meaning set forth in Section
l.C.(2). In the second Rental Year, Operating Costs shall increase by three
percent (3%) of the Base Operating Costs and in subsequent Rental Years,
Operating Costs shall increase by three percent (3%) of the Operating Costs for
the immediately preceding Rental Year. The annual increase in Operating Costs
over Base Operating Costs is hereinafter referred to as the "Operating Cost
Increase."
The Base Operating Costs shall be adjusted at the beginning of each Renewal
Term to equal the actual Operating Costs incurred during the first Rental Year
during such Renewal Term.
7
<PAGE>
b. "Fractional Share" shall be agreed upon by the Landlord and the
Tenant within ten (10) days of completion of the Tenant Improvements and shall
be based upon the proportion the Agreed Rental Area of the Premises bears to the
total rental area of the Building.
c. "Operating Costs" means all expenses and costs of every kind
and nature which Landlord shall pay or become obligated to pay because of or in
connection with operating, managing, painting, repairing, insuring and cleaning
the Building, including the Premises, the Common Area, and the pedestrian
walkways serving the Building, such costs including, but not limited to, the
following:
(i) costs of all supplies and materials used, and labor charges
incurred, in the operation, maintenance, decoration, repairing and cleaning of
the Property, including janitorial service for all areas of the Building;
(ii) cost of all equipment purchased or rented which is utilized
in the performance of Landlord's obligations hereunder, and the cost of
maintenance and operation of any such equipment;
(iii) cost of all maintenance and service agreements for the
Property and the equipment therein, including, without limitation, alarm
service, security service, window cleaning, and elevator maintenance;
(iv) accounting costs, including the cost of audits by certified
public accountants, outside legal and engineering fees and expenses incurred in
connection with the operation and management of the Property;
(v) wages, salaries and related expenses of all on-site and off-
site agents or employees engaged in the operation, maintenance, security and
management of the Property;
(vi) cost of all insurance coverage for the Property from time to
time maintained by Landlord, including but not limited to the costs of premiums
for commercially-obtained insurance or a self-insurance program with respect to
personal injury, bodily injury, including death, property damage, business
interruption, workmen's compensation insurance covering personnel and such other
insurance as Landlord shall deem necessary, which insurance Landlord may
maintain under policies covering other properties owned by Landlord in which
event the premium shall be reasonably allocated and documented by Landlord;
(vii) cost of repairs, replacements, and general maintenance to
the Property, including without limitation the mechanical, electrical and
heating, ventilating and air conditioning equipment and/or systems;
(viii) any and all Common Area maintenance, repair or
redecoration (including repainting) and exterior and interior landscaping;
8
<PAGE>
(ix) cost of removal of trash, rubbish, garbage and other refuse from
the Property as well as removal of ice and snow from the sidewalks on or
adjacent to the Property;
(x) all charges for electricity, gas, water, sewerage service,
heating, ventilation and air conditioning and other utilities furnished to the
Building (including legal, architectural and engineering fees incurred in
connection therewith);
(xi) amortization of capital improvements made to the Building after
the year of substantial completion of the Base Building Improvements, which
improvements were undertaken by Landlord with the reasonable expectation that
the same would result in more efficient operation of the Building or are made by
Landlord pursuant to any governmental law, regulation or action not applicable
to the Building at commencement of construction of the Building; provided that
the cost of each such capital improvement, together with any financing charges
incurred in connection therewith, shall be amortized over the useful life
thereof and only that portion attributable to each Operating Year shall be
included herein for such Operating Year;
(xii) a management fee for the operation and management of the
Property, which shall be equal to three and one-half percent (3.5%) of gross
revenues; and
(xiii) costs and expenses incurred in order to comply with covenants
and conditions contained in liens, encumbrances and other matters of public
record affecting the Property.
Any of the foregoing costs which under generally accepted accounting
principles would be considered capital expenditures shall be amortized in
accordance with generally accepted accounting principles.
d. "Tax Year" means the assessment and taxation year established by
the applicable taxing authority.
e. "Taxes" means all real estate taxes, assessments (special or
otherwise), levies, ad valorem charges, benefit charges, rates and charges,
privilege permits and any other governmental liens, impositions or charges of a
similar or dissimilar nature, and any payments in lieu of such charges,
regardless of whether any such items shall be extraordinary or ordinary, general
or special, foreseen or unforeseen, levied, assessed or imposed on or with
respect to all or any part of the Building and the land upon which the Building
is situated ("Land") or upon the rent due and payable hereunder by any
governmental authority; provided, however, that if at any time during the Term
or any extension thereof the method of taxation prevailing at the commencement
of the Term shall be altered or eliminated so as to cause the whole or any part
of the above items which would otherwise be included in Taxes to be replaced by
a levy, assessment or imposition, which is (A) a tax assessment, levy,
imposition or charge based on the rents received from the Building and Land
whether or not wholly or partially a capital levy or otherwise, or (B) a tax,
assessment, levy, imposition or charge measured by or based in whole or in part
upon all or any portion of the Building and Land and imposed on Landlord, or (C)
a license fee measured by the
9
<PAGE>
rent payable by Tenant to Landlord, or (D) any other tax, levy, imposition,
charge or license fee, however described or imposed, then such levy, assessment
or imposition shall be included in Taxes.
7.2. Payment of Operating Cost Increase. Commencing with the second Rental
Year in the Term, Tenant shall pay the Operating Cost Increase in equal monthly
installments, in advance, on the first day of each calendar month during the
Term.
7.3. Payment of Taxes. For each Tax Year, Tenant shall pay its Fractional
Share of all Taxes, which shall be computed by multiplying the actual Taxes
assessed for the Tax Year in question by Tenant's Fractional Share, and which
shall be paid to Landlord as Additional Rent within thirty (30) days of
invoicing by Landlord; provided, however, for so long as an agreement is in
effect between Landlord and the City of Baltimore providing for a PILOT for real
estate taxes which would otherwise be payable with respect to the Premises,
Tenant shall pay to Landlord, in lieu of real estate taxes, the PILOT set forth
in Section 1.C.(1). The Base PILOT is included in the Annual Basic Rent for the
first Rental Year. For each Tax Year commencing after the first Rental Year,
Tenant shall pay, as Additional Rent, the PILOT Increase. Nothing in this
paragraph shall be deemed to relieve Tenant from the payment of its Fractional
Share of Taxes which are not subsumed in the PILOT.
8. USE, CARE AND REPAIR OF PREMISES BY TENANT.
8.1. Permitted Uses. Tenant shall use and occupy the Premises solely
for general office purposes in accordance with all applicable laws, codes, and
regulations and for no other purpose Tenant shall not do anything or permit
anything to be done in or on the Premises, or bring or keep anything therein
which will, in any way, obstruct, injure or interfere with the rights of
Landlord or other tenants, or subject Landlord to any liability for injury to
persons or damage to property, or interfere with, the good order of the
Building.
8.2. Care of Premises. Tenant shall, at its sole expense, keep the
Premises and the improvements and appurtenances therein in good order and
condition consistent with the operation of a first-class office building, and at
the expiration of the Term, or at the sooner termination of this Lease as herein
provided, deliver up the same broom clean and in as good order and condition as
at the beginning of the Term, ordinary wear and tear and damage by fire or other
casualty excepted. Tenant, at its sole expense, shall promptly replace damaged
or broken doors and glass in the interior of the Premises which are caused by
Tenant and shall be responsible for the repair and maintenance of all Tenant
Improvements (except in the event of a defect, which shall be the responsibility
of Landlord or its contractor) and Alterations, including, without limitation,
the repair and replacement of appliances and equipment installed specifically
for Tenant such as refrigerators, disposal, computer room air conditioning,,
sinks and special plumbing, special light fixtures and bulbs for those fixtures,
nor-standard outlets and plug-in strips, and special cabinetry. Tenant shall
not operate any equipment within the Premises which will exceed the electric
load of six (6) watts per square foot of Rental Area (exclusive of lighting)
plus one and one half (1.5) warts of 277V power lighting. Consistent with the
provisions of Section 22, Tenant shall pay for all damage to the Premises and
the Building and any fixtures and appurtenances related thereto, as well as for
all property damage sustained by other tenants or occupants of the Building,
10
<PAGE>
due to any waste, misuse or neglect of the Premises and any fixtures and
appurtenances related thereto or due to any breach of this Lease by Tenant, its
employees, agents, or representatives.
8.3. Hazardous Substances. Tenant covenants and agrees that, other than the
use and storage of ordinary business office and cleaning supplies (such as
copier toner) in small quantities, it will not use or allow the Premises to be
used for the storage, use, treatment or disposal of any "hazardous substance,"
as defined under either the Comprehensive Environmental Response, Compensation
and Liability Act of 1980(42 U.S.C. (S)9601 et. seq, as amended) and similar
state and local statutes.
Landlord shall be responsible for the containment and remediation of any
release of a hazardous substance within the Building to the extent such release
exists prior to the Tenant's work on the Tenant Improvements or arises directly
from the actions of Landlord, its agents, servants and employees, and not solely
from Landlord's position as an owner/operator of the Property.
Tenant shall indemnify and hold harmless Landlord and its agents from and
against any damages, claims, judgments, fines, penalties, costs, liabilities
(including sums paid in settlement of claims) or loss including reasonable
attorneys' fees, reasonable consultants' fees, and reasonable expert fees
(collectively "Damage") incurred as a direct result of Tenant's use, handling,
generation, treatment, storage, disposal, other management or release of any
hazardous substance at or from the Premises, whether or not Tenant has acted
negligently with respect to such hazardous substance. This indemnity shall
survive the expiration or earlier termination of this Lease.
8.4. Compliance with Laws.
Tenant, at its sole cost and expense, shall conform to and comply with and
shall cause the Premises to conform to and comply with all federal, state,
county, municipal and other governmental statutes, laws, rules, orders,
regulations, and ordinances applicable to Tenant or resulting from Tenant's use
or occupancy of the Premises. The Tenant may, after notice to Landlord, by
appropriate proceedings conducted at the Tenant's expense, contest the validity
or enforcement of any such legal requirements or alleged violation thereof so
long as doing so does not result in any lien against the Building or claim
against Landlord. Landlord shall be responsible at its own cost and expense,
for any repairs, alterations or Base Building Improvements, including the Land
and the Common Areas of the Building, to the extent required to comply with
applicable building codes, the American with Disabilities Act, and any other
applicable federal, state or local laws, rules, orders, regulations or
ordinances.
9. RULES AND REGULATIONS.
Tenant and its agents and invitees shall abide by and observe the rules and
regulations attached hereto as Schedule E for the operation and maintenance of
the Building or any new rules and regulations which may from time to time be
issued by Landlord ("Rules and Regulations"), provided that any new rules or
regulations are not inconsistent with the provisions of this Lease. Landlord
shall enforce such rules and regulations against
11
<PAGE>
all tenants in the Building in a non-discriminatory manner, but Landlord shall
not be liable to Tenant for any violation of these rules and regulations by any
other tenant or its agents or invitees.
10. COMMON AREA.
10.1. Definition of Common Area. As used herein, "Common Area" means those
areas and facilities furnished by Landlord in the Building and as designated by
Landlord from time to time, intended for the general common use and benefit of
all tenants of the Building and their agents, representatives, licensees,
employees and invitees, including, without limitation, any and all stairs,
landings, roof, utility and mechanical rooms and equipment, service closets,
corridors, elevators, lobbies, lavatories and other public areas of the
Building. In no event shall "Common Area" include any areas located within the
Premises as outlined on Schedule A.
10.2. Use of Common Area. During the Term, Tenant shall have a non-
exclusive easement to use the Common Area in common with Landlord, other tenants
in the Building, and others entitled to the use thereof, subject to such
reasonable rules and regulations governing the use of the Common Area as
Landlord may from time to time prescribe and subject to such easements therein
as Landlord may from time to time grant to others. Tenant shall not obstruct in
any way any portion of the Common Area or in any way interfere with the rights
of other persons entitled to use the Common Area and shall not, without the
prior written consent of Landlord, use the Common Area in any manner, directly
or indirectly, for the location or display of any merchandise or property
belonging to Tenant or for the location of signs relating to Tenant's operations
in the Premises except that signs may be located in those locations provided in
this Lease or approved by Landlord. - The Common Area shall at all times be
subject to the exclusive control and management of Landlord.
10.3. Alterations to the Common Area. Landlord reserves the right at any
time and from time to time, upon thirty (30) days' prior notice to Tenant, (i)
to change or alter the location, layout, nature or arrangement of the Common
Area or any portion thereof, including but not limited to the arrangement and/or
location of entrances, passageways, doors, corridors, stairs, lavatories,
elevators, and other public areas of the Building, and (ii) to construct
additional improvements adjacent to the Building, to make alterations thereof
and build additional stories on or in any such buildings or build adjoining
same; provided, however, that no such change or alteration shall (a) materially
interfere with Tenant's access to the Building or the Premises (b) reduce the
Rental Area of the Premises (unless such reduction is required by Federal, State
or local laws or regulations, in which event, the provisions of Section 18 shall
apply), (c) invite access by the general public into the lobby of the Building
used by Tenant, (d) materially diminish the availability of air and light to the
Premises, or (e) change or restrict freight access to the Premises. Tenant
acknowledges that retail operators located in the Building lobby may have an
entrance to the Building lobby for the convenience of the office tenants of the
Building, and Tenant agrees that such entrances shall not constitute a violation
of this Section 10.3. Landlord shall have the right to close temporarily all or
any portion of the Common Area to such extent as may, in the reasonable opinion
of Landlord, be necessary to prevent a dedication thereof to the public,
provided that Tenant retains reasonable access to the Premises, or for repairs,
replacements or maintenance
12
<PAGE>
to the Common Area, provided such repairs, replacements or maintenance are
performed expeditiously and in such a manner as not to materially restrict
Tenant's access to the Premises.
10.4. Maintenance. Landlord covenants to keep, maintain, manage and operate
the Common Area in a manner consistent with the operation of a first class
office building. Landlord reserves the right of access to the Common Area
through the Premises for the purposes of operation, decoration, cleaning,
maintenance, safety, security, alterations and repairs with prior notice to
Tenant and at such time or times as are reasonably acceptable to Tenant except
in the case of an emergency.
11. SERVICES AND UTILITIES.
So long as an Event of Default does not exist under this Lease, Landlord
shall provide the following facilities and services to Tenant:
a. At least one (1) passenger elevator subject to call at all times,
including Sundays and holidays, subject to scheduled maintenance and repairs.
b. During "normal business hours" as hereinafter defined, central
heating and air conditioning during the seasons of the year when these services
are normally and usually furnished, and within the temperature ranges and in
such amounts normally or usually furnished in first-class office buildings in
downtown Baltimore City. For the purposes of this paragraph b, the term "normal
business hours" shall mean the periods from 7:00 a.m. until 6:00 p.m. Monday
through Friday, excluding the holidays of New Year's Day, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Landlord shall
provide the aforesaid services at other times provided Tenant gives Landlord
notice by 1:00 p.m. on weekdays for after-hour service on the next weekday, by
1:00 p.m. the day before a holiday for service on a holiday, and by 1:00 p.m. on
Friday for service on Saturday or service on Sunday. Landlord reserves the
right to adjust, from time to time, the rate at which such services shall be
provided corresponding to adjustments in Landlord's costs. Tenant shall pay for
such service, as Additional Rent, promptly upon receipt of an invoice with
respect thereto.
c. Electricity for lighting and power.
d. Cleaning in accordance with the specifications set forth in
Schedule F attached hereto and made a part hereof, pursuant to annual contracts
for such services with contractors selected through Landlord's customary bidding
process.
e. Rest room facilities and necessary lavatory supplies, including
hot and cold running water at the points of supply, as provided for general use
of all tenants in the Building and routine maintenance, painting, and electric
lighting service for all public areas of the Building in such manner as Landlord
deems reasonable.
f. Hot and cold running water to rest room facilities and kitchen
areas located within the Premises.
13
<PAGE>
g. Security for the Building in accordance with the security plan
provided by Landlord and reasonably approved by Tenant.
Unless a different standard is prescribed for such services, all services
shall be comparable to those supplied in first-class office buildings in
downtown Baltimore City. Any failure by Landlord to furnish the foregoing
services, resulting from circumstances beyond Landlord's reasonable control or
from interruption of such services due to non-routine repairs or maintenance,
shall not render Landlord liable in any respect for damages to either person or
property, nor be construed as an eviction of Tenant, nor cause an abatement of
rent hereunder, nor relieve Tenant from any of its obligations hereunder
provided Landlord takes all commercially reasonable actions to rectify such
failure. If any public utility or governmental body shall require Landlord or
Tenant to restrict the consumption of any utility or reduce any service for the
Premises or the Building, Landlord and Tenant shall comply with such
requirements, whether or not the utilities and services referred to in this
Section 11 are thereby reduced or otherwise affected, without any liability on
the part of Landlord to Tenant or any other person or any reduction or
adjustment in rent payable hereunder; provided, however, Tenant shall have the
right to contest or dispute such restriction or reduction by appropriate
proceedings provided such contest or dispute does not result in a lien against
the Building or a claim against Landlord. Landlord and its agents shall be
permitted reasonable access to the Premises upon prior reasonable notice to
Tenant for the purpose of installing and servicing systems within the Premises
deemed necessary by Landlord to provide the services and utilities referred to
in this Section 11 to Tenant and other tenants in the Building.
12. PARKING.
During the Term, Tenant shall have the right to use (but shall not be
obligated to use) four (4) unassigned parking spaces in the parking area; two
(2) of which shall be in the North Warehouse Lot and two (2) of which shall be
in Lot A at the monthly rate of Seventy Dollars ($70.00) per space for the North
Warehouse Lot and Seventy-five Dollars ($75.00) per space for Lot A for the
first Rental Year ("Parking Fees"), such parking fees to increase each
subsequent Rental Year by three percent (3%) over the previous year's Parking
Fee.
Tenant, or its employees wishing to use such spaces, shall enter into
separate monthly contracts for such spaces with Landlord's parking operator at
the rates described above. Tenant acknowledges that all parking spaces must be
vacated ninety (90) minutes before a scheduled game on those weekdays during the
major league baseball season (and post-season, if applicable) on which nighttime
games are scheduled and any time during the year when baseball related events
open to the public for use of field and stands are scheduled, and that the
parking operator shall have the right to have any vehicle parked in violation of
such contract removed from the parking lot at Tenant's or its employee's cost.
Tenant further acknowledges that such parking spaces shall not be used within
ninety (90) minutes of the scheduled game or event time on those weekdays during
the baseball season (and post-season, if applicable) on which daytime games are
scheduled and any time during the year when baseball related events open to the
public for use of field and stands are scheduled, unless the game or other event
is canceled. Landlord shall have the right to relocate the parking spaces from
time to time during the Term.
14
<PAGE>
Tenant shall have the further right in common with others, without charge,
to use of bicycle parking areas.
13. LOSS, DAMAGE AND INJURY.
Subject to the terms of this Lease, Tenant shall occupy and use the
Premises, the Building and the Common Area at Tenant's own risk. Consistent
with the provisions of subsection 16.4, Tenant's Personal Property and the
property of those claiming by, through or under Tenant, located in or on the
Premises or the Building, shall be and remain at the sole risk of Tenant or such
other person except for damage or loss caused by the gross negligence or willful
misconduct of the Landlord and not covered or required to be covered by Tenant's
insurance as provided under Section 16.1 hereof.
Although Landlord shall use reasonable diligence in application of the
security plan, no representation, guaranty, assurance, or warranty is made or
given by Landlord that the communications or security systems, devices or
procedures used, if any, will be effective to prevent injury to Tenant or any
other person or damage to, or loss (by theft or otherwise) of any of Tenant's
Personal Property or of the property of any other person, and Landlord reserves
the right to modify the Security Plan at any time without liability to Tenant
provided that such modification does not effect a diminishment in the level of
security provided.
14. REPAIRS BY LANDLORD.
Landlord shall keep the Premises and the Building and all machinery,
equipment, fixtures and systems of every kind attached to, or used in connection
with the operation of, the Building, including all electrical, heating,
mechanical, sanitary, sprinkler, utility, power, plumbing, cleaning,
refrigeration, ventilating, air conditioning and elevator systems and equipment
(excluding, however, lines, improvements, systems and machinery for water, gas,
steam and electricity owned and maintained by any public utility company or
governmental agency or body) in good order and repair consistent with the
operation of the Building as a first-class office building. Further, Landlord
shall keep the pedestrian walkways around the Building, the private driveways
and the Parking Areas in good repair and reasonably free of snow and ice.
Landlord, at its expense (subject to reimbursement by Tenant pursuant to Section
7), shall make all repairs and replacements necessary to comply with its
obligations set forth in the immediately preceding sentence, except for (a)
repairs required to be made by Tenant pursuant to Section 8 and (b)
notwithstanding the provisions of Section 16.4, repairs caused by the negligence
or willful misconduct of Tenant, its agents and employees, which repairs shall
be made by Landlord at the cost of Tenant, and for which Tenant shall pay
promptly, as Additional Rent, upon receipt of an invoice setting forth the cost
of such repairs.
15. ALTERATIONS, TITLE AND PERSONAL PROPERTY.
15.1. Alterations. Tenant shall in no event make or permit to be made
any alteration, modification, substitution or other change of any nature to the
mechanical, electrical, plumbing, HVAC and sprinkler systems within or serving
the Premises without the
15
<PAGE>
prior written approval of Landlord. After completion of Tenant's Improvements
within the Premises, Tenant shall not make or permit any other improvements,
alterations, fixed decorations, substitutions or modifications, structural or
otherwise, to the Premises or the Building ("Alterations") without the prior
written approval of Landlord. Landlord shall not unreasonably withhold or delay
its consent to Alterations which do not affect the structural, mechanical,
plumbing or electrical elements or systems of the Building and which are not
visible from outside the Premises, provided such work conforms with the general
design standards of the Building. Landlord's approval shall include the
conditions under which acceptable Alterations may be made. Alterations shall
include, but not be limited to, the installation or modification of carpeting,
walls, partitions, counters, doors, shelves, lighting fixtures, hardware, locks,
ceiling, window and wall coverings; but shall not include the initial Tenant's
Improvements placed within the Premises pursuant to Section 5.1. All Alterations
shall be based on complete plans and specifications prepared and submitted by
Tenant to Landlord for approval, except in the instance of cosmetic changes,
such as painting and carpeting, in which case Tenant shall provide Landlord with
samples showing colors, styles, etc. Alterations shall not be made until (a)
Landlord has approved Tenant's contractor, (b) Tenant has provided Landlord with
certificates of insurance meeting the requirements of Section 16.1.A.(iv), and
(c) Tenant has furnished Landlord with all necessary permits and licenses. If
required for issuance of a permit, Landlord agrees to execute, at no cost to
Landlord, any permit application for Alterations approved by Landlord. All such
work shall be subject to reasonable rules and regulations prescribed by Landlord
for tenant construction. Alterations made by Landlord at Tenant's request shall
be at Tenant's sole cost, payable by Tenant, as Additional Rent, within thirty
(30) days after receipt of an invoice for same from Landlord, which cost shall
include Landlord's standard construction management fee, which shall be agreed
upon between Landlord and Tenant prior to commencement of the Alterations.
Tenant shall be responsible for the cost of any additional improvements within
the Premises or the Common Area required by The Americans with Disabilities Act
of 1990 as a result of Tenant's Alterations.
If Tenant makes any Alterations without the prior consent of Landlord,
then, in addition to Landlord's other remedies, Landlord may correct or remove
such Alterations and Tenant shall pay the cost thereof, as Additional Rent, on
demand.
15.2. Title. The Tenant Improvements, all Alterations and all
equipment, fixtures, machinery, furnishings, and other improvements installed in
the Premises by or on behalf of Landlord or Tenant, other than Tenant's Personal
Property, (a) shall immediately become the property of Landlord upon
installation, and (b) shall remain upon and be surrendered to Landlord with the
Premises as a part thereof at the end of the Term. Notwithstanding the
foregoing, Landlord may, upon notice to Tenant at the time Alterations are
submitted for approval, elect that any Alterations be removed at the end of the
Term, and thereupon, Tenant shall at its sole expense, cause such Alterations to
be removed and restore the Premises to its condition prior to the making of such
Alterations, reasonable wear and tear excepted. If Tenant does not complete
such removal within a reasonable period, Landlord shall have the right to do so
and Tenant shall promptly reimburse Landlord, as Additional Rent, for the cost
of such work, which reimbursement obligation shall survive termination of the
Lease.
16
<PAGE>
15.3. Tenant's Personal Property. "Tenant's Personal Property" means
all equipment, machinery, furniture, furnishings and/or other property now or
hereafter installed or placed in or on the Premises by and at the sole expense
of Tenant with respect to which Tenant has not been granted any credit or
allowance by Landlord and which do not constitute Tenant Improvements or
Alterations or any substitute therefor or replacement thereof. Notwithstanding
any other provision of this Lease, Tenant's Personal Property shall not include
any Alterations or any improvements or other property installed or placed in or
on the Premises as part of Tenant's Improvements, whether or not installed at
Tenant's expense. Tenant shall promptly pay all personal property taxes on
Tenant's Personal Property, as applicable. Provided that there shall not have
been an Event of Default under this Lease, Tenant may remove all Tenant's
Personal Property from the Premises at the termination of this Lease. Any
property belonging to Tenant or any other person which is left in the Premises
after the Termination Date, or within ten (10) days after an earlier termination
of the Lease, shall be deemed to have been abandoned. In such event, Landlord
shall have the right to declare itself the owner of such property and to dispose
of it in whatever manner Landlord considers appropriate without waiving its
right to claim from Tenant all expenses and damages caused by Tenant's failure
to remove such property, and Tenant shall not have any right to compensation or
claim against Landlord as a result.
15.4. Tenant's Right to Certain Items. Notwithstanding any of the
foregoing provisions of this Section 15 to the contrary, Tenant shall always be
entitled, following an Event of Default hereunder, to the possession of its
books and records, computer programs, stationery, standard office forms unique
to Tenant, currency, the property of third parties, to the extent any of the
foregoing is located within the Premises, and confidential customer information;
provided, however, in the event Landlord must remove any of the foregoing items
from the Premises in the course of the exercise by Landlord of its remedies
under this Lease, Landlord shall store the foregoing items in a secure place and
Tenant shall reimburse Landlord as Additional Rent or otherwise any and all
costs incurred by Landlord in connection therewith, including, but not limited
to, any removal and/or storage costs so incurred. Notwithstanding the
immediately preceding sentence, if Landlord has given Tenant at least ten (10)
days' prior notice of Landlord's intent to remove any of the foregoing items
from the Premises and Tenant fails to remove all of such items from the Premises
within said ten (10) day period, Landlord, its agents, employees and contractors
shall have no liability in regard to the removal and/or storage thereof.
16. INSURANCE.
16.1. Tenant's Insurance. Tenant, at its expense, shall obtain and
maintain in effect as long as this Lease remains in effect and during such other
time as Tenant occupies the Premises or any part thereof insurance policies in
accordance with the following provisions, unless waived in writing by the
Landlord. In addition, Tenant shall require any subtenant of the Premises to
obtain and maintain such policies.
A. Coverage.
(i) commercial general liability insurance policy, including
contractual liability, with respect to the Building, to afford protection with
limits, per occurrence, of not
17
<PAGE>
less than Two Million Dollars ($2,000,000.00), combined single limit, with
respect to personal injury, bodily injury, including death, and property damage
and Two Million Dollars ($2,000,000.00) aggregate (occurrence form), such
insurance to provide for no deductible;
(ii) Special Form property insurance policy, including theft, written
at replacement cost value and with replacement cost endorsement, covering all of
Tenant's Personal Property in the Premises, and covering loss of income
resulting from casualty, such insurance to provide for no deductible greater
than Twenty-Five Thousand Dollars ($23,000.00).
(iii) worker's compensation or similar insurance policy offering
statutory coverage and containing statutory limits, which policy shall also
provide Employer's Liability Coverage of not less than Five Hundred Thousand
Dollars ($300,000. 00) per occurrence.
(iv) Notwithstanding anything set forth above in this subsection
16.1 to the contrary, all dollar limits specified herein shall be increased from
time to time, but not more often than every five (5) years, as reasonably
necessary to effect economically equivalent insurance coverage, or coverage
deemed adequate in light of then existing circumstances.
B. Policies.
Such policies shall be maintained with companies licensed to do business in
the State where the Premises are located and in form reasonably acceptable to
Landlord and will be written as primary policy coverage and not contributing
with, or in excess of, any coverage which Landlord shall carry. Such policies
shall be provided on an occurrence form basis unless otherwise approved by
Landlord and shall include Landlord and its managing agent as additional insured
as to coverage under paragraphs 16.1 .A.(i) and 16.1 .A.(iv). Such policies
shall also contain a waiver of subrogation provision and a provision stating
that such policy or policies shall not be canceled, non-renewed, reduced in
coverage or materially altered except after thirty (30) day's written notice,
said notice to be given in the manner required by this Lease to Landlord,
Attention: Deputy Director. All such policies of insurance shall be effective
as of the date Tenant occupies the Premises and shall be maintained in force at
all times during the Term of this Lease and all other times during which Tenant
shall occupy the Premises. Tenant shall deposit the policy or policies of such
required insurance or certificates thereof with Landlord prior to the Lease
Commencement Date.
16.2. Tenant's Failure to Insure. If Tenant shall fail to obtain
insurance as required under this Section 16, Landlord may, but shall not be
obligated to, obtain such insurance, and in such event, Tenant shall pay, as
Additional Rent, the premium for such insurance upon demand by Landlord.
16.3. Compliance with Policies. Tenant shall not do or allow to be
done, or keep, or allow to be kept, anything in, upon or about the Premises
which will contravene Landlord's policies insuring against loss or damage by
fire, other casualty, or any other cause, including without limitation, public
liability, or which will prevent Landlord from procuring such policies in
companies acceptable to Landlord. If any act or failure to act by Tenant in and
18
<PAGE>
about the Building and the Premises shall cause the rates with respect to
Landlord's insurance policies to be increased beyond those rates that would
normally be applicable for such limits of coverage, Tenant shall pay, as
Additional Rent, the amount of any such increases upon demand by Landlord.
16.4. Waiver of Right of Recovery. Neither party, including Landlord's
managing agent, shall be liable to the other party, including Landlord's
managing agent, or to any insurance company (by way of subrogation or otherwise)
insuring the other party, for any loss or damage to any building, structure or
other tangible property, or loss of income resulting therefrom, or losses under
worker's compensation laws and benefits even though such loss or damage might
have been occasioned by the negligence of such party, its agents or employees,
if, and to the extent, such loss or damage is covered by the insurance
benefitting the party suffering such loss or damage or is required to be covered
by insurance pursuant to subsections 16.1 or 16.3.
16.5. Landlord's Insurance. Landlord shall carry insurance against
damage or destruction to the Building, including Tenant Improvements and
Alterations but excluding Tenant's Personal Property. Landlord shall obtain
such insurance either through the self-insurance provided through the State
Insurance Trust Fund, through insurance purchased from commercial insurance
carriers, or through a combination of both, as determined by the Director of
Insurance, State Treasurer's Office.
Landlord shall not be obligated to repair any damage to Tenant's Personal
Property or replace the same unless caused by Landlord's negligence or willful
misconduct and not covered by Tenant's insurance as required in this subsection
16.1. Neither party shall be responsible for any loss or damage falling under
any deductible applicable to the other party's insurance coverage.
17. DAMAGE AND DESTRUCTION.
17.1. Landlord's Obligation to Repair and Reconstruct. If, as the
result of fire, the elements, accident or other casualty (any of such causes
being referred to herein as a "Casualty"), the Premises shall be rendered wholly
or partially Untenantable, as hereinafter defined, then, subject to the
provisions of subsection 17.2, Landlord shall cause such damage to be repaired,
including Tenant Improvements and Alterations, to the extent proceeds of
insurance (including proceeds of insurance from the State Insurance Trust Fund)
are paid to Landlord, and the Annual Basic Rent and Additional Rent (but not any
Additional Rent due Landlord either by reason of Tenant's failure to perform any
of its obligations hereunder or by reason of Landlord's having provided Tenant
with additional services hereunder) shall be abated proportionately as to the
portion of the Premises rendered untenantable during the period of such
untenantability. All such repairs shall be made at the expense of Landlord,
subject to the availability of proceeds of insurance and Tenant's
responsibilities set forth herein. Landlord shall not be liable for
interruption to Tenant's business or for damage to or replacement or repair of
Tenant's Personal Property, all of which replacement or repair shall be
undertaken and completed by Tenant, at Tenant's expense. For purposes of this
Lease, the Premises shall be deemed "Untenantable" if Tenant is unable to use
the Premises for the purposes originally intended.
19
<PAGE>
If the Premises shall be damaged by Casualty, but the Premises shall not be
thereby rendered wholly or partially untenantable, Landlord shall promptly cause
such damage to be repaired and there shall be no abatement of rent reserved
hereunder.
17.2. Termination of Lease. If the Premises are (a) rendered wholly
untenantable, or (b) damaged as a result of any cause which is not covered by
Landlord's insurance, or if the Building is damaged to the extent of fifty
percent (50%) or more of the Rental Area thereof, or if, for reasons beyond
Landlord's control or by virtue of the terms of any financing of the Building,
sufficient insurance proceeds are not available for the reconstruction or
restoration of the Building or Premises, then, in any of such events, Landlord
may elect to terminate this Lease by giving to Tenant notice of such election
within ninety (90) days after the occurrence of such event, or after the
insufficiency of such proceeds becomes known to Landlord, whichever is
applicable. If such notice is given, the rights and obligations of the parties
shall cease as of the date set forth in such notice, and the Annual Basic Rent
and Additional Rent (but not any Additional Rent due Landlord either by reason
of Tenant's failure to perform any of its obligations hereunder or by reason of
Landlord's having provided Tenant with additional services hereunder) shall be
adjusted as of the date set forth in such notice, or, if the Premises were
rendered untenantable, as of the date of the Casualty.
Within ninety (90) days following a Casualty, Landlord shall notify Tenant
in writing of the date on which Landlord, in its best professional judgment,
estimates restoration to be substantially complete. If restoration is expected
to exceed one hundred eighty (180) days from the date of the Casualty, then
Tenant shall have the right to terminate this Lease on written notice to
Landlord within fifteen (15) days after receipt of Landlord's notice. If,
despite Landlord's estimate, restoration is not substantially complete within
one hundred eighty (180) days following the Casualty, then Tenant shall have the
right to terminate this Lease upon written notice to Landlord given within
fifteen (15) days after expiration of said 180-day period.
17.3. Demolition of the Building. If the Building shall be so
substantially damaged that it is reasonably necessary, in Landlord's judgment,
to demolish the Building for the purpose of reconstruction, Landlord may
demolish the same, in which event the Annual Basic Rent and Additional Rent (but
not any Additional Rent due Landlord either by reason of Tenant's failure to
perform any of its obligations hereunder or by reason of Landlord's having
provided Tenant with additional services hereunder) shall be abated to the same
extent as if the Premises were rendered wholly untenantable by a Casualty.
17.4. Reinstatement of Lease. If the Building is restored by Landlord
within one-year period without the benefit of insurance proceeds, then so long
as the Tenant named in this Lease was in occupancy of the Premises at the time
of the Casualty, Tenant shall have a right of first refusal to lease space in
the new building on the same terms and conditions as contained in this Lease.
Tenant shall respond to Landlord's notice of restoration within five (5) days
after receipt of such notice.
17.5. Insurance Proceeds. If the Lease is not terminated pursuant to
subsection 17.2, Landlord shall, subject to the terms of any Mortgage or bond
repayment obligation, disburse and apply any insurance proceeds received by
Landlord to the restoration and rebuilding of
20
<PAGE>
the Building in accordance with subsection 17.1 hereof. All insurance proceeds
payable with respect to the Premises and the Building shall belong to and shall
be payable to Landlord.
8. CONDEMNATION.
18.1. Termination. If either the entire Premises or the Building shall
be acquired or condemned by any governmental authority under its power of
eminent domain for any public or quasi-public use or purpose, this Lease shall
terminate as of the date of vesting or acquisition of title in the condemning
authority and the rents hereunder shall be abated on that date. If less than
the whole but more than twenty-five percent (25 %) of the Agreed Rental Area of
the Premises or more than fifty percent (50%) of the total area of the Building
(even if the Premises are unaffected) or such portion of the Common Area as
shall render the Premises or the Building untenantable should be so acquired or
condemned, Landlord and Tenant shall each have the option to terminate this
Lease by notice given to the other within ninety (90) days of such taking. In
the event that such a notice of termination is given, this Lease shall terminate
as of the date of vesting or acquisition of title in the condemning authority
and the Annual Basic Rent and Additional Rent (but not any Additional Rent due
Landlord either by reason of Tenant's failure to perform any of its obligations
hereunder, or by reason of Landlord's having provided Tenant with additional
services hereunder) shall be adjusted as of such date.
If (a) neither Landlord nor Tenant shall exercise their respective options
to terminate this Lease, as hereinabove set forth, or (b)some lesser portion of
the Premises or the Building or Common Area, which does not give rise to a right
to terminate pursuant to this subsection 18.1, is taken by the condemning
authority, this Lease shall continue in force and effect, but from and after the
date of the vesting of title in the condemning authority, the Annual Basic Rent
payable hereunder during the unexpired portion of the Term shall be reduced in
proportion to the reduction in the total Rental Area of the Premises, and any
Additional Rent (but not any Additional Rent due Landlord either by reason of
Tenant's failure to perform any of its obligations hereunder, or by reason of
Landlord's having provided Tenant with additional services hereunder) payable
pursuant to the terms hereof shall be adjusted to reflect the diminution of the
Premises and/or the Building, as the case may be.
18.2. Rights to Award. Tenant shall have no claim against Landlord
arising out of the taking or condemnation, or arising out of the cancellation of
this Lease as a result of any such taking or condemnation, or for any portion of
the amount that may be awarded to Landlord as damages as a result of any taking
or condemnation, or for the value of any unexpired portion of the Term, or for
any property lost through condemnation, and Tenant hereby assigns to Landlord
all its rights, title and interest in and to any such award with regard to the
Premises; provided, however that in the event of a total taking, Tenant may
assert any claim it may have against the condemning authority for compensation
for Tenant's Personal Property lost thereby, loss of income, and for any
relocation expenses compensable by statute and receive such awards therefor as
may be allowed in the condemnation proceedings provided that such awards shall
be made in addition to, and stated separately from, the award made to Landlord
for the Building, the underlying land and the Premises. Landlord shall have no
obligation to contest any taking or condemnation. This Lease shall terminate as
of the date title vests in the condemning authority. For the purposes of this
21
<PAGE>
subsection, a substantial part of the Premises shall be considered to have been
taken if the entire Premises are considered untenantable as defined in
subsection 17.1.
If less than twenty-five percent (25%) of the Premises is condemned or
acquired in lieu of condemnation by any governmental authority, the Rent shall
be equitably adjusted as of the date title vests in the governmental authority
and the Lease shall otherwise continue in full force and effect.
19. BANKRUPTCY.
19.1. Event of Bankruptcy. For purposes of this Lease, each of the
following shall be deemed an "Event of Tenant's Bankruptcy":
(a) if Tenant becomes insolvent, as defined in the Bankruptcy Code,
or under the Insolvency Laws;
(b) the commencement of any action or proceeding for the dissolution
or liquidation of Tenant or for the appointment of a receiver or
trustee of the property of Tenant, whether instituted by or
against Tenant, if not bonded or discharged within sixty (60)
days of the date of the commencement of such proceeding or
action;
(c) if Tenant files a voluntary petition under the Bankruptcy Code
or Insolvency Laws;
(d) if there is filed an involuntary petition against Tenant as the
subject debtor under the Bankruptcy Code or Insolvency laws,
which is not dismissed within ninety (90) days of filing, or
results in issuance of an order for relief against the debtor;
and
(e) if Tenant makes or consents to an assignment of its assets, in
whole or in part, for the benefit of creditors, or to a common
law composition of creditors.
As used herein, (i) "Bankruptcy Code" means title 11 of the United States
Code, 11 U.S.C. Section 101 et. seq. as amended or any successor statute and
(ii) Insolvency Laws means the insolvency laws of any state or territory of the
United States.
19.2. Assumption by Trustee. If Tenant becomes the subject debtor in a
case pending under the Bankruptcy Code, Landlord's right to terminate this Lease
under Section 20 hereof shall be subject to the applicable rights (if any) of
the Trustee in Bankruptcy to assume or assign this Lease as then provided for in
the Bankruptcy Code. However, the Trustee in Bankruptcy must give to Landlord
and Landlord must receive proper written notice of the Trustee's assumption or
rejection of this Lease, within sixty (60) days (or such other applicable period
as is provided for in the Bankruptcy Code) after the date of the Trustee's
appointment. The failure of the Trustee to give notice of the assumption within
the period shall conclusively and irrevocably constitute the Trustee's rejection
of this Lease and
22
<PAGE>
waiver of any rights of the Trustee to assume or assign this Lease. The Trustee
shall not have the right to assume or assign this Lease unless the Trustee (i)
promptly and fully cures all defaults under this Lease, (ii) promptly and fully
compensates Landlord for all monetary damages incurred as a result of such
default, and (iii) provides to Landlord adequate assurance of future
performance. In the event Tenant is unable to: (i) cure its defaults, (ii)
reimburse Landlord for its monetary damages, or (iii) pay the Rent due under
this Lease on time, then Tenant hereby agrees in advance that it has not met its
burden to provide adequate assurance of future performance, and this Lease may
be terminated by Landlord in accordance with Section 20.
19.3. Tenant's Guarantor's Bankruptcy. Notwithstanding any of the
other provisions of this Lease, in the event Tenant's obligations under this
Lease are guaranteed by a guarantor, and said guarantor shall voluntarily or
involuntarily come under the jurisdiction of the Bankruptcy Code, and thereafter
said guarantor or its trustee in bankruptcy, under the authority of and pursuant
to applicable provisions thereof, shall determine to assign the guarantee
obligations of said guarantor hereunder, Tenant and its said guarantor agree
that (a) said guarantor or its trustee will provide Landlord sufficient
information enabling it to independently determine whether Landlord will incur
actual and substantial detriment by reason of such assignment, and (b) "adequate
assurance of future performance" in regard to such guarantee obligations of said
guarantor, as that term is generally defined under the Bankruptcy Code, will be
provided to Landlord by said guarantor or its trustee and its assignee as a
condition of said assignment.
20. DEFAULT PROVISIONS AND REMEDIES.
20.1. Events of Default. Each of the following shall be deemed an
Event of Default by Tenant under this Lease:
a. failure of Tenant to pay Annual Basic Rent, Additional Rent,
including the Tenant Improvement Financing, or any other sum required to be paid
under the terms of this Lease, including late charges, within five (5) days
after notice to Tenant of failure to pay, specifying the sums due;
b. failure by Tenant to perform or observe any other term, covenant,
agreement or condition of this Lease, on the part of Tenant to be performed
(other than those obligations of Tenant set forth in subsection 16.2 for which
Tenant shall be entitled to receive no prior notice, and other than the
conditions set forth in paragraphs 20.1.a, c, d, e, f and g, which shall be
governed solely by the provisions set forth herein), within twenty (20) days
after notice thereof from the Landlord, unless such performance shall reasonably
require a longer period, in which case Tenant shall not be deemed in default if
Tenant commences the required performance promptly and thereafter pursues and
completes such action diligently and expeditiously;
c. the filing of a tax or mechanic's lien against any property of
Tenant which is not bonded or discharged within forty-five (45) days of the date
such lien is filed;
d. abandonment of the Premises by Tenant;
23
<PAGE>
e. an Event of Tenant's Bankruptcy;
f. the sale of Tenant's interest in the Premises under attachment,
execution or similar legal process; and
g. the failure of Tenant to vacate the Premises upon the expiration
of the Term, or the earlier termination thereof pursuant to the other provisions
hereof.
20.2. Remedies. Upon the occurrence of an Event of Default, Landlord,
without notice to Tenant in any instance (except where expressly provided for
below or by applicable law) may do any one or more of the following:
(a) Sell at public or private sale all or any part of the goods,
chattels, fixtures and other Tenant's Personal Property which are
or may be put into the Premises during the Term, whether exempt
or not from sale under execution or attachment (it being agreed
that said property shall at all times be bound within a lien in
favor of Landlord and shall be chargeable for all Rent and for
the fulfillment of the other covenants and agreements herein
contained) and apply the proceeds of such sale, first, to the
payment of all costs and expenses of conducting the sale or
caring for or storing said property (including all attorneys'
fees), second, toward the payment of any indebtedness, including
(without limitation) indebtedness for Annual Basic Rent, which
may be or may become due from Tenant to Landlord, and third, to
pay Tenant, on demand in writing, any surplus remaining after all
indebtedness of Tenant to Landlord has been fully paid;
(b) perform, on behalf and at the expense of Tenant, any obligation
of Tenant under this Lease which Tenant has failed to perform and
of which Landlord shall have given Tenant notice, the cost of
which performance by Landlord, together with interest thereon at
the Default Rate from the date of such expenditure, shall be
payable by Tenant to Landlord, as Additional Rent, upon demand.
Notwithstanding the provisions of this clause (b) and regardless
of whether an Event of Default shall have occurred, Landlord may
exercise the remedy described in clause (b) without any notice to
Tenant if Landlord, in its good faith judgment, believes it would
be materially injured by failure to take rapid action or if the
unperformed obligation of Tenant constitutes an emergency;
(c) elect to terminate this Lease and the tenancy created hereby by
giving notice of such election to Tenant, and reenter the
Premises, by summary proceedings or otherwise, and remove Tenant
and all other persons and property from the Premises, and store
such property in a public warehouse or elsewhere at the cost of
and for the account of Tenant without resort to legal process and
without Landlord being deemed
24
<PAGE>
guilty of trespass or becoming liable for any loss or damage
occasioned thereby;
(d) declare any option which Tenant may have to renew the Term or
expand the Premises to be null and void and of no further force
and effect; or
(e) exercise any other legal or equitable right or remedy which it
may have.
Any costs and expenses incurred by Landlord (excluding, however, attorneys'
fees) in enforcing any of its rights or remedies under this Lease shall be paid
to Landlord by Tenant, as Additional Rent, upon demand.
20.3. Damages. If this Lease is terminated by Landlord pursuant to
Section 20.2.(c), Tenant nevertheless shall remain liable for (a) any Annual
Basic Rent, Additional Rent, including the Tenant Improvement Financing, and
damages which may be due or sustained prior to such termination, and (b) all
reasonable costs, fees and expenses incurred by Landlord in pursuit of its
remedies hereunder or in renting the Premises to others from time to time,
excluding attorneys' fees. In addition, Landlord may recover from Tenant
additional damages to compensate Landlord for loss of rent resulting from
termination of the Lease, which, at the election of Landlord, shall be either:
(i) An amount equal to the rent which, but for termination of this
Lease, would have become due during the remainder of the Term,
less the amount of rent, if any, which Landlord shall receive
during such period from others to whom the Premises may be rented
(other than any Additional Rent received by Landlord as a result
of any failure of such other person to perform any of its
obligations to Landlord), in which case such damages shall be
computed and payable in monthly installments, in advance, on the
first day of each calendar month following termination of the
Lease and continuing until the date on which the Term would have
expired but for such termination; any suit or action brought to
collect any such damages for any month shall not in any manner
prejudice the right of Landlord to collect any damages for any
subsequent month by a similar proceeding; or
(ii) an amount equal to the present worth (as of the date of such
termination) of rent which, but for termination of this Lease,
would have become due during the remainder of the Term, less the
present worth of any leases of the Premises for the remainder of
the Term, in which case such damages shall be payable to Landlord
in one lump sum on demand and shall bear interest at the Default
Rate until paid. For purposes of this clause (ii), "present
worth" shall be computed by discounting such amount to present
worth at a discount rate equal to one percentage point above the
discount rate then in effect at the Federal Reserve Bank nearest
to the location of the Building. If
25
<PAGE>
Landlord later re-leases the Premises during the remainder of the
Term it shall reimburse Tenant for such amounts as have been
paid.
Damages shall be due and payable immediately upon demand by Landlord
following any termination of this Lease pursuant to Section 20.2.
If this Lease is terminated pursuant to Section 20.2., Landlord may re-
lease the Premises or any part thereof, alone or together with other premises,
for such term(s) (which may be greater or less than the period which otherwise
would have constituted the balance of the Term) and on such terms and conditions
(which may include concessions or free rent and alterations of the Premises) as
Landlord, in its reasonable discretion, may determine. The failure or refusal of
Landlord to re-lease the Premises or any part or parts thereof shall not release
or affect Tenant's liability for damages.
Nothing contained in this Lease shall limit or prejudice the right of
Landlord to prove and obtain in proceedings for the termination of this Lease by
reason of bankruptcy or insolvency, an amount equal to the maximum allowed by
any statute or rule of law in effect at the time when, and governing the
proceedings in which, the damages are to be proved, whether or not the amount be
greater, equal to, or less than the amount of the loss or damages referred to
above.
20.4. No Waiver. No act or omission by Landlord shall be deemed to be an
acceptance of a surrender of the Premises or a termination of Tenant's
liabilities hereunder, unless Landlord shall execute a written release of
Tenant. Tenant's liability hereunder shall not be terminated by the execution
by Landlord of any new lease for all or any portion of the Premises or the
acceptance of rent from any assignee or subtenant.
20.5. Remedies Not Exclusive. All rights and remedies of Landlord set
forth in this Lease shall be cumulative, and none shall exclude any other right
or remedy, now or hereafter allowed by or available under any statute,
ordinance, rule of court, or the common law, either at law or in equity, or
both. For the purposes of any suit brought or based hereon, this Lease shall be
construed to be a divisible contract, to the end that successive actions may be
maintained on this Lease as successive periodic sums shall mature hereunder. The
failure of Landlord to insist, in any one or more instances, upon a strict
performance of any of the covenants, terms and conditions of this Lease or to
exercise any right or option herein contained shall not be construed as a waiver
or a relinquishment for the future, of such covenant, term, condition, right or
option, but the same shall continue and remain in full force and effect unless
the contrary is expressed by Landlord in writing. The receipt by Landlord of
rents hereunder, with knowledge of the breach of any covenant hereof or the
receipt by Landlord of less than the full rent due hereunder, shall not be
deemed a waiver of such breach or of Landlord's right to receive the full rents
hereunder, and no waiver by Landlord of any provision hereof shall be deemed to
have been made unless expressed in writing and signed by Landlord.
20.6. Persistent Failure to Pay Rent. In addition to any other
remedies available to Landlord pursuant to this Lease or by law, Landlord may,
at any time throughout the Term of this Lease, terminate this Lease upon
Tenant's default on three (3) separate occasions
26
<PAGE>
during any twelve (12) month period under subsection 20.1 a, regardless of
whether or not such prior defaults have been cured. Termination, pursuant to
this subsection 20.6, shall be effective upon Landlord's delivery to Tenant of a
notice of termination.
20.7. Landlord's Default. In the event Landlord fails to perform any
material term, covenant, agreement or condition of this Lease on the part of
Landlord to be performed for a period of five (5) days after notice thereof from
Tenant with respect to any monetary default and as to any other default thirty
(30) days after notice thereof from Tenant, (unless such performance shall
reasonably require a longer period, in which case Landlord shall not be deemed
in default if Landlord commences the required performance promptly and
thereafter continuously pursues and completes such action diligently and
expeditiously) (each of the foregoing being termed an "Event of Landlord's
Default"), Tenant shall be entitled to exercise any and all rights and seek any
and all remedies which Tenant may hold or to which it may be entitled at law or
in equity, including, but not limited to, an action in equity for injunctive
relief and/or the specific performance of this Lease by Landlord, and/or an
action at law for damages. In the event Tenant is successful in any action or
suit brought against Landlord to assert its rights under the provisions of this
subsection 20.7, such sums shall bear interest at the Default Rate from and
after the date of judgment.
In addition to the remedies specified above, in the event an Event of
Landlord's Default renders the Premises Untenantable, then Tenant may place Rent
as due in escrow with a mutually acceptable federally insured interest-bearing
bank account subject to Landlord's cure of such breach, and immediately upon
Landlord's cure of such Event of Landlord's Default, or upon a determination in
Landlord's favor (i.e., either that an Event of Landlord's Default does not
exist or has not rendered the Premises Untenantable), all sums so escrowed,
together with accrued interest thereon, shall be paid over to Landlord. In
addition, in the event of a determination in Landlord's favor, the sums escrowed
shall bear interest at the Default Rate from the date such sums were due under
this Lease through the date of payment to Landlord.
21. LANDLORD'S LIEN.
21.1. Subject to Section 15.4, Tenant hereby grants to Landlord a lien
and security interest on all tangible personal property of Tenant now or
hereafter placed in or upon the Premises, and such property shall be and remain
subject to such lien and security interest of Landlord for payment of all Rent
and other sums agreed to be paid by Tenant herein. It is provided, however, the
Landlord shall not have a lien which would be superior to a lien from a lending
institution, supplier or leasing company, if such lending institution, supplier
or leasing company has a security interest in the equipment, furniture or other
tangible personal property and which security interest has its origin in a
transaction whereby Tenant (a) originally acquired such equipment, furniture or
other tangible personal property, or (b) with the prior approval of Landlord,
refinanced the debt for such equipment, furniture or other tangible personal
property.
21.2. The provisions of this paragraph relating to such lien and security
interest shall constitute a security agreement under and subject to the Uniform
Commercial Code of the state where the Premises are located so that Landlord
shall have and may enforce
27
<PAGE>
a security interest on all property of Tenant now or hereafter placed in or on
the Premises, in addition to and cumulative of the Landlord's liens and rights
provided by law or by the other terms and provisions of this Lease.
22. INDEMNITY.
To the maximum extent permitted by law, Tenant shall indemnify, hold
harmless and (at Landlord's option) defend Landlord, its agents, members,
officials, servants and employees from and against all claims, actions, losses,
costs and expenses (including attorneys' and other professional fees),
judgments, settlement payments, and, whether or not reduced to final judgment,
all liabilities, damages, or fines paid, incurred or suffered by any third
parties to the extent arising directly or indirectly from (a) any default by
Tenant under the terms of this Lease, (b) the use or occupancy of the Building
by Tenant or any person claiming through or under Tenant, and/or (c) any acts or
omissions of Tenant or any contractor, agent, employee, invitee or licensee of
Tenant in or about the Building. The foregoing indemnity is in addition to, and
not in substitution for, any indemnity given by Tenant to Landlord under Section
8.3.
23. LIMITATION ON LANDLORD LIABILITY.
The term "Landlord" as used in this Lease shall mean only the owner or the
Mortgagee or its trustees, as the case may be, then in possession of the
Building so that in the event of any transfer by Landlord of its interest in the
Building, the Landlord in possession immediately prior to such transfer shall
be, and hereby is, entirely released and discharged from all covenants,
obligations and liabilities of Landlord under this Lease accruing after such
transfer. In consideration of the benefits accruing hereunder, Tenant, for
itself, its successors and assigns, covenants and agrees that, in the event of
any actual or alleged failure, breach or default hereunder by the Landlord, and
notwithstanding anything to the contrary contained elsewhere in this Lease, the
remedies of Tenant under this Lease shall be solely and exclusively limited to
Landlord's interest in the Building, subject to the limitations set forth in the
following paragraph.
Tenant understands and agrees that Landlord is an instrumentality of the
State of Maryland and can exercise only those powers expressly granted to it by
the pertinent Acts of Maryland or those that are necessarily implied from the
powers that are expressly granted, and in the event Landlord is temporarily or
permanently prevented, restricted or delayed in the performance of any or all of
the duties and obligations imposed upon it, or assumed by it by the terms and
provisions of this Lease, Landlord and its members, officers, agents and
employees shall not be liable directly or indirectly for any costs, losses,
damages, injuries or liabilities caused to or suffered or incurred by Tenant or
any other person or legal entity in connection with or as the result of or
growing Out of any such prevention, restriction or delay.
24. LANDLORD OBLIGATIONS.
Landlord agrees to perform all of its obligations under this Lease in a
manner consistent with the standards applicable to first-class office buildings
in downtown Baltimore
28
<PAGE>
City. Landlord shall be excused for the period of any delay in the performance
of any of its obligations when the delay is due to any cause or causes beyond
Landlord's control which include, without limitation, acts of God, all labor
disputes, governmental regulations or controls, civil unrest, war, extreme
adverse weather condition, fire or other casualty, inability to obtain any
material or services, unless otherwise provided for in this Lease. Except where
specifically set forth in this Lease, there shall be no abatement, set-off or
deduction of Annual Basic Rent or Additional Rent due under this Lease.
25. ASSIGNMENT AND SUBLETTING.
25.1. Prohibited Without Landlord's Consent. Tenant agrees for itself
and its permitted successors and assigns in interest hereunder that it will not
(a) assign or otherwise transfer, mortgage or otherwise encumber this Lease or
any of its rights hereunder; (b)sublet the Premises or any part thereof or
permit the occupancy or use of the Premises or any part thereof by any person
other than Tenant; and/or (c) permit the assignment or other transfer of this
Lease or any of Tenant's rights hereunder by operation of law, without the prior
written consent of Landlord in each instance first obtained, which consent shall
not be unreasonably withheld, and any consent given shall not constitute a
consent to any subsequent assignment or subletting. Tenant acknowledges that any
assignment or subletting is also subject to the approval of Baltimore Orioles
Limited Partnership with regard to any prospective use of the Premises. Any
attempted assignment or subletting without Landlord's consent shall be null and
void and shall not confer any rights upon any purported transferee, assignee,
mortgagee, sublessee, or occupant. No assignment or subletting, regardless of
whether Landlord's consent has been granted or withheld, shall be deemed to
release Tenant from any of its obligations hereunder or to alter, impair or
release the obligations of any person guaranteeing the obligations of Tenant
hereunder. Tenant hereby indemnities Landlord against liability resulting from
any claim made against Landlord by any assignee or subtenant or by any broker
claiming a commission in connection with the proposed assignment or subletting.
In the event Landlord shall consent to an assignment of this Lease, any option
which Tenant may have to renew the Term shall be null and void.
Notwithstanding the foregoing, Tenant shall have the right to assign this
Lease or sublet all or any part of the Premises to a corporation which controls,
is controlled by or is under common control with the corporation named as Tenant
in the introduction to this Lease or to any other entity which is controlled by
the share-holders controlling the Tenant as of the date of this Lease
("Affiliate"). Tenant shall notify Landlord in writing prior to any such
assignment or subletting. No such assignment or subletting shall relieve the
Tenant named in the introduction to this Lease from its obligations under this
Lease. If within one (1) year following the assignment or subletting to an
Affiliate, such Affiliate becomes unaffiliated with Tenant, then the assignment
or subletting shall be deemed to have occurred in violation of this Section
25.1.
25.2. Stock Transfer. If Tenant is a privately-held corporation, then
each of the following events are prohibited if such event results in a change in
control of Tenant or Guarantor: any transfer of Tenant's or Guarantor's issued
and outstanding capital stock; any issuance of additional capital stock (except
for the initial issuance of stock to investors in the Tenant); or the redemption
of any issued and outstanding stock. If Tenant is a partnership,
29
<PAGE>
any transfer of any interest in the partnership, or any other change in the
composition of the partnership, which results in a change in management of
Tenant or Guarantor from the person or persons managing the partnership as of
the date hereof, is prohibited. The foregoing shall not be deemed to prohibit
the public issuance of Tenant's stock.
Notwithstanding the foregoing, the sale of any securities of Tenant to
unrelated third parties pursuant to public or private offerings shall not be
deemed a violation of this Section 25.2 nor shall Tenant be prohibited from
redeeming any of its currently issued and outstanding stock, unless such events
result in a material change in the nature of the business conducted by Tenant
(i.e. administrative offices for a health care and ancillary service provider).
25.3. Rents from Subletting or Assignment. In the event Landlord shall
consent to an assignment of this Lease or a subletting of the Premises and the
amount of the rents (or other compensation) to be paid to Tenant by the assignee
or subtenant is greater than the rents required to be paid by Tenant to Landlord
pursuant to this Lease or a premium is to be paid to Tenant for an assignment of
this Lease, Tenant, after deducting its costs of assignment or subletting,
including but not limited to brokers' commissions and the cost of carrying
unused space, shall pay to Landlord (unless waived in writing by Landlord) any
such excess or any such premium, as the case may be, upon receipt thereof by
Tenant from such assignee or subtenant.
25.4. Procedure for Obtaining Landlord's Consent.
A. In the event that, at any time or from time to time prior to or during
the Term, Tenant desires to assign this Lease, whether by operation of law or
otherwise, or sublease all or a portion of the Premises, Tenant shall submit to
Landlord for its consideration (a) in writing, the name and address of the
proposed subtenant or assignee, a reasonably detailed statement of the proposed
subtenant's or assignee's business and reasonably detailed financial references
and information concerning the financial condition of the proposed subtenant or
assignee, (b) a disclosure of the rents to be paid by any subtenant in excess of
the rents reserved hereunder or the premium to be paid for the assignment, and
(c) if a subletting, a description of the area of the Premises to be sublet,
Tenant agrees to pay Landlord, as Additional Rent, all costs incurred by
Landlord in connection with any actual or proposed assignment or subletting,
including, without limitation, the costs of making investigations as to the
acceptability of a proposed subtenant or assignee and legal costs incurred in
connection with any requested consent.
B. Landlord's consent to an assignment of this Lease shall be effective
upon the execution by Tenant, the assignee, and Landlord of an assignment
document prepared by Landlord in which the assignee shall agree to assume,
observe, perform, and be bound by, all of Tenant's obligations under this Lease
and Tenant shall agree to remain primarily liable for such obligations.
Any consent by Landlord to a subletting of all or a portion of the Premises
shall be deemed to have been given only upon the delivery by Landlord to Tenant
of a consent document prepared and executed by Landlord expressly consenting to
such subletting.
30
<PAGE>
26. HOLDING OVER.
Tenant agrees to vacate the Premises at the end of the Term, and Landlord
shall be entitled to the benefit of all summary proceedings to recover
possession of the Premises at the end of the Term. If Tenant remains in
possession of the Premises after the expiration of the Term, such action shall
not renew this Lease by operation of law and nothing herein shall be deemed as a
consent by Landlord to Tenant's remaining in the Premises. If Tenant fails to
vacate the Premises as required, Landlord may consider Tenant as either (a) a
"Tenant-at-Will" (i.e. month-to-month tenant) liable for the payment of rent at
the then market rate as determined by Landlord or (b) as a "Tenant-Holding Over"
liable for an amount equal to the actual damages incurred by Landlord as a
result of Tenant's holding over, including, without limitation, all actual and
consequential damages and attorney's fees, but in no event shall such amount be
less than an amount equal to one and one-fourth times the Annual Basic Rent, and
Additional Rent, reserved hereunder applicable to the period of the holdover, or
twice the Annual Basic Rent, and Additional Rent, if the Landlord has another
tenant who wishes to lease the Rental Area. In either event, all other
covenants of this Lease shall remain in full force and effect.
27. SUBORDINATION AND ATTORNMENT.
This Lease shall be subject and subordinate to the liens of all mortgages,
deeds of trust and other security instruments now or hereafter placed upon the
Building or any portion thereof and all ground and other underlying leases from
which Landlord's interest is derived (said mortgages, deeds of trust, other
security instruments, and ground leases being hereinafter referred to as
"Mortgages" and the mortgagees, beneficiaries, secured parties, and ground
lessors thereunder from time to time being hereinafter called "Mortgagees"), and
to any and all renewals, extensions, modifications, or refinancing thereof,
without any further act of the Tenant. If requested by Landlord, however,
Tenant shall promptly execute any certificate or other document confirming such
subordination. Tenant agrees that, if any proceedings are brought for the
foreclosure of any of the Mortgages, Tenant, if requested to do so by the
purchaser at the foreclosure sale, shall attorn to the purchaser, recognize the
purchaser as the landlord under this Lease, and make all payments required
hereunder to such new landlord without any deduction or set-off of any kind
whatsoever. Tenant waives the provisions of any law or regulation, now or
hereafter in effect, which may give, or purport to give, Tenant any right to
terminate this Lease or to alter the obligations of Tenant hereunder in the
event that any such foreclosure or termination or other proceeding is prosecuted
or completed.
Notwithstanding anything contained herein to the contrary, any Mortgagee
may at any time subordinate the lien of its Mortgages to the operation and
effect of this Lease without obtaining the Tenant's consent thereto, by giving
the Tenant written notice thereof, in which event this Lease shall be deemed to
be senior to such Mortgages without regard to the respective dates of execution
and/or recordation of such Mortgages and this Lease and thereafter such
Mortgagee shall have the same rights as to this Lease as it would have had were
this Lease executed and delivered before the execution of such Mortgages.
31
<PAGE>
If, in connection with obtaining financing for the Building, a Mortgagee
shall request reasonable modifications in this Lease as a condition to such
financing, Tenant will not unreasonably withhold, delay or defer its consent
thereto, provided that such modifications do not materially adversely increase
the obligations of Tenant hereunder, or materially adversely affect the
leasehold interest hereby created or Tenant's use and enjoyment of the Premises,
or increase the amount of Annual Basic Rent or Additional Rent payable
hereunder.
28. ESTOPPEL CERTIFICATES.
Tenant shall, without charge, at any time and from time-to-time, within
fifteen (13) days after receipt of request therefor by Landlord, execute,
acknowledge and deliver to Landlord a written estoppel certificate, in such form
as may be reasonably determined by Landlord, certifying to Landlord, Landlord's
Mortgagee, any purchaser of Landlord's interest in the Building, or any other
person designated by Landlord, as of the date of such estoppel certificate, the
following, without limitation: (a) whether Tenant is in possession of the
Premises; (b)whether this Lease is in full force and effect; (c) whether there
have been any amendments to this Lease, and if so, specifying such amendments;
(d) whether there are then existing any set-offs or defenses against the
enforcement of any rights hereunder, and if so, specifying such matters in
detail; (e) the dates, if any, to which any rent or other charges have been paid
in advance and the amount of any Security Deposit held by Landlord; (f) that
Tenant has no knowledge of any then existing defaults of Landlord under this
Lease, or if there are such defaults, specifying them in detail; (g)that Tenant
has no knowledge of any event having occurred that authorizes the termination of
this Lease by Tenant, or if such event has occurred, specifying it in detail;
and (h) the address to which notices to Tenant under this Lease should be sent.
Any such certificate may be relied upon by the person or entity to whom it is
directed or by any other person or entity who could reasonably be expected to
rely on it in the normal course of business. The failure of Tenant to execute,
acknowledge and deliver such a certificate in accordance with this Section 28
within fifteen (15) days after a request therefor by Landlord shall constitute
an acknowledgment by Tenant, which may be relied on by any person who would be
entitled to rely upon any such certificate, that such certificate as submitted
by Landlord to Tenant is true and correct.
29. PEACEFUL AND QUIET POSSESSION.
If and so long as Tenant pays all rents due hereunder and performs and
observes the other terms and covenants to be performed and kept by it as
provided in this Lease, Tenant shall and may enter on, have, hold and enjoy the
Premises demised under this Lease, with all the rights, privileges and
appurtenances belonging to it, without any eviction, interruption, suit, claim
or demand by the Landlord and free from any claim or demand by any other person
or entity claiming by, through or under Landlord, subject, however, to the terms
of this Lease, claims and demands arising through Tenant and to matters of
public record existing as of the date of this Lease.
30. LANDLORD'S ACCESS TO PREMISES.
32
<PAGE>
Landlord and its agents may at any reasonable time and without incurring
any liability to Tenant, other than liability for personal injuries and damages
resulting solely from the negligence or intentional misconduct of Landlord or
its agents, enter the Premises to inspect them or to make alterations or repairs
or for any purpose which Landlord considers necessary for the repair, operation,
or maintenance of the Building; provided, however, that in the case of an
emergency, Landlord may enter the Premises at any time. Tenant shall allow the
Premises to be exhibited by Landlord (a) at any time during normal business
hours with forty-eight (48) hours' prior notice to Tenant, to any representative
of a lender or to any prospective purchaser of the Building or Landlord's
interest therein or (b) within six (6) months of the end of the Term to any
persons who may be interested in leasing the Premises.
31. BROKERS, COMMISSIONS, ETC.
Landlord and Tenant acknowledge, represent and warrant each to the other
that, no broker, real estate agent or consultant brought about or was involved
in the making of this Lease and that no brokerage fee or commission is due from
Landlord to Tenant or to any other party as a result of the execution of this
Lease. Tenant agrees to indemnify and hold harmless Landlord against any claim
by any broker, agent, finder or consultant based upon the execution of this
Lease and predicated upon a breach of the above representation and warranty.
32. RECORDATION.
Neither Landlord nor Tenant shall record this Lease, any amendment to this
Lease or any other memorandum of this Lease without the prior written consent of
the other party, which consent may be withheld in the sole discretion of either
party and, in the event such consent is given, the party requesting such consent
and recording shall pay all transfer taxes, recording fees and other charges in
connection with such recording. Notwithstanding the above, Tenant covenants
that if at any time any mortgagee or ground lessor relating to the financing of
the Building shall require the recordation of this Lease, or if the recordation
of this Lease shall be required by any valid governmental order, or if any
governmental authority having jurisdiction in the matter shall assess and be
entitled to collect transfer taxes, documentary stamp taxes, or both, on this
Lease, Tenant, upon the request of Landlord, shall execute such instruments,
including a Memorandum of this Lease, as may be necessary to record this Lease,
and the parties shall share equally all recording fees, transfer taxes and
documentary stamp taxes, payable on, or in connection with, this Lease or such
recordation; provided, however, if Landlord's mortgagee or bond holder requires
such recordation, Landlord shall pay all such fees, taxes and costs.
33. MANDATORY STATE CLAUSES.
A. No employee of the State of Maryland, or any unit thereof, whose
duties as such employee include matters relating to or affecting the subject
matter of this Agreement, shall, while so employed, become or be an employee of
the party or parties hereby contracting with the State of Maryland, or any unit
thereof. [COMAR Sec. 21.07.01.05]
33
<PAGE>
B. Tenant shall comply with the provisions of Article 33, Sections 30-1
through 30-4 of the Annotated Code of Maryland, which require that every person
that enters into contracts, leases, or other agreements with the State of
Maryland, including its agencies, or a political subdivision of the State,
during a calendar year under which the person receives in the aggregate $10,000
or more, shall, on or before February 1 of the following year, file with the
Secretary of State of Maryland certain specified information to include
disclosure of political contributions in excess of $ 100 to a candidate for
elective office in any primary or general election. [COMAR Sec. 21.07.01.20]
C. Tenant agrees: (a) not to discriminate in any manner against an
employee or applicant for employment because of race, color, religion, creed,
age, sex, marital status, national origin, ancestry or physical or mental
handicap unrelated in nature and extent so as reasonably to preclude the
performance of such employment; (b) to include a provision similar to that
contained in subsection (a) above in any subcontract except a subcontract for
standard commercial supplies or raw materials, and (c) to post and to cause
subcontractors to post in conspicuous places available to employees and
applicants for employment, notices setting forth the substance of this clause.
[COMAR Sec. 21.07.01.O8]
D. If the General Assembly fails to appropriate sufficient funds or if
sufficient funds from an alternative source are not otherwise made available for
continued performance by Landlord for any fiscal period of this Lease succeeding
the first fiscal period, this Lease shall be canceled automatically as of the
beginning of the fiscal year for which funds were not appropriated or otherwise
made available. The effect of termination of this Lease hereunder will be to
discharge both Landlord and Tenant from future performance of this Lease, except
any obligations which by the terms of this I-ease survive such termination,
including, without limitation, indemnification relating to matters arising under
this Lease prior to the effective date of termination or Tenant's surrender of
the Premises, whichever occurs later. [COMAR Sec. 21.07.01.10]
E. Tenant hereby represents and warrants that:
1. It is qualified to do business in the State of Maryland and that
it will take such action as, from time to time hereafter, may be necessary to
remain so qualified;
2. It is not in arrears with respect to the payment of any monies
due and owing the State of Maryland, or any department or unit hereof,
including, but not limited to, the payment of taxes and employee benefits, and
that it shall not become so in arrears during the Term;
3. It shall comply with all federal, state and local laws,
regulations and ordinances applicable to its activities and obligations under
this Lease; and
4. It shall obtain at its expense all licenses, permits, insurance,
and governmental approvals, if any, necessary to the performance of its
obligations under this Lease. [COMAR 21.07.01.22]
34
<PAGE>
F. Tenant shall, simultaneously with the execution of this Lease,
complete and sign the affidavit attached hereto as Schedule G and made a part
hereof. [COMAR Sec. 21.07.01.25]
34. MISCELLANEOUS.
34.1. Separability. If any term or provision of this Lease or the
application thereof to any person or circumstance shall, to any extent, be
invalid or unenforceable, the remainder of this Lease or the application of such
term or provision to persons or circumstances other than those as to which it is
held invalid or unenforceable, shall not be affected thereby, and each term and
provision of this Lease shall be valid and enforceable to the fullest extent
permitted by law.
34.2. Applicable Law. This Lease shall be given effect and construed
by application of the laws of the state where the Building is located, and any
action or proceeding arising hereunder shall be brought in the courts in
Baltimore City.
34.3. Authority. If Tenant is a corporation or partnership, the person
executing this Lease on behalf of Tenant represents and warrants that Tenant is
duly organized and validly existing; that this Lease has been authorized by all
necessary parties, is validly executed by an authorized officer or agent of
Tenant and is binding upon and enforceable against Tenant in accordance with its
terms. The person executing this Lease on behalf of Landlord represents that
Landlord has the necessary authority to enter into this Lease.
34.4. Integration of Agreements. This writing is intended by the parties
as a final expression of their agreement and is a complete and exclusive
statement of its terms, and all negotiations, considerations and representations
between the parties hereto are incorporated herein. No course of prior dealings
between the parties or their agents shall be relevant or admissible to
supplement, explain, or vary any of the terms of this Lease. Acceptance of, or
acquiescence to, a course of performance rendered under this Lease or any prior
agreement between the parties or their agents shall not be relevant or
admissible to determine the meaning of any of the terms or covenants of this
Lease. Other than as specifically set forth in this Lease, no representations,
understandings or agreements have been made or relied upon in the making of this
Lease. This Lease can only be modified by a writing signed by each of the
parties hereto.
34.5. Third Party Beneficiary. Except as expressly provided elsewhere
in this Lease, nothing contained in this Lease shall be construed so as to
confer upon any other party the rights of a third party beneficiary.
34.6. Captions; Gender. The captions used in this Lease are for
convenience only and do not in any way limit or amplify the terms and provisions
hereof. As used in this Lease and where the context so requires, the singular
shall be deemed to include the plural and the masculine shall be deemed to
include the feminine and neuter, and vice versa.
34.7. Successors and Assigns. Subject to the express provisions of
this Lease to the contrary (e.g., Section 25), the terms, provisions and
covenants contained in this Lease shall
35
<PAGE>
apply to, inure to the benefit of, and be binding upon the parties hereto and
their respective heirs, personal representatives, successors and assigns.
34.8. No Partnership. No term, covenant or agreement contained in this
Lease shall act to or be deemed or constructed to create a partnership or joint
venture of or between Landlord and Tenant or to create any other relationship
between the parties other than that of lessor and lessee.
34.9. Notices. All notices, demands and requests required under this
Lease shall be in writing. All such notices, demands and requests shall he
deemed to have been properly given if sent by United States certified mall,
return receipt requested postage prepaid, or hand delivered, or overnight
delivery with receipt requested, addressed to Landlord or Tenant, at the
Landlord Notice Address and Tenant Notice Address, respectively. Either party
may designate a change of address by written notice to the other party, in the
manner set forth above. Notice, demand and requests which shall be served by
certified mail in the manner aforesaid, shall be deemed to have been given three
(3) days after mailing or upon earlier refusal of delivery by the addressee.
Notices sent by overnight delivery shall be deemed to have been given the day
actually delivered or upon earlier refusal of delivery by the addressee.
Without intending to limit the generality of the foregoing requirement that all
notices, demands and requests be in writing, there are certain provisions in
this Lease where, for emphasis alone, such requirement is reiterated.
34.10. Effective Date of this Lease. Unless otherwise expressly
provided, all terms, conditions and covenants by Tenant contained in this Lease
shall be effective as of the date first above written.
34.11. Mechanics' Liens. Except as to Tenant Improvements, Alterations
or other work at or for the Premises by Landlord, its contractors or agents, in
the event that any mechanics' or materialmen's liens shall at any time be filed
against the Premises purporting to be for work, labor, services or materials
performed or furnished to Tenant or anyone holding the Premises through or under
Tenant, Tenant shall cause the same to be discharged of record or bonded within
forty-five (45) days after the filing thereof. If Tenant shall fail to cause
such lien to be discharged within forty-five (45) days after the filing thereof,
then, in addition to any other right or remedy of Landlord, Landlord may, but
shall not be obligated to, discharge the same by paying the amount claimed to be
due; and the amount so paid by Landlord, and all costs and expenses, including
reasonable attorneys' fees incurred by Landlord in procuring the discharge of
such lien, shall be due and payable by Tenant to Landlord, as Additional Rent,
on the first day of the next succeeding month. Notice is hereby given that
Landlord shall not be liable for any labor or materials furnished to Tenant upon
credit and that no mechanics', materialmen's or other liens for any such labor
or materials shall attach to or affect the estate or interest of Landlord in and
to the land and improvements of which the Premises are a part. Landlord shall
have the same obligations as Tenant and Tenant the same rights as Landlord under
this Section 34.11 with regard to the Common Area and other portions of the
Building, excluding the Premises.
34.12. Waiver of Right of Redemption. Tenant hereby expressly waives (to
the extent legally permissible) for itself and all persons claiming by, through
or under it, any right of
36
<PAGE>
redemption or right to restore the operation of this Lease under any present or
future law in the event Tenant is dispossessed for any proper cause, or in the
event Landlord shall obtain possession of the Premises pursuant to the terms of
this Lease. Tenant understands that the Premises are leased exclusively for
business, commercial and mercantile purposes and therefore shall not be
redeemable under any provision of law.
34.13. Mortgagee's Performance. If requested by any Mortgagee, Tenant
shall give such Mortgagee written notice of any default by Landlord under this
Lease and a reasonable opportunity to cure such default, provided that such
Mortgagee has entered into a non-disturbance agreement with Tenant. Tenant
shall accept performance of any of Landlord's obligations hereunder by any
ground lessor or mortgagee relating to the financing of the Building.
34.14. Mortgagee's Liability. No mortgagee or ground lessor relating to
the financing of the Building, not in possession of the Premises or the
Building, shall have any liability whatsoever hereunder.
34.15. Schedules. Each writing or plat referred to herein as being
attached hereto as a schedule or exhibit is hereby made a part hereof, with the
same full force and effect as if such writing or plat were set forth in the body
of this Lease.
34.16. Time of Essence. Time shall be of the essence of this Lease with
respect to the performance by Tenant of its obligations hereunder.
34.17. Amendment. This Lease may be amended by and only by an instrument
executed and delivered by each party hereto. No amendments of this Lease
entered into by Landlord and Tenant, as aforesaid, shall impair or otherwise
affect the obligations of any guarantor of Tenant's obligations hereunder, all
of which obligations shall remain in full force and effect and pertain equally
to any such amendments, with the same full force and effect as if the substance
of such amendments was set forth in the body of this Lease.
34.18. [Intentionally Left Blank]
34.19. Landlord's Lease with Baltimore Orioles Limited Partnership.
Tenant acknowledges that Landlord has entered into agreements (with amendments,
the "Orioles Agreements") with the Baltimore Orioles Limited Partnership,
regarding, among other matters, uses of space, rights to parking, advertising,
promotions, intellectual property, concessions, maintenance and repair of not
only Oriole Park at Camden Yards (the "Ballpark"), the grounds and walkways
surrounding the Ballpark, the Camden Yards Warehouse Building and portions of
the pedestrian walkway known as Eutaw Street, but also other portions of the
area bounded by Camden Street on the north, Howard Street and Interstate 395 on
the east, Russell Street on the west and Ostend Street on the south ("Camden
Yards"), including parking areas, the exterior and certain interior spaces of
the Camden Yards Warehouse Building, Camden Station and pedestrian and vehicular
access to Camden Yards. Tenant recognizes that Landlord's obligations under the
Orioles Agreements will affect, among other matters, the ability of Landlord to
approve any changes in use, implement or change the Rules and Regulations and
grant consents required to assign or
37
<PAGE>
sublet the Premises or to place signs, decorations or other material on the
exterior of the Building or portions of the Premises visible from the exterior.
Tenant acknowledges the existence of the Orioles Agreements and accepts the
Premises subject to Landlord's obligations thereunder.
IN WITNESS WHEREOF, the parties hereto have executed this Lease under their
respective seals as of the day and year first above written.
ATTEST: LANDLORD:
MARYLAND STADIUM AUTHORITY
By: /s/ Bruce Hoffman (SEAL)
____________________________ _____________________________
Name: Name: Bruce H. Hoffman, P.E.
Title: Title: Executive Director
ATTEST: TENANT:
PHYSICIANS QUALITY CARE, INC.
/s/ Nancy J. Kelley By: /s/ Jerilyn P. Asher (SEAL)
____________________________ _____________________________
Name: Name:
Title Title:
38
<PAGE>
FORM OF MERGER AGREEMENT
Agreement entered into as of December 11, 1996 by and among Physicians
Quality Care, Inc., a Delaware corporation ("PQC"), Flagship Health, P.A., a
Maryland professional association ("Flagship"), _______________________ (the
"Company"), and the stockholders of the Company listed on Schedule I hereto (the
"Stockholders"). Flagship, PQC, the Company and the Stockholders are referred
to collectively herein as the "Parties."
This Agreement contemplates a merger of the Company into Flagship. In such
merger, the Stockholders will receive cash and/or shares of PQC Class A Common
Stock, par value $0.01 per share (the "Common Stock"), in exchange for their
capital stock of the Company.
Now, therefore, in consideration of the representations, warranties and
covenants herein contained, the Parties agree as follows.
ARTICLE I
THE MERGER
1.1 The Merger. Upon and subject to the terms and conditions of this
----------
Agreement, the Company shall merge with and into Flagship (with such merger
referred to herein as the "Merger") at the Effective Time (as defined below).
From and after the Effective Time, the separate corporate existence of the
Company shall cease, and Flagship shall continue as the surviving corporation in
the Merger (the "Surviving Corporation"). The "Effective Time" shall be the
time at which the Company and Flagship file the Articles of Merger or other
appropriate documents prepared and executed in accordance with the relevant
provisions of the Maryland General Corporation Law (the "Articles of Merger")
with the Department of Assessments of Taxation of the State of Maryland. The
Merger shall have the effects set forth in (S)3-114 of the Maryland General
Corporation Law.
1.2 The Closing. The closing of the transactions contemplated by this
-----------
Agreement (the "Closing") shall take place at the offices of PQC in Baltimore,
Maryland, commencing at 9:00 a.m. local time on such mutually agreeable date as
soon as practicable after the satisfaction or waiver of all conditions to the
obligations of the Parties to consummate the transactions contemplated hereby
(the "Closing Date").
1.3 Actions at the Closing. At the Closing: (a) the Company and the
----------------------
Stockholders shall deliver to Flagship and PQC the various certificates,
instruments and documents referred to in Article V; (b) Flagship and PQC shall
deliver to the Company and the Stockholders the various certificates,
instruments and documents referred to in Article VI; (c) the Company and
Flagship shall file with the Department of Assessments of Taxation of the State
of Maryland the Articles of Merger; (d) each Stockholder (and, in the case of
treasury shares, the Company) shall deliver to Flagship for cancellation the
certificates representing his Shares (as defined in Section 1.5(a) below); and
(e) each Stockholder shall receive the amount of cash (by check) and/or the
number of shares of Common Stock with an assumed value, as determined and
provided in Section 1.12, as set forth opposite such Stockholder's name on
Schedule 1.3 attached hereto (reflecting adjustments for net working capital and
- ------------
assets acquired or disposed of or liabilities assumed since the date of
valuations prepared by
<PAGE>
Arthur Andersen of the Company as contemplated by Schedule 1.14) (the "Merger
-------------
Consideration").
1.4 Additional Action. The Surviving Corporation may, at any time
-----------------
after the Effective Time, take any action, including executing and delivering
any document, in the name and on behalf of either the Company or Flagship, in
order to consummate the transactions contemplated by this Agreement.
1.5 Conversion of Securities. At the Effective Time, by virtue of the
------------------------
Merger and without any action on the part of any Party or the holder of any of
the following securities:
(a) Each share of common stock of the Company (collectively, the
"Shares") held by the Stockholders or held in the Company's treasury immediately
prior to the Effective Time shall be canceled and retired without payment of any
consideration therefor, other than the payment of the Merger Consideration to
the Stockholders as set forth in Section 1.3; and
(b) Each share of common stock, $5.00 par value per share, of Flagship
issued and outstanding immediately prior to the Effective Time shall remain
outstanding and evidence one (1) share of common stock, $5.00 par value per
share, of the Surviving Corporation.
1.6 Dissenting Stockholder. Each Stockholder represents that such
----------------------
Stockholder has voted the Shares owned beneficially or of record by such
Stockholder in favor of the adoption of this Agreement and the Merger and,
consequently, shall not be entitled to, and shall not, demand and perfect
appraisal rights in accordance with (S)3-201, et. seq. of the Maryland General
Corporation Law.
1.7 Articles of Incorporation. The Articles of Incorporation of the
-------------------------
Surviving Corporation shall be the same as the Articles of Incorporation of
Flagship immediately prior to the Effective Time.
1.8 Bylaws. The bylaws of the Surviving Corporation shall be the same
------
as the bylaws of Flagship immediately prior to the Effective Time.
1.9 Directors and Officers. The directors and officers of the
----------------------
Surviving Corporation as of the Effective Time shall be those officers and
directors specified on Schedule 1.9.
------------
1.10 No Further Rights. From and after the Effective Time, no Shares
-----------------
of the Company shall be deemed to be outstanding, and holders of certificates
formerly representing Shares shall cease to have any rights with respect thereto
except as provided herein or by law.
1.11 Closing of Transfer Books. At the Effective Time, the stock
-------------------------
transfer books of the Company shall be closed and no transfer of Shares shall
thereafter be made. If, after the Effective Time, certificates formerly
representing Shares are presented to the Surviving Corporation, they shall be
canceled and exchanged for the Merger Consideration as set forth in Section 1.3.
-2-
<PAGE>
1.12 PQC Common Stock.
----------------
(a) The parties agree that the per share fair market value of the
Common Stock to be included in the Merger Consideration shall be Two Dollars and
Fifty Cents ($2.50).
(b) The Stockholders agree to enter into, and the shares of Common
Stock shall be subject to, the Stockholders Agreement dated as of August 30,
1996, by and among PQC and certain of its Stockholders, as amended and in effect
from time to time (the "Stockholders Agreement") attached hereto as Exhibit A.
---------
(c) Each stockholder represents, warrants and covenants to PQC as
follows:
(i) The Stockholder is acquiring the Common Stock for the
Stockholder's own account for investment only, and not with a view to, or for
sale in connection with, any distribution of the shares of Common Stock in
violation of the Securities Act of 1933, as amended (the "Securities Act"), or
any rule or regulation under the Securities Act.
(ii) The Stockholder has received a copy of the Confidential
Private Placement Memorandum, dated as of December 10, 1996, and the supplement
thereto dated as of the date hereof, with respect to PQC and the Common Stock
and has had such opportunity as the Stockholder has deemed adequate to obtain
from representatives of PQC such information as is necessary to permit the
Stockholder to evaluate the merits and risks of the Stockholder's investment in
PQC.
(iii) The Stockholder has sufficient experience in business,
financial and investment matters to be able to evaluate the risks involved in
the acquisition of the shares of Common Stock and to make an informed investment
decision with respect to such acquisition.
(iv) The Stockholder can afford a complete loss of the value of
the shares of Common Stock and is able to bear the economic risk of holding such
Common Stock for an indefinite period.
(v) The Stockholder understands that: (A) the shares of Common
Stock have not been registered under the Securities Act and are "restricted
securities" within the meaning of Rule 144 under the Securities Act, (B) the
Common Stock cannot be sold, transferred or otherwise disposed of unless they
are subsequently registered under the Securities Act or an exemption from
registration is then available; (C) in any event, the exemption from
registration under Rule 144 will not be available for at least two (2) years and
even then will not be available unless a public market then exists for the
capital stock of PQC, adequate information concerning PQC is then available to
the public, and other terms and conditions of Rule 144 are complied with; and
(D) there is now no registration statement on file with the Securities and
Exchange Commission with respect to any stock of PQC and PQC has no obligation
or current intention to register the Common Stock under the Securities Act.
(vi) A legend substantially in the following form will be placed
on the certificate representing the Common Stock:
-3-
<PAGE>
"The shares represented by this certificate were issued in a private placement,
without registration under the Securities Act of 1933, as amended (the "Act"),
and may not be sold, assigned, pledged or otherwise transferred in the absence
of an effective registration under the Act covering the transfer or an opinion
of counsel, satisfactory to the issuer, that registration under the Act is not
required."
(vii) Except as set forth on Schedule 1.12(c), each Stockholder
----------------
is an "accredited investor" as defined in Rule 501 of the rules and regulations
under the Securities Act.
1.13 Certain Tax Agreements. The Parties intend to adopt this
----------------------
Agreement and Merger as a tax-free reorganization under Section 368(a) of the
Internal Revenue Code of 1986, as amended, (the "Code"). The Parties shall not
take a position on any tax return or engage in any activities inconsistent with
this Section 1.13. Without limiting the foregoing each Stockholder agrees that:
(a) Such Stockholder has not sold, exchanged, transferred or disposed
of or received any shares of the Company's capital stock in contemplation of the
Merger except as disclosed on Schedule 1.13 attached hereto, and such
-------------
Stockholder has no present intent to sell, exchange, transfer, dispose of or
receive the Company's capital stock in contemplation of the Merger, nor has such
Stockholder entered into any discussions or negotiations with regard to the
possible sale, exchange, transfer or other disposition of such capital stock.
(b) Such Stockholder is not subject to any obligation to sell,
exchange, transfer or otherwise dispose of all or any of the Common Stock of PQC
to be received by such Stockholder in the Merger. Such Stockholder has not
entered into any discussions or negotiations with regard to the possible sale,
exchange, transfer or other disposition of all or any of the Common Stock. Such
Stockholder has no plan or intent to engage in any transaction or arrangement
that would reduce such Stockholder's risk of ownership in any way, including
without limitation a short sale, hedging transaction or otherwise, with respect
to all or any of such Common Stock.
1.14 Adjustments to Merger Consideration Due to Changes in Net Working
-----------------------------------------------------------------
Capital. The Merger Consideration shall be subject to adjustment for changes in
- -------
net working capital from the date of the valuation of the Company prepared by
Arthur Andersen, such adjustment to be calculated as set forth on Schedule 1.14
-------------
attached hereto.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company and the Stockholders, who join herein individually (not jointly)
and subject to the limitations contained in Section 7.1, represent and warrant
to Flagship and PQC that the statements contained in this Article II are true
and correct, except as set forth in the disclosure schedule attached hereto (the
"Disclosure Schedule"), as of the date hereof and as of the Effective Time.
Each representation or warranty made by a Stockholder herein regarding the
Stockholders of the Company shall be deemed to have been made only with respect
to the Stockholder making the representation or warranty and not with respect to
any
-4-
<PAGE>
other Stockholder. The Disclosure Schedule shall be arranged in paragraphs
corresponding to the numbered and lettered paragraphs contained in this Article
II, and the disclosures in any paragraph of the Disclosure Schedule shall
qualify only the corresponding paragraph in this Article II.
2.1 Organization, Qualification and Corporate Power. The Company is a
-----------------------------------------------
professional association duly organized, validly existing and in corporate and
tax good standing under the laws of the State of Maryland and has all power and
authority to carry on the businesses in which it is engaged and to own and use
the properties owned and used by it. The Company has furnished to PQC true and
complete copies of its Articles of Incorporation and Bylaws, each as amended and
as in effect on the date hereof. The Company is not in default under or in
violation of any provision of its Articles of Incorporation or Bylaws. Except
as set forth in Schedule 2.1 hereto, the Company has no subsidiaries or any
------------
equity interest in any corporation, partnership, joint venture or other entity.
2.2 Capitalization. Schedule 2.2 accurately sets forth the authorized
-------------- ------------
and outstanding capital stock of the Company. Schedule 2.2 sets forth a
------------
complete and accurate list of all stockholders of the Company, indicating the
numbers of Shares held by each Stockholder. The Shares are all of the issued
and outstanding shares of capital stock of the Company and each Share is duly
authorized, validly issued, fully paid, nonassessable and free of all preemptive
rights. There are no outstanding or authorized options, warrants, rights,
agreements or commitments to which the Company is a party or which are binding
upon the Company providing for the issuance, disposition or acquisition of any
of its capital stock. There are no outstanding or authorized stock
appreciation, phantom stock or similar rights with respect to the Company.
There are no agreements, voting trusts, proxies or understandings with respect
to the voting, or registration under the Securities Act, of any Shares. All of
the issued and outstanding Shares were issued in compliance with applicable
federal and state securities laws.
2.3 Authorization. This Agreement and the other agreements, documents
-------------
and instruments to be executed and delivered by the Company pursuant hereto and
the consummation by the Company of the transactions contemplated hereby and
thereby have been approved by all required corporate action, including approval
by the Board of Directors of the Company and all of the Stockholders. No
further corporate or other proceedings on the part of Company are necessary to
authorize this Agreement or the other agreements, documents and instruments to
be executed and delivered by the Company pursuant hereto or the transactions
contemplated hereby or thereby.
2.4 Valid and Binding Agreement. The Company and each Stockholder
---------------------------
have the necessary power and authority to enter into this Agreement and the
other agreements, documents and instruments to be executed and delivered by the
Company or any Stockholder pursuant hereto, and to carry out the transactions
contemplated hereby and thereby. Assuming due authorization, execution and
delivery thereof by Flagship and PQC, this Agreement and each of the other
agreements, documents and instruments to be executed and delivered by the
Company or the Stockholders pursuant hereto will constitute valid and binding
agreements of the Company and/or the Stockholders, enforceable against the
Company and/or the Stockholders, as the case may be, in accordance with their
terms,
-5-
<PAGE>
except to the extent that enforceablitity is limited by bankruptcy or similar
laws or by general principles of equity.
2.5 No Violation. Except as set forth in Schedule 2.5 hereto, neither
------------ ------------
the execution and delivery of this Agreement or the other agreements, documents
and instruments to be executed and delivered by the Company or the Stockholders
pursuant hereto nor the consummation by the Company or the Stockholders of the
transactions contemplated hereby or thereby: (a) will violate any provision of
the charter documents or Bylaws of the Company, each as currently in effect; (b)
subject to obtaining the required consents and approvals described in Schedule
--------
2.6, will violate or conflict with any applicable statute, law, ordinance, rule,
- ---
regulation, order, judgment or decree except that no representation or warranty
is made under this section with regard to laws referred to in Section 2.22; or
(c) subject to obtaining the required consents and approvals described in
Schedule 2.6, will violate or conflict with or constitute a default (or an event
- ------------
which, with notice or lapse of time, or both, would constitute a default) under,
or will result in the termination of, or accelerate the performance required by,
or result in the creation of any Security Interest (as defined in Section 2.12)
upon any of the properties of the Company under, any contract, commitment,
understanding, arrangement, agreement or restriction of any kind by which the
properties of the Company are bound or affected, or to which the Company or any
Stockholder is a party except for any such violation, conflict or default that
would not have a Material Adverse Effect. The term "Material Adverse Effect" as
used in this Agreement shall mean any change or effect or any prospective change
or effect that, individually or when taken together with other changes or
effects, is or is reasonably likely (whether now or after the Effective Time) to
be materially adverse to the medical practice conducted by the Stockholders (the
"Practice"), the financial condition or results of operation of the Company,
Flagship or PQC, the financial arrangements contemplated by the Employment
Agreements (as defined in Section 5.8(a)), the value to Flagship or PQC of their
affiliation with the Company and the Stockholders or any Party's ability to
consummate the transactions contemplated herein.
2.6 Consents; Filings. Except as set forth in Schedule 2.6 hereto, no
----------------- ------------
registration or filing with, or consent, approval, permit, authorization or
action by, any third-party (including, without limitation, any federal, state,
local, foreign or other governmental agency, instrumentality, commission,
authority, board or body or other person or entity (a "Governmental Entity") is
required in connection with the execution and delivery by the Company or any
Stockholder of this Agreement or the other agreements, documents and instruments
to be executed and delivered by Company or any Stockholder pursuant hereto or
the consummation by the Company or the Stockholders of the transactions
contemplated hereby or thereby.
2.7 Financial Statements. The Company has delivered to Flagship and
--------------------
PQC the balance sheets and statements of income of the Company for and as at the
fiscal years ended December 31, 1993, 1994 and 1995 (the "Financial Statements")
and the fiscal period ended June 30, 1996 (the "Interim Financial Statements"),
and such balance sheets and statements of income are true, complete and accurate
and fairly present the financial condition and results of operations for and as
at the end of the periods therein referred to on a stand-alone basis.
-6-
<PAGE>
2.8 Undisclosed Liabilities. To the best knowledge of the Company,
-----------------------
the Company has no liabilities or obligations (whether known or unknown, whether
absolute or contingent, whether liquidated or unliquidated and whether due or to
become due), except for (a) liabilities shown on the balance sheet referred to
in Section 2.7 for the period ended June 30, 1996 (the "Most Recent Balance
Sheet") or otherwise listed on Schedule 2.8(a) as being assumed by Flagship as
---------------
part of the Merger, or (b) liabilities which have arisen since the most recent
Financial Statements in the Ordinary Course of Business (as defined in Section
2.12).
2.9 No Material Adverse Change. Except as set forth in Schedule 2.9
-------------------------- ------------
hereto, to the best knowledge of the Company, no event with respect to the
Company or the Practice involving a Material Adverse Effect has occurred since
the date of the Financial Statements.
2.10 Compliance with Law. The Company has complied with, and the
-------------------
Practice has been conducted in compliance with, all applicable laws, regulations
and other requirements of all national governmental authorities, of all states,
municipalities and other political subdivisions and agencies thereof, having
jurisdiction over the Company or the Stockholders, including without limitation,
all such laws, regulations and requirements relating to antitrust, consumer
protection, employee benefit, equal opportunity, health, occupational safety,
pension, pollution or environmental protection matters, except for such
noncompliance as would not have a Material Adverse Effect. Neither the Company
nor any Stockholder has received any notification of any asserted present or
past failure to comply with such laws, rules or regulations.
2.11 Tax Matters.
-----------
(a) The Company has filed in a timely manner all Tax Returns (as
defined below) that it was required to file and all such Tax Returns were
correct and complete in all material respects. The Company has timely paid all
Taxes (as defined below) that are shown to be due on any such Tax Returns. The
unpaid Taxes of the Company for tax periods through the date of the Most Recent
Balance Sheet do not exceed the accruals and reserves for Taxes set forth on the
Most Recent Balance Sheet (excluding any accruals and reserves for deferred
Taxes established to reflect timing difference between book and Tax income). The
Company does not have any actual or potential liability for any Tax obligation
of any taxpayer (including without limitation any affiliated group of
corporations or other entities that included the Company during a prior period)
other than the Company. All Taxes that the Company is or was required by law to
withhold or collect have been duly withheld or collected and, to the extent
required, have been paid to the proper Governmental Entity. For purposes of this
Agreement, "Taxes" means all taxes, charges, fees, levies or other similar
assessments or liabilities, including without limitation income, gross receipts,
ad valorem, premium, value-added, excise, real property, personal property,
sales, use, transfer, withholding, employment, payroll and franchise taxes
imposed by the United States of America or any state, local or foreign
government, or any agency thereof, or other political subdivision of the United
States or any such government, and any interest, fines, penalties, assessments
or additions to tax resulting from, attributable to or incurred in connection
with any tax or any contest or dispute thereof. For purposes of this Agreement,
"Tax Returns" means all reports, returns, declarations, statements or other
information required to be supplied to a taxing authority in connection with
Taxes.
-7-
<PAGE>
(b) The Company has delivered to PQC correct and complete copies
of all federal income Tax Returns, examination reports and statements of
deficiencies assessed against or agreed to by the Company since the organization
of the Company. No examination or audit of any Tax Returns of the Company by any
Governmental Entity is currently in progress or, to the knowledge of the
Company, threatened or contemplated. The Company has not waived any statute of
limitations with respect to Taxes or agreed to an extension of time with respect
to a Tax assessment or deficiency.
(c) The Company is not a "consenting corporation" within the
meaning of Section 341(f) of the Code, and none of the assets of the Company are
subject to an election under Section 341(f) of the Code. The Company has not
been a United States real property holding corporation within the meaning of
Section 897(c)(2) of the Code during the applicable period specified in Section
897(c)(1)(A)(ii) of the Code. The Company is not a party to any Tax allocation
or sharing agreement.
(d) The Company is not nor has ever been a member of an
"affiliated group" of corporations (within the meaning of Section 1504 of the
Code).
(e) The Company is not a party to any agreement, contract,
arrangement or plan that has resulted or would result, separately or in the
aggregate, in the payment of any "parachute payments" within the meaning of
Section 280G of the Code.
2.12 Assets. The Company owns or leases all tangible assets necessary
------
for the conduct of the Practice. Each such tangible asset is free from material
defects, has been maintained in accordance with normal industry practice, is in
good operating condition and repair (subject to normal wear and tear) and is
suitable for the purposes for which it presently is used. Except as disclosed
on Schedule 2.12, no asset of the Company (tangible or intangible) is subject to
-------------
any Security Interest. The term "Security Interest" means any mortgage, pledge,
security interest, encumbrance, charge or other lien (whether arising by
contract or by operation of law), other than (i) mechanics', materialmen's and
similar liens, (ii) liens arising under worker's compensation, unemployment
insurance, social security, retirement and similar legislation and (iii) liens
on goods in transit incurred pursuant to documentary letters of credit, in each
case arising in the ordinary course of business consistent with past practice
(including with respect to frequency and amount) (the "Ordinary Course of
Business").
2.13 Leases.
------
(a) Schedule 2.13 contains a complete and accurate listing of all
-------------
leases (the "Leases") pursuant to which the Company leases real or personal
property, which listing sets forth a general description of the leased property
or items, the term, the annual rent, any and all renewal options, and any
requirements for the consent of third parties to assignments thereof. All such
Leases are valid, binding and enforceable in accordance with their terms and are
in full force and effect; no event of default has occurred which (whether with
or without notice, lapse of time or both or the happening or occurrence of any
other event) would constitute a default thereunder on the part of the Company;
and the Company has no knowledge of the occurrence of any event of default which
(whether with or without notice,
-8-
<PAGE>
lapse of time or both or the happening or occurrence of any other event) would
constitute a default thereunder by any other party.
(b) Except for Leases listed on Schedule 2.13, there are no
-------------
leases, subleases, licenses, occupancy agreements, options, rights, concessions
or other agreements or arrangements, written or oral, granting to any person the
right to purchase, use or occupy any facility occupied by the Company.
(c) With respect to each Lease, the Company has and will transfer
to Flagship at the Closing an unencumbered interest in the leasehold interest
covered thereby. The Company enjoys peaceful and undisturbed possession of all
the leased real property, and the Company has in all material respects performed
all the obligations required to be performed by it through the date hereof.
2.14 Contracts and Commitments.
-------------------------
(a) Schedule 2.14 sets forth a complete and accurate list of all
-------------
contracts known to the Company and the Stockholders after reasonable
investigation which have been entered into by the Company or any Stockholder
relating to the Practice and still in effect as of the date hereof (the
"Contracts"), of the following categories:
(i) Managed care contracts and other contracts with third-
party payors;
(ii) Employment or similar contracts and severance
agreements;
(iii) Contracts (other than Leases set forth on Schedule
--------
2.13) relating to the Company or the Practice which are not cancelable without
- ----
liability on thirty (30) calendar days (or less) notice;
(iv) Options with respect to any property, real or personal,
whether the Company is the grantor or grantee thereunder;
(v) Contracts involving expenditures or liabilities, actual
or potential, in excess of one thousand dollars ($1,000) or otherwise material
to the Practice or the Company;
(vi) Promissory notes, loans, agreements, indentures,
evidences of indebtedness, letters of credit, guarantees, or other instruments
relating to an obligation to pay money, individually in excess of or in the
aggregate in excess of one thousand dollars ($1,000), whether the Company shall
be the borrower, lender or guarantor thereunder or whereby any properties of the
Company are pledged;
(vii) Contracts containing covenants limiting the freedom of
the Company or any officer, director, employee, or stockholder of the Company,
to engage in any line of business or compete with any person; and
-9-
<PAGE>
(viii) Any Contract with the United States, state or local
government or any agency or department thereof.
The Company has made available to PQC true, correct and complete copies within
the Company's or a Stockholder's possession of, and all records relating to, all
of the Contracts listed on Schedule 2.14, including all amendments and
-------------
supplements thereto.
(b) Absence of Breaches or Defaults. To the knowledge of the
-------------------------------
Company or any Stockholder, all of the Contracts are valid and in full force and
effect. The Company and the Stockholders have duly performed all of its or their
obligations under the Contracts, and no violation of, or default or breach,
under any Contracts by the Company or any other party has occurred except for
any violations, defaults, or breaches that would not have a Material Adverse
Effect and neither Company nor any other party, to the best of Company's or any
Stockholder's knowledge after due inquiry, has repudiated any provisions
thereof.
2.15 Permits. The Company, the Stockholders and any other physicians
-------
employed by the Company have all licenses, permits, franchises, approvals,
authorizations, consents or orders of, or filings with ("Permits") any
Governmental Entity or any other person, necessary or desirable to conduct the
Practice as now being conducted, except where the failure to obtain such Permits
would not have a Material Adverse Effect. All Permits of the Company, each
Stockholder and any other physicians employed by the Company are valid and in
full force and effect and are listed on Schedule 2.15. Except as disclosed on
-------------
Schedule 2.15, no notice to, declaration, filing or registration with, or Permit
- -------------
or consent from, any governmental or regulatory body or authority, or any other
person or entity, is required to be made or obtained by the Company or any
Stockholder in connection with the execution, delivery or performance of this
Agreement and the consummation of the transactions contemplated hereby, except
as set forth on Schedule 2.15. No Stockholder has suffered any loss,
-------------
revocation, suspension, expiration without renewal or other failure to keep in
full force and effect and good standing the Stockholder's membership on the
medical staff of the hospitals listed for such Stockholder on Schedule 2.23, or
-------------
any material license, certification, accreditation, clinical privilege or other
right or authorization necessary for the unrestricted practice of medicine by
the Stockholder or for the conduct of the Practice as previously conducted.
2.16 Books and Records. The Company has made and kept (and given
-----------------
Flagship and PQC access to) books and records (including patient lists) and
accounts, which, in reasonable detail, accurately and fairly reflect the
activities of the Company.
2.17 Litigation. Except as set forth on Schedule 2.17, there is not,
---------- -------------
and during the past five (5) years there has not been any, action, order, writ,
injunction, judgment or decree outstanding or any claim, suit, litigation,
proceeding, labor dispute, arbitral action, governmental audit or investigation
(collectively, "Actions") pending or, to the best of the Company's or any
Stockholder's knowledge threatened (a) against, related to or affecting (i) the
Company, any of the Stockholders, the Practice or the assets of the Company,
(ii) any officers, directors or employees of the Company as such, or (iii) any
Stockholder of the Company in such Stockholder's capacity as a Stockholder of
the Company; (b) seeking to delay, limit or enjoin the transactions contemplated
by this Agreement; (c) that involves the risk of criminal liability (other than
minor traffic violations); or (d) in which the Company is
-10-
<PAGE>
a plaintiff. Neither the Company nor any Stockholder is in default with respect
to or subject to any judgment, order, writ, injunction or decree of any court or
governmental agency, and there are no unsatisfied judgments against the Company,
any of the Stockholders, the Practice or the Company's assets.
2.18 Transactions with Certain Persons. Except as set forth on
---------------------------------
Schedule 2.18, no officer, director or employee of the Company nor any member of
- -------------
any such person's immediate family is presently, or within the past two (2)
years has been a party to any transaction with the Company relating to the
Practice with an aggregate annual value of more than one thousand dollars
($1,000) to the Company or the other parties thereto, including, without
limitation, any contract, agreement or other arrangement (a) providing for the
furnishing of services by, (b) providing for the rental of real or personal
property from, or (c) otherwise requiring payments to (other than for services
as officers, directors or employees of the Company) any such person or
corporation, partnership, trust or other entity in which any such person has an
interest as a stockholder, officer, director, trustee or partner, except that
the Company provides certain medical services to employees and family members as
set forth on Schedule 2.18.
-------------
2.19 Insurance. Schedule 2.19 contains a complete and accurate list
--------- -------------
of all policies or binders of fire, liability, title, worker's compensation,
malpractice and other forms of insurance (showing as to each policy or binder
the carrier, policy number, coverage limits, expiration dates, annual premiums
and a general description of the type of coverage provided) maintained by the
Company on any of its assets, the Stockholders, the Practice or the Company's
employees. Such insurance provides, and during such period provided, coverage
to the extent and in the manner (a) customary for a medical practice and (b) as
may be required by applicable law and by any and all Contracts known to the
Company or any Stockholder to which the Company is a party. The Company is not
in default under any of such policies or binders, and the Company has not failed
to give any notice or to present any claim under any such policy or binder in a
due and timely fashion. No insurer has advised the Company that it intends to
reduce coverage, increase premiums or fail to renew an existing policy or
binder. There are no outstanding unpaid claims under any such policies or
binders. All policies and binders provide sufficient coverage for the risks
insured against, and are in full force and effect on the date hereof and shall
be kept in full force and effect through the Closing Date.
2.20 Brokers. The Company is not obligated to pay, nor has the
-------
Company retained any broker or finder or other person who is entitled to, any
broker's or finder's fee or any other commission or financial advisory fee based
on any agreement or understanding made by the Company in connection with the
transactions contemplated hereby.
2.21 Benefit Plans.
-------------
(a) Except as set forth in Schedule 2.21, the Company is not a
-------------
party to any pension, retirement, profit sharing, savings, bonus, incentive,
deferred compensation, group health insurance or group life insurance plan or
any similar obligation (an "Employee Benefit Plan"), or to any collective
bargaining agreement or other contract, written or oral, with any trade or labor
union, employees; association or similar organization. Except as set forth in
Schedule 2.21, the Company does not have any obligations to provide to its
- -------------
active employees
-11-
<PAGE>
or current retirees any post-retirement non-pension benefits. No Stockholder
has any present intention of discontinuing the Stockholder's medical practice
with the Company except to become an employee of Flagship.
(b) The Company (i) is and has been in compliance in all material
respects with all applicable laws respecting employment and employment
practices, terms and conditions of employment, and wages and hours, (ii) has
made all contributions required to be made under any state unemployment or
disability laws or regulations and has accrued the amount of any such
contribution required for any period prior to the Closing Date which is not yet
due and payable and (iii) is not engaged in any unfair labor practice, and there
are no arrears in the payment of wages or taxes with respect to employees.
(c) Except as set forth in Schedule 2.21, no employee has any
-------------
claims pending against Company (whether under any law, any employment agreement
or otherwise) on account of or for: (i) overtime pay, other than overtime pay
for the current payroll period, (ii) wages or salary (excluding bonuses and
amounts accruing under pension and profit sharing plans) for any period other
than the current payroll period, (iii) vacation, time off or pay in lieu of
vacation or time off, other than that earned in respect of the current fiscal
year, (iv) any violation of any statute, ordinance or regulation relating to
minimum wages or maximum hours of work or (v) the Employee Retirement Income
Security Act of 1974, as amended ("ERISA").
(d) Except as set forth on Exhibit 2.21 (which liabilities will be
------------
discharged on or prior to the Closing Date) the Company is not, and neither PQC
nor Flagship shall be, pursuant to any employment agreement, employee benefit
plan or other law, arrangement or understanding, obligated to pay or be liable
for the payment of any compensation (including accrued vacation), severance pay
or other benefit (including any disability benefit or payment or any unfunded
liabilities relating to pension benefits) by reason of the voluntary or
involuntary termination at or prior to the Effective Time of employment of any
employee, or the consummation of the transactions contemplated by this
Agreement.
(e) Each employee benefit plan of the Company intended to be
qualified under Section 401(a) of the Code has received a favorable
determination letter and the Company or any entity which, within the last five
(5) years, has been under common control or affiliated with Company (an "ERISA
Affiliate") within the meaning of Section 414(b), (c) or (m) of the Code, and
each employee benefit plan of the Company is in compliance in all material
respects with the requirements prescribed by any and all statutes, orders or
governmental rules or regulations currently in effect, including, but not
limited to, ERISA and the Code, applicable to such employee benefit plans and
the Company is in compliance in all material respects with its obligations under
the terms of such plans. None of the employee benefit plans are subject to Title
IV of ERISA. Neither the Company nor any ERISA Affiliate has ever been obligated
to contribute to any "multi-employer plan" as such term is defined in Section
III(37) of ERISA. No employee benefit plan of the Company or any ERISA Affiliate
has engaged in any prohibited transaction as such term is defined in Section
4975 of the Code or Section 406 of ERISA.
2.22 Fraud and Abuse; Stark Law. Except as set forth in Schedule 2.22
-------------------------- -------------
hereto, neither the Company nor any of the Stockholders, nor, to the knowledge
of the Company or
-12-
<PAGE>
any Stockholders, any other persons or entities providing professional services
for the Practice, have engaged in any activities which are prohibited under 42
U.S.C. (S)1320a-7b or 42 U.S.C. (S)1395nn et seq., or the regulations
-- ---
promulgated thereunder pursuant to such statutes, or related state or local
statutes or regulations, or which are prohibited by rules of professional
conduct, including but not limited to the following: (i) knowingly and willfully
making or causing to be made a false statement or representation of a material
fact in any application for any benefit or payment; (ii) knowingly and willfully
making or causing to be made any false statement or representation of a material
fact for use in determining rights to any benefit or payment; (iii) failure to
disclose knowledge by a claimant of the occurrence of any event affecting the
initial or continued right to any benefit or payment on its own behalf or on
behalf of another, with intent to fraudulently secure such benefit of payment;
(iv) knowingly and willfully soliciting or receiving any remuneration (including
any kickback, bribe or rebate), directly or indirectly, overtly or covertly, in
cash or in kind or offering to pay or receive such remuneration (a) in return
for referring an individual to a person for the furnishing or arranging for the
furnishing of any item or service for which payment may be made in whole or in
part by Medicare or Medicaid, or (b) in return for purchasing, leasing, or
ordering or arranging for or recommending purchasing, leasing, or ordering any
good, facility, service, or item for which payment may be made in whole or in
part by Medicare or Medicaid; and (v) referring a patient for Designated Health
Services (within the meaning of 42 U.S.C. (S)1395nn) when the referring
physician has a financial relationship with the entity to which the referral is
made in the absence of an applicable exception under 42 U.S.C. (S)1395nn.
2.23 Hospital Privileges. Schedule 2.23 hereto lists all of the
------------------- -------------
hospitals at which each Stockholder is a member of the medical staff.
2.24 Employment Agreements. No event permitting termination under the
---------------------
Employment Agreements, if they were in effect at such time of such event, shall
have occurred at any time prior to the Closing Date. Except as set forth on
Schedule 2.24, no Stockholder has any current intention of terminating an
- -------------
Employment Agreement with Flagship prior to the termination of its initial five
(5) year term.
2.25 Inventory. All inventory of the Company consists of a quality
---------
and quantity usable in the Ordinary Course of Business, except for items which
have been written off or written down to their net realizable value on the Most
Recent Balance Sheet. All inventory not written off has been priced at the
lower of cost or market. The quantities of each type of inventory are not
excessive in the present circumstances of the Company.
2.26 Powers of Attorney. There are no outstanding powers of attorney
------------------
executed on behalf of the Company.
2.27 Employees. Schedule 2.27 contains a list of all employees of the
--------- -------------
Company, other than the Stockholders, along with the position and the rate of
compensation of each such person. To the knowledge of the Company or any of the
Stockholders, no employee or group of employees has any plans to terminate
employment with the Company or not to continue as an employee of the Surviving
Corporation after the Effective Time. The Company is not a party to or bound by
any collective bargaining agreement, nor has it experienced any strikes,
grievances, claims of unfair labor practices or other collective bargaining
disputes.
-13-
<PAGE>
2.28 Environmental Matters.
---------------------
(a) The Company has complied with all applicable Environmental Laws (as
defined below). There is no pending or, to the knowledge of the Company or any
Stockholder, threatened civil or criminal litigation, written notice of
violation, formal administrative proceeding, or investigation, inquiry or
information request by any Governmental Entity, relating to any Environmental
Law involving the Company. For purposes of this Agreement, "Environmental Law"
means any federal, state or local law, statute, rule or regulation or the common
law relating to the environment or occupational health and safety, including
without limitation any statute, regulation or order pertaining to (i) treatment,
storage, disposal, generation and transportation of industrial, toxic or
hazardous substances or solid or hazardous waste; (ii) air, water and noise
pollution; (iii) groundwater and soil contamination; (iv) the release or
threatened release into the environment of industrial, toxic or hazardous
substances, or solid or hazardous waste, including without limitation emissions,
discharges, injections, spills, escapes or dumping of pollutants, contaminants
or chemicals; (v) underground and other storage tanks or vessels, abandoned,
disposed or discarded barrels, containers and other closed receptacles; (vi)
health and safety of employees and other persons; and (vii) manufacture,
processing, use, distribution, treatment, storage, disposal, transportation or
handling of pollutants, contaminants, chemicals or industrial, toxic or
hazardous substances or oil or petroleum products or solid or hazardous waste.
As used above, the terms "release", and "environment" shall have the meaning set
forth in the federal Comprehensive Environmental Compensation, Liability and
Response Act of 1980 ("CERCLA").
(b) There have been no releases of any Materials of Environmental
Concern (as defined below) into the environment at any parcel of real property
or any facility formerly or currently owned, operated or controlled by the
Company. With respect to any such releases of Materials of Environmental
Concern, the Company has given all required notices to Governmental Entities
(copies of which have been provided to PQC in its due diligence process). The
Company is not aware of any releases of Materials of Environmental Concern at
parcels of real property or facilities other than those owned, operated or
controlled by the Company that could reasonably be expected to have an impact on
the real property or facilities owned, operated or controlled by the Company.
For purposes of this Agreement, "Materials of Environmental Concern" means any
chemicals, pollutants or contaminants, hazardous substances (as such term is
defined under CERCLA), solid wastes and hazardous wastes (as such terms are
defined under the federal Resources Conservation and Recovery Act), toxic
materials, oil or petroleum and petroleum products.
(c) Set forth in Schedule 2.28 is a list of all environmental reports,
-------------
investigations and audits relating to premises currently or previously owned or
operated by the Company (whether conducted by or on behalf of the Company or a
third party, and whether done at the initiative of the Company or directed by a
Governmental Entity or other third party) which the Company has possession of or
access to.
2.29 Disclosure. No representation or warranty by the Company
----------
contained in this Agreement or in any other document delivered to Flagship or
PQC in connection with their due diligence investigation of the Company, taken
as a whole, contains or will contain any untrue statement of a material fact or
omits or will omit to state any material fact necessary,
-14-
<PAGE>
in light of the circumstances under which it was or will be made, in order to
make the statements herein or therein not misleading. The Company and the
Stockholders have disclosed to PQC all material information relating to the
Practice, the Company, the Stockholders and the transactions contemplated by
this Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PQC
AND FLAGSHIP
Each of Flagship and PQC jointly and severally represents and warrants to
the Company and the Stockholders as of the date hereof and as of the Effective
Time as follows:
3.1 Organization. Each of Flagship and PQC is a corporation duly
------------
organized, validly existing and in good standing under the laws of the
jurisdictions of their incorporation, and each of Flagship and PQC has the power
and authority to carry on its business as presently being conducted. PQC has
provided the Company with complete and accurate copies of the Certificate of
Incorporation and bylaws of PQC and the Articles of Incorporation and bylaws of
Flagship. Flagship and PQC each is duly qualified and is in good standing as a
foreign corporation in each jurisdiction where the nature of its business,
properties or other activities requires it to be qualified.
3.2 Capitalization of Flagship and PQC. Schedule 3.2 accurately sets
----------------------------------
forth the authorized and outstanding capital stock of each of Flagship and PQC
and sets forth a complete and accurate list of all stockholders of each of those
companies indicating the number and class of shares held by each stockholder.
The authorized capital stock of PQC consists of 75,000,000 shares of Class A
Common Stock, par value $0.01 per share, of which 11,979,447 shares are
outstanding, 15,267,915 shares of Class B-1 Common Stock, par value $0.01 per
share of which 1,587,863 shares are outstanding, 9,732,085 shares of Class B-2
Common Stock, par value $0.01 per share, of which 1,012,137 shares are
outstanding, and 10,000,000 shares of Preferred Stock, par value $0.01 per
share, of which no shares are outstanding. Except for Physicians Quality Care
of Massachusetts, Inc. and Physician Quality Care of Maryland, Inc., PQC is not
the owner of record of the equity securities of any issuer. On the Closing Date,
Flagship's authorized capital stock will consist of 1,000 shares of common
stock, $5.00 par value per share, of which 1,000 shares will be outstanding.
Except as set forth in Schedule 3.2, there are not, and on the Closing Date
------------
there will not be, outstanding (i) any options, warrants or other rights to
purchase any capital stock of PQC or Flagship; (ii) any securities convertible
into or exchangeable for shares of such stock; or (iii) any other commitments of
any kind for the issuance of additional shares of capital stock or options,
warrants or other securities of PQC or Flagship. Except as disclosed on
Schedule 3.2, there are no agreements, voting trusts, proxies or understandings
- ------------
with respect to the voting, or registration under the Securities Act of any
shares of PQC or Flagship except for the Shareholder Designation and Stock
Transfer Agreement by and among PQC, Flagship and the sole shareholder of
Flagship dated as of the date hereof (the "Designation Agreement"). All of the
issued and outstanding shares of PQC or Flagship were issued in compliance with
applicable federal and state securities laws.
-15-
<PAGE>
3.3 Authorization. The Board of Directors of each of Flagship and
-------------
PQC has duly authorized the execution and delivery of this Agreement and the
other agreements, documents and instruments to be executed and delivered by
Flagship and PQC pursuant hereto and the consummation by Flagship and PQC of the
transactions contemplated hereby and thereby. No further corporate or other
proceedings on the part of PQC or Flagship are necessary to authorize this
Agreement or the other agreements, documents and instruments to be executed and
delivered by PQC pursuant hereto or the transactions contemplated hereby or
thereby.
3.4 Valid and Binding Agreement. Each of Flagship and PQC has the
---------------------------
necessary power and authority to enter into this Agreement and the other
agreements, documents and instruments to be executed and delivered by Flagship
and PQC pursuant hereto, and to carry out the transactions contemplated hereby
and thereby. When fully executed and delivered, this Agreement and each of the
other agreements, documents and instruments to be executed and delivered by
Flagship and PQC pursuant hereto will constitute valid and binding agreements of
Flagship and PQC, enforceable against them in accordance with their terms,
except to the extent that enforceability is limited pursuant to bankruptcy or
similar laws or by general principles of equity.
3.5 No Violation. Neither the execution and delivery of this
------------
Agreement or the other agreements, documents and instruments to be executed and
delivered by Flagship and PQC pursuant hereto nor the consummation by Flagship
and PQC of the transactions contemplated hereby or thereby (a) will violate any
provision of the Certificate of Incorporation or bylaws of PQC or the Articles
of Incorporation or bylaws of Flagship, each as currently in effect, (b) will
violate or conflict with any applicable statute, law, ordinance, rule,
regulation, order, judgment or decree, except that no representation or warranty
is made under this Section with regard to the laws referred to in Section 3.9,
or (c) will violate any contract or commitment which violation would have the
effect of preventing PQC or Flagship from performing its obligations hereunder
or preventing PQC or Flagship or any of their respective affiliates from
consummating the transactions contemplated herein and in the agreements and
instruments to be executed and delivered by Flagship and PQC and their
respective affiliates in connection therewith.
3.6 Consents; Filings. No registration or filing with, or consent,
-----------------
approval, permit, authorization or action by, any third party (including,
without limitation, any federal, state, local, foreign or other governmental
agency, instrumentality, commission, authority, board or body or other person or
entity) is required to be made by Flagship or PQC in connection with the
execution and delivery by Flagship and PQC of this Agreement or the other
agreements, documents and instruments to be executed and delivered by Flagship
and PQC pursuant hereto or the consummation by Flagship and PQC of the
transactions contemplated hereby or thereby.
3.7 Capital Stock. All shares of Common Stock issued to any
-------------
Stockholder in connection with the transactions contemplated by this Agreement
shall be duly authorized, validly issued, fully paid and nonassessable and not
subject to any pre-emptive rights created by statute, PQC's Certificate of
Incorporation or bylaws, or any agreement (other than the Stockholders
Agreement) to which PQC is a party or by which PQC is bound.
-16-
<PAGE>
3.8 Brokers. Neither PQC nor Flagship is obligated to pay, nor has
-------
PQC or Flagship retained any broker or finder or other person who is entitled
to, any broker's or finder's fee or any other commission or financial advisory
fee based on any agreement or understanding made by PQC or Flagship in
connection with the transactions contemplated hereby.
3.9 Fraud and Abuse; Stark Law. Neither Flagship nor PQC has engaged
--------------------------
in any activities which are prohibited under 42 U.S.C. (S)1320a-7b or 42 U.S.C.
(S)1395nn et seq., or the regulations promulgated thereunder pursuant to such
-- ---
statutes, or related state or local statutes or regulations, or which are
prohibited by rules of professional conduct, including but not limited to the
following: (i) knowingly and willfully making or causing to be made a false
statement or representation of a material fact in any application for any
benefit or payment; (ii) knowingly and willfully making or causing to be made
any false statement or representation of a material fact for use in determining
rights to any benefit or payment; (iii) failure to disclose knowledge by a
claimant of the occurrence of any event affecting the initial or continued right
to any benefit or payment on its own behalf or on behalf of another, with intent
to fraudulently secure such benefit of payment; (iv) knowingly and willfully
soliciting or receiving any remuneration (including any kickback, bribe or
rebate), directly or indirectly, overtly or covertly, in cash or in kind or
offering to pay or receive such remuneration (a) in return for referring an
individual to a person for the furnishing or arranging for the furnishing of any
item or service for which payment may be made in whole or in part by Medicare or
Medicaid, or (b) in return for purchasing, leasing, or ordering or arranging for
or recommending purchasing, leasing, or ordering any good, facility or item for
which payment may be made in whole or in part by Medicare or Medicaid; and (v)
referring a patient for Designated Health Services (within the meaning of 42
U.S.C. (S)1395nn) when the referring physician has a financial relationship with
the entity to which the referral is made in the absence of an applicable
exception under 42 U.S.C. (S)1395nn.
3.10 Litigation. Except as set forth on Schedule 3.10, there is not,
---------- -------------
and during the past five (5) years there have not been any Actions pending or,
to the best of Flagship and PQC's knowledge: (a) threatened against, related to
or affecting (i) PQC or Flagship, (ii) any officers, directors or employees of
Flagship or PQC as such, or (iii) any shareholder of Flagship or PQC in such
shareholder's capacity as a shareholder of Flagship or PQC; (b) seeking to
delay, limit or enjoin the transactions contemplated by this Agreement; (c) that
involves the risk of criminal liability; or (d) in which Flagship or PQC is a
plaintiff. Neither Flagship nor PQC is in default with respect to or subject to
any judgment, order, writ, injunction or decree of any court or governmental
agency, and there are no unsatisfied judgments against Flagship or PQC.
3.12 Disclosure. No representation or warranty by Flagship or PQC
----------
contained in this Agreement or in any other document delivered to the Company in
connection with its due diligence investigation of Flagship or PQC, taken as a
whole, contains or will contain any untrue statement of a material fact or omits
or will omit to state any material fact necessary, in light of the circumstances
under which it was or will be made, in order to make the statements herein or
therein not misleading. Flagship and PQC have disclosed to the Company all
material information relating to Flagship and PQC.
-17-
<PAGE>
ARTICLE IV
COVENANTS
4.1 Reasonable Efforts to Close. Each of Company, the Stockholders,
---------------------------
Flagship and PQC shall use its or their respective reasonable efforts to proceed
to the closing of the transactions contemplated hereby and to satisfy any of the
conditions precedent to the other Parties' obligations set forth in Articles V
and VI to the extent such conditions are within such Party's control.
4.2 Notices and Consents. The Company and each Stockholder shall use
--------------------
its best efforts to obtain, at its expense, all such waivers, permits, consents,
approvals or other authorizations from third parties and Governmental Entities,
and to effect all such registrations, filings and notices with or to third
parties and Governmental Entities, as may be required by or with respect to the
Company or any Stockholder in connection with the transactions contemplated by
this Agreement, including without limitation those listed in Schedule 2.6.
------------
4.3 Conduct of Business. Without the prior written consent of PQC
-------------------
(which consent shall not be unreasonably withheld), the Company shall not and
the Stockholders shall not permit the Company to:
(a) take any action to amend the Company's Articles of Incorporation or
bylaws or other organizational documents;
(b) issue any stock, bonds or other corporate securities or grant any
option or issue any warrant to purchase or subscribe to any of such securities
or issue any securities convertible into such securities or authorize the
transfer of any of its outstanding capital stock;
(c) split, combine or reclassify any shares of its capital stock;
declare, set aside or pay any dividend or other distribution (whether in cash,
stock or property or any combination thereof) in respect of its capital stock;
(d) incur any obligations or liabilities (absolute or contingent)
greater than one thousand dollars ($1,000) in the aggregate, except current
liabilities incurred and obligations under contracts entered into in the
Ordinary Course of Business;
(e) acquire, sell, lease, encumber or dispose of any assets or
property, corporation, partnership, association or other business, other than
purchases and sales of assets in the Ordinary Course of Business;
(f) discharge or satisfy any Security Interest or pay any obligation
or liability other than in the Ordinary Course of Business;
(g) mortgage or pledge any of its property or assets or subject any
such assets to any Security Interest;
-18-
<PAGE>
(h) take any action or fail to take any action within their respective
control and permitted by this Agreement with the knowledge that such action or
failure to take action would result in (i) any of the representations and
warranties of the Company and the Stockholders set forth in this Agreement
becoming untrue or (ii) any of the conditions to the Merger set forth in Article
V not being satisfied;
(i) merge or consolidate with or into any corporation or other entity;
(j) make, accrue or become liable for any bonus, profit sharing or
incentive payment, except for accruals under existing plans, if any, or increase
the rate of compensation payable or to become payable by it to any of its
officers, directors or employees, other than increases in the Ordinary Course of
Business consistent with past practice;
(k) make any election or give any consent under the Code or the tax
statutes of any state or other jurisdiction or make any termination, revocation
or cancellation of any such election or any consent or compromise or settle any
claim for past or present tax due;
(1) waive any rights of material value;
(m) modify, amend, alter or terminate any of its executory contracts
of a material value or which are material in amount;
(n) take any act or permit to occur any omission constituting a breach
or default under any contract, indenture or agreement by which it or its
properties are bound;
(o) fail to use its reasonable efforts to: (i) preserve the
possession and control of its assets and the Practice; (ii) keep in faithful
service its present officers and employees; (iii) preserve the goodwill of its
patients, suppliers, agents, brokers and others having business relations with
it; and (iv) keep and preserve its business existing on the date hereof until
after the Closing Date;
(p) fail to operate its business and maintain its books, accounts and
records in the customary manner and in the Ordinary Course of Business and
maintain in good repair its business premises, fixtures, machinery, furniture
and equipment;
(q) enter into any leases, contracts, agreements or understandings
which are required to be performed in whole or in material part after the
Closing Date;
(r) engage any new employee except in the Ordinary Course of Business;
(s) materially alter the terms, status or funding condition of any
Employee Benefit Plan; or
(t) commit or agree to do any of the foregoing in the future.
-19-
<PAGE>
4.4 Access to Management, Properties and Records. From the date of
--------------------------------------------
this Agreement until the Closing Date, the Company shall afford the officers,
attorneys, accountants and other authorized representatives of PQC free and full
access upon reasonable notice and during normal business hours to all management
personnel, offices, properties, books and records of the Company, and all
properties under the management of the Company and all records relating thereto,
so that PQC may have full opportunity to make such investigation as it shall
desire to make of the management, business, properties and affairs of the
Company and the properties under the management of the Company, and PQC shall be
permitted to make abstracts from, or copies of, all such books and records. The
Company shall furnish to PQC such financial and operating data and other
information as to the business of the Company as PQC shall reasonably request.
4.5 Taxes. The Company and the Stockholders will, on a timely basis,
-----
file all Tax Returns for and pay any and all taxes which shall become due on or
prior to the Closing Date.
4.6 Compliance with Laws. The Company and the Stockholders will
--------------------
comply in all material respects with all laws and regulations which are
applicable to it or each of them and the Practice or to the conduct of its
Practice and will perform and comply in all material respects with all
contracts, commitments and obligations by which it or each of them is bound.
4.7 Exclusive Dealing. The Company and the Stockholders will not,
-----------------
directly or indirectly, through any officer, director, agent or otherwise, (a)
solicit, initiate or encourage submission of proposals or offers from any person
relating to any affiliation transaction between the Company or the Stockholders
and any health care company or practice management company or any acquisition or
purchase of all or a material portion of the assets of the Company, or any
equity interest in the Company or any equity investment, merger, consolidation
or business combination with the Company, or (b) participate in any discussions
or negotiations regarding, or furnish to any other person, any non- public
information with respect to, or otherwise cooperate in any way with, or assist
or participate in, facilitate or encourage, any effort or attempt by any other
person to do or seek any of the foregoing except to inform such person of the
Company's obligations hereunder.
4.8 Notice of Breaches. The Company shall promptly deliver to PQC
------------------
written notice of any event or development that would (a) render any statement,
representation or warranty of the Company in this Agreement (including the
Disclosure Schedule) inaccurate or incomplete in any material respect, or (b)
constitute or result in a breach by the Company of, or a failure by the Company
to comply with, any agreement or covenant in this Agreement applicable to such
Party. PQC or Flagship shall promptly deliver to the Company written notice of
any event or development that would (i) render any statement, representation or
warranty of PQC or Flagship in this Agreement inaccurate or incomplete in any
material respect, or (ii) constitute or result in a breach by PQC or Flagship
of, or a failure by PQC or Flagship to comply with, any agreement or covenant in
this Agreement applicable to such Party. No such disclosure shall be deemed to
avoid or cure any such misrepresentation or breach.
4.9 Severance Obligations. The Company shall satisfy all severance
---------------------
obligations
-20-
<PAGE>
related to each person employed by the Company prior to or at the Closing Date
who is, or as a consequence of the transactions contemplated by this Agreement
will be, entitled to any severance or compensation from the Company or any
Stockholder.
4.10 Confidentiality. All information not previously disclosed to
---------------
the public or generally known to persons engaged in the respective businesses of
the Company or PQC which shall have been furnished by PQC or the Company to the
other Party in connection with the transactions contemplated hereby or as
provided pursuant to this Agreement shall not be disclosed to any person other
than their respective employees, directors, attorneys, accountants or financial
advisors or other than as expressly contemplated herein or as required by law or
legal process. In the event that the transactions contemplated by this
Agreement shall not be consummated, all such information which shall be in
writing shall upon request be returned to the Party furnishing the same,
including, to the extent reasonably practicable, all copies or reproductions
thereof which may have been prepared, and none of the Parties, without the
consent of PQC and the Company, shall at any time thereafter disclose to third
parties, or use, directly or indirectly, for its or their own benefit, any such
information, written or oral, about the business of the other Party hereto.
4.11 Provision of Certain Closing Date Financial Information. Two
-------------------------------------------------------
(2) days prior to the Closing Date, the Company shall deliver to Flagship and
PQC a certificate setting forth in detail to the best of the Company's
knowledge; (i) all liabilities of the Company, including liabilities for accrued
vacation and any Employee Benefit Plan (as defined in Section 2.21) that shall
accrue on or before the Closing Date but shall remain unpaid on the Closing
Date; (ii) all prepaid expenses of the Company that relate to a period
subsequent to the Closing Date; and (iii) all cash, cash equivalents and
accounts receivables expected to be reflected in accordance with generally
accepted accounting principals on the Company's records on the Closing Date.
4.12 Continuing Obligation to Inform. From time to time prior to the
-------------------------------
Closing, the Parties shall deliver or cause to be delivered to the other Parties
supplemental information concerning events subsequent to the date hereof which
would render any statement, representation or warranty in this Agreement or any
information contained in any Schedule inaccurate or incomplete in any material
respect at any time after the date hereof until the Closing Date.
ARTICLE V
CONDITIONS TO FLAGSHIP'S AND PQC'S OBLIGATIONS
The obligation of each of Flagship and PQC to consummate the Merger is
subject to the satisfaction on the Closing Date of the following conditions
precedent, each of which may be waived in writing by Flagship and PQC:
5.1 Approval of Merger. This Agreement and the Merger shall have
------------------
been unanimously approved by the Board of Directors of the Company and the
Stockholders and no Stockholder shall be entitled to exercise appraisal rights.
-21-
<PAGE>
5.2 Continued Truth of Representations and Warranties of The Company;
-----------------------------------------------------------------
Compliance with Covenants and Obligations. The representations and warranties
- -----------------------------------------
of the Company and the Stockholders shall be true on and as of the Closing Date
as though such representations and warranties were made on and as of such date,
except for any changes permitted by the terms hereof or consented to in writing
by Flagship and PQC. The Company and the Stockholders shall have performed and
complied with all terms, conditions, covenants, obligations, agreements and
restrictions required by this Agreement to be performed or complied with by it
prior to or at the Closing Date.
5.3 No Proceedings or Litigation. No action by any Governmental
----------------------------
Entity or other person shall have been instituted or threatened which questions
the validity or legality of the transactions contemplated hereby and which could
reasonably be expected to result in a Material Adverse Effect. There shall not
be any statute, rule or regulation that makes the Merger or the other
transactions contemplated hereby illegal or otherwise prohibited.
5.4 Material Changes. Between the date of the Interim Financial
----------------
Statements and the Closing, there shall not have been any material adverse
change in the business, prospects, operations or conditions of the Company or
the Practice.
5.5 Stockholders Agreement. The Stockholders shall have become
----------------------
parties to and be in compliance with the Stockholders Agreement.
5.6 Other Transactions. Each of the practices listed on Schedule 5.6
------------------ ------------
shall have entered into or delivered (i) an agreement among PQC, Flagship and
such practice to merge such practice into Flagship or for Flagship to purchase
substantially all the assets of such practice, and (ii) employment agreements
with Flagship signed by each physician currently a stockholder, partner or
employee of such Practice.
5.7 Financing. There shall have been no material modification to the
---------
Class B Common Stock and Warrant Purchase Agreement, by and among PQC and Bain
Capital Fund V, L.P., Bain Capital Fund V-B, L.P., BCIP Associates, and BCIP
Trust Associates, L.P. dated as of August 30, 1996 (the "Bain Agreement"), to
furnish capital to PQC and the Bain Agreement shall still be in full force and
effect.
5.8 Closing Deliveries. Simultaneously with the Closing, the Company
------------------
and the Stockholders shall deliver or cause to be delivered to PQC the
following:
(a) employment agreements (the "Employment Agreements") between
Flagship and each of the Stockholders and any other physician employed by the
Practice, in the form attached hereto as Exhibit B;
----------
(b) an Instrument of Joinder to Stockholders Agreement executed by
each of the Stockholders in a form reasonably acceptable to PQC;
(c) [Reserved];
(d) certificates of duly authorized officers of the Company, dated the
Closing Date, setting forth the resolutions of the Board of Directors and
Stockholders of the
-22-
<PAGE>
Company authorizing the execution and delivery by the Company of this Agreement
and the consummation of the transactions contemplated hereby, and certifying
that such resolutions were duly adopted and have not been rescinded or amended;
(e) [Reserved.]
(f) a report of a reputable lien search firm indicating that there are
no liens of record against any of the Company's assets (except for liens which
are (i) acceptable to Flagship and PQC in their sole discretion or (ii) arising
under equipment leases listed on Schedule 5.8(f));
-----------------
(g) the consent of the landlord to the assignment of each Lease,
together with any non-disturbance and recognition agreements required by PQC
from the lessor;
(h) a release from any party with a mortgage or lien on any of the
assets of the Company, except for liens which, pursuant to subsection (f) of
this Section 5.8, are acceptable to Flagship and PQC;
(i) the consents of all parties necessary for the consummation of the
Merger and to consummate the other transactions contemplated by this Agreement;
(j) a tax lien waiver, if required, from the Comptroller of the
Treasury of the State of Maryland; and
(k) such other agreements, consents and documents as PQC and Flagship
shall reasonably request in connection with (i) their due diligence
investigation of the Company, (ii) the affiliation of the Stockholders with
Flagship and PQC, (iii) the transactions contemplated by this Agreement and the
Employment Agreements.
ARTICLE VI
CONDITIONS TO OBLIGATIONS OF THE COMPANY AND THE STOCKHOLDERS
The obligations of Company and the Stockholders under this Agreement
are subject to the fulfillment, at the Closing Date, of the following conditions
precedent, each of which may be waived in writing in the sole discretion of
Company:
6.1 Continued Truth of Representations and Warranties of PQC and
------------------------------------------------------------
Flagship; Compliance with Covenants and Obligations. The representations and
- ---------------------------------------------------
warranties of Flagship and PQC shall be true on and as of the Closing Date as
though such representations and warranties were made on and as of such date,
except for any changes permitted by the terms hereof or consented to in writing
by the Company. Flagship and PQC shall have performed and complied with all
terms, conditions, covenants, obligations, agreements and restrictions required
by this Agreement to be performed or complied with by it prior to or at the
Closing Date.
6.2 No Proceedings or Litigation. No action by any Governmental
----------------------------
Entity or other person shall have occurred or shall have been instituted or
threatened which questions the validity or legality of the transactions
contemplated hereby and which could reasonably be
-23-
<PAGE>
expected to result in a Material Adverse Effect. There shall not be any
statute, rule or regulation that makes the Merger or the other transactions
contemplated hereby illegal or otherwise prohibited.
6.3 Offers of Employment. Flagship shall have extended offers of
--------------------
employment upon the same financial terms as the employee received from the
Company on the date of execution hereof, subject to any subsequent changes
acceptable to the Company and PQC, to the persons listed on Schedule 6.3.
------------
6.4 Financing. There shall have been no material modification to the
---------
Bain Agreement, and the Bain Agreement shall still be in full force and effect.
6.5 Deliveries by PQC. Simultaneously with the Closing, PQC shall
-----------------
deliver or cause to be delivered to the Stockholders the following:
(a) the Merger Consideration.
(b) certificates of duly authorized officers of Flagship and PQC,
dated the Closing Date, setting forth the resolutions of the Board of Directors
of Flagship and PQC authorizing the execution and delivery by Flagship and PQC
of this Agreement and the consummation of the transactions contemplated hereby,
and certifying that such resolutions were duly adopted and have not been
rescinded or amended;
(c) such other instruments, consents and documents as the Company
shall reasonably request in connection with (i) its due diligence investigation
of PQC and (ii) the transactions contemplated by this Agreement.
6.6 Material Changes. Between June 1, 1996 and the Closing, there
----------------
shall not have been any Material Adverse Change in the business, prospects,
operations or conditions of Flagship or PQC.
6.7 Other Transactions. Each of the practices listed on Schedule 5.6
------------------ ------------
shall have entered into or delivered (i) an agreement among PQC, Flagship and
such practice to merge such practice into Flagship or for Flagship to purchase
substantially all the assets of such practice, and (ii) employment agreements
with Flagship signed by each physician currently a stockholder, partner or
employee of such Practice.
6.8 Services Agreement. PQC and Flagship shall have mutually
------------------
executed and delivered to each other the Services Agreement in the form and
substance attached hereto as Exhibit C.
---------
6.9 PQC and Flagship Closing Conditions. Each of the conditions
-----------------------------------
precedent set forth in Article V above shall have been satisfied or waived in
writing by PQC and Flagship.
-24-
<PAGE>
ARTICLE VII
INDEMNIFICATION
7.1 Indemnification.
---------------
(a) The Stockholders, severally and not jointly, shall indemnify,
defend, and hold harmless PQC, Flagship and their respective subsidiaries and
affiliates and their directors, officers, employees and agents or the successor
of any of the foregoing (collectively, the "PQC Indemnified Parties"), and
reimburse the PQC Indemnified Parties for, from and against all payments,
demands, claims, suits, judgments, liabilities, losses, costs, damages and
expenses, including, without limitation, interest, penalties and reasonable
attorneys' fees, disbursements and expenses (collectively, "Damages"), imposed
on or incurred by any PQC Indemnified Party which relate to or arise out of:
(i) breach of any representation and warranty of, or covenant
or agreement to be performed by, the Company or any Stockholder, in each case
contained in this Agreement or the Stockholders Agreement;
(ii) failure of any Stockholder to have good, valid and
marketable title to the issued and outstanding Shares held by such Stockholder,
free and clear of all liens, claims, pledges, options, adverse claims or charges
of any nature whatsoever;
(iii) any claim by a Stockholder or former stockholder of the
Company, or any other person, firm, corporation or entity, seeking to assert, or
based upon: (A) ownership or rights to ownership of any shares of stock of the
Company; (B) any rights of a stockholder, including any options, preemptive
rights or rights to notice or to vote; (C) any rights under the Articles of
Incorporation or bylaws of the Company; or (D) any claim that such stockholder's
shares were wrongfully repurchased by the Company;
(iv) any Tax liabilities of the Company or the Stockholders,
provided however, that with respect to any Stockholder, there is excluded from
Section 7.1 (a)(iv) any amounts actually deducted as a Deductible Expense of
such Stockholder under Section 10.4 of Appendix A of the Services Agreement;
(v) the conduct of the Practice prior to the Closing Date,
except for liabilities described in Section 2.8(a) or reflected in the
Settlement Date Financial Certificate required by Schedule 1.14;
-------------
(vi) any liability of the Company incurred prior to the Closing
Date that is not described in Schedule 2.8(a);
----------------
(vii) any liability incurred by PQC or Flagship relating to
agreements or obligations of the Company or any Stockholder, whether written or
oral, that are not specifically identified on the Disclosure Schedule; and
(viii) to the extent, if any, that on the Closing Date the accrued
but unpaid liabilities of the Company exceeds the sum of (i) the amount actually
collected from
-25-
<PAGE>
accounts receivable that arose out of services prior to the Closing Date and
which were uncollected on the Closing Date, (ii) cash and cash equivalents held
by the Company on the Closing Date and (iii) prepaid expenses reflected on the
records of the Company on the Closing Date.
Notwithstanding the foregoing or any other term or condition contained herein or
in any other agreement or instrument referred to herein, the indemnification
obligations of each Stockholder under this Section 7.1(a)(i) - (viii) shall be
limited, in the aggregate, to the dollar value on the Closing Date of the Merger
Consideration paid to such Stockholder reduced by any amount deducted as a
Deductible Expense of such Stockholder under Section 10.4 of Appendix A of the
Services Agreement resulting from any Tax Liabilities of the Company, if, but
only if, the Company has filed all tax returns based on the good faith
determination of its accountants and paid all taxes shown to be due thereon
through the taxable year ending on the date of the Merger.
(b) PQC and Flagship shall indemnify and hold harmless the Company and
the Stockholders and their respective agents or the successors of any of the
foregoing (collectively, the "Company Indemnified Parties") and together with
the PQC Indemnified Parties (the "Indemnified Parties"), and reimburse such
Company Indemnified Parties for, from, and against all Damages imposed on or
incurred by such Company Indemnified Parties which relate to or arise out of any
breach of any representation or warranty of, or covenant or agreement to be
performed by, PQC or Flagship, in each case contained in this Agreement.
7.2 Method of Asserting Claims.
--------------------------
(a) An Indemnified Party shall give prompt written notice to an
indemnifying party (the "Indemnifying Party") of any payments, demands, claims,
suits, judgments, liabilities, losses, costs, damages or expenses (a "Claim") in
respect of which such Indemnifying Party has a duty to provide indemnity to such
Indemnified Party under this Article VII, except that any delay or failure so to
notify the Indemnifying Party only shall relieve the Indemnifying Party of its
obligations hereunder to the extent, if at all, that it is prejudiced by reason
of such delay or failure.
(b) If a Claim is brought or asserted by a third party (a "Third-Party
Claim"), the Indemnifying Party shall assume the defense thereof, including the
employment of counsel reasonably satisfactory to the Indemnified Party and the
payment of all expenses. The Indemnified Party shall have the right to employ
separate counsel in such Third-Party Claim and participate in the defense
thereof, but the fees and expenses of such counsel shall be at the expense of
the Indemnified Party. In the event that the Indemnifying Party, within twenty
(20) days after written notice of any Third-Party Claim, fails to assume the
defense thereof, or in the event the Indemnifying Party fails to demonstrate, to
the reasonable satisfaction of the Indemnified Party, that it has sufficient
assets to meet its indemnification obligations hereunder, the Indemnified Party
shall have the right to undertake the defense, compromise or settlement of such
Third-Party Claim for the account of the Indemnifying Party. Anything in this
Section 7.2(b) to the contrary notwithstanding, the Indemnifying Party shall
not, without the Indemnified Party's prior written consent, settle or compromise
any Third-Party Claim or consent to the entry of any judgment with respect to
any Third-
-26-
<PAGE>
Party Claim which would have any adverse effect on the Indemnified Party, except
as provided immediately below. The Indemnifying Party may, without the
Indemnified Party's prior written consent, settle or compromise any such Third-
Party Claim or consent to entry of any judgment with respect to any Third-Party
Claim which requires solely money damages paid by the Indemnifying Party and
which includes as an unconditional term thereof the release by the claimant or
the plaintiff of the Indemnified Party from all liability in respect of such
Third-Party Claim.
(c) With respect to any Claim other than a Third Party Claim, the
Indemnifying Party shall have thirty (30) days from receipt of written notice
from the Indemnified Party of such Claim within which to respond thereto. If
the Indemnifying Party does not respond within such thirty (30) day period, the
Indemnifying Party shall be deemed to have accepted responsibility to make
payment and shall have no further right to contest the validity of such Claim.
If the Indemnifying Party notifies the Indemnified Party within such thirty (30)
day period that it rejects such Claim in whole or in part, the Indemnified Party
shall be free to pursue such remedies as may be available to the Indemnified
Party under applicable law.
7.3 Survival. All representations, warranties, covenants and agreements
--------
made by the Parties herein or in any instrument or document furnished in
connection herewith shall survive the Closing and any investigation at any time
made by or on behalf of the Parties hereto. All such representations and
warranties and the Stockholders' obligations pursuant to Sections 7.1(a)(i) and
(viii) and the obligations of PQC and Flagship pursuant to Section 7.1(b) shall
expire on the third anniversary of the Closing Date, except for Claims, if any,
asserted in writing prior to such third anniversary, which shall survive until
satisfied in full or otherwise finally resolved. The obligation of the
Stockholders pursuant to Section 7-1(a)(ii), (iii), (iv), (v), (vi) and (vii)
shall survive until six (6) months after the expiration of the applicable
statute of limitations with respect thereto. All Claims and actions for
indemnity pursuant to this Article VII shall be asserted or maintained in
writing by a Party hereto on or prior to the expiration of such periods.
7.4 Set-off and Recoupment. Any amount or amounts due from any
----------------------
Indemnifying Party to PQC under this Article VII may be paid to PQC, at PQC's
option, by set-off or recoupment against any amounts due to the Indemnifying
Party pursuant to this Agreement or pursuant to any agreement between the
Indemnifying Party and PQC, Flagship or any of their respective affiliates. Any
such set-off will be without prejudice to PQC's right to pursue any other
remedies at law or in equity available to it.
ARTICLE VIII
TERMINATION
8.1 Optional Termination. This Agreement may be terminated and the
--------------------
transaction contemplated herein abandoned at any time prior to the Closing as
follows:
(a) by the mutual consent of the Company, PQC and Flagship;
-27-
<PAGE>
(b) by the Company, upon a material breach of any representation,
warranty, covenant or agreement on the part of PQC or Flagship set forth in this
Agreement, or if any representation or warranty of PQC or Flagship has become
materially untrue, in either case such that any of the conditions set forth in
Article VI would be incapable of being satisfied by December 20, 1996; provided,
that in any case, a willful breach will be deemed to cause such conditions to be
incapable of being satisfied for purposes of this paragraph (b). Any breach on
the part of PQC or Flagship of the representations and warranties contained in
Article III or the covenants contained in Article IV, which permits termination
of this Agreement shall permit the Company and the Stockholders to immediately
terminate any other agreement between PQC or Flagship and the Company or any of
the Stockholders;
(c) by PQC and Flagship upon a material breach of any representation,
warranty, covenant or agreement on the part of the Company or the Stockholders
set forth in this Agreement, or if any representation or warranty of the Company
has become materially untrue, in either case such that any of the conditions set
forth in Article V would be incapable of being satisfied by December 20, 1996;
provided, that in any case, a willful breach will be deemed to cause such
conditions to be incapable of being satisfied for purposes of this paragraph
(c). Any breach on the part of the Company or the Stockholders of the
representations and warranties contained in Article II or the covenants
contained in Article IV, which permits termination of this Agreement shall
permit PQC and Flagship to immediately terminate any other agreement between the
Company or the Stockholder and PQC or Flagship; or
(d) by either Party if the Closing shall not have occurred by December
20, 1996, or such other date agreed to by the Parties.
8.2 Effect of Termination. In the event this Agreement is terminated
---------------------
as provided above, (a) each of PQC, Flagship, the Stockholders and the Company
shall, upon another Party's request, deliver to such other Party all documents
previously delivered (and copies thereof in its possession) concerning one
another and the transactions contemplated hereby as required by Section 4.10
above, and (b) none of the Parties nor any of their respective stockholders,
directors, officers or agents shall have any liability to the other Parties,
except for any deliberate breach or deliberate omission resulting in a material
breach of any of the provisions of this Agreement. In such case, the breaching
Party shall be liable only for the expenses and costs of the non-breaching
Party, and in no event shall either Party be liable for anticipated profits or
consequential damages. After termination each Party shall keep confidential all
information provided by the others pursuant to this Agreement which is not in
the public domain, shall exercise the same degree of care in handling such
information as it would exercise with similar information of its own, and shall
return any such information upon another Party's request.
ARTICLE IX
MISCELLANEOUS
9.1 Press Releases and Announcements. No Party shall issue any press
--------------------------------
release or public disclosure relating to the subject matter of this Agreement
without the prior written approval of the other Parties; provided, however, that
-------- -------
any Party may make any public
-28-
<PAGE>
disclosure it believes in good faith is required by law or regulation (in which
case the disclosing Party shall advise the other Parties and provide them with a
copy of the proposed disclosure prior to making the disclosure).
9.2 No Third Party Beneficiaries. This Agreement shall not confer
----------------------------
any rights or remedies upon any person other than the Parties and their
respective successors and permitted assigns; provided, however, that the
--------
provisions in Article I concerning payment of the Merger Consideration are
intended for the benefit of the Stockholders.
9.3 Entire Agreement. This Agreement (including the documents
----------------
referred to herein) constitutes the entire agreement among the Parties and
supersedes any prior understandings, agreements, or representations by or among
the Parties, written or oral, with respect to the subject matter hereof.
9.4 Succession and Assignment. This Agreement shall be binding upon
-------------------------
and inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this Agreement or
any of its rights, interests, or obligations hereunder without the prior written
approval of each of the other Parties.
9.5 Counterparts. This Agreement may be executed in two (2) or more
------------
counterparts, each of which shall be deemed an original but all of which
together shall constitute one (1) and the same instrument.
9.6 Headings. The section headings contained in this Agreement are
--------
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
9.7 Notices. All notices, requests, demands, claims, and other
-------
communications hereunder shall be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly delivered two (2)
business days after it is sent by registered or certified mail, return receipt
requested, postage prepaid, or one (1) business day after it is sent via a
reputable nationwide overnight courier service, in each case to the intended
recipient as set forth below:
If to the Company or the Stockholders:
- --------------------------------------
To the last known home address of each Stockholder as maintained in the records
of Flagship with a copy to:
Hogan & Hartson L.L.P.
Columbia Square
555 Thirteenth Street, N.W.
Washington, DC 20004-1109
Attention: Michael Williams, Esq.
-29-
<PAGE>
If to PQC or Flagship:
- ----------------------
Physicians Quality Care, Inc.
950 Winter Street
Suite 2410
Waltham, MA 02154
Attention: Jerilyn Asher
With a copy to:
Anne Ogilby, Esq.
Ropes & Gray
One International Place
Boston, MA 02110
Any Party may give any notice, request, demand, claim, or other communication
hereunder using any other means (including personal delivery, expedited courier,
messenger service, telecopy, telex, ordinary mail, or electronic mail), but no
such notice, request, demand, claim, or other communication shall be deemed to
have been duly given unless and until it actually is received by the Party for
whom it is intended. Any Party may change the address to which notices,
requests, demands, claims, and other communications hereunder are to be
delivered by giving the other Parties notice in the manner herein set forth.
9.8 Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the internal laws (and not the law of conflicts) of the State of
Maryland.
9.9 Amendments and Waivers. The Parties may mutually amend any provision
----------------------
of this Agreement at any time prior to the Effective Time. No amendment of any
provision of this Agreement shall be valid unless the same shall be in writing
and signed by all of the Parties. No waiver by any Party of any default,
misrepresentation, or breach of warranty or covenant hereunder, whether
intentional or not, shall be deemed to extend to any prior or subsequent
default, misrepresentation, or breach of warranty or covenant hereunder or
affect in any way any rights arising by virtue of any prior or subsequent such
occurrence.
9.10 Severability. If any term, provision, covenant or restriction of this
------------
Agreement is held by a court of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated.
9.11 Expenses. Except as otherwise expressly provided herein, each Party
--------
to this Agreement shall pay its own costs and expenses in connection with the
transactions contemplated hereby.
9.12 Further Assurances. From time to time, at the request of any Party
------------------
hereto and without further consideration, the other Parties will execute and
deliver to such requesting Party such documents and take such other action (but
without incurring any material financial obligation) as such requesting Party
may reasonably request in order to consummate more effectively the transactions
contemplated hereby.
-30-
<PAGE>
9.13 Specific Performance. Each of the Parties acknowledges and agrees
--------------------
that one (1) or more of the other Parties would be damaged irreparably in the
event any of the provisions of this Agreement are not performed in accordance
with their specific terms or otherwise are breached. Accordingly, each of the
Parties agrees that the other Parties shall be entitled to an injunction or
injunctions to prevent breaches of the provisions of this Agreement and to
enforce specifically this Agreement and the terms and provisions hereof in any
action instituted in any court of the United States or any state thereof having
jurisdiction over the Parties and the matter, in addition to any other remedy to
which it may be entitled, at law or in equity.
9.14 Construction. The language used in this Agreement shall be deemed to
------------
be the language chosen by the Parties hereto to express their mutual intent, and
no rule of strict construction shall be applied against any Party. Any
reference to any federal, state, local, or foreign statute or law shall be
deemed also to refer to all rules and regulations promulgated thereunder, unless
the context requires otherwise.
9.15 Incorporation of Exhibits and Schedules. The Exhibits and Schedules
---------------------------------------
identified in this Agreement are incorporated herein by reference and made a
part hereof.
9.16 Gender. All references herein to the masculine gender shall be deemed
------
to include the feminine or neuter gender as appropriate.
9.17 Table of Cross-References. The following defined terms have the
-------------------------
meaning set forth in the respective locations within this Agreement set forth
below:
<TABLE>
<S> <C>
"Accredited Investor" Section 1.12(c)(vii)
"Actions" Section 2.17
"Additional Consideration" Section 1.14
"Affiliated Group" Section 2.11(d)
"Articles of Merger" Section 1.1
"Bain Agreement" Section 6.4
"CERCLA" Section 2.28(a)
"Claim" Section 7.2(a)
"Code" Section 1.13
"Closing" Section 1.2
"Closing Date" Section 1.2
"Closing Date Receivables" Section 1.14
"Common Stock" Preamble
"Company" Preamble
"Company Indemnified Parties" Section 7.1(b)
"Consenting Corporation" Section 2.11(c)
"Contracts" Section 2.14(a)
"Damages" Section 7.1(a)
"Disclosure Schedule" Article II
"ERISA" Section 2.21(c)
"ERISA Affiliate" Section 2.21(e)
"Effective Time" Section 1.1
"Employee Benefit Plan" Section 2.21(a)
</TABLE>
-31-
<PAGE>
<TABLE>
<S> <C>
"Employment Agreements" Section 5.8(a)
"Environment" Section 2.28(a)
"Environmental Law" Section 2.28(a)
"Excess Pre-Paid Expenses" Section 1.14
"Financial Statements" Section 2.7
"Flagship" Preamble
"Governmental Entity" Section 2.6
"Indemnified Parties" Section 7.1(b)
"Indemnifying Party" Section 7.2(a)
"Interim Financial Statements" Section 2.7
"Leases" Section 2.13(a)
"Material Adverse Effect" Section 2.5
"Material of Environmental Concern" Section 2.28(b)
"Merger" Section 1.1
"Merger Consideration" Section 1.3
"Most Recent Balance Sheet" Section 2.8
"Multi-Employer Plan" Section 2.21(e)
"Ordinary Course of Business" Section 2.12
"PQC" Preamble
"PQC Indemnified Parties" Section 7.1(a)
"Parachute Payments" Section 2.11(e)
"Parties" Preamble
"Permits" Section 2.15
"Practice" Section 2.5
"Pre-Closing Liabilities" Section 1.14
"Premises Lease" Section 5.8 (c)
"Realized Adjusted Net Value" Section 1.14
"Release" Section 2.28(a)
"Restricted Securities" Section 1.12(c)(v)
"Securities Act" Section 1.12(c)(i)
"Security Interest" Section 2.12
"Shares" Section 1.5(a)
"Stockholders" Preamble
"Surviving Corporation" Section 1.1
"Tax Returns" Section 2.11(a)
"Taxes" Section 2.11(a)
"Third Party Claim" Section 7.2(b)
</TABLE>
[BALANCE OF THIS PAGE LEFT BLANK INTENTIONALLY]
-32-
<PAGE>
[Merger Agreement]
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
PHYSICIANS QUALITY CARE, INC.
------------------------------
By: Jerilyn P. Asher
Title: Chief Executive Officer
FLAGSHIP HEALTH, P.A.
------------------------------
By: Laura M. Mumford, M.D.
Title: President
By:
--------------------------
Its:
Shareholders:
- -----------------------------
- -----------------------------
<PAGE>
FORM OF ASSET PURCHASE AGREEMENT
--------------------------------
THIS AGREEMENT is made and entered into as of this 11th day of December,
1996, by and between ________________________, physician engaged in the practice
of medicine at ______________________ (the "Seller"), and Physicians Quality
Care, Inc., a Delaware corporation with principal offices at 950 Winter Street,
Waltham, MA 02154 ("PQC") and Flagship Health, P.A., a Maryland professional
association with principal offices at 323 W. Camden Street, Baltimore, MD 21291
("Flagship"). Each of Flagship, PQC and the Seller are sometimes referred to
herein as a "Party" or collectively as the "Parties".
Recitals
--------
Seller owns and operates a medical practice (the "Practice") and certain
assets utilized in connection therewith, including accounts receivable,
inventory, equipment and other assets.
In connection with the acquisition and the affiliation transactions
contemplated hereby, Seller is becoming an employee of Flagship with other
physicians.
Now therefore, in consideration of the respective representations,
warranties, covenants, agreements and conditions hereinafter set forth, and
intending to be legally bound hereby, the Parties hereto agree as follows:
ARTICLE I
PURCHASE AND SALE OF ASSETS
1.01 Assets to be Purchased from Seller.
----------------------------------
(a) Simultaneously with the closing of the transactions contemplated hereby
(the "Closing"), Seller is selling, conveying, assigning, transferring and
delivering to Flagship all of Seller's right, title and interest in and to all
of the assets owned by Seller (tangible and intangible) and used in the Practice
(the "Assets"), including, without limitation, the assets described below, other
than Excluded Assets as provided in Section 1.01(b):
(i) all inventory (the "Inventory") of Seller, wherever located,
including, without limitation, medical supplies, office supplies, maintenance
supplies, pharmaceuticals and similar items of Seller that are used in the
Practice;
(ii) all deposits and prepaid expenses and prepaid insurance related
to the Practice;
(iii) all outstanding purchase orders (the "Purchase Orders");
(iv) all fixtures, leasehold improvements, furnishings, office
equipment and tangible personal property including all computers and medical
equipment and appliances
<PAGE>
owned by Seller and used in the Practice and all service agreements, license
agreements and warranties and operating manuals relating thereto;
(v) all rights of Seller under the contracts, agreements, leases,
licenses and other instruments set forth on Schedule 1.01(a) hereto;
----------------
(vi) (a) all records and lists of Seller pertaining to the Assets;
(b) all records and lists pertaining to the Practice, patients, suppliers or
personnel of the Practice; (c) all records, history and analysis relating to
purchasing, selling, advertising and promotional activities relating to the
Practice; and (d) all billing records and information necessary for Flagship's
collection of the accounts and notes receivables referenced to in 1.01(a)(ix),
in all forms in which such information is recorded;
(vii) all of Sellers's rights to use the name of Laura Mumford,
M.D. and any variations thereof in connection with the delivery of professional
services;
(viii) all intangible property rights relating to the Practice;
(ix) accounts and notes receivable of the Seller arising prior to
the Closing Date;
(x) all cash and cash equivalents held by Seller; and
(xi) all other assets, properties, claims, rights and interests of
Seller relating to the Practice that exist on the Closing Date, of every kind
and nature, whether tangible or intangible, real, personal or mixed.
(b) Notwithstanding Section 1.01(a), the Assets shall not include the
following ("Excluded Assets"):
(i) all licenses and permits of the Seller, to the extent not
transferable;
(ii) all claims, causes of action, choses in action, rights of
recovery and rights of set-off of any kind against any person or entity arising
out of or relating to the Assets to the extent related to the Excluded
Liabilities;
(iii) all managed care contracts listed on Schedule 1.01(b) that
----------------
are not assignable by Seller;
(iv) the Seller's Medicare and Medicaid provider agreements;
(v) all personal property, furniture, artwork, and similar items
owned by the Seller or any partner or member of Seller and not used in the
Practice;
(vi) any other asset of the Seller that is not related to or used
by the Seller in the Practice;
-2-
<PAGE>
(vii) Seller's insurance policies relating to coverage periods prior
to the Closing, including any tail coverage;
(viii) the consideration paid by PQC and Flagship hereunder and under
any related agreements or instruments; and
(ix) Seller's financial statements, financial records, tax returns
and related records and all other records (other than the records referred to in
1.01(a)(vi)).
1.02 (a) Assumption of Certain Liabilities. Upon the terms and subject
---------------------------------
to the conditions contained herein, at the Closing, Flagship shall only assume
(the "Assumed Liabilities"): (1) all obligations and liabilities that have
accrued in the ordinary course of Seller's Practice through the Closing Date
that are reflected on Schedule 1.02 (the "Current Assumed Liabilities") and (2)
-------------
all obligations and liabilities accruing, arising out of, or relating to events
or occurrences happening after the Closing Date under: (i) the equipment leases
described on Schedule 1.01(a), but not including any obligation or liability for
----------------
any breach of such equipment leases occurring on or prior to the Closing Date;
and (ii) the contracts described on Schedule 1.01(a), but not including any
----------------
obligation or liability for any breach of such contract occurring on or prior to
the Closing Date. Flagship shall be deemed to have assumed and shall assume all
liabilities which may be incurred by reason of any breach of or default
occurring after the Closing Date under any leases, contracts, commitments, or
obligations assumed by Flagship hereunder.
(b) Excluded Liabilities. Notwithstanding any other provisions of this
--------------------
Agreement, except for the Assumed Liabilities expressly specified in Section
1.02(a), neither PQC nor Flagship shall assume, or otherwise be responsible for,
any liabilities or obligations of Seller, whether actual or contingent, matured
or unmatured, liquidated or unliquidated, or known or unknown, whether arising
out of occurrences prior to, at or after the date hereof ("Excluded
Liabilities"), which Excluded Liabilities include, without limitation:
(i) any liability or obligation to or in respect of any employees or
former employees of Seller including without limitations: (i) any employment
agreement, whether or not written; (ii) any liability under any Employee Plan
(as defined in Section 2.18) at any time maintained, contributed to or required
to be contributed to, by or with respect to Seller or under which Seller may
incur liability; and (iii) any claim of an unfair labor practice, or any claim
under any state unemployment compensation or worker's compensation law or
regulation or under any federal or state employment discrimination law or
regulation, which shall have been asserted on or prior to the Closing Date or is
based on acts or omissions which occurred on or prior to the Closing Date;
(ii) any liability or obligation of Seller in respect of any tax
except for any personal property, use, or similar taxes imposed in connection
with the Assets and attributable to any period after the Closing Date; and
(iii) any liability arising from any injury to or death of any
person or damage to or destruction of any property, whether based on negligence,
malpractice, strict liability, enterprise liability or any other legal or
equitable theory arising from services
-3-
<PAGE>
performed by or on behalf of Seller or any other person or entity on or prior to
the Closing Date.
1.03 Deliveries by Seller. On the date of the Closing (the "Closing
--------------------
Date"), and simultaneously with the Closing, Seller shall deliver or cause to be
delivered to Flagship and PQC the following:
(a) a Bill of Sale in the form of Exhibit A hereto;
---------
(b) the employment agreement (the "Employment Agreement") between Flagship
and the Seller, in the form attached hereto as Exhibit B;
---------
(c) an assignment and copy of the lease in the form attached hereto as
Exhibit C hereto with respect to the premises at 10755 Falls Road, Suite 470,
- ---------
Lutherville, Maryland 21093 ("Premises Lease");
(d) a report of a reputable lien search firm indicating that there are no
liens of record against any of the Assets (except for the liens arising under
equipment leases listed on Schedule 1.01(a));
----------------
(e) the consent of the Landlord to the assignment of the Premises Lease,
together with any nondisturbance and recognition agreements reasonably required
by Flagship from the Lessor;
(f) a release from any party with a mortgage or lien on any of the Assets;
(g) the consents of all parties necessary to enable Flagship to acquire the
Assets and assume the Assumed Liabilities and to consummate the other
transactions contemplated by this Agreement including consents of third-party
payors and governmental authorities (including, but not limited to, all consents
listed on Schedule 2.03) necessary: (i) to assign to Flagship all third-party
-------------
payment agreements listed on Schedule 1.01(a); and (ii) otherwise to consummate
----------------
the transactions contemplated by this Agreement;
(h) a tax lien waiver, if required, from the Comptroller of the Treasury of
the State of Maryland;
(i) such instruments of conveyance, assignment and transfer, in form and
substance reasonably satisfactory to PQC and Flagship, as shall be appropriate
to convey, transfer and assign to and be vested in, Flagship good, clean, record
and marketable title to the Assets; and
(j) such other agreements, consents and documents as PQC shall reasonably
request in connection with: (i) its due diligence investigation of the Seller;
(ii) the affiliation of the Seller with Flagship and PQC; and (iii) the
transactions contemplated by this Agreement, the Affiliation Agreement among
Flagship, PQC and Seller dated as of the date hereof (the "Affiliation
Agreement"), and the Employment Agreement.
-4-
<PAGE>
1.04 Deliveries by Flagship. On the Closing Date and simultaneously with
----------------------
the Closing, Flagship shall deliver or cause to be delivered to Seller the
following:
(a) the Purchase Price by check and/or in shares of PQC Class A Common
Stock, par value $0.01 per share. The "Purchase Price" shall be an amount equal
to the value assigned to the Assets based upon the report (the "Report")
prepared by Arthur Andersen dated as of June 30, 1996, such amount being the
amount reflected on Schedule 1.04, subject to adjustment for changes in net
working capital as contemplated by Schedule 1.04.
(b) an Instrument of Assumption of Liabilities, with respect to the Assumed
Liabilities in form reasonably satisfactory to PQC, Flagship and Seller;
(c) certificates of duly authorized officers of Flagship and PQC, dated the
Closing Date, setting forth the resolutions of the Board of Directors of
Flagship and PQC authorizing the execution and delivery by Flagship and PQC of
this Agreement and the consummation of the transactions contemplated hereby, and
certifying that such resolutions were duly adopted and have not been rescinded
or amended;
(d) such other instruments, consents and documents as the Seller shall
reasonably request in connection with (i) its due diligence investigation of
Flagship and PQC and (ii) the transactions contemplated by this Agreement, the
Affiliation Agreement and the Employment Agreement.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF SELLER
Except as set forth in the Schedules attached hereto (which shall identify
exceptions by specific section reference), as of the date hereof and as of the
Closing Date, Seller, subject to the limitations contained in Section 8.02,
represents and warrants to PQC and Flagship as follows:
2.01 Valid and Binding Agreement. Seller has the necessary power and
---------------------------
authority to enter into this Agreement and the other agreements, documents and
instruments to be executed and delivered by Seller pursuant hereto, and to carry
out the transactions contemplated hereby and thereby. Assuming due
authorization, execution and delivery thereof by PQC and Flagship, this
Agreement and each of the other agreements, documents and instruments to be
executed and delivered by Seller pursuant hereto will constitute valid and
binding agreements of Seller, enforceable against Seller in accordance with
their terms, except to the extent that enforceability is limited by bankruptcy
or similar laws or by general principles of equity.
2.02 No Violation. Except as set forth in Schedule 2.02 hereto, neither
------------ -------------
the execution and delivery of this Agreement or the other agreements, documents
and instruments to be executed and delivered by Seller pursuant hereto nor the
consummation by Seller of the transactions contemplated hereby or thereby (a)
subject to obtaining the required consents
-5-
<PAGE>
and approvals described in Schedule 2.03, will violate or conflict with any
-------------
applicable statute, law, ordinance, rule, regulation, order, judgment or decree
except that no representation or warranty is made under this Section with regard
to compliance with the laws referred to in Section 2.19 or (b) subject to
obtaining the required consents and approvals described in Schedule 2.03, will
-------------
violate or conflict with or constitute a default (or an event which, with notice
or lapse of time, or both, would constitute a default) under, or will result in
the termination of, or accelerate the performance required by, or result in the
creation of any lien, security interest, charge or encumbrance upon any of the
Assets under, any contract, commitment, understanding, arrangement, agreement or
restriction of any kind by which the Assets are bound or affected, to which the
Assets are subject, or to which Seller is a party, except for any such
violation, conflict, or default that would not have a Material Adverse Effect.
The term "Material Adverse Effect" as used in this Agreement shall mean any
change or effect or any prospective change or effect that, individually or when
taken together with other changes or effects, is or is reasonably likely to be
materially adverse to any of the Practice, the Assets, the financial
arrangements contemplated by the Employment and Affiliation Agreements, the
financial condition and results of operation of Flagship or PQC, the value of
PQC or Flagship or their affiliation with the Seller or any Party's ability to
consummate the transactions contemplated herein.
2.03 Consents; Filings. Except as set forth in Schedule 2.03 hereto, no
----------------- -------------
registration or filing with, or consent, approval, permit, authorization or
action by, any third-party (including, without limitation, any federal, state,
local, foreign or other governmental agency, instrumentality, commission,
authority, board or body or other person or entity ("Government Entity")) is
required in connection with the execution and delivery by Seller of this
Agreement or the other agreements, documents and instruments to be executed and
delivered by Seller pursuant hereto or the consummation by Seller of the
transactions contemplated hereby or thereby.
2.04 Financial Statements. Seller has delivered to PQC balance sheets and
--------------------
statements of income with respect to the Practice for and as at the end of the
fiscal years ended December 31, 1993, 1994 and 1995 (the "Financial
Statements"), interim financial statements dated June 30, 1996 (the "Interim
Financial Statements") and such balance sheets and statements of income are
true, complete and accurate and fairly present the financial condition and
results of operations for and as at the end of the periods therein referred to
on a stand-alone basis.
2.05 No Material Adverse Change. Except as set forth in Schedule 2.05
-------------------------- -------------
attached hereto, to the best knowledge of Seller, no event involving a Material
Adverse Effect has occurred since June 30, 1996.
2.06 Compliance with Law. The Practice has been conducted in substantial
-------------------
compliance with all applicable laws, regulations and other requirements of all
national governmental authorities, and of all states, municipalities and other
political subdivisions and agencies thereof, having jurisdiction over Seller,
including without limitation, all such laws, regulations and requirements
relating to antitrust, consumer protection, employee benefit, equal opportunity,
health, occupational safety, pension, pollution or environmental protection
matters except for such noncompliance as would not have a Material Adverse
Effect. Seller
-6-
<PAGE>
has not received any notification of any asserted present or past failure to
comply with such laws, rules or regulations.
2.07 Tax Matters. Seller has filed all Tax Returns relating to the
-----------
Practice which are required to be filed prior to the date hereof or the Closing
Date and has paid all Taxes for all periods covered by such returns. Seller is
current in the payment of all Taxes relating to the Practice. No deficiencies
have been asserted or assessed as a result of any audit by the Internal Revenue
Service or any state or local taxing authority which have not been satisfied in
full and no such deficiency or audit has been proposed or threatened. Except as
described in Schedule 2.07, there are no liens for Taxes (other than for current
-------------
Taxes not yet due and payable) on the Assets. None of the Assets is property
that is required to be treated as being owned by any other person pursuant to
the safe harbor lease provisions of former (S)168(f)(8) of the Internal Revenue
Code of 1986, as amended (the "Code"). None of the Assets is "tax exempt use
property" within the meaning of (S)168(h) of the Code. None of the Assets
directly or indirectly secures any debt the interest on which is tax-exempt
under Section 103(a) of the Code. The Seller is not a person other than a
United States person within the meaning of the Code. The transaction
contemplated herein is not subject to tax withholding under (S)3406 of the Code,
under Subchapter A of chapter 3 of the Code, or of any other provision of law.
For purposes of this Agreement, "Taxes" means all taxes, charges, fees, levies
or other similar assessments or liabilities, including without limitation
income, gross receipts, ad valorem, premium, value added, excise, real property,
personal property, sales, use, transfer, withholding, employment, payroll and
franchise taxes imposed by the United States of America or any state or local
government, or any agency thereof, or other political subdivision of the United
States or any such government, and any interest, fines, penalties, assessments
or additions to tax resulting from, attributable to or incurred in connection
with any tax or any contest or dispute thereof. For purposes of this Agreement,
"Tax Returns" means all reports, returns, declarations, statements or other
information required to be supplied to a taxing authority in connection with
Taxes.
2.08 Good Title. Except as set forth in Schedule 2.08 hereto, Seller has
---------- -------------
complete and unrestricted power and the unqualified right to sell, convey,
assign, transfer and deliver to Flagship, and upon payment of the Purchase
Price, Flagship will acquire, good, valid and marketable title to the Assets,
free and clear of title defects or objections, liens, claims, charges, security
interests or other encumbrances (collectively "Encumbrances") of any nature
whatsoever, except for any encumbrances relating to the equipment leases assumed
by Flagship pursuant to Section 1.01(a). The Bill of Sale provided for in
Section 1.03 constitutes the valid and binding obligation of Seller and will
effectively vest in Flagship good, valid and marketable title to all of the
Assets.
2.09 No Undisclosed Liabilities. Seller has no liabilities or obligations
--------------------------
of any nature relating to the Practice (whether absolute, accrued, known or
unknown, contingent or otherwise and whether due or to become due) which are not
disclosed on the most recent Financial Statement or otherwise listed on Schedule
2.09 as being assumed by Flagship as part of the transaction or which have not
been incurred since the date of the Financial Statements in the ordinary course
of business.
-7-
<PAGE>
2.10 Leases.
------
(a) Schedule 2.10 contains a complete and accurate listing of all leases
-------------
(the "Leases") pursuant to which Seller leases real or personal property
relating to the Practice, which listing sets forth a general description of the
leased property or items, the term, the annual rent, any and all renewal
options, and any requirements for the consent of third parties to assignments
thereof. All such Leases are valid, binding and enforceable in accordance with
their terms and are in full force and effect; no event of default has occurred
which (whether with or without notice, lapse of time or both or the happening or
occurrence of any other event) would constitute a default thereunder on the part
of Seller; and Seller has no knowledge of the occurrence of any event of default
which (whether with or without notice, lapse of time or both or the happening or
occurrence of any other event) would constitute a default thereunder by any
other party.
(b) Except for Leases listed on Schedule 2.10, there are no leases,
-------------
subleases, licenses, occupancy agreements, options, rights, concessions or other
agreements or arrangements, written or oral, granting to any person the right to
purchase, use or occupy any facility occupied by the Seller and related to or
used in the Practice.
(c) With respect to each Lease, Seller has and will transfer to Flagship
at the Closing an unencumbered interest in the leasehold interest covered
thereby. Seller enjoys peaceful and +undisturbed possession of all the leased
real property related to and used in the Practice, and Seller has in all
material respects performed all the obligations required to be performed by it
through the date hereof.
2.11 Contracts and Commitments.
-------------------------
(a) Schedule 2.11 sets forth a complete and accurate list of all
-------------
contracts which are known to the Seller after reasonable investigation and which
were entered into by Seller and relating to the Practice and still in effect as
of the date hereof (the "Contracts"), of the following categories:
(i) Managed care contracts and other contracts with third-party
payors;
(ii) Employment or similar contracts and severance agreements;
(iii) Contracts (other than Leases set forth on Schedule 2.10)
-------------
relating to the Assets of the Practice which are not cancelable without
liability on thirty (30) calendar days (or less) notice;
(iv) Options with respect to any property, real or personal
related to the Practice, whether Seller is the grantor or grantee thereunder;
(v) Contracts involving expenditures or liabilities, actual or
potential, in excess of one thousand dollars ($1,000) or otherwise material to
the Practice or the Assets;
-8-
<PAGE>
(vi) Promissory notes, loans, agreements, indentures, evidences of
indebtedness, letters of credit, guarantees, or other instruments relating to an
obligation to pay money, individually or in the aggregate in excess of one
thousand dollars ($1,000) and related to the Practice, whether Seller shall be
the borrower, lender or guarantor thereunder or whereby any Assets are pledged;
(vii) Contracts containing covenants limiting the freedom of Seller
or an employee of Seller, to engage in any line of business or compete with any
person; and
(viii) Any Contract with the United States, state or local government
or any agency or department thereof related to the Practice.
Seller has made available to PQC and Flagship true, correct and complete copies
within Seller's possession of, and all records related to, all of the Contracts
listed on Schedule 2.11, including to Seller's knowledge, all amendments and
-------------
supplements thereto.
(ix) Absence of Breaches or Defaults. To the Seller's knowledge,
-------------------------------
all of the Contracts are valid and in full force and effect. Seller has duly
performed all of its obligations under the Contracts, and no violation of, or
default or breach, under any Contracts by Seller or, to the best of Seller's
knowledge, any other party has occurred except for any violations, defaults, or
breaches that would not have a Material Adverse Effect and neither Seller nor
any other party, to the best of Seller's knowledge after due inquiry, has
repudiated any provisions thereof.
2.12 Permits. Seller has all licenses, permits, franchises, approvals,
-------
authorizations, consents or orders of, or filings ("Permits") with any
Governmental Entity or any other person, necessary or desirable to conduct the
Practice as now being conducted, except where the failure to obtain such permits
would not have a Material Adverse Effect. All Permits of Seller are valid and
in full force and effect and are listed on Schedule 2.12. No notice to,
-------------
declaration, filing or registration with, or Permit or consent from, any
governmental or regulatory body or authority, or any other person or entity, is
required to be made or obtained by Seller in connection with the execution,
delivery or performance of this Agreement and the consummation of the
transactions contemplated hereby, except as set forth on Schedule 2.12. The
-------------
Seller has not suffered any loss, revocation, suspension, expiration without
renewal or other failure to keep in full force and effect and good standing his
membership on the medical staff of the hospitals listed on Schedule 2.20, or any
-------------
material license, certification, accreditation, clinical privilege or other
right or authorization necessary for the unrestricted practice of medicine by
Seller or for the conduct of the Practice as previously conducted.
2.13 Books and Records. Seller has made and kept (and given PQC and
-----------------
Flagship access to) books and records (including patient lists) and accounts,
which, in reasonable detail, accurately and fairly reflect the activities of the
Practice.
2.14 Litigation. Except as set forth on Schedule 2.14, there is no, and
---------- -------------
during the past five (5) years there has not been any, action, order, writ,
injunction, judgment or decree outstanding or any claim, suit, litigation,
proceeding, labor dispute, arbitral action,
-9-
<PAGE>
governmental audit or investigation (collectively, "Actions") pending or, to the
best of Seller's knowledge, threatened (a) against, related to or affecting (i)
Seller, the Practice or the Assets, or (ii) any employees of Seller as such, (b)
seeking to delay, limit or enjoin the transactions contemplated by this
Agreement, (c) that involve the risk of criminal liability (other than minor
traffic violations), or (d) in which Seller is a plaintiff. Seller is not in
default with respect to or subject to any judgment, order, writ, injunction or
decree of any court or governmental agency, and there are no unsatisfied
judgments against Seller, the Practice or the Assets.
2.15 Transactions with Certain Persons. Except as set forth on Schedule
--------------------------------- --------
2.15, neither Seller nor any employee of Seller nor any member of any such
- ----
person's immediate family is presently, or within the past two (2) years has
been a party to any transaction with Seller relating to the Practice with an
aggregate annual value of more than one thousand dollars ($1,000) to Seller or
the other parties thereto, including, without limitation, any contract,
agreement or other arrangement (a) providing for the furnishing of services by,
(b) providing for the rental of real or personal property from, or (c) otherwise
requiring payments to (other than for services as an employee of Seller) any
such person or any corporation, partnership, trust or other entity in which any
such person has an interest as a shareholder, officer, director, trustee or
partner, except that Seller provides certain medical services to employees and
family members as previously disclosed to PQC.
2.16 Insurance. Schedule 2.16 contains a complete and accurate list of
--------- -------------
all policies or binders of fire, liability, title, worker's compensation,
malpractice and other forms of insurance (showing as to each policy or binder
the carrier, policy number, coverage limits, expiration dates, annual premiums
and a general description of the type of coverage provided) maintained by Seller
on the Assets, the Practice or its employees. Such insurance provides, and
during such period provided, coverage to the extent and in the manner (a)
customary for medical practices and (b) as may be required by applicable law and
by any and all Contracts known to the Seller to which Seller is a party. Seller
is not in default under any of such policies or binders, and Seller has not
failed to give any notice or to present any claim under any such policy or
binder in a due and timely fashion. No insurer has advised Seller that it
intends to reduce coverage, increase premiums or fail to renew any existing
policy or binder. There are no outstanding unpaid claims under any such
policies or binders. All policies and binders provide sufficient coverage for
the risks insured against, are in full force and effect on the date hereof and
shall be kept in full force and effect through the Closing Date.
2.17 Brokers. Seller is not obligated to pay, nor has Seller retained any
-------
broker or finder or other person who is entitled to, any broker's or finder's
fee or any other commission or financial advisory fee based on any agreement or
understanding made by Seller in connection with the transactions contemplated
hereby.
2.18 Benefit Plans.
-------------
(a) Except as set forth in Schedule 2.18, Seller is not a party to any
-------------
pension, retirement, profit sharing, savings, bonus, incentive, deferred
compensation, group health insurance or group life insurance plan or obligation,
or to any collective bargaining
-10-
<PAGE>
agreement or other contract, written or oral, with any trade or labor union,
employees, association or similar organization (the "Employee Plans"). Seller
does not have any obligations to provide to its active employees or current
retirees any post-retirement non-pension benefits. There are no labor disputes
pending or threatened by, or to the best knowledge or Seller, any attempts at
union organization of, any of the employees of Seller.
(b) Seller: (i) is and has been in compliance in all material respects
with all applicable laws respecting employment and employment practices, terms
and conditions of employment, and wages and hours; (ii) has made all
contributions required to be made under any state unemployment or disability
laws or regulations and has accrued the amount of any such contribution required
for any period prior to the Closing Date which is not yet due and payable; and
(iii) is not engaged in any unfair labor practice, and there are no arrears in
the payment of wages or taxes with respect to employees.
(c) Except as set forth in Schedule 2.18, no employee has any claims
-------------
pending against Seller (whether under any law, any employment agreement or
otherwise) on account of or for: (i) overtime pay, other than overtime pay for
the current payroll period; (ii) wages or salary (excluding bonuses and amounts
accruing under pension and profit sharing plans) for any period other than the
current payroll period; (iii) vacation, time off or pay in lieu of vacation or
time off, other than that earned in respect of the current fiscal year; (iv) any
violation of any statute, ordinance or regulation relating to minimum wages or
maximum hours of work; or (v) the Employee Retirement Income Security Act of
1974, as amended ("ERISA").
(d) Except as set forth on Schedule 2.18 (which liabilities will be
-------------
discharged on or prior to the Closing Date) Seller is not, and neither Flagship
nor PQC will be, pursuant to any employment agreement, employee benefit plan or
other law, arrangement or understanding, obligated to pay or be liable for the
payment of any compensation (including accrued vacation), severance pay or other
benefit (including any disability benefit or payment or any unfunded liabilities
relating to pension benefits) by reason of the voluntary termination of
employment of any employee, the voluntary or involuntary termination prior to
the Closing Date of employment of any employee, or the consummation of the
transactions contemplated by this Agreement.
(e) Each employee benefit plan to which Seller is a party that is intended
to be qualified under Section 401(a) of the Code has received a favorable
determination letter and Seller or any entity which, within the last five (5)
years, has been under common control or affiliated with Seller (an "ERISA
Affiliate") within the meaning of Section 414(b), (c) or (m) of the Code, and
each employee benefit plan of Seller is in compliance in all material respects
with the requirements prescribed by any and all statutes, orders or governmental
rules or regulations currently in effect, including, but not limited to, ERISA
and the Code, applicable to such employee benefit plans and Seller is in
compliance in all material respects with its obligations under the terms of such
plans. None of the employee benefit plans are subject to Title IV of ERISA.
Neither Seller nor any ERISA Affiliate has ever been obligated to contribute to
any "multi-employer plan" as such term is defined in Section III(37) of ERISA.
No employee benefit plan of Seller or any ERISA Affiliate has engaged in any
prohibited transaction as such term is defined in Section 4975 of the Code or
Section 406 of ERISA.
-11-
<PAGE>
2.19 Fraud and Abuse; Stark Law. Except as set forth in Schedule 2.19
-------------------------- -------------
hereto, neither the Seller nor, to the knowledge of the Seller, any other
persons or entities providing professional services for the Practice, have
engaged in any activities which are prohibited under 42 U.S.C. (S)1320a-7b or 42
U.S.C. (S)1395nn et seq., or the regulations promulgated thereunder pursuant to
-- ---
such statutes, or related state or local statutes or regulations, or which are
prohibited by rules of professional conduct, including but not limited to the
following: (i) knowingly and willfully making or causing to be made a false
statement or representation of a material fact in any application for any
benefit or payment; (ii) knowingly and willfully making or causing to be made
any false statement or representation of a material fact for use in determining
rights to any benefit or payment; (iii) failure to disclose knowledge by a
claimant of the occurrence of any event affecting the initial or continued right
to any benefit or payment on its own behalf or on behalf of another, with intent
to fraudulently secure such benefit of payment; (iv) knowingly and willfully
soliciting or receiving any remuneration (including any kickback, bribe or
rebate), directly or indirectly, overtly or covertly, in cash or in kind or
offering to pay or receive such remuneration (a) in return for referring an
individual to a person for the furnishing or arranging for the furnishing of any
item or service for which payment may be made in whole or in part by Medicare or
Medicaid, or (b) in return for purchasing, leasing, or ordering or arranging for
or recommending purchasing, leasing, or ordering any good, facility, service, or
item for which payment may be made in whole or in part by Medicare or Medicaid;
and (v) referring a patient for Designated Health Services (within the meaning
of 42 U.S.C. (S)1395nn) when the referring physician has a financial
relationship with the entity to which the referral is made in the absence of an
applicable exception under 42 U.S.C. (S)1395nn.
2.20 Hospital Privileges. Schedule 2.20 hereto lists all of the hospitals
------------------- -------------
at which Seller is a member of the medical staff.
2.21 Employment Agreements. No event permitting termination under the
---------------------
Employment Agreement, if it were in effect at such time of such event, shall
have occurred at any time prior to the Closing Date. The Seller does not have
any current intention of terminating the Employment Agreement with Flagship
prior to the termination of its initial five (5) year term.
2.22 Employees. Schedule 2.22 contains a list of all employees of the
--------- -------------
Practice, other than Seller, along with the position and the annual rate of
compensation of each such person. To the knowledge of the Seller, no employee or
group of employees has any plans to terminate employment with the Practice or
not to continue as an employee of Flagship after the Closing Date.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF EACH OF PQC AND FLAGSHIP
Each of PQC and Flagship hereby jointly and severally represents and
warrants to Seller as of the date hereof and as of the Closing Date as follows:
-12-
<PAGE>
3.01 Organization. Each of PQC and Flagship is a corporation duly
------------
organized, validly existing and in good standing under the laws of the
jurisdictions of their incorporation and is duly qualified and is in good
standing as a foreign corporation in each jurisdiction where the nature of its
business, properties or other activities requires it to be qualified.
3.02 Capitalization of Physicians Quality Care, Inc. and Flagship.
------------------------------------------------------------
Section 3.02 accurately sets forth the authorized and outstanding capital stock
- ------------
of each of Flagship and PQC and sets forth a complete and accurate list of all
stockholders of each, indicating the number and class of shares held by each
stockholder. The authorized capital stock of PQC, consists of 75,000,000 shares
of Class A Common Stock, par value $0.01 per share, of which 11,979,447 shares
are outstanding, 15,267,915 shares of Class B-1 Common Stock, par value $0.01
per share, of which 1,587,863 shares are outstanding, 9,732,085 shares of Class
B-2 Common Stock, par value $0.01 per share, of which 1,012,137 shares are
outstanding, and 10,000,000 shares of Preferred Stock, par value $0.01 per
share, of which no shares are outstanding. Except for Physicians Quality Care
of Massachusetts, Inc. and Physicians Quality Care of Maryland, Inc., PQC is not
the record owner of the equity securities of any issuer. Flagship's authorized
capital stock consists of 1,000 shares of Common Stock, $5.00 par value per
share, of which 1,000 shares are outstanding. Except as set forth in Schedule
--------
3.02 attached hereto, there are not, and on the Closing Date there will not be,
- ----
outstanding (i) any options, warrants or other rights to purchase from Flagship
or PQC any capital stock of Flagship or PQC; (ii) any securities convertible
into or exchangeable for shares of such stock; or (iii) any other commitments of
any kind for the issuance of additional shares of capital stock or options,
warrants or other securities of Flagship or PQC. Except as disclosed in
Schedule 3.02, there are no agreements, voting trusts, proxies or understandings
- -------------
with respect to the voting, or registration under the Securities Act of 1933, as
amended (the "Securities Act") of any Shares. All of the issued and outstanding
Shares were issued in compliance with applicable federal and state securities
laws.
3.03 Authorization. The Boards of Directors of PQC and Flagship have duly
-------------
authorized the execution and delivery of this Agreement and the other
agreements, documents and instruments to be executed and delivered by PQC and
Flagship pursuant hereto and the consummation by PQC and Flagship of the
transactions contemplated hereby and thereby. No further corporate or other
proceedings on the part of PQC and Flagship are necessary to authorize this
Agreement or the other agreements, documents and instruments to be executed and
delivered by PQC and Flagship pursuant hereto or the transactions contemplated
hereby or thereby.
3.04 Valid and Binding Agreement. Each of Flagship and PQC has the
---------------------------
necessary power and authority to enter into this Agreement and the other
agreements, documents and instruments to be executed and delivered by PQC and
Flagship pursuant hereto, and to carry out the transactions contemplated hereby
and thereby. When fully executed and delivered, this Agreement and each of the
other agreements, documents and instruments to be executed and delivered by PQC
and Flagship pursuant hereto will constitute valid and binding agreements of PQC
and Flagship, enforceable against Flagship or PQC, as the case may be, in
accordance with their terms, except to the extent that enforceability is limited
by the bankruptcy or similar laws or by general principles of equity.
-13-
<PAGE>
3.05 No Violation. Neither the execution and delivery of this Agreement
------------
or the other agreements, documents and instruments to be executed and delivered
by PQC or Flagship pursuant hereto nor the consummation by PQC or Flagship of
the transactions contemplated hereby or thereby (a) will violate any provision
of the Certificate of Incorporation or By-laws of PQC or Flagship, each as
currently in effect, (b) will violate or conflict with any applicable statute,
law, ordinance, rule, regulation, order, judgment or decree, except that no
representation or warranty is made under this Section with regard to compliance
with the laws referred to in Section 3.09 or (c) will violate any contract or
commitment which violation would have the effect of preventing PQC or Flagship
from performing its obligations hereunder or preventing PQC, Flagship or any of
their affiliates from consummating the transactions contemplated herein and in
the agreements and instruments to be executed and delivered by PQC or Flagship
and its affiliates in connection therewith.
3.06 Consents; Filings. No registration or filing with, or consent,
-----------------
approval, permit, authorization or action by, any third party (including,
without limitation, any federal, state, local, foreign or other governmental
agency, instrumentality, commission, authority, board or body or other person or
entity) is required to be obtained by PQC or Flagship in connection with the
execution and delivery by PQC or Flagship of this Agreement or the other
agreements, documents and instruments to be executed and delivered by PQC or
Flagship pursuant hereto or the consummation by PQC or Flagship of the
transactions contemplated hereby or thereby.
3.07 Capital Stock. All shares of capital stock of PQC issued to the
-------------
Seller in connection with the transactions contemplated by this Agreement shall
be duly authorized, validly issued, fully paid and nonassessable and not subject
to any preemptive rights created by statute, PQC's Certificate of Incorporation
or By-Laws, or any agreement (other than the Stockholders Agreement dated as of
August 30, 1996 by and among PQC and certain of its Stockholders, as amended and
in effect from time to time (the "Stockholders Agreement") to which PQC is a
party or by which PQC is bound.
3.08 Brokers. Neither PQC nor Flagship is obligated to pay, nor has PQC
-------
or Flagship retained any broker or finder or other person who is entitled to,
any broker's or finder's fee or any other commission or financial advisory fee
based on any agreement or understanding made by PQC or Flagship in connection
with the transactions contemplated hereby.
3.09 Fraud and Abuse; Stark Law. Neither Flagship nor PQC has engaged in
--------------------------
any activities which are prohibited under 42 U.S.C. (S)1320a-7b, 42 U.S.C.
(S)1395nn et seq. or the regulations promulgated thereunder pursuant to such
-- ---
statutes, or related state or local statutes or regulations, or which are
prohibited by rules of professional conduct, including but not limited to the
following: (i) knowingly and willfully making or causing to be made a false
statement or representation of a material fact in any application for any
benefit or payment; (ii) knowingly and willfully making or causing to be made
any false statement or representation of a material fact for use in determining
rights to any benefit or payment; (iii) failure to disclose knowledge by a
claimant of the occurrence of any event affecting the initial
-14-
<PAGE>
or continued right to any benefit or payment on its own behalf or on behalf of
another, with intent to fraudulently secure such benefit of payment; (iv)
knowing and willfully soliciting or receiving any remuneration including any
kickback, bribe or rebate), directly or indirectly, overtly or covertly, in cash
or in kind or offering to pay or receive such remuneration (a) in return for
referring an individual to a person for the furnishing or arranging for the
furnishing of any item or service for which payment may be made in whole or in
part by Medicare or Medicaid, or (b) in return for purchasing leasing, or
ordering or arranging for or recommending purchasing leasing, or ordering any
good, facility or item for which payment may be made in whole or in part by
Medicare or Medicaid; and (v) referring a patient for Designated Health Services
(within the meaning of 42 U.S.C. (S)1395nn) when the referring physician has a
financial relationship with the entity to which the referral is made in the
absence of an applicable exception under 42 U.S.C. (S)1395nn.
3.10 Litigation. Except as set forth on Schedule 3.10, there is not, and
---------- -------------
during the past five (5) years there has not been any, action, order, writ,
injunction, judgment or decree outstanding or any claim, suit, litigation,
proceeding, labor dispute, arbitral action, governmental audit or investigation
(collectively, "Actions") pending or, to the best of PQC's or Flagship's
knowledge: (a) threatened against, related to or affecting (i) PQC or Flagship
(ii) any officers, directors or employees of the PQC or Flagship as such, or
(iii) any stockholder of PQC or Flagship in such stockholder's capacity as a
stockholder of the PQC or Flagship; (b) seeking to delay, limit or enjoin the
transactions contemplated by this Agreement; (c) that involves the risk of
criminal liability; or (d) in which PQC or Flagship is a plaintiff. Neither PQC
nor Flagship is in default with respect to or subject to any judgment, order,
writ, injunction or decree of any court or governmental agency, and there are no
unsatisfied judgments against the PQC or Flagship.
3.11 Disclosure. No representation or warranty by PQC or Flagship
----------
contained in this Agreement or in any other document delivered to the Company in
connection with its due diligence investigation of PQC or Flagship, taken as a
whole, contains or will contain any untrue statement of a material fact or omits
or will omit to state any material fact necessary, in light of the circumstances
under which it was or will be made, in order to make the statements herein or
therein not misleading. PQC and Flagship have disclosed to the Company all
material information relating to the PQC and Flagship and the transactions
contemplated by this Agreement.
ARTICLE IV
CERTAIN COVENANTS OF THE PARTIES
4.01 Purchase Price Allocation. The allocation of the Purchase Price,
-------------------------
which shall be utilized by the parties hereto in connection with the preparation
of their respective federal and state tax returns and the return required by
Section 1060 of the Code, shall be as set forth on Schedule 4.01, attached
-------------
hereto. Such allocation shall be subject to adjustment to the extent that the
Purchase Price is adjusted pursuant to the terms of this Agreement.
-15-
<PAGE>
4.02 Reasonable Efforts to Close. Each of Seller, PQC and Flagship shall
---------------------------
use its respective reasonable efforts to proceed to the closing of the purchase
and sale of the Assets and to satisfy any of the conditions precedent to the
other Party's obligations set forth in Article VI or Article VII, as the case
may be, to the extent such conditions are within such Party's control. Seller
shall use the Seller's reasonable efforts: (i) to keep available the services
of the professional and non-professional members of the Practice's staff; (ii)
to maintain all existing relationships with and the goodwill of all managed care
payors, patients and others having business or professional relations with the
Seller related to the Practice; and (iii) to obtain prior to the Closing Date
all consents necessary to consummate the transaction contemplated by this
agreement or any other agreement referred to herein.
4.03 Confidentiality. All information not previously disclosed to the
---------------
public or generally known to persons engaged in the respective businesses of the
Seller, PQC or Flagship which shall have been furnished by PQC, Flagship or the
Seller to the other Parties in connection with the transactions contemplated
hereby or as provided pursuant to this Agreement shall not be disclosed to any
person other than their respective employees, directors, attorneys, accountants
or financial advisors or other than as expressly contemplated herein or as
required by law or legal process. In the event that the transactions
contemplated by this Agreement shall not be consummated, all such information
which shall be in writing shall upon request be returned to the Party furnishing
the same, including, to the extent reasonably practicable, all copies or
reproductions thereof which may have been prepared, and none of the Parties,
without the consent of PQC and the Seller, shall at any time thereafter disclose
to third parties, or use, directly or indirectly, for its own benefit, any such
information, written or oral, about the business of the other Parties hereto.
4.04 Public Announcements. The Parties agree that prior to the Closing
--------------------
Date, except as otherwise required by law, any and all public announcements or
other public communications concerning this Agreement and the purchase of the
Assets by Flagship shall be subject to the approval of each of the Parties,
which approval shall not be unreasonably withheld.
4.05 Certain Transaction Costs. Each party shall bear its own transaction
-------------------------
costs, including fees of counsel and auditors, in connection with the execution
and delivery of this Agreement.
4.06 Continued Truth of Representations and Warranties. The Seller shall
-------------------------------------------------
not take any actions which would result in any of the representations or
warranties set forth in Article 2 hereof being untrue. Neither Flagship nor PQC
shall take any actions which would result in any of the representations and
warranties set forth in Article 3 hereof being untrue.
4.07 Continuing Obligation to Inform. From time to time prior to the
-------------------------------
Closing, the Parties shall deliver or cause to be delivered to the other Parties
supplemental information concerning events subsequent to the date hereof which
would render any statement, representation or warranty in this Agreement or any
information contained in any Schedule inaccurate or incomplete in any material
respect at any time after the date hereof until the Closing Date.
-16-
<PAGE>
ARTICLE V
PRE-CLOSING COVENANTS OF THE SELLER
From and after the date hereof and until the Closing Date or termination of
this Agreement in accordance with Article IX:
5.01 Conduct of Business. The Seller shall carry on the Practice
-------------------
diligently and substantially in the same manner as heretofore and shall not make
or institute any unusual or new methods of practice, management, accounting or
operation, except as expressly contemplated in this Agreement or any other
agreement referred to herein or as agreed to in writing by PQC. All of the
property of the Seller used in the Practice shall be used, operated, repaired
and maintained in a normal business manner consistent with past practice.
5.02 Absence of Material Changes. Without the prior written consent of
---------------------------
PQC (which consent shall not be unreasonably withheld), the Seller shall not:
(a) Incur any obligations or liabilities (absolute or contingent) related
to the Practice greater than one thousand dollars ($1,000) in the aggregate,
except current liabilities incurred and obligations under contracts entered into
in the ordinary course of business;
(b) Mortgage, pledge, or subject to any lien, charge or any other
encumbrance any of the Assets;
(c) Sell, assign, or transfer any of the Assets;
(d) Cancel any debts or claims that are included in the Assets, except in
the ordinary course of business;
(e) Make, accrue or become liable for any bonus, profit sharing or
incentive payment, except for accruals under existing plans, if any, or increase
the rate of compensation payable or to become payable by the Seller to any
employee, other than increases in the ordinary course of business consistent
with past practice;
(f) Make any election or give any consent under the Code or the tax
statutes of any state or other jurisdiction or make any termination, revocation
or cancellation of any such election or any consent or compromise or settle any
claim for past or present tax due.
(g) Waive any rights of material value that are included in the Assets;
(h) Take or permit any act or omission constituting a breach or default
under any contract, indenture or agreement included in the Assets by which the
Seller or the Seller's properties are bound;
(i) Modify, amend, alter or terminate any executory contracts of a
material value or which are material in amount and are included in the Assets;
-17-
<PAGE>
(j) Fail to use the Seller's reasonable efforts to: (i) preserve the
possession and control of the Assets and the Practice; (ii) keep in faithful
service the present employees of the Practice; (iii) preserve the goodwill of
the Practice's patients, suppliers, agents, brokers and others having business
relations with the Practice; and (iv) keep and preserve the Practice's business
existing on the date hereof until after the Closing Date;
(k) Fail to operate the Practice's business and maintain the Practice's
books, accounts and records in the customary manner and in the ordinary or
regular course of business and maintain in good repair the Practice's business
premises, fixtures, machinery, furniture and equipment;
(l) Enter into any leases, contracts, agreements or understandings
related to the Practice which is required to be performed in whole or in
material part after the Closing Date;
(m) Engage any new Practice employee except in the ordinary course of
business;
(n) Materially alter the terms, status or funding condition of any
Employee Plan; or
(o) Commit or agree to do any of the foregoing in the future.
5.03 Taxes. The Seller will, on a timely basis, file all tax returns for
-----
and pay any and all taxes which shall become due or shall have accrued (a) on
account of the operation of the Practice or the ownership of the Assets on or
prior to the Closing Date or (b) on account of the sale of the Assets (including
a pro-rata portion of all personal property and excise taxes payable with
respect to the Assets by the Seller).
5.04 Compliance with Laws. The Seller will comply in all material
--------------------
respects with all laws and regulations which are applicable to the Seller and
the Practice, the Seller's ownership of the Assets or to the conduct of the
Practice and will perform and comply in all material respects with all
contracts, commitments and obligations related to the Practice by which the
Seller is bound.
5.05 Exclusive Dealing. The Seller will not, directly or indirectly,
-----------------
through any agent or otherwise, (a) solicit, initiate or encourage submission of
proposals or offers from any person relating to any affiliation transaction
between the Seller and any health care company or practice management company or
any acquisition or purchase of all or a material portion of the Assets, or any
equity investment, merger, consolidation or business combination with the
Practice, or (b) participate in any discussions or negotiations regarding, or
furnish to any other person, any non-public information with respect to, or
otherwise cooperate in any way with, or assist or participate in, facilitate or
encourage, any effort or attempt by any other person to do or seek any of the
foregoing except to inform such person of Seller's obligations hereunder.
5.06 Access to Management; Properties and Records. From the date of this
--------------------------------------------
Agreement until the Closing Date, the Seller shall afford the officers,
attorneys, accountants
-18-
<PAGE>
and other authorized representatives of PQC, free and full access, upon
reasonable notice and during normal business hours, to all management personnel,
offices, properties, books and records of the Seller related to the Practice,
and all properties under the management of the Seller related to the Practice
and all records relating thereto, so that PQC may have full opportunity to make
such investigation as it shall desire to make of the management, business,
properties and affairs of the Seller related to the Practice and the properties
under the management of Seller related to the Practice, and PQC and Flagship
shall be permitted to make abstracts from, or copies of, all such books and
records. The Seller shall furnish to PQC and Flagship such financial and
operating data and other information as to the Assets and the Practice as PQC
and Flagship shall reasonably request.
5.07 Severance Obligations. Seller shall satisfy all severance
---------------------
obligations related to each person employed by Seller prior to or at the Closing
Date who is to become employed by Flagship after the Closing Date.
ARTICLE VI
CONDITIONS TO OBLIGATIONS OF PQC AND FLAGSHIP
The obligations of PQC and Flagship under this Agreement are subject to the
fulfillment, at the Closing Date, of the following conditions precedent, each of
which may be waived in writing in the sole discretion of PQC:
6.01 Delivery of Documents. Seller shall have delivered to PQC and
---------------------
Flagship all items described in Section 1.03 above.
6.02 Due Diligence. Seller shall have provided to PQC access to all
-------------
materials and information requested by PQC to allow PQC to conduct a thorough
due diligence review of all aspects of the Practice in such detail as PQC in its
discretion deems appropriate, and PQC shall in its sole discretion be satisfied
with the results of that review in both scope and substance.
6.03 Continued Truth of Representations and Warranties of Seller;
------------------------------------------------------------
Compliance with Covenants and Obligations. The representations and warranties
- -----------------------------------------
of Seller shall be true on and as of the Closing Date as though such
representations and warranties were made on and as of such date, except for any
changes permitted by the terms hereof or consented to in writing by PQC. Seller
shall have performed and complied with all terms, conditions, covenants,
obligations, agreements and restrictions required by this Agreement to be
performed or complied with by the Seller prior to or at the Closing Date.
6.04 No Proceedings or Litigation. No action by any governmental
----------------------------
authority or other person shall have been instituted or threatened which
questions the validity or legality of the transactions contemplated hereby and
which could reasonably be expected to result in a Material Adverse Effect.
There shall not be any statute, rule or regulation that makes the purchase and
sale of the Assets contemplated hereby illegal or otherwise prohibited.
-19-
<PAGE>
6.05 Material Changes. Between the date of the latest Financial
----------------
Statements and the Closing, there shall not have been any Material Adverse
Change in the business, prospects, operations or conditions of the Practice or
in the Assets.
6.06 Stockholders Agreement. The Seller shall have entered into and be in
----------------------
compliance with the Stockholders Agreement between the Seller and PQC.
6.07 Other Transactions. Each of the medical practices listed on Schedule
------------------ --------
6.07 shall have entered into or delivered: (i) an agreement among PQC, Flagship
- ----
and such practice to merge such Practice into Flagship or for Flagship or PQC to
purchase substantially all of the assets of such practice; and (ii) all
physicians employed by such medical practice shall have entered into an
Employment Agreement.
6.08 PQC's Right to Restructure. Prior to the Closing, PQC shall have the
--------------------------
right to review the terms of any agreement or transaction between the Seller or
affiliate of the Seller, which agreement or transaction relates to or affects
the Assets or the Practice ("Related Party Transactions"). To the extent that
PQC determines that the terms of any such Related Party Transaction would not be
fair and commercially reasonable to Flagship or PQC, PQC shall be entitled to
require, as a condition to its obligation under this Agreement, amendments to
such Related Party Transactions as shall be reasonably satisfactory to PQC,
acting reasonably, in order to cause such Related Party Transactions to be fair
and commercially reasonable to Flagship and PQC.
ARTICLE VII
CONDITIONS TO OBLIGATIONS OF SELLER
The obligations of the Seller under this Agreement are subject to the
fulfillment, at the Closing Date, of the following conditions precedent, each of
which may be waived in writing in the sole discretion of the Seller:
7.01 Delivery of Documents. PQC and Flagship shall have delivered to the
---------------------
Seller all items described in Section 1.04 above.
7.02 Continued Truth of Representations and Warranties of PQC and
------------------------------------------------------------
Flagship; Compliance with Covenants and Obligations. The representations and
- ---------------------------------------------------
warranties of Flagship and PQC shall be true on and as of the Closing Date as
though such representations and warranties were made on and as of such date,
except for any changes permitted by the terms hereof or consented to in writing
by Seller. Flagship and PQC shall have performed and complied with all terms,
conditions, covenants, obligations, agreements and restrictions required by this
Agreement to be performed or complied with by it prior to or at the Closing
Date.
7.03 Related Party Transactions. Any restructuring of a Related Party
--------------------------
Transaction proposed by PQC pursuant to Section 6.08 shall be acceptable to
Seller.
-20-
<PAGE>
7.04 Due Diligence. PQC shall have provided Seller with access to all
-------------
materials and information requested by Seller to allow Seller to review the
business of PQC and its affiliates (including, without limitation, information
relating to the stock of PQC to be issued to the Seller), and Seller shall in
its sole discretion be satisfied with the results of that review in both scope
and substance.
7.05 No Proceedings or Litigation. No action by any governmental
----------------------------
authority or other person shall have been instituted or threatened which
questions the validity or legality of the transactions contemplated hereby and
which could reasonably be expected to damage Flagship or PQC materially if the
transactions contemplated hereby are consummated, including without limitation
any material adverse effect on the right or ability of Flagship to own, operate,
possess or transfer the Assets after the Closing. There shall not be any
statute, rule or regulation that makes the purchase and sale of the Assets
contemplated hereby illegal or otherwise prohibited.
7.06 Offers of Employment. Flagship shall have offered employment to the
--------------------
persons listed on Schedule 7.06.
-------------
7.07 Financing. (a) there shall have been no material modification to
---------
that Class B Common Stock and Warrant Purchase Agreement between PQC and Bain
Capital Fund V, L.P., Bain Capital Fund V-B, L.P., BCIP Associates, and BCIP
Trust Associates, L.P. dated as of August 30, 1996 (the "Bain Agreement"), to
furnish capital to PQC; and (b) the Bain Agreement shall still be in full force
and effect.
7.08 Material Changes. Between June 1, 1996 and the Closing, there shall
----------------
not have been any Material Adverse Change in the business, prospects, operations
or conditions of Flagship or PQC.
7.09 Other Transactions. (i) Each of the medical practices listed on
------------------
Schedule 6.07 shall have simultaneously consummated the merger of that practice
- -------------
into Flagship or shall have sold substantially all of its assets to Flagship or
PQC, and (ii) employment agreements shall have been signed by Flagship and each
physician currently a stockholder, partner or employee of such practice.
7.10 Services Agreement. PQC and Flagship shall have mutually executed
------------------
and delivered to each other the Services Agreement in the form and substance
attached hereto as Exhibit D.
---------
7.11 PQC and Flagship Closing Conditions. Each of the conditions
-----------------------------------
precedent set forth in Article VI above shall have been satisfied or waived in
writing by PQC and Flagship.
-21-
<PAGE>
ARTICLE VIII
SURVIVAL AND INDEMNIFICATION
8.01 Indemnification.
---------------
(a) Seller shall indemnify, defend, and hold harmless each of Flagship
and PQC and their respective subsidiaries and affiliates and their respective
directors, officers, employees and agents or the successor of any of the
forgoing (collectively, the "PQC Indemnified Persons"), and reimburse the PQC
Indemnified Persons for, from and against all payments, demands, claims, suits,
judgments, liabilities, losses, costs, damages and expenses, including, without
limitation, interest, penalties and reasonable attorneys' fees, disbursements
and expenses, ("Losses") imposed on or incurred by the PQC Indemnified Persons,
directly or indirectly, which relate to or arise out of any of: (i) breach of
any representation and warranty of, or covenant or agreements to be performed
by, Seller contained in this Agreement, the Affiliation Agreement or the
Stockholders' Agreement and; (ii) any of the liabilities or obligations retained
by Seller pursuant to Section 1.02. Notwithstanding the foregoing or any other
term or condition contained herein or in any other agreement or instrument
referred to herein, the indemnification obligations of Seller under this Section
8.01(a) and under the Affiliation Agreement shall be limited, in the aggregate,
to the dollar value on the Closing Date of the Purchase Price and the
consideration under the Affiliation Agreement between Seller and PQC or its
affiliates.
(b) Flagship and PQC shall indemnify and hold harmless Seller and its
agents (collectively, "Seller Indemnified Persons" and together with the PQC
Indemnified Persons, the "Indemnified Persons"), and reimburse such Indemnified
Persons for, from, and against all Losses imposed on or incurred, directly or
indirectly, by such Indemnified Persons which relate to or arise out of (i)
breach of any representation or warranty of, or covenant or agreement to be
performed by, PQC or Flagship, in each case contained in this Agreement or the
Affiliation Agreement and (ii) the Assumed Liabilities.
(c) An Indemnified Party shall give prompt written notice to an
indemnifying party (the "Indemnifying Party") of any payments, demands, claims,
suits, judgments, liabilities, losses, costs, damages or expenses (a "Claim") in
respect of which such Indemnifying Party has a duty to provide indemnity to such
Indemnified Party under this Section 8.01, except that any delay or failure so
to notify the Indemnifying Party only shall relieve the Indemnifying Party of
its obligations hereunder to the extent, if at all, that it is prejudiced by
reason of such delay or failure.
(d) If a Claim is brought or asserted by a third party (a "Third-Party
Claim"), the Indemnifying Party shall assume the defense thereof, including the
employment of counsel reasonably satisfactory to the Indemnified Party and the
payment of all expenses. The Indemnified Party shall have the right to employ
separate counsel in such Third-Party Claim and participate in the defense
thereof, but the fees and expenses of such counsel shall be at the expense of
the Indemnified Party. In the event that the Indemnifying Party, within twenty
(20) days after written notice of any Third-Party Claim, fails to assume the
defense thereof, or in the event the Indemnifying Party fails to demonstrate, to
the reasonable
-22-
<PAGE>
satisfaction of the Indemnified Party, that it has sufficient assets to meet its
indemnification obligations hereunder, the Indemnified Party shall have the
right to undertake the defense, compromise or settlement of such Third-Party
Claim for the account of the Indemnifying Party. Anything in this Section 8.01
to the contrary notwithstanding, the Indemnifying Party shall not, without the
Indemnified Party's prior written consent, settle or compromise any Third-Party
Claim or consent to the entry of any judgment with respect to any Third-Party
Claim which would have any adverse effect on the Indemnified Party, except as
provided immediately below. The Indemnifying Party may, without the Indemnified
Party's prior written consent, settle or compromise any such Third-Party Claim
or consent to entry of any judgment with respect to any Third-Party Claim which
requires solely money damages paid by the Indemnifying Party and which includes
as an unconditional term thereof the release by the claimant or the plaintiff of
the Indemnified Party from all liability in respect of such Third-Party Claim.
(e) With respect to any Claim other than a Third-Party Claim, the
Indemnifying Party shall have thirty (30) days from receipt of written notice
from the Indemnified Party of such Claim within which to respond thereto. If
the Indemnifying Party does not respond within such thirty (30)-day period, the
Indemnifying Party shall be deemed to have accepted responsibility to make
payment and shall have no further right to contest the validity of such Claim.
If the Indemnifying Party notifies the Indemnified Party within such thirty
(30)-day period that it rejects such Claim in whole or in part, the Indemnified
Party shall be free to pursue such remedies as may be available to the
Indemnified Party under applicable law.
8.02 Survival of Representations; Claims for Indemnification. All
-------------------------------------------------------
representations, warranties, covenants and agreements made by the Parties herein
or in any instrument or document furnished in connection herewith shall survive
the Closing and any investigation at any time made by or on behalf of the
parties hereto. All such representations and warranties and the Seller's
obligations pursuant to Sections 8.01(a)(i) and (ii) and PQC's and Flagship's
obligations pursuant to Section 8.01(b) shall expire on the third anniversary of
the Closing Date, except for claims, if any, asserted in writing prior to such
third anniversary, which shall survive until finally resolved and satisfied in
full. All claims and actions for indemnity pursuant to this Section 8 shall be
asserted or maintained in writing by a Party hereto on or prior to the
expiration of such periods.
8.03 Confidentiality. The Parties hereto agree to use reasonable
---------------
efforts to preserve in full the confidentiality of all confidential business
records and the attorney-client and work-product privileges. In connection
therewith, each Party hereto agrees that:
(a) it will use all reasonable efforts, in any action, suit or
proceeding in which it has assumed or participated in the defense, to avoid
production of confidential business records; and
(b) all communications between any Party hereto and counsel
responsible for, or participating in, the defense of any action, suit or
proceeding shall, to the extent possible, be made so as to preserve any
applicable attorney-client or work-product privilege.
-23-
<PAGE>
8.04 Remedies Cumulative. Except as otherwise provided herein, the
-------------------
remedies provided herein shall be cumulative and shall not preclude the
assertion by any Party hereto of any other rights or the seeking of any other
remedies against any other Party hereto.
8.05 Set-off and Recoupment. Any amount or amounts due from any
----------------------
Indemnifying Party to PQC under this Section 8 may be paid to PQC, at PQC's
option, by set-off or recoupment against any amounts due to the Indemnifying
Party pursuant to this Agreement or pursuant to any agreement between the
Indemnifying Party and PQC or any of its affiliates. Any such set-off will be
without prejudice to PQC's right to pursue any other remedies at law or in
equity available to it.
ARTICLE IX
TERMINATION
9.01 Optional Termination. This Agreement may be terminated and the
--------------------
transaction contemplated herein abandoned at any time prior to the Closing as
follows:
(a) by the mutual consent of the Seller, Flagship and PQC;
(b) by the Seller, upon a material breach of any representation,
warranty, covenant or agreement on the part of PQC or Flagship set forth in this
Agreement, or if any representation or warranty of PQC and Flagship has become
materially untrue, in either case such that any of the conditions set forth in
Article VII would be incapable of being satisfied by December 20, 1996;
provided, that in any case, a willful breach will be deemed to cause such
conditions to be incapable of being satisfied for purposes of this paragraph
(b). Any breach on the part of PQC or Flagship of the representations and
warranties contained in Article III or the covenants contained in Article IV and
V, which permits termination of this Agreement shall permit the Seller to
immediately terminate any other agreement between PQC and/or Flagship and the
Seller;
(c) by PQC upon a material breach of any representation, warranty,
covenant or agreement on the part of the Seller set forth in this Agreement, or
if any representation or warranty of the Seller has become materially untrue, in
either case such that any of the conditions set forth in Article VI would be
incapable of being satisfied by December 20, 1996; provided, that in any case, a
willful breach will be deemed to cause such conditions to be incapable of being
satisfied for purposes of this paragraph (c). Any breach on the part of the
Seller of the representations and warranties contained in Article II or the
covenants contained in Articles IV and V, which permits termination of this
Agreement shall permit PQC and/or Flagship to immediately terminate any other
agreement between Flagship and/or PQC and the Seller; or
(d) by either party if the Closing shall not have occurred by December
20, 1996; or such other date agreed to by the Parties.
-24-
<PAGE>
(e) Effect of Termination. In the event this Agreement is terminated
---------------------
as provided above, (a) each of PQC, Flagship and Seller shall, upon another
Party's request, deliver to such other Party all documents previously delivered
(and copies thereof in its possession) concerning one another and the
transactions contemplated hereby, and (b) none of the Parties nor any of their
respective stockholders, directors, officers or agents shall have any liability
to the other Parties, except for any deliberate breach or deliberate omission
resulting in a material breach of any of the provisions of this Agreement. In
such case, the breaching Party shall be liable only for the expenses and costs
of the non-breaching Party, and in no event shall either Party be liable for
anticipated profits or consequential damages. After termination each Party
shall keep confidential all information provided by the others pursuant to this
Agreement which is not in the public domain, shall exercise the same degree of
care in handling such information as it would exercise with similar information
of its own, and shall return any such information upon another Party's request.
ARTICLE X
GENERAL PROVISIONS
10.01 Amendment and Waiver. No amendment of any provision of this
--------------------
Agreement shall in any event be effective unless the same shall be in writing
and signed by the Parties hereto. Any failure of any Party to comply with any
obligation, agreement or condition hereunder may only be waived in writing by
PQC if such failure is by Seller and by Seller if such failure is by PQC or
Flagship, but such waiver shall not operate as a waiver of, or estoppel with
respect to, any subsequent or other failure. No failure by any Party to take
any action against any breach of this Agreement or default by the other A Party
shall constitute a waiver of such Party's right to enforce any provision hereof
or to take any such action.
10.02 Notices. All notices, requests, demands and other communications
-------
hereunder shall be in writing and shall be sent by personal delivery or
registered or certified mail, postage prepaid, or by telecopier as follows:
(a) if to Seller:
---------------------
---------------------
---------------------
-25-
<PAGE>
with a copy to:
Hogan & Hartson L.L.P.
Columbia Square
555 Thirteenth Street, N.W.
Washington, DC 20004-1109
Attention: Michael Williams, Esq.
(b) if to PQC or Flagship:
Physicians Quality Care, Inc.
950 Winter Street, Suite 2410
Waltham, MA 02154
with a copy to:
Anne P. Ogilby, Esq.
Ropes & Gray
One International Place
Boston, MA 02110
Any Party may change its address for receiving notice by written notice given to
the others named above. All notices shall be effective upon the earlier of
actual delivery or when deposited in the mail addressed as set forth above.
10.03 Counterparts. This Agreement may be executed simultaneously in two
------------
(2) or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same Agreement.
10.04 Parties in Interest. This Agreement shall bind and inure to the
-------------------
benefit of the Parties named herein and their respective heirs, successors and
assigns. This Agreement shall not be assignable by any Party without the prior
written consent of the other Parties.
10.05 Further Assurances. From time to time, at the request of any Party
------------------
hereto and without further consideration, the other Parties will execute and
deliver to such requesting Party such documents and take such other action (but
without incurring any material financial obligation) as such requesting Party
may reasonably request in order to consummate more effectively the transactions
contemplated hereby, including, without limitation, vesting in Flagship good,
valid and marketable title to the Assets.
10.06 Entire Transaction. This Agreement and the other agreements,
------------------
documents and instruments referred to herein contain the entire understanding
among the Parties with respect to the transactions contemplated hereby and
supersede all other agreements and understandings among the Parties.
-26-
<PAGE>
10.07 Applicable Law. This Agreement shall be governed by and
--------------
construed in accordance with the internal substantive laws of the State of
Maryland, and the Parties hereby consent to the sole jurisdiction of the federal
courts sited in the State of Maryland over all matters relating to this
Agreement.
10.08 Headings. The section and other headings contained in this
--------
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
10.09 Expenses. Except as otherwise expressly provided herein (including
--------
Section 4.05), each Party to this Agreement shall pay its own costs and expenses
in connection with the transactions contemplated hereby. Seller shall be
responsible for any documentary and transfer taxes and any sales, use or other
taxes imposed by reason of the transfers of Assets provided hereunder and any
deficiency, interest or penalty asserted with respect thereto.
10.10 Third Parties. Except as specifically set forth or referred to
-------------
herein, nothing herein expressed or implied is intended or shall be construed to
confer upon or give to any person or entity other than the Parties hereto and
their successors or assigns, any rights or remedies under or by reason of this
Agreement.
10.11 Severability. If any term, provision, covenant or restriction of
------------
this Agreement is held by a court of competent jurisdiction to be invalid, void
or unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated.
10.12 Gender. All references herein to the masculine gender shall be
------
deemed to include the feminine or neuter gender as appropriate.
10.13 Cross Reference Table. The following terms defined elsewhere in
---------------------
this Agreement in the Sections set forth below shall have the respective
meanings therein defined.
<TABLE>
<CAPTION>
Term Definition
---- ----------
<S> <C>
"Actions" Section 2.14
"Affiliation Agreement" Section 1.03
"Assets" Section 1.01
"Assumed Liabilities" Section 1.02
"Bain Agreement" Section 7.07
"Claim" Section 8.01
"Closing" Section 1.01
"Code" Section 2.07
"Contracts" Section 2.11
"Employee Plans" Section 2.18
"Employment Agreement" Section 1.03
"Encumbrances" Section 2.08
"ERISA" Section 2.18
"ERISA Affiliate" Section 2.18
"Excluded Assets" Section 1.01
</TABLE>
-27-
<PAGE>
<TABLE>
<S> <C>
"Excluded Liabilities" Section 1.02
"Financial Statements" Section 2.04
"Flagship" Introduction
"Government Entity" Section 2.03
"Indemnified Persons" Section 8.01
"Indemnifying Party" Section 8.01
"Inventory" Section 1.01
"Leases" Section 2.10
"Losses" Section 8.01
"Material Adverse Effect" Section 2.02
"multi-employer plan" Section 2.18
"Permits" Section 2.12
"PQC" Introduction
"PQC Indemnified Persons" Section 8.01
"Practice" Recitals
"Premises Lease" Section 1.03
"Purchase Orders" Section 1.01
"Purchase Price" Section 1.04
"Report" Section 1.04
"Securities Act" Section 3.02
"Seller" Introduction
"Seller Indemnified Persons" Section 8.01
"tax exempt use property" Section 2.07
"Taxes" Section 2.07
"Third-Party Claim" Section 8.01
</TABLE>
[Rest of Page Intentionally Left Blank]
-28-
<PAGE>
IN WITNESS WHEREOF, each of the Parties has caused this Agreement to be duly
executed all as of the day and year first written above.
---------------------------
FLAGSHIP HEALTH, P.A.
By:
------------------------
Name:
Title:
PHYSICIANS QUALITY CARE, INC.
By:
------------------------
Name:
Title:
<PAGE>
AFFILIATION AGREEMENT
---------------------
THIS AGREEMENT is made and entered into this 11th day of December,
1996, by and among (the "Physician"), Flagship Health,
-------------------------
P.A., a Maryland professional association with its principal offices at 323 West
Camden Street, Suite 675, Baltimore, MD 21201 ("Flagship"), and Physicians
Quality Care, Inc., a Delaware corporation with its principal offices at 950
Winter Street, Waltham, MA 02154 ("PQC").
Any defined terms used herein and not defined herein shall have the
meaning assigned thereto in the Asset Purchase Agreement (as defined below).
Recitals
--------
The Physician owns and operates a medical practice (the "Practice") and
certain assets utilized in connection therewith.
PQC and Flagship have entered into an asset purchase agreement with the
Physician (the "Asset Purchase Agreement") pursuant to which Flagship is
acquiring substantially all of the assets used in the Practice.
Now therefore, in consideration of the respective representations,
warranties, covenants, agreements and conditions hereinafter set forth, and
intending to be legally bound hereby, the parties hereto agree as follows:
ARTICLE I
AGREEMENT TO AFFILIATE
1.01 Agreement to Affiliate. In consideration of the agreement of
----------------------
PQC to make the Affiliation Payments set forth in Section
1.02, the Physician agrees to leave his current practice, to
become affiliated with Flagship as a licensed physician and to
enter into and keep in full force and effect during its stated
term the Employment Agreement executed on even date herewith.
1.02 Affiliation Payments. In consideration of the Physician
--------------------
performing the Physician's obligations under Section 1.01,
PQC agrees that PQC shall make the following payments to
the Physician:
(i) The amount of cash set forth on Schedule 1.02; and
-------------
(ii) The number of shares of PQC Common Stock, $.01 par
value per share (the "PQC Shares"), determined in
accordance with Section 1.03 with an aggregate fair
market value set forth on Schedule 1.02, subject to
-------------
the conditions set forth in Section 1.03
1.03 PQC Shares
----------
(a) The fair market value of the PQC Shares issued to the Physician
pursuant to Section 1.02 shall be equal to Two Dollars and Fifty Cents ($2.50)
per share.
<PAGE>
(b) The Physician agrees to enter into, and the PQC Shares shall be
subject to, the Stockholders Agreement.
(c) The Physician represents, warrants and covenants to PQC as follows:
(i) The Physician is acquiring the PQC Shares for the
Physician's own account for investment only, and not
with a view to, or for sale in connection with, any
distribution of the PQC Shares in violation of the
Securities Act of 1933, as amended (the "Securities
Act"), or any rule or regulation under the Securities
Act.
(ii) The Physician has received a copy of the Confidential
Private Placement Memorandum, dated as of December,
1996, with respect to PQC and the PQC Shares and has
had such opportunity as the Physician has deemed
adequate to obtain from representatives of PQC such
information as is necessary to permit the Physician
to evaluate the merits and risks of his investment in
PQC.
(iii) The Physician has sufficient experience in business,
financial and investment matters to be able to
evaluate the risks involved in the acquisition of the
PQC Shares and to make an informed investment
decision with respect to such acquisition.
(iv) The Physician can afford a complete loss of the value
of the PQC Shares and is able to bear the economic
risk of holding such PQC Shares for an indefinite
period.
(v) The Physician understands that (i) the PQC Shares
have not been registered under the Securities Act and
are "restricted securities" within the meaning of
Rule 144 under the Securities Act; (ii) the PQC
Shares cannot be sold, transferred or otherwise
disposed of unless they are subsequently registered
under the Securities Act or an exemption from
registration is then available; (iii) in any event,
the exemption from registration under Rule 144 will
not be available for at least two (2) years and even
then will not be available unless a public market
then exists for the common stock of PQC, adequate
information concerning PQC is then available to the
public, and other terms and conditions of Rule 144
are complied with; and (iv) there is now no
registration statement on file with the Securities
and Exchange Commission with respect to any stock of
PQC and PQC has no obligation or current intention to
register the PQC Shares under the Securities Act.
(vi) A legend substantially in the following form will be
placed on the certificate representing the PQC
Shares:
"The shares represented by this certificate were
issued in a private placement, without registration
under the Securities Act of 1933, as
-2-
<PAGE>
amended (the "Act"), and may not be sold, assigned,
pledged or otherwise transferred in the absence of an
effective registration under the Act covering the
transfer or an opinion of counsel, satisfactory to
the issuer, that registration under the Act is not
required."
(vii) The Physician is an "accredited investor" as defined
in Rule 501 of the rules and regulations under the
Securities Act.
ARTICLE II
REPRESENTATIONS, WARRANTIES AND COVENANTS
The representations and warranties contained in Article II of the Asset
Purchase Agreement are incorporated herein and made by the Physician to PQC. The
representations and warranties contained in Article III of the Asset Purchase
Agreement are incorporated herein and made by PQC and Flagship to the Physician.
ARTICLE III
CONDITIONS TO OBLIGATIONS OF PQC
The obligations of PQC under this Agreement are subject to the delivery
on the Closing Date of the documents required to be delivered pursuant to
Article VI of the Asset Purchase Agreement and the satisfaction on the Closing
Date of the conditions set forth in Article VI of the Asset Purchase Agreement,
each of which deliveries and conditions may be waived in writing in the sole
discretion of PQC.
ARTICLE IV
CONDITIONS TO OBLIGATIONS OF THE PHYSICIAN
The obligations of the Physician under this Agreement are subject to
the delivery on the Closing Date of the documents set forth in Article VII of
the Asset Purchase Agreement and satisfaction on the Closing Date of the
conditions set forth in Article VII of the Asset Purchase Agreement, each of
which delivery and conditions may be waived in writing in the sole discretion of
the Physician.
ARTICLE V
TERMINATION
5.01 Optional Termination. This Agreement may be terminated at any
--------------------
time prior to the Closing Date as follows:
(i) by the mutual consent of the Physician, Flagship
and PQC;
(ii) by the Physician, upon a material breach of any
representation, warranty, covenant or agreement on
the part of PQC or Flagship set forth in this
Agreement or any other agreement referred to herein;
-3-
<PAGE>
(iii) by PQC or Flagship upon a material breach of any
representation, warranty, covenant or agreement on
the part of the Physician set forth in this Agreement
or any other agreement referred to herein; and
(iv) by either party if the Closing shall not have
occurred by December 20, 1996, or such other date
agreed to by the parties.
5.02 Effect of Termination.
---------------------
(a) In the event this Agreement is terminated as provided in Section
5.01 above, (i) each of the parties shall deliver to the other parties all
documents previously delivered (and copies thereof in its possession) concerning
one another and the transactions contemplated hereby, and (ii) none of the
parties nor any of their respective stockholders, directors, officers or agents
shall have any liability to the other parties, except for any deliberate breach
or deliberate omission resulting in breach of any of the provisions of this
Agreement. In such case, the breaching party shall be liable only for the
expenses and costs of the non-breaching party, and in no event shall any party
be liable for anticipated profits or consequential damages.
(b) After termination each party shall keep confidential all
information provided by the others pursuant to this Agreement which is not in
the public domain, shall exercise the same degree of care in handling such
information as it would exercise with similar information of its own, and shall
return any such information upon the other party's request.
ARTICLE VI
SURVIVAL AND INDEMNIFICATION
6.01 Indemnification.
---------------
(a) Physician shall indemnify, defend, and hold harmless each of
Flagship and PQC and their respective subsidiaries and affiliates and their
respective directors, officers, employees and agents or the successor of any of
the foregoing (collectively, the "PQC Indemnified Persons"), and reimburse the
PQC Indemnified Persons for, from and against all payments, demands, claims,
suits, judgments, liabilities, losses, costs, damages and expenses, including,
without limitation, interest, penalties and reasonable attorneys' fees,
disbursements and expenses ("Damages") imposed on or incurred by PQC Indemnified
Persons, directly or indirectly, which relate to or arise out of any of: (i)
breach of any representation and warranty of, or covenant or agreements to be
performed by, Physician contained in this Agreement, the Asset Purchase
Agreement or the Stockholders Agreement [or the Retiree Stockholders Agreement];
and (ii) any of the liabilities or obligations retained by Physician pursuant to
the Asset Purchase Agreement (which for purposes of this Article V shall be read
as if all qualifications as to the knowledge of the maker of such
representation, warranty or covenant and as to materiality or Material Adverse
Effects or changes were deleted therefrom). Notwithstanding the foregoing or any
other term or condition contained herein or in any other agreement or instrument
referred to herein, the indemnification obligations of Physician under this
Section 6.01(a) and under the Asset Purchase Agreement shall be
-4-
<PAGE>
limited, in the aggregate, to the dollar value on the Closing Date of the
aggregate purchase price under the Asset Purchase Agreement and the
consideration under this Agreement.
(b) Flagship and PQC shall indemnify and hold harmless Physician (the
"Indemnified Physician" and together with the PQC Indemnified Persons, the
"Indemnified Parties"), and reimburse such Indemnified Physician for, from, and
against all Damages imposed on or incurred, directly or indirectly, by such
Indemnified Physician which arise out of or relate to: (i) breach of any
representation or warranty of, or covenant to be performed by, PQC or Flagship,
in each case contained in this Agreement or the Asset Purchase Agreement; and
(ii) the Assumed Liabilities (as defined in the Asset Purchase Agreement).
(c) An Indemnified Party shall give prompt written notice to an
indemnifying party (the "Indemnifying Party") of any payments, demands, claims,
suits, judgments, liabilities, losses, costs, damages or expenses (a "Claim") in
respect of which such Indemnifying Party has a duty to provide indemnity to such
Indemnified Party under this Section 6.01, except that any delay or failure so
to notify the Indemnifying Party only shall relieve the Indemnifying Party of
its obligations hereunder to the extent, if at all, that it is prejudiced by
reason of such delay or failure.
(d) If a Claim is brought or asserted by a third party (a "Third-Party
Claim"), the Indemnifying Party shall assume the defense thereof, including the
employment of counsel reasonably satisfactory to the Indemnified Party and the
payment of all expenses. The Indemnified Party shall have the right to employ
separate counsel in such Third-Party Claim and participate in the defense
thereof, but the fees and expenses of such counsel shall be at the expense of
the Indemnified Party. In the event that the Indemnifying Party, within twenty
(20) days after written notice of any Third-Party Claim, fails to assume the
defense thereof, or in the event the Indemnifying Party fails to demonstrate, to
the reasonable satisfaction of the Indemnified Party, that it has sufficient
assets to meet its indemnification obligations hereunder, the Indemnified Party
shall have the right to undertake the defense, compromise or settlement of such
Third-Party Claim for the account of the Indemnifying Party. Anything in this
Section 6.01(d) to the contrary notwithstanding, the Indemnifying Party shall
not, without the Indemnified Party's prior written consent, settle or compromise
any Third-Party Claim or consent to the entry of any judgment with respect to
any Third-Party Claim which would have any adverse effect on the Indemnified
Party, except as provided immediately below. The Indemnifying Party may, without
the Indemnified Party's prior written consent, settle or compromise any such
Third-Party Claim or consent to entry of any judgment with respect to any
Third-Party Claim which requires solely money damages paid by the Indemnifying
Party and which includes as an unconditional term thereof the release by the
claimant or the plaintiff of the Indemnified Party from all liability in respect
of such Third-Party Claim.
(e) With respect to any Claim other than a Third-Party Claim, the
Indemnifying Party shall have thirty (30) days from receipt of written notice
from the Indemnified Party of such Claim within which to respond thereto. If the
Indemnifying Party does not respond within such thirty (30) day period, the
Indemnifying Party shall be deemed to have accepted responsibility to make
payment and shall have no further right to contest the validity of such Claim.
If the Indemnifying Party notifies the Indemnified Party within such thirty (30)
day
-5-
<PAGE>
period that it rejects such Claim in whole or in part, the Indemnified Party
shall be free to pursue such remedies as may be available to the Indemnified
Party under applicable law.
6.02 Survival of Representations: Claims for Indemnification. All
-------------------------------------------------------
representations and warranties made by the parties herein or
in any instrument or document furnished in connection herewith
shall survive the Closing and any investigation at any time
made by or on behalf of the parties hereto. All such
representations and warranties and the Physician's obligations
pursuant to Sections 6.1(a)(i) and (ii) and PQC's and
Flagship's obligations pursuant to Section 6.1(b) shall expire
on the third anniversary of the Closing Date, except for
claims, if any, asserted in writing prior to such third
anniversary, which shall survive until finally resolved and
satisfied in full. All claims and actions for indemnity
pursuant to this Section 6 shall be asserted or maintained in
writing by a party hereto on or prior to the expiration of
such periods.
6.03 Set-off and Recoupment. Any amount or amounts due from any
----------------------
Indemnifying Party to PQC under this Section 6 may be paid to
PQC, at PQC's option, by set-off or recoupment against any
amounts due to the Indemnifying Party pursuant to this
Agreement or pursuant to any agreement between the
Indemnifying Party and PQC, Flagship or any of their
respective affiliates. Any such set-off will be without
prejudice to PQC's right to pursue any other remedies at law
or in equity available to it.
ARTICLE VII
GENERAL PROVISIONS
7.01 Amendment and Waiver. No amendment of any provision of this
--------------------
Agreement shall in any event be effective unless the same
shall be in writing and signed by the parties hereto. Any
failure of any party to comply with any obligation, agreement
or condition hereunder may only be waived in writing by PQC
and Flagship if such failure is by Physician and by Physician
if such failure is by PQC and Flagship, but such waiver shall
not operate as a waiver of, or estoppel with respect to, any
subsequent or other failure. No failure by any party to take
any action against any breach of this Agreement or default by
the other party shall constitute a waiver of such party's
right to enforce any provision hereof or to take any such
action.
7.02 Notices. All notices, requests, demands and other
-------
communications hereunder shall be in writing and shall be sent
by personal delivery or registered or certified mail, postage
prepaid, or by telecopier as follows:
(a) if to the Physician: Last known home address
of Physician as listed
in the records of Flagship
-6-
<PAGE>
with a copy to: Hogan & Hartson
Columbia Square
555 Thirteenth Street, N.W.
Washington, DC 20004-1109
Attn: Michael Williams, Esq.
(b) if to PQC or Flagship:
Physicians Quality Care, Inc.
950 Winter Street, Suite 2410
Waltham, MA 02154
Attn: Jerilyn Asher
with a copy to: Anne Ogilby, Esq.
Ropes & Gray
One International Place
Boston, MA 02110-2624
Any party may change its address for receiving notice by written notice given to
the others named above. All notices shall be effective upon the earlier of
actual delivery or when deposited in the mail addressed as set forth above.
7.03 Counterparts. This Agreement may be executed simultaneously in
------------
two (2) or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one (1)
and the same Agreement.
7.04 Parties in Interest. This Agreement shall bind and inure to
-------------------
the benefit of the parties named herein and their respective
heirs, successors and assigns. This Agreement shall not be
assignable by any party without the prior written consent of
the other parties, except that PQC may assign its rights and
obligations under this Agreement to any affiliate of PQC.
7.05 Entire Transaction. This Agreement and the other agreements,
------------------
documents and instruments referred to herein contain the
entire understanding among the parties with respect to the
transactions contemplated hereby and supersede all other
agreements and understandings among the parties.
7.06 Applicable Law. This Agreement shall be governed by and
--------------
construed in accordance with the internal substantive laws of
the State of Maryland, and the parties hereby consent to the
sole jurisdiction of federal courts sited in the State of
Maryland over all matters relating to this Agreement.
7.07 Headings. The section and other headings contained in this
--------
Agreement are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement.
-7-
<PAGE>
7.08 Expenses. Each party to this Agreement shall pay its own costs
and expenses in connection with the transactions contemplated
hereby.
7.09 Third Parties. Except as specifically set forth or referred to
herein, nothing herein expressed or implied is intended or
shall be construed to confer upon or give to any person or
entity other than the parties hereto and their successors or
assigns, any rights or remedies under or by reason of this
Agreement.
7.10 Severability. If any term, provision, covenant or restriction
of this Agreement is held by a court of competent jurisdiction
to be invalid, void or unenforceable, the remainder of the
terms, provisions, covenants and restrictions of this
Agreement shall remain in full force and effect and shall in
no way be affected, impaired or invalidated.
7.11 Gender. All references herein to the masculine gender shall be
deemed to include the feminine or neuter gender as
appropriate.
7.10 Cross Reference Table. The following terms defined elsewhere
in this Agreement in the Sections set forth below shall have
the respective meanings therein defined.
Term Definition
---- ----------
"Accredited "Investor" Section 1.03(c)(vii)
"Asset Purchase Agreement" Recitals
"Claim" Section 6.01(c)
"Damages" Section 6.01(a)
"Flagship" Introduction
"Indemnified Parties" Section 6.01(b)
"Indemnifying Party" Section 6.01(c)
"Indemnified Physician" Section 6.01(b)
"PQC Shares" Section 1.02(ii)
"PQC" Introduction
"PQC Indemnified Persons" Section 6.01(a)
"Physician" Introduction
"Practice" Recitals
"Restricted securities" Section 1.03(c)(v)
"Securities Act" Section 1.03(c)(i)
"Third-Party Claim" Section 6.01(d)
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
-8-
<PAGE>
[Affiliation Agreement]
IN WITNESS WHEREOF, each of the Parties has caused this Agreement to be
duly executed all as of the day and year first written above.
-----------------------------------------
FLAGSHIP HEALTH, P.A.
By:
-----------------------------------------
Its: President
PHYSICIANS QUALITY CARE, INC.
By:
-----------------------------------------
Its:
-9-
<PAGE>
SERVICES AGREEMENT
BETWEEN
FLAGSHIP HEALTH, P.A.
and
PHYSICIANS QUALITY CARE, INC.
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
1. APPOINTMENT OF PQC; RETENTION OF CLINICAL AUTHORITY...................1
1.1. Appointment and Authority....................................1
-------------------------
1.2. Retention of Authority.......................................1
----------------------
2. OBLIGATIONS OF MEDICAL GROUP..........................................2
2.1. Physician Personnel..........................................2
-------------------
2.2. Credentialing of Medical Group Physicians....................2
-----------------------------------------
2.3. Employment and Engagement of Medical Group Physicians........2
-----------------------------------------------------
(a) General.............................................2
-------
(b) Pods................................................3
----
(c) Form of Agreements..................................3
------------------
(d) Medical Group Physician Qualifications..............3
--------------------------------------
2.4. Licensing and Accreditation..................................3
---------------------------
2.5. Supervision and Direction of Clinical Staff..................3
-------------------------------------------
2.6. Liability Insurance..........................................3
-------------------
2.7. Medical Records..............................................4
---------------
2.8. Assignment of Intellectual Property..........................5
-----------------------------------
3. OBLIGATIONS OF PQC....................................................5
3.1. General......................................................5
-------
3.2. Facilities...................................................5
----------
3.3. Equipment and Office Furnishings.............................5
--------------------------------
3.4. Personnel and Payroll........................................5
---------------------
3.5. Borrowings...................................................6
----------
3.6. Supplies and Inventory.......................................7
----------------------
3.7. Contracts....................................................7
---------
3.8. Budgets......................................................7
-------
(a) General Preparation Principles......................7
------------------------------
(b) Approval of Budgets.................................8
-------------------
(c) Reporting...........................................9
---------
3.9. Preparation of Tax Returns...................................9
--------------------------
3.10. Charges......................................................9
-------
3.11. Billing and Collection.......................................9
----------------------
3.12. Payment of Accounts and Indebtedness........................10
------------------------------------
3.13. Power of Attorney for Billing and Payment of Accounts.......10
-----------------------------------------------------
3.14. Other Billings and Charges..................................11
--------------------------
3.15. Insurance...................................................11
---------
3.16. Other Administrative Services...............................12
-----------------------------
3.17. Development of Integrated Health Services...................12
-----------------------------------------
3.18. Advertising and Public Relations............................13
--------------------------------
</TABLE>
-i-
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
4. MANAGEMENT FEE; FINANCIAL ARRANGEMENTS...............................13
5. TERM AND TERMINATION.................................................13
5.1. Term........................................................13
----
5.2. Termination on Default......................................13
----------------------
5.3. Effect of Termination.......................................14
---------------------
6. JOINT POLICY BOARD; CERTAIN PROVISIONS REGARDING
GOVERNANCE OF MEDICAL GROUP...................................................15
6.1. Joint Policy Board..........................................15
------------------
(a) Representation.....................................15
--------------
(b) Authority and Responsibility.......................15
----------------------------
(c) Voting; Procedures.................................17
------------------
6.2. Medical Advisory Board......................................17
----------------------
6.3. The President of Medical Group..............................17
------------------------------
6.4. The Medical Director of Medical Group.......................18
-------------------------------------
6.5. Operating Manager...........................................19
-----------------
7. INTELLECTUAL PROPERTY................................................20
8. RESTRICTIVE COVENANTS................................................20
8.1. Noncompetition..............................................20
--------------
8.2. Ancillary Enterprise........................................20
--------------------
8.3. Non-solicitation of Employees and Patients..................21
------------------------------------------
8.4. Enforcement of Medical Group Physician
Employment Agreements.......................................21
---------------------
8.5. Remedies....................................................21
--------
9. MISCELLANEOUS........................................................21
9.1. Exclusivity.................................................21
-----------
9.2. Names; Trademarks...........................................22
-----------------
9.3. Independent Contractors.....................................22
-----------------------
9.4. [Reserved]..................................................22
--------
9.5. Severability................................................22
------------
9.6. Waiver......................................................22
------
9.7. Notices.....................................................22
-------
9.8. Entire Agreement............................................22
----------------
9.9. Amendment...................................................23
---------
9.10. Successors and Assigns......................................23
----------------------
9.11. Governing Law...............................................23
-------------
9.12. Headings....................................................23
--------
9.13. No Obligation to Third Parties..............................23
------------------------------
9.14. Contract Modifications for Prospective Legal Events.........23
---------------------------------------------------
9.15. Availability of Certain Documents...........................24
---------------------------------
9.16. Gender......................................................24
------
APPENDIX A............................................................................. 1
</TABLE>
-ii-
<PAGE>
<TABLE>
<S> <C>
APPENDIX B..............................................................................1
SCHEDULE B-1............................................................................5
APPENDIX C..............................................................................1
- ----------
APPENDIX D..............................................................................2
- ----------
EXHIBIT A...............................................................................1
- ---------
</TABLE>
-iii-
<PAGE>
FLAGSHIP HEALTH, P.A.
SERVICES AGREEMENT
This Agreement (this "Agreement") is made as of November 30, 1996 by
and between Physicians Quality Care, Inc., a Delaware corporation ("PQC"), and
Flagship Health, P.A., a Maryland professional association ("Medical Group").
(All capitalized terms not defined below in this Agreement shall have the
meanings set forth in Appendix A or B attached hereto.)
WHEREAS, Medical Group has entered into a business arrangement with PQC
in order to help effectuate the parties' mutual vision of establishing a high
quality, competitive, cost-effective health care delivery system, as part of
which Medical Group and PQC will work together to enhance the efficiency of the
business aspects of Medical Group's practice, to promote the quality of care and
patient satisfaction, and to create sufficient economies of scale to permit
Medical Group to undertake risk-based managed care obligations;
WHEREAS, Medical Group engages in the provision of medical and surgical
services through its physicians (each a "Medical Group Physician" and
collectively the "Medical Group Physicians"), who currently practice in a number
of divisions (each a "Pod"), each of which may have one (1) or more Practice
Locations; and
WHEREAS, Medical Group wishes to retain PQC to provide or arrange for
comprehensive management, administrative and other support services to manage
Medical Group and each Pod in order better to serve its patients, enhance
efficiency, and improve financial results of operation of the Medical Group's
activities.
NOW, THEREFORE, in consideration of the mutual covenants and premises
herein contained, the parties hereby agree as follows:
1. APPOINTMENT OF PQC; RETENTION OF CLINICAL AUTHORITY
1.1. Appointment and Authority. Medical Group hereby appoints and
-------------------------
engages PQC as Medical Group's sole and exclusive business manager and PQC
accepts such appointment and engagement on and subject to the terms and
conditions set forth in this Agreement. Subject to the terms of this Agreement,
including applicable requirements of consultation and prior approval of the
Joint Policy Board, PQC shall have the authority and responsibility to: (i)
manage all business operations of Medical Group in an efficient and
cost-effective manner; (ii) provide or arrange for such services in any manner
as PQC, in the exercise of its reasonable business judgment, deems appropriate
to meet the day-to-day requirements of the business functions of Medical Group;
and (iii) negotiate and execute, on behalf of Medical Group, all contracts that,
in the exercise of PQC's reasonable business judgment, are necessary and
appropriate for the business and affairs of Medical Group, subject, in the case
of Payor Contracts, to the approval of the Joint Policy Board.
1.2. Retention of Authority. Notwithstanding anything to the
----------------------
contrary in this Agreement, Medical Group will have exclusive authority and
control over the provision of
-1-
<PAGE>
medical services, including all diagnoses, treatment and ethical determinations
with respect to patients. All diagnoses, treatments, procedures and other
medical and professional services shall be provided and performed exclusively by
or under the supervision of a physician employed or otherwise engaged by Medical
Group who meets the qualifications set forth in this Agreement. It is
acknowledged that PQC is not authorized nor qualified to engage in any activity
that constitutes the practice of medicine. To the extent, if any, that any act
or service of PQC under this Agreement is determined to constitute the practice
of medicine, the performance of such act or service by PQC shall be deemed
waived and excused by Medical Group.
2. OBLIGATIONS OF MEDICAL GROUP
2.1. Physician Personnel. Medical Group, subject to oversight by the
-------------------
Medical Advisory Board, shall be solely responsible for all determinations with
respect to an individual physician concerning the recruitment, hiring,
termination, credentialing, training and supervision of such physician. PQC
shall not exercise any control over nor have any responsibility for Medical
Group Physicians or other Clinical Staff (as defined in Section 2.5) with
respect to the provision of clinical services.
2.2. Credentialing of Medical Group Physicians. Medical Group, through
-----------------------------------------
the Medical Advisory Board, shall credential its physicians in conformance with
the requirements imposed under state and federal law and by the terms of any
third party payment agreement to which the Medical Group is bound. Medical Group
shall assure that each Medical Group Physician at all times is: (i) duly
licensed to practice medicine by the applicable state within the Geographic Area
(as defined in Section 10.8 of Appendix A); and (ii) a member in good standing
of the medical staffs of hospitals designated from time to time by the Joint
Policy Board or as may be necessary in connection with the participation in one
(1) or more Payor Contracts negotiated on Medical Group's behalf by PQC. No
physician other than those Medical Group Physicians who meet the requirements
and qualifications of this Agreement, including without limitation Section 2.3,
shall be permitted: (a) to use or occupy the Pod Practice Locations, except as
approved by the Joint Policy Board; or (b) except as may be required to assure
appropriate medical care (e.g., locum tenens coverage), to render services to
patients of Medical Group. New physicians may be employed by Medical Group, or
physician groups or practices may be acquired by Medical Group, subject to
approval of the Joint Policy Board and the Medical Advisory Board.
2.3. Employment and Engagement of Medical Group Physicians.
-----------------------------------------------------
(a) General. During the term of this Agreement, Medical Group, through
-------
its Pods, shall operate and maintain a full-time practice of
medicine providing primary care, medical and surgical specialty
services and such other services as are agreed upon by the Joint
Policy Board and PQC. Medical Group shall engage a sufficient
number of Medical Group Physicians to provide services to patients
of Medical Group during the normal office hours of the Practice
Locations and to provide after hours coverage for all patients of
Medical Group whether on an inpatient or outpatient basis;
provided, however, that a Pod may close its practice to new
patients for such period as the Joint Policy
-2-
<PAGE>
Board may determine to be necessary in the event the Pod has
reached capacity.
(b) Pods. Each Medical Group Physician hired or otherwise engaged by
-----
Medical Group shall be a member of a Pod and shall provide
services at the Practice Locations associated with that Pod.
(c) Form of Agreements. Medical Group shall maintain employment
-------------------
agreements with all Medical Group Physicians (individually, an
"Employment Agreement"). Such Employment Agreements shall be in
substantially the form attached hereto as Annex A with such
changes as may be agreed upon by PQC and Medical Group and
approved by the Joint Policy Board. Except as otherwise expressly
provided in this Agreement, Medical Group shall not amend any
Employment Agreements nor waive any rights thereunder without the
prior written approval of PQC. Except as otherwise expressly
provided in this Agreement, Medical Group shall not offer, agree
to or amend any salary, benefit or other compensation terms with a
Medical Group Physician except as expressly approved by PQC in
writing.
(d) Medical Group Physician Qualifications. Medical Group shall assure
--------------------------------------
that each Medical Group Physician meets at all times each of the
qualifications set forth in the approved form of Employment
Agreement in addition to any other qualifications reasonably
established by the Medical Advisory Board and PQC. In the event
that any disciplinary, malpractice or other actions are initiated
against any Medical Group Physician, the Medical Group, through
the Medical Advisory Board, shall immediately inform PQC of such
action and shall inform PQC of the underlying facts and
circumstances.
2.4. Licensing and Accreditation. Medical Group, through the Medical
---------------------------
Advisory Board, shall ensure that all Medical Group Physicians maintain such
licenses and certifications as are reasonably necessary for the provision of
medical services by Medical Group and all Medical Group Physicians in a manner
that complies with all laws and applicable third-party payor requirements.
Medical Group shall obtain and maintain such additional licenses and
accreditations as the Medical Advisory Board and PQC mutually determine are
advisable. Medical Group shall conduct its medical practice in compliance with
all applicable laws and all applicable contractual requirements.
2.5. Supervision and Direction of Clinical Staff. (As used in this
--------------------------------------------
Agreement, the term "Clinical Staff" shall mean nurses and any other
non-physician clinical personnel and shall not include Medical Group Physicians
or any other physician.) Medical Group Physicians shall supervise and direct the
Clinical Staff. Medical Group shall assure that all Clinical Staff members
perform only those duties permitted by applicable law and regulation to be
performed by such personnel, and only under such supervision and in such a
manner as permitted by applicable law and regulation.
2.6. Liability Insurance. Medical Group shall assure that each
--------------------
Medical Group Physician maintains in effect a policy of professional liability
insurance in accordance with
-3-
<PAGE>
the Medical Group Physician's employment agreement. Medical Group shall maintain
in effect a policy of comprehensive general liability and professional liability
insurance in the minimum amount of $1,000,000 per occurrence or claim and
$3,000,000 annual aggregate, or such greater amount as is required by the Joint
Policy Board or by law, to cover Medical Group, Medical Group Physicians and
Clinical Staff. In addition, Medical Group shall maintain in effect (i)
comprehensive general liability insurance with limits and a deductible
reasonably determined by PQC and the Joint Policy Board and (ii) property damage
insurance covering all Practice Locations and equipment with limits and
deductibles reasonably determined by PQC and the Joint Policy Board. Each such
policy shall name PQC as an additional insured. As set forth in Section 3.15,
PQC shall be responsible for administering Medical Group's insurance policies
required under this Section 2.6.
2.7. Medical Records. Medical Group, through its Pods, shall maintain
----------------
and cause each Medical Group Physician to maintain accurate and complete patient
records in accordance with all applicable laws and regulations. Such records
shall be maintained by Medical Group in a manner sufficient to enable PQC, on
behalf of Medical Group, to bill and collect for the services provided by
Medical Group and Medical Group Physicians. Subject to the requirements of
applicable law, Medical Group shall permit PQC to access the patient records to
perform its duties under this Agreement, including, without limitation, billing
and collection services. All patient medical records relating to services
rendered by Medical Group and Medical Group Physicians shall be and remain the
property of Medical Group.
Medical Group hereby grants to PQC the exclusive right to develop and
commercialize any statistical data base or other quality assurance, utilization
review or medical management data base or software program derived from Medical
Group's medical records (collectively, "Medical Data") and agrees to include in
all patient consent forms a mutually agreeable provision permitting the
commercialization of such Medical Data; provided, however, that PQC shall in all
events delete or otherwise disguise any patient identifying information such as
the name or street address of a patient and comply with all applicable laws
concerning patient confidentiality. If PQC determines to commercialize any
Medical Data derived solely from medical records of Medical Group, then PQC
shall offer to Medical Group a right of first refusal to participate in the
effort to commercialize such Medical Data on terms consistent with those set
forth in Section 3.17 with respect to the development of Integrated Health
Services. If PQC determines to commercialize any Medical Data derived from both
Medical Group and other PQC-managed physician practices, then prior to entering
into any arrangement to commercialize such Medical Data, PQC shall solicit the
advice of the Medical Advisory Board, which may make a recommendation to PQC's
National Medical Advisory Board, concerning an allocation of revenue from such
commercialization to Medical Group and any other medical group or entity also
contributing data or software to the commercialization effort in a manner that
is fair and not inconsistent with PQC's legitimate business objectives and its
obligations to its shareholders. The recommendation, if any, of the National
Medical Advisory Board shall be considered by PQC in reaching its determination
concerning any commercialization of Medical Data and the allocation of proceeds
thereof, but ultimate decision-making authority with respect to such
commercialization and any recommended allocation of proceeds thereof shall
remain exclusively within the discretion of the Board of Directors of PQC and
Medical Group shall
-4-
<PAGE>
have no right to any allocation of proceeds except and to the extent, if any,
authorized by the Board of Directors of PQC after consultation as set forth in
this Section 2.7.
2.8. Assignment of Intellectual Property. Medical Group hereby assigns
------------------------------------
to PQC (i) any Intellectual Property rights that Medical Group acquires or
develops during the term of this Agreement and (ii) agrees to cause each Medical
Group Physician to assign to PQC such Intellectual Property rights as may be
specified in, and subject to the terms of, the applicable employment agreement,
as the case may be.
3. OBLIGATIONS OF PQC
3.1. General. Subject to Medical Group's control of the practice of
--------
medicine, PQC shall have authority and responsibility to conduct, supervise and
manage the day-to-day business operation of Medical Group and shall be
responsible for providing the services set forth in this Section 3 to Medical
Group. All services, facilities, furniture, fixtures and equipment provided by
PQC under this Agreement shall be in a manner consistent with community
standards for a medical practice of similar size. Notwithstanding anything in
this Agreement to the contrary, the parties realize that development of
appropriate reporting systems for financial and utilization information and
similar tools designed to support the efficient management and development of
Medical Group should be a collaborative process between the parties, and
accordingly the parties agree to work together to develop such tools,
particularly during the initial months following the Effective Date.
3.2. Facilities. PQC shall arrange for Medical Group to use the
-----------
premises at the locations listed on Schedule 2 which may be amended by PQC from
----------
time to time (collectively, the "Practice Locations"), subject to the terms of
any leases for the premises entered into from time to time by Medical Group or
PQC, as the case may be, and subject to approval of the Joint Policy Board. PQC
shall provide or arrange for routine maintenance and cleaning services for the
Practice Locations required to cause the Practice Locations to satisfy the
standard set forth in Section 3.1.
3.3. Equipment and Office Furnishings. PQC shall arrange for Medical
---------------------------------
Group to have use of such equipment and office furnishings reasonably deemed
necessary by PQC, in consultation with the Joint Policy Board, for the operation
of Medical Group at each Practice Location (the "Equipment") in a manner
consistent with community standards for a medical practice of similar
characteristics. PQC shall arrange for reasonable and necessary repair and
maintenance of the Equipment. In connection with PQC's obligation hereunder,
Medical Group shall notify PQC immediately upon becoming aware of any Equipment
in need of repair.
3.4. Personnel and Payroll. PQC shall arrange for the provision to
----------------------
Medical Group of all administrative personnel deemed necessary by PQC, in
consultation with the Joint Policy Board, for the operation of Medical Group
(the "Administrative Staff"). PQC shall also arrange for the provision to
Medical Group of all Clinical Staff reasonably deemed necessary by PQC, in
consultation with Medical Group and the Joint Policy Board, for the efficient,
professional operation of Medical Group. All members of the Clinical Staff shall
be employees of Medical Group. All members of the Administrative Staff on the
Effective Date
-5-
<PAGE>
shall be employees of Medical Group. Subject to the provisions of Section 2.5
and this Section and in consultation with Medical Group and the Joint Policy
Board, PQC shall be responsible for recruiting, hiring, discharging and
determining the compensation, benefits and conditions of employment of the
Administrative Staff and Clinical Staff. PQC shall perform all payroll and
payroll accounting transactions for the Administrative Staff, the Clinical Staff
and the Medical Group Physicians. Any member of the Administrative Staff and
Clinical Staff may, upon assignment by PQC following consultation with the
affected Pods, provide services to more than one (1) Pod. If any Medical Group
Physician is dissatisfied with the services of any employee who provides
services for such Medical Group Physician at a Practice Location, PQC, after
consultation with the Joint Policy Board, shall in good faith determine whether
the performance of that employee could be brought to acceptable levels through
counsel and assistance, or whether the employment of such employee should be
terminated. If PQC determines to retain such employee and the Medical Group
Physician is still dissatisfied with such employee's services after a two (2)
month period, PQC shall either relocate such employee or otherwise cease to use
such employee unless PQC reasonably determines that such termination may expose
Medical Group to liability.
3.5. Borrowings.
-----------
(a) All borrowings of Medical Group shall be subject to prior
approval by the Joint Policy Board. Upon receipt of such
approval to borrow funds on behalf of Medical Group, PQC shall
arrange for such borrowing on behalf of Medical Group on terms
approved by the Joint Policy Board pursuant to Section 6.
1(b)(i) and in accordance with the Practice Expense definition
set forth provisions in Section 10.22 of Appendix A. In
addition to or in lieu of the foregoing, and subject always to
prior approval by the Joint Policy Board, PQC may in its sole
discretion make loans to Medical Group from time to time to
fund capital expenditures or working capital of the Medical
Group, in each case on such terms and conditions as are agreed
upon by the parties and the Joint Policy Board.
(b) In the event that during the Fiscal Periods ended December 31,
1997 and December 31, 1998, Medical Group does not receive
distributions under Appendix B hereto equal to the full
Baseline Amount (as defined in Section 10.2 of Appendix A)
(minus the amount necessary to pay all Deductible Expenses);
due to (a) a failure by PQC to assist Medical Group in
establishing additional revenue sources from services other
than professional services so as to increase Practice
Revenues, or (b) such other cause as may be approved by the
Joint Policy Board, PQC shall loan to Medical Group an amount
not to exceed an aggregate of $1,000,000 at any one time
outstanding on a non-interest bearing basis to cover such
shortfalls in Baseline Amount, and in no event shall PQC
Direct Expenses be included in determining whether a shortfall
in Baseline Amount exists (the "Loan"). The Loan shall be
carried on the balance sheet of Medical Group and shall be
repaid in successive Fiscal Periods from the first available
dollars of Net Margin allocable to Medical Group. In the event
PQC undertakes a public offering of securities at any time
-6-
<PAGE>
prior to which the Loan has been repaid in full, the parties
agree to consider in good faith whether interest on the Loan
should be assessed at a fair market interest rate in order to
comply with then applicable health care laws.
3.6. Supplies and Inventory. PQC shall be responsible for all inventory
----------------------
systems of Medical Group at each Practice Location and for the ordering,
purchasing and maintenance of all supplies and inventory necessary for the
operation of Medical Group. All drugs shall be purchased and maintained by
Medical Group or, at PQC's discretion and to the extent consistent with
applicable law, on behalf of Medical Group by PQC.
3.7. Contracts. PQC shall negotiate and administer contracts for
----------
equipment, materials, supplies and data processing services for the Medical
Group and for each Pod. PQC shall seek, review, evaluate and negotiate Payor
Contracts on behalf of Medical Group. Medical Group agrees to enter into and be
bound by all such Payor Contracts negotiated on its behalf by PQC; provided,
however, that any such Payor Contract must be approved in advance by the Joint
Policy Board. If required by applicable law, such contracts will be entered into
in the name of Medical Group. PQC shall arrange for administrative support
appropriate to fulfill reporting requirements under Payor Contracts, such as
eligibility verification and financial and utilization reporting.
3.8. Budgets.
--------
(a) General Preparation Principles.
-------------------------------
(i) PQC, acting through the Operating Manager in
cooperation with a Physician representative (the
"Representative") of the Pod, shall have
responsibility for the preparation of budgets for
each Pod (a "Pod Budget").
(ii) Each Pod Budget shall consist of an operating budget
(revenues and expenses) and an annual capital
expenditures budget, prepared on an accrual basis of
accounting and in conformity with generally accepted
accounting principles.
(iii) PQC shall prepare, with input from the Joint Policy
Board, budget guidelines ("Budget Guidelines") that
PQC shall then follow in the preparation of each Pod
Budget. Examples of possible Budget Guidelines
include but are not limited to the following:
(A) each Pod Budget shall be constructed
on management policies that enable
the Pod to achieve its financial
goals (profit from operations);
(B) each Pod Budget shall provide
specific detail sufficient for the
Pod Physicians and PQC to evaluate
and prioritize changes in programs
and capital expenditures;
-7-
<PAGE>
(C) each Pod Budget period shall be for a
twelve (12) month period ending December
31 or, for the initial Pod Budget for
each newly formed Pod, such shorter
period ending December 31 as is
appropriate; and
(D) each Pod Budget shall be prepared on a
pre-physician compensation, pre-
management fee and pre-tax basis.
(iv) PQC shall prepare the initial Pod Budgets for each
Pod using available historical financial information.
PQC shall follow the Budget Guidelines and identify
budget preparation assumptions that deviate from the
acquired medical group's historical financial
information. Subsequent Pod Budgets shall be prepared
in a similar manner by PQC (on the basis of the prior
year's results) and take into account deviations from
the Pod Budget that occurred in the prior year.
(b) Approval of Budgets. The Joint Policy Board shall have the
--------------------
responsibility for and authority to approve each Pod Budget.
PQC shall submit each Pod Budget to the Joint Policy Board for
approval on a timely basis. Once approved in accordance with
this Section 3.8(b), all of PQC, Pod and Pod Physicians shall
be bound by the terms of the approved Pod Budget for the
following twelve (12) month period or such lesser period as
may be provided for in the Budget Guidelines, subject only to
any modifications suggested by PQC and/or Pod Physicians and
approved by the Joint Policy Board. At any point during a
Fiscal Period, including for example if the actual Physician
Pod Practice Revenues less actual Physician Pod Practice
Expenses is below budgeted levels for such Physician Pod or if
there is an actual or projected negative Net Margin the Joint
Policy Board may review the budgets for such Physician Pod and
make such changes to such budgets, including the aggregate Pod
Distributions (as defined in Section 3 of Appendix A to the
Employment Agreements), as the Joint Policy Board deems to be
appropriate. All capital and operating budgets, and changes
thereto, also shall be subject to the approval of PQC. The
Joint Policy Board shall not unreasonably withhold its
approval of a Pod Budget but if such approval is not
forthcoming, the following process shall prevail so that the
Pod may remain open to treat patients:
(i) If, prior to the commencement of any budget period,
the Joint Policy Board has not yet approved the Pod
Budget, then PQC and Medical Group will work
diligently in good faith to obtain such approval.
Until such approval is obtained, the following
procedures shall apply:
(A) as to any disputed line items, the
immediately preceding budget
period's Pod Budget shall be
controlling until such time, if any,
as agreement is reached on the
amounts to be allocated to such
disputed line items, except that:
-8-
<PAGE>
(1) non-recurring extraordinary items
shall not be continued from the Pod
Budget for the immediately preceding
budget period;
(2) if items such as lease payments or
payroll taxes are subject to an
automatic increase, such increases
shall be effective at the increased
rate; and
(3) for items such as personnel
salaries, the total salary number
shall be adjusted to take into
account changes in the number and
classifications of personnel members
employed or contracted; and
(B) as to any line items which are not in
dispute, the new Pod Budget submitted by
PQC shall be effective for the new budget
period.
(c) Reporting. PQC shall establish and administer the accounting
----------
procedures and control for Medical Group and the Pods in
accordance with generally accepted accounting principles. PQC
shall have the responsibility to prepare and submit to each
Pod and to the Joint Policy Board as soon as practicable after
the end of each month, but in any event within forty-five (45)
days of the end of each month, management reports designed to
convey Pod financial performance for the month and on a
year-to-year basis. PQC shall design the management reports to
highlight actual financial performance and actual to budget
variances in the Pod's financial performance. Additionally,
PQC shall from time to time attempt to identify, discuss with
the Joint Policy Board and implement appropriate management
intervention to counter adverse financial trends.
3.9. Preparation of Tax Returns. PQC shall prepare any and all required
---------------------------
tax returns of Medical Group but shall not have responsibility for preparation
of individual tax returns or other tax returns (e.g., IRS forms W-2s, 5500s,
etc.) for any Medical Group Physician or for any entity of which such Medical
Group Physician was a shareholder, partner, member, or employee prior to the
date of execution of this Agreement.
3.10. Charges. PQC shall advise Medical Group on the establishment,
--------
maintenance and revision of a schedule of charges for physician services,
ancillary services, supplies, medication and all other services rendered by
Medical Group through each Pod. Revisions to the fee schedule of a Pod must be
approved by the Joint Policy Board.
3.11. Billing and Collection. PQC shall provide or arrange for such
-----------------------
billing and collection services as are reasonably necessary to attempt to
collect in a timely manner all
-9-
<PAGE>
Practice Revenues, including without limitation all allowable charges resulting
from Medical Group's provision of all billable items and services.
3.12. Payment of Accounts and Indebtedness.
-------------------------------------
(a) PQC shall review the payables of Medical Group and shall cause
payment of any undisputed amounts thereof to be made out of
the funds of Medical Group. In addition to billing, collecting
and payment services, PQC shall manage the cash and cash
equivalents of Medical Group.
(b) All Practice Revenues shall be deposited in one or more bank
accounts maintained in the name of and owned by Medical Group
(collectively, the "Medical Group Account") but managed solely
by PQC in accordance with the terms of this Agreement. The
bank in which the Medical Group Account is maintained shall be
federally insured and shall be selected by PQC subject to
approval by the Joint Policy Board. A representative of PQC
shall be the authorized signatory for the Medical Group
Account. Medical Group hereby appoints the Medical Group
Shareholder as an additional authorized signatory for the
Medical Group Account. Medical Group covenants that it will
not permit any funds to be withdrawn from the Medical Group
Account except as authorized by PQC in accordance with the
terms of this Agreement.
3.13. Power of Attorney for Billing and Payment of Accounts. Medical
------------------------------------------------------
Group hereby exclusively authorizes PQC to take the following actions for and on
behalf of and in the name of Medical Group throughout the term of this Agreement
and thereafter in accordance with Section 5:
(a) bill, in Medical Group's name, under its provider number when
obtained and on its behalf, and until such time as Medical
Group has obtained its provider number, bill, in the Medical
Group Physicians, names under their respective provider
numbers and on their behalf, all claims (including co-payments
due from patients) for reimbursement or indemnification from
all other Payors, fiscal intermediaries or patients for all
covered items and services provided by Medical Group or by the
Medical Group Physicians to patients;
(b) take possession of and endorse in the name of the Medical
Group Physicians or Medical Group, all cash, notes, checks,
money orders, insurance payments, and any other instruments
received as payment of accounts receivable (and Medical Group
will cause an individual Medical Group Physician who receives
any payments for the benefit of Medical Group directly, to
deliver such amounts promptly to PQC for deposit in the
Medical Group Account, and Medical Group covenants to transfer
and deliver promptly to PQC for deposit in the Medical Group
Account, all funds received by Medical Group from patients or
Payors for medical services), all such funds to be deposited
directly into a Medical Group Account and to be applied in a
manner consistent with this Agreement;
-10-
<PAGE>
(c) deposit all collections directly into the Medical Group
Account and to make withdrawals from such Medical Group
Account for such purposes as are permitted by this Agreement;
(d) in Medical Group's name and on its behalf, and in the Medical
Group Physicians' names and on behalf of each of them, as
necessary, collect and receive all accounts receivable
generated by such billings and claims for reimbursement, place
such accounts for collection, settle and compromise claims and
institute legal action for the recovery of accounts; Medical
Group shall cooperate fully with PQC in facilitating such
collections and in collecting accounts receivable transferred
to PQC for deposit in the Medical Group Account by Medical
Group, including endorsement of checks and delivery to PQC of
all revenues in whatever form, received from patients or
Payors on their behalf, and completion of all forms necessary
for the collection of said monies; and
(e) sign checks on behalf of Medical Group and make withdrawals
from the Medical Group Accounts for payments specified in this
Agreement and as requested from time to time by Medical Group.
In addition to the foregoing, Medical Group, to the extent not
prohibited by law, hereby grants to PQC an exclusive power of attorney and
appoints PQC its exclusive true and lawful attorney in fact to take each of the
actions specified in Sections (a) through (e) above for and on behalf of and in
the name of Medical Group throughout the term of this Agreement and thereafter
in accordance with Section 5.
Upon request of PQC, Medical Group shall, and shall cause each of the
Medical Group Physicians to, execute and deliver to PQC and to each financial
institution wherein Medical Group or PQC maintains an account, such additional
documents or instruments (including one (1) or more powers of attorney naming
PQC as its or their, as the case may be, exclusive true and lawful attorney in
fact) as may be necessary or desirable to evidence or effect the authority or
the power of attorney or both granted to PQC pursuant to this Section.
3.14. Other Billings and Charges. PQC shall serve as Medical Group's
---------------------------
exclusive billing agent. Medical Group covenants that neither it nor any Medical
Group Physician shall bill or submit a statement of charges to, or enter into
any agreement or, except in the event of an emergency, any undertaking with, any
patient, third person or entity for the provision of items and services (with or
without consideration), nor shall it make any surcharge for care without the
prior written authorization and approval of PQC.
3.15. Insurance. PQC, on behalf of Medical Group, shall negotiate,
----------
obtain, and maintain with such licensed insurance companies as are reasonably
acceptable to the Joint Policy Board the policies of general liability, fire and
property insurance that satisfy the requirements of Section 2.6. PQC shall
furnish certificates of insurance to Medical Group evidencing the coverage set
forth in this section upon request by Medical Group. Subject to approval by the
Joint Policy Board, PQC may arrange for a group professional liability
-11-
<PAGE>
insurance policy covering Medical Group Physicians that would satisfy Medical
Group's obligations under 2.6.
3.16. Other Administrative Services. In addition to the business and
------------------------------
administrative services specifically described above in this Section 3, PQC
shall be responsible for providing all other administrative services necessary
to the business operations of Medical Group, including without limitation human
resource services, administrative support for Medical Group's recruitment
efforts, management information systems (including development on a uniform data
base across all PODs), accounting services and systems, and advertising, sales
and marketing services.
3.17. Development of Integrated Health Services. Neither PQC nor any
------------------------------------------
Affiliate shall provide Integrated Health Services in the Geographic Area unless
PQC gives Medical Group the option to be the exclusive provider of these
services, as provided in this Section. To that end, if PQC or one (1) of its
Affiliates proposes to provide any Integrated Health Service in the Geographic
Area, PQC shall notify Medical Group and the Joint Policy Board of the nature of
the service and the terms upon which PQC or its Affiliate proposes to provide
the service, and the Joint Policy Board, on behalf of Medical Group, shall have
forty-five (45) days during which to elect to participate in the provision of
such Integrated Health Service in the Geographic Area on such terms as are
mutually acceptable to Medical Group and PQC. Any such proposal shall specify
the proposed manner in which the net revenues (meaning all receipts from such
Integrated Health Services less all expenses attributable to such Integrated
Health Services, determined in accordance with generally accepted accounting
principles) shall be allocated between Medical Group and PQC, but to the extent
permitted by law in any event such proposal shall offer to Medical Group the
right to receive an allocation to the Variable Distribution Pool (as defined in
the Employment Agreements) of at least fifty percent (50%) of the net revenues
attributable to such Integrated Health Service provided that as a condition
thereof Medical Group shall agree that a percentage of any net loss attributable
to such Integrated Health Service equal to the percentage of net revenues
attributable to such Integrated Health Service shall be offset against amounts
otherwise allocable to Medical Group under Appendix B in any one (1) or more
Fiscal Periods thereafter occurring. Medical Group shall not agree to
participate in any Integrated Health Service or fail to elect to participate in
such Integrated Health Service except as approved by and on such terms as have
been approved by the Joint Policy Board. If Medical Group does not elect to
participate in such Integrated Health Service in the Geographic Area within such
forty-five (45) day period, PQC may, but shall not be obligated to, provide such
Integrated Health Service directly or through another Affiliate or subsidiary
(but in no event through or with any outside third party without the prior
consent of the Joint Policy Board) and Medical Group shall have no right to
participate in the revenues or income from such Integrated Health Service;
provided, however, that PQC shall not directly or indirectly provide such
Integrated Health Service if within such forty-five (45) day period the Medical
Advisory Board reasonably determines and notifies PQC that the provision of such
services have not been determined to be clinically efficacious, are clinically
dangerous, or would otherwise adversely affect the reputation of PQC and/or
Medical Group as to quality of care.
-12-
<PAGE>
3.18. Advertising and Public Relations. PQC shall design and implement
---------------------------------
local public relations and advertising programs, subject to approval by the
Joint Policy Board. In the event that there is any adverse incident involving
Medical Group or any Medical Group Physician or patient, any public statement
and announcement by or on behalf of Medical Group or any Medical Group Physician
shall be approved in advance by PQC.
4. MANAGEMENT FEE; FINANCIAL ARRANGEMENTS
In consideration for the services furnished by PQC to Medical Group
under this Agreement and in order to encourage the cost-effective management of
the Medical Group, PQC shall be entitled to receive, and Medical Group hereby
agrees to pay PQC, an aggregate management fee calculated under the formulas set
forth in Appendix B hereto.
5. TERM AND TERMINATION
5.1. Term. The term of this Agreement shall commence on the date first
----
written above and shall continue until the date forty (40) years thereafter,
unless terminated earlier in accordance with this Agreement. After the
expiration of the initial forty (40) year term, this Agreement shall
automatically renew for successive forty (40) year terms unless sooner
terminated in accordance with the provisions hereof.
5.2. Termination on Default.
-----------------------
(a) Either party shall be entitled to terminate this Agreement if
the other party fails to perform in any material respect any
material obligation required of it hereunder, and such default
continues for sixty (60) days after the giving of written
notice by the nondefaulting party, specifying the nature and
extent of such default; provided, however, that the non-
-------- -------
defaulting party shall not be entitled to terminate this
Agreement if the defaulting party commences the cure of such
default within the first sixty (60) day period and thereafter
diligently and in good faith continues to cure such default
until completion.
(b) Termination at election of PQC. PQC shall be entitled to
terminate this Agreement upon written notice to Medical
Group if:
(i) a law firm with a nationally recognized expertise in
health care law and acceptable to PQC and the Joint
Policy Board renders an opinion to PQC, with a copy
provided to the Joint Policy Board, stating that a
material provision of this Agreement is in violation
of applicable law, and the parties do not agree to
amend this Agreement pursuant to Section 9.14 hereof
to cure such violation; or
(ii) any court or regulatory agency enters an order
finding a material provision of this Agreement is in
violation of applicable laws and the parties do not
agree to amend this Agreement pursuant to Section
9.14 hereof to cure such violation; or
-13-
<PAGE>
(iii) PQC is prevented by Medical Group or any person under
the Medical Group's direction or control, from
entering any material portion of the Pod Practice
Locations considered on any aggregate basis, and such
inability to enter such premises continues for more
than forty-eight (48) hours after notice thereof to
the Joint Policy Board.
(c) Termination by Medical Group. Notwithstanding Section 5.2(a),
Medical Group may terminate this Agreement (if and only if
such termination has been approved by the Joint Policy Board)
for the reasons set forth below:
(i) upon written notice to PQC of the failure of PQC to
remit any funds or make any payments required under
this Agreement when due and continued failure to
remit those funds or make the payment after thirty
(30) days notice of such failure to PQC unless the
amount of such payment is being contested in good
faith; or
(ii) a law firm with a nationally recognized expertise in
health care law and acceptable to PQC and the Joint
Policy Board renders an opinion to the Medical Group,
with a copy provided to the Joint Policy Board,
stating that a material provision of this Agreement
is in violation of applicable law, and the parties do
not agree to amend this Agreement pursuant to Section
9.14 hereof to cure such violation; or
(iii) any court or regulatory agency enters an order
finding a material provision of this Agreement is in
violation of applicable laws, and the parties do not
agree to amend this Agreement pursuant to Section
9.14 hereof to cure such violation.
Medical Group shall take appropriate action to terminate this
Agreement pursuant to this Section (c) if recommended by the
Joint Policy Board.
5.3. Effect of Termination. Upon termination of this Agreement
----------------------
pursuant to this Section 5:
(a) PQC and Medical Group shall cooperate and continue to perform
their obligations under this Agreement as may be necessary to
ensure the provision of proper care to patients under
treatment, consistent with applicable law concerning
continuation of benefits under Payor Contracts, until
appropriate alternative arrangements are made.
(b) Medical Group and PQC shall cooperate to ensure the
appropriate billing and collection for all health care items
and services provided by Medical Group prior to the effective
date of termination, and any proceeds of such billings or
collections shall be retained by Medical Group and/or paid to
PQC in accordance with the terms of this Agreement.
-14-
<PAGE>
(c) Any amounts due and owing to PQC under any loan to Medical
Group shall become immediately due and payable, subject to
offset for amounts owed hereunder by PQC to Medical Group.
(d) Medical Group shall reimburse PQC for all drug and
pharmaceutical inventory retained by Medical Group following
termination to the full extent of funds advanced by PQC for
the purchase of such inventory pursuant to Section 3.6.
(e) Provisions of this Agreement shall survive any termination if
so provided herein or if necessary or desirable fully to
accomplish the purposes of such provision.
6. JOINT POLICY BOARD; CERTAIN PROVISIONS REGARDING
GOVERNANCE OF MEDICAL GROUP
6.1. Joint Policy Board. Medical Group and PQC shall establish
-------------------
and maintain the Joint Policy Board, which shall have the representation,
responsibility and authority described below.
(a) Representation. For purposes of this Agreement, "Physician
--------------
Members" means only those Medical Group Physicians whose
Employment Agreement permits them to share in Net Revenues as
provided in Appendix B. The Joint Policy Board shall consist
of nine (9) individuals: four (4) elected by plurality vote of
the Physician Members (the "Medical Group Representatives"),
at least one of whom must be a primary care physician; four
(4) appointed by PQC (the "PQC Representatives"), and the
President of Medical Group (who shall serve ex-officio with
vote). Each Medical Group Representative shall be a physician
selected for a three (3) year term by Physician Members. Each
Medical Group Representative may serve an unlimited number of
terms and shall serve until a successor is selected. The PQC
Representatives shall be appointed from time to time by PQC.
The Medical Group Representatives shall select, from among the
physicians who are members of the Joint Policy Board, the
Chair of the Joint Policy Board.
(b) Authority and Responsibility. The Joint Policy Board shall be
-----------------------------
responsible for periodically reviewing and making any
appropriate recommendations to PQC and the Board of Directors
of Medical Group regarding the operations of Medical Group,
and, to the extent expressly provided in this Agreement, shall
have the right to approve certain decisions by Medical Group
and PQC. Any amendment of this Agreement that would limit or
otherwise materially diminish the authority or responsibility
of the Joint Policy Board, including without limitation any
changes to this Section 6 or Appendix B, shall require the
prior approval of the Joint Policy Board. In addition, the
following actions shall require the affirmative vote of a
majority of the members of the Joint Policy Board:
(i) approval of all budgets and borrowings pursuant
to Section 6.1;
-15-
<PAGE>
(ii) approval of the number and type of physicians
required for the efficient operation of Medical
Group;
(iii) review and approval of all advertising and other
marketing of the services performed by Medical Group;
(iv) approval of Integrated Health Services and the scope
of those services to be provided by Medical Group as
contemplated by Section 3.17;
(v) approval of the formation, maintenance and/or
termination of relationships with institutional
health care providers and payors, including Payor
Contracts in accordance with Section 3.7;
(vi) approval of all contracts material to Medical Group,
including all amendments to real property leases in
effect as of the date of this Agreement, and all the
terms of and amendments to real property leases
entered into after such date governing the space
utilized by any Medical Group Physician;
(vii) consideration and determination of non-clinical
matters raised by Medical Group Physicians;
(viii) approval of fee schedules and charges;
(ix) approval of business and strategic plans;
(x) approval of the Operating Manager;
(xi) approval of Medical Group's termination of a Medical
Group Physician on the basis of disability;
(xii) approval of any change in the Baseline Amount (as
defined in Section 10.2) to reflect the addition or
termination of Medical Group Physicians; and
(xiii) approval of the modification or waiver of the
restrictive covenants applicable to any Medical Group
Physician.
The Joint Policy Board may consult with Medical Group, PQC and any
Medical Group Physician before taking any action specified in this Section
6.1(b), but, except as otherwise provided in this Agreement, neither the
recommendations of Medical Group, PQC nor any Medical Group Physician shall be
binding on the Joint Policy Board. Any determination of the Joint Policy Board
pursuant to (i), (ii), (iii), (iv), (v), (vi), (xii) and (xiii) shall not be
effective unless approved by the Medical Group Shareholder.
-16-
<PAGE>
(c) Voting; Procedures.
-------------------
(i) Each Medical Group Representative shall have one
(1) vote and shall have the right to grant his proxy
to another Medical Group Representative. Each of the
PQC Representatives and the President of Medical
Group shall have one (1) vote and shall have the
right to grant his proxy to another member of the
Joint Policy Board. No action of the Joint Policy
Board shall be effective unless authorized by a
majority of the members of the Joint Policy Board. A
quorum of the Joint Policy Board shall consist of at
least three (3) Medical Group Representatives and
three (3) PQC Representatives, present in person or
by proxy; provided, however, that if a meeting is
called and a quorum cannot be obtained within thirty
(30) days of notice of such meeting, then the quorum
requirement shall be automatically reduced for the
first meeting thereafter to a majority of the members
of the Joint Policy Board, present in person or by
proxy.
(ii) The Joint Policy Board shall meet from time to time
when a meeting is called by the chair or by three (3)
or more members of the Joint Policy Board upon at
least five (5) days' written notice to the other
members of the Joint Policy Board, which notice
requirement may be waived with respect to any member
of the Joint Policy Board by the attendance at such
meeting. The Joint Policy Board may also hold
meetings by telephone or act by written consent
according to procedures established by the Joint
Policy Board. Minutes shall be kept of all formal
actions taken by the Joint Policy Board. The Joint
Policy Board may appoint a secretary who is not a
member of the Joint Policy Board.
6.2. Medical Advisory Board. A Medical Advisory Board shall be
-----------------------
established, which shall be responsible for: (i) providing medical advice to
Medical Group on managed care contracting, including oversight of all
utilization review, risk management, and peer review functions required by any
Payor Contract; (ii) developing and disseminating, subject to Medical Group's
approval, medical protocols and quality and outcome measures for Medical Group
and the Physicians; (iii) advising Medical Group with respect to the number and
qualifications of physicians required for the efficient operation of Medical
Group's practice; and (iv) overseeing the recruitment by Medical Group and
credentialing of new physicians. The Medical Advisory Board shall consist of
seven (7) members. The members of the Medical Advisory Board shall be the
Medical Director of Medical Group and six (6) other licensed physicians elected
by a plurality vote of the Physician Members, of whom three (3) shall be primary
care physicians and three (3) shall be engaged in a specialist practice. The
Medical Director of Medical Group shall act as chair of the Medical Advisory
Board.
6.3. The President of Medical Group.
-------------------------------
(a) Medical Group shall appoint, in the manner set forth in
(b) below, a physician to act as President of Medical Group
who shall work in conjunction with PQC
-17-
<PAGE>
in order to implement the policies established by the Joint
Policy Board. Such individual shall also be an employee of
PQC. Subject to the direction and supervision of the Medical
Group Shareholder, the duties of the President shall include,
without limitation:
(i) interfacing with representatives from the national
corporate offices of PQC;
(ii) implementing the business and strategic plans of
Medical Group and overseeing the business operation
of Medical Group; and
(iii) working with PQC representatives in negotiating and
interfacing with Payors and other regulatory
agencies.
The Medical Group Shareholder shall determine the salary and fringe
benefits of the President.
Subject to the By-Laws of Medical Group (which shall not be amended to reduce
the rights of the Medical Group Physicians under this section without the prior
consent of a majority of the Physician Members), the Physician Members shall
nominate by plurality vote three (3) candidates, who shall be primary care
physicians and who shall be Physician Members, for the position of President,
and the Medical Group Shareholder shall select one (1) candidate from among such
nominees to be President. In the event that there is a vacancy in the position
of President at any time for any reason, the Medical Group Shareholder shall
have the authority to appoint a person to serve as interim President until
another person is duly appointed in accordance with the above specified
procedures. The President shall serve part-time in this capacity until such time
as his responsibilities warrant full-time employment status. Notwithstanding the
foregoing, the President shall be a Medical Group Physician active in the
practice of medicine, until such time as the President's responsibilities
warrant full-time employment status with the Medical Group. The President shall
serve for an initial period of two (2) years which may be renewed for a maximum
of two (2) additional two (2) year terms, subject to the control of and review
by Medical Group. Medical Group may remove the President at any time in the
event that the employment agreement between the President and PQC is terminated,
but in such event the position of President may be filled by Medical Group
Shareholder for an interim period only until a successor to the position of
President has been appointed in accordance with the provisions of this Section
6.3(b). Medical Group shall assist in the development of procedures for the
nomination, appointment and replacement of the President in such a manner as to
ensure a smooth transition period in the medical practice of any individual who
assumes the position of the President.
6.4. The Medical Director of Medical Group.
--------------------------------------
(a) Medical Group shall hire and appoint a physician to act as
Medical Director to provide guidance and advice to Medical
Group on clinical issues. The duties of the Medical Director
shall include, without limitation:
-18-
<PAGE>
(i) interfacing with the National Medical Advisory
Board of PQC and representing Medical Group on the
PQC National Medical Advisory Board;
(ii) chairing the Medical Advisory Board;
(iii) providing medical advice on managed care contracting
by Medical Group;
(iv) leading the development and dissemination of medical
protocols, quality and outcome measures; and
(v) overseeing the recruitment and credentialing of new
physicians.
The Medical Group Shareholder shall determine the salary and
fringe benefits of the Medical Director.
(b) Subject to the By-Laws of Medical Group (which shall not be
amended to reduce the rights of the Medical Group under this
Section without the prior consent of a majority of Physician
Members), the Physician Members shall nominate by plurality
vote three (3) candidates who shall be Physician Members for
the position of Medical Director, and the Medical Group
Shareholder shall select one (1) candidate from among such
nominees to be Medical Director. In the event that there is a
vacancy in the position of Medical Director at any time for
any reason, the Medical Group Shareholder shall have the
authority to appoint a person to serve as interim Medical
Director until another person is duly appointed in accordance
with the above specified procedures. The Medical Director
shall serve part-time in this capacity until such time as his
responsibilities warrant full-time employment status.
Notwithstanding the foregoing, the Medical Director shall be a
Medical Group Physician active in the practice of medicine,
until such time as the Medical Director's responsibilities
warrant full-time employment status with the Medical Group.
The Medical Director shall serve for an initial period of two
(2) years, which may be renewed for a maximum of two (2)
additional two (2) year terms, subject to the control of and
review by Medical Group. Medical Group shall assist in the
development of procedures for the nomination, appointment and
replacement for the Medical Director in such a manner as to
ensure a smooth transition period in the medical practice of
any individual who assumes the position of the Medical
Director. The Physician Members shall have the right to remove
the Medical Director upon a two-thirds (2/3) vote of all
Physician Members, but in such event the position of Medical
Director may be filled only in accordance with the provisions
of this Section 6.4(b).
6.5. Operating Manager. Subject to the reasonable approval of
------------------
the Joint Policy Board, PQC shall retain a full-time non-physician employee to
serve as an operating manager (the "Operating Manager"). The Operating Manager
shall manage and administer all of the
-19-
<PAGE>
day-to-day business transactions necessary for the operation of Medical Group.
PQC shall determine the salary and fringe benefits of the Operating Manager, who
shall be an employee of PQC. At the direction, supervision and control of PQC,
the Operating Manager shall implement the policies established by Medical Group
and the Joint Policy Board and shall generally perform the duties and have the
responsibilities of an administrator.
7. INTELLECTUAL PROPERTY
Medical Group acknowledges that PQC will continually develop
Intellectual Property and that Medical Group may have access to and use
Intellectual Property during the term of this Agreement. Medical Group agrees
that, except as required for the proper operation of the medical practice in
accordance with applicable law and the terms of this Agreement, it will not,
directly or indirectly, use or disclose any Intellectual Property. Medical Group
understands and agrees that this restriction will continue to apply after the
termination of this Agreement for any reason.
Medical Group agrees that all Intellectual Property to which it has
access as a result of its relationship with PQC under this Agreement is and
shall remain the sole and exclusive property of PQC. Except as required for the
proper operation of the medical practice in accordance with applicable law and
the terms of this Agreement, Medical Group will not copy any documents, tapes or
other media containing Intellectual Property ("Documents"). Medical Group will
return to PQC immediately after this Agreement terminates, and at such other
times as may be specified by PQC, all Documents and copies of Documents. Medical
Group shall use its best efforts to assure that all Medical Group Physicians and
other employees and agents of Medical Group are aware of and comply with the
restrictions on disclosure and use of Intellectual Property set forth in this
Section. (For purposes of this Section, references to PQC shall be deemed to
refer to PQC and any Affiliates.)
8. RESTRICTIVE COVENANTS
The parties recognize that the services to be provided by PQC hereunder
shall be feasible only if Medical Group operates an active medical practice to
which the physicians associated with Medical Group devote their full time and
attention. Accordingly, the parties hereto agree as follows:
8.1. Noncompetition. During the term of this Agreement, Medical Group
---------------
shall not, without the prior written consent of PQC, establish, operate or
provide physician or other medical services at any medical office, clinic or
other health care facility providing services similar to those provided by
Medical Group, PQC or any Affiliate of PQC, within the Geographic Area.
8.2. Ancillary Enterprise. During the term of this Agreement, except as
---------------------
permitted by this Agreement, Medical Group shall not provide any of the
additional services that have been approved by the Joint Policy Board and PQC as
"Integrated Health Services" or any other services provided by PQC. For two (2)
years after termination of this Agreement, except as permitted by this
Agreement, Medical Group shall not provide any of the additional services that
have been approved by the Joint Policy Board and PQC as
-20-
<PAGE>
"Integrated Health Services" or any other services provided by PQC, within
fifteen (15) miles of any Pod Practice Location.
8.3. Non-solicitation of Employees and Patients. During the term of
-------------------------------------------
this Agreement and for a two (2) year period thereafter, Medical Group shall not
recruit, solicit or induce or attempt to induce, any employee or employees of
Medical Group or PQC to terminate their employment with, or otherwise cease
their relationship with, Medical Group or PQC. During the term of this Agreement
and for a one (1) year period thereafter, Medical Group shall not solicit,
attempt to divert or to take away, the business or patronage of any of the
patients, clients, customers or accounts, or prospective patients, clients,
customers or accounts of Medical Group.
8.4. Enforcement of Medical Group Physician Employment Agreements.
-------------------------------------------------------------
Medical Group shall enforce the Employment Agreements of Medical Group
Physicians, including, without limitation, restrictive covenants and liquidated
damages provisions contained in such agreements. In the event that, after a
request by PQC, Medical Group does not pursue any remedy that may be available
to it by reason of a breach or default of the restrictive covenants and
liquidated damages provisions or any other provision of any Employment
Agreement, upon the request of PQC, and in addition to any rights PQC may have
under Section 9.13 hereunder, Medical Group shall assign to PQC such causes of
action and any other rights it has related to such breach or default and shall
cooperate with and provide reasonable assistance to PQC with respect thereto.
8.5. Remedies. PQC and Medical Group acknowledge and agree that a
---------
remedy at law for any breach or attempted breach of the provisions of this
Section 8 shall be inadequate, and, therefore, either party shall be entitled to
specific performance and injunctive or other equitable relief in the event of
any such breach or attempted breach, in addition to any other rights or remedies
available to either party at law or in equity or under the Employment
Agreements, including without limitation provisions thereunder relating to the
repurchase by the Medical Group and/or the Medical Group Physicians of certain
assets. Each party hereto waives any requirement for the securing or posting of
any bond in connection with the obtaining of any such injunctive or other
equitable relief. If any provision of this Section 8 relating to the restrictive
period, scope of activity and the territory described therein shall be declared
by a court of competent jurisdiction to exceed the maximum time period, scope of
activity restricted or geographical area such court deems reasonable and
enforceable under applicable law, the time period, scope of activity restricted
and area of restriction held reasonable and enforceable by the court shall
thereafter be the restrictive period, scope of activity restricted and the
territory applicable to such provision of this Section 8. The invalidity or
non-enforceability of any provision of this Section 8 in any respect shall not
affect the validity or enforceability of the remainder of this Section 8 or of
any other provisions of this Agreement.
9. MISCELLANEOUS
9.1. Exclusivity. During the term of this Agreement, PQC shall be
------------
the exclusive provider to Medical Group of the types of services to be provided
under this Agreement by PQC (the "Management Services"). During the Term,
Medical Group shall not establish,
-21-
<PAGE>
operate, or provide medical services or practice medicine at a medical office,
clinic or other health care facility anywhere except at offices, clinics and
facilities at which PQC is the exclusive provider of Management Services;
provided, however, that the Medical Group may provide services at hospital and
other facilities unaffiliated with PQC so long as PQC retains the sole right to
provide Management Services in connection with all activities conducted by
Medical Group at such hospitals and other facilities. Except in connection with
any Integrated Health Services which PQC is permitted to provide itself or
through an Affiliate pursuant to Section 3.8, neither PQC nor any Affiliate may,
during the term of this Agreement, provide to any other person or entity which
is located or doing business in the Geographic Area, the management or other
services to be provided by PQC pursuant to this Agreement.
9.2. Names; Trademarks. Medical Group and the Pods shall conduct
------------------
their professional practice under the name or names mutually agreed upon by PQC
and Medical Group and subject to the terms of applicable trademark licenses
between PQC and Medical Group.
9.3. Independent Contractors. For the purpose of this Agreement
------------------------
and for all services to be provided hereunder, each party will be, and will be
deemed to be, independent contractors and not (except to the limited extent
provided in Sections 3.7, 3.13 and 3.14) employees or agents of the other party.
9.4. [Reserved]
----------
9.5. Severability. If any provision of this Agreement is found by
-------------
a court of competent jurisdiction to be void, invalid or unenforceable, the same
will either be reformed to comply with applicable law or stricken if not so
conformable, so as not to affect the validity or enforceability of the remainder
of this Agreement.
9.6. Waiver. Failure of either party to enforce a right under
-------
this Agreement will not act as a waiver of that right or the ability to later
assert that right relative to the particular situation involved.
9.7. Notices. Any notice required to be given pursuant to the terms and
--------
provisions of this Agreement shall be in writing and shall be sent by certified
mail, return receipt requested, postage prepaid or by reputable overnight
delivery service, to PQC and Medical Group at their respective places of
business as designated from time to time by the parties and to the Joint Policy
Board at the address of its Chair. Notices shall be effective the second day
after mailing (in the case of certified mail) or the first day after mailing (in
the case of overnight delivery). A copy of any notice given to Medical Group
shall be addressed to the President of Medical Group with a copy to PQC.
9.8. Entire Agreement. This Agreement, together with all appendices,
-----------------
schedules and exhibits attached hereto, constitutes the entire agreement among
the parties pertaining to the subject matter hereof and supersedes all prior and
contemporary agreements, understandings, negotiations, and discussion, whether
oral or written, of the parties respecting the subject matter hereof. All
appendices, schedules and exhibits attached hereto
-22-
<PAGE>
are hereby made a part of this Agreement.
9.9. Amendment. Except as specifically provided elsewhere in this
----------
Agreement, no change or modification of this Agreement shall be valid unless the
same shall be in writing and signed by an authorized officer of Medical Group
and PQC and shall have been approved by the Joint Policy Board. Except as
specifically provided elsewhere in this Agreement, no waiver of any provision of
this Agreement shall be valid unless the same shall be in writing and signed by
Medical Group and PQC.
9.10. Successors and Assigns. PQC shall have the right to assign its
-----------------------
rights and obligations under this Agreement to any entity controlled by,
controlling or under common control with PQC. Except as set forth in the prior
sentence, neither PQC nor Medical Group may assign its rights or delegate its
obligations under this Agreement without the prior written consent of the other
party. This Agreement shall be binding upon and shall inure to the benefit of
the parties hereto and their respective transferees, successors and assigns.
9.11. Governing Law. This Agreement will be construed and enforced in
--------------
accordance with the laws of the State of Maryland. Each of the parties hereto
submits to the exclusive jurisdiction of the United States federal district
courts seated in that state and agrees that process may be served upon it if it
cannot otherwise be served in such state by registered or certified mail
addressed as provided for notices under this Agreement.
9.12. Headings. Headings in this Agreement are inserted for
---------
convenience only and are not to be considered in construing the provisions
hereof.
9.13. No Obligation to Third Parties. Except as expressly set forth in
-------------------------------
this Section 9.13, none of the obligations and duties of PQC or Medical Group
under this Agreement shall in any way or in any manner be deemed to create any
obligation of PQC or of the Medical Group to, or any rights in, any person or
entity not a party to this Agreement. Notwithstanding the foregoing, in
accordance with and subject to the terms of the provisions of the Employment
Agreements between the Medical Group Physicians and Medical Group, the Medical
Group Physicians are hereby made third party beneficiaries of and may enforce
the obligations of PQC hereunder (as the same may be amended from time to time
in accordance with the provisions of Section 9.9 hereof) by any means, at law or
in equity, all in accordance with any procedural requirements set forth in the
said Employment Agreements; it being expressly agreed that this Agreement may be
amended by the parties in accordance with Section 9.9 without the consent of the
Medical Group Physicians.
9.14. Contract Modifications for Prospective Legal Events. In the event
----------------------------------------------------
(a) any state or federal laws or regulations, now existing or enacted or
promulgated after the Effective Date are interpreted by judicial decision, a
regulatory agency, or legal counsel with a nationally recognized expertise in
the field of law in question in such a manner as to indicate that this Agreement
or any provision hereof may be in violation of such laws or regulations, or (b)
the Financial Accounting Standards Board, Emerging Issues Task Force or other
applicable accounting standard setting entity promulgates standards or issues a
consensus that would prevent PQC from consolidating for financial statement
presentation purposes all Practice Revenues of Medical Group on PQC's
consolidated financial statements, then PQC
-23-
<PAGE>
shall propose to the Joint Policy Board and Medical Group for their approval
such amendments to this Agreement as necessary to conform the Agreement to all
applicable law and preserve the underlying economic and financial arrangements
between PQC and Medical Group without substantial economic detriment to either
PQC or Medical Group. Any such amendment approved by the Joint Policy Board and
Medical Group shall be binding upon Medical Group, and Medical Group hereby
consents to any such amendment. To the extent any act or service required of PQC
should be construed or deemed, by any governmental authority, agency or court,
to constitute the practice of medicine by PQC, the performance of said act or
service by PQC shall be deemed waived and forever unenforceable and the
provisions of this Section 9.14 shall be applicable. To the fullest extent
permitted by law, Medical Group hereby waives and agrees not to assert
illegality as a defense to the enforcement of this Agreement or any provision
hereof, instead, any such purported illegality shall be resolved pursuant to the
terms of this Section 9.14.
9.15. Availability of Certain Documents. The parties agree, to the
----------------------------------
extent required by law necessary to permit receipt of reimbursement for services
by Medical Group, to make available to the Secretary of Health and Human
Services, the Comptroller General of the General Accounting Office, or their
authorized representatives, any books, documents and records in their possession
relating to the nature and extent of the costs of services hereunder for a
period of four (4) years after the provision of such services.
9.16. Gender. References herein to the masculine shall be deemed
-------
to refer to the feminine or neuter gender as the context may require.
-24-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the date first written above.
FLAGSHIP HEALTH, P.A. PHYSICIANS QUALITY CARE, INC.
("Medical Group") ("PQC")
By: /s/ Laura M. Mumford By: /s/ Jerilyn P. Asher
--------------------- -----------------------
Laura M. Mumford, M.D. Jerilyn P. Asher
President Chief Executive Officer
-25-
<PAGE>
APPENDIX A
----------
DEFINITIONS
10. As used in this Agreement, the following terms shall have the
meanings set forth below:
10.1. "Affiliate" or "Affiliates" means with respect to any person, a
--------- ----------
person that directly or indirectly through one (1) or more intermediaries
controls, or is controlled by or is under common control with, such person.
10.2. "Baseline Amount" means $ . The Baseline Amount shall be
---------------
adjusted from time to time as determined by the Joint Policy Board and Medical
Group (i) to reflect the addition of new Physicians or the termination or
resignation of any Medical Group Physician or (ii) to reflect such other factors
as PQC and the Joint Policy Board shall mutually agree to be appropriate, in
consultation with the Medical Group Compensation Committee, as appropriate.
10.3. "Book Value" means the value of an asset, after deduction for any
----------
depreciation or amortization, reflected on a balance sheet prepared in
accordance with generally accepted accounting principles.
10.4. "Deductible Expenses" with respect to any Fiscal Period shall
-------------------
mean, when used with respect to any Pod, an amount equal to (i) any income tax
Medical Group is required to pay or withhold with respect to Medical Group
Physicians assigned to such Pod, (ii) the cost of any pension and any other
benefits not included in Practice Expenses, in each case that are provided to
such Medical Group Physicians and (iii) any Discretionary Expenses; provided,
however, that the parties agree and understand that Deductible Expenses may
include items that are not deductible for income tax purposes, and PQC makes no
representation as to the deductibility of such items for purposes of income tax
liabilities of any Medical Group Physician or Medical Group.
10.5. "Discretionary Expenses" means, during the Fiscal Period ended
----------------------
December 31, 1996, any increase in actual staffing or other expenses, including
Physician Pod Practice Expenses, above the levels set forth in Appendix D to
this Agreement, subject to adjustment in successive Fiscal Periods pursuant to
approval by the Joint Policy Board as part of the budgetary process contemplated
in Appendix A to the form of Employment Agreement attached hereto. With respect
to any Fiscal Period commencing after December 31, 1996, Discretionary Expenses
means any personnel, operating and other expenses, including Physician Pod
Practice Expenses, over and above the standard levels developed by the Joint
Policy Board and approved by PQC and included in a Pod's annual operating
budget, as adjusted from time to time in accordance with Appendix B attached
hereto or the terms of any Employment Agreement. In addition, "Discretionary
Expenses" shall include for a given Pod any liability for federal, state, local
or other taxes attributable to the merger into Medical Group (or attributable to
taxable periods preceding the merger) of any entity owned by one
A-1
<PAGE>
or more Medical Group Physicians practicing in such Pod; provided, however that
there shall be excluded any such tax liability if and to the extent that Medical
Group or PQC has received payment from the Physician Members of the applicable
Pod pursuant to the indemnification provisions of any agreement of merger
pursuant to which the said merger has occurred; and provided, further that if
any such Discretionary Expense arises prior to an initial public offering of PQC
stock, the Joint Policy Board may recommend to PQC that it consider taking steps
to finance such taxes or otherwise stage the imposition of such Discretionary
Expenses over a period of three years, which recommendation shall be subject to
the Board of Directors of PQC.
10.6. "Effective Date" means the date of execution of the Agreement.
--------------
10.7. "Fiscal Period" means the twelve (12) month or shorter period
-------------
ending on December 31 of each year.
10.8. "Geographic Area" means the states of Maryland, Delaware,
---------------
Pennsylvania (including all areas within a 15 mile radius of Philadelphia),
Virginia, West Virginia, and the District of Columbia.
10.9. "Gross Margin" means, for any Fiscal Period, the excess
------------
(or deficit) of Practice Revenues over Practice Expenses.
10.10. "Including" or "to include" any item shall mean containing
--------- ----------
or to contain such item as part of a whole, without any implied exclusion of
other items.
10.11. "Integrated Health Services" means any business that Medical
--------------------------
Group or PQC establishes in the Geographic Area, whether directly or through a
subsidiary, that (i) provides medical or medical related services that are not
traditionally performed by physicians or physician practices at medical offices
(it being agreed that in-office laboratory and other ancillary services
performed by the Medical Group Physicians on the Effective Date of this
Agreement shall be deemed to be medical services and are not Integrated Health
Services) and (ii) are determined to be Integrated Health Services by PQC,
Medical Group, and the Joint Policy Board.
10.12. "Intellectual Property" means all (i) patents, patent
---------------------
applications, patent disclosures and all related continuation,
continuation-in-part, divisional, reissue, reexamination, utility model,
certificate of invention and design patents, registrations and applications for
registrations, (ii) trademarks, services marks, trade dress, logos, trade names
and corporate names and registration and applications for registration thereof,
(iii) copyrights and registrations and applications for registration thereof,
(iv) mask works and registrations and applications for registration thereof, (v)
computer software, data and documentation, (vi) trade secrets and confidential
business information, whether patentable or non-patentable and whether or not
reduced to practice, know-how, clinical product and service processes and
techniques, research and development information, medical protocols,
copyrightable works, financial, marketing and business data, pricing and cost
information, business and marketing plans and customer and supplier lists and
information, (vii) other proprietary rights relating to the foregoing
(including, without limitations, remedies against infringement thereof and
A-2
<PAGE>
rights of protection of interest therein under the laws of all jurisdictions)
and (viii) copies and tangible embodiments thereof; provided, however, that
there is excluded from the definition of "Intellectual Property" any information
(a) previously known to or under development by a Medical Group Physician and
listed on an Appendix to his Employment Agreement, (b) generally known in the
health care industry, or (c) obtained by a Medical Group Physician from a third
party lawfully possessing such Intellectual Property.
10.13. "Medical Group Shareholder" means the individual or individuals
-------------------------
in whose name the shares of Medical Group have been issued.
10.14. "Net Margin" means, for any Fiscal Period, the excess
----------
(or deficit) of Gross Margin less the sum of (i) the Baseline Amount, and (ii)
PQC Direct Expenses.
10.15. "Payor" shall mean any insurer, health maintenance organization,
-----
preferred provider organization, self-insured employer, labor union or other
organization or entity that arranges for the delivery of health care services to
enrollees or patients, including the Medicare and Medicaid programs and
including independent practice associations, physician-hospital organizations,
medical groups and other licensed providers.
10.16. "Payor Contracts" shall mean the contracts, agreements and
---------------
arrangements between Medical Group and Payors for the provision of health care
items and services.
10.17. "Physician Draw" shall mean, with respect to each Physician, for
--------------
each Fiscal Period (prorated for any partial Fiscal Periods) the amount of cash
to be advanced to Physician on a bi-weekly basis as an interim payment of the
portion of Gross Margin and Net Margin due to Physician hereunder, which amount
of Physician Draw shall be subject to change from time to time in accordance
with the provisions of Section 3 of Appendix B hereof. For purposes of the
Fiscal Period commencing January 1, 1996, the Physician Draw shall be, for each
Physician, the amount set forth on Schedule B-1 attached to this Agreement.
10.18. "Pod Physician" shall mean, with respect to a Pod, all Medical
-------------
Group Physicians who are assigned to the Pod.
10.19. "Pod Practice" or "Pod" shall mean, with respect to a Pod, the
------------ ---
medical practice of Medical Group as conducted through the Pod: (i) a Pod
Practice Location, or (ii) a group of Pod Practice Locations, or (iii) a
functional line of business such as a laboratory, and in the case of clause (ii)
or (iii), as approved by the Joint Policy Board to function as a distinct
reporting unit within Medical Group.
10.20. "Pod Practice Locations" shall mean, with respect to a Pod,
----------------------
all Practice Locations assigned to the Pod.
10.21. "PQC Direct Expenses" or "Direct Expenses" shall mean all actual
------------------- ---------------
direct expenses of PQC incurred in connection with providing management services
to Medical Group under this Agreement calculated in accordance with generally
accepted accounting principles, including rent, utilities, cleaning, and other
occupancy costs attributable to PQC's Baltimore office or any other office in
the Geographic Area maintained for the purpose of
A-3
<PAGE>
supporting one (1) or more Pod Practice Locations (together with PQC's Baltimore
office, the "Area Offices"); salary and benefit expense for PQC's employees
providing services to benefit any one (1) or more of the Pod Practice Locations;
depreciation and amortization of equipment located at the Area Offices except
depreciation and amortization with respect to the assets initially acquired by
PQC or Medical Group from Medical Group Physicians on their practices;
telephone, facsimile, and similar communication charges (including the cost of
any so-called tie-line from the Area Offices to the office housing the principal
central computer system for physician practice sites managed by PQC or any of
its affiliates); maintenance and repair costs for the Area Offices and equipment
located therein; insurance related to the Area Offices and PQC's employees based
in any such office or any one (1) or more of the Pod Practice Locations;
professional services (including legal and accounting) related directly to the
Area Offices or any of the Pod Practice Locations; office supplies used by PQC's
Area Offices or any of PQC's employees located at any of the Pod Practice
Locations; and other expenses incurred by PQC with the consent of the Joint
Policy Board.
10.22. "Practice Expenses" shall mean, with respect to a Pod,
-----------------
the following expenses:
(a) Salaries, fringe benefits, and employment taxes and
insurance of all Administrative Staff and Clinical Staff (as
defined in Sections 3.4 and 2.5 of this Agreement) and
physicians who are not Member Physicians, whether employees
or independent contractors, working at or for the direct
benefit of the Pod Practice Locations; and employment taxes
and expenses for a standard package of health and disability
insurance approved by the parties prior to the Effective Date
and for up to $50,000 of term life insurance coverage for Pod
Physicians;
(b) The direct cost (excluding any general and administrative
overhead of PQC) of any other management, administrative or
professional services provided at or in connection with the
Pod Practice that are incurred by PQC, including management,
billing and collections, business office consultation,
accounting and legal services for the Pod Practice;
(c)
(i) The cost of capital (including actual interest on
indebtedness incurred by or on behalf of Medical
Group but only to the extent actual interest is
incurred from a third party other than Bain Capital),
to finance or refinance obligations of Medical Group
related to the Pod Practice, to purchase medical or
nonmedical equipment for the Pod Practice (other than
those assets, if any, purchased by PQC as part of the
initial acquisition of the medical practice that
served as the basis of the Pod) or to provide working
capital or finance new ventures of Medical Group
related to the Pod Practice;
(ii) depreciation and amortization charges to be paid to
PQC, the amounts of which shall be set forth in the
Pod Budget or for costs of capital described in
Section 10.21(c)(i) of this Appendix A, or, if in
excess of the budgeted amount, is agreed upon by PQC
and the Joint Policy Board
A-4
<PAGE>
(expressly excluding any depreciation and
amortization charges relating to assets, if any,
purchased by PQC as part of the initial acquisition
of the medical practice that served as the basis of
the Pod);
(d) Occupancy costs attributable to the Pod Practice (whether
principal, interest, depreciation, taxes or rent) incurred in
obtaining, improving, developing, leasing, operating,
maintaining, replacing and preserving office space and
equipment for the Pod Practice, including janitorial
services, refuse disposal and medical waste disposal;
(e) Direct costs incurred in obtaining, leasing, operating,
maintaining and replacing computer systems and software
located at the Pod Practice Locations, including billing
systems, outcomes reporting systems and financial reporting
systems and the cost of so-called tielines;
(f) All utilities, including but not limited to telephone service
(including business calls on cellular telephones), answering
services, electricity, heat, water, and sewer that are used
at the Pod Practice Locations;
(g) Postage, facsimile, collection and credit verification costs
incurred for the Pod Practice;
(h) Pharmaceuticals, x-ray and laboratory expenses (both in-house
and other) for the Pod Practice;
(i) Medical supplies for the Pod Practice;
(j) All office supplies for the Pod Practice;
(k) Copying charges for the Pod Practice;
(l) Professional journals and books, professional dues and
memberships, and magazine and newspaper subscriptions for
the Pod Practice;
(m) Continuing Medical Education expenses for the Pod Physicians,
within guidelines approved by the Joint Policy Board;
(n) Direct advertising, accounting and legal expenses incurred
in connection with the Pod Practice;
(o) Insurance expenses, including but not limited to (1) general
liability, fire, and property for each Pod Practice Location
and (2) professional liability insurance for Pod Physicians
and for Clinical Staff while providing services in connection
with the Pod Practice;
A-5
<PAGE>
(p) Any casualty losses suffered by Medical Group that are
related to the Pod Practice to the extent that such losses
are not reimbursed by any third party responsible therefor or
through insurance;
(q) A pro rata share calculated on the basis of the ratio of
the number of Pod Physicians to the number of Medical Group
Physicians or such other reasonable allocation methodology as
PQC may develop from time to time and as may be approved by
the Joint Policy Board, of expenses incurred by PQC and
included within a budget approved by the Joint Policy Board
for Medical Group as a whole (excluding any corporate-related
general and administrative overhead of PQC), for example,
Medical Group-wide management information system expenses,
malpractice costs for Medical Group as a whole (as opposed to
individual physicians), accounting and pension plan services,
Medical Group tax return preparation, and providing or
arranging for other necessary administrative, accounting and
legal services.
10.23. "Practice Revenues" with respect to a Pod, the amount equal to
-----------------
all revenues of Medical Group attributable to the Pod Practice or assigned by
the Pod Physicians pursuant to their Employment Agreements with the Medical
Group, net of federal, state and local income taxes of Medical Group,
adjustments for uncollectible accounts, Medicare, Medicaid and other contractual
allowances, discounts, workers' compensation adjustments, professional
courtesies and other reductions in collections, including: (a) all professional
fees and other charges actually recorded each month on an accrual basis of
accounting under generally accepted accounting principles as a result of medical
services rendered by Medical Group through the Pod and the Pod Physicians,
whether rendered in an outpatient or inpatient setting; (b) the technical
component of fees earned with respect to services rendered by Medical Group
through the Medical Group Pod (including all fees for technical and ancillary
services and all facility fees and similar charges); (c) all collections from
managed care organizations and Payors, or payments made in respect of enrollees
of such managed care organizations or Payors, including payments made
periodically on a per member basis for the partial or total medical needs of a
subscribing member, and any co-payments and incentive bonuses, management fees
and other amounts received and fees paid in respect of services provided by or
through the Pod as a result of a capitation plan or risk-sharing arrangement;
(d) grants, fees and other payments in connection with basic or clinical
research conducted by Pod Physicians or under grant programs, whether publicly
or privately funded, including grants or programs for the care of special
patient populations; (e) consulting fees of Pod Physicians, including without
limitation honoraria, witness fees and like amounts; (f) fees and payments for
workers compensation evaluations or independent medical examinations; (g) all
coordination of benefits, patient co-payments or deductibles and third-party
liability recoveries; and (h) any other revenues from the practice of medicine
or provision of health care items and services of any kind, except to the extent
that the parties may otherwise agree in writing). Notwithstanding the foregoing,
Practice Revenues shall not include any income unrelated to any of the foregoing
items that is personal to a Pod Physician and unrelated to the provision of
health care or ancillary services (e.g., personal dividend or trust income), and
provided further that the Joint Policy Board may approve in writing the
retention by a Pod Physician of limited honoraria and similar amounts.
A-6
<PAGE>
APPENDIX B
FINANCIAL ARRANGEMENTS
ARTICLE A. COMPENSATION TO PQC
-------------------
1. General. As set forth in greater detail below and subject to all of
--------
the conditions and provisions hereof, the parties agree that the aggregate
compensation to be paid to PQC for services rendered under this Agreement shall
equal the sum of (1) all PQC Direct Expenses incurred in connection with the
provision of services to Medical Group and (2) additional compensation equal to
fifty percent (50%) of Net Margin of the Medical Group. This Appendix B also
provides for the priority of application of Practice Revenues to various
categories of expenditures.
2. Application of Practice Revenues.
---------------------------------
Practice Revenues shall be applied to expenses and other required
distributions under this Agreement in the following order of priority:
(a) Step 1 - Practice Revenues shall be
------
applied to pay Practice Expenses.
(b) Step 2 - Any Gross Margin
------
remaining after Step 1 above shall
next be applied to payment of (i)
the Baseline Amount (minus the
amount necessary to pay all
Deductible Expenses) and (b) PQC
Direct Expenses on a proportional
basis equal to the ratio of the
Baseline Amount to PQC Direct
Expenses as approved by the Joint
Policy Board for the then current
Fiscal Period or in the absence of
approval of a budget for the then
current Fiscal Period, in the ratio
set forth on Schedule B-1 attached
to this Agreement. By way of
example only and not as a
limitation, if the Baseline Amount is
$12 million and budgeted PQC
Direct Expenses are $1 million, then
under this Step 2 12/13ths or
92.31% of each dollar of Gross
Margin shall be allocated to
Medical Group for payment of the
Baseline Amount and the remaining
B-1
<PAGE>
1/13th or 7.69% of each dollar of
Gross Margin shall be allocated to
PQC.
(c) Step 3 - After completion of Step 2,
------
any remaining Net Margin shall be
allocated fifty percent (50%) to
Medical Group for distribution to the
Medical Group Physicians and fifty
percent (50%) to PQC as additional
compensation hereunder.
Subject to review by the Joint Policy Board, PQC shall calculate the
amounts of Gross Margin and Net Margin to be allocated to each of Medical Group
and PQC under this Section 2. If the Gross Margin is negative in any Fiscal
Period, such negative amount shall constitute Practice Expenses for the next
following Fiscal Period. In the event Net Margin is negative in the Fiscal
Periods ending December 31, 1997 or December 31, 1998, PQC may be obligated to
make a loan to Medical Group in accordance with the provisions of Section 3.5 of
the Agreement.
3. Payment of Physician Draw. On a bi-weekly basis, PQC shall
--------------------------
distribute to Medical Group from the account referred to in Section 3.12 of this
Agreement ("Medical Group Account") an amount equal to one twenty-sixth of the
budgeted aggregate Physician Draw (minus the amount necessary to pay all
Deductible Expenses) for distribution by Medical Group to the Pods; provided,
however, if (a) at any time during a Fiscal Period, PQC determines that the
amount of Practice Revenues allocated to the payment of aggregate Physician Draw
under Section 2 of this Appendix B for any Fiscal Period may be less than
ninety-five percent (95%) of the budgeted aggregate Physician Draw for such
Fiscal Period, or (b) if PQC or the Joint Policy Board determines (1) the
aggregate Practice Expenses for such Fiscal Period will exceed the aggregate
budgeted Practice Expenses for such Fiscal Period, or (2) the aggregate Practice
Revenues will be less than the aggregate budgeted Practice Revenues, PQC may,
and upon direction from the Joint Policy Board, shall, reduce the aggregate
Physician Draw in such manner as PQC determines to be appropriate. Subject to
the provisions of Section 3.5 of this Agreement, the aggregate Physician Draw
shall be adjusted to reflect the addition of new Medical Group Physicians or the
termination or resignation of any Medical Group Physician or to reflect such
other factors as PQC and the Joint Policy board shall mutually agree to be
appropriate. PQC may, but shall not be required to, advance money to the
Compensation Pool as defined in Appendix A to the Employment Agreement to fund
such Physician Draw.
4. Payment of Variable Distribution Pool. Within forty-five (45) days
--------------------------------------
of the end of each of the first three (3) calendar quarters in each Fiscal
Period, PQC shall advise Medical Group's Compensation Committee (as defined in
Employment Agreements) of the amount (the "Variable Distribution"), if any, of
Net Margin allocable to Medical Group under Section 2 that has not been used, or
is not reasonably anticipated by PQC to be needed for Medical Group to fund, all
amounts required to be funded by Section 3. PQC shall disburse to Medical Group
from the account referred to in Section 3.12 of this Agreement the amount of
B-2
<PAGE>
the Variable Distribution, which shall be distributed to the Physicians in such
manner consistent with law as is described in Section 4 of Appendix A to the
Employment Agreements.
5. Annual Reconciliation of Distributions. Within sixty (60) days after
---------------------------------------
the end of each year, PQC shall (i) total and report Practice Revenues and
Practice Expenses for each Pod, (ii) total and report aggregate Practice
Revenues for all Pods and aggregate Practice Expenses for all Pods, (iii) total
and report PQC Direct Expenses, (iv) total and report all amounts advanced as
Physician Draws and Variable Distributions, (v) total and report the level of
Gross Margin, whether positive or negative, and (vi) total and report the level
of Net Margin, whether positive or negative (taking into account any adjustments
necessary in the event that distributions during the said Fiscal Period or any
prior Fiscal Periods have resulted in an over-advancement or under-advancement
of funds). Each Pod, as a Discretionary Expense of its Member Physicians, may
inspect Medical Group's books and records and PQC's books and records in order
to verify the amount and proper calculation of the sums to be determined
hereunder. PQC may not charge any Pod or Physician Member any access or similar
fee in connection with any request to review books and records. If such
independent accounting presents a report identifying a departure in such
financial reports from generally accepted accounting principles, which departure
has had a material adverse effect on the revenues allocated to Physician Group,
PQC shall reimburse the Physician Members for the cost of such report.
6. Distribution in Event of Actual or Anticipated Negative Gross
-------------------------------------------------------------
Margin. In the event that for any calendar quarter, Gross Margin is a negative
- -------
number or in the event either party gives notice to the other that there is
reason to believe Gross Margin may be a negative number, PQC shall promptly
propose a remedial plan of action to the Joint Policy Board and the parties
agree to cooperate in good faith in order to implement such remedial plan or
such other corrective action as shall be approved by the Joint Policy Board. At
PQC's sole discretion, PQC may elect to advance working capital funds to Medical
Group in such amounts and at such times, and from time to time, as PQC shall
determine necessary to satisfy aggregate Practice Expenses for all Pods, such
advances to be treated as loans, the repayment of which shall be required in
accordance with the definition of "Practice Expenses" in Section 10.22 of
Appendix A hereto. In the event PQC shall elect not to make advances sufficient
to satisfy aggregate Practice Expenses for all Pods and Medical Group has not
otherwise satisfied Practice Expenses from its own resources, either party shall
have the right to terminate this Agreement upon thirty (30) days' written
notice.
7. Manner of Payment of Final Reconciliation. Within seventy (70) days
------------------------------------------
after the end of the Fiscal Period, Medical Group and PQC shall make such
payments, if any, to each other as may be required under the provisions of this
Appendix B. Medical Group covenants to distribute any amounts to the Physicians
in a manner that complies with all applicable law.
8. Manner of Payment of PQC Direct Expenses and Compensation to PQC.
-----------------------------------------------------------------
PQC shall arrange for the payment of PQC Direct Expenses and the compensation to
PQC itself in accordance with the terms of this Appendix and is hereby
authorized to make withdrawals from the Medical Group Account for such amounts
at the time or times that the amounts
B-3
<PAGE>
become due. Medical Group hereby authorizes PQC to make such withdrawals from
the Medical Group Account for accrued but unpaid PQC Direct Expenses and
compensation owed to PQC under the provisions of this Appendix B after
termination of this Agreement.
B-4
<PAGE>
SCHEDULE B-1
I. Name of Physician Physician Draw for Fiscal Period Ending
----------------- ---------------------------------------
December 31, 1996
-----------------
[See Section 6 of Appendix A to the Employment Agreements with the Physician
Members.]
II. Ratio of Baseline Amount to budgeted PQC Direct Expenses
B-5
<PAGE>
APPENDIX C
LIST OF PHYSICIANS
Name of Pod Partner Physicians Employed Physicians
- ----------- ------------------ -------------------
Pod A
Pod B
Pod C
Pod D
Pod E
Pod F
Pod G
Pod H
Pod I
Pod J
Pod K
Pod L
Pod M
Pod N
Pod O
Pod P
Pod Q
C-1
<PAGE>
APPENDIX D
----------
[Discretionary Expense Levels]
[See Section 7 of Appendix A to the Employment Agreements with the Physicians
Members.]
D-1
<PAGE>
EXHIBIT A
---------
Form of Employment Agreement
-1-
<PAGE>
EMPLOYMENT AGREEMENT
OF (TITLE)
This Agreement is made and entered into as of December __ , 1996 by and
between Flagship Health, P.A. ("Medical Group"), a Maryland professional
association and (Name) ("Physician"). Reference is made to Appendix A of that
certain Services Agreement between Medical Group and Physicians Quality Care,
Inc. ("PQC") dated as of the date hereof (the "Services Agreement"). Capitalized
terms used herein and not otherwise defined have the respective meanings set
forth therein.
WHEREAS, Medical Group employs qualified physicians to provide medical
services under its auspices to its patients and wishes to engage Physician to
provide medical care to its patients; and
WHEREAS, Physician is a duly licensed medical doctor and desires to
provide such professional services to Medical Group.
NOW, THEREFORE, in consideration of the mutual promises, terms,
provisions and conditions contained in this Agreement, the parties agree as
follows:
1. Employment. Medical Group hereby agrees to employ Physician and
-----------
Physician hereby accepts such employment on a full-time basis upon the terms and
conditions as are hereinafter set forth.
2. Term. This Agreement shall become effective as of the date first
-----
written above and, subject to earlier termination as hereinafter provided, shall
terminate five (5) years thereafter (the "Anniversary Date"). Thereafter, this
Agreement will automatically be extended on the same terms as set forth herein
for successive one (1) year periods, unless earlier terminated in accordance
with this Agreement.
3. Duties and Responsibilities of Physician.
-----------------------------------------
3.1. Services. As an employee of Medical Group, Physician shall
--------
have the following duties and responsibilities under this Agreement and such
other duties and responsibilities as may be designated from time to time by
Medical Group:
(a) To provide direct patient care services to patients of
Medical Group;
(b) To deliver professional services on a full time basis
during the week (and on weekends as appropriate), all in accordance
with Medical Group's 8 schedule of office hours as reasonably
established from time to time and approved by the Joint Policy
Board;
(c) To participate in coverage arrangements in cooperation
with other physicians to provide twenty-four (24) hour availability
and coverage in person or on an on-call basis in accordance with
Medical Group's coverage schedule as reasonably established from
time to time and approved by the Joint Policy Board; and
<PAGE>
(d) To arrange in a reasonable and timely manner for follow-
up treatment of patients evaluated or treated by Physician where
such follow-up treatment is medically indicated.
3.2. Physician Qualifications. As a continuing condition of
------------------------
Physician's employment, Physician agrees to:
(a) maintain an unrestricted license to practice medicine in
the State of Maryland and maintain good standing with the Maryland
Board of Physician Quality Assurance;
(b) maintain a federal Drug Enforcement Administration
certificate, without restrictions, to the extent necessary for his
practice;
(c) maintain full hospital medical staff memberships and
clinical privileges as are appropriate to his specialty and as are
reasonably determined by the Joint Policy Board to be necessary in
connection with participation in contracts with third-party payors
negotiated by Medical Group or on Medical Group's behalf by an agent
of Medical Group;
(d) perform all professional services through Medical Group
in accordance with all applicable federal, state and local laws and
regulations and with prevailing standards of care and medical ethics
and with practice protocols and policies as adopted from time to
time by the Medical Advisory Board;
(e) maintain his skills through continuing education and
training, including participation in those programs reasonably
designated from time to time by Medical Group's Medical Director;
(f) maintain eligibility for and participate in (at Medical
Group's expense) insurance under the professional liability policy
or policies at a commercially reasonable cost for Physician's
specialty as determined by Medical Group;
(g) be board-certified or board-eligible or have equivalent
training and experience in the area listed on Schedule 3.2(g),
---------------
(h) be and remain a participating provider in the Medicare
programs and other carriers and managed care entities with which
Medical Group contracts; provided, however, that with respect to
managed care plans, Physician shall not be required to accept new
patients for care during such period, if any, as the Joint Policy
Board shall have determined that Physician may reasonably close his
practice to new patients due to capacity constraints;
(i) abide by the Principles of Medical Ethics of the
American Medical Association and the Maryland Medical and
Chirurgical Faculty;
(j) comply with all material federal, state and municipal
laws,
<PAGE>
statutes, ordinances, orders and regulations applicable to the
conduct of Physician's activities, as well as with the articles of
incorporation and bylaws of Medical Group and other rules or
regulations adopted from time to time by the Joint Policy Board;
(k) promptly disclose to Medical Group the commencement or
pendency of any legal action, administrative proceeding or
investigation, medical staff or professional disciplinary actions
against Physician;
(l) abide by any reasonable guidelines adopted by the Joint
Policy Board or, subject to the approval of the Joint Policy Board,
any person or entity providing management services to Medical Group
under the Services Agreement designed to encourage the appropriate,
efficient and cost-effective delivery of medical services, subject
always to the clinical judgment of Physician, and cooperate with and
participate in all other Medical Group programs approved by the
Medical Advisory Board regarding quality assurance, utilization
review, risk management and peer review by serving on committees or
otherwise participating in such activities as the Joint Policy Board
may reasonably require;
(m) maintain on a timely basis appropriate and accurate
medical records in accordance with accepted medical standards and
Medical Group policies with respect to all patients evaluated and
treated; and
(n) satisfy such other reasonable requirements as are
established from time to time by Medical Group and approved by the
Joint Policy Board, provided that any requirements involving
clinical matters shall also require the approval of the Medical
Advisory Board.
3.3. Outside Practice: Conflicts of Interest.
----------------------------------------
(a) Physician shall not, during the term of this Agreement,
undertake any activity that interferes with, adversely affects, or
represents a conflict of interest with Physician's obligations under
this Agreement or that competes with Medical Group for patients, or
(except as arranged by Medical Group) enter into any managed care
contract or assume any liability under a risk pool or similar
arrangement without Medical Group's consent. Physician shall, during
the term of this Agreement, confine Physician's practice to Medical
Group and its patients, except with respect to teaching and research
activities approved by the Joint Policy Board. It is expressly
understood and agreed that any medical services rendered by
Physician to patients who express a wish to engage Physician
personally shall be rendered by Physician as an employee of Medical
Group.
(b) Physician recognizes and agrees that the successful
operation of Medical Group depends in large part upon the loyalty of
Physician to Medical Group and upon the avoidance of conflicts of
personal time and availability. Accordingly, as used in Section 1
and in other sections of this Agreement, the term "fulltime" shall
mean that Physician shall during the term hereof devote his full
working time, attention, loyalty and best efforts to the affairs of
<PAGE>
Medical Group, taking into account any vacation time and Continuing
Medical Education time to which Physician is entitled and also
taking into account any teaching, research, community activities,
activities with professional organizations and care of indigent
patients performed by Physician to the same extent that Physician
historically has engaged in such activities. Upon the advance
written approval of Medical Group, Physician may be relieved of
Physician's obligation to provide services hereunder on a full-time
basis for such professional purposes and such limited time period as
may be so approved. Except to the extent the Joint Policy Board
approves in writing Physician's retention of limited honoraria and
similar amounts, any remuneration earned by Physician in connection
with such approved professional activities shall be assigned to
Medical Group; provided that no such exception shall take effect
absent approval by the Joint Policy Board and PQC.
(c) During the term of this Agreement, Physician shall not,
and shall not undertake any planning (other than after the giving of
notice under Section 8(d)(i)(C)) to, establish, operate or provide
medical services to or practice medicine at any medical office,
clinic or other health care facility other than pursuant to this
Agreement, except as approved by Medical Group.
(d) Physician understands and acknowledges that the
foregoing provisions in this Section 3.3 are designed to preserve
the goodwill of Medical Group and the goodwill of the other
individual physicians of Medical Group. Accordingly, if Physician
breaches any obligation of this Section 3.3, in addition to any
other remedies available under this Agreement, at law or in equity,
Medical Group shall be entitled to enforce this Agreement by
injunctive relief and by specific performance of the Agreement, such
relief to be without the necessity of posting a bond, cash or
otherwise. Additionally, nothing in this paragraph shall limit
Medical Group's right to recover any other damages to which it is
entitled as result of Physician's breach.
3.4. Location of Practice. It is anticipated that Physician's
---------------------
services hereunder will be performed at the location listed on Appendix C (the
"Practice Site"). In addition, Medical Group will consult with Physician before
assigning him to provide services at a different practice site, which assignment
may be made only with the approval of the Joint Policy Board and Physician.
3.5. Name. Physician agrees that Medical Group shall be
-----
entitled to use the name of Physician on a royalty free, non-exclusive basis for
the term of this Agreement, solely in connection with advertising for or
informational documents with respect to Medical Group or PQC.
3.6. Assignment of Intellectual Property. Physician agrees to
------------------------------------
assign to PQC any Intellectual Property rights that Physician acquires during
the term of this Agreement; provided, however, that Physician shall not be
required to assign to PQC Intellectual Property rights that relate to (i)
non-medical studies and inventions, (ii) royalties from medical devices unless
developed as part of Physician's services to Medical Group, (iii) publications
on clinical aspects of a medical practice unless developed as a part of
Physician's services to Medical Group, (iv) medical books and articles designed
primarily for purchase by
<PAGE>
non-physicians, (v) any Intellectual Property developed by Physician prior to,
or in progress on, the date of this Agreement as disclosed on Schedule 3.6
hereto, and (vi) any Intellectual Property rights which Physician is, on the
date of this Agreement, obligated to assign to or share with the Johns Hopkins
Hospital, the Johns Hopkins University or any affiliated company or institution.
PQC will review the feasibility of commercializing any Intellectual Property
assigned to it pursuant to this Agreement. If PQC does not elect to
commercialize the Intellectual Property, it will reassign it to Physician. If
PQC elects to commercialize such Intellectual Property, PQC and Physician shall
enter into an agreement on mutually acceptable terms to share the costs and
revenues from such commercialization with Physician. Physician agrees for the
benefit of PQC, to execute, at PQC's expense, such further instruments or
agreements, to make such filing or registration and to take such other actions
as PQC determines to be necessary or desirable to give effect to the assignments
contemplated by this Section 3.6 or to protect, establish or record PQC's rights
to such Intellectual Property. Physician also agrees that PQC, the Joint Policy
Board and the Compensation Committee may consider the time devoted by Physician
to the development or promotion of Intellectual Property rights that are not
assigned to PQC in determining the operating budget of such Physician's
Physician Pod, including Physician Draw, and the allocation of the Compensation
Pool among Physician Pods.
4. Compensation and Benefits. Subject to performance of Physician's
--------------------------
duties and obligations to Medical Group pursuant to this Agreement or otherwise,
Physician shall be compensated as follows:
4.1. Compensation. As compensation for all services performed under
------------
and during the term of this Agreement, Medical Group shall pay Physician in
accordance with the terms set forth on Appendix A, attached hereto and made a
----------
part hereof.
4.2. Fringe Benefits. Physician shall be entitled during the
----------------
term of this Agreement to participate in the employee fringe benefit plans
provided to other physician employees of Medical Group as set forth on
Appendix B, attached hereto and made a part hereof, as amended from time to
- ----------
time upon approval by the Joint Policy Board. Such participation shall be
subject to (i) the terms of the applicable plan documents and (ii) generally
applicable Medical Group policies.
4.3. Professional Liability Insurance. During the term of this
---------------------------------
Agreement, the Medical Group shall provide professional liability insurance
covering professional services provided by Physician in accordance with the
provisions of this Agreement with such limits of liability as determined by the
Joint Policy Board, which shall be initially not less than $1,000,000 per
occurrence and $3,000,000 annual aggregate. Medical Group's obligation to
provide such insurance is subject to Physician's compliance with any conditions
of such insurance other than the obligation to pay premiums.
5. Warranties of Physician. Physician represents and warrants that:
------------------------
(a) Physician now possesses and will continue to possess
a valid and unlimited license to practice medicine pursuant to the laws
of the State of Maryland;
(b) Physician possesses a valid federal narcotics number
which has never been revoked or suspended other than a temporary
suspension, now cured, resulting solely from the late filing of renewal
papers;
<PAGE>
(c) Physician's medical staff privileges at any hospital have
never been (other than for delinquency in the completion of medical
records) and are not in the process of being curtailed, suspended,
revoked or otherwise the subject of any proceedings which can or could
have resulted in the same;
(d) Neither Physician's provider number for or eligibility to
participate in Blue Shield, Medicare or Medicaid programs nor
Physician's eligibility to participate in any other third-party payment
system has ever been or is in the process of being curtailed,
suspended, revoked or otherwise the subject of any proceedings which
can or could have resulted in the same;
(e) Physician has not been convicted of a criminal offense
related to participation in the delivery of medical care services under
Titles XVIII, XIX, or XX of the Social Security Act;
(f) Except as disclosed in writing to Medical Group on
Schedule 5(f), Physician is not now and has not in the past been a
-------------
party to or the subject of any other professional litigation or, to the
best of Physician's knowledge and belief, any investigation or
proceeding, whether civil, criminal or administrative in nature;
(g) To the best of Physician's knowledge and belief,
Physician is not now and never has been the subject of any
investigation related to Physician's medical practice or qualifications
for licensure as a physician other than that routinely conducted by a
state' 8 board or agency with jurisdiction over the licensure of
physicians in the usual course of initial and renewal licensure by the
state; and
(h) Physician's license to practice medicine in any state has
never been revoked (not including revocation solely for non-payment of
filing or renewal fees), suspended, restricted or otherwise curtailed
nor has Physician been placed on probation by any medical licensing
board.
6. Charges. Physician agrees that Medical Group, subject to the
--------
approval of the Joint Policy Board, shall set any and all charges to patients
for any professional services rendered by Physician during the term of this
Agreement.
7. Billings, Assignment and Delivery of Revenues. As the employer of
----------------------------------------------
Physician, Medical Group has the right to bill for and to receive, hold, and
disburse all revenues (whether for professional services or ancillary services
such as laboratory services), generated by Physician. Physician hereby assigns,
and agrees to assign to Medical Group, all of his rights existing in said
revenues due on account of services rendered pursuant to this Agreement.
Physician acknowledges Medical Group's engagement of Physicians Quality Care,
Inc., a Delaware corporation pursuant to the Services Agreement, under which
Medical Group has authorized PQC to take those actions described below in this
Section 7 for and on behalf of and in the name of Medical Group and, as
necessary, for and on behalf of and in the name of Physician.
If for any reason PQC cannot, on behalf of and in the name of Medical
Group, bill for and receive fees generated by any clinical services provided by
Physician, Physician hereby grants to PQC an exclusive power of attorney and
appoints PQC its exclusive true and lawful attorney-in-fact to take those
actions described below in this Section 7, including without
<PAGE>
limitation to bill for such services on behalf of Physician under Physician's
individual provider number or numbers.
Physician acknowledges that, pursuant to the terms of the Services
Agreement, PQC shall:
(a) bill in Medical Group's name, under its provider
number(s) when obtained within guidelines approved by the Joint Policy
Board, and on its behalf, and
(b) until such time as Medical Group has obtained its
provider number(s), may bill in Physician's name, all claims (including
co-payments due from patients) for reimbursement from Payors, as
defined below, fiscal intermediaries or patients for all covered
medical services provided by Physician or Medical Group to patients;
(c) take possession of and endorse in the name of Physician
or Medical Group all cash, notes, checks, money orders, insurance
payments, and any other instruments received as payment of accounts
receivable (and Physician covenants to transfer and deliver promptly to
PQC all funds received by Physician from patients or Payors for medical
services), all such funds to be deposited directly into a Medical Group
account and to be applied in a manner consistent with the Services
Agreement;
(d) deposit all collections directly into a Medical Group
account with a banking institution selected by PQC and approved by
Medical Group and to make withdrawals from such Medical Group account
for such purposes as are consistent with the Services Agreement;
(e) collect and receive in: (i) Medical Group's name and on
its behalf, and (ii) Physician's name and on his behalf, all accounts
receivable generated by such billings and claims for reimbursement and
to place such accounts for collection, settle and compromise claims,
and institute legal action for the recovery of accounts; and
(f) sign checks on behalf of the Medical Group and make
withdrawals from Medical Group accounts for payments specified in the
Services Agreement and as requested from time to time by Medical Group.
Physician shall cooperate fully with Medical Group and PQC (1) in
facilitating such collections and (2) in collecting accounts receivable
transferred to PQC by Physician pursuant to this Agreement, including
endorsement of checks and delivery to PQC of all revenues, in whatever form,
received from patients or Payors on their behalf, and completion of all forms
necessary for the collection of said revenue, including, without limitation,
executing and delivering to each financial institution wherein Medical Group or
PQC maintains an account, such additional documents or instruments as may be
necessary to evidence or effect the power of attorney granted hereby to PQC. If
PQC assigns said power of attorney, then Physician shall execute a power of
attorney in favor of the assignee in a form acceptable to PQC.
For purposes of this Section 7, "Payors" shall mean any persons that,
on behalf of a patient or enrollee or employee, pay or reimburse Physician or
Medical Group for providing health care services or for managing the provision
of health care services, such as insurance companies, managed care plans,
employers or the Medicare and Medicaid programs. The
<PAGE>
provisions of this Section 7 shall survive the termination of this Agreement.
8. Termination. This Agreement shall terminate or be terminable at the
------------
end of the Employment Period, as it may be extended, or under any of the
circumstances set forth below. The "Termination Date" shall be the date as of
which all notice and cure periods, if any, have lapsed with respect to the
applicable provision under which either party is seeking to terminate this
Agreement.
(a) Death In the event of Physician's death, this Agreement
-----
shall immediately and automatically terminate.
(b) Disability. Either Medical Group or Physician may terminate this
----------
Agreement, upon written notice to the other party, in the event that
Physician becomes disabled through any illness, injury, accident or
condition of either a physical or psychological nature and, as a
result, is unable to perform substantially all of Physician's duties
and responsibilities hereunder for ninety (90) consecutive days during
any period of three hundred sixty-five (365) calendar days and Medical
Group determines that there is no reasonable likelihood that Physician
will be able to return to the performance of substantially all of
Physician's duties and responsibilities on a regular basis within
thirty (30) days thereafter; provided, however that the Joint Policy
Board must approve any decision by the Medical Group to terminate a
Physician pursuant to this Section 8(b), which approval shall not be
unreasonably withheld. If any question arises as to whether Physician
is so disabled, Physician shall, at Physician's election or at the
request of Medical Group, submit to a medical examination by a
physician selected by Medical Group, to whom Physician or Physician's
guardian has no reasonable objection, to determine whether Physician is
so disabled. If Physician (or his guardian) shall disagree with the
determination of such physician, Physician, within thirty (30) days
following the determination by the physician selected by Medical Group,
may submit to a medical examination by a physician selected by
Physician (or his guardian). If the determination of such second
physician differs from that of the first, Medical Group and Physician
(or his guardian), within thirty (30) days following the determination
by such physician, shall agree upon a third physician, who shall
examine Physician and whose determination shall be conclusive of the
issue. If Physician does not request a second opinion, the
determination of the first physician shall be conclusive of the issue.
If this question arises and Physician does not submit to medical
examination, Medical Group's determination of the issue shall be
binding on Physician.
(c) Termination by Medical Group for Cause.
---------------------------------------
(i) Medical Group may terminate this Agreement for cause at any
time provided that Medical Group first gives ninety (90) days
written notice to Physician setting forth in reasonable detail the
nature of such cause and provides Physician with an opportunity to
respond to the notice and discuss with the Medical Director of
Medical Group the issues identified in the notice, and to cure the
basis for the notice. If within that ninety (90) day period,
Physician has not cured the problem described in the notice, then
Medical Group may immediately terminate Physician's employment,
without further notice provided, however, that Medical Group shall
not be required to provide ninety (90) days notice or an opportunity
to cure any cause that in the
<PAGE>
reasonable judgment of Medical Group is not capable of being cured.
Cause shall be determined by Medical Group in its reasonable
judgment and shall include, but not be limited to:
(A) Physician's fraud or dishonesty with respect to Medical
Group, its employees, patients or visitors;
(B) Physician's suspension or termination from, or failure
to participate as an eligible provider in Medicare, Medicaid
or any third-party reimbursement program approved by the
Joint Policy Board, for cause such as quality of care,
utilization review, or quality assurance reasons; provided,
however, that termination or failure to renew Physician's
participation in a third-party reimbursement program due to
changes in the size or character of provider panels shall not
constitute cause under this Section 8(c)(i)(B);
(C) Revocation, suspension, or failure to renew Physician's
Board Certifications (if any) in his primary area of
practice; provided, however, that such termination shall be
approved by Medical Advisory Board and the Joint Policy
Board;
(D) Physician's material negligence in the performance of
Physician's duties or responsibilities to Medical Group;
(E) Physician's breach of any material term of this
Agreement or any other agreement entered into in connection
with such Physician's affiliation with Medical Group;
(F) the medical staff membership or clinical privileges of
Physician at any hospital in the State of Maryland or any
other jurisdiction: (1) being revoked or terminated, or not
being renewed at the election of the hospital or, without the
approval of the Medical Director, expiring; or (2) or being
reduced to a level which, in the sole judgment of the Medical
Director of Medical Group, would prevent Physician from
rendering the services contemplated by this Agreement in any
material respect. Medical Group may terminate this Agreement,
upon written notice to Physician, if Physician's medical
staff membership or clinical privileges at any hospital in
the State of Maryland or any other jurisdiction are suspended
other than (a) during a period of summary suspension pending
hearing and appeal, provided such hearing and appeal are
timely requested by Physician or (b) a nonrecurring,
temporary suspension arising solely out of failure to
complete medical records. During any period of summary
suspension of Physician's privileges (other than a
nonrecurring, temporary suspension arising solely out of
failure to complete medical records), Physician's employment
shall be suspended pending hearing and appeal as timely
requested by Physician and compensation and benefits shall be
continued to the extent provided by policies in effect at the
time;
(G) Physician ceasing to be licensed to practice medicine
without
<PAGE>
restriction under the laws of any state in which
Physician is licensed;
(H) Physician ceasing to maintain a current and valid
Federal Drug Enforcement Agency license;
(I) Physician ceasing to be covered by professional
liability insurance (other than as a result of Medical
Group's act or omission in connection with such insurance);
(J) Physician being convicted of a felony or any crime
involving moral turpitude;
(K) Physician being penalized with civil monetary fines or
assessment under any federal or state law involving Medicare,
Medicaid or any third-party reimbursement program;
(L) Physician (a) engages in any conduct or is formally
accused of conduct for which Physician's license to practice
medicine reasonably would be expected to be subject to
revocation or suspension, whether or not actually revoked or
suspended, or (b) is otherwise disciplined by any licensing,
regulatory or professional entity or institution, the result
of any of which events described in clause (a) or (b) of this
Section 8(c)(i)(L) does, or reasonably would be expected to,
materially adversely affect Medical Group or significantly
impair the ability of Medical Group to perform medical
services in an amount and of a nature consistent with the
medical services performed at the time of such action; or
(M) Medical Group or PQC is prevented by Physician or any
person under Physician's direction or control, from entering
any premises at which Medical Group provides services, and
such inability to enter such premises continues for more than
forty-eight (48) hours after written notice thereof to the
Joint Policy Board.
(ii) Upon the termination of this Agreement pursuant to
Section 8(c)(i) by Medical Group, subject to the provisions set
forth below, Medical Group shall have the option to require
Physician to:
(A) Subject to cooperation from PQC and its Affiliates,
purchase from Medical Group, PQC or its Affiliates at Book
Value (as of the Purchase Closing) (1) all tangible assets of
Medical Group, PQC or their Affiliates that relate primarily
to Physician's practice or that were acquired, directly or
indirectly, from Physician, other than Medical Group's, PQC's
or its Affiliates' medical, accounting and financial records,
and (at a price equal to the unamortized balance of the
payments to Physician for intangibles (including goodwill as
set forth or reflected on the balance sheet of Medical Group,
PQC or its Affiliates) (2) a release from the restrictive
covenant set forth in Section 14 (the assets to be purchased
pursuant to (1) and (2) of this Section 8(c)(ii) referred to
hereinafter as the "Purchased Assets"); and
<PAGE>
(B) Assume or pay all of Medical Group's, PQC's and its
Affiliates' liabilities, debts, payables and other
obligations (including lease and other contractual
obligations), or portions thereof, accrued and unpaid through
the Purchase Closing which relate directly or are directly
attributable to Physician or Physician's medical practice
(the "Physician Related Liabilities"). The parties agree that
if Physician is one (1) of a number of physicians practicing
within a Pod, then the parties will cooperate in good faith
to allocate fairly to Physician only those liabilities,
debts, payables and other obligations that relate directly to
Physician and not to other members of the Pod.
(iii) The exercise of the option by Medical Group described
in Section 8(c)(ii) shall be upon written notice thereof in the
termination notice, if applicable, on or prior to ninety (90) days
before the Purchase Closing. In connection with the purchase and
sale of the Purchased Assets pursuant to this Section 8(c), Medical
Group shall use its commercially reasonable efforts to cause such
assets to be conveyed free of any lien, claim or encumbrance.
(iv) Notwithstanding Section 8(c)(ii), this Agreement shall
not constitute an agreement to assign any contract or asset, or any
benefit arising thereunder or resulting therefrom, if any attempted
assignment thereof, without the consent required or necessary for
such assignment, would constitute a breach or violation of any
agreement or restriction applicable to such contract or asset or in
any way adversely affect the rights of Medical Group, Physician, or
PQC thereunder. Medical Group agrees to use its commercially
reasonable efforts to obtain any consent required for such
assignment.
(d) Termination by Physician.
-------------------------
(i) Physician may terminate this Agreement (A) upon
written notice to Medical Group of the failure of Medical Group to
make any payments of the compensation required under this Agreement
when due and continued failure to pay such compensation after thirty
(30) days notice of such failure to Medical Group unless the amount
of such payment is being contested in good faith, (B) upon ninety
(90) days written notice from Physician to Medical Group of Medical
Group's failure to comply with any other material obligation of
Medical Group under this Agreement, which failure is not cured
within such ninety (90) day period, (C) after the first anniversary
of the execution of this Agreement, upon not less than six (6)
months written notice to Medical Group from Physician, and (D) upon
written notice to Medical Group, in the event of the termination by
Medical Group of the Services Agreement between PQC and Medical
Group pursuant to Sections 5.2(a) [breach] or 5.2(c)(i) [breach for
non-payment] of said Services Agreement by Medical Group or the
termination by either party of the Services Agreement under Section
6 [Negative Gross Margin] of Appendix B thereof.
(ii) Upon the termination of Physician's employment
by Physician pursuant to Section 8(d)(i)(A), (B) or (D), Physician
shall have the option to require Medical Group, subject to
cooperation from PQC and its Affiliates, to
<PAGE>
sell all tangible assets of Medical Group, PQC or their
Affiliates that relate primarily to Physician's practice or
that were acquired, directly or indirectly, from Physician,
other than Medical Group's, PQC's or its Affiliates' medical,
accounting and financial records, collectively and not
individually, to Physician (the "Section 8(d)(ii) Assets") at
the lesser of (1) Book Value or (2) Fair Market Value as of
the date of termination. For the purposes of this Agreement,
"Book Value" shall have the meaning set forth in Section 10.3
of Appendix A of the Services Agreement, and "Fair Market
Value" shall mean, as to any asset, the fair market value of
such asset as agreed upon by Medical Group and Physician, or
in the event that Medical Group and Physician cannot agree to
such value by ninety (90) days prior to the Purchase Closing,
the fair market value of such assets as determined by an
entity (the "Independent Financial Expert") regularly engaged
in the business of evaluating assets of medical clinics and
associated businesses and that is mutually acceptable to
Medical Group and Physician. The Independent Financial Expert
may use any customary and generally accepted method of
determining fair market values, and shall take into account
the effect of any liens, claims or encumbrances (other than
those arising out of Physician Related Liabilities that may
reasonably be expected to have an effect on the value of such
assets. The cost of any Independent Financial Expert shall be
paid one-half (1/2) by Medical Group and one-half (1/2) by
Physician.
(iii) In the event that Physician terminates this
Agreement pursuant to Section 8(d)(i)(C), Physician shall have
the right to purchase the following assets (the "Section
8(d)(iii) Assets "):
(A) All, but not less than all, of the physical assets
purchased by Medical Group from Physician as part of the
transaction simultaneous with which Physician became an
employee of Medical Group (an "Affiliation"), provided
that Medical Group, PQC or an Affiliate still owns such
physical assets. Medical Group and Physician may also
agree that Physician shall purchase other physician assets
acquired by Medical Group, PQC or an Affiliate after
Affiliation; provided that Medical Group shall not be
obligated to sell any assets acquired after Affiliation.
The purchase price of the physical assets shall be the
lesser of their Book Value or their Fair Market Value as
of the Purchase Closing.
(B) If Physician requests, then, subject to the consent
of the lessor and release by the lessor of Medical Group
from any obligations under the lease, Medical Group agrees
to use commercially reasonable efforts to transfer to
Physician the lease relating to any premises occupied
solely by Physician prior to Affiliation and that
Physician continues to occupy at the time of termination
of this Agreement. In consideration of such transfer,
Physician shall pay Medical Group an amount equal to the
sum of (i) fifteen percent (15 %) of the total lease
obligations required to be paid during the remaining term
of the lease and (ii) to the extent not covered in (A)
above the Book Value of any leasehold improvements.
<PAGE>
(C) Physician (notwithstanding Section 12 of this
Agreement) shall be entitled for a three (3) month period
commencing upon the delivery of Physician's termination
notice to solicit any employee of Medical Group directly
providing support for Physician's medical practice to leave
such employee's employment with Medical Group. Prior to
soliciting such employee, Physician shall notify Medical
Group of Physician's intent to solicit such employee and pay
Medical Group an amount equal to three (3) months salary and
benefits of any employee so solicited.
(D) Medical Group shall not attempt to prevent Physician
from obtaining and using the telephone number that Physician
used prior to Affiliation if such telephone number has been
used by a Pod in which Physician is the sole physician
employee. Medical Group shall have no obligation to cause
such telephone number to be assigned to Physician and
Physician shall be responsible for all costs associated with
reestablishing such phone number.
(E) Medical Group shall retain custody of patient records.
Physician shall be entitled, at Physician's cost and at the
written request or with the written approval of the patient,
to make copies of the patient record for any patient to whom
Physician provided services. If requested by a patient,
Medical Group shall transfer copies of each patient's
medical records as directed by the patient.
(F) Medical Group will not interfere with Physician's
efforts to reactivate any provider numbers under any managed
care contracts that were assigned to Physician prior to the
date of his initial employment hereunder. Medical Group
shall not be obligated to terminate or transfer any provider
number that it possesses and shall not be liable to
Physician if Physician is unable to establish or re-
establish provider status under any managed care contract.
(G) Except as provided in clause (C) of this Section
8(d)(iii), Physician shall continue to be subject to the
restrictive covenants and agreements in Sections 11, 12 and
14 of this Agreement.
(iv) The exercise of the option by Physician described in
Sections 8(d)(ii) and (iii) shall be upon written notice thereof in
the termination notice, if applicable, on or prior to ninety (90)
days before the Purchase Closing. In connection with the purchase
and sale of the Section 8(d)(ii) Assets or the Section 8(d)(iii)
Assets as appropriate, pursuant to Sections 8(d)(ii) or 8(d)(iii) as
appropriate, Medical Group shall use its commercially reasonable
efforts to cause such assets to be conveyed free of any lien, claim
or encumbrance.
(v) Notwithstanding Sections 8(d)(ii) and (iii), this
Agreement shall not constitute an agreement to assign any contract
or asset, or any benefit arising thereunder or resulting therefrom,
if any attempted assignment thereof, without the consent required or
necessary for such assignment, would constitute a breach or
violation of any agreement or restriction applicable to
<PAGE>
such contract or asset or m any way adversely affect the rights of
Medical Group or Physician or PQC thereunder. Medical Group agrees
to use its commercially reasonable efforts to obtain any consent
required for such assignment.
(e) Mutual Termination.
-------------------
(i) Either Physician or Medical Group may terminate this
Agreement if (i) a law firm with a nationally recognized expertise
in health care law and acceptable to Medical Group and the Joint
Policy Board renders an opinion to Medical Group with a copy to the
Joint Policy Board and Physician stating that a material provision
of this Agreement is in violation of applicable law; or (ii) any
court or regulatory agency enters an order finding a material
provision of this Agreement is in violation of any applicable law
and in either case (i) or (ii), the parties are unable, after a
period of good faith negotiation not to exceed thirty (30) days
after notice to either party to agree upon such amendments to this
Agreement as are necessary to cause this Agreement to comply with
applicable law and which preserve the underlying economic and
financial arrangements between the parties without substantial
economic detriment to either party.
(ii) In the event of termination under this Section 8(e),
Medical Group shall have the option to require Physician to
purchase, and Physician shall have the option to require Medical
Group to:
(A) Subject to cooperation from PQC and its Affiliates,
purchase from Medical Group, PQC or its Affiliates at Book
Value, all tangible assets of Medical Group, PQC or their
Affiliates that relate primarily to Physician's practice or
that were acquired, directly or indirectly, from Physician,
other than Medical Group's, PQC's or its Affiliates' medical,
accounting and financial records (the "Section 8(e)(ii)
Assets"); and
(B) Assume or pay all of the Physician Related Liabilities as
defined in Section 8(c)(ii)(B). The parties agree that if
Physician is one (I) of a number of physicians practicing
within a Pod, then the parties will cooperate m good faith to
allocate fairly to Physician only those liabilities, debts,
payables and other obligations that relate directly to
Physician and not to other members of the Pod.
(iii) The exercise of the option by a party described in
Section 8(e)(ii) shall be upon written notice thereof in the
termination notice, if applicable, on or prior to ninety (90) days
before the Purchase Closing. In connection with the purchase and
sale of the Section 8(e)(ii) Assets pursuant to this Section 8(e),
Medical Group shall use its commercially reasonable efforts to cause
such assets to be conveyed free of any lien, claim or encumbrance.
(iv) Notwithstanding Section 8(e)(ii), this Agreement shall
not constitute an agreement to assign any contract or asset, or any
benefit arising thereunder or resulting therefrom, if any attempted
assignment thereof, without the consent required or necessary for
such assignment, would
<PAGE>
constitute a breach or violation of any agreement or
restriction applicable to such contract or asset or in any way
adversely affect the rights of Medical Group or Physician
thereunder. Medical Group agrees to use its commercially
reasonable efforts to obtain any consent required for such
assignment.
(f) Effect of Termination on Accrued Salary and Benefits. In
-----------------------------------------------------
the event that this Agreement is terminated, Medical Group shall pay to
Physician the compensation and benefits otherwise payable to Physician
under this Agreement through the last day of his actual employment by
Medical Group.
If, but only if, this Agreement is terminated under Section
8(a) [death], 8(b) [disability], 8(d) [termination by Physician] or
8(e) [mutual termination], then in addition to amounts owed to
Physician under the preceding sentence, Medical Group shall pay
(without duplication of any amounts owed hereunder) such portion (if
any) of the available Distribution Pool (if any) accrued on the
financial statements of Medical Group prior to the date of termination
as may be approved by the Compensation Committee in its sole discretion
(the "Discretionary Amount"). No Discretionary Amount shall be payable
in the event of termination under any other section of this Agreement,
including without limitation Section 8(c).
(g) Terms of Purchase. The closing of the transactions
-----------------
contemplated by Sections 8(c)(ii), 8(d)(ii), 8(d)(iii) or 8(e)(ii) (the
"Purchase Closing") shall occur on a date mutually acceptable to
Medical Group and Physician that shall be within one hundred and eighty
(180) days after receipt of a termination notice (or such later date as
is necessary for Medical Group to obtain lessor consents to the
assignment to Physician of leases of real and personal property to be
assumed by Physician). Subject to the conditions set forth below, at
the Purchase Closing, Medical Group shall transfer and assign, or shall
use its reasonable efforts to cause PQC or its Affiliates to transfer
and convey, the Purchase Assets, the Section 8(d)(ii) Assets, the
Section 8(d)(iii) Assets, or the Section 8(e)(ii) Assets, as the case
may be, to Physician and in consideration therefor, Physician shall (a)
pay to Medical Group the purchase price in cash and (b) assume, if
applicable, Physician Related Liabilities. Each of Medical Group and
Physician shall execute such documents or instruments as are reasonably
necessary, in the opinion of Medical Group, Physician and their
respective counsel, to effect the foregoing transaction.
(h) Exception to Purchase. Notwithstanding anything contained
---------------------
herein to the contrary, Medical Group shall not be obligated to sell
the Purchase Assets, the Section 8(d)(ii) Assets, the Section 8(d)(iii)
Assets, or the Section 8(e)(ii) Assets, as the case may be, to
Physician if Physician is not able to pay the purchase price therefor
pursuant to the terms set forth above at the Purchase Closing. In such
event, Physician shall surrender the assets in Physician's possession
or control to Medical Group as of the Purchase Closing. If Physician
fails to so surrender the assets, Medical Group may, without prejudice
to any other remedy which it may have hereunder or otherwise, enter the
premises and take possession of the assets and expel or remove
Physician and any other person who may be occupying the Premises or any
part thereof, by force if necessary, without being liable for
prosecution or any claim for damages therefor.
(i) Waiver of Restrictive Covenants. If Physician's employment
--------------------------------
terminates
<PAGE>
pursuant to Sections 8(b) (if but only if Physician, upon any recovery
from disability during the original term hereof sufficient to permit
him to return to medical practice, has first offered Medical Group the
option to rehire him on the terms set forth herein), 8(d)(i)(A),
8(d)(i)(B), 8(d)(i)(D), or 8(e), Physician's obligation to comply with
the restrictions and obligations contained in Sections 11, 12 and 14
hereof shall be waived, and those sections shall be of no force and
effect.
9. Withholding. All payments made by Medical Group under this
-----------
Agreement shall be reduced by any tax or other amounts required to be withheld
by Medical Group under applicable law.
10. Records. Physician and Medical Group agree that, as between
-------
Medical Group and Physician, all patient records and other records are the
property of Medical Group and not the property of Physician.
11. Nonsolicitation of Patients. Physician agrees that, during the term
---------------------------
of this Agreement and for two (2) years thereafter, Physician will not solicit
any patients of Medical Group for whom Physician provides any services during
the term of this Agreement, nor suggest, request or direct that any such
patients change their health plan from one in which Medical Group participates
or plans to participate to a health plan in which Physician, directly or
indirectly, participates or plans to participate, nor, unless the patient asks
to use the services of Physician, suggest, request or direct that any such
patients request that their medical records be copied or otherwise removed or
transferred from Medical Group's office, nor remove or copy any medical records
or patient mailing lists. Medical Group acknowledges that neither advertising in
a "yellow pages" telephone directory nor inclusion of Physician's name in the
directory or similar advertising of a general nature of a medical plan shall be
deemed to be the solicitation of patients.
12. Nonsolicitation of Employees. Physician agrees that, during the
----------------------------
term of this Agreement and for two (2) years thereafter, Physician will not
solicit, directly or indirectly, any physician, nurse or other medical or
administrative employee, any agent or any independent contractor of Medical
Group or induce or seek to induce, or take action which results in the
termination of employment or other arrangements between Medical Group and such
employee, agent or independent contractor or otherwise diminishes or interferes
with such employment or contractual arrangements.
13. Referrals of Patients of Medical Group. Physician agrees that,
--------------------------------------
during the term of this Agreement and for two (2) years thereafter, Physician
will give to all patients of Medical Group, or persons who contact Physician as
a result of Physician's association with Medical Group, who are seeking medical
services within the Practice Area (as defined in Section 14 below) the phone
number and address of Medical Group and any Medical Group physicians identified
by the patient and known to Physician.
14. Noncompetition. Physician agrees that, during the term hereof and
--------------
for a period of one (1) year after the termination of this Agreement, such
Physician shall not establish, operate or provide physician or other medical
services (whether as an employee, shareholder, partner, independent contractor,
manager, consultant or otherwise) at any medical office, clinic or other health
care facility providing services similar to those provided by Medical Group, PQC
or its Affiliates within fifteen (15) miles of the premises at which Physician
practiced at the time of such termination of employment as set forth in Appendix
<PAGE>
C (the "Practice Area"); provided, however, that Physician shall not be
prohibited from (i) working at a research or teaching facility if Physician does
not devote more than ten percent (10%) of Physician's time to clinical practice
or (ii) practicing medicine in the Practice Area either as a solo practitioner
or with one (1) other physician or (iii) admitting a patient to a hospital in
the Practice Area where such admission is in the best medical interest of the
patient. In addition, during the term of this Agreement, Physician shall not
directly or directly (whether as a shareholder, employee, individual, partner,
independent contractor, consultant or otherwise) establish, operate or provide
any Integrated Health Services or any medical practice management services
provided by Medical Group, PQC or its Affiliates in the Practice Area. Physician
agrees that, during the term hereof and for a period of two (2) years after the
termination of this Agreement, except as otherwise expressly permitted by this
Agreement, Physician shall not directly or indirectly (whether as a shareholder,
employee, individual, partner, independent contractor, consultant or otherwise)
establish, operate or provide any Integrated Health Services or any other
medical practice management services provided by Medical Group, PQC or its
Affiliates in the Practice Area. For purposes of this Agreement, "Integrated
Health Services" shall mean any business that Medical Group or PQC establishes
after the date of execution of the Services Agreement, whether directly or
through a subsidiary, which provides medical related services that are not
traditionally performed by physicians or physician practices at medical offices
(it being understood that in-office laboratory services are not Integrated
Health Services).
15. Enforcement of Covenants. Physician acknowledges that he has
------------------------
carefully read and considered all the terms and conditions of this Agreement,
including the restraints imposed upon Physician pursuant to Sections 11, 12, 13,
14 and 16 hereof. Physician agrees that said restraints are necessary for the
reasonable and proper protection of Medical Group and its goodwill, confidential
information and relationships, and economic advantage and agrees that each and
every one of the restraints is reasonable in respect to subject matter, length
of time and geographic area. Physician further acknowledges that, were he to
breach any of the covenants contained in Sections 11, 12, 13, 14 or 16 hereof,
Medical Group would be harmed and the damage to Medical Group would be
irreparable. Accordingly, if Physician breaches any obligation of Sections 11,
12, 13, 14 or 16, in addition to any other remedies available under this
Agreement, at law or in equity, Medical Group shall be entitled to enforce this
Agreement by preliminary and permanent injunctive relief and by specific
performance of the Agreement. Additionally, nothing in this Section 15 shall
limit Medical Group's right to recover any other damages to which it is entitled
as result of Physician's breach.
16. Confidentiality. Physician will not, directly or indirectly, use or
---------------
disclose any professional or trade secrets or confidential information with
respect to Medical Group, its medical practice or its patients except as
required by law or legal process. In addition to the restrictions set forth
above, Physician agrees to comply with and be bound by any restrictions on the
use or disclosure of Intellectual Property of PQC set forth in the Services
Agreement, a copy of which has been given to Physician. Physician shall not copy
any documents, tapes or other media containing Intellectual Property
("Documents") or remove any Documents or copies from Medical Group premises.
Physician will return to Medical Group immediately after Physician's employment
terminates, and at such other times as may be specified by Medical Group, all
Documents and copies and all other property of Medical Group then in Physician's
possession or control. "Intellectual Property" means all (i) patents, patent
applications, patent disclosures and all related continuation,
continuation-in-part, divisional, reissue, re-examination, utility model,
certificate of invention and design patents, registrations
<PAGE>
and applications for registrations, (ii) trademarks, services marks, trade
dress, logos, trade names and corporate names and registration and applications
for registration thereof, (iii) copyrights and registrations and applications
for registration thereof, (iv) mask works and registrations and applications for
registration thereof, (v) computer software, data and documentation, (vi) trade
secrets and confidential business information, whether patentable or
non-patentable and whether or not reduced to practice, know-how, clinical
product and service processes and techniques, research and development
information, medical protocols, copyrightable works, financial, marketing and
business data, pricing and cost information, business and marketing plans and
customer and supplier lists and information, (vii) other proprietary rights
relating to the foregoing (including, without limitation, remedies against
infringement thereof and rights of protection of interest therein under the laws
of all jurisdictions) and (viii) copies and tangible embodiments thereof.
Intellectual Property shall also include such information that Medical Group may
receive or has received belonging to patients, PQC or others who do business
with Medical Group. Intellectual Property does not include any information that
Physician can establish (a) is or becomes generally available to and known by
the public or in the trade (other than as a result of an unpermitted disclosure
directly or indirectly by Physician or another person who was not authorized by
Medical Group to make such disclosure); or (b) is or becomes available to
Physician on a nonconfidential basis from a source other than Medical Group, PQC
or its Affiliates, advisers, or representatives, provided that such source is
not and was not bound by a confidentiality agreement with or other obligation of
secrecy to Medical Group of which Physician has knowledge. Notwithstanding
anything to the contrary in this Section 16, the obligations of Physician not to
use or disclose Intellectual Property set forth in this Section 16 shall be in
effect during the entire duration of Physicians employment with Medical Group
and for three (3) years thereafter, except that Physician's obligations with
respect to any Intellectual Property that constitutes a "trade secret" under
applicable law shall be in effect during the entire duration of Physician's
employment with Medical Group and for as long thereafter as such information
continues to constitute a trade secret.
17. Miscellaneous.
-------------
17.1. Arbitration. Any controversy or claim between Medical
-----------
Group, PQC and Physician arising under or relating to this Agreement or any
breach thereof (including the question of whether any particular matter is
arbitrable hereunder) shall be settled by arbitration in accordance with the
commercial arbitration rules of the American Arbitration Association then in
effect; provided, however, that no provision of this Agreement shall be
modified, deleted or added by reason of such arbitration. Medical Group and
Physician agree to abide by all awards rendered in such arbitration proceedings,
and all such awards may be filed by the prevailing party in any federal or state
court having proper jurisdiction, as a basis for judgment in the issuance of
execution thereon. Such arbitration shall be initiated by either Medical Group
or Physician by serving a written demand on the other party and the Joint Policy
Board stating the substance of the controversy and the contention of the party
requesting arbitration. The American Arbitration Association shall appoint or
provide the procedure for the determination of a single neutral arbitrator who
shall be a fit and impartial person. The fees and costs of the arbitrator and
related expenses of arbitration shall be borne by the non- prevailing party. If
the arbitrator determines that neither party has substantially prevailed, the
parties shall bear equally the fees and costs of the arbitrator and the related
expenses of arbitration.
17.2. Contract Modifications for Prospective Legal Events.
---------------------------------------------------
In the event any
<PAGE>
state or federal laws or regulations, now existing or enacted or promulgated
after the date of execution of this Agreement are interpreted by judicial
decision, a regulatory agency or legal counsel in such a manner as to indicate
that this Agreement or any provision hereof may be in violation of such laws or
regulations, Medical Group shall propose to the Joint Policy Board for its
approval such amendments to this Agreement as necessary to comply with
applicable law and preserve the underlying economic and financial arrangements
between Physician and Medical Group without substantial economic detriment to
either Medical Group or Physician. Any such amendment approved by the Joint
Policy Board shall be binding upon Physician, and Physician hereby consents to
any such amendment. To the fullest extent permitted by law, each of Physician
and Medical Group waives and agrees not to assert illegality as a defense to the
enforcement of this Agreement or any provision hereof; instead, any such
purported illegality shall be resolved pursuant to the terms of this Section
17.2.
17.3. No Waive, Remedies Cumulative. None of Medical Group,
-----------------------------
PQC or Physician shall by any act, delay, indulgence, omission or otherwise be
deemed to have waived any right or remedy hereunder or to have acquiesced in any
default in or breach of any of the terms and conditions hereof. No failure to
exercise, nor any delay in exercising, on the part of either Medical Group, PQC
or Physician, any right, power or privilege hereunder shall operate as a waiver
thereof. No single or partial exercise of any right, power or privilege shall
operate as a waiver thereof. No single or partial exercise of any right, power
or privilege hereunder shall preclude any other or further exercise thereof or
the exercise of any other right, power or privilege. No remedy set forth in this
Agreement or otherwise conferred upon or reserved to either Medical Group or
Physician shall be considered exclusive of any other remedy available to either
Medical Group or Physician, but the same shall be distinct, separate and
cumulative and may be exercised from time to time as often as occasion may arise
or as may be deemed expedient.
17.4. Availability of Certain Documents. The parties agree, to
---------------------------------
the extent required by law necessary to permit receipt of reimbursement for
services by Medical Group, to make available to the Secretary of Health and
Human Services, the Comptroller General of the General Accounting Office, or
their authorized representatives, any books, documents and records in their
possession relating to the nature and extent of the costs of services hereunder
for a period of four (4) years after the provision of such services.
17.5. Severability. If any provision in this Agreement,
------------
including without limitation any of the covenants set forth in Sections 3.3, 8,
11, 12, 13, 14, 15 or 16, is held by a court of competent jurisdiction to be
invalid or unenforceable for any reason, the parties desire, intend and agree
that it shall not affect any other provision and shall be construed by limiting
it so as to be enforceable to the maximum extent permissible by law.
17.6. Assignment. This Agreement shall be binding upon and
----------
shall inure to the benefit of Medical Group and any successor of Medical Group
by reorganization, merger, consolidation, acquisition, transfer of Medical Group
stock or liquidation and any assignee of all or substantially all of the
business or assets of Medical Group. Medical Group may assign this Agreement to
any of such persons without the consent of Physician. This Agreement shall be
binding upon and shall inure to the benefit of Physician and Physician's
personal and legal representatives. Medical Group requires the personal services
of Physician hereunder, and Physician may not assign this Agreement or delegate
any duties hereunder.
<PAGE>
17.7. Notices. Any notices, requests, demands and other
-------
communications provided for by this Agreement shall be in writing and shall be
effective when delivered in person or deposited in the United States mail,
postage prepaid, registered or certified, and addressed to Physician at
Physician's last known address on the books of Medical Group or, in the case of
Medical Group, at its main office, attention of President with a copy to
Physicians Quality Care, Inc., 950 Winter Street, Suite 2410 Waltham, MA 02154,
attention Chief Executive Officer.
17.8. Acknowledgment of Services Agreement. Physician
------------------------------------
understands that, as a physician employed by Medical Group, he will be a member
of a Pod and that certain matters affecting the governance and operation of the
Pod are described in the Services Agreement. Physician acknowledges that certain
terms of the Services Agreement are applicable to him as a Pod Physician,
including but not limited to reasonably cooperating with Medical Group in
credentialing, utilization review, payor contracting and other activities
described in the Services Agreement. Pursuant to the Services Agreement,
Physician agrees that the provisions of the Services Agreement may be enforced
only upon written direction of a majority of the Physician Members of Medical
Group.
17.9. No Obligation to Third Parties. Except as expressly set
------------------------------
forth in this Section, none of the obligations and duties of Physician or
Medical Group under this Agreement shall in any way or in any manner be deemed
to create any obligation of Physician or Medical Group to, or any rights in, any
person or entity not a party to this Agreement. Notwithstanding the foregoing,
in accordance with and subject to the terms of the provisions of the Service
Agreement between Medical Group and PQC, PQC is hereby made a third party
beneficiary of and may enforce the obligations of Medical Group hereunder by any
means, at law or in equity.
17.10. Gender. References herein to the masculine shall be
------
deemed to refer to the feminine or neuter gender as the context may require.
17.11. Table of Cross-References
-------------------------
<TABLE>
<CAPTION>
<S> <C>
"Affiliation" Section 8(d)(iii)(A)
"Anniversary Date" Section 2
"Book Value" Section 8(d)(ii)
"Compensation Committee" Appendix A - Section 4
"Compensation Pool" Appendix A - Section 1
"Discretionary Amount" Section 8(f)
"Documents" Section 16
"Fair Market Value" Section 8(d)(ii)
"Full-Time" Section 3.3(b)
"Independent Financial Expert" Section 8(d)(ii)
"Integrated Health Services" Section 14
"Intellectual Property" Section 16
"Medical Group" Recitals
"PQC" Recitals
"Payors" Section 7
"Physician" Recitals
"Physician Related Liabilities" Section 8(c)(ii)(B)
"Pod Distribution" Appendix A - Section 3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
"Purchase Closing" Section 8(g)
"Purchased Assets Section 8(c)(ii)(A)
"Practice Area" Section 14
"Practice Site" Section 3.4
"Section 8(d)(ii) Assets" Section 8(d)(ii)
"Section 8(d)(iii) Assets" Section 8(d)(iii)
"Section 8(e)(ii) Assets" Section 8(e)(ii)
"Services Agreement" Recitals
"Termination Date" Section 8
</TABLE>
[Rest of Page Intentionally Left Blank]
<PAGE>
IN WITNESS WHEREOF, the undersigned have duly executed this Agreement
as of the day and year first written above.
PHYSICIAN: FLAGSHIP HEALTH, P.A.
By:
- ----------------------- -----------------------
(Name) Name:
Title:
<PAGE>
APPENDIX A
COMPENSATION FORMULA
____________________
Reference is made to Appendices A and B to the Services Agreement, the
definitions and provisions of which are incorporated herein by reference.
1. Compensation Pool. As exclusive compensation for the services of
-----------------
Medical Group Physician under this Agreement and all other Medical Group
Physician employees of Medical Group under their respective Employment
Agreements, Medical Group shall establish a compensation pool (the "Compensation
Pool") which, on an annual basis, shall be equal to all amounts distributed to
Medical Group pursuant to Section 2 of Article A of Appendix B of the Services
Agreement. The Compensation Pool shall be allocated among and distributed to
Medical Group Physician and other Medical Group Physician employees of Medical
Group as provided in this Appendix A. Medical Group Physician shall not be
entitled to any compensation for services under this Agreement except as
provided in this Appendix A.
2. Establishment of Budgets for Medical Group Physician Pods. Prior to
---------------------------------------------------------
the beginning of each Fiscal Period, a capital and operating budget for each
Medical Group Physician Pod shall be established pursuant to Section 3.8 of the
Services Agreement. At any point during a Fiscal Period, the Joint Policy Board
may, and if the actual Medical Group Physician Pod Practice Revenues less actual
Medical Group Physician Pod Practice Expenses is below budgeted levels for such
Medical Group Physician Pod or if there is a projected negative Net Margin,
shall, review the budgets for such Medical Group Physician Pod and make such
changes to such budgets, including the aggregate Pod Distributions (as defined
in Section 3 below), as the Joint Policy Board deems to be appropriate. All
capital and operating budgets, and changes thereto, also shall be subject to the
approval of PQC.
3. Allocation of the Compensation Pool among Medical Group Physicians.
------------------------------------------------------------------
(a) On a biweekly basis, Medical Group shall distribute to each Medical Group
Physician Pod from the Compensation Pool an amount equal to one twenty-sixth of
the aggregate Medical Group Physician Draw allocated to such Medical Group
Physician Pod pursuant to the operating budget approved by the Joint Policy
Board (the "Pod Distribution") less the Deductible Expenses allocated to such
Medical Group Physician Pod (which amount shall be distributed to Medical Group
to pay such Deductible Expenses); provided, however, if at any time during a
Fiscal Period: (1) Medical Group determines that the amount allocated to the
Compensation Pool for any Fiscal Period pursuant to Section 1 of this Appendix A
may be less than ninety-five percent (95 %) of the aggregate Medical Group
Physician Draw budgeted for such Fiscal Period, or (2) Medical Group or the
Joint Policy Board determine that: (a) the Medical Group Physician Pod's
Practice Expenses for such Fiscal Period will exceed the budgeted Medical Group
Physician Pod Practice Expenses for such Medical Group Physician Pod, or (b) the
Medical Group Physician Pod's Practice Revenues will be less than the Medical
Group Physician Pod's budgeted Practice Revenues, Medical Group may reduce the
Pod Distributions in such manner as Medical Group determines to be appropriate
in order that the aggregate Pod Distributions to all Medical Group Physician
Pods do not
<PAGE>
exceed the amount of the Compensation Pool for such Fiscal Period. The Pod
Distribution shall be allocated among the Medical Group Pod Physicians as
determined by the majority of the Medical Group Pod Physicians.
4. Allocation of Variable Distribution Pool. There shall be a
----------------------------------------
Compensation Committee (the "Compensation Committee") consisting of at least
seven (7) Medical Group Physicians elected annually by the Physician Members of
Medical Group, a minimum of three (3) of whom shall be primary care physicians,
two (2) of whom shall be pediatricians and two (2) of whom shall be specialists.
Any action of the Compensation Committee shall require the affirmative vote of
at least one (1) primary care physician, one (1) pediatrician, and one (1)
specialist. Within forty-five (45) days of the end of each three (3) month
period, Medical Group shall advise the Compensation Committee of the amount, if
any, of Variable Distribution. The Compensation Committee, by the approval of a
majority of the members of such committee, shall determine how the Variable
Distribution, if any, shall be allocated among the Medical Group Physician Pods.
The Variable Distribution, if any, to a Medical Group Physician Pod shall be
allocated among the Medical Group Pod Physicians as determined by a majority of
the Medical Group Pod Physicians.
5. Determination of Compensation Committee I Majority of Medical Group
-------------------------------------------------------------------
Pod Physicians Final. The determination of the Compensation Committee (with
- --------------------
respect to allocating the Variable Distribution, if any, among Medical Group
Physician Pods) and the majority of Medical Group Pod Physicians (with respect
to allocating the Pod Distribution and any Variable Distribution granted to such
Medical Group Physician Pod among the Medical Group Pod Physicians) pursuant to
this Appendix A shall be binding upon Medical Group and Medical Group Physician,
and neither PQC nor Medical Group shall have any liability to Medical Group
Physician as a result of any determination of the Compensation Committee or
majority of Medical Group Pod Physicians; provided, however, that Medical Group
shall not be required to make any distribution in accordance with the
determinations of the Compensation Committee or majority of Medical Group Pod
Physicians that Medical Group reasonably believes to conflict with any federal
or state statute or regulation. In no event shall any Medical Group Physician be
entitled to any compensation in addition to that determined pursuant to this
Appendix A nor shall the aggregate compensation to all Medical Group Physicians
with respect to any Fiscal Period exceed the amount of the Compensation Pool for
such Fiscal Period.
6. Initial Individual Draw. The portion of the aggregate Medical Group
-----------------------
Physician Draw allocable to the Physician is (Draw) on an annualized basis
(payable on a bi-weekly basis as set forth in this Appendix A), for the one
month period ending December 31, 1996, and the Fiscal Period ending December 31,
1997, subject to adjustment from time to time as provided in the Services
Agreement; which number expressly includes Nine Thousand Six Hundred Eighty
Dollars ($9,680) (being an amount equal to the standard benefit package approved
by the Joint Policy Board); provided that at the direction of the Physician,
some or all of such $9,680 may be applied either to the payment of benefit
premiums (in which case such amount shall be treated as a Practice Expense) or
shall be paid to the Physician as Physician Draw.
7. Threshold for Discretionary Expenses. Expenditures by the
------------------------------------
Physician's Medical Group Physician Pod in any Fiscal Period in excess of the
amount set forth hereinafter shall constitute Discretionary Expenses (as that
term is defined in Section 10.5 of Appendix A to the Services Agreement):
(Discretionary Expenses).
<PAGE>
APPENDIX B
BENEFITS
--------
1. Family coverage for health insurance through a managed care
plan acceptable to the Joint Policy Board
2. Term life insurance - $50,000 coverage
3. Long term disability insurance at 60%, maximum benefit
of $10,000/month, 90-day eligibility
<PAGE>
APPENDIX C
EMPLOYMENT AGREEMENT
OF (TITLE)
PRACTICE AREA & PRACTICE SITE
-----------------------------
A. Practice Area.
-------------
"Practice Area" shall mean the area within a fifteen (15) mile radius
of the following clinic location[s] of Medical Group:
(Location)
B. Practice Site.
--------------
"Practice Site" shall mean the clinic of the Medical Group located at
the address(es) set forth above in Section A of this Appendix C.
<PAGE>
SCHEDULE 3.2(g) (PHYSICIAN SPECIALTY)
As a continuing condition of Physician's employment, Physician agrees
to be board-certified or board-eligible or have equivalent training and
experience in [Physician Specialty].
<PAGE>
SCHEDULE 3.6 (INTELLECTUAL PROPERTY IN DEVELOPMENT)
[Intellectual Property]
<PAGE>
SCHEDULE 5(f)
(CIVIL, CRIMINAL OR ADMINISTRATIVE LITIGATION,
INVESTIGATIONS, OR PROCEEDINGS)
<PAGE>
EXECUTION COPY
--------------
SHAREHOLDER DESIGNATION AND STOCK TRANSFER AGREEMENT
This SHAREHOLDER DESIGNATION AND STOCK TRANSFER AGREEMENT (the
"Agreement"), dated as of December 11, 1996, by and among Physicians Quality
Care, Inc., a Delaware business corporation ("PQC"); Flagship Health, P.A. a
Maryland professional association ("Flagship"); and Laura M. Mumford, M.D. in an
individual capacity (the "Shareholder") (hereinafter, collectively, the
"Parties").
WHEREAS, PQC provides management, administrative and other support services
to affiliated medical practices;
WHEREAS, Flagship provides comprehensive medical professional services;
WHEREAS, the Shareholder is the sole shareholder of all of the issued and
outstanding shares of Flagship (the "Shares"); and
WHEREAS, the parties desire to restrict the transferability of the Shares
for the benefit of PQC and its relationship with Flagship;
NOW THEREFORE, in consideration of the foregoing, and of the mutual
covenants and agreements contained herein, the Parties agree as follows:
Section 1. - Effective Date and Term
- ------------------------------------
1.1 Effective Date: Term. This Agreement shall be effective as of
--------------------
November 30, 1996, and shall continue until terminated in accordance with the
provisions of Section 1.2 below.
1.2 Written Agreement Required. This Agreement may be terminated only
--------------------------
upon the written direction of PQC, or upon the execution of a succeeding version
of this Agreement with a Successor Shareholder, as defined in Section 10.
Section 2. - Acquisition of Shares
- ----------------------------------
2.1 Execution of Agreements. In consideration of the issuance by Flagship
-----------------------
of all of the outstanding capital stock to the Shareholder the Shareholder is
simultaneously entering into this Agreement.
2.2 Shareholder Designee's Record Title to Shares. During the Period of
---------------------------------------------
Designation of the Shareholder (as defined in Section 9.1), the Shareholder
shall be the shareholder of record of the Shares and shall be entitled to
exercise the right to vote in person or by proxy in respect of any and all of
the Shares in accordance herewith.
<PAGE>
Section 3. - Transfer of Shares
- -------------------------------
3.1 Attorney-in-Fact. The Shareholder, on behalf of himself, his
----------------
successors and assigns, hereby appoints the Attorney-in-Fact (defined in Section
12) as the Shareholder's and his successors and assign's attorney-in-fact with
full power and authority to execute all documents and do all things necessary to
effectuate the transfer to the Successor Shareholder, designated as provided in
Section 10 hereof, of record ownership of the Shares held in the name of the
Shareholder when the Shareholder's Period of Designation has expired. Such
appointment shall be irrevocable. In furtherance of such appointment, the
Shareholder has caused, or shall promptly cause upon commencement of the Period
of Designation, the Shares and all certificates representing the same and all
securities, if any, resulting from a merger or consolidation of Flagship or a
split-up or reclassification of the equity of Flagship to be delivered to the
Attorney-in-Fact, accompanied by an executed stock power, endorsed in blank.
3.2 Resignation. The Shareholder shall have the right to resign for any
-----------
reason by giving ninety (90) days written notice to the Attorney-in-Fact, which
resignation shall become effective upon the expiration of the ninety (90) day
period following receipt of such notice by the Attorney-in-Fact. In no event
shall the Shareholder have a right to resign prior to the end of the notice
period specified in the previous sentence.
3.3 Automatic Transfer. The Shares shall be deemed to have been
------------------
transferred to the Successor Shareholder, designated as provided in Section 10,
without further action by the Shareholder, immediately upon the occurrence of
any of the following events (each a "Transfer Event"); provided, however, that
-------- -------
until the Successor Shareholder shall have made the Shareholders designation
effective pursuant to Section 10, the Shareholder shall continue to hold the
Shares in trust for the benefit of the Successor Shareholder, subject to the
limitations imposed by Section 9.3:
(a) the death of the Shareholder;
(b) the incompetence or permanent disability of the Shareholder such
that the Shareholder is unable to render any professional services
on behalf of Flagship;
(c) the Shareholder becoming disqualified under Maryland law to be a
shareholder of Flagship;
(d) the resignation of the Shareholder pursuant to Section 3.2;
(e) any attempt by the Shareholder or by any person to transfer the
Shares, whether voluntarily or involuntarily, by operation of law
or otherwise, to any person who is not the Successor Shareholder
designated by PQC pursuant to Section 10;
-2-
<PAGE>
(f) the filing of any petition for or another documents causing or
intended to cause a judicial, administrative, voluntary or
involuntary dissolution of Flagship; or
(g) the designation of a Successor Shareholder by PQC pursuant to
Section 10, whether or not such designation has become effective
under that provision.
3.4 Effect of Transfer. Upon the transfer of the Shares, the Shareholder
------------------
shall immediately resign, or be deemed to have resigned, as a director of
Flagship, if the Shareholder holds such position, and from any and all corporate
offices if any, of Flagship at the time held by the Shareholder.
Notwithstanding anything to the contrary herein, upon the occurrence of a
Transfer Event, the Shares will be immediately transferred, or deemed to be
transferred, to the Successor Shareholder upon the effective date of such
Transfer Event. The Successor Shareholder shall have from and after such
Transfer Event all ownership and voting rights as to the Shares in accordance
with this Agreement, irrespective of receipt of a certificate for such Shares,
receipt by the Shareholder of payment for the Shares, or any other act or
matter. Upon the transfer of the Shares, the Shareholder shall be released in
writing from all obligations under this Agreement.
3.5 Consideration for Transfer. Shareholder acknowledges that PQC
--------------------------
transferred to Flagship all consideration required to be paid with respect to
the issuance of Shares of Flagship to Shareholder and Shareholder has provided
no consideration to Flagship or PQC with respect to Shares issued or held by
him. Accordingly, Shareholder agrees and hereby confirms that upon any event
requiring or effecting the transfer of Shares to a Successor Shareholder, such
transfer shall occur without any consideration being paid or payable to
Shareholder, notwithstanding any increase or decline in the value of the Shares
or in the value of Flagship's businesses or assets.
Section 4. - Voting of Shares
- -----------------------------
4.1 Election of Directors of Flagship.
---------------------------------
4.1.1 Election. The Shareholder agrees to consult with the Attorney-
--------
in-Fact in accordance with Section 12 of this Agreement with respect to the
election of directors of Flagship (as defined in the By-laws of Flagship), which
consultation shall include a written communication and a written response.
4.1.2 Vacancies. In the event of a vacancy for any reason in the
---------
office of a director, the Shareholder shall consult with the Attorney-in-Fact
with respect to the election of a new director.
4.2 Voting on All Other Matters. The Shareholder agrees that on any other
---------------------------
proposal to be voted upon by holders of the Shares that the Shareholder shall
vote the Shares, or sign consents taking action on such matter, only after
consultation with the Attorney-in-Fact in accordance with Section 12 of this
Agreement, except only to the extent the same requires the exercise of
professional medical judgment. The Shareholder shall
-3-
<PAGE>
consult with the Attorney-in-Fact from time to time as necessary and appropriate
to obtain advice with respect to matters to be voted upon by holders of the
Shares.
Section 5. - Voting as a Director
- ---------------------------------
5.1 Business Judgment. In the event that the Shareholder shall serve as a
-----------------
director of Flagship, the Shareholder shall act in good faith, in a manner the
Shareholder reasonably believes to be in the best interests of Flagship, and
with such care as an ordinarily prudent person in a like position would use in
similar circumstances in voting and otherwise acting as a member of the Board of
Directors of Flagship.
5.2 Obligation to Consult with the Attorney-in-Fact. In voting with
-----------------------------------------------
respect to matters, the approval of which by the Board of Directors of Flagship
requires the affirmative vote of the Shareholder, the Shareholder shall consult
in advance with the Attorney-in-Fact with respect to such matters before voting
on such matters.
Section 6. - Professional Medical Judgment
- ------------------------------------------
The other provisions of this Agreement notwithstanding, the Shareholder
shall be unfettered in the exercise of the Shareholder's professional medical
judgment in the Shareholder's capacity as a shareholder, a director or officer
of Flagship to the extent the matters under consideration require the exercise
of such judgment.
Section 7. - Notices. Reports and Information
- ----------------------------------------------
The Shareholder shall promptly deliver to the Attorney-in-Fact, on receipt,
copies of all written materials received by the Shareholder in such capacity
and, consistent with such Shareholders fiduciary obligations as a director of
Flagship, all written materials received by the Shareholder in the Shareholder's
capacity as a member of the Board of Directors of Flagship.
Section 8. - Distributions and Proceeds
- ---------------------------------------
The Shareholder shall promptly give prior notice to PQC of any event giving
rise to the receipt of any shares, securities, moneys or property representing a
dividend, distribution or return of capital with respect to the Shares. The
Shareholder agrees that the Shareholder shall cause any dividend, distribution
or return of capital with respect to the Shares to be paid directly to PQC and
hereby directs Flagship to make any such payment to PQC. The Shareholder
disclaims any beneficial interest in any such dividend, distribution or return
of capital.
Section 9. - Designation and Status of Shareholder
- --------------------------------------------------
9.1 Period of Designation of Shareholder. The Shareholder who executes
------------------------------------
this Agreement or an amendment hereto, accepting the Shareholders designation as
a "Shareholder" hereunder, shall serve as such for a period commencing on the
date hereof, with respect to the original Shareholder, and on the date of
acceptance, with respect to
-4-
<PAGE>
Successor Shareholders, and in each case continuing until the date such
Shareholder dies, resigns or ceases to serve as the Shareholder in accordance
with Section 3.3. As to each Shareholder, such period is referred to herein as
a "Period of Designation."
9.2 No Compensation. The Shareholder shall not be entitled to receive
---------------
compensation for the Shareholder services as Shareholder hereunder.
9.3 Limitation on Authority. Other than as provided herein, the
-----------------------
Shareholder shall not sell, transfer, assign or otherwise dispose of, or pledge,
mortgage, hypothecate or otherwise encumber, or permit or suffer any
encumbrance, for all or any part of the Shares, except on the express written
direction or with the express written consent of the Attorney-in-Fact. Upon the
occurrence of an event of automatic transfer pursuant to Section 3.3, the
Shareholder shall hold the Shares in trust for the benefit of the Successor
Shareholder until the designation of a Successor Shareholder becomes effective,
but shall have no authority to act on behalf of or bind Flagship.
Section 10. - Successor Shareholder
- -----------------------------------
At any time PQC may at its sole discretion, and immediately upon the
occurrence of any Transfer Event PQC shall, designate a successor shareholder
(the "Successor Shareholder") to serve in accordance with this Agreement and
with applicable provisions of the Bylaws of Flagship and applicable law. Such
Successor Shareholder shall be a physician licensed to practice medicine in the
State of Maryland and shall be a party to an employment agreement with PQC. In
order to make such designation effective, the Successor Shareholder shall accept
such designation by executing a written amendment to this Agreement and
expressly, in writing, assume all of the Shareholder's obligations under this
Agreement.
Section 11. - Restrictions on Certificate
- -----------------------------------------
Shareholder acknowledges that the certificates representing the Shares to
Flagship, issued upon the organization of Flagship, contains the notice of the
restrictions on the transfer of such Shares imposed by this Agreement. Such
notice shall be substantially in the form of Exhibit A attached hereto and
incorporated herein by reference.
Section 12. - Attorney-in-Fact
- ------------------------------
PQC is hereby designated as the Attorney-in-Fact for the purposes of this
Agreement. The Shareholder shall act upon the advice of PQC as the Attorney-in-
Fact in all matters arising with respect to this Agreement. On notice to the
Shareholder and Flagship from PQC, the Shareholder shall change the designation
of the Attorney-in-Fact to another person or entity designated by PQC.
Section 13. - No Joint Venture
- ------------------------------
The relationship created by this Agreement is not intended to be, shall not
be deemed to be, and shall not be treated as a general partnership, limited
partnership, joint venture, corporation or joint stock company or association.
-5-
<PAGE>
Section 14. - Breach
- --------------------
Any (i) attempted sale, transfer, assignment, pledge or other encumbrance
or disposition of any of the Shares by the Shareholder or (ii) action by the
Shareholder in violation of any of the provisions of this Agreement shall be
considered a breach of this Agreement.
Section 15. - Miscellaneous Provisions
- --------------------------------------
15.1 Service as Officer or Director. Nothing herein shall preclude the
------------------------------
Shareholder from serving as an officer or director of Flagship or from serving
as a member of any Flagship committee.
15.2 Successors and Assigns. This Agreement shall be binding upon the
----------------------
parties and their respective successors, assigns, heirs, transferees, executors
and administrators, and except as otherwise expressly provided in any particular
provision of this Agreement, any subsequent holder or holders of any of the
Shares.
15.3 Notices. Except as otherwise specified in this Agreement, any notice
-------
required to be given pursuant to this Agreement shall be given in writing. Any
notice, demand or other communication in connection with this Agreement shall be
deemed to be given if given in writing (including telex, telecopy or similar
teletransmission) addressed to the respective party at the address set forth on
the signature page hereof (or to such party at such other address as such party
shall have specified by notice actually received by the other party) and if
either (i) actually delivered in fully legible form to such address (evidenced
in the case of a telecopy by receipt of the correct answer back) or (ii) in the
case of a letter, five (5) days shall have elapsed after the same shall have
been deposited in the United States mails, with the first-class postage prepaid
and registered or certified.
15.4 Waiver. No waiver of any provision hereof shall be effective unless
------
made in writing and signed by the waiving party. The failure of any party to
require the performance of any term or obligation of this Agreement, or the
waiver by any party of any breach of this Agreement, shall not prevent any
subsequent enforcement of such term or obligation or be deemed a waiver of any
subsequent breach.
15.5 Separability. If any provision of this Agreement is held for any
------------
reason to be unenforceable by a court of competent jurisdiction, the remainder
of this Agreement shall nevertheless remain in full force and effect.
15.6 Headings. The headings in this Agreement are intended solely for
--------
convenience of reference and shall be given no effect in the construction or
interpretation of this Agreement.
15.7 Governing Law. This Agreement is made in, and shall be governed by
-------------
and construed in accordance with, the laws of the State of Maryland.
-6-
<PAGE>
15.8 Counterparts. This Agreement may be executed in three (3) or more
------------
counterparts, each of which shall be deemed an original but all of which taken
together shall constitute one and the same instrument.
15.9 Indemnification.
---------------
(a) PQC shall ensure that the directors and officers liability
insurance purchased by Flagship or PQC on behalf of Shareholder shall include
coverage for any claims against Shareholder or liabilities arising out of
Shareholder's performance of the Shareholder's obligations under this Agreement
or the Shareholder's involvement, in the Shareholder's capacity as a shareholder
of Flagship (but not in the Shareholder's capacity as a physician), in a
proceeding involving alleged medical malpractice by a physician employee of
Flagship, and PQC shall indemnify Shareholder for any costs and expenses arising
out of such a proceeding in the event such costs and expenses are not reimbursed
pursuant to such policy.
(b) Notification and Defense of Claim. Not later than thirty
---------------------------------
(30) days after receipt by Shareholder of notice of the commencement of any
action, suit or proceeding, Shareholder will, if a claim in respect thereof is
to be made against PQC under this Agreement, notify PQC of the commencement
thereof but the omission so to notify PQC will not relieve PQC from any
liability which it may have to Shareholder otherwise than under this Agreement.
With respect to any such action, suit, or proceeding as to which Shareholder
notifies PQC of the commencement thereof:
(i) PQC will be entitled to participate therein at its own
expense;
(ii) Except as otherwise provided below, to the extent that
it may wish, PQC jointly with any other indemnifying party similarly notified
will be entitled to assume the defense thereof, with counsel reasonably
satisfactory to Shareholder. After notice from PQC to Shareholder of its
election so as to assume the defense thereof, PQC will not be liable to
Shareholder under this Agreement for any legal or other expenses subsequently
incurred by Shareholder in connection with the defense thereof other than
reasonable costs of investigation or as otherwise provided below. Shareholder
shall have the right to employ separate Shareholder's counsel in such action,
suit, or proceeding but the fees and expenses of such counsel incurred after
notice from PQC of its assumption of the defense thereof shall be at the expense
of Shareholder unless (A) the employment of counsel by Shareholder has been
authorized by PQC, (B) Shareholder or Shareholder's counsel, in a written
opinion to PQC, shall have reasonably concluded that there may be a conflict of
interest between PQC and Shareholder in the conduct of the defense of such
action or (C) PQC shall not in fact have reasonably promptly employed counsel to
assume the defense of such action, in each of which cases the fees and expenses
of Shareholder's separate counsel shall be at the expense of PQC. PQC shall not
be entitled to assume the defense of any action, suit, or proceeding brought by
or on behalf of PQC or as to which Shareholder shall have made the conclusion
provided for in (B) above; and
-7-
<PAGE>
(iii) PQC shall not be liable to indemnify Shareholder under
this Agreement for any amounts paid in settlement of any action or claim
effected without its written consent. PQC shall be permitted to settle any
action except that it shall not settle any action or claim in any manner which
would impose any penalty or limitation on Shareholder without Shareholder's
written consent. Neither PQC nor Shareholder will unreasonably withhold its
consent to any proposed settlement.
[Rest of page intentionally left blank]
-8-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first written above.
PHYSICIANS QUALITY CARE, INC.
By: /s/ Jerilyn P. Asher
----------------------------
Name: Jerilyn P. Asher
Title: President
FLAGSHIP HEALTH, P.A.
By: /s/ Laura M. Mumford
-----------------------------
Name: Laura M. Mumford
Title: President
/s/ Laura M. Mumford
-----------------------------
Laura M. Mumford, M.D.
-9-
<PAGE>
EXHIBIT A
NOTICE OF RESTRICTIONS
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS
IMPOSED BY THE MARYLAND PROFESSIONAL SERVICE CORPORATION ACT. APPROPRIATE
REGULATING BOARD(S), THE CORPORATION'S ARTICLES OF INCORPORATION AND BYLAWS AND
THE TERMS OF A SHAREHOLDER DESIGNATION AND RESTRICTED STOCK TRANSFER AGREEMENT
BY AND AMONG THE SHAREHOLDER NAMED HEREIN, THE CORPORATION AND ANOTHER PARTY (A
COPY OF WHICH IS ON FILE WITH THE CORPORATION AND AVAILABLE WITHOUT CHARGE), AND
NO TRANSFER OF THE SHARES REPRESENTED HEREBY OR OF SHARES ISSUED IN EXCHANGE
THEREFOR SHALL BE VALID OR EFFECTIVE UNTIL THE TERMS AND CONDITIONS OF SUCH
STATUTES, BOARD REQUIREMENTS, ORGANIZATIONAL DOCUMENTS AND AGREEMENT SHALL HAVE
BEEN FULFILLED IN THE JUDGMENT OF THE CORPORATION.
THE TRANSFER OF STOCK OF A PROFESSIONAL CORPORATION IS RESTRICTED BY THE
MARYLAND PROFESSIONAL SERVICE CORPORATION ACT AND IS SUBJECT TO FURTHER
RESTRICTION IMPOSED FROM TIME TO TIME BY THE LICENSING UNIT. STOCK OF A
PROFESSIONAL CORPORATION IS ALSO SUBJECT TO A STATUTORY COMPULSORY REPURCHASE
OBLIGATION.
-10-
<PAGE>
FORM OF MERGER AGREEMENT
Agreement entered into as of__________________, 199__ by and among
Physicians Quality Care, Inc., a Delaware corporation ("PQC"), Medical Care
Partners, P.C., a Massachusetts professional corporation ("MCP"), ___________
______, a Massachusetts professional corporation (the "Company"), and
___________________, the sole stockholder of the Company (the "Stockholder").
MCP, PQC, the Company and the Stockholder are referred to collectively herein as
the "Parties."
This Agreement contemplates a merger of the Company into MCP. In such
merger, the Stockholder will receive cash and/or shares of Class A Common Stock,
par value $0.01 per share (the "Common Stock") of PQC in exchange for the
Stockholders' capital stock of the Company.
Now, therefore, in consideration of the representations, warranties and
covenants herein contained, the Parties agree as follows.
ARTICLE I
THE MERGER
1.1 The Merger. Upon and subject to the terms and conditions of
----------
this Agreement, the Company shall merge with and into MCP (with such merger
referred to herein as the "Merger") at the Effective Time (as defined below).
From and after the Effective Time, the separate corporate existence of the
Company shall cease, and MCP shall continue as the surviving corporation in the
Merger (the "Surviving Corporation"). The "Effective Time" shall be the time at
which the Company and MCP file the articles of merger or other appropriate
documents prepared and executed in accordance with the relevant provisions of
the Massachusetts General Laws (the "Articles of Merger") with the Secretary of
State of the Commonwealth of Massachusetts. The Merger shall have the effects
set forth in Section 16 of Chapter 156A and Section 80 of Chapter 156B of the
Massachusetts General Laws.
1.2 The Closing. The closing of the transactions contemplated by
-----------
this Agreement (the "Closing") shall take place at the offices of Hale and Dorr
in Boston, Massachusetts 02109, commencing at 9:00 a.m. local time on January
10, 1997 or such later date as shall be mutually agreeable to the Parties hereto
as soon as practicable after the satisfaction or waiver of all conditions to the
obligations of the Parties to consummate the transactions contemplated hereby
(the "Closing Date").
1.3 Actions at the Closing. At the Closing, (a) the Company shall
----------------------
deliver to MCP and PQC the various certificates, instruments and documents
referred to in Article V, (b) MCP and PQC shall deliver to the Company the
various certificates, instruments and documents referred to in Article VI, (c)
the Company and MCP shall file with the Secretary of
<PAGE>
State of the Commonwealth of Massachusetts the Articles of Merger, (d) the
Stockholder shall deliver to MCP for cancellation the certificate(s)
representing his/her Shares (as defined in Section 1.5(a) below), and (e) the
Stockholder shall receive the amount of cash (by check) and/or the number of
shares of Common Stock with an assumed value, as determined and provided in
Section 1.12, as set forth opposite the Stockholder's name on Schedule 1.3
attached hereto (collectively, the "Merger Consideration").
1.4 Additional Action. The Surviving Corporation may, at any time
-----------------
after the Effective Time, take any action, including executing and delivering
any document, in the name and on behalf of either the Company or MCP, in order
to consummate the transactions contemplated by this Agreement.
1.5 Conversion of Securities. At the Effective Time, by virtue of
------------------------
the Merger and without any action on the part of any Party or the holder of any
of the following securities:
(a) Each share of common stock of the Company (the "Shares")
held by the Stockholder or held in the Company's treasury immediately prior to
the Effective Time shall be cancelled and retired without payment of any
consideration therefor, other than the payment of the Merger Consideration to
the Stockholder as set forth in Section 1.3.
(b) Each share of common stock, $0.01 par value per share, of
MCP issued and outstanding immediately prior to the Effective Time shall be
converted into and thereafter evidence one (1) share of common stock, $0.01 par
value per share, of the Surviving Corporation.
1.6 Dissenting Stockholder. The Stockholder represents that the
----------------------
Stockholder has voted the Shares owned beneficially or of record by the
Stockholder in favor of the adoption of this Agreement and the Merger and,
consequently, shall not be entitled to, and shall not, demand and perfect
appraisal rights in accordance with Section 16 of Chapter 156A and Section 86 of
Chapter 156B of the Massachusetts General Laws.
1.7 Certificate of Incorporation. The Articles of Organization of
----------------------------
the Surviving Corporation shall be the same as the Articles of Organization of
MCP immediately prior to the Effective Time.
1.8 By-laws. The By-laws of the Surviving Corporation shall be the
-------
same as the By-laws of MCP immediately prior to the Effective Time.
1.9 Directors and Officers. The directors and officers of the
----------------------
Surviving Corporation as of the Effective Time shall be those officers and
directors immediately prior to the Effective Time.
1.10 No Further Rights. From and after the Effective Time, no Shares
------------------
shall be deemed to be outstanding, and holders of certificates formerly
representing Shares shall cease to have any rights with respect thereto except
as provided herein or by law.
2
<PAGE>
1.11 Closing of Transfer Books. At the Effective Time, the stock
-------------------------
transfer books of the Company shall be closed and no transfer of Shares shall
thereafter be made. If, after the Effective Time, certificates formerly
representing Shares are presented to the Surviving Corporation, they shall be
cancelled and exchanged for the Merger Consideration as set forth on Schedule
--------
1.3.
- ---
1.12 Shares of PQC.
-------------
(a) The Parties agree that the per share fair market value of
the Common Stock to be included in the Merger Consideration is $2.50.
(b) The Stockholder agrees to enter into, and the shares of
Common Stock shall be subject to, the Stockholder's Agreement, dated as of
August 30, 1996 among certain Class A Stockholders of PQC and the Class B Common
Stockholder (the "Stockholders Agreement").
(c) The Stockholder represents, warrants and covenants to PQC
as follows:
(i) The Stockholder is acquiring the Common Stock for
the Stockholder's own account for investment only, and not with a view to, or
for sale in connection with, any distribution of the shares of Common Stock in
violation of the Securities Act of 1933 (the "Securities Act"), or any rule or
regulation under the Securities Act.
(ii) The Stockholder has received a copy of the
Confidential Private Placement Memorandum, dated December 10, 1996, as
Supplement on December 12, 1996, with respect to PQC and the Common Stock and
has had such opportunity as the Stockholder has deemed adequate to obtain from
representatives of PQC such information as is necessary to permit the
Stockholder to evaluate the merits and risks of the Stockholder's investment in
PQC.
(iii) The Stockholder has sufficient experience in
business, financial and investment matters to be able to evaluate the risks
involved in the acquisition of the shares of Common Stock and to make an
informed investment decision with respect to such acquisition.
(iv) The Stockholder can afford a complete loss of
the value of the shares of Common Stock and is able to bear the economic risk of
holding such Common Stock for an indefinite period.
(v) The Stockholder understands that (i) the shares
of Common Stock have not been registered under the Securities Act and are
"restricted securities" within the meaning of Rule 144 under the Securities Act,
(ii) the Common Stock cannot be sold, transferred or otherwise disposed of
unless they are subsequently registered under the Securities Act or an exemption
from registration is then available; (iii) in any event, the exemption from
registration under Rule 144 will not be available for at least two (2) years and
even then will not be available unless a public market then exists for the
capital stock of PQC, adequate information concerning PQC is then available to
the public, and other terms
3
<PAGE>
and conditions of Rule 144 are complied with; and (iv) there is now no
registration statement on file with the Securities and Exchange Commission with
respect to any stock of PQC and PQC has no obligation or current intention to
register the Common Stock under the Securities Act.
(vi) A legend substantially in the following form
will be placed on the certificate representing the Common Stock:
"The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended, and may
not be sold, transferred or otherwise disposed of in the absence of
an effective registration statement under such Act or an opinion of
counsel satisfactory to the corporation to the effect that such
registration is not required."
(vii) The Stockholder is an "accredited investor"
as defined in Rule 501 of the rules and regulations under the Securities Act.
1.13 Certain Tax Agreements. The parties intend to adopt this
----------------------
Agreement and Merger as a tax-free reorganization under Section 368(a) of the
Internal Revenue Code of 1986, as amended, (the "Code"). The parties shall not
take a position on any tax return or engage in any activities inconsistent with
this Section 1.13. Without limiting the foregoing the Stockholder agrees that:
(a) The Stockholder has not sold, exchanged, transferred or
disposed of or received any shares of the Company's capital stock in
contemplation of the Merger, and the Stockholder has no present intent to sell,
exchange, transfer, dispose of or receive the Company's capital stock in
contemplation of the Merger, nor has the Stockholder entered into any
discussions or negotiations with regard to the possible sale, exchange, transfer
or other disposition of such shares.
(b) The Stockholder is not subject to any obligation to
sell, exchange, transfer or otherwise dispose of all or any of the shares of PQC
to be received by the Stockholder in the Merger. The Stockholder has not entered
into any discussions or negotiations with regard to the possible sale, exchange,
transfer or other disposition of all or any of such shares. The Stockholder has
no plan or intent to engage in any transaction or arrangement that would reduce
the Stockholder's risk of ownership in any way, including without limitation a
short sale, hedging transaction or otherwise, with respect to all or any of such
shares.
(c) Until December 31, 1998, the Stockholder shall not,
directly or indirectly, offer, sell, assign, transfer, grant a participation in,
pledge, or otherwise dispose of, or encumber any of the Shares, or any interest
therein (each, a "Transfer") unless and until such Transfer has been approved by
the Company (it being understood that the Company intends to consent to such
Transfer (subject to the Company's rights under the Stockholders Agreement)
unless the Company reasonably concludes that the Transfer may cause the
4
<PAGE>
transactions contemplated by this Agreement not to qualify as a tax-free
reorganization pursuant to Section 365 of the Code).
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company and the Stockholder, who join herein individually (not
jointly) and subject to the limitations contained in Section 7.1, represent and
warrant to MCP and PQC that the statements contained in this Article II are true
and correct, except as set forth in the disclosure schedule delivered to MCP and
PQC by the Company and the Stockholder prior to the Closing (the "Disclosure
Schedule"), as of the date hereof and as of the Effective Time. The Disclosure
Schedule shall be initialed by the Parties and shall be arranged in paragraphs
corresponding to the numbered and lettered paragraphs contained in this Article
II, and the disclosures in any paragraph of the Disclosure Schedule shall
qualify only the corresponding paragraph in this Article II.
2.1 Organization, Qualification and Corporate Power. The Company is
------------------------------------------------
a corporation duly organized, validly existing and in corporate and tax good
standing under the laws of the Commonwealth of Massachusetts and has all power
and authority to carry on the businesses in which it is engaged and to own and
use the properties owned and used by it. The Company has furnished to PQC true
and complete copies of its Articles of Organization and By-laws, each as amended
and as in effect on the date hereof. The Company is not in default under or in
violation of any provision of its Articles of Organization or By-laws. The
Company has no subsidiaries or any equity interest in any corporation,
partnership, joint venture or other entity.
2.2 Capitalization. Schedule 2.2 accurately sets forth the authorized
-------------- ------------
and outstanding capital stock of the Company. Schedule 2.2 sets forth a complete
------------
and accurate list of all stockholder of the Company, indicating the numbers of
Shares held by each stockholder. The Shares are all of the issued and
outstanding shares of capital stock of the Company and each Share is duly
authorized, validly issued, fully paid, nonassessable and free of all preemptive
rights. There are no outstanding or authorized options, warrants, rights,
agreements or commitments to which the Company is a party or which are binding
upon the Company providing for the issuance, disposition or acquisition of any
of its capital stock. There are no outstanding or authorized stock appreciation,
phantom stock or similar rights with respect to the Company. There are no
agreements, voting trusts, proxies or understandings with respect to the voting,
or registration under the Securities Act of any Shares. All of the issued and
outstanding Shares were issued in compliance with applicable federal and state
securities laws.
2.3 Authorization. This Agreement and the other agreements,
-------------
documents and instruments to be executed and delivered by the Company pursuant
hereto and the consummation by the Company of the transactions contemplated
hereby and thereby have been approved by all required corporate action,
including approval by the Board of Directors of the Company and all of the
Stockholder. No further corporate or other proceedings on the
5
<PAGE>
part of Company are necessary to authorize this Agreement or the other
agreements, documents and instruments to be executed and delivered by the
Company pursuant hereto or the transactions contemplated hereby or thereby.
2.4 Valid and Binding Agreement. The Company and the Stockholder
---------------------------
have the necessary power and authority to enter into this Agreement and the
other agreements, documents and instruments to be executed and delivered by the
Company or the Stockholder pursuant hereto, and to carry out the transactions
contemplated hereby and thereby. Assuming due authorization, execution and
delivery thereof by MCP and PQC, this Agreement and each of the other
agreements, documents and instruments to be executed and delivered by the
Company or the Stockholder pursuant hereto will constitute valid and binding
agreements of the Company and/or the Stockholder, enforceable against Company or
the Stockholder, as the case may be, in accordance with their terms.
2.5 No Violation. Neither the execution and delivery of this
------------
Agreement or the other agreements, documents and instruments to be executed and
delivered by the Company or the Stockholder pursuant hereto nor the consummation
by the Company or the Stockholder of the transactions contemplated hereby or
thereby (a) will violate any provision of the charter documents or By-laws of
the Company, each as currently in effect, (b) subject to obtaining the required
consents and approvals described in Schedule 2.6, will violate or conflict with
------------
any applicable statute, law, ordinance, rule, regulation, order, judgment or
decree or (c) subject to obtaining the required consents and approvals described
in Schedule 2.6, will violate or conflict with or constitute a default (or an
------------
event which, with notice or lapse of time, or both, would constitute a default)
under, or will result in the termination of, or accelerate the performance
required by, or result in the creation of any Security Interest (as defined in
Section 2.12) upon any of the properties of the Company under any contract,
commitment, understanding, arrangement, agreement or restriction of any kind by
which the properties of the Company are bound or affected, or to which the
Company or the Stockholder is a party except for any such violation, conflict or
default that would not have a Material Adverse Effect. The term "Material
Adverse Effect" as used in this Agreement shall mean any change or effect or any
prospective change or effect that, individually or when taken together with
other changes or effects, is or is reasonably likely to be materially adverse to
the medical practice conducted by the Stockholder (the "Practice"), whether now
or after the Effective Time, the financial condition or results of operation of
the Company, MCP or PQC, the financial arrangements contemplated by the
Employment Agreement (as defined in Section 5.5(a)), the value to MCP or PQC of
their affiliation with the Company and the Stockholder or any Party's ability to
consummate the transactions contemplated herein.
2.6 Consents; Filings. Except as set forth in Schedule 2.6 hereto,
----------------- ------------
no registration or filing with, or consent, approval, permit, authorization or
action by, any third-party (including, without limitation, any federal, state,
local, foreign or other governmental agency, instrumentality, commission,
authority, board or body or other person or entity (a "Governmental Entity")) is
required in connection with the execution and delivery by the Company or the
Stockholder of this Agreement or the other agreements, documents and instruments
to be executed and delivered by Company or the Stockholder pursuant hereto or
the consummation by the Company or the Stockholder of the transactions
contemplated hereby or thereby.
6
<PAGE>
2.7 Financial Statements. The Company has delivered to MCP and PQC
---------------------
the balance sheets and statements of income for and as at the Company's three
most recent fiscal years (the "Financial Statements") and the fiscal period
ended August 31, 1996 (the "Interim Financial Statements"), and such balance
sheets and statements of income are true, complete and accurate and fairly
present the financial condition and results of operations for and as at the end
of the periods therein referred to on a stand-alone basis.
2.8 Undisclosed Liabilities. The Company has no liabilities or
------------------------
obligations (whether known or unknown, whether absolute or contingent, whether
liquidated or unliquidated and whether due or to become due), except for (a)
liabilities shown on the balance sheet referred to in Section 2.7 for the period
ended August 31, 1996 (the "Most Recent Balance Sheet"), or (b) liabilities
which have arisen since the Most Recent Financial Statements in the Ordinary
Course of Business (as defined in Section 2.12).
2.9 No Material Adverse Change. No event with respect to the Company
--------------------------
or the Practice involving a Material Adverse Effect has occurred since the date
of the Financial Statements.
2.10 Compliance with Law. The Company has complied with, and the
-------------------
Practice has been conducted in compliance with all applicable laws, regulations
and other requirements of all national governmental authorities, and of all
states, municipalities and other political subdivisions and agencies thereof,
having jurisdiction over the Company or the Stockholder, including without
limitation, all such laws, regulations and requirements relating to antitrust,
consumer protection, employee benefit, equal opportunity, health, occupational
safety, pension, pollution or environmental protection matters, except for such
noncompliance as would not have a Material Adverse Effect. Neither Company nor
the Stockholder has received any notification of any asserted present or past
failure to comply with such laws, rules or regulations.
2.11 Tax Matters.
------------
(a) The Company has filed in a timely manner all Tax Returns
(as defined below) that it was required to file and all such Tax Returns were
correct and complete in all material respects. The Company has timely paid all
Taxes (as defined below) that are shown to be due on any such Tax Returns. The
unpaid Taxes of the Company for tax periods through the date of the Most Recent
Balance Sheet do not exceed the accruals and reserves for Taxes set forth on the
Most Recent Balance Sheet (excluding any accruals and reserves for deferred
Taxes established to reflect timing difference between book and Tax income). The
Company does not have any actual or potential liability for any Tax obligation
of any taxpayer (including without limitation any affiliated group of
corporations or other entities that included the Company during a prior period)
other than the Company. All Taxes that the Company is or was required by law to
withhold or collect have been duly withheld or collected and, to the extent
required, have been paid to the proper Governmental Entity. For purposes of this
Agreement, "Taxes" means all taxes, charges, fees, levies or other similar
assessments or liabilities, including without limitation income, gross receipts,
ad valorem, premium, value-added, excise, real property, personal property,
sales, use, transfer, withholding, employment, payroll and franchise taxes
imposed by the United States of
7
<PAGE>
America or any state, local or foreign government, or any agency thereof, or
other political subdivision of the United States or any such government, and any
interest, fines, penalties, assessments or additions to tax resulting from,
attributable to or incurred in connection with any tax or any contest or dispute
thereof. For purposes of this Agreement, "Tax Returns" means all reports,
returns, declarations, statements or other information required to be supplied
to a taxing authority in connection with Taxes.
(b) The Company has delivered to PQC correct and complete
copies of all federal income Tax Returns, examination reports and statements of
deficiencies assessed against or agreed to by the Company since the organization
of the Company. No examination or audit of any Tax Returns of the Company by any
Governmental Entity is currently in progress or, to the knowledge of the
Company, threatened or contemplated. The Company has not waived any statute of
limitations with respect to Taxes or agreed to an extension of time with respect
to a Tax assessment or deficiency.
(c) The Company is not a "consenting corporation" within the
meaning of Section 341(f) of the Internal Revenue Code of 1986, as amended (the
"Code"), and none of the assets of the Company are subject to an election under
Section 341(f) of the Code. The Company has not been a United States real
property holding corporation within the meaning of Section 897(c)(2) of the Code
during the applicable period specified in Section 897(c)(l)(A)(ii) of the Code.
The Company is not a party to any Tax allocation or sharing agreement.
(d) The Company is not nor has ever been a member of an
"affiliated group" of corporations (within the meaning of Section 1504 of the
Code).
(e) The Company is not a party to any agreement, contract,
arrangement or plan that has resulted or would result, separately or in the
aggregate, in the payment of any "parachute payments" within the meaning of
Section 280G of the Code.
2.12 Assets. The Company owns or leases all tangible assets
------
necessary for the conduct of the Practice. Each such tangible asset is free from
material defects, has been maintained in accordance with normal industry
practice, is in good operating condition and repair (subject to normal wear and
tear) and is suitable for the purposes for which it presently is used. Except as
disclosed on Schedule 2.12, no asset of the Company (tangible or intangible) is
-------------
subject to any Security Interest. The term "Security Interest" means any
mortgage, pledge, security interest, encumbrance, charge or other lien (whether
arising by contract or by operation of law), other than (i) mechanic's,
materialmen's and similar liens, (ii) liens arising under worker's compensation,
unemployment insurance, social security, retirement and similar legislation and
(iii) liens on goods in transit incurred pursuant to documentary letters of
credit, in each case arising in the ordinary course of business consistent with
past practice (including with respect to frequency and amount) ("Ordinary Course
of Business").
8
<PAGE>
2.13 Leases.
------
(a) Schedule 2.13 contains a complete and accurate listing
-------------
of all leases (the "Leases") pursuant to which the Company leases real or
personal property, which listing sets forth a general description of the leased
property or items, the term, the annual rent, any and all renewal options, and
any requirements for the consent of third parties to assignments thereof. All
such Leases are valid, binding and enforceable in accordance with their terms
and are in full force and effect; no event of default has occurred which
(whether with or without notice, lapse of time or both or the happening or
occurrence of any other event) would constitute a default thereunder on the part
of the Company; and the Company has no knowledge of the occurrence of any event
of default which (whether with or without notice, lapse of time or both or the
happening or occurrence of any other event) would constitute a default
thereunder by any other party.
(b) Except for Leases listed on Schedule 2.13, there are no
-------------
leases, subleases, licenses, occupancy agreements, options, rights, concessions
or other agreements or arrangements, written or oral, granting to any person the
right to purchase, use or occupy any facility occupied by the Company.
(c) With respect to each Lease, the Company has and will
transfer to MCP at the Closing an unencumbered interest in the leasehold
interest covered thereby. The Company enjoys peaceful and undisturbed possession
of all the leased real property, and the Company has in all material respects
performed all the obligations required to be performed by it through the date
hereof.
2.14 Contracts and Commitments.
--------------------------
(a) Schedule 2.14 sets forth a complete and accurate list of
-------------
all contracts known to the Company and the Stockholder after reasonable
investigation which have been entered into by the Company or the Stockholder
related to the Practice, and still in effect as of the date hereof (the
"Contracts"), of the following categories:
(i) Managed care contracts and other contracts with
third-party payors;
(ii) Employment or similar contracts and severance
agreements;
(iii) Contracts (other than Leases set forth on Schedule 2.13)
-------------
related to the Company or the Practice which are not cancelable without
liability on thirty (30) calendar days (or less) notice;
(iv) Options with respect to any property, real or personal,
whether the Company is the grantor or grantee thereunder;
(v) Contracts involving expenditures or liabilities, actual
or potential, in excess of one thousand dollars ($1,000) or otherwise material
to the Practice or the Company;
9
<PAGE>
(vi) Promissory notes, loans, agreements, indentures,
evidences of indebtedness, letters of credit, guarantees, or other instruments
relating to an obligation to pay money, individually in excess of or in the
aggregate in excess of one thousand dollars ($1,000), whether the Company shall
be the borrower, lender or guarantor thereunder or whereby any properties of the
Company are pledged;
(vii) Contracts containing covenants limiting the freedom of
the Company or any officer, director, employee, or stockholder of the Company,
to engage in any line of business or compete with any person; and
(viii) Any Contract with the United States, state or local
government or any agency or department thereof.
The Company has made available to PQC true, correct and complete copies within
the Company's or a Stockholder's possession of, and all records relating to, all
of the Contracts listed on Schedule 2.14, including all amendments and
-------------
supplements thereto.
(b) Absence of Breaches or Defaults. To the knowledge of
--------------------------------
the Company or the Stockholder, all of the Contracts are valid and in full force
and effect. The Company and the Stockholder have duly performed all of their
respective obligations under the Contracts, and no violation of, or default or
breach, under any Contracts by the Company or any other party has occurred
except for any violations, defaults, or breaches that would not have a Material
Adverse Effect and neither Company nor any other party, to the best of Company's
or the Stockholder's knowledge after due inquiry, has repudiated any provisions
thereof.
2.15 Permits. The Company, the Stockholder and any other physicians
-------
employed by the Company have all licenses, permits, franchises, approvals,
authorizations, consents or orders of, or filings with ("Permits") any
Governmental Entity or any other person, necessary or desirable to conduct the
Practice as now being conducted, except where the failure to obtain such Permits
would not have a Material Adverse Effect. All Permits of the Company, the
Stockholder and any other physicians employed by the Company are valid and in
full force and effect and are listed on Schedule 2.15. Except as disclosed on
-------------
Schedule 2.15, no notice to, declaration, filing or registration with, or Permit
- -------------
or consent from, any governmental or regulatory body or authority, or any other
person or entity, is required to be made or obtained by the Company or the
Stockholder in connection with the execution, delivery or performance of this
Agreement and the consummation of the transactions contemplated hereby, except
as set forth on Schedule 2.15. The Stockholder has not suffered any loss,
-------------
revocation, suspension, expiration without renewal or other failure to keep in
full force and effect and good standing the Stockholder's membership on the
medical staff of the hospitals listed for such Stockholder on Schedule 2.23, or
-------------
any material license, certification, accreditation, clinical privilege or other
right or authorization necessary for the unrestricted practice of medicine by
the Stockholder or for the conduct of the Practice as previously conducted.
2.16 Books and Records. The Company has made and kept (and given MCP
------------------
and PQC access to) books and records (including patient lists) and accounts,
which, in reasonable detail, accurately and fairly reflect the activities of
the Company.
10
<PAGE>
2.17 Litigation. Except as set forth on Schedule 2.17, there is no,
----------- -------------
and during the past five (5) years there has not been any, action, order, writ,
injunction, judgment or decree outstanding or any claim, suit, litigation,
proceeding, labor dispute, arbitral action, governmental audit or investigation
(collectively, "Actions") pending or, to the best of the Company's or the
Stockholder's knowledge, threatened (a) against, related to or affecting (i) the
Company, any of the Stockholder, the Practice or the assets of the Company, (ii)
any officers, directors or employees of the Company as such, or (iii) any
stockholder of the Company in such stockholder's capacity as a stockholder of
the Company, (b) seeking to delay, limit or enjoin the transactions contemplated
by this Agreement, (c) that involve the risk of criminal liability (other than
minor traffic violations), or (d) in which the Company is a plaintiff. Neither
the Company nor the Stockholder is in default with respect to or subject to any
judgment, order, writ, injunction or decree of any court or governmental agency,
and there are no unsatisfied judgments against the Company, any of the
Stockholder, the Practice or the Company's assets.
2.18 Transactions with Certain Persons. Except as set forth on
----------------------------------
Schedule 2.18, no officer, director or employee of the Company nor any member of
- -------------
any such person's immediate family is presently, or within the past two (2)
years has been a party to any transaction with the Company relating to the
Practice with an aggregate annual value of more than one thousand dollars
($1,000) to the Company or the other parties thereto, including, without
limitation, any contract, agreement or other arrangement (a) providing for the
furnishing of services by, (b) providing for the rental of real or personal
property from, or (c) otherwise requiring payments to (other than for services
as officers, directors or employees of the Company) any such person or
corporation, partnership, trust or other entity in which any such person has an
interest as a stockholder, officer, director, trustee or partner, except that
the Company provides certain medical services to employees and family members as
previously disclosed to PQC.
2.19 Insurance. Schedule 2.19 contains a complete and accurate list
--------- -------------
of all policies or binders of fire, liability, title, worker's compensation,
malpractice and other forms of insurance (showing as to each policy or binder
the carrier, policy number, coverage limits, expiration dates, annual premiums
and a general description of the type of coverage provided) maintained by the
Company on any of its assets, the Stockholder, the Practice or the Company's
employees. Such insurance provides, and during such period provided, coverage to
the extent and in the manner (a) customary for a medical practice and (b) as may
be required by applicable law and by any and all Contracts known to the Company
or the Stockholder to which the Company is a party. The Company is not in
default under any of such policies or binders, and the Company has not failed to
give any notice or to present any claim under any such policy or binder in a due
and timely fashion. No insurer has advised the Company that it intends to reduce
coverage, increase premiums or fail to renew existing policy or binder. There
are no outstanding unpaid claims under any such policies or binders. All
policies and binders provide sufficient coverage for the risks insured against,
are in full force and effect on the date hereof and shall be kept in full force
and effect through the Closing Date.
2.20 Brokers. The Company is not obligated to pay, nor has the
--------
Company retained any broker or finder or other person who is entitled to, any
broker's or finder's fee or any
11
<PAGE>
other commission or financial advisory fee based on any agreement or
understanding made by the Company in connection with the transactions
contemplated hereby.
2.21 Benefit Plans.
-------------
(a) Except as set forth in Schedule 2.21, the Company is not
-------------
a party to any pension, retirement, profit sharing, savings, bonus, incentive,
deferred compensation, group health insurance or group life insurance plan or
any similar obligation (an "Employee Benefit Plan"), or to any collective
bargaining agreement or other contract, written or oral, with any trade or labor
union, employees' association or similar organization. The Company does not have
any obligations to provide to its active employees or current retirees any
post-retirement non-pension benefits. No Stockholder has any present intention
of discontinuing the Stockholder's medical practice with the Company except to
become an employee of MCP
(b) The Company (i) is and has been in compliance in all
material respects with all applicable laws respecting employment and employment
practices, terms and conditions of employment, and wages and hours (including,
but not limited to, the Worker Adjustment and Retraining Notification Act, 29
U.S.C. 2101 et seq. ("WARN"), or any similar state or local law), (ii) has made
------
all contributions required to be made under any state unemployment or disability
laws or regulations and has accrued the amount of any such contribution required
for any period prior to the Closing Date which is not yet due and payable and
(iii) is not engaged in any unfair labor practice, and there are no arrears in
the payment of wages or taxes with respect to employees.
(c) Except as set forth in Schedule 2.21, no employee has any
-------------
claims pending against Company (whether under any law, any employment agreement
or otherwise) on account of or for (i) overtime pay, other than overtime pay for
the current payroll period, (ii) wages or salary (excluding bonuses and amounts
accruing under pension and profit sharing plans) for any period other than the
current payroll period, (iii) vacation, time off or pay in lieu of vacation or
time off, other than that earned in respect of the current fiscal year, (iv) any
violation of any statute, ordinance or regulation relating to minimum wages or
maximum hours of work or (v) the Employee Retirement Income Security Act of
1974, as amended ("ERISA").
(d) Except as set forth on Exhibit 2.21 (which liabilities
------------
will be discharged on or prior to the Closing Date) the Company is not, neither
PQC nor MCP shall be, pursuant to any employment agreement, employee benefit
plan or other law, arrangement or understanding, obligated to pay or be liable
for the payment of any compensation (including accrued vacation), severance pay
or other benefit (including any disability benefit or payment or any unfunded
liabilities relating to pension benefits) by reason of the voluntary termination
of employment of any employee, the voluntary or involuntary termination at or
prior to the Effective Time of employment of any employee, or the consummation
of the transactions contemplated by this Agreement.
(e) With respect to all employee benefit plans (as defined in
ERISA) for which any employee is or was eligible to participate in, the Company
or any entity which, within the last five (5) years, has been under common
control or affiliated with Company (an
12
<PAGE>
"ERISA Affiliate") within the meaning of Section 414(b), (c) or (m) of the Code,
is in compliance in all material respects with the requirements prescribed by
any and all statutes, orders or governmental rules or regulations currently in
effect, including, but not limited to, ERISA and the Code, applicable to such
employee benefit plans and the Company is in compliance in all material respects
with its obligations under the terms of such plans. None of the employee benefit
plans are subject to Title IV of ERISA. Neither the Company nor any ERISA
Affiliate has ever been obligated to contribute to any "multi-employer plan" as
such term is defined in Section III(37) of ERISA. No employee benefit plan of
the Company or any ERISA Affiliate has engaged in any prohibited transaction as
such term is defined in Section 4975 of the Code or Section 406 of ERISA.
2.22 Fraud and Abuse. Neither the Company nor the Stockholder, nor,
---------------
to the knowledge of the Company or the Stockholder, any other persons or
entities providing professional services for the Practice, have engaged in any
activities which are prohibited under U.S.C. ss.1320a-7b, or the regulations
promulgated thereunder pursuant to such statutes, or related state or local
statutes or regulations, or which are prohibited by rules of professional
conduct, including but not limited to the following: (i) knowingly and willfully
making or causing to be made a false statement or representation of a material
fact in any application for any benefit or payment; (ii) knowingly and willfully
making or causing to be made any false statement or representation of a material
fact for use in determining rights to any benefit or payment; (iii) failure to
disclose knowledge by a claimant of the occurrence of any event affecting the
initial or continued right to any benefit or payment on its own behalf or on
behalf of another, with intent to fraudulently secure such benefit of payment;
and (iv) knowingly and willfully soliciting or receiving any remuneration
(including any kickback, bribe or rebate), directly or indirectly, overtly or
covertly, in cash or in kind or offering to pay or receive such remuneration (a)
in return for referring an individual to a person for the furnishing or
arranging for the furnishing of any item or service for which payment may be
made in whole or in part by Medicare or Medicaid, or (b) in return for
purchasing, leasing, or ordering or arranging for or recommending purchasing,
leasing, or ordering any good, facility, service, or item for which payment may
be made in whole or in part by Medicare or Medicaid.
2.23 Hospital Privileges. Schedule 2.23 hereto lists all of the
------------------- -------------
hospitals at which the Stockholder is a member of the medical staff.
2.24 Employment Agreements. No event permitting termination under
----------------------
the Employment Agreement (as defined in Section 5.5(a)), if they were in effect
at such time of such event, shall have occurred at any time prior to the Closing
Date. The Stockholder has no current intention of terminating an Employment
Agreement with MCP prior to the termination of its initial term.
2.25 Inventory. All inventory of the Company consists of a quality
----------
and quantity usable in the Ordinary Course of Business, except for items which
have been written off or written down to their net realizable value on the Most
Recent Balance Sheet. All inventory not written off has been priced at the lower
of cost and market. The quantities of each type of inventory are not excessive
in the present circumstances of the Company.
13
<PAGE>
2.26 Powers of Attorney. There are no outstanding powers of attorney
------------------
executed on behalf of the Company.
2.27 Employees. Schedule 2.27 contains a list of all employees of
---------- -------------
the Company along with the position and the rate of compensation of each such
person. To the knowledge of the Company or the Stockholder, no employee or group
of employees has any plans to terminate employment with the Company or not to
continue as an employee of the Surviving Corporation after the Effective Time.
The Company is not a party to or bound by any collective bargaining agreement,
nor has any of them experienced any strikes, grievances, claims of unfair labor
practices or other collective bargaining disputes.
2.28 Environmental Matters.
----------------------
(a) The Company has complied with all applicable
Environmental Laws (as defined below). There is no pending or, to the knowledge
of the Company or the Stockholder, threatened civil or criminal litigation,
written notice of violation, formal administrative proceeding, or investigation,
inquiry or information request by any Governmental Entity, relating to any
Environmental Law involving the Company. For purposes of this Agreement,
"Environmental Law" means any federal, state or local law, statute, rule or
regulation or the common law relating to the environment or occupational health
and safety, including without limitation any statute, regulation or order
pertaining to (i) treatment, storage, disposal, generation and transportation of
industrial, toxic or hazardous substances or solid or hazardous waste; (ii) air,
water and noise pollution; (iii) groundwater and soil contamination; (iv) the
release or threatened release into the environment of industrial, toxic or
hazardous substances, or solid or hazardous waste, including without limitation
emissions, discharges, injections, spills, escapes or dumping of pollutants,
contaminants or chemicals; (v) the protection of wild life, marine sanctuaries
and wetlands, including without limitation all endangered and threatened
species; (vi) storage tanks, vessels and containers; (vii) underground and other
storage tanks or vessels, abandoned, disposed or discarded barrels, containers
and other closed receptacles; (viii) health and safety of employees and other
persons; and (ix) manufacture, processing, use, distribution, treatment,
storage, disposal, transportation or handling of pollutants, contaminants,
chemicals or industrial, toxic or hazardous substances or oil or petroleum
products or solid or hazardous waste. As used above, the terms "release" and
"environment" shall have the meaning set forth in the federal Comprehensive
Environmental Compensation, Liability and Response Act of 1980 ("CERCLA").
(b) There have been no releases of any Materials of
Environmental Concern (as defined below) into the environment at any parcel of
real property or any facility formerly or currently owned, operated or
controlled by the Company. With respect to any such releases of Materials of
Environmental Concern, the Company has given all required notices to
Governmental Entities (copies of which have been provided to PQC). The Company
is not aware of any releases of Materials of Environmental Concern at parcels of
real property or facilities other than those owned, operated or controlled by
the Company that could reasonably be expected to have an impact on the real
property or facilities owned, operated or controlled by the Company. For
purposes of this Agreement, "Materials of Environmental Concern" means any
chemicals, pollutants or contaminants, hazardous
14
<PAGE>
substances (as such term is defined under CERCLA), solid wastes and hazardous
wastes (as such terms are defined under the federal Resources Conservation and
Recovery Act), toxic materials, oil or petroleum and petroleum products.
(c) Set forth in Schedule 2.28(c) is a list of all
---------------
environmental reports, investigations and audits relating to premises currently
or previously owned or operated by the Company (whether conducted by or on
behalf of the Company or a third party, and whether done at the initiative of
the Company or directed by a Governmental Entity or other third party) which the
Company has possession of or access to.
2.29 Disclosure. No representation or warranty by the Company or the
----------
Stockholder contained in this Agreement or in any other document delivered to
MCP or PQC in connection with their due diligence investigation of the Company,
taken as a whole, contains or will contain any untrue statement of a material
fact or omits or will omit to state any material fact necessary, in light of the
circumstances under which it was or will be made, in order to make the
statements herein or therein not misleading. The Company and the Stockholder
have disclosed to PQC all material information relating to the Practice, the
Company, the Stockholder and the transactions contemplated by this Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PQC
AND MCP
Each of MCP and PQC represents and warrants to the Company and the
Stockholder as of the date hereof and as of the Effective Time as follows:
3.1 Organization. Each of MCP and PQC is a corporation duly
------------
organized, validly existing and in good standing under the laws of the
jurisdictions of their incorporation, and each of MCP and PQC has the power and
authority to carry on its business as presently being conducted. PQC has
provided the Company with complete and accurate copies of the Articles of
Incorporation and By-Laws of PQC and the Articles of Organization and By-laws of
MCP.
3.2 Capitalization of MCP and PQC. Schedule 3.2 accurately sets
----------------------------- ------------
forth the number of authorized and outstanding shares of Capital Stock of PQC.
Except for Physicians Quality Care of Massachusetts, Inc. and Physician Quality
Care of Maryland, Inc., PQC is not the owner of record of the equity securities
of any issuer. MCP's authorized capital stock consists of 1,000 shares of Common
Stock, $0.01 par value per share, all of which are outstanding. Except as set
forth in Schedule 3.2 and as provided for in Section 1.14, there are not, and on
------------
the Closing Date there will not be, outstanding (i) any options, warrants or
other rights to purchase any capital stock of PQC or MCP; (ii) any securities
convertible into or exchangeable for shares of such stock; or (iii) any other
commitments of any kind for the issuance of additional shares of capital stock
or options, warrants or other securities of PQC or MCP
15
<PAGE>
3.3 Authorization. The Board of Directors of each of MCP and PQC has
--------------
duly authorized the execution and delivery of this Agreement and the other
agreements, documents and instruments to be executed and delivered by MCP and
PQC pursuant hereto and the consummation by MCP and PQC of the transactions
contemplated hereby and thereby. No further corporate or other proceedings on
the part of PQC or MCP are necessary to authorize this Agreement or the other
agreements, documents and instruments to be executed and delivered by PQC
pursuant hereto or the transactions contemplated hereby or thereby.
3.4 Valid and Binding Agreement. Each of MCP and PQC has the necessary
----------------------------
power and authority to enter into this Agreement and the other agreements,
documents and instruments to be executed and delivered by MCP and PQC pursuant
hereto, and to carry out the transactions contemplated hereby and thereby. When
fully executed and delivered, this Agreement and each of the other agreements,
documents and instruments to be executed and delivered by MCP and PQC pursuant
hereto will constitute valid and binding agreements of MCP and PQC, enforceable
against them in accordance with their terms.
3.5 No Violation. Neither the execution and delivery of this Agreement
-------------
or the other agreements, documents and instruments to be executed and delivered
by MCP and PQC pursuant hereto nor the consummation by MCP and PQC of the
transactions contemplated hereby or thereby (a) will violate any provision of
the Certificate of Incorporation or By-laws of PQC or the Articles of
Organization or By-laws of MCP, each as currently in effect, (b) will violate or
conflict with any applicable statute, law, ordinance, rule, regulation, order,
judgment or decree or (c) will violate any contract or commitment which
violation would have the effect of preventing PQC or MCP from performing its
obligations hereunder or preventing PQC or MCP or any of their respective
affiliates from consummating the transactions contemplated herein and in the
agreements and instruments to be executed and delivered by MCP and PQC and their
respective affiliates in connection therewith.
3.6 Consents; Filings. No registration or filing with, or consent,
------------------
approval, permit, authorization or action by, any third party (including,
without limitation, any federal, state, local, foreign or other governmental
agency, instrumentality, commission, authority, board or body or other person or
entity) is required to be made by MCP or PQC in connection with the execution
and delivery by MCP and PQC of this Agreement or the other agreements, documents
and instruments to be executed and delivered by MCP and PQC pursuant hereto or
the consummation by MCP and PQC of the transactions contemplated hereby or
thereby.
3.7 Capital Stock. All shares of Common Stock issued to the Stockholder
--------------
in connection with the transactions contemplated by this Agreement shall be duly
authorized, validly issued, fully paid and nonassessable and not subject to any
pre-emptive rights created by statute, PQC's Certificate of Incorporation or
By-laws, or any agreement to which PQC is a party or by which PQC is bound.
3.8 Brokers. Neither PQC nor MCP is obligated to pay, nor have PQC or
--------
MCP retained any broker or finder or other person who is entitled to, any
broker's or finder's fee
16
<PAGE>
or any other commission or financial advisory fee based on any agreement or
understanding made by PQC or MCP in connection with the transactions
contemplated hereby.
3.9 Fraud and Abuse. Neither MCP nor PQC has engaged in any activities
----------------
which are prohibited under U.S.C. ss. 1320a-7b, or the regulations promulgated
thereunder pursuant to such statutes, or related state or local statutes or
regulations, or which are prohibited by rules of professional conduct, including
but not limited to the following: (i) knowingly and willfully making or causing
to be made a false statement or representation of a material fact in any
application for any benefit or payment; (ii) knowingly and willfully making or
causing to be made any false statement or representation of a material fact for
use in determining rights to any benefit or payment; (iii) failure to disclose
knowledge by a claimant of the occurrence of any event affecting the initial or
continued right to any benefit or payment on its own behalf or on behalf of
another, with intent to fraudulently secure such benefit of payment; and (iv)
knowingly and willfully soliciting or receiving any remuneration (including any
kickback, bribe or rebate), directly or indirectly, overtly or covertly, in cash
or in kind or offering to pay or receive such remuneration (a) in return for
referring an individual to a person for the furnishing or arranging for the
furnishing of any item or service for which payment may be made in whole or in
part by Medicare or Medicaid, or (b) in return for purchasing, leasing, or
ordering or arranging for or recommending purchasing, leasing, or ordering any
good, facility or item for which payment may be made in whole or in part by
Medicare or Medicaid.
ARTICLE IV
COVENANTS
4.1 Reasonable Efforts to Close. Each of Company, the Stockholder, MCP
----------------------------
and PQC shall use its or their respective reasonable efforts to proceed to the
closing of the transactions contemplated hereby and to satisfy any of the
conditions precedent to the other Parties' obligations set forth in Articles V
and VI to the extent such conditions are within such Party's control.
4.2 Notices and Consents. The Company and the Stockholder shall use
---------------------
their respective best efforts to obtain, at their expense, all such waivers,
permits, consents, approvals or other authorizations from third parties and
Governmental Entities, and to effect all such registrations, filings and notices
with or to third parties and Governmental Entities, as may be required by or
with respect to the Company or the Stockholder in connection with the
transactions contemplated by this Agreement (including without limitation those
listed in Schedule 2.6.
4.3 Conduct of Business. Without the prior written consent of PQC
--------------------
(which consent shall not be unreasonably withheld), the Company shall not and
the Stockholder shall not permit the Company to:
(a) take any action to amend the Company's Articles of
Organization or By-laws or other organizational documents;
17
<PAGE>
(b) issue any stock, bonds or other corporate securities or grant
any option or issue any warrant to purchase or subscribe to any of such
securities or issue any securities convertible into such securities or authorize
the transfer of any of its outstanding capital stocks;
(c) split, combine or reclassify any shares of its capital stock;
declare, set aside or pay any dividend or other distribution (whether in cash,
stock or property or any combination thereof) in respect of its capital stock;
(d) incur any obligations or liabilities (absolute or contingent)
greater than one thousand dollars ($1,000) in the aggregate, except current
liabilities incurred and obligations under contracts entered into in the
Ordinary Course of Business;
(e) acquire, sell, lease, encumber or dispose of any assets or
property, corporation, partnership, association or other business, other than
purchases and sales of assets in the Ordinary Course of Business;
(f) discharge or satisfy any Security Interest or pay any
obligation or liability other than in the Ordinary Course of Business;
(g) mortgage or pledge any of its property or assets or subject any
such assets to any Security Interest;
(h) take any action or fail to take any action permitted by this
Agreement with the knowledge that such action or failure to take action would
result in (i) any of the representations and warranties of the Company and the
Stockholder set forth in this Agreement becoming untrue or (ii) any of the
conditions to the Merger set forth in Article V not being satisfied;
(i) merge or consolidate with or into any corporation or other
entity;
(j) make, accrue or become liable for any bonus, profit sharing or
incentive payment, except for accruals under existing plans, if any, or increase
the rate of compensation payable or to become payable by it to any of its
officers, directors or employees, other than increases in the Ordinary Course of
Business consistent with past practice;
(k) make any election or give any consent under the Code or the tax
statutes of any state or other jurisdiction or make any termination, revocation
or cancellation of any such election or any consent or compromise or settle any
claim for past or present tax due;
(l) waive any rights of material value;
(m) modify, amend, alter or terminate any of its executory
contracts of a material value or which are material in amount;
18
<PAGE>
(n) take or permit any act or omission constituting a breach
or default under any contract, indenture or agreement by which it or its
properties are bound;
(o) fail to use its reasonable efforts to (i) preserve the
possession and control of its assets and the Practice, (ii) keep in faithful
service its present officers and employees, (iii) preserve the goodwill of its
patients, suppliers, agents, brokers and others having business relations with
it, and (iv) keep and preserve its business existing on the date hereof until
after the Closing Date;
(p) fail to operate its business and maintain its books, accounts
and records in the customary manner and in the Ordinary Course of Business and
maintain in good repair its business premises, fixtures, machinery, furniture
and equipment;
(q) enter into any leases, contracts, agreements or understandings
which are required to be performed in whole or in material part after the
Closing Date;
(r) engage any new employee;
(s) materially alter the terms, status or funding condition of any
Employee Plan; or
(t) commit or agree to do any of the foregoing in the future.
4.4 Access to Management, Properties and Records. From the date of this
---------------------------------------------
Agreement until the Closing Date, the Company shall afford the officers,
attorneys, accountants and other authorized representatives of PQC free and full
access upon reasonable notice and during normal business hours to all management
personnel, offices, properties, books and records of the Company, and all
properties under the management of the Company and all records relating thereto,
so that PQC may have full opportunity to make such investigation as it shall
desire to make of the management, business, properties and affairs of the
Company and the properties under the management of the Company, and PQC shall be
permitted to make abstracts from, or copies of, all such books and records. The
Company shall furnish to PQC such financial and operating data and other
information as to the business of the Company as PQC shall reasonably request.
4.5 Taxes. The Company and the Stockholder will, on a timely basis,
------
file all Tax Returns for and pay any and all taxes which shall become due or
shall have accrued on account of the operation of the business of the Company on
or prior to the Closing Date.
4.6 Financial Information. Between the execution of this Agreement and
----------------------
the Closing Date, the Company shall provide PQC with such access as PQC shall
reasonably request to the financial and accounting records of the Company and
shall provide PQC with copies of all financial statements or other financial
data prepared by the Company.
4.7 Compliance with Laws. The Company and the Stockholder will comply
---------------------
in all material respects with all laws and regulations which are applicable to
them and the Practice
19
<PAGE>
or to the conduct of its practice and will perform and comply in all material
respects with all contracts, commitments and obligations by which it or each of
them is bound.
4.8 Exclusive Dealing. The Company and the Stockholder will not,
------------------
directly or indirectly, through any officer, director, agent or otherwise, (a)
solicit, initiate or encourage submission of proposals or offers from any person
relating to any affiliation transaction between the Company or the Stockholder
and any healthcare company or practice management company or any acquisition or
purchase of all or a material portion of the assets of the Company, or any
equity interest in the Company or any equity investment, merger, consolidation
or business combination with the Company, or (b) participate in any discussions
or negotiations regarding, or furnish to any other person, any non-public
information with respect to, or otherwise cooperate in any way with, or assist
or participate in, facilitate or encourage, any effort or attempt by any other
person to do or seek any of the foregoing except to inform such person of the
Company's obligations hereunder.
4.9 Notice of Breaches. The Company shall promptly deliver to PQC
-------------------
written notice of any event or development that would (a) render any statement,
representation or warranty of the Company in this Agreement (including the
Disclosure Schedule) inaccurate or incomplete in any material respect, or (b)
constitute or result in a breach by the Company of, or a failure by the Company
to comply with, any agreement or covenant in this Agreement applicable to such
party. PQC or MCP shall promptly deliver to the Company written notice of any
event or development that would (i) render any statement, representation or
warranty of PQC or MCP in this Agreement inaccurate or incomplete in any
material respect, or (ii) constitute or result in a breach by PQC or MCP of, or
a failure by PQC or MCP to comply with, any agreement or covenant in this
Agreement applicable to such Party. No such disclosure shall be deemed to avoid
or cure any such misrepresentation or breach.
4.10 Severance Obligations. The Company shall satisfy all severance
----------------------
obligations related to each person employed by the Company prior to or at the
Closing Date who is, or as a consequence of the transactions contemplated by
this Agreement will be, entitled to any severance or compensation from the
Company or the Stockholder.
4.11 Confidentiality. All information not previously disclosed to the
----------------
public or generally known to persons engaged in the respective businesses of the
Company or PQC which shall have been furnished by PQC or the Company to the
other Party in connection with the transactions contemplated hereby or as
provided pursuant to this Agreement shall not be disclosed to any person other
than their respective employees, directors, attorneys, accountants or financial
advisors or other than as expressly contemplated herein. In the event that the
transactions contemplated by this Agreement shall not be consummated, all such
information which shall be in writing shall upon request be returned to the
Party furnishing the same, including, to the extent reasonably practicable, all
copies or reproductions thereof which may have been prepared, and none of the
Parties, without the consent of PQC and the Company, shall at any time
thereafter disclose to third parties, or use, directly or indirectly, for its
own benefit, any such information, written or oral, about the business of the
other Party hereto.
20
<PAGE>
ARTICLE V
CONDITIONS TO MCP'S AND PQC'S OBLIGATIONS
The obligation of each of MCP and PQC to consummate the Merger is
subject to the satisfaction on the Closing Date of the following conditions
precedent, each of which may be waived in writing by MCP and PQC:
5.1 Approval of Merger. This Agreement and the Merger shall have been
-------------------
unanimously approved by the Board of Directors of the Company and the
Stockholder and the Stockholder shall not be entitled to exercise appraisal
rights.
5.2 Continued Truth of Representations and Warranties of The Company;
-----------------------------------------------------------------
Compliance with Covenants and Obligations; Disclosure Schedule. The
- ---------------------------------------------------------------
representations and warranties of the Company and the Stockholder shall be true
on and as of the Closing Date as though such representations and warranties were
made on and as of such date, except for any changes permitted by the terms
hereof or consented to in writing by PQC. The Company and the Stockholder shall
have performed and complied with all terms, conditions, covenants, obligations,
agreements and restrictions required by this Agreement to be performed or
complied with by it prior to or at the Closing Date. Neither PQC nor MCP shall,
acting in their sole discretion, object to any matter included on the Disclosure
Schedule to be delivered pursuant to Article II hereof; provided, however, in
the event that PQC or MCP objects to any matter included in the Disclosure
Schedules, the Company shall be entitled to terminate this Agreement.
5.3 No Proceedings or Litigation. No action by any Governmental Entity
-----------------------------
or other person shall have been instituted or threatened which questions the
validity or legality of the transactions contemplated hereby and which could
reasonably be expected to result in a Material Adverse Effect. There shall not
be any statute, rule or regulation that makes the Merger or the other
transactions contemplated hereby illegal or otherwise prohibited.
5.4 Material Changes; Due Diligence. Between the date of the Financial
--------------------------------
Statements and the Closing, there shall not have been any material adverse
change in the business, prospects, operations or conditions of the Company or
the Practice. MCP and PQC shall have completed to their satisfaction, both as to
scope and substance, their due diligence investigation of the Company and the
Practice.
5.5 Closing Deliveries. Simultaneously with the Closing, the Company
-------------------
and the Stockholder shall deliver or cause to be delivered to PQC the following:
(a) employment agreements (the "Employment Agreements") between MCP
and the Stockholder and any other physician employed by the Practice, which, in
the case of the Stockholder shall be in the form attached hereto as Schedule
--------
5.5(a);
- ------
(b) Instrument of Joinder to the Stockholders Agreement;
21
<PAGE>
(c) An assignment of the Lease, in form satisfactory to PQC with
respect to the premises at 2 Medical Center Drive, Suite 210, Springfield,
Massachusetts (the "Premises Lease");
(d) certificates of duly authorized officers of the Company, dated
the Closing Date, setting forth the resolutions of the Board of Directors and
Stockholder of the Company authorizing the execution and delivery by the Company
of this Agreement and the consummation of the transactions contemplated hereby,
and certifying that such resolutions were duly adopted and have not been
rescinded or amended;
(e) a report of a reputable lien search firm indicating that there
are no liens of record against any of the Company's assets (except for the liens
which are (i) acceptable to MCP and PQC in their sole discretion or (ii) arising
under equipment leases listed on Schedule 5.5(e));
----------------
(f) a release from any party with a mortgage or lien on any of the
assets of the Company;
(g) the consents of all parties necessary for the consummation of
the Merger and to consummate the other transactions contemplated by this
Agreement;
(h) a tax lien waiver from the Department of Revenue of the
Commonwealth of Massachusetts; and
(i) such other agreements, consents and documents as PQC shall
reasonably request in connection with (i) its due diligence investigation of the
Company, (ii) the affiliation of the Stockholder with MCP and PQC, (iii) the
transactions contemplated by this Agreement and the Employment Agreements.
5.6 Financing. PQC shall be entitled to, and shall have satisfied all
----------
conditions with respect to borrowing under, the Class B Common Stock and Warrant
Purchase Agreement, dated August 30, 1996, between PQC and affiliates of Bain
Capital, Inc.
ARTICLE VI
CONDITIONS TO OBLIGATIONS OF THE COMPANY
AND THE STOCKHOLDER
The obligations of Company and the Stockholder under this Agreement are
subject to the fulfillment, at the Closing Date, of the following conditions
precedent, each of which may be waived in writing in the sole discretion of
Company:
6.1 Continued Truth of Representations and Warranties of PQC;
---------------------------------------------------------
Compliance with Covenants and Obligations. The representations and warranties of
- ------------------------------------------
MCP and PQC shall be true on and as of the Closing Date as though such
representations and warranties were made on and as of such date, except for any
changes permitted by the terms hereof or consented to in writing by the Company.
MCP and PQC shall have performed and complied with all
22
<PAGE>
terms, conditions, covenants, obligations, agreements and restrictions required
by this Agreement to be performed or complied with by it prior to or at the
Closing Date.
6.2 No Proceedings or Litigation. No action by any governmental
-----------------------------
authority or other person shall have been instituted or threatened which
questions the validity or legality of the transactions contemplated hereby and
which could reasonably be expected to damage PQC materially if the transactions
contemplated hereby are consummated. There shall not be any statute, rule or
regulation that makes the Merger or the other transactions contemplated hereby
illegal or otherwise prohibited.
6.3 Offers of Employment. MCP shall have extended offers of
---------------------
employment to the persons listed on Schedule 2.27.
6.4 Deliveries by PQC. Simultaneously with the Closing, PQC shall
-----------------
deliver or cause to be delivered to the Stockholder:
(a) the Merger Consideration;
(b) certificates of duly authorized officers of MCP and PQC, dated
the Closing Date, setting forth the resolutions of the Board of Directors of MCP
and PQC authorizing the execution and delivery by MCP and PQC of this Agreement
and the consummation of the transactions contemplated hereby, and certifying
that such resolutions were duly adopted and have not been rescinded or amended;
and
(c) such other instruments, consents and documents as the
Stockholders shall reasonably request in connection with the transactions
contemplated by this Agreement.
6.5 Assumption of Browne-Martin Agreement. By virtue of the Merger, MCP
--------------------------------------
shall have assumed the employment agreement between the Company and Dr.
Browne-Martin, MCP agrees to renegotiate such agreement in good faith upon its
expiration on July 31, 1997.
6.6 Amendment of Vanderleeden Agreement. The Agreement between the
------------------------------------
Company and Dr. Marc Vanderleeden shall have been amended or superseded in a
manner acceptable to the Company, PQC and MCP.
6.7 Determination of Base Compensation Pool Amount. Dr. Barry
-----------------------------------------------
Izenstein and MCP shall have agreed upon a Base Compensation Pool Amount to be
included in the Employment Agreement to be entered into between Dr. Izenstein
and MCP at the Closing. Such Base Compensation Pool Amount shall have been based
on a budget for Responsibility Center J that is reasonably acceptable to Dr.
Izenstein and MPC.
23
<PAGE>
ARTICLE VII
INDEMNIFICATION
7.1 Indemnification.
----------------
(a) The Stockholder shall indemnify, defend, and hold harmless
PQC, MCP and their respective subsidiaries and affiliates and their directors,
officers, employees and agents or the successor of any of the forgoing
(collectively, "PQC Indemnified Parties"), and reimburse such PQC Indemnified
Party for, from and against all payments, demands, claims, suits, judgments,
liabilities, losses, costs, damages and expenses, including, without limitation,
interest, penalties and reasonable attorneys' fees, disbursements and expenses
(collectively, "Damages"), imposed on or incurred by a PQC Indemnified Party
which relate to or arise out of:
(i) breach of any representation and warranty of, or
covenant or agreements to be performed by, the Company or the Stockholder, in
each case contained in this Agreement or the Stockholders Agreement;
(ii) failure of the Stockholder to have good, valid and
marketable title to the issued and outstanding Shares held by the Stockholder,
free and clear of all liens, claims, pledges, options, adverse claims or charges
of any nature whatsoever;
(iii) any claim by a Stockholder or former stockholder of
the Company, or any other person, firm, corporation or entity, seeking to
assert, or based upon: (A) ownership or rights to ownership of any shares of
stock of the Company; (B) any rights of a stockholder, including any option,
preemptive rights or rights to notice or to vote; (C) any rights under the
Articles of Organization or By-laws of the Company; or (D) any claim that such
stockholder's shares were wrongfully repurchased by the Company;
(iv) any Tax liabilities of the Company or the
Stockholder;
(v) the conduct of the Practice prior to the Closing
Date;
(vi) any liability of the Company incurred prior to the
Closing Date; and
(vii) any liability incurred by PQC or MCP relating to
agreements or obligations of the Company or the Stockholder, whether written or
oral, that are not specifically identified on the Disclosure Schedule.
Notwithstanding the foregoing or any other term or condition contained herein or
in any other agreement or instrument referred to herein, the indemnification
obligations of the Stockholder under this Section 7.1 shall be limited, in the
aggregate, to the Merger Consideration paid to the Stockholder.
24
<PAGE>
(b) PQC shall indemnify and hold harmless the Stockholder and
his respective agents or the successors of any of the foregoing (collectively,
"Company Indemnified Parties" and together with the PQC Indemnified Parties (the
"Indemnified Parties")), and reimburse such Company Indemnified Parties for,
from, and against all Damages imposed on or incurred by such Company Indemnified
Persons which relate to or arise out of any breach of any representation or
warranty of, or covenant to be performed by, PQC or MCP, in each case contained
in this Agreement.
7.2 Method of Asserting Claims.
---------------------------
(a) An Indemnified Party shall give prompt written notice to
an indemnifying party (the "Indemnifying Party") of any payments, demands,
claims, suits, judgments, liabilities, losses, costs, damages or expenses (a
"Claim") in respect of which such Indemnifying Party has a duty to provide
indemnity to such Indemnified Party under this Article VII, except that any
delay or failure so to notify the Indemnifying Party only shall relieve the
Indemnifying Party of its obligations hereunder to the extent, if at all, that
it is prejudiced by reason of such delay or failure.
(b) If a Claim is brought or asserted by a third party (a
"Third-Party Claim"), the Indemnifying Party shall assume the defense thereof,
including the employment of counsel reasonably satisfactory to the Indemnified
Party and the payment of all expenses. The Indemnified Party shall have the
right to employ separate counsel in such Third-Party Claim and participate in
the defense thereof, but the fees and expenses of such counsel shall be at the
expense of the Indemnified Party. In the event that the Indemnifying Party,
within twenty (20) days after written notice of any Third-Party Claim, fails to
assume the defense thereof, or in the event the Indemnifying Party fails to
demonstrate, to the reasonable satisfaction of the Indemnified Party, that it
has sufficient assets to meet its indemnification obligations hereunder, the
Indemnified Party shall have the right to undertake the defense, compromise or
settlement of such Third-Party Claim for the account of the Indemnifying Party.
Anything in this Section 7.2(b) to the contrary notwithstanding, the
Indemnifying Party shall not, without the Indemnified Party's prior written
consent, settle or compromise any Third-Party Claim or consent to the entry of
any judgment with respect to any ThirdParty Claim which would have any adverse
effect on the Indemnified Party, except as provided immediately below. The
Indemnifying Party may, without the Indemnified Party's prior written consent,
settle or compromise any such Third-Party Claim or consent to entry of any
judgment with respect to any Third-Party Claim which requires solely money
damages paid by the Indemnifying Party and which includes as an unconditional
term thereof the release by the claimant or the plaintiff of the Indemnified
Party from all liability in respect of such Third-Party Claim.
(c) With respect to any Claim other than a Third Party Claim,
the Indemnifying Party shall have thirty (30) days from receipt of written
notice from the Indemnified Party of such Claim within which to respond thereto.
If the Indemnifying Party does not respond within such thirty (30) day period,
the Indemnifying Party shall be deemed to have accepted responsibility to make
payment and shall have no further right to contest the validity of such Claim.
If the Indemnifying Party notifies the Indemnified Party within such thirty (30)
day period that it rejects such Claim in whole or in part, the Indemnified
25
<PAGE>
Party shall be free to pursue such remedies as may be available to the
Indemnified Party under applicable law.
7.3 Survival. All representations and warranties made by the Parties
---------
herein or in any instrument or document furnished in connection herewith shall
survive the Closing and any investigation at any time made by or on behalf of
the Parties hereto. All such representations and warranties and the
Stockholder's obligations pursuant to Section 7.1(a)(i) and PQC's obligations
pursuant to Section 7.1(b) shall expire on the third anniversary of the Closing
Date, except for claims, if any, asserted in writing prior to such third
anniversary, which shall survive until finally resolved and satisfied in full.
The obligation of the Stockholder pursuant to Section 7.1(a)(ii), (iii), (iv),
(v), (vi), (vii) and (viii) shall survive until six (6) months after the
expiration of the applicable statute of limitations with respect thereto. All
claims and actions for indemnity pursuant to this Article VII shall be asserted
or maintained in writing by a party hereto on or prior to the expiration of such
periods.
7.4 Confidentiality. The Parties hereto agree to use reasonable efforts
----------------
to preserve in full the confidentiality of all confidential business records and
the attorney-client and work-product privileges. In connection therewith, each
Party hereto agrees that:
(a) it will use all reasonable efforts, in any action, suit or
proceeding in which it has assumed or participated in the defense, to avoid
production of confidential business records; and
(b) all communications between any Party hereto and counsel
responsible for, or participating in, the defense of any action, suit or
proceeding shall, to the extent possible, be made so as to preserve any
applicable attorney-client or work-product privilege.
7.5 Remedies Cumulative. Except as otherwise provided herein, the
--------------------
remedies provided herein shall be cumulative and shall not preclude the
assertion by any Party hereto of any other rights or the seeking of any other
remedies against any other Party hereto.
7.6 Set-off and Recoupment. Any amount or amounts due from any
-----------------------
Indemnifying Party to PQC under this Article VII may be paid to PQC, at PQC's
option, by set-off or recoupment against any amounts due to the Indemnifying
Party pursuant to this Agreement or pursuant to any agreement between the
Indemnifying Party and PQC, MCP or any of their respective affiliates. Any such
set-off will be without prejudice to PQC's right to pursue any other remedies at
law or in equity available to it.
ARTICLE VIII
TERMINATION
8.1 Optional Termination. This Agreement may be terminated and
---------------------
the transaction contemplated herein abandoned at any time prior to the Closing
as follows:
(a) by the mutual consent of the Company, MCP and PQC;
26
<PAGE>
(b) by the Company, upon a material breach of any representation,
warranty, covenant or agreement on the part of PQC or MCP set forth in this
Agreement, or if any representation or warranty of PQC or MCP has become
materially untrue, in either case such that the conditions set forth in Article
V would be incapable of being satisfied by January 31, 1997 provided, that in
any case, a willful breach will be deemed to cause such conditions to be
incapable of being satisfied for purposes of this paragraph (b);
(c) by PQC upon a material breach of any representation, warranty,
covenant or agreement on the part of the Company or the Stockholder set forth in
this Agreement, or if any representation or warranty of the Company has become
materially untrue, in either case such that the conditions set forth in Article
V would be incapable of being satisfied by January 31, 1997; provided, that (i)
in any case, a willful breach will be deemed to cause such conditions to be
incapable of being satisfied for purposes of this paragraph (c). Any breach on
the part of the Company or the Stockholder of the representations and warranties
contained in Article II or the covenants contained in Article IV, which permits
termination of this Agreement shall permit PQC to immediately terminate any
other agreement between the Company or the Stockholder and PQC or MCP; or
(d) by either Party if the Closing shall not have occurred by
January 31, 1997, or such other date agreed to by the Parties.
8.2 Effect of Termination. In the event this Agreement is terminated as
----------------------
provided above, (a) each of PQC and the Company shall, upon the other Party's
request, deliver to the other Parties all documents previously delivered (and
copies thereof in its possession) concerning one another and the transactions
contemplated hereby, and (b) none of the Parties nor any of their respective
Stockholder, directors, officers or agents shall have any liability to the other
Parties, except for any deliberate breach or deliberate omission resulting in a
material breach of any of the provisions of this Agreement. In such case, the
breaching Party shall be liable only for the expenses and costs of the
non-breaching Party, and in no event shall either Party be liable for
anticipated profits or consequential damages. After termination each Party shall
keep confidential all information provided by the others pursuant to this
Agreement which is not in the public domain, shall exercise the same degree of
care in handling such information as it would exercise with similar information
of its own, and shall return any such information upon the other Party's
request.
ARTICLE IX
MISCELLANEOUS
9.1 Press Releases and Announcements. No Party shall issue any press
---------------------------------
release or public disclosure relating to the subject matter of this Agreement
without the prior written approval of the other Parties; provided, however, that
any Party may make any public disclosure it believes in good faith is required
by law or regulation (in which case the disclosing Party shall advise the other
Parties and provide them with a copy of the proposed disclosure prior to making
the disclosure).
27
<PAGE>
9.2 No Third Party Beneficiaries. This Agreement shall not confer any
-----------------------------
rights or remedies upon any person other than the Parties and their respective
successors and permitted assigns; provided, however, that the provisions in
Article I concerning payment of the Merger Consideration are intended for the
benefit of the Stockholder.
9.3 Entire Agreement. This Agreement (including the documents referred
-----------------
to herein) constitutes the entire agreement among the Parties and supersedes any
prior understandings, agreements, or representations by or among the Parties,
written or oral, with respect to the subject matter hereof.
9.4 Succession and Assignment. This Agreement shall be binding upon and
--------------------------
inure to the benefit of the Parties named herein and their respective successors
and permitted assigns. No Party may assign either this Agreement or any of its
rights, interests, or obligations hereunder without the prior written approval
of the other Parties.
9.5 Counterparts. This Agreement may be executed in two (2) or more
-------------
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
9.6 Headings. The section headings contained in this Agreement are
---------
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
9.7 Notices. All notices, requests, demands, claims, and other
--------
communications hereunder shall be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly delivered two (2)
business days after it is sent by registered or certified mail, return receipt
requested, postage prepaid, or one (1) business day after it is sent via a
reputable nationwide overnight courier service, in each case to the intended
recipient as set forth below:
If to the Company or the Stockholder:
-------------------------------------
To the address set forth on the signature page below with a
copy to:
Michael Williams
Hogan & Hartson
555 Thirteenth Street, N.W.
Washington, D.C. 20004-1109
If to PQC or MCP:
-----------------
Physicians Quality Care, Inc.
950 Winter Street, Suite 2410
Waltham, MA 02154
Attention: Jerilyn Asher
28
<PAGE>
Any Party may give any notice, request, demand, claim, or other communication
hereunder using any other means (including personal delivery, expedited courier,
messenger service, telecopy, telex, ordinary mail, or electronic mail), but no
such notice, request, demand, claim, or other communication shall be deemed to
have been duly given unless and until it actually is received by the Party for
whom it is intended. Any Party may change the address to which notices,
requests, demands, claims, and other communications hereunder are to be
delivered by giving the other Parties notice in the manner herein set forth.
9.8 Governing Law. This Agreement shall be governed by and
--------------
construed in accordance with the internal laws (and not the law of conflicts)
of the Commonwealth of Massachusetts.
9.9 Amendments and Waivers. The Parties may mutually amend any
-----------------------
provision of this Agreement at any time prior to the Effective Time. No
amendment of any provision of this Agreement shall be valid unless the same
shall be in writing and signed by all of the Parties. No waiver by any Party of
any default, misrepresentation, or breach of warranty or covenant hereunder,
whether intentional or not, shall be deemed to extend to any prior or subsequent
default, misrepresentation, or breach of warranty or covenant hereunder or
affect in any way any rights arising by virtue of any prior or subsequent such
occurrence.
9.10 Severability. If any term, provision, covenant or restriction of
-------------
this Agreement is held by a court of competent jurisdiction to be invalid, void
or unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated.
9.11 Expenses. Except as otherwise expressly provided herein (including
---------
Section 4.14), each Party to this Agreement shall pay its own costs and expenses
in connection with the transactions contemplated hereby.
9.12 Further Assurances. From time to time, at the request of any Party
-------------------
hereto and without further consideration, the other Parties will execute and
deliver to such requesting Party such documents and take such other action (but
without incurring any material financial obligation) as such requesting Party
may reasonably request in order to consummate more effectively the transactions
contemplated hereby.
9.13 Specific Performance. Each of the Parties acknowledges and agrees
---------------------
that one (1) or more of the other Parties would be damaged irreparably in the
event any of the provisions of this Agreement are not performed in accordance
with their specific terms or otherwise are breached. Accordingly, each of the
Parties agrees that the other Parties shall be entitled to an injunction or
injunctions to prevent breaches of the provisions of this Agreement and to
enforce specifically this Agreement and the terms and provisions hereof in any
action instituted in any court of the United States or any state thereof having
jurisdiction over the Parties and the matter, in addition to any other remedy to
which it may be entitled, at law or in equity.
9.14 Construction. The language used in this Agreement shall be
-------------
deemed to be the language chosen by the Parties hereto to express their mutual
intent, and no rule of strict
29
<PAGE>
construction shall be applied against any Party. Any reference to any federal,
state, local, or foreign statute or law shall be deemed also to refer to all
rules and regulations promulgated thereunder, unless the context requires
otherwise.
9.15 Incorporation of Exhibits and Schedules. The Exhibits and
----------------------------------------
Schedules identified in this Agreement are incorporated herein by reference
and made a part hereof.
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as
of the date first above written.
PHYSICIANS QUALITY CARE, INC.
By:
--------------------------------
Title:
-----------------------------
[ ]
----------------------------
----------------------------
MEDICAL CARE PARTNERS, P.C.
----------------------------
30
<PAGE>
FORM OF ASSET PURCHASE AGREEMENT
--------------------------------
THIS AGREEMENT is made and entered into this 9th day of August, 1996, by
and between (the "Seller"), and Physicians Quality Care,
Inc., a Delaware corporation with principal offices at 950 Winter Street,
Waltham, MA 02154 ("PQC") and Medical Care Partners, P.C., a Massachusetts
professional corporation with principal offices at 950 Winter Street, Waltham,
MA 02154 ("MCP"). MCP, PQC and the Seller are sometimes referred to herein as
a "Party" or collectively as the "Parties".
Recitals
--------
Seller owns and operates a medical practice (the "Practice") and certain
assets utilized in connection therewith, including accounts receivable,
inventory, equipment and other assets.
In connection with the acquisition and the affiliation transactions
contemplated hereby, the Seller is becoming an employee of MCP with other
physicians.
Now therefore, in consideration of the respective representations,
warranties, covenants, agreements and conditions hereinafter set forth, and
intending to be legally bound hereby, the parties hereto agree as follows:
ARTICLE I
PURCHASE AND SALE OF ASSETS
1.01 Assets to be Purchased from Seller. (a) Simultaneously with the
----------------------------------
closing of the transactions contemplated hereby (the "Closing"), Seller is
selling, conveying, assigning, transferring and delivering to MCP all of
Seller's right, title and interest in and to all of the assets owned by Seller
(tangible and intangible) and used in the Practice (the "Assets"), including,
without limitation, the assets described below, other than Excluded Assets as
provided in Section 1.01(b):
(i) all inventory (the "Inventory") of Seller, wherever located,
including, without limitation, medical supplies, office supplies, maintenance
supplies, pharmaceuticals and similar items of Seller that are used in the
Practice;
(ii) all deposits and prepaid expenses related to the Practice;
(iii) all outstanding purchase orders (the "Purchase Orders");
(iv) all fixtures, leasehold improvements, furnishings, office
(including all computers) and medical equipment and appliances owned by Seller
and used in the Practice and all service agreements, license agreements and
warranties relating thereto;
(v) all rights of Seller under contracts, agreements, leases,
licenses and other instruments set forth on Schedule 1.01(a) hereto;
----------------
(vi) (a) all records and lists of Seller pertaining to the Assets;
(b) all records and lists pertaining to the Practice, patients, suppliers or
personnel of the Practice; (c) all
<PAGE>
records, history and analysis relating to purchasing, selling, advertising and
promotional activities relating to the Practice, in all forms in which such
information is recorded;
(vii) all intangible property rights relating to the Practice; and
(viii) all other assets, properties, claims, rights and interests of
Seller relating to the Practice that exist on the date of Closing, of every kind
and nature, whether tangible or intangible, real, personal or mixed.
(b) Notwithstanding Section 1.01(a), the Assets shall not include the
following ("Excluded Assets"):
(i) accounts and notes receivable of the Seller arising prior to
the Closing Date (as defined below);
(ii) all cash and cash equivalents held by Seller;
(iii) all licenses and permits of the Seller, to the extent not
transferable;
(iv) all claims, causes of action, chosen in action, rights of
recovery and rights of set-off of any kind against any person or entity arising
out of or relating to the Assets to the extent related to the Excluded
Liabilities;
(v) all managed care contracts listed on Schedule 1.01(b) that
---------------
are not assignable by Seller;
(vi) the Seller's Medicare and Medicaid participation agreements;
(vii) all personal property, furniture, artwork, and similar items
owned by the Seller and not used in the Practice;
(viii) any other asset of the Seller that is not related to or used
by the Seller in the Practice;
(ix) Seller's insurance policies relating to coverage periods
prior to the Closing, including any tail coverage;
(x) the consideration paid by PQC and MCP hereunder and under any
related agreements or instruments; and
(xi) Seller's financial statements, financial records, tax returns
and related records and all other records (other than the records referred to in
1.01(a)(vi)) that are necessary for the Seller's collection of the accounts and
notes receivables referenced to in 1.01(b)(i).
1.02 (a) Assumption of Liabilities. Upon the terms and subject to the
-------------------------
conditions contained herein, at the Closing, MCP shall assume (the "Assumed
Liabilities") all obligations
-2-
<PAGE>
and liabilities accruing, arising out of, or relating to events or occurrences
happening after the Closing Date under (i) the equipment leases described on
Schedule 1.01(a), but not including any obligation or liability for any breach
- ----------------
of such equipment leases occurring on or prior to the Closing Date; and (ii) the
contracts described on Schedule 1.01(a), but not including any obligation or
----------------
liability for any breach of such contract occurring on or prior to the Closing
Date. MCP shall be deemed to have assumed and shall assume all liabilities
which may be incurred by reason of any breach of or default occurring after the
Closing Date under any leases, contracts, commitments, or obligations assumed by
MCP hereunder.
(b) Excluded Liabilities. Notwithstanding any other provisions of this
--------------------
Agreement, except for the Assumed Liabilities expressly specified in Section
1.02(a), neither PQC nor MCP shall assume, or otherwise be responsible for, any
liabilities or obligations of Seller, whether actual or contingent, matured or
unmatured, liquidated or unliquidated, or known or unknown, whether arising out
of occurrences prior to, at or after the date hereof ("Excluded Liabilities"),
which Excluded Liabilities include, without limitation:
(i) any liability or obligation to or in respect of any employees
or former employees of Seller including without limitations (I) any employment
agreement, whether or not written, (II) any liability under any Employee Plan
(as defined in Section 2.19) at any time maintained, contributed to or required
to be contributed to, by or with respect to Seller or under which Seller may
incur liability, and (III) any claim of an unfair labor practice, or any claim
under any state unemployment compensation or worker's compensation law or
regulation or under any federal or state employment discrimination law or
regulation, which shall have been asserted on or prior to the Closing Date or is
based on acts or omissions which occurred on or prior to the Closing Date;
(ii) any liability or obligation of Seller in respect of any tax
except for any personal property, use, or similar taxes imposed in connection
with the Assets and attributable to any period after the Closing Date; and
(iii) any liability arising from any injury to or death of any
person or damage to or destruction of any property, whether based on negligence,
malpractice, strict liability, enterprise liability or any other legal or
equitable theory arising from services performed by or on behalf of Seller or
any other person or entity on or prior to the Closing Date.
1.03 Deliveries by Seller. Simultaneously with the Closing, Seller shall
--------------------
deliver or cause to be delivered to MCP and PQC the following:
(a) a Bill of Sale in the form of Schedule 1.03(a) hereto;
----------------
(b) the employment agreement (the "Employment Agreement") between
MCP and the Seller, in the form attached hereto as Schedule 1.03(b);
---------------
(c) an opinion of Hogan & Hartson LLP, counsel to Seller, in form
and substance satisfactory to counsel for MCP and PQC;
-3-
<PAGE>
(d) The Lease in form satisfactory to PQC with respect to the
premises at 22 Ridgewood Terrace, Springfield, Massachusetts ("Premises Lease");
(e) a report of a reputable lien search firm indicating that
there are no liens of record against any of the Assets (except for the liens
arising under equipment leases listed on Schedule 1.01(a);
----------------
(f) a release from any party with a mortgage or lien on any of
the Assets;
(g) the consents of all parties necessary to enable MCP to
acquire the Assets and assume the Assumed Liabilities and to consummate the
other transactions contemplated by this Agreement including consents of third-
party payors and governmental authorities (including, but not limited to, all
consents listed on Schedule 2.03) necessary (i) to assign to MCP all third-party
-------- ----
payment agreements listed on Schedule 1.01(a) and (ii) otherwise to consummate
-------- ------
the transactions contemplated by this Agreement;
(h) a tax lien waiver from the Department of Revenue of the
Commonwealth of Massachusetts;
(i) such instruments of conveyance, assignment and transfer, in
form and substance reasonably satisfactory to PQC and MCP, as shall be
appropriate to convey, transfer and assign to and be vested in, MCP good, clean,
record and marketable title to the Assets; and
(j) such other agreements, consents and documents as PQC shall
reasonably request in connection with (i) its due diligence investigation of the
Seller, (ii) the affiliation of the Seller with MCP and PQC, and (iii) the
transactions contemplated by this Agreement, the affiliation agreement among
MCP, PQC and Seller, and the Employment Agreement.
1.04 Deliveries by MCP. Simultaneously with the Closing, MCP shall
-----------------
deliver or cause to be delivered to Seller the following:
(a) the Purchase Price by check. The "Purchase Price" shall be an
amount equal to the value assigned to the Assets based upon the report (the
"Report") prepared by Coopers & Lybrand dated as of June 30, 1995, such amount
being $ .
(b) an Instrument of Assumption of Liabilities, with respect to
the Assumed Liabilities in form reasonably satisfactory to PQC, MCP and Seller;
(c) certificates of duly authorized officers of MCP and PQC,
dated the Closing Date, setting forth the resolutions of the Board of Directors
of MCP and PQC authorizing the execution and delivery by MCP and PQC of this
Agreement and the consummation of the transactions contemplated hereby, and
certifying that such resolutions were duly adopted and have not been rescinded
or amended;
-4-
<PAGE>
(d) an opinion of Hale and Dorr, counsel to PQC, in form and
substance reasonably satisfactory to counsel to the Company; and
(e) such other instruments, consents and documents as the Seller
shall reasonably request in connection with (i) its due diligence investigation
of MCP and PQC and (ii) the transactions contemplated by this Agreement, the
affiliation agreement and the Employment Agreement.
1..05 The Closing. The Closing shall take place at the offices of Hale
-----------
and Dorr in Boston, Massachusetts 02109, commencing at 9:00 a.m. local time on
the date on which the Financing contemplated by Section 6.09 of this Agreement
is completed, or, if all of the conditions to the obligations of the Parties to
consummate the transactions contemplated hereby have not been satisfied or
waived by such date, on such mutually agreeable later date as soon as
practicable after the satisfaction or waiver of all conditions to the
obligations of the Parties to consummate the transactions contemplated hereby
(the "Closing Date").
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF SELLER
Except as set forth in the Schedules attached hereto (which shall identify
exceptions by specific section reference), as of the date hereof and as of the
Closing Date, Seller, subject to the limitations contained in Section 8.02,
represents and warrants to PQC and MCP as follows:
2.01 Valid and Binding Agreement. Seller has the necessary power and
---------------------------
authority to enter into this Agreement and the other agreements, documents and
instruments to be executed and delivered by Seller pursuant hereto, and to carry
out the transactions contemplated hereby and thereby. Assuming due
authorization, execution and delivery thereof by PQC and MCP, this Agreement and
each of the other agreements, documents and instruments to be executed and
delivered by Seller pursuant hereto will constitute valid and binding agreements
of Seller, enforceable against Seller in accordance with their terms.
2.02 No Violation. Neither the execution and delivery of this Agreement
------------
or the other agreements, documents and instruments to be executed and delivered
by Seller pursuant hereto nor the consummation by Seller of the transactions
contemplated hereby or thereby (a) subject to obtaining the required consents
and approvals described in Schedule 2.03, will violate or conflict with any
-------------
applicable statute, law, ordinance, rule, regulation, order, judgment or decree
or (b) subject to obtaining the required consents and approvals described in
Schedule 2.03, will violate or conflict with or constitute a default (or an
- -------------
event which, with notice or lapse of time, or both, would constitute a default)
under, or will result in the termi nation of, or accelerate the performance
required by, or result in the creation of any lien, se curity interest, charge
or encumbrance upon any of the Assets under, any contract, commitment,
understanding, arrangement, agreement or restriction of any kind by which the
Assets are bound or affected, to which the Assets are subject, or to which
Seller is a party, except for any such violation, conflict, or default that
would not have a Material Adverse Effect. The term "Material Adverse Effect" as
used in this Agreement shall mean any change
-5-
<PAGE>
or effect or any prospective change or effect that, individually or when taken
together with other changes or effects, is or is reasonably likely to be
materially adverse to any of the Practice, the Assets, the financial
arrangements contemplated by the Employment and Affiliation Agreements, the
financial condition and results of operation of MCP or PQC, the value to PQC or
MCP of their affiliation with the Seller or any Party's ability to consummate
the transactions contemplated herein.
2.03 Consents; Filings. Except as set forth in Schedule 2.03 hereto, no
----------------- -------------
registration or filing with, or consent, approval, permit, authorization or
action by, any third-party (including, without limitation, any federal, state,
local, foreign or other governmental agency, instrumentality, commission,
authority, board or body or other person or entity ("Government Entity")) is
required in connection with the execution and delivery by Seller of this
Agreement or the other agreements, documents and instruments to be executed and
delivered by Seller pursuant hereto or the consummation by Seller of the
transactions contemplated hereby or thereby.
2.04 Financial Statements. Seller has delivered to PQC balance sheets and
--------------------
statements of income with respect to the Practice for and as at the end of the
Practice's three most recent fiscal years (the "Financial Statements"), and such
balance sheets and statements of income are true, complete and accurate and
fairly present the financial condition and results of operations for and as at
the end of the periods therein referred to on a stand-alone basis.
2.05 No Material Adverse Change. No event involving a Material Adverse
--------------------------
Effect has occurred since December 31, 1995.
2.06 Compliance with Law. The Practice has been conducted in substantial
-------------------
compliance with all applicable laws, regulations and other requirements of all
national governmental authorities, and of all states, municipalities and other
political subdivisions and agencies thereof, having jurisdiction over Seller,
including without limitation, all such laws, regulations and requirements
relating to antitrust, consumer protection, employee benefit, equal opportunity,
health, occupational safety, pension, pollution or environmental protection
matters except for such noncompliance as would not have a Material Adverse
Effect. Seller has not received any notification of any asserted present or
past failure to comply with such laws, rules or regulations.
2.07 Tax Matters. Seller has filed all Tax Returns relating to the
-----------
Practice which are required to be filed prior to the date hereof or the Closing
Date and has paid all Taxes for all periods covered by such returns. Seller is
current in the payment of all Taxes relating to the Practice. No deficiencies
have been asserted or assessed as a result of any audit by the Internal Revenue
Service or any state or local taxing authority which has not been satisfied in
full and no such deficiency or audit has been proposed or threatened. Except as
described in Schedule 2.07, there are no liens for Taxes (other than for current
-------------
Taxes not yet due and payable) on the Assets. None of the Assets is property
that is required to be treated as being owned by any other person pursuant to
the safe harbor lease provisions of former (S)168(f)(8) of the Internal Revenue
Code of 1986, as amended (the "Code"). None of the Assets is "tax exempt use
property" within the meaning of (S)168(h) of the Code. None of the Assets
directly
-6-
<PAGE>
or indirectly secures any debt the interest on which is tax-exempt under Section
103(a) of the Code. The Seller is not a person other than a United States
person within the meaning of the Code. The transaction contemplated herein is
not subject to tax withholding under (S)3406 of the Code, under Subchapter A of
chapter 3 of the Code, or of any other provision of law. For purposes of this
Agreement, "Taxes" means all taxes, charges, fees, levies or other similar
assessments or liabilities, including without limitation income, gross receipts,
ad valorem, premium, value-added, excise, real property, personal property,
sales, use, transfer, withholding, employment, payroll and franchise taxes
imposed by the United States of America or any state or local government, or any
agency thereof, or other political subdivision of the United States or any such
government, and any interest, fines, penalties, assessments or additions to tax
resulting from, attributable to or incurred in connection with any tax or any
contest or dispute thereof. For purposes of this Agreement, "Tax Returns" means
all reports, returns, declarations, statements or other information required to
be supplied to a taxing authority in connection with Taxes.
2.08 Good Title. Except as set forth on Schedule 2.08 Seller has complete
---------- -------------
and unrestricted power and the unqualified right to sell, convey, assign,
transfer and deliver to MCP, and upon payment of the Purchase Price, MCP will
acquire, good, valid and marketable title to the Assets, free and clear of title
defects or objections, liens, claims, charges, security interests or other
encumbrances (collectively "Encumbrances") of any nature whatsoever, except for
any encumbrances relating to the equipment leases assumed by MCP pursuant to
Section 1.01(a). The Bill of Sale provided for in Section 1.03 constitutes the
valid and binding obligation of Seller and will effectively vest in MCP good,
valid and marketable title to all of the Assets.
2.09 No Undisclosed Liabilities. Seller has no liabilities or obligations
--------------------------
of any nature relating to the Practice (whether absolute, accrued, known or
unknown, contingent or otherwise and whether due or to become due) which are not
disclosed on the most recent Financial Statement or which have not been incurred
since the date of the Financial Statements in the ordinary course of business.
2.10 Leases. (a) Schedule 2.10 contains a complete and accurate listing of
------ -------------
all leases (the "Leases") pursuant to which Seller leases real or personal
property relating to the Practice, which listing sets forth a general
description of the leased property or items, the term, the annual rent, any and
all renewal options, and any requirements for the consent of third parties to
assignments thereof. All such Leases are valid, binding and enforceable in
accordance with their terms and are in full force and effect; no event of
default has occurred which (whether with or without notice, lapse of time or
both or the happening or occurrence of any other event) would constitute a
default thereunder on the part of Seller; and Seller has no knowledge of the
occurrence of any event of default which (whether with or without notice, lapse
of time or both or the happening or occurrence of any other event) would
constitute a default thereunder by any other party.
(b) Except for Leases listed on Schedule 2.10, there are no
-------------
leases, subleases, licenses, occupancy agreements, options, rights, concessions
or other agreements or arrangements, written or oral, granting to any person the
right to purchase, use or occupy any facility occupied by the Seller and related
to or used in the Practice.
-7-
<PAGE>
(c) With respect to each Lease, Seller has and will transfer to
MCP at the Closing an unencumbered interest in the leasehold interest covered
thereby. Seller enjoys peaceful and undisturbed possession of all the leased
real property related to and used in the Practice, and Seller has in all
material respects performed all the obligations required to be performed by it
through the date hereof.
2.11 Contracts and Commitments.
-------------------------
(a) Schedule 2.11 sets forth a complete and accurate list of all
-------------
contracts which are known to the Seller after reasonable investigation and which
were entered into by Seller and related to the Practice and still in effect as
of the date hereof (the "Contracts"), of the following categories:
(i) Managed care contracts and other contracts with third-party
payors;
(ii) Employment or similar contracts and severance agreements;
(iii) Contracts (other than Leases set forth on Schedule 2.10)
-------------
related to the Assets of the Practice which are not cancelable without liability
on thirty (30) calendar days (or less) notice;
(iv) Options with respect to any property, real or personal
related to the Practice, whether Seller is the grantor or grantee thereunder;
(v) Contracts involving expenditures or liabilities, actual or
potential, in excess of one thousand dollars ($1,000) or otherwise material to
the Practice or the Assets;
(vi) Promissory notes, loans, agreements, indentures, evidences of
indebtedness, letters of credit, guarantees, or other instruments relating to an
obligation to pay money, individually in excess of or in the aggregate in excess
of one thousand dollars ($1,000) and related to the Practice, whether Seller
shall be the borrower, lender or guarantor thereunder or whereby any Assets are
pledged;
(vii) Contracts containing covenants limiting the freedom of Seller
or employee of Seller, to engage in any line of business or compete with any
person; and
(viii) Any Contract with the United States, state or local
government or any agency or department thereof related to the Practice.
Seller has made available to PQC true, correct and complete copies within
Seller's possession of, and all records related to, all of the Contracts listed
on Schedule 2.11, including all amendments and supplements thereto.
-------------
(b) Absence of Breaches or Defaults. To the Seller's knowledge, all of
-------------------------------
theContracts are valid and in full force and effect. Seller has duly performed
all of its obligations under the Contracts, and no violation of, or default or
breach, under any Contracts by Seller or any other party has occurred except for
any violations, defaults, or breaches that would not have a
-8-
<PAGE>
Material Adverse Effect and neither Seller nor any other party, to the best of
Seller's knowledge after due inquiry, has repudiated any provisions thereof.
2.12 Permits. Seller has all licenses, permits, franchises, approvals,
-------
authorizations, consents or orders of, or filings with ("Permits") any
Governmental Entity or any other person, necessary or desirable to conduct the
Practice as now being conducted, except where the failure to obtain such permits
would not have a Material Adverse Effect. All Permits of Seller are valid and
in full force and effect and are listed on Schedule 2.12. No notice to,
-------------
declaration, filing or registration with, or Permit or consent from, any
governmental or regulatory body or authority, or any other person or entity, is
required to be made or obtained by Seller in connection with the execution,
delivery or performance of this Agreement and the consummation of the
transactions contemplated hereby, except as set forth on Schedule 2.12. The
-------------
Seller has not suffered any loss, revocation, suspension, expiration without
renewal or other failure to keep in full force and effect and good standing his
or her membership on the medical staff of the hospitals listed on Schedule 2.20,
-------- ----
or any material license, certification, accreditation, clinical privilege or
other right or authorization necessary for the unrestricted practice of medicine
by Seller or for the conduct of the Practice as previously conducted.
2.13 Books and Records. Seller has made and kept (and given PQC and MCP
-----------------
access to) books and records (including patient lists) and accounts, which, in
reasonable detail, accurately and fairly reflect the activities of the Practice.
2.14 Litigation. Except as set forth on Schedule 2.14, there is no, and
---------- -------------
during the past five (5) years there has not been any, action, order, writ,
injunction, judgment or decree outstanding or any claim, suit, litigation,
proceeding, labor dispute, arbitral action, governmental audit or investigation
(collectively, "Actions") pending or, to the best of Seller's knowledge,
threatened (a) against, related to or affecting (i) Seller, the Practice or the
Assets, or (ii) any employees of Seller as such, (b) seeking to delay, limit or
enjoin the transactions contemplated by this Agreement, (c) that involve the
risk of criminal liability (other than minor traffic violations), or (d) in
which Seller is a plaintiff. Seller is not in default with respect to or
subject to any judgment, order, writ, injunction or decree of any court or
governmental agency, and there are no unsatisfied judgments against Seller, the
Practice or the Assets.
2.15 Transactions with Certain Persons. Except as set forth on Schedule
--------------------------------- --------
2.15, neither Seller nor any employee of Seller nor any member of any such
- ----
person's immediate family is presently, or within the past two (2) years has
been a party to any transaction with Seller relating to the Practice with an
aggregate annual value of more than one thousand dollars ($1,000) to Seller or
the other parties thereto, including, without limitation, any contract,
agreement or other arrangement (a) providing for the furnishing of services by,
(b) providing for the rental of real or personal property from, or (c) otherwise
requiring payments to (other than for services as an employee of Seller) any
such person or any corporation, partnership, trust or other entity in which any
such person has an interest as a shareholder, officer, director, trustee or
partner, except that Seller provides certain medical services to employees and
family members as previously disclosed to PQC.
2.16 Insurance. Schedule 2.16 contains a complete and accurate list of
--------- -------------
all policies or binders of fire, liability, title, worker's compensation,
malpractice and other forms of insurance
-9-
<PAGE>
(showing as to each policy or binder the carrier, policy number, coverage
limits, expiration dates, annual premiums and a general description of the type
of coverage provided) maintained by Seller on the Assets, the Practice or its
employees. Such insurance provides, and during such period provided, coverage
to the extent and in the manner (a) customary for medical practices and (b) as
may be required by applicable law and by any and all Contracts known to the
Seller to which Seller is a party. Seller is not in default under any of such
policies or binders, and Seller has not failed to give any notice or to present
any claim under any such policy or binder in a due and timely fashion. No
insurer has advised Seller that it intends to reduce coverage, increase premiums
or fail to renew any existing policy or binder. There are no outstanding unpaid
claims under any such policies or binders. All policies and binders provide
sufficient coverage for the risks insured against, are in full force and effect
on the date hereof and shall be kept in full force and effect through the
Closing Date. If any insurance policy maintained by the Seller is carried on a
claims made basis, the Seller shall obtain a "tail policy" or "prior acts
policy" with the same limits and deductibles as the applicable policy listed on
Schedule 2.16 and naming MCP and PQC as co-insureds.
- -------------
2.17 Brokers. Seller is not obligated to pay, nor has Seller retained any
-------
broker or finder or other person who is entitled to, any broker's or finder's
fee or any other commission or financial advisory fee based on any agreement or
understanding made by Seller in connection with the transactions contemplated
hereby.
2.18 Benefit Plans.
-------------
(a) Except as set forth in Schedule 2.18, Seller is not a party
-------- ----
to any pension, retirement, profit sharing, savings, bonus, incentive, deferred
compensation, group health insurance or group life insurance plan or obligation,
or to any collective bargaining agreement or other contract, written or oral,
with any trade or labor union, employees' association or similar organization
(the "Employee Plans"). Seller does not have any obligations to provide to its
active employees or current retirees any post-retirement non-pension benefits.
There are no labor disputes pending or threatened by, or to the best knowledge
or Seller, any attempts at union organization of, any of the employees of
Seller.
(b) Seller (i) is and has been in compliance in all material
respects with all applicable laws respecting employment and employment
practices, terms and conditions of employment, and wages and hours (including,
but not limited to, the Worker Adjustment and Retraining Notification Act, 29
U.S.C. 2101 et seq. ("WARN"), or any similar state or local law), (ii) has made
-- ---
all contributions required to be made under any state unemployment or disability
laws or regulations and has accrued the amount of any such contribution required
for any period prior to the Closing Date which is not yet due and payable and
(iii) is not engaged in any unfair labor practice, and there are no arrears in
the payment of wages or taxes with respect to employees.
(c) Except as set forth in Schedule 2.18, no employee has any
-------------
claims pending against Seller (whether under any law, any employment agreement
or otherwise) on account of or for (i) overtime pay, other than overtime pay for
the current payroll period, (ii) wages or salary (excluding bonuses and amounts
accruing under pension and profit sharing plans) for any period other than the
current payroll period, (iii) vacation, time off or pay in lieu of
-10-
<PAGE>
vacation or time off, other than that earned in respect of the current fiscal
year, (iv) any violation of any statute, ordinance or regulation relating to
minimum wages or maximum hours of work or (v) the Employee Retirement Income
Security Act of 1974, as amended ("ERISA").
(d) Except as set forth on Exhibit 2.18 (which liabilities will
------------
be discharged on or prior to the Closing Date) Seller is not, and neither MCP
nor PQC will be, pursuant to any employment agreement, employee benefit plan or
other law, arrangement or understanding, obligated to pay or be liable for the
payment of any compensation (including accrued vacation), severance pay or other
benefit (including any disability benefit or payment or any unfunded liabilities
relating to pension benefits) by reason of the voluntary termination of
employment of any employee, the voluntary or involuntary termination prior to
the Closing Date of employment of any employee, or the consummation of the
transactions contemplated by this Agreement.
(e) With respect to all employee benefit plans (as defined in
ERISA) for which any employee is or was eligible to participate in, Seller or
any entity which, within the last five (5) years, has been under common control
or affiliated with Seller (an "ERISA Affiliate") within the meaning of Section
414(b), (c) or (m) of the Code, is in compliance in all material respects with
the requirements prescribed by any and all statutes, orders or governmental
rules or regulations currently in effect, including, but not limited to, ERISA
and the Code, applicable to such employee benefit plans and Seller is in
compliance in all material respects with its obligations under the terms of such
plans. None of the employee benefit plans are subject to Title IV of ERISA.
Neither Seller nor any ERISA Affiliate has ever been obligated to contribute to
any "multi-employer plan" as such term is defined in Section III(37) of ERISA.
No employee benefit plan of Seller or any ERISA Affiliate has engaged in any
prohibited transaction as such term is defined in Section 4975 of the Code or
Section 406 of ERISA.
2.19 Fraud and Abuse. Neither the Seller nor, to the knowledge of the
---------------
Seller, any other persons or entities providing professional services for the
Practice, have engaged in any activities which are prohibited under U.S.C.
(S)1320a-7b, or the regulations promulgated thereunder pursuant to such
statutes, or related state or local statutes or regulations, or which are
prohibited by rules of professional conduct, including but not limited to the
following: (i) knowingly and willfully making or causing to be made a false
statement or representation of a material fact in any application for any
benefit or payment; (ii) knowingly and willfully making or causing to be made
any false statement or representation of a material fact for use in determining
rights to any benefit or payment; (iii) failure to disclose knowledge by a
claimant of the occurrence of any event affecting the initial or continued right
to any benefit or payment on its own behalf or on behalf of another, with intent
to fraudulently secure such benefit of payment; and (iv) knowingly and willfully
soliciting or receiving any remuneration (including any kickback, bribe or
rebate), directly or indirectly, overtly or covertly, in cash or in kind or
offering to pay or receive such remuneration (a) in return for referring an
individual to a person for the furnishing or arranging for the furnishing of any
item or service for which payment may be made in whole or in part by Medicare or
Medicaid, or (b) in return for purchasing, leasing, or ordering or arranging for
or recommending purchasing, leasing, or
-11-
<PAGE>
ordering any good, facility, service, or item for which payment may be made in
whole or in part by Medicare or Medicaid.
2.20 Hospital Privileges. Schedule 2.20 hereto lists all of the hospitals
------------------- -------- ----
at which Seller is a member of the medical staff.
2.21 Employment Agreements. No event permitting termination under the
---------------------
Employment Agreement, if it were in effect at such time of such event, shall
have occurred at any time prior to the Closing Date. The Seller does not have
any current intention of terminating the Employment Agreement with MCP prior to
the termination of its initial three (3) year term.
2.22 Employees. Schedule 2.22 contains a list of all employees of the
--------- -------- ----
Practice along with the position and the annual rate of compensation of each
such person. To the knowledge of the Seller, no employee or group of employees
has any plans to terminate employment with the Practice or not to continue as an
employee of MCP after the Closing Date.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF EACH OF PQC AND MCP
Each of PQC and MCP hereby represents and warrants to Seller as of the date
hereof and as of the Closing Date as follows:
3.01 Organization. Each of PQC and MCP is a corporation duly organized,
------------
validly existing and in good standing under the laws of the jurisdictions of
their incorporation, and each of PQC and MCP has the power and authority to
carry on its business as presently being conducted. PQC has provided the Seller
with complete and accurate copies of the Articles of Incorporation and By-Laws
of PQC and MCP
3.02 Capitalization of Physicians Quality Care, Inc. and MCP The
----------------------------------------------------
authorized capital stock of PQC, consists of 15,308,333 shares of Common Stock,
par value $0.01 per share, of which 6,693,750 shares are outstanding, 1,666,667
shares of Series A Preferred Stock, of which 1,666,151 shares are outstanding.
Except for Physicians Quality Care of Massachusetts, Inc. and Physicians Quality
Care of Maryland, Inc., PQC is not the record owner of the equity securities of
any issuer. Prior to and on the Closing Date, MCP's authorized capital stock
will consist of 10,000 shares of Common Stock, $0.01 par value per share, of
which 1,000 shares will be outstanding. Except as set forth in Schedule 3.02
-------------
attached hereto, there are not, and on the Closing Date there will not be,
outstanding (i) any options, warrants or other rights to purchase from MCP or
PQC any capital stock of MCP or PQC; (ii) any securities convertible into or
exchangeable for shares of such stock; or (iii) any other commitments of any
kind for the issuance of additional shares of capital stock or options, warrants
or other securities of MCP or PQC.
3.03 Authorization. The Boards of Directors of PQC and MCP have duly
-------------
authorized the execution and delivery of this Agreement and the other
agreements, documents and instruments to be executed and delivered by PQC and
MCP pursuant hereto and the
-12-
<PAGE>
consummation by PQC and MCP of the transactions contemplated hereby and there-
by. No further corporate or other proceedings on the part of PQC and MCP are
necessary to authorize this Agreement or the other agreements, documents and
instruments to be executed and delivered by PQC and MCP pursuant hereto or the
transactions contemplated hereby or thereby.
3.04 Valid and Binding Agreement. Each of MCP and PQC has the necessary
---------------------------
power and authority to enter into this Agreement and the other agreements,
documents and instruments to be executed and delivered by PQC and MCP pursuant
hereto, and to carry out the transactions contemplated hereby and thereby. When
fully executed and delivered, this Agreement and each of the other agreements,
documents and instruments to be executed and delivered by PQC and MCP pursuant
hereto will constitute valid and binding agreements of PQC and MCP, enforceable
against MCP or PQC, as the case may be, in accordance with their terms.
3.05 No Violation. Neither the execution and delivery of this Agreement
------------
or the other agreements, documents and instruments to be executed and delivered
by PQC or MCP pursuant hereto nor the consummation by PQC or MCP of the
transactions contemplated hereby or thereby (a) will violate any provision of
the Certificate of Incorporation or By-laws of PQC or MCP, each as currently in
effect, (b) will violate or conflict with any applicable statute, law,
ordinance, rule, regulation, order, judgment or decree or (c) will violate any
contract or commitment which violation would have the effect of preventing PQC
or MCP from performing its obligations hereunder or preventing PQC, MCP or any
of their affiliates from consummating the transactions contemplated herein and
in the agreements and instruments to be executed and delivered by PQC or MCP and
its affiliates in connection therewith.
3.06 Consents; Filings. No registration or filing with, or consent,
-----------------
approval, permit, authorization or action by, any third party (including,
without limitation, any federal, state, local, foreign or other governmental
agency, instrumentality, commission, authority, board or body or other person or
entity) is required to be obtained by PQC or MCP in connection with the
execution and delivery by PQC or MCP of this Agreement or the other agreements,
docu ments and instruments to be executed and delivered by PQC or MCP pursuant
hereto or the consummation by PQC or MCP of the transactions contemplated hereby
or thereby.
3.07 Capital Stock. All shares of capital stock of PQC issued to the
-------------
Seller in connection with the transactions contemplated by this Agreement shall
be duly authorized, validly issued, fully paid and nonassessable and not subject
to any pre-emptive rights created by statute, PQC's Certificate of Incorporation
or By-Laws, or any agreement to which PQC is a party or by which PQC is bound.
3.08 Brokers. Neither PQC nor MCP is obligated to pay, nor has PQC or MCP
-------
retained any broker or finder or other person who is entitled to, any broker's
or finder's fee or any other commission or financial advisory fee based on any
agreement or understanding made by PQC or MCP in connection with the
transactions contemplated hereby.
-13-
<PAGE>
3.09 Fraud and Abuse. Neither MCP nor PQC has engaged in any activities
---------------
which are prohibited under U.S.C. (S)1320a-7b, or the regulations promulgated
thereunder pursuant to such statutes, or related state or local statutes or
regulations, or which are prohibited by rules of professional conduct, including
but not limited to the following: (i) knowingly and willfully making or causing
to be made a false statement or representation of a material fact in any
application for any benefit or payment; (ii) knowingly and willfully making or
causing to be made any false statement or representation of a material fact for
use in determining rights to any benefit or payment; (iii) failure to disclose
knowledge by a claimant of the occurrence of any event affecting the initial or
continued right to any benefit or payment on its own behalf or on behalf of
another, with intent to fraudulently secure such benefit of payment; and (iv)
knowingly and willfully soliciting or receiving any remuneration (including any
kickback, bribe or rebate), directly or indirectly, overtly or covertly, in cash
or in kind or offering to pay or receive such remuneration (a) in return for
referring an individual to a person for the furnishing or arranging for the
furnishing of any item or service for which payment may be made in whole or in
part by Medicare or Medicaid, or (b) in return for purchasing, leasing, or
ordering or arranging for or recommending purchasing, leasing, or ordering any
good, facility or item for which payment may be made in whole or in part by
Medicare or Medicaid.
ARTICLE IV
CERTAIN COVENANTS OF THE PARTIES
4.01 Purchase Price Allocation. The allocation of the Purchase Price,
-------------------------
which shall be utilized by the parties hereto in connection with the preparation
of their respective federal and state tax returns and the return required by
Section 1060 of the Code, shall be as set forth on Schedule 4.01, attached
-------------
hereto. Such allocation shall be subject to adjustment to the extent that the
Purchase Price is adjusted pursuant to the terms of this Agreement.
4.02 Reasonable Efforts to Close. Each of Seller, PQC and MCP shall use
---------------------------
its respective reasonable efforts to proceed to the closing of the purchase and
sale of the Assets and to satisfy any of the conditions precedent to the other
Party's obligations set forth in Article VI or Article VII, as the case may be,
to the extent such conditions are within such Party's control. Seller shall use
the Seller's reasonable efforts (i) to keep available the services of the
professional and non-professional members of the Practice's staff, (ii) to
maintain all existing relationships with and the goodwill of all managed care
payors, patients and others having business or professional relations with the
Seller related to the Practice, and (iii) to obtain prior to the Closing Date
all consents necessary to consummate the transaction contemplated by this
agreement or any other agreement referred to herein.
4.03 Confidentiality. All information not previously disclosed to the
---------------
public or generally known to persons engaged in the respective businesses of the
Seller, PQC or MCP which shall have been furnished by PQC, MCP or the Seller to
the other Parties in connection with the transactions contemplated hereby or as
provided pursuant to this Agreement shall not be disclosed to any person other
than their respective employees, directors, attorneys, accountants or financial
advisors or other than as expressly contemplated herein. In the event that the
transactions contemplated by this Agreement shall not be consummated, all such
information which shall be in writing shall upon request be returned to the
Party furnishing
-14-
<PAGE>
the same, including, to the extent reasonably practicable, all copies or
reproductions thereof which may have been prepared, and none of the Parties,
without the consent of PQC and the Seller, shall at any time thereafter disclose
to third parties, or use, directly or indirectly, for its own benefit, any such
information, written or oral, about the business of the other Parties hereto.
4.04 Public Announcements. The Parties agree that prior to the Closing
--------------------
Date, except as otherwise required by law, any and all public announcements or
other public communications concerning this Agreement and the purchase of the
Assets by MCP shall be subject to the approval of each of the Parties, which
approval shall not be unreasonably withheld.
4.05 Certain Transaction Costs. If the transactions contemplated by this
-------------------------
Agreement are completed, PQC agrees to reimburse the Seller for the Seller's
transaction costs, including fees of counsel and auditors, to the extent
provided in the memorandum, dated May 30, 1996, from Jerilyn Asher to Alphonse
Calvanese, M.D. and Paul Hetzel, M.D.
4.06 Continued Truth of Representations and Warranties. The Seller shall
-------------------------------------------------
not take any actions which would result in any of the representations or
warranties set forth in Article 2 hereof being untrue. Neither MCP nor PQC
shall take any actions which would result in any of the representations and
warranties set forth in Article 3 hereof being untrue.
4.07 Continuing Obligation to Inform. From time to time prior to the
-------------------------------
Closing, the Parties shall deliver or cause to be delivered to the other Parties
supplemental information concerning events subsequent to the date hereof which
would render any statement, representation or warranty in this Agreement or any
information contained in any Schedule inaccurate or incomplete in any material
respect at any time after the date hereof until the Closing Date.
ARTICLE V
PRE-CLOSING COVENANTS OF THE SELLER
From and after the date hereof and until the Closing Date or termination of
this Agreement in accordance with Article IX:
5.01 Conduct of Business. The Seller shall carry on the Practice
-------------------
diligently and substantially in the same manner as heretofore and shall not make
or institute any unusual or new methods of practice, management, accounting or
operation, except as expressly contemplated in this Agreement or any other
agreement referred to herein or as agreed to in writing by PQC. All of the
property of the Seller used in the Practice shall be used, operated, repaired
and maintained in a normal business manner consistent with past practice.
5.02 Absence of Material Changes. Without the prior written consent of
---------------------------
PQC (which consent shall not be unreasonably withheld), the Seller shall not:
-15-
<PAGE>
(a) Incur any obligations or liabilities (absolute or contingent)
related to the Practice greater than one thousand dollars ($1,000) in the
aggregate, except current liabilities incurred and obligations under contracts
entered into in the ordinary course of business;
(b) Mortgage, pledge, or subject to any lien, charge or any other
encumbrance any of the Assets;
(c) Sell, assign, or transfer any of the Assets;
(d) Cancel any debts or claims that are included in the Assets, except
in the ordinary course of business;
(e) Make, accrue or become liable for any bonus, profit sharing or
incentive payment, except for accruals under existing plans, if any, or increase
the rate of compensation payable or to become payable by the Seller to any
employee, other than increases in the ordinary course of business consistent
with past practice;
(f) Make any election or give any consent under the Code or the tax
statutes of any state or other jurisdiction or make any termination, revocation
or cancellation of any such election or any consent or compromise or settle any
claim for past or present tax due;
(g) Waive any rights of material value that are included in the
Assets;
(h) Modify, amend, alter or terminate any executory contracts of a
material value or which are material in amount and are included in the Assets;
(i) Take or permit any act or omission constituting a breach or
default under any contract, indenture or agreement included in the Assets by
which the Seller or the Seller's properties are bound;
(j) Fail to use the Seller's reasonable efforts to (i) preserve the
possession and control of the Assets and the Practice, (ii) keep in faithful
service the present employees of the Practice, (iii) preserve the goodwill of
the Practice's patients, suppliers, agents, brokers and others having business
relations with the Practice, and (iv) keep and preserve the Practice's business
existing on the date hereof until after the Closing Date;
(k) Fail to operate the Practice's business and maintain the
Practice's books, accounts and records in the customary manner and in the
ordinary or regular course of business and maintain in good repair the
Practice's business premises, fixtures, machinery, furniture and equipment;
(l) Enter into any leases, contracts, agreements or understandings
related to the Practice which is required to be performed in whole or in
material part after the Closing Date;
(m) Engage any new Practice employee;
-16-
<PAGE>
(n) Materially alter the terms, status or funding condition of any
Employee Plan; or
(o) Commit or agree to do any of the foregoing in the future.
5.03 Taxes. The Seller will, on a timely basis, file all tax returns for
-----
and pay any and all taxes which shall become due or shall have accrued (a) on
account of the operation of the Practice or the ownership of the Assets on or
prior to the Closing Date or (b) on account of the sale of the Assets (including
a pro-rata portion of all personal property and excise taxes payable with
respect to the Assets by the Seller).
5.04 Financial Information. Between the execution of this Agreement and
---------------------
the Closing Date, the Seller shall provide PQC and MCP with such access as PQC
and MCP shall reasonably request to the financial and accounting records of the
Seller related to the Practice and shall provide PQC with copies of all
financial statements or other financial data prepared by the Seller.
5.05 Compliance with Laws. The Seller will comply in all material
--------------------
respects with all laws and regulations which are applicable to the Seller and
the Practice, the Seller's ownership of the Assets or to the conduct of the
Practice and will perform and comply in all material respects with all
contracts, commitments and obligations related to the Practice by which the
Seller is bound.
5.06 Exclusive Dealing. The Seller will not, directly or indirectly,
-----------------
through any agent or otherwise, (a) solicit, initiate or encourage submission of
proposals or offers from any person relating to any affiliation transaction
between the Seller and any healthcare company or practice management company or
any acquisition or purchase of all or a material portion of the Assets, or any
equity investment, merger, consolidation or business combination with the
Practice, or (b) participate in any discussions or negotiations regarding, or
furnish to any other person, any non-public information with respect to, or
otherwise cooperate in any way with, or assist or participate in, facilitate or
encourage, any effort or attempt by any other person to do or seek any of the
foregoing except to inform such person of Seller's obligations hereunder.
5.07 Access to Management, Properties and Records. From the date of this
--------------------------------------------
Agreement until the Closing Date, the Seller shall afford the officers,
attorneys, accountants and other authorized representatives of PQC free and full
access upon reasonable notice and during normal business hours to all management
personnel, offices, properties, books and records of the Seller related to the
Practice, and all properties under the management of the Seller related to the
Practice and all records relating thereto, so that PQC may have full opportunity
to make such investigation as it shall desire to make of the management,
business, properties and affairs of the Seller related to the Practice and the
properties under the management of Seller related to the Practice, and PQC and
MCP shall be permitted to make abstracts from, or copies of, all such books and
records. The Seller shall furnish to PQC and MCP such financial and operating
data and other information as to the Assets and the Practice as PQC and MCP
shall reasonably request.
-17-
<PAGE>
5.08 Severance Obligations. Seller shall satisfy all severance obligations
---------------------
related to each person employed by Seller prior to or at the Closing Date who is
to become employed by MCP after the Closing Date.
ARTICLE VI
CONDITIONS TO OBLIGATIONS OF PQC AND MCP
The obligations of PQC and MCP under this Agreement are subject to the
fulfillment, at the Closing Date, of the following conditions precedent, each of
which may be waived in writing in the sole discretion of PQC:
6.01 Delivery of Documents. Seller shall have delivered to PQC and MCP
---------------------
all items described in Section 1.03 above.
6.02 Continued Truth of Representations and Warranties of Seller;
------------------------------------------------------------
Compliance with Covenants and Obligations. The representations and warranties
- -----------------------------------------
of Seller shall be true on and as of the Closing Date as though such
representations and warranties were made on and as of such date, except for any
changes permitted by the terms hereof or consented to in writing by PQC. Seller
shall have performed and complied with all terms, conditions, covenants,
obligations, agreements and restrictions required by this Agreement to be
performed or complied with by the Seller prior to or at the Closing Date.
6.03 No Proceedings or Litigation. No action by any governmental
----------------------------
authority or other person shall have been instituted or threatened which
questions the validity or legality of the transactions contemplated hereby and
which could reasonably be expected to result in a Material Adverse Effect.
There shall not be any statute, rule or regulation that makes the purchase and
sale of the Assets contemplated hereby illegal or otherwise prohibited.
6.04 Material Changes. Between the date of the latest Financial
----------------
Statements and the Closing, there shall not have been any material adverse
change in the business, prospects, operations or conditions of the Practice or
in the Assets.
6.05 Stockholder Agreements. The Seller shall have entered into and be in
----------------------
compliance with the Stockholder Agreement between the Seller and PQC.
6.06 Other Transactions. Each of the medical practices listed on Schedule
------------------ --------
6.06 shall have entered into or delivered (i) an agreement among PQC, MCP and
- ----
such practice to merge such practice into MCP or for MCP or PQC to purchase
substantially all of the assets of such practice, and (ii) the Employment
Agreement.
6.07 Financing. PQC or its affiliate shall have completed a private
--------
placement of equity securities, on terms satisfactory to PQC in its sole
determination, with net proceeds to PQC or such affiliate in an amount equal to
at least ten million dollars ($10,000,000).
-18-
<PAGE>
ARTICLE VII
CONDITIONS TO OBLIGATIONS OF SELLER
The obligations of the Seller under this Agreement are subject to the
fulfillment, at the Closing Date, of the following conditions precedent, each of
which may be waived in writing in the sole discretion of the Seller:
7.01 Delivery of Documents. PQC and MCP shall have delivered to the
---------------------
Seller all items described in Section 1.04 above.
7.02 Continued Truth of Representations and Warranties of PQC and
------------------------------------------------------------
MCP; Compliance with Covenants and Obligations. The representations and
- ----------------------------------------------
warranties of MCP and PQC shall be true on and as of the Closing Date as though
such representations and warranties were made on and as of such date, except for
any changes permitted by the terms hereof or consented to in writing by Seller.
MCP and PQC shall have performed and complied with all terms, conditions,
covenants, obligations, agreements and restrictions required by this Agreement
to be performed or complied with by it prior to or at the Closing Date.
7.03 No Proceedings or Litigation. No action by any governmental
----------------------------
authority or other person shall have been instituted or threatened which
questions the validity or legality of the transactions contemplated hereby and
which could reasonably be expected to damage MCP or PQC materially if the
transactions contemplated hereby are consummated, including without limitation
any material adverse effect on the right or ability of MCP to own, operate,
possess or transfer the Assets after the Closing. There shall not be any
statute, rule or regulation that makes the purchase and sale of the Assets
contemplated hereby illegal or otherwise prohibited.
7.04 Offers of Employment. MCP shall have offered employment to the
--------------------
persons listed on Schedule 7.04.
-------------
7.05 By-Laws of MCP. MCP shall have adopted Articles of Organization
--------------
and By-laws that conform to the terms thereof specified in the Employment
Agreement.
7.06 Financing. PQC or one of its affiliates shall have completed a
---------
private placement of equity securities in an amount equal to at least ten
million dollars ($10,000,000).
ARTICLE VIII
SURVIVAL AND INDEMNIFICATION
8.01 Indemnification.
---------------
(a) Seller shall indemnify, defend, and hold harmless each of MCP and
PQC and their respective subsidiaries and affiliates and their respective
directors, officers, employees and agents or the successor of any of the
forgoing (collectively, "PQC Indemnified Persons"), and reimburse PQC
Indemnified Persons for, from and against all payments,
-19-
<PAGE>
demands, claims, suits, judgments, liabilities, losses, costs, damages and
expenses, including, without limitation, interest, penalties and reasonable
attorneys' fees, disbursements and expenses, ("Losses") imposed on or incurred
by PQC Indemnified Persons, which relate to or arise out of (i) breach of any
representation and warranty of, or covenant or agreements to be performed by,
Seller contained in this Agreement, the Affiliation Agreement or the
Stockholders' Agreement, (ii) any of the liabilities or obligations retained by
Seller pursuant to Section 1.02, (iii) the failure of Seller or of MCP to comply
with any bulk sales laws applicable to the transactions contemplated hereby,
(iv) any Tax liabilities of Seller; and (v) the conduct of the Practice prior to
the Closing Date. Notwithstanding the foregoing or any other term or condition
contained herein or in any other agreement or instrument referred to herein, the
indemnification obligations of Seller under this Section 8.01(a) and under the
Affiliation Agreement shall be limited, in the aggregate, to the Purchase Price
and to the consideration under the Affiliation Agreement between Seller and PQC
or its affiliates.
(b) MCP and PQC shall indemnify and hold harmless Seller and its
agents (collectively, "Seller Indemnified Persons" and together with the PQC
Indemnified Persons, the "Indemnified Persons"), and reimburse such Indemnified
Persons for, from, and against all Losses imposed on or incurred, by such
Indemnified Persons which relate to or arise out of (i) breach of any
representation or warranty of, or covenant to be performed by, PQC or MCP, in
each case contained in this Agreement or the Affiliation Agreement and (ii) the
Assumed Liabilities.
(c) An Indemnified Party shall give prompt written notice to an
indemnifying party (the "Indemnifying Party") of any payments, demands, claims,
suits, judgments, liabilities, losses, costs, damages or expenses (a "Claim") in
respect of which such Indemnifying Party has a duty to provide indemnity to such
Indemnified Party under this Section 8.01, except that any delay or failure so
to notify the Indemnifying Party only shall relieve the Indemnifying Party of
its obligations hereunder to the extent, if at all, that it is prejudiced by
reason of such delay or failure.
(d) If a Claim is brought or asserted by a third party (a "Third-Party
Claim"), the Indemnifying Party shall assume the defense thereof, including the
employment of counsel reasonably satisfactory to the Indemnified Party and the
payment of all expenses. The Indemnified Party shall have the right to employ
separate counsel in such Third-Party Claim and participate in the defense
thereof, but the fees and expenses of such counsel shall be at the expense of
the Indemnified Party. In the event that the Indemnifying Party, within twenty
(20) days after written notice of any Third-Party Claim, fails to assume the
defense thereof, or in the event the Indemnifying Party fails to demonstrate, to
the reasonable satisfaction of the Indemnified Party, that it has sufficient
assets to meet its indemnification obligations hereunder, the Indemnified Party
shall have the right to undertake the defense, compromise or settlement of such
Third-Party Claim for the account of the Indemnifying Party. Anything in this
Section 8.01 to the contrary notwithstanding, the Indemnifying Party shall not,
without the Indemnified Party's prior written consent, settle or compromise any
Third-Party Claim or consent to the entry of any judgment with respect to any
Third-Party Claim which would have any adverse effect on the Indemnified Party,
except as provided immediately below. The Indemnifying Party may, without the
Indemnified Party's prior written consent, settle or compromise any such Third-
Party Claim or consent to entry of any judgment with respect to
-20-
<PAGE>
any Third-Party Claim which requires solely money damages paid by the
Indemnifying Party and which includes as an unconditional term thereof the
release by the claimant or the plaintiff of the Indemnified Party from all
liability in respect of such Third-Party Claim.
(e) With respect to any Claim other than a Third Party Claim, the
Indemnifying Party shall have thirty (30) days from receipt of written notice
from the Indemnified Party of such Claim within which to respond thereto. If
the Indemnifying Party does not respond within such thirty (30)-day period, the
Indemnifying Party shall be deemed to have accepted responsibility to make
payment and shall have no further right to contest the validity of such Claim.
If the Indemnifying Party notifies the Indemnified Party within such thirty
(30)-day period that it rejects such Claim in whole or in part, the Indemnified
Party shall be free to pursue such remedies as may be available to the
Indemnified Party under applicable law.
8.02 Survival of Representations; Claims for Indemnification. All
-------------------------------------------------------
representations and warranties made by the Parties herein or in any instrument
or document furnished in connection herewith shall survive the Closing and any
investigation at any time made by or on behalf of the parties hereto. All such
representations and warranties and the Seller's obligations pursuant to Sections
8.01(a)(i), (ii) and (iii) and PQC's and MCP's obligations pursuant to Section
8.01(b) shall expire on the third anniversary of the Closing Date, except for
claims, if any, asserted in writing prior to such third anniversary, which shall
survive until finally resolved and satisfied in full. The obligation of the
Seller pursuant to Section 8.01(a)(iv) and (v) shall survive until six (6)
months after the expiration of the applicable statute of limitations with
respect thereto. All claims and actions for indemnity pursuant to this Section
8 shall be asserted or maintained in writing by a Party hereto on or prior to
the expiration of such periods.
8.03 Confidentiality. The Parties hereto agree to use reasonable
---------------
efforts to preserve in full the confidentiality of all confidential business
records and the attorney-client and work-product privileges. In connection
therewith, each Party hereto agrees that:
(a) it will use all reasonable efforts, in any action, suit or
proceeding in which it has assumed or participated in the defense, to avoid
production of confidential business records; and
(b) all communications between any Party hereto and counsel
responsible for, or participating in, the defense of any action, suit or
proceeding shall, to the extent possible, be made so as to preserve any
applicable attorney-client or work-product privilege.
8.04 Remedies Cumulative. Except as otherwise provided herein, the
-------------------
remedies provided herein shall be cumulative and shall not preclude the
assertion by any Party hereto of any other rights or the seeking of any other
remedies against any other Party hereto.
8.05 Set-off and Recoupment. Any amount or amounts due from any
----------------------
Indemnifying Party to PQC under this Section 8 may be paid to PQC, at PQC's
option, by set-off or recoupment against any amounts due to the Indemnifying
Party pursuant to this Agreement or pursuant to any agreement between the
Indemnifying Party and PQC or any of its affiliates.
-21-
<PAGE>
Any such set-off will be without prejudice to PQC's right to pursue any other
remedies at law or in equity available to it.
ARTICLE IX
TERMINATION
9.01 Optional Termination. This Agreement may be terminated and the
--------------------
transaction contemplated herein abandoned at any time prior to the Closing as
follows:
(a) by the mutual consent of the Seller, MCP and PQC;
(b) by the Seller, upon a material breach of any representation,
warranty, covenant or agreement on the part of PQC or MCP set forth in this
Agreement, or if any representation or warranty of PQC and MCP has become
materially untrue, in either case such that the conditions set forth in Article
VII would be incapable of being satisfied by August 31, 1996; provided, that in
any case, a willful breach will be deemed to cause such conditions to be
incapable of being satisfied for purposes of this paragraph (b);
(c) by PQC upon a material breach of any representation, warranty,
covenant or agreement on the part of the Seller set forth in this Agreement, or
if any representation or warranty of the Seller has become materially untrue, in
either case such that the conditions set forth in Article VI would be incapable
of being satisfied by August 31, 1996; provided, that in any case, a willful
breach will be deemed to cause such conditions to be incapable of being
satisfied for purposes of this paragraph (c). Any breach on the part of the
Seller of the representations and warranties contained in Article II or the
covenants contained in Articles IV and V, which permits termination of this
Agreement shall permit PQC and/or MCP to immediately terminate the Affiliation
Agreement and Employment Agreement to be entered into between MCP and/or PQC and
Seller; or
(d) by either party if the Closing shall not have occurred by August
31, 1996, or such other date agreed to by the Parties.
9.02 Effect of Termination. In the event this Agreement is terminated
---------------------
as provided above, (a) each of PQC, MCP and Seller shall, upon the other Party's
request, deliver to the other Parties all documents previously delivered (and
copies thereof in its possession) concerning one another and the transactions
contemplated hereby, and (b) none of the Parties nor any of their respective
stockholders, directors, officers or agents shall have any liability to the
other Parties, except for any deliberate breach or deliberate omission resulting
in a material breach of any of the provisions of this Agreement. In such case,
the breaching Party shall be liable only for the expenses and costs of the non-
breaching Party, and in no event shall either Party be liable for anticipated
profits or consequential damages. After termination each Party shall keep
confidential all information provided by the others pursuant to this Agreement
which is not in the public domain, shall exercise the same degree of care in
handling such information as it would exercise with similar information of its
own, and shall return any such information upon the other Party's request.
-22-
<PAGE>
ARTICLE X
GENERAL PROVISIONS
10.01 Amendment and Waiver. No amendment of any provision of this
--------------------
Agreement shall in any event be effective unless the same shall be in writing
and signed by the Parties hereto. Any failure of any Party to comply with any
obligation, agreement or condition hereunder may only be waived in writing by
PQC if such failure is by Seller and by Seller if such failure is by PQC or MCP,
but such waiver shall not operate as a waiver of, or estoppel with respect to,
any subsequent or other failure. No failure by any Party to take any action
against any breach of this Agreement or default by the other Party shall
constitute a waiver of such Party's right to enforce any provision hereof or to
take any such action.
10.02 Notices. All notices, requests, demands and other communications
-------
hereunder shall be in writing and shall be sent by personal delivery or
registered or certified mail, postage prepaid, or by telecopier as follows:
(a) if to Seller:
------------------------
with a copy to:
Hogan & Hartson
555 Thirteenth Street, N.W.
Washington, D.C. 20004-1109
Attention: Michael Williams
(b) if to PQC or MCP:
Physicians Quality Care, Inc.
950 Winter Street, Suite 2410
Waltham, MA 02154
Attention: Jerilyn Asher
Any Party may change its address for receiving notice by written notice given to
the others named above. All notices shall be effective upon the earlier of
actual delivery or when deposited in the mail addressed as set forth above.
10.03 Counterparts. This Agreement may be executed simultaneously in
------------
two (2) or more counterparts, each of which shall be deemed an original, but all
of which together shall constitute one and the same Agreement.
10.04 Parties in Interest. This Agreement shall bind and inure to
-------------------
the benefit of the Parties named herein and their respective heirs, successors
and assigns. This Agreement shall not be assignable by any Party without the
prior written consent of the other Parties.
10.05 Further Assurances. From time to time, at the request of any
------------------
Party hereto and without further consideration, the other Parties will execute
and deliver to such requesting
-23-
<PAGE>
Party such documents and take such other action (but without incurring any
material financial obligation) as such requesting Party may reasonably request
in order to consummate more effectively the transactions contemplated hereby,
including, without limitation, vesting in MCP good, valid and marketable title
to the Assets.
10.06 Entire Transaction. This Agreement and the other agreements,
------------------
documents and instruments referred to herein contain the entire understanding
among the Parties with respect to the transactions contemplated hereby and
supersede all other agreements and understandings among the Parties.
10.07 Applicable Law. This Agreement shall be governed by and
--------------
construed in accordance with the internal substantive laws of the Commonwealth
of Massachusetts, and the Parties hereby consent to the sole jurisdiction of
Massachusetts courts over all matters relating to this Agreement.
10.08 Headings. The section and other headings contained in this
--------
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
10.09 Expenses. Except as otherwise expressly provided herein
--------
(including Section 4.05), each Party to this Agreement shall pay its own costs
and expenses in connection with the transactions contemplated hereby. Seller
shall be responsible for any documentary and transfer taxes and any sales, use
or other taxes imposed by reason of the transfers of Assets provided hereunder
and any deficiency, interest or penalty asserted with respect thereto.
10.10 Third Parties. Except as specifically set forth or referred to
-------------
herein, nothing herein expressed or implied is intended or shall be construed to
confer upon or give to any person or entity other than the Parties hereto and
their successors or assigns, any rights or remedies under or by reason of this
Agreement.
10.11 Severability. If any term, provision, covenant or restriction
------------
of this Agreement is held by a court of competent jurisdiction to be invalid,
void or unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated.
[Rest of Page Intentionally Left Blank]
-24-
<PAGE>
IN WITNESS WHEREOF, each of the Parties has caused this Agreement to
be duly executed all as of the day and year first written above.
--------------------------
PHYSICIANS QUALITY CARE, INC.
By:
-------------------------
Name:
Title:
MEDICAL CARE PARTNERS, P.C.
By:
-------------------------
Name:
Title:
-25-
<PAGE>
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (the "Agreement"), made this_____day of
_________, 1996, is entered into by Medical Care Partners, P.C., a Massachusetts
professional corporation (the "Practice"), Physicians Quality Care, Inc, a
Delaware corporation as guarantor ("PQC") and the physician whose name appears
on the signature page hereof (the "Physician Member").
The Practice desires to employ the Physician Member to provide
professional medical services, and the Physician Member desires to be employed
by the Practice. In consideration of the mutual covenants and promises contained
herein, and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged by the parties hereto, the parties agree as
follows:
1. Terms and Conditions. The General Terms and Conditions of Physician
--------------------
Member Employment attached hereto as Annex A, as modified by the addendum
attached hereto as Annex B, (the "Terms and Conditions") are made a part of this
Employment Agreement. All terms used herein and defined in the Terms and
Conditions shall have the meaning assigned thereto. To the extent that the terms
of this Agreement conflict with the Terms and Conditions, the Terms and
Conditions shall control and be binding upon the parties hereto.
2. Term of Employment. The Practice hereby agrees to employ the
------------------
Physician Member, and the Physician Member hereby accepts employment with the
Practice, upon the terms set forth in this Agreement and the Terms and
Conditions, for an initial period commencing on the Effective Date (as defined
in Annex A) and ending on the anniversary of the Effective Date (such period, as
it may be extended, the "Employment Period"), unless terminated in accordance
with the Terms and Conditions. The Employment Period shall automatically extend
as provided in the Terms and Conditions. The Base Compensation Pool Amount for
the Physician Responsibility Center to which the Physician Member is assigned is
set forth on Annex D.
3. Reimbursement of Expenses. The Physician Member shall be entitled
-------------------------
to be reimbursed, subject to such procedures as the Practice shall establish,
for any any travel, entertainment and other
-1-
<PAGE>
expenses reflected in the operating budget established with respect to the
Physician Member by the Joint Policy Board.
4. Professional Liability Insurance. During the term of this Agreement,
--------------------------------
the Practice shall provide professional liability insurance covering
professional services provided by the Physician Member to the Practice's
patients in accordance with the Physician Member's duties under this Agreement
with such limits of liability as determined from time to time by the Joint
Policy Board and which initially shall be not less than $1 million per person
and $3 million in the aggregate. The Practice's obligation to provide such
insurance is subject to the Physician Member's compliance with any conditions of
such insurance other than the obligation to pay premiums. Except as otherwise
provided by separate agreement with the Physician Member, such insurance shall
cover only such services as the Physician Member provides in connection with
employment by the Practice. MCP shall consider in good faith, but shall not be
obligated to, include the activities of the Physician Member that are not
performed pursuant to this Agreement in MCP's professional insurance coverage if
such coverage can be efficiently provided through MCP, provided that any such
additional coverage shall be at the expense of the Physician Member.
5. Other Agreements. The Physician Member hereby represents that the
----------------
Physician Member is not bound by the terms of any agreement with any previous
employer or other party to refrain from using or disclosing any trade secret or
confidential or proprietary information in the course of the Physician Member's
employment with the Practice or to refrain from competing, directly or
indirectly, with the business of such previous employer or any other party. The
Physician Member further represents that the Physician Member's performance of
all the terms of this Agreement and as an employee of the Practice does not and
will not breach any agreement to keep in confidence proprietary information,
knowledge or data acquired by Physician Member in confidence or in trust prior
to his employment with the Practice.
6. Obligations of PQC PQC hereby agrees to pay promptly to the
------------------
Physician Member any amount due to such Physician Member pursuant to Article VII
of the Terms and Conditions if MCP shall fail to pay such amount to the
Physician Member in a timely manner; provided that PQC shall not have any
liability to the Physician Member and all other Physician Members in excess of
the Compensation Pool.
-2-
<PAGE>
7. Survival. Articles VII, VIII and IX and Sections 10.3, 10.4,
--------
10.5, 10.6 and 11.1 of the Terms and Conditions, shall survive termination
of this Agreement for any reason.
8. Notices. All notices required or permitted under this Agreement
-------
shall be in writing and shall be deemed effective upon personal delivery or upon
deposit in the United States Post Office, by registered or certified mail,
postage prepaid, addressed to the other party at the address shown above, or at
such other address or addresses as either party shall designate to the other in
accordance with this Section 8
9. Pronouns. Whenever the context may require, any pronouns used in
--------
this Agreement shall include the corresponding masculine, feminine or neuter
forms, and the singular forms of nouns and pronouns shall include the plural,
and vice versa.
10. Entire Agreement. This Agreement, including all Annexes,
----------------
Schedules and Exhibits hereto, constitutes the entire agreement between the
parties and supersedes all prior agreements and understandings, whether written
or oral, relating to the subject matter of this Agreement.
11. Amendment. This Agreement may be amended or modified only by a
---------
written instrument executed by the MCP, PQC and the Physician Member.
12. Governing Law. This Agreement shall be construed, interpreted
-------------
and enforced in accordance with the laws of the Commonwealth of Massachusetts.
13. Successors and Assigns. Subject to Section 10.2(e) of the Terms and
----------------------
Conditions, this Agreement shall be binding upon and inure to the benefit of
both parties and their respective successors and assigns, including any
corporation with which or into which the Practice may be merged or which may
succeed to its assets or business, provided, however, that the obligations of
the Physician Member are personal and shall not be assigned by Physician Member.
14. Change in Law or Regulation. The Practice and the Physician Member
---------------------------
acknowledge that this Agreement is subject to applicable state, local and
federal laws and regulations. The Practice and the Physician Member further
recognize that this Agreement shall be subject to amendments in such laws and
regulations and to new legislation such as healthcare reform or governmental
health insurance programs. Any provisions of law that invalidate, or are
otherwise inconsistent with the terms of this Agreement or that
-3-
<PAGE>
would cause any party to be in violation of law, shall be deemed to have
superseded the terms of this Agreement, provided, however, that the parties
shall exercise their best efforts to accommodate the terms and intent of this
Agreement to the greatest extent possible consistent with requirements of law.
15. Miscellaneous. (a) No delay or omission by the Practice in
-------------
exercising any right under this Agreement shall operate as a waiver of that or
any other right. A waiver or consent given by the Practice on any one occasion
shall be effective only in that instance and shall not be construed as a bar or
waiver of any right on any other occasion.
(b) The captions or the sections of this Agreement are for
convenience of reference only and in no way define, limit or affect the scope or
substance of any section of this Agreement.
(c) In case any provision of this Agreement shall be invalid,
illegal or otherwise unenforceable, the validity, legality and enforceability of
the remaining provisions shall in no way be affected or impaired thereby.
-4-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year set forth above.
PHYSICIANS QUALITY CARE, INC
By:
-----------------------------------
--------------------------------------
MEDICAL CARE PARTNERS, PC
By:
-----------------------------------
Physician Member
--------------------------------------
-5-
<PAGE>
Annex A to Employment Agreement
-------------------------------
GENERAL TERMS AND CONDITIONS OF PHYSICIAN MEMBER EMPLOYMENT
Article I
Definitions
Section 1.1. Purpose. These General Terms and Conditions of
--------
Physician Member Employment (the "Terms and Conditions") are incorporated in and
made a part of the Employment Agreements between MCP and certain Physicians
Members.
Section 1.2. Physician Responsibility Centers. For purposes of these
---------------------------------
Terms and Conditions, Physician Responsibility Centers shall mean the groups of
Physician Members set forth below and any other group approved by the Joint
Policy Board, as such Physician Responsibility Centers may be increased,
decreased or modified in the future by the admission of new Physician Members,
the resignation or removal of a Physician Member or as otherwise approved by the
Joint Policy Board. Notwithstanding the forgoing, two or more Physician
Responsibility Centers may combine at any time upon the request of the Physician
Members constituting such Physician Responsibility Centers and no Physician
Responsibility Center shall be combined with another Physician Responsibility
Center without the approval of the Physician Members of such Physician
Responsibility Center.
Responsibility Center A: Kevin Beck, M.D.
Responsibility Center B: William Belcastro, M.D.
James Haines, M.D.
Responsibility Center C: Jay S. Burton, D.O.
Kathleen E. Carlson, M.D.
Victoria L. Cook, M.D.
Michael P. Coppola, M.D.
Paul C. Hetzel, M.D.
Robert P. Hoffman, M.D.
Thomas J. Keenan, M.D.
Bruce M. Meth, M.D.
David H. Miller, M.D.
Jeffrey J. Ochs, M.D.
David J. Pierangelo, M.D.
David L. Pleet, M.D.
Thomas F. Race, M.D.
Michael H. Rosen, M.D.
Roy Stillerman, M.D.
John M. Zeroogian, M.D.
Responsibility Center D: Alphonse Calvanese, M.D.
Responsibility Center E: W. Patrick Coughlan, M.D.
Ronald Kanagaki, M.D.
Bernard Oddi, M.D.
Anthony Sobey, M.D.
Responsibility Center F: Neal S. Lakritz, M.D.
Mark J. Mullan, M.D.
<PAGE>
Francis D. Murray, M.D.
P.J. Ramaswamy, M.D.
Responsibility Center G: Jay Ungar, M.D.
Responsibility Center H: Laboratory services
Section 1.3. Definitions. For the purposes of these Terms and
-----------
Conditions, the following definitions shall apply:
(a) "Affiliate" with respect to any person shall mean a person
that directly or indirectly through one (1) or more intermediaries controls, or
is controlled by or is under common control with, such person. Neither MCP nor
any Physician Member is deemed to be an Affiliate of the other for purposes of
these Terms and Conditions.
(b) "Affiliations" means any merger, purchase of assets or
other affiliation transactions pursuant to which a Physician Member becomes an
employee of MCP.
(c) "Base Distributions" have the meaning assigned
thereto in Section 7.4.
(d) "Base Compensation Pool Amount", with respect to each
Physician Responsibility Center, shall initially be the amount set forth on an
annex to the Employment Agreement of the Physician Members of the Physician
Responsibility Center and, with respect to the Physician Responsibility Centers
as a group, shall mean $5,977,063. Base Compensation Pool Amount shall be
adjusted as determined by the Joint Policy Board and MCP (i) to reflect the
addition of new Physician Members or the termination or resignation of any
Physician Member or (ii) to reflect such other factors as PQC and the Joint
Policy Board shall mutually agree to be appropriate.
(e) "Book Value" means the value of an asset reflected on a
balance sheet prepared in accordance with generally accepted accounting
principles, which balance sheet shall be audited by a firm of independent public
accountants.
(f) "Capitation Revenues" means all payments from Managed Care
Payors under contracts pursuant to which payments are made periodically on a per
member basis for the partial or total medical care needs of a patient,
including, but not limited to, (i) co-payments, (ii) incentive payments or
bonuses, and (iii) any other compensation under such agreements; provided,
however, that Capitation Revenues shall not include that portion of the revenues
from Managed Care Payors which is paid by MCP or any of its Affiliates to
contracted providers of care, including, but not limited to hospitals,
specialists (who are not Physician Members) and home care providers.
(g) "Compensation Committee" shall mean five (5) Physician
Members elected annually by the Physician Members pursuant to MCP's By-laws, who
shall be responsible for allocating certain distributions from the Compensation
Pool as contemplated by Section 7.4.
(h) "Compensation Pool" shall have the meaning set forth
in Section 7.1.
(i) "Deductible Expenses" with respect to any Fiscal Period
shall mean, when used with respect to any Physician Responsibility Center, an
amount equal to (i) any Tax MCP is required to pay or withhold with respect to
the Physician Members in such Physician Responsibility Center, (ii) the cost of
any pension, health or automobile benefits and any other benefits not included
in Physician Responsibility Center Operating Expenses, in each case that are
provided to such Physician Members and (iii) any Physician Responsibility Center
Discretionary Expenses.
-2-
<PAGE>
(j) "Effective Date" means August 1996.
--------
(k) "Employment Agreements" means the employment agreements
between MCP and each Physician Member which agreements are made subject to these
Terms and Conditions.
(l) "Fair Market Value" shall mean, as to any asset, the fair
market value of such asset as agreed upon by MCP and the Physician Members, or
in the event that MCP and the Physician Members cannot agree to such value by
ninety (90) days prior to the Purchase Closing (as defined in Section 10.6), the
fair market value of such asset as determined by an entity (the "Independent
Financial Expert") regularly engaged in the business of evaluating assets of
medical clinics and associated businesses and that is mutually acceptable to MCP
and the Physician Members. The Independent Financial Expert may use any
customary and generally accepted method of determining fair market values, and
shall take into account the effect of any liens, claims or encumbrances (other
than those arising out of Physician Related Liabilities (as defined in Section 1
0.4(a)(ii)) that may reasonably be expected to have an effect on the value of
such assets. The cost of any Independent Financial Expert shall be paid one-half
(1/2) by MCP and one-half (1/2) by the Physician Members.
(m) "Fiscal Period" means the twelve (12) month or shorter
period ending on December 31 of each year.
(n) "IHS Expenses" means, for any period, the direct and
indirect expenses (incurred in accordance with a budget approved by the Joint
Policy Board and MCP) by or on behalf of MCP or any of its Affiliates during
such period in connection with the provision of Integrated Health Services
(including overhead of MCP and PQC incurred in connection with the provision of
Integrated Health Services).
(o) "IHS Profits" means, for any period, the excess of
(a) IHS Revenues over (b) IHS Expenses.
(p) "IHS Revenues" means, for any period, the revenues,
determined in accordance with generally accepted accounting principles, earned
during such period by MCP from the provision of Integrated Health Services.
(q) "Integrated Health Services" shall mean any business that
MCP or PQC establishes, whether directly or through a subsidiary, which (i)
provides medical related services that are not traditionally performed by
physicians or physician practices at medical offices (it being understood that
in-office laboratory and other ancillary services performed by the Physician
Members as of the Effective Date are not Integrated Health Services) and (ii)
are determined to be Integrated Health Services by PQC, MCP and the Joint Policy
Board.
(r) "Intellectual Property" means all (i) patents, patent
applications, patent disclosures and all related continuation,
continuation-in-part, divisional, reissue, re-examination, utility model,
certificate of invention and design patents, registrations and applications for
registrations, (ii) trademarks, service marks, trade dress, logos, trade names
and corporate names and registration and applications for registration thereof,
(iii) copyrights and registrations and applications for registration thereof,
(iv) mask works and registrations and applications for registration thereof, (v)
computer software, data and documentations, (vi) trade secrets and confidential
business information, whether patentable or non-patentable and whether or not
reduced to practice, know-how, clinical product and service processes and
techniques, research and development information, medical protocols,
copyrightable works, financial, marketing and business data, pricing and cost
information, business and marketing plans and customer and supplier lists and
information, (vii) other proprietary rights relating to the foregoing
(including, without limitations, remedies against infringement thereof and
rights of protection of interest therein under the laws of all jurisdictions)
and (viii) copies and tangible embodiments thereof.
-3-
<PAGE>
(s) "Joint Policy Board" means the Joint Policy Board
established pursuant to Article IV of these Terms and Conditions and the By-laws
of MCP.
(t) "Laboratory Center" means as of the Effective Date
Physician Responsibility Center H and shall mean in the future any other
Physician Responsibility Center that primarily provides laboratory services.
(u) "Managed Care Contracts" has the meaning assigned
thereto in Section 2.9.
(v) "Managed Care Payors" has the meaning assigned thereto
in Section 2.9.
(w) MCP means Medical Care Partners, P.C., a Massachusetts
professional corporation.
(x) "MCP Allocation Account" shall mean a record keeping entry
on the books of MCP to which Revenues allocated to MCP with respect to any
Fiscal Period are recorded.
(y) "MCP Shareholder" means the one (1) or more physicians who
from time to time are the record holder of all of the issued and outstanding
capital stock of MCP.
(z) "Medical Advisory Board" means the Medical Advisory Board
established pursuant to Article V of these Terms and Conditions and the By-laws
of MCP.
(aa) "Medical Waste" includes, but is not limited to, (i)
pathological waste, (ii) blood, (iii) sharps, (iv) wastes from surgery or
autopsy, (v) dialysis waste, including contaminated disposable equipment and
supplies, (vi) cultures and stocks of infectious agents and associated
biological agents, (vii) contaminated animals, (viii) isolation wastes, (ix)
contaminated equipment, (x) laboratory waste, (xi) any substance, pollutant,
material, or contaminant listed or regulated under any Medical Waste Law, and
(xii) other biological waste and discarded materials contaminated with or
exposed to blood, excretion, or secretions from human beings or animals.
(ab) "Medical Waste Laws" shall mean the following, including
regulations promulgated and orders issued thereunder, all as may be amended from
time to time: (i) the Medical Waste Tracking Act 42 USCA ss.6991 Lt. sea.
("MWTA"), (ii) the U.S. Public Vessel Medical Waste Anti-Dumping Act of 1988, 33
USCA ss.ss.2501 et seq., (iii) the Marine Protection, Research and Sanctuaries
Act of 1972, 33 USCA ss.ss.1401 et seq., (iv) The Occupational Safety and Health
Act, 29 USCA ss.ss.651 et seq., (v) the United States Department of Health and
Human Services, National Institute for Occupational Safety and Health,
Infectious Waste Disposal Guide Publication No. 88-119, and (vi) any other
federal, state, regional, county, municipal, or other local laws, regulations,
and ordinances insofar as they purport to regulate Medical Waste, or impose
requirements relating to Medical Waste.
(ac) "Nonpatient Revenue" means revenue of a Physician Member
attributable to activities other than direct patient care, such as payments for
consulting services outside the scope of direct patient care provided in
connection with the practice, military service, speaking services, legal
consultation (deposition fees), publications, directorships, research and
teaching and, to the extent (i) historically conducted by the Physician Member
and (ii) that such activity does not involve the facilities of MCP,
interpretation of laboratory and diagnostic tests.
(ad) "Operating Manager" has the meaning assigned thereto
in Section 6.3.
(ae) "Operating Revenues" means, for any period, the aggregate
of Physician Responsibility Center Gross Revenues for each Physician
Responsibility Center for such period.
-4-
<PAGE>
(af) "Physicians" means Physician Members and Physician
Associates.
(ag) "Physician Associates" means those employees of MCP who
are licensed physicians but are not Physician Members.
(ah) "Physician Extender Employees" shall mean non-Physicians
who provide medical services which may be billed by MCP to third parties either
as incident to the services of a Physician or separately from the Physicians
services.
(ai) "Physician Responsibility Center Discretionary Expenses"
means, during the Fiscal Period ended December 31,1996, any increase in actual
staffing or other expenses, including Physician Responsibility Center Operating
Expenses, above the levels set forth in Exhibit A to these Terms and Conditions,
subject to adjustment as contemplated in Section 7.3. With respect to any Fiscal
Period commencing after December 31,1996, Physician Responsibility Center
Discretionary Expenses means any personnel, operating and other expenses,
including Physician Responsibility Center Operating Expenses, over and above the
standard levels developed by the Joint Policy Board and approved by MCP and
included in a Physician Responsibility Center's annual operating budget, as
adjusted from time to time in accordance with Section 7.3.
(aj) "Physician Responsibility Center Gross Revenues" means,
except with respect to a Laboratory Center, the aggregate revenues determined in
accordance with generally accepted accounting principles for direct and indirect
patient care services performed in an inpatient or outpatient setting by the
Physician Members, Physician Associates or Physician Extender Employees of any
Physician Responsibility Center, including fee for service payments for billed
services, discounted fee for service payments for Managed Care Payors,
Capitation Revenues, and if applicable, any surplus payment received by MCP with
respect to hospital, medical and other risk pools under any Managed Care
Contract, including the Secured Horizons Managed Care Contract, and may include,
as determined by the Joint Policy Board, Nonpatient Revenues for any Physician
Member in such Physician Responsibility Center; provided, however, that for the
Fiscal Period ended December 31,1996, Physician Responsibility Center Gross
Revenues shall not include Nonpatient Revenues. "Physician Responsibility Center
Gross Revenues" with respect to any Laboratory Center means the aggregate
revenues determined in accordance with generally accepted accounting principles
for the provision of laboratory services performed by such Laboratory Center,
including fee for service payments and the portion, if any, of any payment from
a Managed Care Payor allocated to such Laboratory Center pursuant to Section
2.9.
(ak) "Physician Responsibility Center Net Revenues" means,
with respect to any Physician Responsibility Center, Physician Responsibility
Center Gross Revenues minus Physician Responsibility Center Operating Expenses.
(al) "Physician Responsibility Center Operating Expenses",
except with respect to a Laboratory Center, means, for any period, all the
operating expenses incurred by or on behalf of MCP with respect to any Physician
Responsibility Center to the extent approved from time to time by MCP and to the
extent contemplated by Section 4.1, the Joint Policy Board, including: (i) rent,
utilities, maintenance and related cleaning costs and any other Premises and
Personal Property Expenses; (ii) depreciation and amortization of capital
expenditures made for the benefit of a particular medical practice site operated
by MCP at which all or some of the Physician Members in the Physician
Responsibility Center practice; (iii) repairs; (iv) office equipment expenses;
(v) telephone; (vi) compensation, benefits and other direct and indirect costs
of non-physician employees, Physician Extender Employees and Physician
Associates, including federal and state employee taxes, and the benefits for
Physician Members to the extent not treated as a Deductible Expense; (vii)
insurance (including, but not limited to, malpractice, commercial, property and
casualty, and workers' compensation); (viii) office administration expenses;
(ix) billing services; (x) transcription services; (xi) professional services
(including legal and accounting); (xii) drugs
-5-
<PAGE>
and medical supplies; (xiii) medical dues and subscriptions; (xiv) approved
continuing medical education expenses; (xv) advertising and public relations
expenses; (xvi) personal property and intangible taxes assessed against assets
used by or in connection with MCP; (xvii) office supplies; (xviii) other
expenses incurred by or on behalf of the Physician Members and agreed to be paid
by MCP; and (xix) losses and other costs attributable to the Physician
Responsibility Center under any Managed Care Contract or otherwise allocated to
the Physician Responsibility Center by the Joint Policy Board, including any
liability with respect to any risk pools under such Managed Care Contract.
"Physician Responsibility Center Operating Expenses with respect to any
Laboratory Center means, for any period, all the operating expenses incurred by
or on behalf of MCP with respect to such Laboratory Center to the extent
approved from time to time by MCP and to the extent contemplated by Section 4.1,
the Joint Policy Board, including: (i) rent, utilities, maintenance and related
cleaning costs and any other Premises and Personal Property Expenses; (ii)
depreciation and amortization of capital expenditures made for the benefit of
such Laboratory Center; (iii) repairs; (iv) office equipment expenses; (v)
telephone; (vi) compensation, benefits and other direct and indirect costs of
Laboratory Center employees, including federal and state employee taxes; (vii)
insurance (including, but not limited to, malpractice, commercial, property and
casualty, and workers' compensation); (viii) office administration expenses;
(ix) billing services; (x) transcription services; (xi) professional services
(including legal and accounting); (xii) laboratory, testing, drugs and medical
supplies; (xiii) medical and laboratory dues and subscriptions; (xiv) approved
continuing education expenses; (xv) advertising and public relations expenses;
(xvi) personal property and intangible taxes assessed against assets used by or
in connection with MCP; (xvii) office supplies; and (xviii) losses and other
costs attributable to the Laboratory Center under any Managed Care Contract or
otherwise allocated to the Laboratory Center by the Joint Policy Board,
including any liability with respect to any risk pools under such Managed Care
Contract.
(am) "Physician Members" shall mean only those physicians who
(i) share in the Revenues of MCP as provided in Article VII, (ii) are employees
of MCP, whose employment agreements with MCP provide that such employment
arrangement is subject to these Terms and Conditions and (iii) are licensed to
provide professional medical services in the Commonwealth of Massachusetts or
the State of Connecticut and in any other credentialling guidelines established
by the Medical Advisory Board and approved by the Joint Policy Board and MCP.
(an) "Physician Payments" means the aggregate consideration
pursuant to affiliation, asset purchase, merger or similar agreements, including
earn-out or similar payments, paid from time to time to a Physician Member for
agreeing to become affiliated with MCP.
(ao) "PQC" means Physicians Quality Care, Inc., a Delaware
corporation.
(ap) "Practice Fund Account" shall mean a record keeping entry
on the books of MCP on which expenses incurred by MCP, PQC or their Affiliates
with respect to Practice Wide Expenses are recorded as negative amounts and
allocations of Stage One Gross Margin pursuant to Section 7.1 are reflected as
positive amounts.
(aq) "Practice Wide Expenses" shall mean capital or operating
expenditures which the Joint Policy Board has designated as Practice Wide
Expense and which relate to services beneficial to more than one Physician
Responsibility Center.
(ar) "Premises" has the meaning assigned thereto in
Section 2.3.
(as) "Premises and Personal Property Expenses" has the meaning
assigned thereto in Section 2.3.
-6-
<PAGE>
(at) "Responsibility Center Operating Expenses" means, for any
period, the aggregate of Physician Responsibility Center Operating Expenses for
each Physician Responsibility Center.
(au) "Revenues" means Stage One Gross Margin and IHS Profits.
(av) "Stage One Gross Margin" means, for any period, the
excess of (a) Operating Revenues over (b) Responsibility Center Operating
Expenses.
(aw) "Stage Two Gross Margin" has the meaning set forth in
Section 7.1. [B
(ax) "Stage Three Gross Margin" has the meaning set forth
in Section 7.1.
(ay) "Stark" means 42 U.S.C. (s)1395nn and all rules and
regulations thereunder, and any interpretations thereof issued by any government
authority, as such may be amended or revised from time to time.
(az) "Targeted Physician Responsibility Center Expenses"
means, for any Fiscal Period, the budgeted amount of Physician Responsibility
Center Operating Expenses recommended to be incurred by a Physician
Responsibility Center during such Fiscal Period as determined by the Joint
Policy Board.
(ba) "Targeted Physician Responsibility Center Revenues"
means, for any Fiscal Period, the budgeted amount of Physician Responsibility
Center Gross Revenue recommended to be realized by a Physician Responsibility
Center during such Fiscal Period as determined by the Joint Policy Board.
(bb) "Tax" means all federal, state, local, foreign and other
income, gross receipts, sales, use, ad valorem, transfer, withholding, payroll,
employment, franchise, property and other taxes.
(bc) "Tax Return" means all returns, statements and other
documents in respect of Taxes.
Section 1.4. Initial Partial Year. With respect to the Base
--------------------
Compensation Pool Amount or any other amount expressed as an annual amount or
budget, for the year ended December 31,1996 such amounts shall be adjusted to
reflect the fact that the Effective Date is in the middle of a Fiscal Period,
such adjustment to be accomplished by multiplying such amount or budget by a
fraction the numerator of which is the number of calendar days remaining in the
current calendar year after the Effective Date and the denominator of which is
366.
Article II
Facilities and Support Services to be Provided by MCP
Section 2.1. General Administrative Services.
--------------------------------
(a) MCP shall provide, or arrange for the provision of, all
management and administration services in connection with its day-to-day
business operations and the medical practices of the Physician Members. MCP
shall also provide, or arrange for the provision of, such other non-physician
services relating to its operation contemplated by these Terms and Conditions.
Any reference in these Terms and Conditions to a service being provided or a
person being employed by MCP shall be satisfied if MCP arranges for such service
to be provided or for such person to be employed by a third party, which third
party may, but need not, be an Affiliate of MCP; provided, however, that all
Physician Members shall be employed by MCP. MCP agrees that, to the maximum
extent possible, the intent of MCP is to relieve
-7 -
<PAGE>
the Physician Members of the administrative, accounting, purchasing,
non-physician personnel and other business aspects of their practices. MCP's
employees who are not Physicians shall have no authority, directly or
indirectly, to perform, and shall not perform, any medical services required to
be provided by a physician. All clinical support personnel, while performing
patient care services, shall be subject solely to the direction and supervision
of a Physician and, in the performance of such medical services, shall not be
- --
subject to any direction or control by MCP's employees who are not Physicians.
(b) MCP shall, in its own name and on behalf of the
Physicians, bill patients, insurance companies and other third-party payors and
collect the professional fees for medical services rendered at the Premises and
outside the Premises for hospitalized patients and for all other professional
and medical services and products provided by MCP, the Physicians and the
Physician Extender Employees. To the extent that legal or contractual
obligations require that payment for medical services be paid directly to a
Physician Member, or payment for such services come into a Physician Member's
possession, each Physician Member agrees to promptly endorse and forward any
payment received from patients, insurance companies and other third-party payors
with respect to services rendered by MCP, any Physician Member or Physician
Extender Employee to MCP. Each Physician Member agrees in a timely and accurate
manner to maintain and submit such records, documents and other materials
required for patient billing, reimbursement and requirements of federal and
state statutes, regulations and rules as MCP or PQC shall reasonably determine
to be necessary or desirable. Each Physician Member shall execute a Power of
Attorney in the form and substance reasonably acceptable to MCP in connection
with the rights and powers granted to MCP pursuant to this Section 2.1(b). Each
Physician Member shall cooperate with and, at the request of MCP, shall provide
reasonable assistance to MCP in connection with the functions set forth herein.
In the performance of the services described in this Section 2.1(b), MCP shall
use commercially reasonable efforts to collect such professional fees and shall
comply with all applicable Managed Care Contracts and all applicable laws, rules
and regulations. From time to time, MCP in its discretion, and subject to the
approval of the Joint Policy Board, shall adopt and implement fee schedules for
non-prepaid patients and for all re-billings and recovery items on prepaid
Managed Care Contracts which are authorized and permitted by such contracts.
Notwithstanding any provision of these Terms and Conditions to the contrary,
nothing herein shall be construed as precluding MCP or any of its Affiliates
from entering into agreements with other physicians or entities owned by other
physicians, including use of the trade names and trademarks of MCP or its
Affiliates utilized by MCP.
(c) MCP shall supply to each Physician Member the ordinary,
necessary or appropriate administrative services required for the efficient
operation of the Physician Member's practice, including, without limitation,
necessary clerical, accounting. purchasing, payroll, legal, bookkeeping and
computer services, information management, printing, postage and duplication
services and medical record documentation.
(d) MCP shall prepare unaudited monthly statements of revenues
and expenses with respect to each Physician Responsibility Center, which shall
be delivered to the relevant Physician Responsibility Center as soon as
practicable, but no later than forty-five (45) days, after the end of each
calendar month. All financial statements shall be prepared in accordance with
generally accepted accounting principles applied on a consistent basis. The
Physician Members, at the election of a majority of the Physician Members, shall
have the right, at their own expense, to have the financial statements of MCP
audited by independent accountants selected by such Physician Members with
respect to any Fiscal Period. If such independent accountants present a report
identifying a departure in such financial statements from generally accepted
accounting principles which departure has had a material adverse affect on the
revenues allocated to the Compensation Pool pursuant to Sections 7.1 or 7.2
hereof, MCP shall reimburse the Physician Members for the cost of such audit.
(e) MCP shall maintain all files and records relating to the
operation of the medical practice, including, but not limited to, accounting,
billing, collection and customary financial records and
-8-
<PAGE>
patient files. The management of all files and records shall comply with all
applicable federal, state and local statutes and regulations, and all files and
records shall be located so that they are readily accessible for patient care,
consistent with efficient records management practices. The Physician Members
shall supervise the preparation of, and direct the contents of, patient medical
records, all of which shall remain confidential. Although MCP shall own all
medical and patient records, MCP grants each Physician Member the right to use
such information and data in connection with the provision of medical care to
patients. Subject to applicable laws, regulations and any applicable
accreditation policies, each Physician Member shall, if requested by MCP,
provide MCP with true and complete copies of the original patient records that
such Physician Member owns. Each Physician Member and MCP hereby agree to
preserve the confidentiality of such patient medical records.
Section 2.2. Development of MCP's Practice.
------------------------------
(a) MCP may have opportunities to provide new services and
utilize new technologies that will require capital expenditures, and MCP
anticipates that such opportunities may include use of such new and replacement
equipment, including information management systems, as may be economically
justified. Development of new services will depend on, among other factors,
physician composition, physician support and the performance of MCP. Capital
expenditures shall be made at the election of MCP subject to the approval of the
Joint Policy Board as contemplated by Section 4.1. MCP will attempt, but shall
not be obligated to, add new services, which may include, but are not limited
to, contracts, joint ventures, partnerships and other arrangements with
healthcare providers to provide Integrated Health Services.
(b) Any employment of physicians or acquisition of physician
groups or practices by MCP shall be subject to PQC's approval of the business
prudence of the transaction and the availability of capital.
(c) Each Physician Member shall assist in providing or
operating such Integrated Health Services as are approved by the Joint Policy
Board, MCP and PQC provided such assistance does not unduly burden such
Physician Member or interfere with a Physician Member's ability to render
medical care. If PQC or one of its Affiliates proposes to provide any Integrated
Health Service in the geographic area described on Exhibit B (the "MCP Region"),
PQC shall notify MCP and the Joint Policy Board and MCP shall have 30 days
during which to elect to participate in the provision of such Integrated Health
Service in the MCP Region on such terms as are mutually acceptable to MCP and
PQC. MCP shall not agree to participate in any Integrated Health Service unless
the terms of such participation have been approved by the Joint Policy Board. If
MCP does not elect to participate in such Integrated Health Service in the MCP
Region within such 30 day period, PQC may, but shall not be obligated to,
provide such Integrated Health Service directly or through another entity and
MCP shall have no right to participate in the revenues or income from such
Integrated Health Service. MCP shall not have the right to participate in the
provision of any Integrated Health Service outside of the MCP Region. Except as
provided in this Section 2.2(c), PQC and its Affiliates shall be entitled to
provide Integrated Health Services through entities other than MCP. Except as
provided in this Section 2.2(c), nothing in these Terms and Conditions grants
any Physician Member the right to participate in the provision of, or revenues
from, any services which PQC elects to offer through Affiliates other than MCP.
(d) PQC agrees not to affiliate with a professional
corporation other than MCP in the MCP Region that provides substantially the
same medical services as MCP.
Section 2.3. Facilities.
-----------
(a) Premises. MCP shall make available for use in connection
--------
with a Physician Members' practice the premises that are described in Exhibit C
attached hereto or such other real property
-9-
<PAGE>
in the Commonwealth of Massachusetts or the State of Connecticut acquired or
leased by MCP (the "Premises"); provided that, in the event that MCP's rights to
use any such Premises terminates or MCP determines that such premises are no
longer appropriate for the efficient operation of MCP's medical practice, MCP
shall use its reasonable efforts to provide other suitable premises to be used
by the Physician Members, the use of which premises shall be subject to the
approval of the Joint Policy Board, such approval not to be unreasonably
withheld. MCP shall not require a Physician Member to practice at any Premise
other than the Premises at which the Physician Member practices on the Effective
Date (or the initial date of employment, if later) without the approval of the
Joint Policy Board. MCP shall arrange for the provision of all utilities
reasonably required in connection with the use of the Premises and shall provide
for the proper cleanliness of the Premises, including normal janitorial services
and refuse and Medical Waste disposal. MCP shall maintain the Premises and make
all necessary repairs thereto as promptly as practicable. MCP shall consult with
the Physician Members regarding the condition, use and needs of such Premises
and any required improvements. MCP shall assure that the Premises satisfy the
standard set forth in Section 2.11.
(b) Personal Property. MCP shall own, lease or otherwise
-----------------
provide the equipment, furniture, fixtures, furnishings and other personal
property acquired in the Affiliations, together with such other equipment,
furniture, fixtures, furnishings and other personal property acquired by MCP or
any Affiliate pursuant to these Terms and Conditions, as shall be necessary or
appropriate for MCP's practice (collectively, the "Personal Property"). MCP
shall maintain the Personal Property and promptly make necessary repairs and
maintenance thereto. MCP shall consult with the Physician Members regarding the
condition, use and needs of such Personal Property. MCP shall assure that all
Personal Property satisfy the standard set forth in Section 2.11.
(c) Expenses. All costs, fees, expenses and other
--------
disbursements and liabilities incurred in connection with the Premises and the
Personal Property, including, without limitation, all costs of repairs,
maintenance and improvements, utility expenses (i.e.,telephone, electric, gas
and water), janitorial services, refuse disposal, Medical Waste disposal, real
or personal property lease payments and expenses, interest, principal and other
debt service or refinancing payment and expenses in connection with the Premises
or Personal Property, depreciation, real estate taxes and casualty, liability
and other insurance (collectively, "Premises and Personal Property Expenses")
shall be included in Responsibility Center Operating Expenses.
(d) Disposition. Nothing herein shall be construed as
-----------
precluding MCP or any of its Affiliates from selling, lending or otherwise
disposing of all or any part of its real property, improvements, Personal
Property, trade names, trademarks and other intangible property; provided that
any such disposition shall not eliminate or diminish MCP's obligations
hereunder.
Section 2.4. Financial Planning and Budgeting. MCP shall prepare
--------------------------------
annual budgets reflecting the anticipated revenues and expenses, sources and
uses of capital in the practice of each Physician Responsibility Center. Such
budgets shall be presented to the Joint Policy Board at least thirty (30) days
prior to the end of each Fiscal Period. All budgets are subject to the approval
of the Joint Policy Board and MCP. Subject to the powers assigned to the Joint
Policy Board pursuant to Article IV, PQC shall determine the amount and form of
capital to be invested annually in the assets to be utilized by MCP. MCP shall
specify the targeted profit margin for MCP, which shall be reflected in the
overall budget.
Section 2.5. Management Information Systems. MCP shall make available
------------------------------
for use in each Physician Member's practice, such state-of-the-art (or such
other standards as are approved by the Joint Policy Board) at the earliest
practicable opportunity consistent with budgets adopted in accordance with
Section 7.3 information and management systems hardware and software as PQC,
with the approval of the Joint Policy Board, shall reasonably determine to be
necessary for MCP's operation and such Physician Member's practice. MCP shall
consult with the Physician Members concerning their need for information
-10-
<PAGE>
or management systems hardware and software and make a recommendation to the
Joint Policy Board with respect to the acquisition of such hardware and
software.
Section 2.6. Inventory and Supplies. MCP shall order and purchase
----------------------
inventory, supplies, and such other ordinary, necessary or appropriate materials
which are requested by the Physician Members and which MCP shall reasonably
determine to be necessary in its operation.
Section 2.7. Advertising and Public Relations. MCP shall design and
---------------------------------
implement such local public relations and advertising programs, with appropriate
emphasis on public awareness of the availability of services at MCP, as MCP
determines to be appropriate. Prior to publication or distribution of marketing
or public relations material or information, MCP shall submit such material to
the Joint Policy Board for its review and approval. MCP shall also design and
implement all other non-local public relations or advertising programs (together
with other professional corporations that utilize the services of Affiliates of
PQC). All public relations and advertising programs shall be conducted in
compliance with applicable standards of medical ethics, laws and regulations. In
the event that there is an adverse incident involving MCP or any Physician
Member or patient, any public statement or announcement by or on behalf of
either MCP or any Physician Member shall be approved in advance by MCP.
Section 2.8. Personnel. (a) MCP shall retain such non-physician
----------
professional support, including nursing and other non-physician professional
support, and administrative, clerical, secretarial, bookkeeping and collection
personnel, as is reasonably necessary for the efficient conduct of its
operations. The Joint Policy Board shall determine the salaries and benefits of
any Physician Associate. The salaries and benefits of Physician Extender
Employees shall be determined by MCP after consultation with the Joint Policy
Board and the Physician Responsibility Center utilizing such Physician Extender
Employee. Such personnel shall be under the direction, supervision and control
of MCP, except that those personnel performing patient care services shall be
subject to the professional supervision of the Physicians to whom they are
assigned. If any Physician Member is dissatisfied with the services of any
employee who provides services for such Physician Member at the Premises, MCP,
after consultation with the Joint Policy Board, shall in good faith determine
whether the performance of that employee could be brought to acceptable levels
through counsel and assistance, or whether such employee should be terminated.
If MCP determines to retain such employee and the Physician Member is still
dissatisfied with such employee's services after a two (2) month period, MCP
shall either relocate such employee or otherwise cease to utilize such employee
unless MCP reasonably determines that such termination may expose MCP to
liability.
(b) The staffing of MCP shall be governed by the overriding
principle and goal of providing high-quality medical care. Employee assignments
shall be made to attempt to assure consistent and continued rendering of
high-quality medical and support services and to attempt to assure prompt
availability and accessibility of individual medical and support personnel to
the Physician Members in order to develop constant, familiar and routine working
relationships between individual physicians and individual members of the
medical support personnel. MCP shall maintain established working relationships
between Physician Members, Physician Associates, Physician Extender Employees
and non-physician employees wherever possible and MCP shall make every effort
consistent with sound business practices to honor the specific requests of a
Physician Member with regard to the assignment of MCP's employees. MCP agrees
not to terminate or transfer any employee listed on Exhibit D without the
consent of the Joint Policy Board, which consent shall not be unreasonably
withheld.
(c) MCP and each Physician Member agree not to discriminate
unlawfully against any employee of MCP on the basis of race, religion, age, sex,
sexual orientation, disability or national origin, or any other basis proscribed
by laws.
Section 2.9. Provider and Pavor Relationships. MCP shall negotiate,
--------------------------------
establish, supervise and maintain all contracts and relationships
(collectively, the "Managed Care Contracts") with all managed care
-11-
<PAGE>
and institutional healthcare providers and payors, health maintenance
organizations, preferred provider organizations, exclusive provider
organizations, Medicare, Medicaid and other similar entities (collectively,
"Managed Care Payors"). Each Physician Member appoints MCP and PQC as the
Physician Member's exclusive agents for the negotiation and establishment of
Managed Care Contracts and shall not enter into a Managed Care Contract or
assume any liability under a risk pool or similar arrangement without MCP's and
Joint Policy Board's consent. Except as otherwise provided herein, approval,
disapproval, termination or amendment of any contract or relationship of such
Managed Care Payors with MCP shall be the joint responsibility of the Joint
Policy Board and MCP. The allocation of profits and losses with respect to risk
pools under any Managed Care Contract shall be allocated among Physician
Responsibility Centers in a manner mutually acceptable to each Physician
Responsibility Center which is participating in such Managed Care Contract, or,
in the event that such Physician Responsibility Centers can not agree upon such
allocation, as determined in good faith by MCP and approved by the Joint Policy
Board.
Section 2.10. Events Excusing Performance. In the event of strikes,
---------------------------
lock-outs, calamities, acts of God, or other events beyond the reasonable
control of MCP, MCP shall not be liable to any Physician Member for failure to
perform any of the services required hereunder and the Physician Members shall
not have the right, as a result of such events and their consequences, to
terminate their Employment Agreements pursuant to Article X of these Terms and
Conditions, for so long as such events continue and for a reasonable period of
time thereafter; provided that MCP uses its reasonable efforts to cure any
nonperformance capable of being cured as soon as practicable.
Section 2.11. Performance Standard. All services, facilities,
--------------------
furniture, fixtures, and equipment provided by MCP shall be provided in a manner
consistent with community standards for medical practices of similar locality,
size and speciality.
Section 2.12. Provision of Service Through Third Parties. Any services
------------------------------------------
or other obligation required to be provided by MCP pursuant to these terms and
conditions may, at MCP's sole election, be provided through third parties,
including PQC or any of its Affiliates.
Section 2.13. Compliance with Laws. For purposes of this Section 2.13,
---------------------
actions of, or the failure to comply by, a Physician Member or by any person
under a Physician Member's supervision shall not be deem to be an action of, or
failure to comply by, MCP. MCP shall comply, in all material respects with all
applicable federal, state and local laws, rules, regulations and restrictions in
the conduct of MCP's business. Without limiting the generality of the foregoing,
MCP shall comply with all Medical Waste Laws applicable to the operation of MCP
in the generation, transportation, treatment, storage, disposal or other
handling of Medical Waste. MCP agrees not to:
(a) enter into any contract, lease, agreement or arrangement,
including, but not limited to, any joint venture or consulting agreement, to
provide services, lease space, lease equipment or engage in any other venture or
activity with any physician, hospital, pharmacy, home health agency or other
person or entity which is in a position to make or influence referrals to, or
otherwise generate business for, MCP, if such transaction is in violation of any
applicable law, rule or regulation;
(b) knowingly and willfully make or cause to be made a false
statement or representation of a material fact in any application for, or in
determining rights to, any benefit or payment;
(c) fail to disclose knowledge by a claimant of the
occurrence of any event affecting the initial or continued right to any benefit
or payment on its own behalf or on behalf of another, with intent to
fraudulently secure such benefit or payment;
(d) knowingly and willfully pay, solicit or receive any
remuneration (including any kickback, bribe, or rebate), directly or indirectly,
overtly or covertly, in cash or in kind or offer to pay or
-12-
<PAGE>
receive such remuneration (i) in return for referring an individual to a person
for the furnishing or arranging for the furnishing of any item or service for
which payment may be made in whole or in part by Medicare or Medicaid, or (ii)
in return for purchasing, leasing, or ordering, or arranging for or recommending
purchasing, leasing, or ordering any good, facility, service, or item for which
payment may be made in whole or in part by Medicare or Medicaid; and
(e) refer a Medicare or Medicaid patient for Designated
Health Services (as defined in Stark) to, or provide Designated Health Services
to, a patient upon a referral from, an entity or person with which MCP has a
financial relationship, other than as permitted by exceptions set forth in
Stark.
Section 2.14. Advance of Initial Working Capital. PQC agrees to advance
to MCP working capital in an amount as shall reasonably be require to fund MCP's
operations for the first 45 days after the Effective Date. Thereafter, PQC may,
if required for the operations of MCP, but shall not be obligated to, provide
MCP with additional working capital financing. Any advance for working capital
shall be in the form of a loan, repayable to PQC upon demand, that shall not
accrue interest until 60 days after the Effective Date. If any amount remains
outstanding thereafter, such working capital loan shall bear interest at such
rate as PQC and the Joint Policy Board shall agree or, in the absence of such
agreement, at a rate 200 basis points above the rate charged for prime
commercial loans by commercial banks in the City of Boston.
Article III
Obligations of Physician Members
Section 3.1. Professional Services. Each Physician Member shall provide
---------------------
professional services to patients in compliance at all times with ethical
standards, laws, rules and regulations applicable to the operations of MCP and
the Physician Members and any standards, guidelines, policies and procedures
established by MCP or the Medical Advisory Board. Each Physician Member
represents to MCP that such Physician Member has and will maintain all required
licenses, credentials, approvals or other certifications to perform his or her
duties and services for MCP. In the event that any disciplinary actions or
medical malpractice actions are initiated against any Physician Member or the
Physician Member becomes aware of the breach of any law, policies, guidelines,
procedures or standards, such Physician Member shall promptly inform the
president of MCP of such action and the underlying facts and circumstances.
Section 3.2. Medical Practice. (a) The primary responsibility of the
----------------
Physician Member shall be to provide medical services to MC P's patients with
scheduled office hours at MCP's medical practice offices or any other site
served by MCP in the Commonwealth of Massachusetts or, if the Physician Member
holds a valid, unencumbered medical license in Connecticut, the State of
Connecticut. The Physician Member shall be available for regularly scheduled
office visits consistent with the schedule generally applicable to Physician
Members and developed by the Medical Director. The Physician Members shall use
and occupy the Premises exclusively for the practice of medicine and for
providing other related services. Unless otherwise approved in writing by MCP,
it is expressly acknowledged by each Physician Member that the medical practice
or practices conducted at MCP shall be conducted solely by physicians associated
with MCP, and no other physician or medical practitioner shall be permitted to
use or occupy the Premises. All medical professional services, including, but
not limited to, diagnosis, treatment, surgery, therapy, the prescription of
medicine and drugs, and the supervision and preparation of medical reports shall
be the responsibility of the Physicians.
(b) A Physician Member shall devote the Physician Member's
full professional time, attention and energy to the Physician Member's medical
practice and other professional duties, except as both MCP and the Joint Policy
Board shall otherwise agree. MCP agrees that it will at no time knowingly
-13-
<PAGE>
issue to the Physician Member any direction or impose upon the Physician Member
any requirements the compliance with which would cause the Physician Member to
violate any regulations or mandatory professional standards applicable to the
Physician Member. The Physician Member agrees to provide professional services
to all MCP patients that are customarily performed by physicians including, but
not limited to, examination of patients, performance of diagnostic procedures,
treatment, surgery (if the Physician Member is a surgeon), consultation and
referral, prompt preparation of medical records, charts and reports and
follow-up care. The Physician Member agrees that any medical services rendered
by the Physician Member to MCP's patients who expressly desire to engage the
Physician Member personally shall be rendered by the Physician Member as an
employee of MCP. The Physician Member further agrees to serve on committees and
to perform such other professional duties and responsibilities and comply with
such policies and procedures as may be reasonably designated or adopted from
time to time by MCP and, if required by Section 4.1, the Joint Policy Board.
(c) The Physician Member agrees and understands that, as a
condition of employment, the Physician Member must maintain in good standing an
unrestricted license to practice medicine in the Commonwealth of Massachusetts
or the State of Connecticut. The Physician Employee agrees to participate as a
provider in MCP's local care networks and all other managed care plans and other
third-party payment arrangements approved as to the Physician Member by the
Joint Policy Board.
(d) The Physician Member shall participate in an on-call
rotation to provide twenty-four (24) hour availability and coverage in person or
on an on-call basis for MCP's patients, in each case as determined by the
Medical Director.
(e) The Physician Member shall maintain active privileges as
a member of the active or courtesy staff of any hospital in the Commonwealth of
Massachusetts or the State of Connecticut with MCP's consent or as MCP shall
reasonably require.
Section 3.3. Professional Education. Each Physician Member shall
----------------------
participate in such medical education programs as shall be necessary for such
Physician Member to maintain the Physician Member's licenses and credentials or
as shall otherwise be necessary for the efficient conduct of the Physician
Member's practices.
Section 3.4. Cooperation with Other Employees. Each Physician Member
--------------------------------
agrees not to interfere with, and shall take all steps reasonably necessary for
the other employees of MCP, including the Operating Manager, to perform their
duties.
Section 3.5. Name. Each Physician Member agrees that MCP shall be
----
entitled to use on a royalty free, non-exclusive and non-transferable basis for
the term of the Employment Agreement, solely in connection with advertising for
or informational documents with respect to MCP or PQC, the name of each
Physician Member.
Section 3.6. Compliance with Laws. Each Physician Member shall comply,
--------------------
in all material respects with all applicable federal, state and local laws,
rules, regulations and restrictions in the conduct of MCP's business. Without
limiting the generality of the foregoing, each Physician Member shall comply
with all Medical Waste Laws applicable to the operation of MCP in the
generation, transportation, treatment, storage, disposal or other handling of
Medical Waste (to the extent that the Physician Member or persons under the
Physician Member's supervision engage in such activities). Each Physician Member
agrees not to:
(a) enter into any contract, lease, agreement or arrangement,
including, but not limited to, any joint venture or consulting agreement, to
provide services, lease space, lease equipment or engage in any other venture or
activity with any physician, hospital, pharmacy, home health agency or other
-14-
<PAGE>
person or entity which is in a position to make or influence referrals to, or
otherwise generate business for, MCP or any Physician Member, if such
transaction is in violation of any applicable law, rule or regulation;
(b) knowingly and willfully make or cause to be made
a false statement or representation of a material fact in any application
for, or in determining rights to, any benefit or payment;
(c) fail to disclose knowledge by a claimant of the
occurrence of any event affecting the initial or continued right to any benefit
or payment on the Physician Member's own behalf or on behalf of another, with
intent to fraudulently secure such benefit or payment;
(d) knowingly and willfully pay, solicit or receive any
remuneration (including any kickback, bribe, or rebate), directly or indirectly,
overtly or covertly, in cash or in kind or offer to pay or receive such
remuneration (i) in return for referring an individual to a person for the
furnishing or arranging for the furnishing of any item or service for which
payment may be made in whole or in part by Medicare or Medicaid, or (ii) in
return for purchasing, leasing, or ordering, or arranging for or recommending
purchasing, leasing, or ordering any good, facility, service, or item for which
payment may be made in whole or in part by Medicare or Medicaid; and
(e) refer a Medicare or Medicaid patient for Designated
Health Services (as defined in Stark) to, or provide Designated Health Services
to, a patient upon a referral from, an entity or person with which the Physician
Member or an immediate family member has a financial relationship (as defined in
Stark), other than as permitted by exceptions set forth in Stark.
Section 3.7. Other Medical Services. During the term of a Physician
----------------------
Member's Employment Agreement and thereafter subject to Section 8.1, a Physician
Member shall not (directly or as an employee, shareholder, partner, consultant
or otherwise) acquire. establish or commence the operation of any medical
office, ambulatory surgery center, Integrated Health Service, optical shop,
health maintenance organization. preferred provider organization, exclusive
provider organization or similar entity or organization without the prior
approval of the Joint Policy Board and PQC.
Section 3.8. Premises and Personal Property. Each Physician Member
------------------------------
shall use his or her best efforts to prevent damage, excessive wear and tear,
and malfunction or other breakdown of the Premises and Personal Property or any
part thereof by the Physician Members. Each Physician Member shall promptly
inform MCP in writing of any and all necessary replacements, repairs or
maintenance to any of the Premises or Personal Property and any failures of
equipment that such Physician Member becomes aware of. Each Physician Member
shall comply in all material respects with all of the covenants and provisions
set forth in any leases or subleases for the Premises entered into or assumed by
MCP.
Section 3.9. Assignment of Intellectual Property. Each Physician
-----------------------------------
Member agrees to assign to PQC any Intellectual Property rights that the
Physician Member acquires during the term of the Employment Agreement; provided,
that the Physician Member shall not be required to assign to PQC Intellectual
Property rights that relate to (i) non-medical studies and inventions, (ii)
royalties from medical devices unless developed as part of the Physician
Member's services to MCP, (iii) publications on clinical aspects of a medical
practice unless developed as a part of the Physician Member's services to MCP
and (iv) medical books and articles designed primarily for purchase by non-
physicians and (v) any Intellectual Property developed by the Physician Member
prior to, or in progress on, the date of the Employment Agreement as disclosed
in writing to MCP on such date. MCP intends to review the feasibility of
commercializing any Intellectual Property assigned to it pursuant to these Terms
and Conditions. If PQC elects to commercialize such Intellectual Property, PQC
and the Physician Member shall enter into an agreement on terms acceptable to
PQC and the Physician Member to share the costs and revenues from such
commercialization with the Physician Member that assigned the Intellectual
Property to PQC. Each Physician Member agrees for the benefit of PQC, to execute
such further instruments or agreements, to
-15-
<PAGE>
make such filing or registration and to take such other actions as PQC
determines to be necessary or desirable to give effect to the assignments
contemplated by this Section 3.9 or to protect. establish or record PQC's rights
to such Intellectual Property. Each Physician Member also agrees that PQC, the
Joint Policy Board and the Compensation Committee may consider the time devoted
by the Physician Member to the development or promotion of Intellectual Property
rights that are not assigned to PQC in determining a Physician Member's
operating budget (and the operating budget of the Physician Responsibility
Center of which such Physician Member is a part) and the allocation of the
Compensation Pool among Physician Members and Physician Responsibility Centers.
Article IV
Joint Policy Board
Section 4.1. Formation and Operation of the Joint Policy Board. (a)
-------------------------------------------------
MCP shall establish a Joint Policy Board that is responsible for developing
certain management and administrative polices for the overall business operation
of MCP and facilitating communication and interaction between MCP and the
Physician Members. The Joint Policy Board shall have the following duties and
responsibilities:
(i) Approval of all annual budgets with respect to each Physician
Responsibility Center, including but not limited to, the
salaries and benefits of Physician Associates, Targeted
Physician Responsibility Center Revenues and Targeted
Physician Responsibility Center Expenses with respect to each
Physician Responsibility Center and amounts to be expended
with respect to insurance coverage, acquisition of information
and management systems hardware and software, facilities,
furniture, equipment and fixtures, professional association
memberships, professional education and development of
ancillary services;
(ii) Determination of the policy of MCP with respect to courtesy
discounts, professional discounts, free care and other
matters;
(iii) Approval of the number and type of physicians required for the
efficient operation of MCP;
(iv) Approval of any modification to the definition of all
revenues and expenses under these Terms and Conditions;
(v) Review and approval of all advertising and other marketing
of the services performed at MCP;
(vi) Approval of the scope of Integrated Health Services provided
by MCP as contemplated by Section 2.2(c) and any revenue and
expense allocation with respect to such Integrated Health
Service if different than the allocation provided in Section
7.2;
(vii) Approval of the formation, maintenance and/or termination
of relationships with institutional health care providers and
payors;
(viii) Approval of all contracts material to MCP, including all
amendments to real property leases in effect on the Effective
Date, and all the terms of and amendments to all real property
leases entered into after the date thereof, governing the
space utilized by any Physician Member;
-16-
<PAGE>
(ix) Consideration and determination of non-patient care grievances
pertaining to matters raised by MCP or the Physician Members;
(x) Approval of the transfer or termination of any non-physician
employee listed on Exhibit E, as contemplated by Section
2.8(b);
(xi) Approval of any review of the records of MCP as contemplated
by Section 2.1(d);
(xii) Approval of fee schedules;
(xiii) Allocation of profit and losses from risk pools to the extent
contemplated by Section 2.9;
(xiv) Approval of the Operating Manager;
(xv) Approval of any change in the Base Compensation Pool Amount to
reflect the addition or termination of Physician Members or to
reflect other factors it deems appropriate, in each case as
contemplated by Section 1.3(d);
(xvi) Approval of business and strategic plans;
(xvii) Approval of MCP's determination to terminate a Physician
Member upon disability;
(xviii) Approval of the modification or waiver of the restriction
covenants applicable to any Physician Member; and
(xix) Other activities as required by these Terms and Conditions.
The Joint Policy Board may consult with MCP, PQC and any Physician
Member before taking any action specified in this Section 4.1. but, except as
otherwise provided in these Terms and Conditions, neither the recommendations of
MCP, PQC nor any Physician Member shall be binding on the Joint Policy Board.
Any determination of the Joint Policy Board pursuant to (i), (iii), (iv), (vi),
(vii), (viii), (xiv), (xv), (xiv), and (xv) shall not be effective unless
approved by the MCP Shareholder. The President of MCP and a member of the Joint
Policy Board designated by PQC shall act as Co-Chairs of the Joint Policy Board.
Section 4.2. Number, Election and Qualification. The number of
----------------------------------
members which shall constitute the Joint Policy Board shall be nine (9). The
Physician Members, by a majority vote of the Physician Members, shall appoint
four (4) members of the Joint Policy Board; two (2) of whom shall be primary
care physicians and two (2) of whom shall be specialist physicians (the
"Physician Board Members"). PQC shall appoint five (5) members of the Joint
Policy Board, one (1) of whom shall be the President of MCP ("MCP Board
Members").
Section 4.3. Tenure. Each member of the Joint Policy Board shall
------
hold office for any number of terms, each term to be for three (3) years, except
that the initial terms of one-third (1/3) of the initial members shall be for a
term of one (1) year, one-third (1/3) shall have an initial term of two (2)
years and one-third (1/3) shall have an initial term of three (3) years. In the
event that there is a vacancy existing by reason of the death, resignation,
removal or expiration of the term of one (1) or more members of the Joint Policy
Board, such vacancy shall be filled by a person elected by whoever had
previously appointed such member, either Physician Members or PQC, as the case
may be. Each such successor shall hold office for the unexpired term of his or
her predecessor. Any member of the Joint Policy Board may resign by delivering
his or her written resignation to the President of MCP. A Physician Board Member
may be removed and replaced at any time with or without cause upon the
affirmative vote of a majority of the
-17-
<PAGE>
Physician Members. A PQC appointed Joint Policy Board Member may be replaced
at any time with or without cause by the PQC.
Section 4.4. Subcommittees of the Joint Policy Board. The Joint
---------------------------------------
Policy Board may, by the vote of a majority of its members, elect such
committees, including an Information Systems Subcommittee, as the members of the
Joint Policy Board shall determine to be appropriate; provided, however, that
the Joint Policy Board shall establish a Dispute Resolution Subcommittee with
the powers and duties specified in Sect Section 4.5 hereof; provided further
that the Joint Policy Board shall not delegate to any other committee the duties
and responsibilities assigned to the Dispute Resolution Subcommittee. The
Dispute Resolution Subcommittee shall be composed of the persons designated in
Section 4.5. Subcommittees may include persons who are not members of the Joint
Policy Board. All subcommittees shall be chaired by a member of the Joint Policy
Board. Each subcommittee shall include, to the extent practicable, members who
are engaged in a primary care practice and physicians engaged in a specialist
practice in a ratio of 3:2.
Section 4.5. Dispute Resolution Subcommittee. The Joint Policy Board
-------------------------------
shall establish a Dispute Resolution Subcommittee. The Subcommittee shall
consist of the following five (5) members: the President of MCP, the Medical
Director of MCP, the Operating Manager and two (2) members (who shall be members
of the Joint Policy Board) appointed by the Physician Members. The President of
MCP shall act as Chair of the Dispute Resolution Subcommittee. The Dispute
Resolution Subcommittee shall have the authority to consider and make a final
determination with respect to (i) any issue within the authority of the Joint
Policy Board that has been presented for consideration by the Joint Policy Board
but with respect to which an equal number of members of the Joint Policy Board
have voted against and in favor, and (ii) any non-patient care grievances that
are referred to the Dispute Resolution Subcommittee by MCP or the Joint Policy
Board.
Article V
Medical Advisory Board
Section 5.1. Medical Advisory Board. A Medical Advisory Board shall
----------------------
be established, which shall be responsible for (i) providing medical advice to
MCP on managed care contracting, (ii) developing and disseminating, subject to
MCP's approval, medical protocols and quality and outcome measures for MCP and
the Physicians, (iii) advising MCP with respect to the number and qualifications
of physicians required for the efficient operation of MCP's practice and (iv)
overseeing the recruitment by MCP and credentialling of new physicians. The
Medical Advisory Board shall consist of seven (7) members. The members of the
Medical Advisory Board shall be the Medical Director of MCP and six (6) other
licensed physicians elected by a majority of the Physician Members, of whom four
(4) shall be primary care physicians and two (2) shall be engaged in a
specialist practice. The Medical Director of MCP shall act as chair of the
Medical Advisory Board. Each member of the Medical Advisory Board shall hold
office for any number of three (3) years terms and until successors are elected.
In the event that there is a vacancy existing by reason of the death,
resignation, removal or expiration of the term of one (1) or more members of the
Medical Advisory Board, such vacancy shall be filled by a physician elected by a
majority of the Physician Members, except that vacancies created by the death,
resignation, removal of the Medical Director shall only be filled by the
successor Medical Director or an interim Medical Director selected by MCP. Each
such successor shall hold office for the unexpired term of his or her
predecessor. Any member of the Medical Advisory Board may resign by delivering
his or her written resignation to the President of MCP. A member of a Medical
Advisory Board may be removed with or without cause by the vote of a majority of
Physician Members, except that the Medical Director may only be removed by
seventy-five percent (75%) of the Physician Members. The Medical Director shall
be responsible for organizing the agenda for each meeting of the Medical
Advisory Board.
-18-
<PAGE>
Section 5.2. Subcommittees of the Medical Advisory Board. The
-------------------------------------------
Medical Advisory Board may, by a vote of a majority of its members, elect such
committees, including the Quality Assurance Committee, Utilization Review
Committee and the Committee on Clinical Protocols and Medical Outcome
Management, as the members of the Medical Advisory Board shall determine to be
appropriate. Subcommittees may include physicians who are not members of the
Medical Advisory Board. Each subcommittee shall be chaired by a member of the
Medical Advisory Board and shall include physicians engaged in a primary care
practice and physicians engaged in a specialist practice in a ratio of 3:2.
Article VI
Certain Provisions Regarding the
Governance of MCP
Section 6.1. The President of MCP. (a) MCP shall hire and appoint a
---------------------
physician to act as President of MCP who shall work in conjunction with the
Operating Manager in order to implement the policies established by the Joint
Policy Board. Subject to the direction and supervision of PQC and the Board of
Directors of MCP, the duties of the President shall include, without limitation,
(i) interfacing with representatives from the national corporate offices of PQC;
(ii) in cooperation with the Operating Manager, implementing the business and
strategic plans of MCP and overseeing the business operation of MCP; (iii) in
cooperation with the Operating Manager, negotiating and interfacing with payors
and other regulatory agencies; and (iv) serving as the Co-chair of the Joint
Policy Board and the Chair of the Dispute Resolution Subcommittee. The MCP
Shareholder shall determine the salary and fringe benefits of the President, who
shall also be an employee of MCP or one of its Affiliates.
(b) Subject to the By-Laws of MCP, the Physician Members shall
nominate three (3) candidates, who shall be primary care physicians, for the
position of President and the MCP Shareholder shall select one (1) candidate
from among such nominees to be employed by MCP as President. In the event that
there is a vacancy in the position of President at any time for any reason, the
MCP Shareholder shall have the authority to appoint a person to serve as interim
President until another person is duly appointed in accordance with the above
specified procedures. The President shall serve part-time in this capacity until
such time as his/her responsibilities warrant full-time employment status. The
President shall serve for an initial period of two (2) years, which may be
renewed for a maximum of two (2) additional two (2) year terms, subject to the
control of and review by MCP. MCP shall assist in the development of procedures
for the nomination, appointment and replacement of the President in such a
manner as to ensure a smooth transition period in the medical practice of any
individual who assumes the position of the President.
Section 6.2. The Medical Director of MCP. (a) MCP shall hire and
----------------------------
appoint a physician to act as Medical Director to provide guidance and advice to
MCP on clinical issues. The duties of the Medical Director shall include,
without limitation, (i) interfacing with the National Medical Advisory Board of
PQC and representing MCP on the PQC National Medical Advisory Board; (ii)
chairing the Medical Advisory Board; (iii) providing medical advice on managed
care contracting by MCP; (iv) leading the development and dissemination of
medical protocols, quality and outcome measures; and (v) overseeing the
recruitment and credentialling of new physicians. The MCP Shareholder shall
determine the salary and fringe benefits of the Medical Director, who shall also
be an employee of MCP or one of its Affiliates.
(b) Subject to the By-Laws of MCP, the Physician Members shall
nominate three (3) candidates, who shall. be engaged in a specialist practice,
for the position of Medical Director and MCP shall select one (1) candidate from
among such nominees to be employed by MCP as Medical Director. In the event that
there is a vacancy in the position of Medical Director at any time for any
reason, the MCP Shareholder shall have the authority to appoint a person to
serve as interim Medical Director until another person is
-19-
<PAGE>
duly appointed in accordance with the above specified procedures. The Medical
Director shall serve part-time in this capacity until such time as his"'her
responsibilities warrant full-time employment status. The Medical Director shall
serve for an initial period of three (3) years, which may be renewed for a
maximum of two (2) additional three (3) year terms, subject to the control of
and review by MCP and the Physician Members. The Medical Director can be removed
prior to the end of his or her term by the vote of seventy-five percent (75%) of
the Physician Members. MCP shall assist in the development of procedures for the
nomination, appointment and replacement for the Medical Director in such a
manner as to ensure a smooth transition period in the medical practice of any
individual who assumes the position of the Medical Director.
Section 6.3. Operating Manager. Subject to the reasonable approval
-----------------
of the Joint Policy Board, MCP shall retain a non-physician employee to serve as
an Operating Manager (the "Operating Manager"). The Operating Manager shall
manage and administer all of the day-to-day business functions necessary for the
operation of MCP. MCP shall determine the salary and fringe benefits of the
Operating Manager. At the direction, supervision and control of MCP, the
Operating Manager shall implement the policies established by MCP and the Joint
Policy Board and shall generally perform the duties and have the
responsibilities of an administrator.
Article VII
Compensation for Physician Services
Section 7.1. Compensation Pool. As exclusive compensation for the
-----------------
services of the Physician Members under their respective Employment Agreements,
MCP shall establish a compensation pool (the "Compensation Pool") which, on an
annual basis, shall be in an amount determined pursuant to this Section 7.1 and
Section 7.2 and shall be allocated among and distributed to the Physician
Members as provided in Section 7.4. No Physician Member shall be entitled to any
compensation for services under an Employment Agreement or these Terms and
Conditions except as provided in this Article VII. The amount of the
Compensation Pool with respect to each Fiscal Period shall be determined as an
allocation of Stage One Gross Margin between the Compensation Pool and MCP,
which allocation shall be determined as provided below:
(a) First, an amount equal to ninety-five percent (95%) of any
Stage One Gross Margin with respect to any Fiscal Period shall be
allocated to the Compensation Pool until the total allocation to the
Compensation Pool for such Fiscal Period equals the ninety-five percent
(95%) of the Base Compensation Pool Amount (or a proportionally lesser
amount for any Fiscal Period that is less than twelve (12) calendar
months) and five percent (5%) of Stage One Gross Margin shall be
allocated to MCP Allocation Account until the total allocation to the
MCP Allocation Account equals five percent (5%) of the Base
Compensation Pool Amount (or a proportionally lesser amount for any
Fiscal Period that is less than twelve (12) calendar months);
(b) Second, any Stage One Gross Margin with respect to any Fiscal
Period that remain after allocation of the Stage One Gross Margin
pursuant to Clause (a) ("Stage Two Gross Margin"), shall be allocated
to the Practice Fund Account up to an amount sufficient to cause the
balance in such account to be equal to zero;
(c) Third, any Stage Two Gross Margin with respect to any Fiscal
Period that remain after allocation of the amounts pursuant to Clauses
(a) and (b) shall be allocated twenty percent (20%) to the Compensation
Pool and eighty percent (80%) to MCP Allocation Account until the
amount of Stage One or Stage Two Gross Margin allocated to the MCP
Allocation Account pursuant to Clause
-20-
<PAGE>
(a) or this Clause (c) equals fifteen percent (15%) of Stage One Gross
Margin with respect to any Fiscal Period; and
(d) Fourth, any Stage Two Gross Margin that remains after
allocation of the amounts pursuant to (a), (b) and (c) ("Stage Three
Gross Margin") shall be allocated fifty percent (50%) to the
Compensation Pool and fifty percent (50%) to the MCP Allocation
Account.
The allocation of Stage One, Stage Two and Stage Three Gross Margins to
the Compensation Pool pursuant to this Section 7.1 shall be calculated
separately for each Fiscal Period. Subject to review by the Joint Policy Board,
MCP shall be responsible for the calculating of the amounts of Stage One, Stage
Two and Stage Three Gross Margins to be allocated to each of MCP and the
Compensation Pool. If the Stage One Gross Margin for any Fiscal Period is
negative, such negative amount shall be an Responsibility Center Operating
Expenses for the next following Fiscal Period.
Section 7.2. Integrated Health Services. As additional compensation
--------------------------
for the services of the Physician Members under the Employment Agreements and
these Terms and Conditions, IHS Profits (whether a profit or loss) shall be
allocated fifty percent (50%) to the Compensation Pool and fifty percent (50%)
to the MCP Allocation Account; provided, however, that with respect to the
provision of individual Integrated Health Services, MCP and the Joint Policy
Board may approve a different allocation of revenues between the Compensation
Pool and the MCP Profit Account. The allocation of IHS Profits shall be
calculated separately for each Fiscal Period pursuant to this Section 7.2.
Section 7.3. Establishment of Budgets for Physician Responsibility
-----------------------------------------------------
Centers. Prior to the end of each Fiscal Period, MCP shall establish a capital
- -------
and operating budget for each Physician Responsibility Center. The capital and
operating budgets for each Physician Member Responsibility Center shall
initially be jointly developed by the Operating Manager and a Physician
representative (the "Representative") of the Physician Responsibility Center.
Targeted Responsibility Center Operating Revenues and Targeted Responsibility
Center Operating Expenses shall be established for the next Fiscal Period with
respect to each Physician Responsibility Center. After the capital and operating
budgets have been established by the Operating Manager and the Representative,
the capital and operating budgets, including the Targeted Responsibility Center
Operating Revenues and Targeted Responsibility Center Operating Expenses for
each Physician Responsibility Center shall be submitted to the Joint Policy
Board. If the Operating Manager and the Representative can not agree upon
capital and operating budgets, each of the Operating Manager and the
Representative shall submit a proposed budget to the Joint Policy Board. The
Joint Policy Board shall approve or modify the budgets or the Targeted
Responsibility Center Operating Revenues and Targeted Responsibility Center
Operating Expenses with respect to any Physician Responsibility Center. At any
point during a Fiscal Period, the Joint Policy Board may, and if the actual
Physician Responsibility Center Net Revenues are below the projected Physician
Responsibility Center Net Revenues for such Physician Responsibility Center
shall, review the budgets for such Physician Responsibility Center and make such
changes to such budgets, including the Base Distributions, as the Joint Policy
Board deems to be appropriate. All capital and operating budgets, and changes
thereto, also shall be subject to the approval of PQC.
Section 7.4. Allocation of the Compensation Pool Among Physician
---------------------------------------------------
Members. (a) On a weekly basis, MCP shall distribute to each Physician
- -------
Responsibility Center (other than a Laboratory Center the contribution from
which will be allocated pursuant to Section 7.4(b)) from the Compensation Pool
an amount equal to 80% of one-fifty-second of the Base Compensation Pool Amount
allocated to such Physician Responsibility Center pursuant to the operating
budget approved by the Joint Policy Board (the "Base Distribution") less the
Deductible Expenses allocated to such Physician Responsibility Center (which
amount shall be distributed to MCP); provided, however. if at any time during a
Fiscal Period MCP determines that the amount of Revenues allocated to the
Compensation Pool for any Fiscal Period may be less than ninety-five percent
(95%) of the Base Compensation Pool Amount for such Fiscal Period, or if
-21-
<PAGE>
MCP or the Joint Policy Board determine the Physician Responsibility Center
Operating Expenses for such Fiscal Period will exceed the Targeted Physician
Responsibility Center Operating Expenses for such Physician Responsibility
Center's or the Physician Responsibility Center's Operating Revenues will be
less than the Physician Responsibility Center's Targeted Responsibility Center
Operating Revenues, MCP may, subject to the approval of the Joint Policy Board,
which approval shall be granted unless the Joint Policy Board determines in good
faith that such shortfall in revenues or increase in operating expense is
primarily attributable to MCP, reduce the Base Distributions as MCP determines
to be appropriate in order that the aggregate Base Distributions to all
Physician Responsibility Centers do not exceed the amount of the Compensation
Pool for such Fiscal Period. MCP may, but shall not be required to, advance
money to the Compensation Pool to fund such Base Distributions. Within 45 days
of the end of each three-month period, the MCP shall advise the Compensation
Committee of the amount (the "Variable Distribution Pool"), if any, of the
Compensation Pool that has not been used, or is not reasonably anticipated by
MCP to be needed to fund, the Base Distributions. The Compensation Committee, by
the approval of a majority of the members of such committee, shall determine how
the Variable Distribution Pool, if any, shall be allocated among the Physician
Responsibility Centers. Distributions of the Base Distribution and, if
applicable, the Variable Distribution Pool to a Physician Responsibility Center
shall be allocated among the Physician Members of such Physician Responsibility
Center as determined by a majority of the Physician Members in such Physician
Responsibility Center.
(b) Within 45 days after the end of each calendar quarter, MCP
shall distribute to the Physician Responsibility Centers (other than a
Laboratory Center) from the Compensation Pool an amount in aggregate equal to
the net amount contributed to the Compensation Pool with respect to any
Laboratory Centers. If a Laboratory Center Physician Responsibility Center
Operating Revenues are less than the Laboratory Center Physician Responsibility
Center Operating Expenses. the amount of such difference shall be deducted from
distributions payable to the Physician Responsibility Centers pursuant to
Section 7.4(a). The Compensation Committee, by the approval of a majority of the
members of such committee, shall determine how the distributions from the
Compensation Pool with respect to Laboratory Centers shall be allocated among
the Physician Responsibility Centers. Distributions from the Compensation Pool
with respect to Laboratory Centers shall be allocated among the Physician
Members of the Physician Responsibility Centers as determined by a majority of
the Physician Members in such Physician Responsibility Center.
(c) The determination of the Compensation Committee and Physician
Responsibility Centers pursuant to this Section 7.4 shall be binding upon MCP
and each Physician Member, and neither PQC nor MCP shall not have any liability
to the Physician Members as a result of any determination of the Compensation
Committee or any Physician Responsibility Center; provided. however, that MCP
shall not be required to make any distribution in accordance with the
determinations of the Compensation Committee or any Physician Responsibility
Center that MCP reasonably believes to conflict with Stark or any other federal
or state statute or regulation. In no event shall any Physician Member be
entitled to any compensation in addition to that determined pursuant to this
Section 7.4 nor shall the aggregate compensation to all Physician Members with
respect to any Fiscal Period exceed the amount of the Compensation Pool for such
Fiscal Period.
Section 7.5. Modification to Sections 7.1 and 7.2. Six months prior
------------------------------------
to the third anniversary of the Effective Date, MCP or a majority of the
Physician Members shall be entitled to require that the provisions of Section
7.1 and Section 7.2 of these Terms and Conditions be amended, effective as of
the third anniversary of the Effective Date (for Fiscal Periods commencing after
such date), so that the economic terms of the Employment Agreements and the
Terms and Conditions, taken as a whole, (and giving effect to any payments or
other compensation received by the Physician Member in connection with their
Affiliation with MCP) are adjusted to reflect the terms being entered into by
independent third parties for similar affiliation and employment relationships
at such time. If MCP and a majority of the Physician Members are not able to
agree upon economic terms that are reflective of then current market practice
for
-22-
<PAGE>
similar affiliation and employment relationships, the determination of market
practice shall be submitted to binding arbitration in accordance with Section
11.1.
Article VIII
Restrictive Covenants and Liquidated Damages
Section 8.1. Restrictive Covenants.
---------------------
(a) Noncompetition. During the term of a Physician Member's
--------------
Employment Agreement, a Physician Member shall not, without the prior written
consent of MCP, directly or indirectly (whether as a shareholder, employee,
individual, partner, independent contractor, consultant or otherwise),
establish, operate or provide physician or other medical services at any medical
office, clinic or other healthcare facility providing services similar to those
provided by MCP, PQC or any of their Affiliates in the MCP region. In addition,
for a period of one (1) year after the termination of a Physician Member's
Employment Agreement, such Physician Member shall not establish, operate or
provide physician or other medical services (whether as an employee,
shareholder, partner, independent contractor, manager, consultant or otherwise)
at any medical office, clinic or other healthcare facility providing services
similar to those provided by MCP, PQC or their Affiliates within twenty-five
(25) miles of the Premises at which the Physician Member practiced at the time
of such termination of employment; provided, however, that the Physician Member
shall not be prohibited from practicing medicine in such geographic area either
as a solo practitioner or with one (1) other physician.
(b) Integrated Health Services. During the term of a Physician
--------------------------
Member's Employment Agreement, a Physician Member shall not directly or
indirectly (whether as a shareholder, employee, individual, partner, independent
contractor, consultant or otherwise) establish, operate or provide any
Integrated Health Services or any medical practice management services provided
by MCP, PQC or their Affiliates. For two (2) years after the termination of a
Physician Member's Employment Agreement, a Physician Member shall not directly
or indirectly (whether as a shareholder, employee, individual, partner,
independent contractor, consultant or otherwise) establish, operate or provide
any Integrated Health Services or any other medical practice management services
provided by MCP, PQC or their Affiliates within twenty-five (25) miles of the
Premises at which the Physician Member practiced at the time of such termination
of employment.
(c) Non-Solicitation of Employees and Patients. During the term of
------------------------------------------
a Physician Member's Employment and for a two (2) year period thereafter, a
Physician Member shall not recruit, solicit or induce, or attempt to induce, any
employee or employees of MCP, PQC or any of their Affiliates to terminate their
employment with, or otherwise cease their relationship with MCP, PQC or any of
their Affiliates. During the term of a Physician Member's Employment Agreement
and for a one (1) year period thereafter, a Physician Member shall not solicit.
divert or take away, or attempt to divert or to take away, the business or
patronage of any of the patients, clients, customers or accounts of MCP.
(d) Acknowledgment of Proprietary Interest. Each Physician Member
---------------------------------------
recognizes the proprietary interest of MCP, PQC and their Affiliates in any
Confidential and Proprietary Information (as hereinafter defined) of MCP, PQC
and their Affiliates and agrees that MCP is entitled to prevent the disclosure
of Confidential and Proprietary Information. Each Physician Member acknowledges
and agrees that any and all Confidential and Proprietary Information
communicated to, learned of, developed or otherwise acquired by the Physician
Member during the term of the Physician Member's Employment Agreement shall be
the property of MCP, PQC and their Affiliates. Each Physician Member further
acknowledges and understands that its disclosure of any Confidential and
Proprietary Information of MCP will result in irreparable injury and damage to
MCP, PQC and their Affiliates. Each Physician Member
-23-
<PAGE>
agrees at all times during the term of the Physician Member's Employment
Agreement and thereafter to hold such Confidential and Proprietary Information
in strictest confidence and not to disclose, without prior written consent of
MCP, such Confidential and Proprietary Information to any person, firm or
corporation, unless (i) such information becomes known or available to the
public generally through no wrongful act of the Physician Member receiving
Confidential and Proprietary Information, (ii) disclosure is required by law, or
the rule, regulation or order of any governmental authority, provided, that
prior to disclosing any Confidential and Proprietary Information pursuant to
this clause (ii), a Physician Member shall, if possible, give prior written
notice thereof to MCP and provide MCP with the opportunity to contest such
disclosure, (iii) such Confidential and Proprietary Information is known by or
generally available to the healthcare industry without restrictions on use, or
(iv) such Confidential and Proprietary Information was received by the Physician
Member on a non-confidential basis from a third-party lawfully possessing and
lawfully entitled to disclose such information. As used herein, "Confidential
and Proprietary Information" means all trade secrets and other confidential
and/or proprietary information of MCP, PQC and their Affiliates, including
information derived from reports, investigations, research, work in progress,
codes, marketing and sales programs, financial projections, cost summaries,
pricing formulas, contracts analyses, financial information, projections,
patient lists, confidential filings with any state or federal agency, and all
other confidential concepts, methods of doing business, ideas, materials or
information prepared or performed for, by or on behalf of a party by their
employees, officers, directors, agents, representatives, or consultants.
(e) Return of Materials to MCP. In the event of the termination of
--------------------------
a Physician Members Employment Agreement for any reason whatsoever or upon the
request of MCP, a Physician Member in receipt of Confidential and Proprietary
Information will promptly deliver to MCP all files, letters, memoranda, reports,
records, data, program listings or other written, photographic or other tangible
material in the Physician Member's possession that contains any Confidential and
Proprietary Information. The Physician Member shall not take or retain any
documents or other information, or any reproduction or excerpt thereof,
containing any Confidential and Proprietary Information, unless otherwise
authorized in writing by MCP.
Section 8.2. Remedies. Each Physician Member acknowledges and agrees
--------
that a remedy at law for any breach or attempted breach of the provisions of
this Article VIII shall be inadequate, and, therefore, MCP shall be entitled to
specific performance and injunctive or other equitable relief in the event of
any such breach or attempted breach, in addition to any other rights or remedies
available to MCP at law or in equity. Each Physician Member waives any
requirement for the securing or posting of any bond in connection with the
obtaining of any such injunctive or other equitable relief. If any provision of
the Restrictive Covenants in this Article VIII relating to the restrictive
period, scope of activity restricted and/or the territory described therein
shall be declared by a court of competent jurisdiction to exceed the maximum
time period, scope of activity restricted or geographical area such court deems
reasonable and enforceable under applicable law, the time period, scope of
activity restricted and/or area of restriction held reasonable and enforceable
by the court shall thereafter be the restrictive period, scope of activity
restricted and/or the territory applicable to such provision of the Restrictive
Covenants in this Article VIII. The invalidity or nonenforceability of any
provision of the Restrictive Covenants in this Article VIII in any respect shall
not affect the validity or enforceability of the remainder of the Restrictive
Covenants or of any other provisions of these Terms and Conditions or the
Physician Member's Employment Agreements. Without limiting any other right that
MCP or PQC may have for violation of any provision of this Article VIII, any
shares of capital stock or options to acquire Capital Stock of PQC (or any
successive entity) (the "Capital Stock") that are beneficially owned by the
Physician Member(s) who violated this Article VIII, which Capital Stock pursuant
to the terms under which such Capital Stock was issued have not yet vested,
shall be immediately forfeited to PQC and any unexercised options to purchase
Capital Stock of PQC shall immediately terminate.
-24-
<PAGE>
ARTICLE IX
Insurance and Indemnity
Section 9.1. Insurance to be Maintained by MCP. MCP will use its
---------------------------------
best efforts to obtain from a third party insurer comprehensive professional
liability insurance for each Physician Member in the amounts and subject to such
conditions and deductibles as shall be approved by the Joint Policy Board, and
comprehensive general liability and property insurance covering the Premises and
MCP's operations.
Section 9.2. Indemnification. Each Physician Member, severally and
---------------
not jointly, shall indemnify, defend and hold MCP, PQC and their Affiliates and
their respective officers, directors, shareholders, employees, agents and
consultants harmless, from and against any and all liabilities, losses, damages,
claims, causes of action and expenses (including reasonable attorneys' fees),
not covered by insurance (including self-insured insurance and reserves),
whenever arising or incurred, that are caused or asserted to have been caused,
directly or indirectly, by or as a result of the performance of medical services
by such Physician Member during the term of the Physician Member's Employment
Agreement. MCP shall indemnify, defend and hold each Physician Member harmless
from and against any and all liabilities, losses, damages, claims, causes of
action and expenses (including reasonable attorneys' fees), not covered by
insurance (including self-insured insurance and reserves), whenever arising or
incurred, that are caused or asserted to have been caused, directly or
indirectly, by, or as a result of, the performance of any intentional acts,
negligent acts or omissions by MCP and/or its shareholders, employees,
consultants, agents and/or subcontractors (other than a Physician Member) during
the term of the Physician Member's Employment Agreement.
ARTICLE X
Term and Termination
Section 10.1. Term of Employment. Each Employment Agreement shall
------------------
have the initial term (the "Employment Period") set forth therein. The
Employment Period under each Employment Agreement shall automatically extend for
an additional twelve (12) months at the end of the initial Employment Period and
on each anniversary of the end of the initial Employment Period thereafter
provided that neither the Physician Member nor MCP has provided at least one
hundred and twenty (120) days notice that the Employment Period shall not be
extended. MCP and each Physician Member intend that these Terms and Conditions
(as they may be amended or modified from time to time) shall be applicable to
any employment relationship between MCP and a Physician Member during the period
of thirty (30) years after the Effective Date.
Section 10.2. Termination. An Employment Agreement shall terminate
-----------
or be terminable at the end of the Employment Period, as it may be extended, or
under any of the following circumstances:
(a) Death.
------
In the event of the Physician Member's death, the Employment Agreement
shall immediately and automatically terminate.
(b) Disability.
-----------
MCP, subject to approval by the Joint Policy Board, which approval
shall be granted unless the Joint Policy Board determines in good faith that the
Physician Member is not disabled, may terminate an Employment Agreement, upon
written notice to the Physician Member, in the event that the Physician
-25-
<PAGE>
Member becomes disabled during the Employment Period through any illness,
injury, accident or condition of either a physical or psychological nature and,
as a result, is unable to perform substantially all of the Physician Member's
duties and responsibilities hereunder for ninety (90) days during any period of
three hundred sixty-five (365) consecutive calendar days. If any question arises
as to whether during any period the Physician Member is so disabled, the
Physician Member shall, at the request of MCP, submit to a medical examination
by a physician selected by MCP, to whom the Physician Member or the Physician
Member's guardian has no reasonable objection, to determine whether the
Physician Member is so disabled. If the Physician Member (or his or her
guardian) shall disagree with the determination of such physician, the Physician
Member within thirty (30) days following the determination by the physician
selected by MCP may submit to a medical examination by a physician selected by
the Physician Member (or his or her guardian). If the determination of such
second physician differs from that of the first, MCP and the Physician Member
(or his or her guardian) within thirty (30) days following the determination by
such physician shall agree upon a third physician, who shall examine the
Physician Member and whose determination shall be conclusive of the issue. If
the Physician Member does not request a second opinion, the determination of the
first physician shall be conclusive of the issue. If this question arises and
the Physician Member does not submit to medical examination, MCP's determination
of the issue shall be binding on the Physician Member.
(c) Termination by MCP for Cause.
-----------------------------
MCP may terminate a Physician Member's Employment Agreement for cause
at any time upon ninety (90) day's written notice to the Physician Member
setting forth in reasonable detail the nature of such cause. MCP shall provide
the Physician Member with an opportunity to respond to the notice and discuss
with the Medical Director of MCP the issues identified in the notice, and to
cure the basis for the notice; provided, however, that MCP shall not be required
to provide ninety (90) days notice of an opportunity to cure any cause that in
the reasonable judgment of MCP is not capable of being cured. Cause shall be
determined by MCP in its reasonable judgment and shall include, but not be
limited to: (i) the Physician Member's fraud or dishonesty with respect to MCP,
its employees, patients or visitors; (ii) the Physician Member's suspension or
termination from, or failure to participate, if so requested by MCP, as an
eligible provider in, Medicare, Medicaid or any third-party reimbursement
program, for cause other than the fact of the Physician Member's employment by
MCP; (iii) the Physician Member ceases to maintain without the approval of the
Medical Director, the Board Certifications in effect at any time during the
Employment Period; (iv) the Physician Member's material negligence in the
performance of the Physician Member's duties or responsibilities to MCP; (v) the
Physician Member's breach (or the breach by a professional corporation of which
the Physician Member was formerly a shareholder (other than a breach based upon
a misrepresentation regarding the conduct of another Physician Member)) of any
material term of any agreement entered into in connection with such Physician
Member's Affiliation; (vi) the medical staff membership or clinical privileges
of the Physician Member at any hospital in the Commonwealth of Massachusetts,
the State of Connecticut or any other jurisdiction: (I) shall be revoked or
shall terminate or shall not be renewed or, without the approval of the Medical
Director, shall expire; or (11) shall be reduced to a level which, in the sole
judgment of the Medical Director of MCP, would prevent the Physician Member from
rendering the services contemplated by the Employment Agreement and these Terms
and Conditions in any material respect. (MCP may terminate the Employment
Agreement, upon written notice to the Physician Member, if the Physician
Member's medical staff membership or clinical privileges at any hospital in the
Commonwealth of Massachusetts, the State of Connecticut or any other
jurisdiction shall be suspended (other than (i) during a period of summary
suspension pending hearing and appeal, provided such are timely requested by the
Physician Member or (ii) a nonrecurring, temporary suspension arising solely out
of failure to complete medical records. During any period of summary suspension
of the Physician Member's privileges (other than a nonrecurring, temporary
suspension arising solely out of failure to complete medical records), the
Physician Member's employment shall be suspended pending hearing and appeal
timely requested by the Physician Member; compensation and benefits shall be
continued to the extent provided by policies in effect at the time); (vii) the
Physician Member ceases to be
-26-
<PAGE>
licensed to practice medicine without restriction under the laws of any state in
which the Physician Member is licensed; (viii) the Physician Member ceases to
maintain a current and valid Federal Drug Enforcement Agency license; (ix) the
Physician Member ceases to be covered by professional liability insurance (other
than as a result of MCP's act or omission in connection with such insurance);
(x) the Physician Member is convicted of a felony or any crime involving moral
turpitude, (xi) the Physician Member is penalized with civil monetary fines or
assessment under any federal or state law involving Medicare, Medicaid or any
third- party reimbursement program (other than as a result of MCP's act or
omission); or (xii) the Physician Member (I) engages in any conduct or is
formally accused of conduct for which the Physician Member's license to practice
medicine reasonably would be expected to be subject to revocation or suspension,
whether or not actually revoked or suspended, or (II) is otherwise disciplined
by any licensing, regulatory or professional entity or institution, the result
of any of which event described in clause (I) or (II) does, or reasonably would
be expected to, materially adversely affect MCP or significantly impair the
ability of MCP to perform medical services in an amount and of a nature
consistent with the medical services performed at the time of such action.
(d) Termination Events Permitting Recovery of Costs.
------------------------------------------------
MCP may terminate an Employment Agreement and require the Physician
Member to comply with Section 10.4 hereof by giving written notice to the
Physician Member and the Joint Policy Board (after the giving of any required
notices and the expiration of any applicable waiting periods set forth below)
upon the occurrence of any of the following events:
(i) The Physician Member shall default in, or shall
continue to fail to comply with, the performance of any material duty
or material obligation imposed upon such Physician Member by these
Terms and Conditions or the related Employment Agreement and such
default or failure to comply shall continue for a period of ninety (90)
days after written notice thereof has been given to the Physician
Member by MCP.
(ii) A law firm with nationally recognized expertise in
healthcare law and acceptable to MCP and the Joint Policy Board renders
an opinion to the Joint Policy Board that (I) a material provision of
these Terms and Conditions is in violation of applicable law or any
court or regulatory agency enters an order finding a material provision
of these Terms and Conditions is in violation of applicable law and
(11) these Terms and Conditions cannot be amended pursuant to Section
11.2 hereof to cure such violation.
(iii) MCP is prevented by the Physician Member or any person
under the Physician Member's direction or control, from entering any
Premises, and such inability to enter such Premises continues for more
than forty-eight (48) hours after notice thereof to the Joint Policy
Board.
(e) Termination by the Physician Member.
-----------------------------------
The Physician Member may terminate such Physician Member's Employment
Agreement (i) upon written notice to MCP of the failure of MCP to make any
payments of the compensation required under the Employment Agreement or these
Terms and Conditions when due and continued failure to pay such compensation
after thirty (30) days notice of such failure to MCP unless the amount of such
payment is being contested in good faith, (ii) upon ninety (90) days written
notice from the Physician Member to MCP of MCP's failure to comply with any
other material obligation of MCP under the Employment Agreement or these Terms
and Conditions, which failure is not cured within such ninety (90) day period,
(iii) the sale of substantially all of the assets of PQC to a third party, or
the issuance (other than in a public or private offering of equity securities of
PQC) of capital stock of PQC to a third party with the result that such third
party obtains a controlling interest in the capital stock of PQC; (iv) a law
firm with a nationally recognized
-27-
<PAGE>
expertise in healthcare law and acceptable to MCP and the Joint Policy Board
renders an opinion to the Joint Policy Board that (1) a material provision of
these Terms and Conditions is in violation of applicable law or any court or
regulatory authority entered into an order finding a material provisions of
these Terms and Conditions is in violation of applicable laws and (11) these
Terms and Conditions cannot be amended pursuant to Section 11.2 to cure such
violation; and (v) upon not less than six (6) months written notice to MCP from
the Physician Member.
Section 10.3. Effect of Termination. In the event that a Physician
----------------------
Members Employment Agreement is terminated pursuant to Section 10.2 (a), (b) or
(c), MCP shall pay to the Physician Member the compensation and benefits
otherwise payable to the Physician Member under these Terms and Conditions
through the last day of his or her actual employment by MCP (but the Physician
Member shall not have any right to the portion of the Compensation Pool, if any,
that has not been allocated by the Compensation Committee). In the event that a
Physician Member's Employment Agreement is terminated pursuant to Section 10.2
(d), MCP shall pay to the Physician Member the compensation and benefits
otherwise payable to the Physician Member under these Terms and Conditions
through the last day of his or her actual employment by MCP (but the Physician
Member shall not have any right to the portion of the Compensation Pool, if any,
that has not been allocated by the Compensation Committee) and MCP shall have
the right to require the Physician Member to purchase the assets contemplated by
Section 10.4 on the terms provided in Section 10.4. In the event that a
Physician Member's Employment Agreement is terminated pursuant to Section 10.2
(e), MCP shall pay to the Physician Member the compensation and benefits
otherwise payable to the Physician Member under these Terms and Conditions
through the last day of his or her actual employment by MCP (but the Physician
Member shall not have any right to the portion of the Compensation Pool, if any,
that has not been allocated by the Compensation Committee) and the Physician
Member shall be entitled to purchase the assets contemplated by and on the terms
set forth in Section 10.5; in addition, if the Employment Agreement is
terminated pursuant to Section 10.2(e)(i), (ii) or (iii) the Physician Member
shall be entitled to purchase the assets and restrictive covenants contemplated
by Section 10.4(b).
Section 10.4. Purchase of Assets Upon Certain Events. (a) Within 120
---------------------------------------
days of the termination of an Employment Agreement pursuant to Sections 1
0.2(d)(i) or (iii) by MCP or 10.02(d) (ii) to the extent that the Physician
Member has not exercised its rights pursuant to Section 10.04(b) with respect to
a termination by the Physician Member pursuant to Section 1 0.02(e)(iv) within
60 days of termination of the Physician Member's employment, subject to the
provisions set forth below. MCP shall have the option to require the Physician
Member to:
(i) Purchase from MCP, PQC or their Affiliates at Book
Value (I) all tangible assets of MCP, PQC or their Affiliates that
relate primarily to the Physician Member's practice or that were
acquired, directly or indirectly, from the Physician Member, other than
MCP' s, PQC's or their Affiliates' medical, accounting and financial
records (II) restrictive covenants in Article VIII, and (III), to the
extent not a duplication of (I) or (II), Physician Payments to the
Physician Member as set forth or reflected on the balance sheet of MCP,
PQC or their Affiliates (the assets to be purchased pursuant to I and
II being referred to as the "Purchased Assets"); and
(ii) Assume or pay all of MCP's, PQC's and their Affiliates'
liabilities, debt, payables and other obligations (including lease and
other contractual obligations). or portions thereof, which relate
directly or are directly attributable to the Physician Member or the
Physician Member's medical practice (the "Physician Related
Liabilities").
(b) Upon the termination of an Employment Agreement by a
Physician Member pursuant to Section 10.2(e)(i), (ii). (iii) or (iv) the
Physician Member shall have the option to require MCP to sell all the Purchased
Assets, collectively and not individually. to the Physician Member at the lesser
of (i) Book Value or (ii) Fair Market Value. The restrictive covenants in
Section 8.1 shall terminate in the event that the
-28-
<PAGE>
Physician Member terminates the Physician Member's Employment Agreement pursuant
to 10.2(e)(i) or (ii) unless such termination is being contested in good faith
by MCP.
(c) Any election to purchase the Purchased Assets pursuant to this
Section 10.4 shall be upon written notice thereof in the termination notice, if
applicable. on or prior to ninety (90) days before the Termination Date. In
connection with the purchase and sale of the Purchased Assets pursuant to this
Section 10.4, MCP shall use its commercially reasonable efforts to cause the
Purchased Assets to be conveyed free of any lien, claim or encumbrance.
(d) Notwithstanding Section 10.4(a) and (b), the Employment
Agreement shall not constitute an agreement to assign any contract or asset, or
any benefit arising thereunder or resulting therefrom, if any attempted
assignment thereof, without the consent required or necessary for such
assignment, would constitute a breach or violation thereof or in anyway
adversely affect the rights of MCP or the Physician Member thereunder. MCP
agrees to use its reasonable efforts to obtain any consent required for such
assignment.
Section 10.5. Certain Rights Upon Voluntary Termination. In the
-----------------------------------------
event that a Physician Member terminates an Employment Agreement pursuant to
Section 1 0.2(e) (v), the terminating Physician Member shall have the right to
purchase the following assets (the "Section 10.5 Assets"):
(i) All, but not less than all, of the physical assets
purchased by MCP from such Physician Member as part of an Affiliation
provided that MCP, PQC or an Affiliate still owns such physical assets.
MCP and the Physician Member may also agree that the Physician Member
shall purchase other physician assets acquired by MCP, PQC or an
Affiliate after Affiliation; provided that MCP shall not be obligated
to sell any assets acquired after Affiliation. The purchase price of
the physical assets shall be the lesser of the purchase price MCP paid
for such assets at the time of Affiliation or their Fair Market Value
as of the Purchase Closing Date.
(ii) Subject to the consent of the lessor and release by the
lessor of MCP from any obligations under the lease, MCP agrees to use
its best efforts to transfer to the Physician Member the lease relating
to any Premises occupied solely by the Physician Member prior to
Affiliation and that the Physician Member continues to occupy at the
time of termination of the Employment Agreement. In consideration of
such transfer, the Physician Member shall pay MCP an amount equal to
the sum of (A) 115% of the total lease obligations required to be paid
during the remaining term of the lease and (B) to the extent not
covered in (I) above the book value of any leasehold improvements.
(iii) The Physician Member (not withstanding Section 8 of
these Terms and Conditions) shall be entitled for a three month period
commencing upon the delivery of the Physician Member's termination
notice to solicit any employee of MCP directly providing support for
the Physician Member's medical practice to leave such employee's
employment with MCP. Prior to soliciting such employee. the Physician
Member shall notify MCP of the Physician Member's intent to solicit
such employee and pay MCP an amount equal to three months salary and
benefits of any employee so solicited.
(iv) MCP shall not attempt to prevent the Physician Member
from obtaining and using the telephone number that the Physician Member
used prior to Affiliation. MCP shall have no obligation to cause such
telephone number to be assigned to the Physician Member and the
Physician Member shall be responsible for all costs associated with
reestablishing such phone number.
-29-
<PAGE>
(v) MCP shall retain custody of patient records. The
Physician Member shall be entitled, at the Physician Member's cost and
with the written approval of the patient, to make copies of the patient
record for any patient to whom the Physician Member provided services.
If requested by a patient, MCP shall transfer each patient's medical
records as directed by the patient.
(vi) MCP agrees that it will not interfere with the
Physician Member's ability to reactivate any provider numbers under any
Managed Care Contract that were assigned to the Physician Member prior
to Affiliation. MCP shall not be obligated to terminate or transfer any
provider number that it possesses and shall not be liable to the
Physician Member if the Physician Member is unable to establish or re-
establish provider status under any Managed Care Contract.
(vii) Except as provided in clause (iii) of this Section
10.5, the Physician Member shall continue to be subject to the
restrictive covenants and agreements in Article VIII of these Terms and
Conditions.
Section 10.6. Terms of Purchase. The closing of the transactions
-----------------
contemplated by Sections 10.4 or 10.5 (the "Purchase Closing") shall occur (a)
on the Termination Date or (b) on a date mutually acceptable to MCP and the
Physician Member that shall be within one hundred and eighty (180) days after
receipt of a termination notice (or such later date as is necessary for MCP to
obtain lessor consents to the assignment to the Physician Member of leases of
real and personal property to be assumed by the Physician Member). Subject to
the conditions set forth below, at the Purchased Closing, MCP, PQC and/or their
Affiliates, as the case may be, shall transfer and assign the Purchase Assets or
the Section 10.5 Assets, as the case may be, to the Physician Member and in
consideration therefor, the Physician Member shall (a) pay to MCP the purchase
price in cash and assume, if applicable, Physician Related Liabilities. Each of
MCP and the Physician Member shall execute such documents or instruments as is
reasonably necessary, in the opinion of MCP, the Physician Member and their
respective counsel, to effect the foregoing transaction.
Section 10.7. Exception to Purchase. Notwithstanding anything
---------------------
contained herein to the contrary, MCP shall not be obligated to sell the assets
to the Physician Member if Physician Member is not able to pay the purchase
price therefor pursuant to the terms set forth above at the Purchase Closing. In
such event, the Physician Member shall surrender the assets in the Physician
Member's possession or control to MCP as of the Purchase Closing. If a Physician
Member fails to so surrender the assets, MCP may, without prejudice to any other
remedy which it may have hereunder or otherwise, enter the Premises and take
possession of the assets and expel or remove the Physician Member and any other
person who may be occupying the Premises or any part thereof, by force if
necessary, without being liable for prosecution or any claim for damages
therefor.
ARTICLE XI
General Provisions
Section 11.1. Arbitration. Any controversy or claim between MCP, PQC
-----------
and any Physician Member arising under or relating to these Terms and Conditions
or any breach thereof (including the question of whether any particular matter
is arbitrable hereunder) shall be settled by arbitration in accordance with the
commercial arbitration rules of the American Arbitration Association then in
effect; provided, however, that no provision of these Terms and Conditions shall
be modified, deleted or added by reason of such arbitration; provided, further,
that no controversy or claim that may be brought before the Dispute Resolution
Subcommittee and no decision of such Subcommittee shall be submitted to
arbitration. MCP and each Physician Member agrees (subject to judicial review)
to abide by all awards rendered in such arbitration proceedings, and all such
awards may be filed by the prevailing party in any federal or state court having
proper jurisdiction, as a basis for judgment in the issuance of execution
-30-
<PAGE>
thereon. Such judgment shall not be open for review except to the extent
permitted by the Federal Rules of Civil Procedure and the relevant arbitration
statute. Such arbitration shall be initiated by either MCP or a Physician Member
by serving a written demand on the other party and the Joint Policy Board
stating the substance of the controversy and the contention of the party
requesting arbitration. The American Arbitration Association shall appoint or
provide the procedure for the determination of a single neutral arbitrator who
shall be a fit and impartial person. The fees and costs of the arbitrator and
related expenses of arbitration shall be borne by the nonprevailing party. If
the arbitrator determines that neither party has substantially prevailed, the
parties shall bear equally the fees and costs of the arbitrator and the related
expenses of arbitration.
Section 11.2. Contract Modifications for Prospective Legal Events.
---------------------------------------------------
In the event any state or federal laws or regulations, now existing or enacted
or promulgated after the Effective Date are interpreted by judicial decision, a
regulatory agency or legal counsel in such a manner as to indicate that these
Terms and Conditions or any provision hereof may be in violation of such laws or
regulations, the Joint Policy Board and MCP shall agree upon such amendments to
these Terms and Conditions as necessary to preserve the underlying economic and
financial arrangements between the Physician Members and MCP and without
substantial economic detriment to either MCP or Physician Members. Any such
amendment approved by the Joint Policy Board shall be binding upon each
Physician Member. To the extent any act or service required of MCP should be
construed or deemed, by any governmental authority, agency or court, to
constitute the practice of medicine by PQC, the performance of said act or
service by MCP shall be deemed waived and forever unenforceable and the
provisions of this Section 11.2 shall be applicable. None of MCP nor any
Physician Member shall claim or assert illegality as a defense to the
enforcement of these Terms and Conditions or any provision hereof; instead, any
such purported illegality shall be resolved pursuant to the terms of this
Section 11.2.
Section 11.3. Parties in Interest; No Third-Party Beneficiaries.
-------------------
Except as otherwise provided herein, these Terms and Conditions shall inure to
the benefit of and be binding upon the respective heirs, legal representatives,
successors and permitted assigns of the parties hereto. Neither these Terms and
Conditions nor any other agreement contemplated hereby shall be deemed to confer
upon any person not a party hereto or thereto any rights or remedies hereunder
or thereunder.
Section 11.4. No Waiver; Remedies Cumulative. None of MCP, PQC or
------------------------------
any Physician Member shall by any act, delay, indulgence, omission or otherwise
be deemed to have waived any right or remedy hereunder or to have acquiesced in
any default in or breach of any of the terms and conditions hereof. No failure
to exercise, nor any delay in exercising, on the part of either MCP, PQC or any
Physician Member, any right, power or privilege hereunder shall operate as a
waiver thereof. No single or partial exercise of any right, power or privilege
shall operate as a waiver thereof. No single or partial exercise of any right,
power or privilege hereunder shall preclude any other or further exercise
thereof or the exercise of any other right. power or privilege. No remedy set
forth in this these Terms and Conditions or the Employment Agreements or
otherwise conferred upon or reserved to either MCP or any Physician Member shall
be considered exclusive of any other remedy available to either MCP or any
Physician Member, but the same shall be distinct, separate and cumulative and
may be exercised from time to time as often as occasion may arise or as may be
deemed expedient.
Section 11.5. Availability of Certain Documents. The parties agree,
---------------------------------
to the extent required by law necessary to permit receipt of reimbursement for
services by MCP, to make available to the Secretary of Health and Human
Services, the Comptroller General of the General Accounting Office, or their
authorized representatives, any books, documents and records in their possession
relating to the nature and extent of the costs of services hereunder for a
period of four (4) years after the provision of such services.
Section 11.6. Governing Law. These Terms and Conditions shall be
-------------
governed by and construed in accordance with the laws of the Commonwealth
of Massachusetts.
-31-
<PAGE>
ANNEX B
ADDENDUM DATED AS OF DECEMBER 31,1996
TO GENERAL TERMS AND CONDITIONS OF PHYSICIAN EMPLOYMENT
Section 1. The General Terms and Conditions are amended to add an
additional Physician Responsibility Center as follows:
Responsibility Center I: Ronald H. Berger, M.D.
John A. Egeihofer, M.D.
David R. Fanti, M.D.
James Hession, M.D.
Responsibility Center J: Barry Izenstein, M.D.
Section 2. Until August 30, 1999, a separate Compensation Pool
(the "Additional Responsibility Centers Pool,") shall be established with
respect to Responsibility Centers I, J and any other Physician Responsibility
Centers designated by the Joint Policy Board as participating in the Additional
Responsibility Centers Pool (the "Additional Responsibility Centers") and
Section 7.1 of the General Terms and Conditions shall not apply to the
Additional Responsibility Centers. Except with respect to Integrated Health
Services, all Stage One Gross Margin attributable to the Additional
Responsibility Centers Pool and MCP, as provided below and shall constitute the
exclusive compensation for the services of the Physician Member in the
additional Responsibility Centers under their respective Employment Agreements.
The Physician Members in the Additional Responsibility Centers shall not be
entitled to participate in the Compensation Pool prior to August 30, 1999 except
to the extent that the Physician Members in an Additional Responsibility Center
are allocated any portion of the Compensation Pool attributable to a Laboratory
Center pursuant Section 7.4(b) or to Integrated Health Services pursuant to
Section 7.2. No Physician Member in the Additional Responsibility Centers shall
be entitled to any compensation for services under an Employment Agreement or
the Terms and Conditions except as provided in Article VII as modified by this
Addendum. No Physician Member who is not included in an Additional
Responsibility Center shall be entitled to any portion of the Additional
Responsibility Centers Pool or to any Stage One Gross Margin attributable to an
Additional Responsibility Center allocated to the Compensation Pool.
The amount of the Additional Responsibility Centers Pool with respect
to each Fiscal Period shall be determined as an allocation of Stage One Gross
Margin attributable to the Additional Responsibility Centers between the
Additional Responsibility Centers Pool and MCP, which allocation shall be
determined as provided below:
(a) First, an amount equal to eighty percent (80%) of any Stage One
Gross Margin attributable to the Additional Responsibility Centers with
respect to any Fiscal Period shall be allocated to the Additional
Responsibility Centers Pool until the total allocation to the
Additional Responsibility Center Pool for such Fiscal Period equals
eighty percent (80%) of the Base Compensation Pool Amount with respect
to the Additional Responsibility Centers (or a proportionally lesser
amount for any Fiscal Period that is less than twelve (12) calendar
months) and twenty percent (20%) of Stage One Gross Margin attributable
to the Additional Responsibility Centers shall be allocated to MCP
Allocation Account until the total allocation to the MCP Allocation
Account equals twenty percent (20%) of the Base Compensation Pool
Amount with respect to the Additional Responsibility Centers (or a
proportionally lesser amount for any Fiscal Period that is less than
twelve (12) calendar months);
<PAGE>
(b) Second, any Stage One Gross Margin attributable to Additional
Responsibility Centers with respect to any Fiscal Period that remain
after allocation of the Stage One Gross Margin pursuant to Clause (a)
("Additional Responsibility Centers Stage Two Gross Margin"), shall be
allocated to the Practice Fund Account proportionately with the
contributions of other Physician Responsible Centers up to an amount
sufficient to cause the balance in such account to be equal to zero;
and
(c) Third, any Additional Responsibility Centers Stage Two Gross
margin that remains after allocation of the amounts pursuant to (a) and
(b) ("the Additional Responsibility Centers Stage Three Gross Margin")
shall be allocated fifty percent (50%) to the Additional Responsibility
Centers Pool and fifty percent (50%) to the MCP Allocation Account.
The allocation of Stage One, Stage Two and Stage Three Gross Margins to
the Additional Responsibility Centers Pool shall be calculated separately for
each Fiscal Period. Subject to review by the Joint Policy Board, MCP shall be
responsible for calculating the amounts of Stage One, Stage Two and Stage Three
Gross Margins to be allocated to each of MCP and the Additional Responsibility
Centers Pool. If the Stage One Gross Margin attributable to the Additional
Responsibility Centers for any Fiscal Period is negative, such negative amount
shall be an Additional Responsibility Centers Operating Expenses for the next
following Fiscal Period.
Section 3. Until August 30, 1999, Section 7.4(a) of the General
Terms and Conditions shall not apply to the Additional Responsibility Centers
and the following provision shall apply in lieu thereof:
Section 7.4. Allocation of the Compensation Pool among Physician Members in each
-------------------------------------------------------------------
Additional Responsibility Center. (a) On a weekly basis, MCP shall distribute to
- --------------------------------
each Additional Responsibility Center from the Additional Responsibility Centers
Pool an amount equal to 80% of one-fifty-second of the Base Compensation Pool
Amount for the Additional Responsibility Centers (the "Base Distribution") less
the Deductible Expenses allocated to the Additional Responsibility Centers
(which amount shall be distributed to MCP); provided, however, if at any time
during a Fiscal Period MCP reasonably determines that the amount of Revenues
allocated to the Additional Responsibility Centers Pool for any Fiscal Period
may be less than eighty percent (80%) of the Additional Responsibility Centers'
Base Compensation Pool Amount for such Fiscal Period maybe less than eighty
percent (80%) of the Additional Responsibility Period, or if MCP or the Joint
Policy Board determines an Additional Responsibility Center's Physician
Responsibility Center Operating Expenses for such Fiscal Period will exceed such
Additional Responsibility Center's Targeted Physician Responsibility Center
Operating Expenses or an Additional Responsibility Center's Operating Revenues
will be less than such Responsibility Center's Targeted Responsibility Center
Operating Revenues, MCP may, subject to the approval of the Joint Policy Board,
which approval shall be granted unless the Joint Policy Board determines in good
faith that such shortfall in revenues or increase in operating expense is
primarily attributable to MCP, reduce the Base Distribution of an Additional
Responsibility Center as MCP determines to be appropriate in order that the
aggregate Base Distributions to the Additional Responsibility Centers do not
exceed the amount of the Additional Responsibility Centers Pool for such Fiscal
Period. MCP may, but shall not be required to, advance money to the Additional
Responsibility Centers Pool to fund such Base Distributions. Within 45 days of
the end of each three-month period, MCP shall advise the Compensation Committee
of the amount (the "Additional Variable Distribution Pool"), if any, of the
Additional Responsibility Centers Pool that has not been used, or is not
reasonably anticipated by MCP to be needed to fund, the Base Distributions. The
Compensation Committee, by the approval of a majority of the members of such
committee, shall determine how the Additional Variable Distribution Pool, if
any, shall be allocated among the Additional Responsibility Centers.
Distributions of the Base Distribution and, if applicable, the Additional
Variable Distribution Pool to an Additional Responsibility Center shall be
allocated among the Physician Members of such Additional Responsibility Center
as determined by a majority of the Physician Members in such Additional
Responsibility Center.
<PAGE>
Section 4. From and after August 30, 1999, Article VII in its
entirety shall apply to Responsibility Center I and the provisions of Section 2
and 3 of this Addendum shall no longer be of any effect.
<PAGE>
ANNEX C
Premises to which Physician Member is to be
assigned:
<PAGE>
ANNEX D
Base Compensation Pool Amount for Physicians Responsibility Center
<PAGE>
AFFILIATION AGREEMENT
----------------------
THIS AGREEMENT is made and entered into this 9th day of August, 1996, by
and among , a physician licensed to
-------------------------------------
practice medicine in the Commonwealth of Massachusetts (the "Physician"),
Medical Care Partners, P.C., a Massachusetts professional corporation with its
principal offices at 950 Winter Street, Waltham, MA 02154 ("MCP") and
Physicians Quality Care, Inc., a Delaware corporation with principal offices at
950 Winter Street, Waltham, MA 02154 ("PQC").
Recitals
--------
Physician owns and operates a medical practice (the "Practice") and certain
assets utilized in connection therewith.
PQC and MCP have entered into an asset purchase agreement with the
Physician (the "Asset Purchase Agreement") pursuant to which MCP is acquiring
substantially all of the assets used in the Practice.
Now therefore, in consideration of the respective representations,
warranties, covenants, agreements and conditions hereinafter set forth, and
intending to be legally bound hereby, the parties hereto agree as follows:
ARTICLE I
AGREEMENT TO AFFILIATE
1.01 Agreement to Affiliate. In consideration of the agreement of PQC to
----------------------
make the Affiliation Payments set forth in Section 1.02, the Physician agrees to
leave his current practice, to become affiliated with MCP as a licensed
physician and to enter into and keep in full force and effect during its stated
term the Employment Agreement in the form attached hereto as Exhibit A.
1.02 Affiliation Payments. In consideration of the Physician performing
--------------------
the Physician's obligations under Section 1.01, PQC agrees that PQC, either
directly or through one of its affiliates, shall make the following payments to
the Physician:
(i) The amount of cash set forth on Annex A; and
(ii) The number of shares of Common Stock of PQC (the "Shares")
determined in accordance with Section 1.03 with an aggregate fair market value
set forth on Annex B-1, subject to the conditions set forth in Sections 1.03.
1.03 Shares of PQC. (a) The fair market value of the Shares issued to
-------------
the Physician pursuant to Section 1.02 shall be equal to the per share purchase
price paid by purchasers who are not affiliated with PQC in the offering of
Common Stock of PQC which shall close in conjunction with the closing date under
the Asset Purchase Agreement (the "Closing Date").
(b) The Physician agrees to enter into, and the Shares shall be subject to,
the Stockholder's Agreement attached hereto as Exhibit B. PQC agrees to enter
into, and make the Shares subject to, the Registration Rights Agreement attached
hereto as Exhibit C.
(c) The Physician represents, warrants and covenants to PQC as follows:
<PAGE>
(i) The Physician is acquiring the Shares for the Physician's own
account for investment only, and not with a view to, or for sale in connection
with, any distribution of the Shares in violation of the Securities Act of 1933
(the "Securities Act"), or any rule or regulation under the Securities Act.
(ii) The Physician has received a copy of the Confidential Private
Placement Memorandum, dated July 29, 1996, with respect to PQC and the Shares
and has had such opportunity as the Physician has deemed adequate to obtain from
representatives of PQC such information as is necessary to permit the Physician
to evaluate the merits and risks of his investment in PQC.
(iii) The Physician has sufficient experience in business, financial
and investment matters to be able to evaluate the risks involved in the
acquisition of the Shares and to make an informed investment decision with
respect to such acquisition.
(iv) The Physician can afford a complete loss of the value of the
Shares and is able to bear the economic risk of holding such Shares for an
indefinite period.
(v) The Physician understands that (i) the Shares have not been
registered under the Securities Act and are "restricted securities" within the
meaning of Rule 144 under the Securities Act, (ii) the Shares cannot be sold,
transferred or otherwise disposed of unless they are subsequently registered
under the Securities Act or an exemption from registration is then available;
(iii) in any event, the exemption from registration under Rule 144 will not be
available for at least two (2) years and even then will not be available unless
a public market then exists for the common stock of PQC, adequate information
concerning PQC is then available to the public, and other terms and conditions
of Rule 144 are complied with; and (iv) there is now no registration statement
on file with the Securities and Exchange Commission with respect to any stock of
PQC and PQC has no obligation or current intention to register the Shares under
the Securities Act.
(vi) A legend substantially in the following form will be placed on
the certificate representing the Shares:
"The shares represented by this certificate have not been registered under
the Securities Act of 1933, as amended, and may not be sold, transferred or
otherwise disposed of in the absence of an effective registration statement
under such Act or an opinion of counsel satisfactory to the corporation to
the effect that such registration is not required."
(vii) The Physician is an "accredited investor" as defined in Rule
501 of the rules and regulations under the Securities Act.
ARTICLE II
REPRESENTATIONS, WARRANTIES AND COVENANTS
The representations and warranties contained in Article II of the Asset
Purchase Agreement are incorporated herein and made by the Physician to PQC.
The representations and warranties contained in Article III of the Asset
Purchase Agreement are incorporated herein and made by PQC and MCP to the
Physician.
-2-
<PAGE>
ARTICLE III
CONDITIONS TO OBLIGATIONS OF PQC
The obligations of PQC under this Agreement are subject to the
delivery on the Closing Date of the documents required to be delivered pursuant
to Article V of the Asset Purchase Agreement and the satisfaction on the Closing
Date of the conditions set forth in Article V of the Asset Purchase Agreement,
each of which deliveries and conditions may be waived in writing in the sole
discretion of PQC.
ARTICLE IV
CONDITIONS TO OBLIGATIONS OF THE PHYSICIAN
The obligations of the Physician under this Agreement are subject to
the delivery on the Closing Date of the documents set forth in Article VI of the
Asset Purchase Agreement and satisfaction on the Closing Date of the conditions
set forth in Article VI of the Asset Purchase Agreement, each of which delivery
and conditions may be waived in writing in the sole discretion of the Physician.
ARTICLE V
TERMINATION
5.01 Optional Termination. This Agreement may be terminated
--------------------
at any time prior to the Closing Date as follows:
(i) by the mutual consent of the Physician, MCP and PQC;
(ii) by the Physician, upon a material breach of any
representation, warranty, covenant or agreement on the part of PQC or MCP set
forth in this Agreement or any other agreement referred to herein;
(iii) by PQC or MCP upon a material breach of any
representation, warranty, covenant or agreement on the part of the Physician set
forth in this Agreement or any other agreement referred to herein; and
(iv) by either party if the Closing shall not have occurred by
August 15, 1996, or such other date agreed to by the parties.
5.02 Effect of Termination. (a) In the event this Agreement is
---------------------
terminated as provided in Section 5.01 above, (i) each of PQC and Physician
shall deliver to the other parties all documents previously delivered (and
copies thereof in its possession) concerning one another and the transactions
contemplated hereby, and (ii) none of the parties nor any of their respective
stockholders, directors, officers or agents shall have any liability to the
other parties, except for any deliberate breach or deliberate omission resulting
in breach of any of the provisions of this Agreement. In such case, the
breaching party shall be liable only for the expenses and costs of the non-
breaching party, and in no event shall either party be liable for anticipated
profits or consequential damages.
(b) After termination each party shall keep confidential all
information provided by the others pursuant to this Agreement which is not in
the public domain, shall exercise the same degree of
-3-
<PAGE>
care in handling such information as it would exercise with similar information
of its own, and shall return any such information upon the other party's
request.
ARTICLE VI
SURVIVAL AND INDEMNIFICATION
6.01 Indemnification.
---------------
(a) Physician shall indemnify, defend, and hold harmless each of MCP
and PQC and their respective subsidiaries and affiliates and their respective
directors, officers, employees and agents or the successor of any of the
forgoing (collectively, "PQC Indemnified Persons"), and reimburse any PQC
Indemnified Persons for, from and against all payments, demands, claims, suits,
judgments, liabilities, losses, costs, damages and expenses, including, without
limitation, interest, penalties and reasonable attorneys' fees, disbursements
and expenses, ("Damages") imposed on or incurred by PQC Indemnified Persons,
directly or indirectly, which relate to or arise out of (i) breach of any
representation and warranty of, or covenant or agreements to be performed by,
Physician contained in this Agreement, the Asset Purchase Agreement or the
Stockholders' Agreement, (ii) any of the liabilities or obligations retained by
Physician pursuant to the Asset Purchase Agreement, (iii) the failure of
Physician or of MCP to comply with any bulk sales laws applicable to the
transactions contemplated hereby, (iv) any Tax liabilities of Physician; and (v)
the conduct of the Practice prior to the Closing Date. Notwithstanding the
foregoing or any other term or condition contained herein or in any other
agreement or instrument referred to herein, the indemnification obligations of
Physician under this Section 6.01(a) and under the Asset Purchase Agreement
shall be limited, in the aggregate, to the purchase price under the Asset
Purchase Agreement and to the consideration under this Agreement.
(b) MCP and PQC shall indemnify and hold harmless Physician
(collectively, "Physician Indemnified Persons" and together with the PQC
Indemnified Persons, the "Indemnified Persons"), and reimburse such Physician
Indemnified Persons for, from, and against all Damages imposed on or incurred,
directly or indirectly, by such Physician Indemnified Persons which arise out of
or relate to (i) breach of any representation or warranty of, or covenant to be
performed by, PQC or MCP, in each case contained in this Agreement or the Asset
Purchase Agreement and (ii) the Assumed Liabilities (as defined in the Asset
Purchase Agreement).
(c) An Indemnified Party shall give prompt written notice to an
indemnifying party (the "Indemnifying Party") of any payments, demands, claims,
suits, judgments, liabilities, losses, costs, damages or expenses (a "Claim") in
respect of which such Indemnifying Party has a duty to provide indemnity to such
Indemnified Party under this Section 6.01, except that any delay or failure so
to notify the Indemnifying Party only shall relieve the Indemnifying Party of
its obligations hereunder to the extent, if at all, that it is prejudiced by
reason of such delay or failure.
(d) If a Claim is brought or asserted by a third party (a "Third-Party
Claim"), the Indemnifying Party shall assume the defense thereof, including the
employment of counsel reasonably satisfactory to the Indemnified Party and the
payment of all expenses. The Indemnified Party shall have the right to employ
separate counsel in such Third-Party Claim and participate in the defense
thereof, but the fees and expenses of such counsel shall be at the expense of
the Indemnified Party. In the event that the Indemnifying Party, within twenty
(20) days after written notice of any Third-Party Claim, fails to assume the
defense thereof, or in the event the Indemnifying Party fails to demonstrate, to
the reasonable satisfaction of the Indemnified Party, that it has sufficient
assets to meet its indemnification obligations hereunder, the Indemnified Party
shall have the right to undertake the defense, compromise or settlement of such
Third-Party Claim for the account of the Indemnifying
-4-
<PAGE>
Party. Anything in this Section 6.01(d) to the contrary notwithstanding, the
Indemnifying Party shall not, without the Indemnified Party's prior written
consent, settle or compromise any Third-Party Claim or consent to the entry of
any judgment with respect to any Third-Party Claim which would have any adverse
effect on the Indemnified Party, except as provided immediately below. The
Indemnifying Party may, without the Indemnified Party's prior written consent,
settle or compromise any such Third-Party Claim or consent to entry of any
judgment with respect to any Third-Party Claim which requires solely money
damages paid by the Indemnifying Party and which includes as an unconditional
term thereof the release by the claimant or the plaintiff of the Indemnified
Party from all liability in respect of such Third-Party Claim.
(e) With respect to any Claim other than a Third Party Claim, the
Indemnifying Party shall have thirty (30) days from receipt of written notice
from the Indemnified Party of such Claim within which to respond thereto. If
the Indemnifying Party does not respond within such thirty (30)-day period, the
Indemnifying Party shall be deemed to have accepted responsibility to make
payment and shall have no further right to contest the validity of such Claim.
If the Indemnifying Party notifies the Indemnified Party within such thirty
(30)-day period that it rejects such Claim in whole or in part, the Indemnified
Party shall be free to pursue such remedies as may be available to the
Indemnified Party under applicable law.
6.02 Survival of Representations; Claims for Indemnification. All
-------------------------------------------------------
representations and warranties made by the parties herein or in any instrument
or document furnished in connection herewith shall survive the Closing and any
investigation at any time made by or on behalf of the parties hereto. All such
representations and warranties and the Physician's obligations pursuant to
Sections 6.1(a)(i), (ii) and (iii) and the PQC's and MCP's obligations pursuant
to Section 6.1(b) shall expire on the third anniversary of the Closing Date,
except for claims, if any, asserted in writing prior to such third anniversary,
which shall survive until finally resolved and satisfied in full. The
obligation of the Physician pursuant to Section 6.1(a)(iv) and (v) shall survive
until six (6) months after the expiration of the applicable statute of
limitations with respect thereto. All claims and actions for indemnity pursuant
to this Section 6 shall be asserted or maintained in writing by a party hereto
on or prior to the expiration of such periods.
6.03 Confidentiality. The Parties hereto agree to use reasonable
---------------
efforts to preserve in full the confidentiality of all confidential business
records and the attorney-client and work-product privileges. In connection
therewith, each party hereto agrees that:
(a) it will use all reasonable efforts, in any action, suit or
proceeding in which it has assumed or participated in the defense, to avoid
production of confidential business records; and
(b) all communications between any party hereto and counsel
responsible for, or participating in, the defense of any action, suit or
proceeding shall, to the extent possible, be made so as to preserve any
applicable attorney-client or work-product privilege.
6.04 Remedies Cumulative. Except as otherwise provided herein, the
-------------------
remedies provided herein shall be cumulative and shall not preclude the
assertion by any Party hereto of any other rights or the seeking of any other
remedies against any other Party hereto.
6.05 Set-off and Recoupment. Any amount or amounts due from any
----------------------
Indemnifying Party to PQC under this Article VI may be paid to PQC, at PQC's
option, by set-off or recoupment against any amounts due to the Indemnifying
Party pursuant to this Agreement or pursuant to any agreement between the
Indemnifying Party and PQC, MCP or any of their respective affiliates. Any such
set-off will be without prejudice to PQC's right to pursue any other remedies at
law or in equity available to it.
-5-
<PAGE>
ARTICLE VII
GENERAL PROVISIONS
7.01 Amendment and Waiver. No amendment of any provision of this
--------------------
Agreement shall in any event be effective unless the same shall be in writing
and signed by the Parties hereto. Any failure of any Party to comply with any
obligation, agreement or condition hereunder may only be waived in writing by
PQC if such failure is by Physician and by Physician if such failure is by PQC,
but such waiver shall not operate as a waiver of, or estoppel with respect to,
any subsequent or other failure. No failure by any Party to take any action
against any breach of this Agreement or default by the other party shall
constitute a waiver of such Party's right to enforce any provision hereof or to
take any such action.
7.02 Notices. All notices, requests, demands and other communications
-------
hereunder shall be in writing and shall be sent by personal delivery or
registered or certified mail, postage prepaid, or by telecopier as follows:
(a) if to the Physician:
with a copy to:
Hogan and Hartson
555 Thirteenth Street, N.W.
Washington, D.C. 20004-1109
Attention: Michael Williams
(b) if to PQC or MCP:
Physicians Quality Care, Inc.
950 Winter Street, Suite 2410
Waltham, MA 02154
Attention: Jerilyn Asher
Any Party may change its address for receiving notice by written notice given to
the others named above. All notices shall be effective upon the earlier of
actual delivery or when deposited in the mail addressed as set forth above.
7.03 Counterparts. This Agreement may be executed simultaneously in
------------
two (2) or more counterparts, each of which shall be deemed an original, but all
of which together shall constitute one and the same Agreement.
7.04 Parties in Interest. This Agreement shall bind and inure to the
-------------------
benefit of the Parties named herein and their respective heirs, successors and
assigns. This Agreement shall not be assignable by any Party without the prior
written consent of the other Parties, except that PQC may assign its rights and
obligations under this Agreement to any affiliate of PQC.
7.05 Entire Transaction. This Agreement and the other agreements,
------------------
documents and instruments referred to herein contain the entire understanding
among the Parties with respect to the
-6-
<PAGE>
transactions contemplated hereby and supersede all other agreements and
understandings among the Parties.
7.06 Applicable Law. This Agreement shall be governed by and construed
--------------
in accordance with the internal substantive laws of the Commonwealth
of Massachusetts, and the parties hereby consent to the sole jurisdiction of
Massachusetts courts over all matters relating to this Agreement.
7.07 Headings. The section and other headings contained in this
--------
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
7.08 Expenses. Each Party to this Agreement shall pay its own costs
--------
and expenses in connection with the transactions contemplated hereby.
7.09 Third Parties. Except as specifically set forth or referred to
-------------
herein, nothing herein expressed or implied is intended or shall be construed to
confer upon or give to any person or entity other than the parties hereto and
their successors or assigns, any rights or remedies under or by reason of this
Agreement.
7.10 Severability. If any term, provision, covenant or restriction
------------
of this Agreement is held by a court of competent jurisdiction to be invalid,
void or unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated.
[Remainder of Page Intentionally Left Blank]
-7-
<PAGE>
7.11 Defined Terms. Any defined terms used herein and not defined
--------------
herein shall have the meaning assigned thereto in the Asset Purchase Agreement.
IN WITNESS WHEREOF, each of the Parties has caused this Agreement to
be duly executed all as of the day and year first written above.
--------------------------
PHYSICIANS QUALITY CARE, INC.
By:
--------------------------
Name:
Title:
MEDICAL CARE PARTNERS, P.C.
By:
---------------------------
Name:
Title:
-8-
<PAGE>
Services Agreement
Services Agreement (the "Agreement") dated August __, 1996, between
Physicians Quality Care, Inc., a Delaware corporation ("PQC"), with its
principal offices located at 950 Winter Street, Waltham, Massachusetts and
Medical Care Partners, P.C., a Massachusetts professional corporation ("MCP"),
with its principal offices located at 950 Winter Street, Waltham, Massachusetts.
Whereas MCP engages in the provision of medical and surgical services
through its physicians and has agreed to provide certain services to such
physicians in connection with its employment of physicians pursuant to MCP's
General Terms and Conditions of Physician Employment in effect as of the date
hereof (the "Terms and Conditions"); and
Whereas, MCP wishes to retain PQC to provide certain of such services on
MCP's behalf and PQC wishes to provide such services;
Now, therefore, MCP and PQC hereby agree as hereinafter provided.
1. Terms defined in the Terms and Conditions and not otherwise defined
herein shall be used herein with the meanings so defined.
2. MCP hereby appoints and engages PQC to provide the services
contemplated by Article II of the General Terms and Conditions of Member
Physician Employment and PQC accepts such appointment and engagement on and
subject to the terms and conditions set forth in this Agreement.
3. In consideration for the services to be provided by PQC pursuant to
Section 2, MCP hereby assigns to PQC all amounts allocated to MCP, including
without limitation Stage One Gross Margins, Stage Two Gross Margins, Stage Three
Gross Margins and IHS Profits, pursuant to Article VII of the Terms and
Conditions.
4. PQC shall review the payables of MCP and shall cause payment thereof to
be' made out of the funds of MCP. All Operating Revenues and IHS Revenues shall
be deposited in a bank account maintained in the name of and owned by MCP with a
banking institution selected by PQC and approved by MCP, (the "Account") but
managed solely by PQC in accordance with the terms of this Agreement. A
representative of PQC shall be the authorized signatory for the Account. The
Shareholder of MCP shall also be, and MCP hereby appoints the Shareholder as, an
authorized signatory for the Account. MCP covenants that it will not permit any
funds to be withdrawn from the Account except as authorized by PQC. In addition
to billing, collecting and payment services, PQC shall manage the cash and cash
equivalents of MCP.
<PAGE>
5. MCP hereby exclusively authorizes PQC to take the following actions for
and on behalf of and in the name of MCP throughout the term of this Agreement
and thereafter in accordance with Section 7:
(a) bill, in MCP's name, under its provider number when obtained and on
its behalf, and until such time as MCP has obtained its provider
number, bill, in the Physicians' names under their respective provider
numbers and on their behalf, all claims (including co-payments due from
patients) for reimbursement or indemnification from all other Managed
Care Payors, fiscal intermediaries or patients for all covered items
and services provided by MCP or by the Physicians to patients;
(b) take possession of and endorse in the name of the Physicians or
MCP, all cash, notes, checks, money orders, insurance payments, and any
other instruments received as payment of accounts receivable (and MCP
will cause an individual Physician who receives any payments for the
benefit of MCP directly, to deliver such amounts promptly to PQC for
deposit in the Account, and MCP covenants to transfer and deliver
promptly to PQC for deposit in the Account, all funds received by MCP
from patients or Managed Care Payors for medical services), all such
funds to be deposited directly into the Account and to be applied in a
manner consistent with this Agreement;
(c) deposit all collections directly into the Account and to make
withdrawals from the Account for such purposes as are consistent with
this Agreement;
(d) in MCP's name and on its behalf, and in the Physicians' names and
on behalf of each of them, as necessary, collect and receive all
accounts receivable generated by such billings and claims for
reimbursement, place such accounts for collection, settle and
compromise claims and institute legal action for the recovery of
accounts; MCP shall cooperate fully with PQC in facilitating such
collections and in collecting accounts receivable transferred to PQC
for deposit in the Account by MCP, including endorsement of checks and
delivery to PQC for deposit in the Account of all revenues in whatever
form, received from patients or Managed Care Payors on their behalf,
and completion of all forms necessary for the collection of said
monies; and
(e) sign checks on behalf of MCP and make withdrawals from the Accounts
for payments specified in this Agreement and as requested from time to
time by MCP for purposes not inconsistent with this Agreement.
In addition to the foregoing, MCP, to the extent not prohibited by law,
hereby grants to PQC an exclusive power of attorney and appoints PQC its
exclusive true and lawful attorney in fact to take each of the actions specified
in Sections (a) through (e) above for and
-2-
<PAGE>
on behalf of and in the name of MCP throughout the term of this Agreement and
thereafter in accordance with Section 7.
Upon request of PQC, MCP shall, and shall cause each of the Physicians to,
execute and deliver to PQC and to each financial institution wherein MCP or PQC
maintains an account, such additional documents or instruments (including one or
more powers of attorney naming PQC as its or their, as the case may be,
exclusive true and lawful attorney in fact) as may be necessary or desirable to
evidence or effect the authority or the power of attorney or both granted to PQC
pursuant to this Section.
6. This Agreement shall continue in effect for forty (40) years
commencing with the date of this Agreement as noted above. Unless terminated
earlier as provided for in section 7 of this Agreement, the term of this
Agreement shall be automatically extended for additional terms of five (5) years
each.
7. Termination.
(a) Termination on Default.
i. Either party shall be entitled to terminate this Agreement if the
other party fails to perform in any material respect any material
obligation required of it hereunder, and such default continues
for sixty (60) days after the giving of written notice by the
non-defaulting party, specifying the nature and extent of such
default; provided, however, that the non-defaulting party shall
-----------------
not be entitled to terminate this Agreement if the defaulting
party commences the cure of such default within the first sixty
(60) day period and thereafter diligently and in good faith
continues to cure such default until completion.
ii. Termination at election of PQC. PQC shall be entitled to
terminate this Agreement upon written notice to MCP if:
(x) a law firm with nationally recognized expertise in
healthcare law and acceptable to PQC and the Joint Policy
Board renders an opinion to PQC, with a copy provided to the
Joint Policy Board stating that a material provision of this
Agreement is in violation of applicable law, and the parties
do not agree to amend this Agreement pursuant to Section 10
to cure such violation; or
-3-
<PAGE>
(y) any court or regulatory agency enters an order finding a
material provision of this Agreement is in violation of
applicable laws; or
(z) PQC is prevented by MCP or any person under the MCP's
direction or control, from entering any of the Physician
Responsibility Centers, and such inability to enter such
premises continues for more than forty-eight (48) hours
after notice thereof to the Joint Policy Board.
iii. Termination by MCP. MCP may terminate this Agreement if and only
if such termination has been approved by the Joint Policy Board
and:
(x) upon written notice to PQC of the failure of PQC to make any
payments required under this Agreement when due and
continued failure to pay such compensation after thirty (30)
days notice of such failure to PQC unless the amount of such
payment is being contested in good faith; or
(y) a law firm with a nationally recognized expertise in health
care law and acceptable to PQC and the Joint Policy Board
renders an opinion to MCP, with a copy provided to the Joint
Policy Board, stating that a material provision of this
Agreement is in violation of applicable law, and the parties
do not agree to amend this Agreement pursuant to Section 10
hereof to cure such violation; or
(z) any court or regulatory agency enters an order finding a
material provision of this Agreement is in violation of
applicable laws.
(b) Effect of Termination. Upon termination of this Agreement
---------------------
pursuant to this Section 7:
i. PQC and MCP shall cooperate and continue to perform their
obligations under this Agreement as may be necessary to ensure
the provision of proper care to patients under treatment until
appropriate alternative arrangements are made.
ii. MCP and PQC shall cooperate to ensure the appropriate billing and
collection for all health care items and services provided by
-4-
<PAGE>
MCP prior to the effective date of termination, and any such
monies collected shall be retained by MCP and/or paid to PQC in
accordance with the terms of this Agreement.
iii. Any amounts due and owing to PQC under any loan to MCP shall
become immediately due and payable.
iv. MCP shall reimburse PQC for all drug and pharmaceutical inventory
retained by MCP following termination to the full extent of funds
advanced by PQC for the purchase of such inventory.
v. Provisions of this Agreement shall survive any termination if so
provided herein or if necessary or desirable fully to accomplish
the purposes of such provision.
8. All notices required or permitted under this Agreement shall be in
writing and shall be deemed effective upon personal delivery or upon deposit in
the United States Post Office, by registered or certified mail, postage prepaid,
addressed to the other party at the address shown above, or at such other
address or addresses as either party shall designate to the other in accordance
with this Section 8.
9. This Agreement constitutes the entire agreement between the parties
and supersedes all prior agreements and understandings, whether written or oral,
relating to the subject matter of this Agreement.
10. This Agreement may be amended or modified only by a written instrument
executed by PQC and MCP, provided, however, in the event (a) any state or
-----------------
federal laws or regulations, now existing or enacted or promulgated after the
Effective Date are interpreted by judicial decision, a regulatory agency, or
legal counsel in such a manner as to indicate that this Agreement or any
provision hereof may be in violation of such laws or regulations, or (b) the
Financial Accounting Standards Board or other applicable accounting standard
setting entity promulgates standards that would prevent PQC from consolidating
for financial statement presentation purposes all revenues of MCP on PQC's
consolidated financial statements, then PQC shall propose to the Joint Policy
Board and the MCP Shareholder for their approval such amendments to this
Agreement as necessary to preserve the underlying economic and financial
arrangements between PQC and MCP and without substantial economic detriment to
either PQC or MCP. Any such amendment approved by the Joint Policy Board and
MCP Shareholder shall be binding upon MCP, and MCP hereby consents to any such
amendment. To the extent any act or service required of PQC should be construed
or deemed, by any governmental authority, agency or court, to constitute the
practice of medicine by PQC, the performance of said act or service by PQC shall
be deemed waived and forever unenforceable and the provisions of this Section 10
shall be applicable. MCP hereby waives and agrees not to assert illegality as a
defense to the enforcement of this
-5-
<PAGE>
Agreement or any provision hereof; instead, any such purported illegality shall
be resolved pursuant to the terms of this Section 10.
11. This Agreement shall be construed, interpreted and enforced in
accordance with the laws of The Commonwealth of Massachusetts.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year set forth above.
PHYSICIANS QUALITY CARE, INC.
By:
---------------------------------
MEDICAL CARE PARTNERS, P.C.
By:
---------------------------------
-6-
<PAGE>
SHAREHOLDER DESIGNATION AND STOCK TRANSFER AGREEMENT
This SHAREHOLDER DESIGNATION AND STOCK TRANSFER AGREEMENT (the
"Agreement"), dated as of August 9, 1996, by and among Physicians Quality Care,
Inc., a Delaware business corporation ("PQC"); Medical Care Partners, P.C., a
Massachusetts professional corporation ("MCP"); and Jay Ungar, M.D. in an
individual capacity (the "Shareholder) (hereinafter, collectively, the
"Parties").
WHEREAS, PQC provides management, administrative and other support services
to affiliated medical practices;
WHEREAS, MCP provides comprehensive medical professional services;
WHEREAS, the Shareholder is the sole shareholder of all of the issued and
outstanding shares of MCP (the "Shares"); and
WHEREAS, the parties desire to restrict the transferability of the Shares
for the benefit of PQC and its relationship with MCP;
NOW THEREFORE, in consideration of the foregoing, and of the mutual
covenants and agreements contained herein, the Parties agree as follows:
Section 1 Effective Date and Term
----------------------------------
1.1 Effective Date: Term. This Agreement shall be effective as of August
--------------------
9, 1996, and shall continue until terminated in accordance with the provisions
of Section 1.2 below.
1.2 Written Agreement Required. This Agreement may be terminated only upon
--------------------------
the written direction of PQC, or upon the execution of a succeeding version of
this Agreement with a Successor Shareholder, as defined in Section 10.
Section 2 - Acquisition of Shares
---------------------------------
2.1 Execution of Agreements. In consideration of the sale by MCP of all of
-----------------------
the outstanding capital stock to the Shareholder under the Restricted Stock and
Stock Transfer Agreement dated as August 9, 1996, among the Shareholder and MCP,
the Shareholder enters into this Agreement.
2.2 Shareholder Designee's Record Title to Shares. During the Period of
---------------------------------------------
Designation of the Shareholder (as defined in Section 9.1), the Shareholder
shall be the shareholder of record of the Shares and shall be entitled to
exercise the right to vote in person or by proxy in respect of any and all of
the Shares in accordance herewith.
Section 3 - Transfer of Shares
------------------------------
3.1 Attorney-in-Fact. The Shareholder, on behalf of himself, his
----------------
successors and assigns, hereby appoints the Attorney-in-Fact (defined in Section
12) as the Shareholder's and his successor's and assign's attorney-in-fact with
full power and authority to execute all documents and do all things necessary to
effectuate the transfer to the Successor Shareholder, designated as provided in
Section 10 hereof, of record ownership of the Shares held in the
<PAGE>
name of the Shareholder when the Shareholder's Period of Designation has
expired. Such appointment shall be irrevocable. In furtherance of such
appointment, the Shareholder has caused, or shall promptly cause upon
commencement of the Period of Designation, the Shares and all certificates
representing the same and all securities resulting from a merger or
consolidation of MCP or a split-up or reclassification of the equity of MCP to
be delivered to the Attorney-in-Fact, accompanied by an executed stock power,
endorsed in blank.
3.2 Resignation. The Shareholder shall have the right to resign for any
-----------
reason by giving ninety (90) days written notice to the Attorney-in-Fact, which
resignation shall become effective upon the expiration of the ninety (90) day
period following receipt of such notice by the Attorney-in-Fact. In no event
shall the Shareholder have a right to resign prior to the end of the notice
period specified in the previous sentence.
3.3 Automatic Transfer, The Shares shall be deemed to have been
------------------
transferred to the Successor Shareholder, designated as provided in Section 10,
without further action by the Shareholder, immediately upon the occurrence of
any of the following events (each a "Transfer Event"); provided, however, that
-----------------
until the Successor Shareholder shall have made the Shareholder's designation
effective pursuant to Section 10, the Shareholder shall continue to hold the
Shares in trust for the benefit of the Successor Shareholder, subject to the
limitations imposed by Section 9.3:
(a) the death of the Shareholder;
(b) the incompetence or permanent disability of the Shareholder such that
the Shareholder is unable to render any professional services on
behalf of MCP;
(c) the Shareholder's becoming disqualified under Massachusetts law to be
a shareholder of MCP;
(d) the resignation of the Shareholder pursuant to Section 3.2;
(e) any attempt by the Shareholder or by any person to transfer the
Shares, whether voluntarily or involuntarily, by operation of law or
otherwise, to any person who is not the Successor Shareholder
designated by PQC pursuant to Section 10;
(f) the filing of any petition for or another documents causing or
intended to cause a judicial, administrative, voluntary or involuntary
dissolution of MCP; or
(g) the designation of a Successor Shareholder by PQC pursuant to Section
10, whether or not such designation has become effective under that
provision.
3.4 Effect of Transfer. Upon the transfer of the Shares, the Shareholder
------------------
shall immediately resign, or be deemed to have resigned, as a director of MCP,
if the Shareholder holds such position, and from any and all corporate offices
if any, of MCP at the time held by the Shareholder. Notwithstanding anything to
the contrary herein, upon the occurrence of
-2-
<PAGE>
a Transfer Event, the Shares will be immediately transferred, or deemed to be
transferred, to the Successor Shareholder upon the effective date of such
Transfer Event. The Successor Shareholder, shall have from and after such
Transfer Event all ownership and voting rights as to the Shares in accordance
with this Agreement, irrespective of receipt of a certificate for such Shares,
receipt by the Shareholder of payment for the Shares, or any other act or
matter. Upon the transfer of the Shares, the Shareholder shall be released in
writing from all obligations under this Agreement,
3.5 Purchase Price. The purchase price for the Shares transferred to the
--------------
Successor Shareholder (the "Purchase Price") shall be the same purchase price,
one hundred dollars ($100) in the aggregate, paid by the Shareholder to acquire
the Shares notwithstanding any increase or decline in the value of MCP's
business or assets in the interim. Payment of the Purchase Price shall be made
by the Successor Shareholder to the Shareholder within five (5) business days of
the transfer of the Shares to the Successor Shareholder. The Shareholder's only
remedy for the failure of the Successor Shareholder to pay the purchase price
for the Shares shall be money damages, and in no way shall such failure
jeopardize the temporary or permanent transfer of any rights as to the Shares.
Section 4 - Voting of Shares
----------------------------
4.1 Election of Directors of MCP.
----------------------------
4.1.1 Election. The Shareholder agrees to consult with the Attorney-in-
--------
Fact in accordance with Section 12 of this Agreement with respect to the
election of directors of MCP (as defined in the By-laws of MCP), which
consultation shall include a written communication and a written response.
4.1.2 Vacancies, In the event of a vacancy for any reason in the office of
---------
a director, the Shareholder shall consult with the Attorney-in-Fact with respect
to the election of a new director.
4.2 Voting on All Other Matters. The Shareholder agrees that on any
---------------------------
other proposal to be voted upon by holders of the Shares that the Shareholder
shall vote the Shares, or sign consents taking action on such matter, only after
consultation with the Attorney-in-Fact in accordance with Section 12 of this
Agreement, except only to the extent the same requires the exercise of
professional medical judgment. The Shareholder shall consult with the Attorney-
in-Fact from time to time as necessary and appropriate to obtain advice with
respect to matters to be voted upon by holders of the Shares.
Section 5 - Voting as a Director
--------------------------------
5.1 Business Judgment. In the event that the Shareholder shall serve as
-----------------
a director of MCP, the Shareholder shall act in good faith, in a manner the
Shareholder reasonably believes to be in the best interests of MCP, and with
such care as an ordinarily prudent person in a like position would use in
similar circumstances in voting and otherwise acting as a member of the Board of
Directors of MCP.
-3-
<PAGE>
5.2 Obligation to Consult with the Attorney-in-Fact. In voting with
-----------------------------------------------
respect to matters, the approval of which by the Board of Directors of MCP
requires the affirmative vote of the Shareholder, the Shareholder shall consult
in advance with the Attorney-in-Fact with respect to such matters before voting
on such matters.
Section 6 - Professional Medical Judgment
-----------------------------------------
The other provisions of this Agreement notwithstanding, the Shareholder
shall be unfettered in the exercise of the Shareholder's professional medical
judgment in the Shareholder's capacity as a shareholder, a director or officer
of MCP to the extent the matters under consideration require the exercise of
such judgment.
Section 7 - Notices, Reports and Information
--------------------------------------------
The Shareholder shall promptly deliver to the Attorney-in-Fact, on receipt,
copies of all written materials received by the Shareholder in such capacity
and, consistent with such Shareholder's fiduciary obligations as a director of
MCP, all written materials received by the Shareholder in the Shareholder's
capacity as a member of the Board of Directors of MCP.
Section 8 - Distributions and Proceeds
--------------------------------------
The Shareholder shall promptly give prior notice to PQC of any event giving
rise to the receipt of any shares, securities, moneys or property representing a
dividend, distribution or return of capital with respect to the Shares. The
Shareholder agrees that the Shareholder shall cause any dividend, distribution
or return of capital with respect to the Shares to be paid directly to PQC and
hereby directs MCP to make any such payment to PQC. The Shareholder disclaims
any beneficial interest in any such dividend, distribution or return of capital.
Section 9 - Designation and Status of Shareholder
-------------------------------------------------
9.1 Period of Designation of Shareholder. The Shareholder who executes
------------------------------------
this Agreement or an amendment hereto, accepting the Shareholder's designation
as a "Shareholder" hereunder, shall serve as such for a period commencing on the
date hereof, with respect to the original Shareholder, and on the date of
acceptance, with respect to Successor Shareholders, and in each case continuing
until the date such Shareholder dies, resigns or ceases to serve as the
Shareholder in accordance with Section 3.3. As to each Shareholder, such period
is referred to herein as a "Period of Designation."
9.2 No Compensation. The Shareholder shall not be entitled to receive
---------------
compensation for the Shareholder services as Shareholder hereunder.
9.3 Limitation on Authoritv. Other than as provided herein, the
-----------------------
Shareholder shall not sell, transfer, assign or otherwise dispose of, or pledge,
mortgage, hypothecate or otherwise encumber, or permit or suffer any
encumbrance, for all or any part of the Shares, except on the express written
direction or with the express written consent of the Attorney-in-Fact. Upon the
occurrence of an event of automatic transfer pursuant to Section 3.3, the
Shareholder shall hold the Shares in trust for the benefit of the Successor
Shareholder
-4-
<PAGE>
until the designation of a Successor Shareholder becomes effective, but shall
have no authority to act on behalf of or bind MCP.
Section 10 - Successor Shareholder
----------------------------------
At any time PQC may at its sole discretion, and immediately upon the
occurrence of any Transfer Event PQC shall, designate a successor shareholder
(the "Successor Shareholder") to serve in accordance with this Agreement and
with applicable provisions of the Bylaws of MCP and applicable law. Such
Successor Shareholder shall be a physician licensed to practice medicine in the
Commonwealth of Massachusetts and shall be a party to an employment agreement
with PQC. In order to make such designation effective, the Successor Shareholder
shall accept such designation by executing a written amendment to this Agreement
and expressly, in writing, assume all of the Shareholder's obligations under
this Agreement,
Section 11 - Restrictions on Certificate
----------------------------------------
Upon the execution of this Agreement, the Shareholder shall surrender the
Shareholder's certificates representing the Shares to MCP, which shall place on
such certificates a notice of the restrictions on the transfer of such Shares
imposed by this Agreement. Such notice shall be substantially in the form of
Exhibit A attached hereto and incorporated herein by reference.
Section 12 - Attorney-in-Fact
-----------------------------
PQC is hereby designated as the Attorney-in-Fact for the purposes of this
Agreement. The Shareholder shall act upon the advice of PQC as the Attorney-in-
Fact in all matters arising with respect to this Agreement. On notice to the
Shareholder and MCP from PQC, the Shareholder shall change the designation of
the Attorney-in-Fact to another person or entity designated by PQC.
Section 13 - No Joint Venture
-----------------------------
The relationship created by this Agreement is not intended to be, shall not
be deemed to be, and shall not be treated as a general partnership, limited
partnership, joint venture, corporation or joint stock company or association.
Section 14 - Breach
-------------------
Any (i) attempted sale, transfer, assignment, pledge or other encumbrance
or disposition of any of the Shares by the Shareholder or (ii) action by the
Shareholder in violation of any of the provisions of this Agreement shall be
considered a breach of this Agreement.
Section 15 - Miscellaneous Provisions
-------------------------------------
15.1 Successors and Assigns. This Agreement shall be binding upon the
----------------------
parties and their respective successors, assigns, heirs, transferees, executors
and administrators, and
-5-
<PAGE>
except as otherwise expressly provided in any particular provision of this
Agreement, any subsequent holder or holders of any of the Shares.
15.2 Notices. Except as otherwise specified in this Agreement, any notice
-------
required to be given pursuant to this Agreement shall be given in writing. Any
notice, demand or other communication in connection with this Agreement shall be
deemed to be given if given in writing (including telex, telecopy or similar
teletransmission) addressed to the respective party at the address set forth on
the signature page hereof (or to such party at such other address as such party
shall have specified by notice actually received by the addressor), and if
either (i) actually delivered in fully legible form to such address (evidenced
in the case of a telex by receipt of the correct answer back) or (ii) in the
case of a letter, five (5) days shall have elapsed after the same shall have
been deposited in the United States mails, with the first class postage prepaid
and registered or certified.
15.3 Waiver. No waiver of any provision hereof shall be effective unless
------
made in writing and signed by the waiving party. The failure of any party to
require the performance of any term or obligation of this Agreement, or the
waiver by any party of any breach of this Agreement, shall not prevent any
subsequent enforcement of such term or obligation or be deemed a waiver of any
subsequent breach.
15.4 Separability. If any provision of this Agreement is held for any
------------
reason to be unenforceable by a court of competent jurisdiction, the remainder
of this Agreement shall nevertheless remain in full force and effect.
15.5 Headings. The headings in this Agreement are intended solely for
--------
convenience of reference and shall be given no effect in the construction or
interpretation of this Agreement.
15.6 Governing Law. This Agreement is made in, and shall be governed by and
-------------
construed in accordance with, the laws of the Commonwealth of Massachusetts.
15.7 Counterparts. This Agreement may be executed in three (3) or more
------------
counterparts, each of which shall be deemed an original but all of which taken
together shall constitute one and the same instrument.
15.8 Indemnification.
---------------
(a) PQC shall ensure that the directors and officers liability insurance
purchased by MCP or PQC on behalf of Shareholder shall include coverage for any
claims against Shareholder or liabilities arising out of Shareholder's
performance of the Shareholder's obligations under this Agreement or the
Shareholder's involvement, in the Shareholder's capacity as a shareholder of MCP
(but not in the Shareholder's capacity as a physician), in a proceeding
involving alleged medical malpractice by a physician employee of MCP, and PQC
shall indemnify Shareholder for any costs and expenses arising out of such a
proceeding in the event such costs and expenses are not reimbursed pursuant to
such policy.
-6-
<PAGE>
(b) Notification and Defense of Claim. Not later than thirty (30) days
---------------------------------
after receipt by Shareholder of notice of the commencement of any action, suit
or proceeding, Shareholder will, if a claim in respect thereof is to be made
against PQC under this Agreement, notify PQC of the commencement thereof but the
omission so to notify PQC will not relieve PQC from any liability which it may
have to Shareholder otherwise than under this Agreement. With respect to any
such action, suit, or proceeding as to which Shareholder notifies PQC of the
commencement thereof:
(i) PQC will be entitled to participate therein at its own expense;
(ii) Except as otherwise provided below, to the extent that it may wish,
PQC jointly with any other indemnifying party similarly notified will be
entitled to assume the defense thereof, with counsel reasonably satisfactory to
Shareholder. After notice from PQC to Shareholder of its election so as to
assume the defense thereof, PQC will not be liable to Shareholder under this
Agreement for any legal or other expenses subsequently incurred by Shareholder
in connection with the defense thereof other than reasonable costs of
investigation or as otherwise provided below. Shareholder shall have the right
to employ the Shareholder's counsel in such action, suit, or proceeding but the
fees and expenses of such counsel incurred after notice from PQC of its
assumption of the defense thereof shall be at the expense of Shareholder unless
(A) the employment of counsel by Shareholder has been authorized by PQC, (B)
Shareholder shall have reasonably concluded that there may be a conflict of
interest between PQC and Shareholder in the conduct of the defense of such
action or (C) PQC shall not in fact have reasonably promptly employed counsel to
assume the defense of such action, in each of which cases the fees and expenses
of Shareholder's separate counsel shall be at the expense of PQC. PQC shall not
be entitled to assume the defense of any action, suit, or proceeding brought by
or on behalf of PQC or as to which Shareholder shall have made the conclusion
provided for in (B) above; and
(iii) PQC shall not be liable to indemnify Shareholder under this
Agreement for any amounts paid in settlement of any action or claim effected
without its written consent. PQC shall be permitted to settle any action except
that it shall not settle any action or claim in any manner which would impose
any penalty or limitation on Shareholder without Shareholder's written consent.
Neither PQC nor Shareholder will unreasonably withhold its consent to any
proposed settlement.
-7-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first written above.
PHYSICIANS QUALITY CARE, INC.
By: /s/ Jerilyn Asher
--------------------------------------------
Name:
Title:
Address:
MEDICAL CARE PARTNERS, P.C.
By: /s/
--------------------------------------------
Name:
Title:
Address:
/s/ Jay Ungar
-------------------------------------
Jay Ungar, M.D.
-8-
<PAGE>
EXHIBIT A
NOTICE OF RESTRICTIONS
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS
IMPOSED BY CHAPTER 156A OF THE GENERAL LAWS OF THE COMMONWEALTH OF
MASSACHUSETTS, APPROPRIATE REGULATING BOARD(S), THE CORPORATION'S ARTICLES OF
INCORPORATION AND BYLAWS AND THE TERMS OF A SHAREHOLDER DESIGNATION AND
RESTRICTED STOCK TRANSFER AGREEMENT BY AND AMONG THE SHAREHOLDER NAMED HEREIN,
THE CORPORATION AND ANOTHER PARTY (A COPY OF WHICH IS ON FILE WITH THE
CORPORATION AND AVAILABLE WITHOUT CHARGE), AND NO TRANSFER OF THE SHARES
REPRESENTED HEREBY OR OF SHARES ISSUED IN EXCHANGE THEREFOR SHALL BE VALID OR
EFFECTIVE UNTIL THE TERMS AND CONDITIONS OF SUCH STATUTES, BOARD REQUIREMENTS,
ORGANIZATIONAL DOCUMENTS AND AGREEMENT SHALL HAVE BEEN FULFILLED IN THE JUDGMENT
OF THE CORPORATION.
-9-
<PAGE>
RESTRICTED STOCK AND STOCK TRANSFER AGREEMENT
---------------------------------------------
AGREEMENT dated as of August 9, 1996, between Medical Care Partners, P.C.,
a Massachusetts professional corporation (the "Company"), and Jay Ungar, M.D.
(the "Purchaser").
For valuable consideration, receipt of which is acknowledged, the parties
hereto agree as follows:
1. Purchase of Shares. The Company shall issue and sell to the
------------------
Purchaser, and the Purchaser shall purchase from the Company, subject to the
terms and conditions set forth in this Agreement, 1,000 shares (the "Shares") of
common stock, $.0l par value, of the Company ("Common Stock"), at a purchase
price of $.0l per share. The aggregate purchase price for the Shares shall be
paid by the Purchaser by check payable to the order of the Company or such other
method as may be acceptable to the Company. Upon receipt of payment by the
Company for the Shares, the Company shall issue to the Purchaser one or more
certificates in the name of the Purchaser for that number of Shares purchased by
the Purchaser. The Purchaser agrees that the Shares shall be subject to the
Purchase Option set forth in Section 2 of this Agreement and the restrictions on
transfer set forth in Section 4 of this Agreement.
2. Purchase Option. At any time, in the Company's sole discretion, the
---------------
Company shall have the right and option (the "Purchase Option") to purchase from
the Purchaser, for a sum of $.0l per share (the "Option Price"), all of the
Shares.
3. Exercise of Purchase Option and Closing.
---------------------------------------
(a) The Company may exercise the Purchase Option by delivering or mailing
to the Purchaser (or his estate), in accordance with Section 15, a written
notice of exercise of the Purchase Option.
(b) Within five (5) days after his receipt of the Company's notice of the
exercise of the Purchase Option pursuant to subsection (a) above, the Purchaser
(or his estate) shall tender to the Company at its principal offices the
certificate or certificates representing the Shares which the Company has
elected to purchase, duly endorsed in blank by the Purchaser or with duly
endorsed stock powers attached thereto, all in form suitable for the transfer of
such Shares to the Company. Upon its receipt of such certificate or
certificates, the Company shall deliver or mail to the Purchaser a check in the
amount of the aggregate Option Price therefor.
(c) After the time at which any Shares are required to be delivered to the
Company for transfer to the Company pursuant to subsection (b) above, the
Company shall not pay any dividend to the Purchaser on account of such Shares or
permit the Purchaser to exercise any of the privileges or rights of a
stockholder with respect to such Shares, but shall, in so far as permitted by
law, treat the Company as the owner of such Shares.
-10-
<PAGE>
(d) The Option Price may be payable, at the option of the Company, in
cancellation of all or a portion of any outstanding indebtedness of the
Purchaser to the Company or in cash (by check) or both.
4. Restrictions on Transfer. The Purchaser shall not sell, assign,
------------------------
transfer, pledge, hypothecate or otherwise dispose of, by operation of law or
otherwise (collectively "transfer") any Shares or any interest therein, except
in accordance with the terms of the Shareholder Designation and Stock Transfer
Agreement dated as of August , 1996 by and among Physicians Quality Care,
Inc., the Company and the Purchaser.
5. Effect of Prohibited Transfer. The Company shall not be required (a)
-----------------------------
to transfer on its books any of the Shares which shall have been sold or
transferred in violation of any of the provisions set forth in this Agreement,
or (b) to treat as owner of such Shares or to pay dividends to any transferee to
whom any such Shares shall have been so sold or transferred.
6. Restrictive Legend. All certificates representing Shares shall have
------------------
affixed thereto a legend in substantially the following form, in addition to any
other legends that may be required under federal or state securities laws:
"The shares of stock represented by this certificate are subject to
restrictions on transfer and an option to purchase set forth in a
certain Restricted Stock and Stock Transfer Agreement between the
corporation and the registered owner of these shares (or his
predecessor in interest), and such Agreement is available for
inspection without charge at the office of the Clerk of the
corporation."
7. Investment Representations. The Purchaser represents, warrants and
--------------------------
covenants as follows:
(a) The Purchaser is purchasing the Shares for his own account for
investment only, and not with a view to, or for sale in connection with, any
distribution of the Shares in violation of the Securities Act of 1933 (the
"Securities Act"), or any rule or regulation under the Securities Act.
(b) The Purchaser has had such opportunity as he has deemed adequate to
obtain from representatives of the Company such information as is necessary to
permit him to evaluate the merits and risks of his investment in the Company.
(c) The Purchaser has sufficient experience in business, financial and
investment matters to be able to evaluate the risks involved in the purchase of
the Shares and to make an informed investment decision with respect to such
purchase.
(d) The Purchaser can afford a complete loss of the value of the Shares and
is able to bear the economic risk of holding such Shares for an indefinite
period.
(e) The Purchaser understands that (i) the Shares have not been registered
under the Securities Act and are "restricted securities" within the meaning of
Rule 144 under the
-11-
<PAGE>
Securities Act, (ii) the Shares cannot be sold, transferred or otherwise
disposed of unless they are subsequently registered under the Securities Act or
an exemption from registration is then available; (iii) in any event, the
exemption from registration under Rule 144 will not be available for at least
two years and even then will not be available unless a public market then exists
for the Common Stock, adequate information concerning the Company is then
available to the public, and other terms and conditions of Rule 144 are complied
with; and (iv) there is now no registration statement on file with the
Securities and Exchange Commission with respect to any stock of the Company and
the Company has no obligation or current intention to register the Shares under
the Securities Act.
(f) A legend substantially in the following form will be placed on the
certificate representing the Shares:
"The shares represented by this certificate have not been registered
under the Securities Act of 1933, as amended, and may not be sold,
transferred or otherwise disposed of in the absence of an effective
registration statement under such Act or an opinion of counsel
satisfactory to the corporation to the effect that such registration is
not required."
8. Adjustments for Stock Splits, Stock Dividends, etc.
--------------------------------------------------
(a) If from time to time during the term of the Purchase Option there is
any stock split-up, stock dividend, stock distribution or other reclassification
of the Common Stock of the Company, any and all new, substituted or additional
securities to which the Purchaser is entitled by reason of his ownership of the
Shares shall be immediately subject to the Purchase Option, the restrictions on
transfer and other provisions of this Agreement in the same manner and to the
same extent as the Shares, and the Option Price shall be appropriately adjusted.
(b) If the Shares are converted into or exchanged for, or stockholders of
the Company receive by reason of any distribution in total or partial
liquidation, securities of another corporation, or other property (including
cash), pursuant to any merger of the Company or acquisition of its assets, then
the rights of the Company under this Agreement shall inure to the benefit of the
Company's successor and this Agreement shall apply to the securities or other
property received upon such conversion, exchange or distribution in the same
manner and to the same extent as the Shares.
9. Withholding Taxes.
-----------------
(a) The Purchaser acknowledges and agrees that the Company has the right to
deduct from payments of any kind otherwise due to the Purchaser any federal,
state or local taxes of any kind required by law to be withheld with respect to
the purchase of the Shares by the Purchaser.
(b) If the Purchaser elects, in accordance with Section 83(b) of the
Internal Revenue Code of 1986, as amended, to recognize ordinary income in the
year of acquisition
-12-
<PAGE>
of the Shares, the Company will require at the time of such election an
additional payment for withholding tax purposes based on the difference, if any,
between the purchase price for such Shares and the fair market value of such
Shares as of the day immediately preceding the date of the purchase of such
Shares by the Purchaser.
10. Severability. The invalidity or unenforceability of any provision of
------------
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, and each other provision of this Agreement shall be
severable and enforceable to the extent permitted by law.
11. Waiver. Any provision contained in this Agreement may be waived,
------
either generally or in any particular instance, by the Board of Directors of the
Company.
12. Binding Effect. This Agreement shall be binding upon and inure to the
--------------
benefit of the Company and the Purchaser and their respective heirs, executors,
administrators, legal representatives, successors and assigns, subject to the
restrictions on transfer set forth in Section 4 of this Agreement.
13. No Rights To Emplovment. Nothing contained in this Agreement shall be
-----------------------
construed as giving the Purchaser any right to be retained, in any position, as
an employee of the Company.
14. Notice. All notices required or permitted hereunder shall be in
------
writing and deemed effectively given upon personal delivery or upon deposit in
the United States Post Office, by registered or certified mail, postage prepaid,
addressed to the other party hereto at the address shown beneath his or its
respective signature to this Agreement, or at such other address or addresses as
either party shall designate to the other in accordance with this Section 14.
15. Pronouns. Whenever the context may require, any pronouns used in this
--------
Agreement shall include the corresponding masculine, feminine or neuter forms,
and the singular form of nouns and pronouns shall include the plural, and vice
versa.
16. Entire Agreement. This Agreement constitutes the entire agreement
----------------
between the parties, and supersedes all prior agreements and understandings,
relating to the subject matter of this Agreement.
17. Amendment. This Agreement may be amended or modified only by a
---------
written instrument executed by both the Company and the Purchaser.
18. Governing Law. This Agreement shall be construed, interpreted and
-------------
enforced in accordance with the laws of the Commonwealth of Massachusetts.
-13-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
MEDICAL CARE PARTNERS, P.C.
By: /s/
----------------------------------------------
Address: 950 Winter Street
Waltham, MA 02154
PURCHASER:
/s/ Jay Ungar M.D.
-------------------------------------------------
Jay Ungar, M.D.
Address: 11 Brookside Drive
Longmeadow, MA 01106
-14-
<PAGE>
[CONFORMED COPY WITH EXHIBITS F, G-1,
G-2 AND H CONFORMED AS EXECUTED]
- --------------------------------------------------------------------------------
CREDIT AGREEMENT
among
PHYSICIANS QUALITY CARE, INC.,
VARIOUS LENDING INSTITUTIONS,
and
BANKERS TRUST COMPANY,
AS AGENT
---------------------------------------
Dated as of January 16, 1997
---------------------------------------
$3,500,000
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
SECTION 1. Amount and Terms of Credit .........................1
1.01 Revolving Loan Commitments .........................1
1.02 Minimum Borrowing Amounts, etc. ....................1
1.03 Notice of Borrowing ................................1
1.04 Disbursement of Funds ..............................2
1.05 Notes ..............................................3
1.06 Conversions ........................................3
1.07 Pro Rata Borrowings ................................3
1.08 Interest ...........................................4
1.09 Interest Periods ...................................4
1.10 Increased Costs, Illegality, etc. ..................5
1.11 Compensation .......................................7
1.12 Change of Lending Office ...........................8
1.13 Replacement of Banks ...............................8
SECTION 2. Fees; Commitments ..................................9
2.01 Fees ...............................................9
2.02 Voluntary Termination or Reduction of Total
Unutilized Revolving Loan Commitment ...............9
2.03 Mandatory Reduction or Termination of
Revolving Loan Commitments, etc. ..................10
SECTION 3. Payments ..........................................10
3.01 Voluntary Prepayments .............................10
3.02 Mandatory Prepayments .............................11
3.03 Method and Place of Payment .......................11
3.04 Net Payments ......................................12
SECTION 4. Conditions Precedent ..............................13
4.01 Execution of Agreement; Revolving Notes ...........13
4.02 No Default; Representations and Warranties ........13
4.03 Officer's Certificate .............................14
4.04 Opinions of Counsel ...............................14
4.05 Proceedings .......................................14
4.06 Adverse Change, etc ...............................14
4.07 Litigation ........................................15
4.08 Approvals .........................................15
4.09 Security Documents ................................15
4.10 Guaranty ..........................................16
4.11 Plans; Collective Bargaining Agreements;
Existing Indebtedness Agreements;
Shareholders' Agreements; Management
Agreements; Employment Agreements; Tax
Allocation Agreements; Material
Contracts .........................................16
-ii-
<PAGE>
4.12 Financial Statements...............................17
4.13 Pro Forma Financial Statements.....................17
4.14 Protections........................................17
4.15 Existing Indebtedness..............................17
4.16 Payment of Fees....................................18
4.17 Notice of Borrowing................................18
4.18 Initial Borrowing Base Certificate.................18
SECTION 5. Representations, Warranties and Agreements.........18
5.01 Status.............................................18
5.02 Power and Authority................................19
5.03 No Violation.......................................19
5.04 Litigation.........................................19
5.05 Use of Proceeds; Margin Regulations................19
5.06 Governmental Approvals.............................20
5.07 Investment Company Act.............................20
5.08 Public Utility Holding Company Act.................20
5.09 True and Complete Disclosure.......................20
5.10 Financial Condition; Financial Statements..........20
5.11 Security Interests.................................25
5.12 Transaction........................................26
5.13 Compliance with ERISA..............................26
5.14 Capitalization.....................................27
5.15 Subsidiaries; Affiliated Businesses................27
5.16 Intellectual Property..............................27
5.17 Compliance with Statutes, Permits, etc.............27
5.18 Environmental Matters..............................28
5.19 Properties.........................................29
5.20 Labor Relations....................................29
5.21 Tax Returns and Payments...........................29
5.22 Existing Indebtedness..............................30
SECTION 6 Affirmative Covenants..............................30
6.01 Information Covenants..............................30
6.02 Books, Records and Inspections.....................33
6.03 Insurance..........................................33
6.04 Payment of Taxes...................................34
6.05 Corporate Franchises...............................34
6.06 Compliance with Statutes, etc......................34
6.07 Compliance with Environmental Laws.................34
6.08 ERISA..............................................35
6.09 Good Repair........................................35
6.10 End of Fiscal Years; Fiscal Quarters...............36
6.11 UCC-11 Searches....................................36
6.12 Additional Security; Further Assurances............36
6.13 Register...........................................37
6.14 Post-Closing Obligations...........................37
-iii-
<PAGE>
SECTION 7. Negative Covenants.................................38
7.01 Changes in Business................................38
7.02 Consolidation, Merger, Sale or
Purchase of Assets, etc ...........................38
7.03 Liens..............................................40
7.04 Indebtedness.......................................41
7.05 Advances, Investments and Loans....................42
7.06 Dividends, etc.....................................43
7.07 Transactions with Affiliates.......................43
7.08 Capital Expenditures...............................44
7.09 Minimum Consolidated EBITDA........................44
7.10 Borrowing Base.....................................44
7.11 Limitation on Voluntary Payments;
Modifications of Indebtedness,
Organizational Documents and Certain
Other Agreements; Issuance of Capital Stock; etc...44
7.12 Limitation on Certain Restrictions on Guarantors...45
7.13 Limitation on the Establishment or
Acquisition of Subsidiaries........................46
SECTION 8. Events of Default..................................46
8.01 Payments...........................................46
8.02 Representations, etc...............................46
8.03 Covenants..........................................47
8.04 Default Under Other Agreements.....................47
8.05 Bankruptcy. etc....................................47
8.06 ERISA..............................................48
8.07 Security Documents.................................48
8.08 Guaranties.........................................48
8.09 Judgments..........................................48
8.10 Ownership..........................................48
8.11 Services Agreements; Class B
Common Stock Purchase Agreement;
Sole Stockholder Designation Agreements............48
SECTION 9. Definitions........................................49
SECTION 10. The Agent..........................................63
10.01 Appointment........................................63
10.02 Delegation of Duties...............................64
10.03 Exculpatory Provisions.............................64
10.04 Reliance by Agent..................................64
10.05 Notice of Default..................................65
10.06 Non-Reliance on Agent and Other Banks..............65
10.07 Indemnification....................................65
10.08 Agent in its Individual Capacity...................66
10.09 Holders............................................66
10.10 Resignation of the Agent; Successor Agent..........66
SECTION 11. Miscellaneous......................................67
-iv-
<PAGE>
11.01 Payment of Expenses, etc...........................67
11.02 Right of Setoff....................................68
11.03 Notices............................................68
11.04 Benefit of Agreement...............................68
11.05 No Waiver; Remedies Cumulative.....................70
11.06 Payments Pro Rata..................................70
11.07 Calculations; Computations.........................70
11.08 Governing Law; Submission to Jurisdiction; Venue...71
11.09 Counterparts.......................................71
11.10 Effectiveness......................................71
11.11 Headings Descriptive...............................72
11.12 Amendment or Waiver; etc...........................72
11.13 Survival...........................................73
11.14 Domicile of Revolving Loans........................73
11.15 Confidentiality....................................73
11.16 Waiver of Jury Trial...............................73
ANNEX I List of Banks
ANNEX II Bank Address
ANNEX III Real Property
ANNEX IV Projections
ANNEX V Insurance
ANNEX VI Existing Indebtedness
ANNEX VII Existing Liens
ANNEX VIII Capitalization
ANNEX IX Subsidiaries and Affiliated Businesses
EXHIBIT A -- Form of Notice of Borrowing
EXHIBIT B -- Form of Revolving Note
EXHIBIT C -- Form of Section 3.04(b)(ii) Certificate
EXHIBIT D -- Form of Opinion of Hale and Dorr
EXHIBIT E -- Form of Officers' Certificate
EXHIBIT F -- Form of Pledge Agreement
EXHIBIT G-1 -- Form of Borrower/Subsidiary Security Agreement
EXHIBIT G-2 -- Form of Affiliated Business Security Agreement
EXHIBIT H -- Form of Guaranty
EXHIBIT I -- Form of Assignment and Assumption Agreement
EXHIBIT J -- Form of Intercompany Note
EXHIBIT K -- Form of Borrowing Base Certificate
-v-
<PAGE>
CREDIT AGREEMENT, dated as of January 16, 1997, among PHYSICIANS
QUALITY CARE, INC., a Delaware corporation (the "Borrower"), the lenders from
time to time party hereto (each, a "Bank" and, collectively, the "Banks"), and
BANKERS TRUST COMPANY, as Agent (in such capacity, the "Agent"). Unless
otherwise defined herein, all capitalized terms used herein and defined in
Section 9 are used herein as so defined.
WITNESSETH:
WHEREAS, subject to and upon the terms and conditions herein set forth,
the Banks are willing to make available the credit facility provided for herein;
NOW, THEREFORE, IT IS AGREED:
SECTION 1. Amount and Terms of Credit.
---------------------------
1.01 Revolving Loan Commitments. Subject to and upon the terms and
--------------------------
conditions herein set forth, each Bank severally agrees to make a loan or loans
under the Revolving Loan Facility (each, a "Revolving Loan" and, collectively,
the "Revolving Loans") to the Borrower, which Revolving Loans (i) may be
incurred by the Borrower at any time and from time to time on and after the
Initial Borrowing Date and prior to the Final Maturity Date, (ii) shall be
denominated in U.S. Dollars, (iii) except as hereinafter provided, may, at the
option of the Borrower, be incurred and maintained as and/or converted into Base
Rate Loans or Eurodollar Loans, provided, that all Revolving Loans made as part
of the same Borrowing shall, unless otherwise specifically provided herein,
consist of Revolving Loans of the same Type, (iv) may be repaid and reborrowed
in accordance with the provisions hereof and (v) shall not exceed for any Bank
at any time outstanding that aggregate principal amount which, when combined
with the aggregate principal amount of all other then outstanding Revolving
Loans made by such Bank, equals the Revolving Loan Commitment of such Bank at
such time.
1.02 Minimum Borrowing Amounts, etc. The aggregate principal amount of
------------------------------
each Borrowing of Revolving Loans shall not be less than the Minimum Borrowing
Amount applicable thereto. More than one Borrowing may be incurred on any day;
provided, that at no time shall there be outstanding more than five Borrowings
of Eurodollar Loans.
1.03 Notice of Borrowing. (a) Whenever the Borrower desires to incur
-------------------
(x) Eurodollar Loans hereunder, the Borrower shall give the Agent at its Notice
Office at least three Business Days' prior written notice (or telephonic notice
promptly confirmed in writing) of each Eurodollar Loan to be incurred hereunder
and (y) Base Rate Loans hereunder, the Borrower shall give the Agent at its
Notice Office written notice (or telephonic notice promptly confirmed in
writing) thereof no later than the date on which each Base Rate Loan is to be
incurred hereunder, provided that (in each case) any such notice shall be deemed
--------
to have been given on a certain day only if given before 11:00 A.M. (New York
time) on such day. Each such notice (each, a "Notice of Borrowing") shall,
except as provided in Section 1.10, be irrevocable, and, in the case of each
written notice and each confirmation of telephonic notice, shall be in the form
of Exhibit A, appropriately completed to specify (i) the
-1-
<PAGE>
aggregate principal amount of the Revolving Loans to be made pursuant to such
Borrowing, (ii) the date of such Borrowing (which shall be a Business Day),
(iii) whether the respective Borrowing shall consist of Base Rate Loans or, to
the extent permitted hereunder, Eurodollar Loans and, if Eurodollar Loans, the
Interest Period to be initially applicable thereto and (iv) the specific
purposes for which the proceeds of such Revolving Loans are to be used. The
Agent shall promptly give each Bank written notice (or telephonic notice
promptly confirmed in writing) of each proposed Borrowing, of such Bank's
proportionate share thereof, if any, and of the other matters covered by the
Notice of Borrowing.
(b) Without in any way limiting the obligation of the Borrower to
confirm in writing any telephonic notice permitted to be given hereunder, the
Agent may prior to receipt of written confirmation act without liability upon
the basis of such telephonic notice, believed by the Agent in good faith to be
from an Authorized Officer of the Borrower. In each such case, the Borrower
hereby waives the right to dispute the Agent's record of the terms of such
telephonic notice.
1.04 Disbursement of Funds. (a) No later than 1:00 P.M. (New York time)
---------------------
(or 2:00 P.M. (New York time) in the case of a Borrowing of Base Rate Loans made
on same day notice) on the date specified in each Notice of Borrowing, each Bank
will make available its pro rata share, if any, of each Borrowing requested to
be made on such date in the manner provided below. All amounts shall be made
available to the Agent in U.S. Dollars and immediately available funds at the
Payment Office and the Agent promptly will make available to the Borrower by
depositing to its account at the Payment Office the aggregate of the amounts so
made available in the type of funds received. Unless the Agent shall have been
notified by any Bank prior to the date of Borrowing that such Bank does not
intend to make available to the Agent its portion of the Borrowing or Borrowings
to be made on such date, the Agent may assume that such Bank has made such
amount available to the Agent on such date of Borrowing, and the Agent, in
reliance upon such assumption, may (in its sole discretion and without any
obligation to do so) make available to the Borrower a corresponding amount. If
such corresponding amount is not in fact made available to the Agent by such
Bank and the Agent has made available same to the Borrower, the Agent shall be
entitled to recover such corresponding amount from such Bank. If such Bank does
not pay such corresponding amount forthwith upon the Agent's demand therefor,
the Agent shall promptly notify the Borrower, and the Borrower shall immediately
pay such corresponding amount to the Agent. The Agent shall also be entitled to
recover from the Bank or the Borrower, as the case may be, interest on such
corresponding amount in respect of each day from the date such corresponding
amount was made available by the Agent to the Borrower to the date such
corresponding amount is recovered by the Agent, at a rate per annum equal to (x)
if paid by such Bank, the overnight Federal Funds rate or (y) if paid by the
Borrower, the then applicable rate of interest, calculated in accordance with
Section 1.08, for the respective Revolving Loans.
(b) Nothing herein shall be deemed to relieve any Bank from its
obligation to fulfill its commitments hereunder or to prejudice any rights which
the Borrower may have against any Bank as a result of any default by such Bank
hereunder.
-2-
<PAGE>
1.05 Notes. (a) The Borrower's obligation to pay the principal of, and
-----
interest on, all the Revolving Loans made to it by each Bank shall be evidenced
by a promissory note substantially in the form of Exhibit B with blanks
appropriately completed in conformity herewith (each, a "Revolving Note" and,
collectively, the "Revolving Notes").
(b) The Revolving Note issued to each Bank shall (i) be executed by the
Borrower, (ii) be payable to the order of such Bank or its registered assigns
and be dated the Initial Borrowing Date, (iii) be in a stated principal amount
equal to the Revolving Loan Commitment of such Bank and be payable in the
principal amount of the Revolving Loans evidenced thereby, (iv) mature on the
Final Maturity Date, (v) bear interest as provided in the appropriate clause of
Section 1.08 in respect of the Base Rate Loans and Eurodollar Loans, as the case
may be, evidenced thereby, (vi) be subject to voluntary prepayment as provided
in Section 3.01, and mandatory repayment as provided in Section 3.02, and (vii)
be entitled to the benefits of this Agreement and the other Credit Documents.
(c) Each Bank will note on its internal records the amount of each
Revolving Loan made by it and each payment in respect thereof and will prior to
any transfer of any of its Revolving Notes endorse on the reverse side thereof
the outstanding principal amount of Revolving Loans evidenced thereby. Failure
to make any such notation shall not affect the Borrower's obligations in respect
of such Revolving Loans.
1.06 Conversions. The Borrower shall have the option to convert on any
-----------
Business Day occurring on or after the Initial Borrowing Date, all or a portion
at least equal to the applicable Minimum Borrowing Amount of the outstanding
principal amount of the Revolving Loans owing by the Borrower into a Borrowing
or Borrowings of another Type of Revolving Loan; provided, that (i) except as
otherwise provided in Section 1.10(b), no partial conversion of a Borrowing of
Eurodollar Loans shall reduce the outstanding principal amount of the Eurodollar
Loans made pursuant to such Borrowing to less than the Minimum Borrowing Amount
applicable thereto, (ii) Base Rate Loans may only be converted into Eurodollar
Loans if no payment Default or Event of Default is in existence on the date of
the conversion, and (iii) Borrowings of Eurodollar Loans resulting from this
Section 1.06 shall be limited in number as provided in Section 1.02. Each such
conversion shall be effected by the Borrower by giving the Agent at its Notice
Office, prior to 11:00 A.M. (New York time), at least three Business Days' (or
one Business Day's in the case of a conversion into Base Rate Loans) prior
written notice (or telephonic notice promptly confirmed in writing) (each, a
"Notice of Conversion") specifying the Revolving Loans to be so converted, the
Type of Revolving Loans to be converted into and, if to be converted into a
Borrowing of Eurodollar Loans, the Interest Period to be initially applicable
thereto. The Agent shall give each Bank prompt notice of any such proposed
conversion affecting any of its Revolving Loans.
1.07 Pro Rata Borrowings. All Borrowings of Revolving Loans under this
-------------------
Agreement shall be made by the Banks pro rata on the basis of their Revolving
--- ----
Loan Commitments. It is understood that no Bank shall be responsible for any
default by any other Bank of its obligation to make Revolving Loans hereunder
and that each Bank shall be obligated to make the Revolving Loans to be made by
it hereunder, regardless of the failure of any other Bank to fulfill its
commitments hereunder.
-3-
<PAGE>
1.08 Interest. (a) The unpaid principal amount of each Base Rate Loan
--------
shall bear interest from the date of the Borrowing thereof until the earlier of
(i) the maturity (whether by acceleration or otherwise) of such Base Rate Loan
and (ii) the conversion of such Base Rate Loan to a Eurodollar Loan pursuant to
Section 1.06, at a rate per annum which shall at all times be the Applicable
Base Rate Margin plus the Base Rate in effect from time to time.
(b) The unpaid principal amount of each Eurodollar Loan shall bear
interest from the date of the Borrowing thereof until the earlier of (i) the
maturity (whether by acceleration or otherwise) of such Eurodollar Loan and (ii)
the conversion of such Eurodollar Loan to a Base Rate Loan pursuant to Section
1.06, 1.09 or 1.10(b), as applicable, at a rate per annum which shall at all
times be the Applicable Eurodollar Margin plus the relevant Eurodollar Rate.
(c) Overdue principal and, to the extent permitted by law, overdue
interest in respect of each Revolving Loan shall bear interest at a rate per
annum equal to the greater of (x) the rate which is 2% in excess of the rate
then borne by such Revolving Loans and (y) the rate which is 2% in excess of the
rate otherwise applicable to Base Rate Loans from time to time. Interest which
accrues under this Section 1.08(c) shall be payable on demand.
(d) Interest shall accrue from and including the date of any Borrowing
to but excluding the date of any repayment thereof and shall be payable (i) in
respect of each Base Rate Loan, quarterly in arrears on each Quarterly Payment
Date, (ii) in respect of each Eurodollar Loan, on (x) the date of any prepayment
or repayment thereof (on the amount prepaid or repaid), (y) the date of any
conversion into a Base Rate Loan pursuant to Section 1.06, 1.09 or 1.10(b), as
applicable (on the amount converted) and (z) the last day of each Interest
Period applicable thereto and, in the case of an Interest Period in excess of
three months, on each date occurring at three month intervals after the first
day of such Interest Period and (iii) in respect of each Revolving Loan, at
maturity (whether by acceleration or otherwise) and, after such maturity, on
demand.
(e) All computations of interest hereunder shall be made in accordance
with Section 11.07(b).
(f) The Agent, upon determining the interest rate for any Borrowing of
Eurodollar Loans for any Interest Period, shall promptly notify the Borrower and
the Banks thereof.
1.09 Interest Periods. At the time the Borrower gives a Notice of
----------------
Borrowing or Notice of Conversion in respect of the making of, or conversion
into, a Borrowing of Eurodollar Loans (in the case of the initial Interest
Period applicable thereto) or prior to 12:00 Noon (New York time) on the third
Business Day prior to the expiration of an Interest Period applicable to a
Borrowing of Eurodollar Loans, it shall have the right to elect by giving the
Agent written notice (or telephonic notice promptly confirmed in writing) of the
Interest Period applicable to such Borrowing, which Interest Period shall, at
the option of the Borrower, be a one-, two-, three- or six-month period.
Notwithstanding anything to the contrary contained above:
-4-
<PAGE>
(i) all Eurodollar Loans comprising a Borrowing shall
have the same Interest Period;
(ii) the initial Interest Period for any Borrowing of
Eurodollar Loans shall commence on the date of such Borrowing
(including the date of any conversion from a Borrowing of Base Rate
Loans) and each Interest Period occurring thereafter in respect of such
Borrowing shall commence on the day on which the next preceding
Interest Period expires;
(iii) if any Interest Period begins on a day for which there
is no numerically corresponding day in the calendar month at the end of
such Interest Period, such Interest Period shall end on the last
Business Day of such calendar month;
(iv) if any Interest Period would otherwise expire on a day
which is not a Business Day, such Interest Period shall expire on the
next succeeding Business Day, provided, that if any Interest Period
--------
would otherwise expire on a day which is not a Business Day but is a
day of the month after which no further Business Day occurs in such
month, such Interest Period shall expire on the next preceding Business
Day;
(v) no Interest Period for a Borrowing may be elected if it
would extend beyond the Final Maturity Date; and
(vi) no Interest Period may be elected at any time when a
payment Default, or an Event of Default, is then in existence.
If upon the expiration of any Interest Period, the Borrower has failed to elect,
or is not permitted to elect by virtue of the application of clause (v) or (vi)
above, a new Interest Period to be applicable to the respective Borrowing of
Eurodollar Loans as provided above, the Borrower shall be deemed to have elected
to convert such Borrowing into a Borrowing of Base Rate Loans effective as of
the expiration date of such current Interest Period.
1.10 Increased Costs, Illegality, etc. (a) In the event that (x) in the
--------------------------------
case of clause (i) below, the Agent or (y) in the case of clauses (ii) and (iii)
below, any Bank, shall have determined (which determination shall, absent
manifest error, be final and conclusive and binding upon all parties hereto):
(i) on any date for determining the Eurodollar Rate for any
Interest Period, that, by reason of any changes arising after the date
of this Agreement affecting the interbank Eurodollar market, adequate
and fair means do not exist for ascertaining the applicable interest
rate on the basis provided for in the definition of Eurodollar Rate; or
(ii) at any time, that such Bank shall incur increased costs
or reductions in the amounts received or receivable hereunder with
respect to any Eurodollar Loans (other than any increased cost or
reduction in the amount received or receivable resulting from the
imposition of or a change in the rate of net income taxes or similar
charges) because of (x) any change since the date of this Agreement in
any applicable
-5-
<PAGE>
law, governmental rule, regulation, guideline, order or request
(whether or not having the force of law), or in the interpretation or
administration thereof and including the introduction of any new law or
governmental rule, regulation, guideline, order or request (such as,
for example, but not limited to a change in official reserve
requirements, but, in all events, excluding reserves required under
Regulation D to the extent included in the computation of the
Eurodollar Rate) and/or (y) other circumstances affecting such Bank,
the interbank Eurodollar market or the position of such Bank in such
market; or
(iii) at any time since the date of this Agreement, that the
making or continuance of any Eurodollar Loan has become unlawful by
compliance by such Bank in good faith with any law, governmental rule,
regulation, guideline or order (or would conflict with any such
governmental rule, regulation, guideline or order not having the force
of law but with which such Bank customarily complies even though the
failure to comply therewith would not be unlawful), or has become
impracticable as a result of a contingency occurring after the date of
this Agreement which materially and adversely affects the interbank
Eurodollar market;
then, and in any such event, such Bank (or the Agent in the case of clause (i)
above) shall (x) on such date and (y) as promptly as practicable (and in any
event within five Business Days) after the date on which such event no longer
exists give notice (by telephone confirmed in writing) to the Borrower and
(except in the case of clause (i)) to the Agent of such determination (which
notice the Agent shall promptly transmit to each of the other Banks).
Thereafter, (x) in the case of clause (i) above, Eurodollar Loans shall no
longer be available until such time as the Agent notifies the Borrower and the
Banks that the circumstances giving rise to such notice by the Agent no longer
exist, and any Notice of Borrowing or Notice of Conversion given by the Borrower
with respect to Eurodollar Loans which have not yet been incurred shall be
deemed rescinded by the Borrower, (y) in the case of clause (ii) above, the
Borrower agrees to pay to such Bank, upon written demand therefor (accompanied
by the written notice referred to below), such additional amounts (in the form
of an increased rate of, or a different method of calculating, interest or
otherwise as such Bank in its sole discretion shall determine) as shall be
required to compensate such Bank for such increased costs or reductions in
amounts received or receivable hereunder (a written notice as to the additional
amounts owed to such Bank, showing the basis for the calculation thereof,
submitted to the Borrower by such Bank shall, absent manifest error, be final
and conclusive and binding upon all parties hereto) and (z) in the case of
clause (iii) above, the Borrower shall take one of the actions specified in
Section 1.10(b) as promptly as possible and, in any event, within the time
period required by law.
(b) At any time that any Eurodollar Loan is affected by the
circumstances described in Section 1.10(a)(ii) or (iii), the Borrower may (and
in the case of a Eurodollar Loan affected pursuant to Section 1.10(a)(iii) the
Borrower shall) either (i) if the affected Eurodollar Loan is then being made
pursuant to a Borrowing, cancel said Borrowing by giving the Agent telephonic
notice (confirmed promptly in writing) thereof on the same date that the
Borrower was notified by a Bank pursuant to Section 1.10(a)(ii) or (iii)), or
(ii) if the affected Eurodollar Loan is then outstanding, upon at least three
Business Days' notice to the Agent, require the affected Bank to convert each
such Eurodollar Loan into a Base Rate Loan
-6-
<PAGE>
(which conversion, in the case of the circumstances described in Section
1.10(a)(iii), shall occur no later than the last day of the Interest Period then
applicable to such Eurodollar Loan (or such earlier date as shall be required by
applicable law)); provided, that if more than one Bank is affected at any time,
--------
then all affected Banks must be treated the same pursuant to this Section
1.10(b).
(c) If any Bank shall have determined that after the date hereof, the
adoption or effectiveness of any applicable law, rule or regulation regarding
capital adequacy, or any change therein, or any change in the interpretation or
administration thereof by the National Association of Insurance Commissioners
("NAIC") or any governmental authority, central bank or comparable agency
charged with the interpretation or administration thereof, or compliance by such
Bank or any corporation controlling such Bank with any request or directive
regarding capital adequacy (whether or not having the force of law) of the NAIC
or any such authority, central bank or comparable agency, has or would have the
effect of reducing the rate of return on such Bank's or such other corporation's
capital or assets as a consequence of such Bank's Revolving Loan Commitment or
obligations hereunder to a level below that which such Bank or such other
corporation could have achieved but for such adoption, effectiveness, change or
compliance (taking into consideration such Bank's or such other corporation's
policies with respect to capital adequacy), then from time to time, upon written
demand by such Bank (with a copy to the Agent), accompanied by the notice
referred to in the last sentence of this clause (c), the Borrower agrees to pay
to such Bank such additional amount or amounts as will compensate such Bank or
such other corporation for such reduction. Each Bank, upon determining in good
faith that any additional amounts will be payable pursuant to this Section
1.10(c), will give prompt written notice thereof to the Borrower, which notice
shall set forth the basis of the calculation of such additional amounts,
although the failure to give any such notice shall not release or diminish the
Borrower's obligations to pay additional amounts pursuant to this Section
1.10(c) upon the subsequent receipt of such notice.
1.11 Compensation. The Borrower agrees to compensate each Bank,
------------
promptly upon its written request (which request shall set forth the basis for
requesting such compensation and shall be made through the Agent), for all
reasonable losses, expenses and liabilities (including, without limitation, any
loss, expense or liability incurred by reason of the liquidation or reemployment
of deposits or other funds required by such Bank to fund its Eurodollar Loans
but excluding loss of anticipated profit with respect to any Revolving Loans)
which such Bank may sustain: (i) if for any reason (other than a default by such
Bank or the Agent) a Borrowing of Eurodollar Loans does not occur on a date
specified therefor in a Notice of Borrowing or Notice of Conversion (whether or
not withdrawn by the Borrower or deemed withdrawn pursuant to Section 1.10(a));
(ii) if any repayment (including any repayment made pursuant to Section 3.01 or
3.02 or as a result of an acceleration of the Revolving Loans pursuant to
Section 8) or conversion of any Eurodollar Loans occurs on a date which is not
the last day of an Interest Period applicable thereto; (iii) if any prepayment
of any Eurodollar Loans is not made on any date specified in a notice of
prepayment given by the Borrower; or (iv) as a consequence of (x) any other
default by the Borrower to repay its Eurodollar Loans when required by the terms
of this Agreement or (y) an election made pursuant to Section 1.10(b).
Calculation of all amounts payable to a Bank under this Section 1.11 shall be
made as though that Bank had actually funded its relevant Eurodollar Loan
-7-
<PAGE>
through the purchase of a Eurodollar deposit bearing interest at the Eurodollar
Rate in an amount equal to the amount of that Eurodollar Loan, having a maturity
comparable to the relevant Interest Period and through the transfer of such
Eurodollar deposit from an offshore office of that Bank to a domestic office of
that Bank in the United States of America; provided, however, that each Bank may
-------- -------
fund each of its Eurodollar Loans in any manner it sees fit and the foregoing
assumption shall be utilized only for the calculation of amounts payable under
this Section 1.11. It is further understood and agreed that if any repayment of
Eurodollar Loans pursuant to Section 3.01 or any conversion of Eurodollar Loans
pursuant to Section 1.06 in either case occurs on a date which is not the last
day of an Interest Period applicable thereto, such repayment or conversion shall
be accompanied by any amounts owing to any Bank pursuant to this Section 1.11.
1.12 Change of Lending Office. Each Bank agrees that, upon the
------------------------
occurrence of any event giving rise to the operation of Section 1.10(a)(ii) or
(iii), 1.10(c) or 3.04 with respect to such Bank, it will, if requested by the
Borrower, use reasonable efforts (subject to overall policy considerations of
such Bank) to designate another lending office for any Revolving Loans affected
by such event; provided, that such designation is made on such terms that, in
--------
the sole judgment of such Bank, such Bank and its lending office suffer no
economic, legal or regulatory disadvantage, with the object of avoiding the
consequences of the event giving rise to the operation of any such Section.
Nothing in this Section 1.12 shall affect or postpone any of the obligations of
the Borrower or the right of any Bank provided in Section 1.10 or 3.04.
1.13 Replacement of Banks. (x) If any Bank becomes a Defaulting Bank,
--------------------
(y) upon the occurrence of any event giving rise to the operation of Section
1.10(a)(ii) or (iii), Section 1.10(c) or Section 3.04 with respect to any Bank
which results in such Bank charging to the Borrower increased costs in excess of
those being generally charged by the other Banks or (z) in the case of a refusal
by a Bank to consent to a proposed change, waiver, discharge or termination with
respect to this Agreement which has been approved by the Required Banks as
provided in Section 11.12(b), the Borrower shall have the right, if no payment
Default, or Event of Default, then exists, to replace such Bank (the "Replaced
Bank") with one or more other Eligible Transferee or Transferees, none of whom
shall constitute a Defaulting Bank at the time of such replacement
(collectively, the "Replacement Bank") reasonably acceptable to the Agent,
provided that (i) at the time of any replacement pursuant to this Section 1.13,
- --------
the Replacement Bank shall enter into one or more Assignment and Assumption
Agreements pursuant to Section 11.04(b) (and with all fees payable pursuant to
said Section 11.04(b) to be paid by the Replacement Bank) pursuant to which the
Replacement Bank shall acquire all of the Revolving Loan Commitment and
outstanding Revolving Loans of the Replaced Bank and, in connection therewith,
shall pay to the Replaced Bank in respect thereof an amount equal to the sum of
(A) an amount equal to the principal of, and all accrued interest on, all
outstanding Revolving Loans of the Replaced Bank and (B) an amount equal to all
accrued, but theretofore unpaid, Fees owing to the Replaced Bank pursuant to
Section 2.01 and (ii) all obligations (including, without limitation, all such
amounts, if any, due and owing under Section 1.11) of the Borrower due and owing
to the Replaced Bank (other than those specifically described in clause (i)
above in respect of which the assignment purchase price has been, or is
concurrently being, paid) shall be paid in full to such Replaced Bank
concurrently with such replacement. Upon the execution of the respective
Assignment and
-8-
<PAGE>
Assumption Agreements, the payment of amounts referred to in clauses (i) and
(ii) above, recordation of the assignment on the Register by the Agent pursuant
to Section 6.13 and, if so requested by the Replacement Bank, delivery to the
Replacement Bank of the appropriate Revolving Note or Revolving Notes executed
by the Borrower, (x) the Replacement Bank shall become a Bank hereunder and the
Replaced Bank shall cease to constitute a Bank hereunder, except with respect to
indemnification provisions under this Agreement, which shall survive as to such
Replaced Bank and (y) Annex I shall be deemed modified to reflect the changed
Revolving Loan Commitments (and/or outstanding Revolving Loans, as the case may
be) resulting from the assignment from the Replaced Bank to the Replacement
Bank.
SECTION 2. Fees; Commitments.
-----------------
2.01 Fees. (a) The Borrower shall pay to the Agent for distribution to
----
each Bank a commitment fee (the "Commitment Fee") for the period from the
Effective Date to but not including the date the Total Revolving Loan Commitment
has been terminated, computed at a rate for each day equal to 1/2 of 1% on the
daily Unutilized Revolving Loan Commitment of such Bank. Accrued Commitment Fees
shall be due and payable in arrears on each Quarterly Payment Date and the date
upon which the Total Revolving Loan Commitment is terminated.
(b) The Borrower shall pay to the Agent, for its own account, such fees
as may be agreed to from time to time between the Borrower and the Agent, when
and as due.
(c) All computations of Fees shall be made in accordance with
Section 11.07(b).
2.02 Voluntary Termination or Reduction of Total Unutilized Revolving
----------------------------------------------------------------
Loan Commitment. (a) Upon at least two Business Days' prior written notice (or
- ---------------
telephonic notice promptly confirmed in writing) to the Agent at its Notice
Office (which notice the Agent shall promptly transmit to each of the Banks),
the Borrower shall have the right, without premium or penalty, to terminate or
partially reduce the Total Unutilized Revolving Loan Commitment; provided that
--------
(x) any such termination or partial reduction shall apply to proportionately and
permanently reduce the Revolving Loan Commitment of each of the Banks and (y)
any partial reduction pursuant to this Section 2.02(a) shall be in the amount of
at least $100,000.
(b) In the event of certain refusals by a Bank to consent to certain
proposed changes, waivers, discharges or terminations with respect to this
Agreement which have been approved by the Required Banks as provided in Section
11.12(b), the Borrower shall have the right, upon five Business Days' prior
written notice to the Agent at its Notice Office (which notice the Agent shall
promptly transmit to each of the Banks), to terminate the Revolving Loan
Commitment of such Bank, so long as all Revolving Loans, together with accrued
and unpaid interest, Fees and all other amounts, due and owing to such Bank are
repaid concurrently with the effectiveness of such termination pursuant to
Section 3.01(b) (at which time Annex I shall be deemed modified to reflect such
changed Revolving Loan Commitments), and at such time, such Bank shall no longer
constitute a "Bank" for purposes of this Agreement, except with respect to
indemnifications under this Agreement (including,
-9-
<PAGE>
without limitation, Sections 1.10, 1.11, 3.04, 11.01 and 11.06), which shall
survive as to such repaid Bank.
2.03 Mandatory Reduction or Termination of Revolving Loan Commitments,
----------------------------------------------------------------
etc. (a) The Total Revolving Loan Commitment shall terminate in its entirety on
- ---
January 31, 1997 unless the Initial Borrowing Date has occurred on or before
such date.
(b) The Total Revolving Loan Commitment (and the Revolving Loan
Commitment of each Bank) shall terminate on the earlier of (x) the date on which
a Change of Control Event occurs and (y) the Final Maturity Date.
(c) Each reduction or termination of the Total Revolving Loan
Commitment pursuant to this Section 2.03 shall apply proportionately to the
Revolving Loan Commitment of each Bank.
SECTION 3. Payments.
--------
3.01 Voluntary Prepayments. (a) The Borrower shall have the right to
---------------------
prepay the Revolving Loans made to it, in whole or in part, without premium or
penalty, except as otherwise provided in this Agreement, from time to time on
the following terms and conditions: (i) the Borrower shall give the Agent at its
Notice Office written notice (or telephonic notice promptly confirmed in
writing) of its intent to prepay such Revolving Loans, the amount of such
prepayment and (in the case of Eurodollar Loans) the specific Borrowing(s)
pursuant to which made, which notice shall be given by the Borrower prior to
11:00 A.M. (New York time) (x) on or prior to the date of such prepayment in the
case of Base Rate Loans and (y) at least three Business Days prior to the date
of such prepayment in the case of Eurodollar Loans, which notice shall promptly
be transmitted by the Agent to each of the Banks; (ii) each prepayment shall be
in an aggregate principal amount of (A) at least $100,000 in the case of
Eurodollar Loans and (B) at least $25,000 in the case of Base Rate Loans;
provided, that no partial prepayment of Eurodollar Loans made pursuant to a
- --------
Borrowing shall reduce the aggregate principal amount of the Eurodollar Loans
outstanding pursuant to such Borrowing to an amount less than the Minimum
Borrowing Amount applicable thereto; and (iii) each prepayment in respect of any
Revolving Loans made pursuant to a Borrowing shall be applied pro rata among
such Revolving Loans; provided, that at the Borrower's election in connection
with any prepayment of Revolving Loans pursuant to this Section 3.01, such
prepayment shall not be applied to any Revolving Loans of a Defaulting Bank at
any time when the aggregate amount of Revolving Loans of any Non-Defaulting Bank
exceeds such Non-Defaulting Bank's Percentage of all Revolving Loans then
outstanding.
(b) In the event of certain refusals by a Bank to consent to certain
proposed changes, waivers, discharges or terminations with respect to this
Agreement which have been approved by the Required Banks as provided in Section
11.12(b), the Borrower shall have the right, upon five Business Days' prior
written notice to the Agent at its Notice Office (which notice the Agent shall
promptly transmit to each of the Banks) to repay all Revolving Loans, together
with accrued and unpaid interest, Fees and all other amounts due and owing to
such Bank in accordance with said Section 11.12(b), so long as (A) the Revolving
Loan
-10-
<PAGE>
Commitment of such Bank is terminated concurrently with such repayment pursuant
to Section 2.02(b) (at which time Annex I shall be deemed modified to reflect
the changed Revolving Loan Commitments) and (B) the consents required by Section
11.12(b) in connection with the repayment pursuant to this clause (b) shall have
been obtained.
3.02 Mandatory Prepayments.
---------------------
(A) Requirements:
-------------
(a) If on any date the aggregate outstanding principal amount
of Revolving Loans exceeds the Total Revolving Loan Commitment as then
in effect, the Borrower shall repay on such date the principal of
Revolving Loans in an aggregate amount equal to such excess.
(b) Notwithstanding anything to the contrary contained in this
Agreement, all outstanding Revolving Loans shall be repaid in full on
the earlier of (x) the date on which a Change of Control Event occurs
and (y) the Final Maturity Date.
(B) Application: With respect to each repayment of Revolving Loans
-----------
required by this Section 3.02, the Borrower may designate the Types of Revolving
Loans which are to be repaid and the specific Borrowing(s) pursuant to which
made; provided, that (i) Eurodollar Loans may be designated for repayment
--------
pursuant to this Section 3.02 only on the last day of an Interest Period
applicable thereto unless all Eurodollar Loans with Interest Periods ending on
such date of required prepayment and all Base Rate Loans have been paid in full;
(ii) if any repayment of Eurodollar Loans made pursuant to a single Borrowing
shall reduce the outstanding Revolving Loans made pursuant to such Borrowing to
an amount less than the Minimum Borrowing Amount, such Borrowing shall be
immediately converted into Base Rate Loans; and (iii) each repayment of any
Revolving Loans made pursuant to a Borrowing shall be applied pro rata among
--- ----
such Revolving Loans; provided, that no repayment pursuant to Section 3.02(A)(a)
--------
shall be applied to any Revolving Loans of a Defaulting Bank at any time when
the aggregate amount of the Revolving Loans of any Non-Defaulting Bank exceeds
such Non-Defaulting Bank's Percentage of Revolving Loans then outstanding. In
the absence of a designation by the Borrower as described in the preceding
sentence, the Agent shall, subject to the above, make such designation in its
sole discretion with a view, but no obligation, to minimize breakage costs owing
under Section 1.11.
3.03 Method and Place of Payment. Except as otherwise specifically
---------------------------
provided herein, all payments under this Agreement shall be made to the Agent
for the ratable account of the Banks entitled thereto, not later than 12:00 Noon
(New York time) on the date when due and shall be made in immediately available
funds and in U.S. Dollars at the Payment Office, it being understood that
written, telex or facsimile transmission notice by the Borrower to the Agent to
make a payment from the funds in the Borrower's account at the Payment Office
shall constitute the making of such payment to the extent of such funds held in
such account. Any payments under this Agreement which are made later than 12:00
Noon (New York time) shall be deemed to have been made on the next succeeding
Business Day. Whenever any payment to be made hereunder shall be stated to be
due on a day which is not a Business Day, the due date thereof shall be extended
to the next succeeding Business
-11-
<PAGE>
Day and, with respect to payments of principal, interest shall be payable during
such extension at the applicable rate in effect immediately prior to such
extension.
3.04 Net Payments. (a) All payments made by the Borrower hereunder or
------------
under any Revolving Note will be made without setoff, counterclaim or other
defense. Except as provided in Section 3.04(b), all such payments will be made
free and clear of, and without deduction or withholding for, any present or
future taxes, levies, imposts, duties, fees, assessments or other charges of
whatever nature now or hereafter imposed by any jurisdiction or by any political
subdivision or taxing authority thereof or therein with respect to such payments
(but excluding, except as provided in the second succeeding sentence, any tax
imposed on or measured by the net income or net profits of a Bank pursuant to
the laws of the jurisdiction in which it is organized or the jurisdiction in
which the principal office or applicable lending office of such Bank is located
or any subdivision thereof or therein) and all interest, penalties or similar
liabilities with respect thereto (all such non-excluded taxes, levies, imposts,
duties, fees, assessments or other charges being referred to collectively as
"Taxes"). If any Taxes are so levied or imposed, the Borrower agrees to pay the
full amount of such Taxes, and such additional amounts as may be necessary so
that every payment of all amounts due under this Agreement or under any
Revolving Note, after withholding or deduction for or on account of any Taxes,
will not be less than the amount provided for herein or in such Revolving Note.
If any amounts are payable in respect of Taxes pursuant to the preceding
sentence, the Borrower agrees to reimburse each Bank, upon the written request
of such Bank, for taxes imposed on or measured by the net income or net profits
of such Bank pursuant to the laws of the jurisdiction in which the principal
office or applicable lending office of such Bank is located or under the laws of
any political subdivision or taxing authority of any such jurisdiction in which
the principal office or applicable lending office of such Bank is located and
for any withholding of taxes as such Bank shall determine are payable by, or
withheld from, such Bank in respect of such amounts so paid to or on behalf of
such Bank pursuant to the preceding sentence and in respect of any amounts paid
to or on behalf of such Bank pursuant to this sentence. The Borrower will
furnish to the Agent within 45 days after the date the payment of any Taxes is
due pursuant to applicable law certified copies of tax receipts evidencing such
payment by the Borrower. The Borrower agrees to indemnify and hold harmless each
Bank, and reimburse such Bank upon its written request, for the amount of any
Taxes so levied or imposed and paid by such Bank.
(b) Each Bank that is not a United States person (as such term is
defined in Section 7701(a)(30) of the Code) agrees to deliver to the Borrower
and the Agent on or prior to the Effective Date, or in the case of a Bank that
is an assignee or transferee of an interest under this Agreement pursuant to
Section 1.13 or 11.04 (unless the respective Bank was already a Bank hereunder
immediately prior to such assignment or transfer), on the date of such
assignment or transfer to such Bank, (i) two accurate and complete original
signed copies of Internal Revenue Service Form 4224 or 1001 (or successor forms)
certifying to such Bank's entitlement to a complete exemption from United States
withholding tax with respect to payments to be made under this Agreement and
under any Revolving Note, or (ii) if the Bank is not a "bank" within the meaning
of Section 881(c)(3)(A) of the Code and cannot deliver either Internal Revenue
Service Form 1001 or 4224 pursuant to clause (i) above, (x) a certificate
substantially in the form of Exhibit C (any such certificate, a "Section
3.04(b)(ii) Certificate") and (y) two accurate and complete original signed
copies of Internal Revenue
-12-
<PAGE>
Service Form W-8 (or successor form) certifying to such Bank's entitlement to a
complete exemption from United States withholding tax with respect to payments
of interest to be made under this Agreement and under any Revolving Note. In
addition, each Bank agrees that from time to time after the Effective Date, when
a lapse in time or change in circumstances renders the previous certification
obsolete or inaccurate in any material respect, it will deliver to the Borrower
and the Agent two new accurate and complete original signed copies of Internal
Revenue Service Form 4224 or 1001, or Form W-8 and a Section 3.04(b)(ii)
Certificate, as the case may be, and such other forms as may be required in
order to confirm or establish the entitlement of such Bank to a continued
exemption from or reduction in United States withholding tax with respect to
payments under this Agreement and any Revolving Note, or it shall immediately
notify the Borrower and the Agent of its inability to deliver any such Form or
Certificate. Notwithstanding anything to the contrary contained in Section
3.04(a), but subject to Section 11.04(b) and the immediately succeeding
sentence, (x) the Borrower shall be entitled, to the extent it is required to do
so by law, to deduct or withhold income or similar taxes imposed by the United
States (or any political subdivision or taxing authority thereof or therein)
from interest, fees or other amounts payable hereunder for the account of any
Bank which is not a United States person (as such term is defined in Section
7701(a)(30) of the Code) for U.S. Federal income tax purposes to the extent that
such Bank has not provided to the Borrower U.S. Internal Revenue Service Forms
that establish a complete exemption from such deduction or withholding and (y)
the Borrower shall not be obligated pursuant to Section 3.04(a) hereof to
gross-up payments to be made to a Bank in respect of income or similar taxes
imposed by the United States if (I) such Bank has not provided to the Borrower
the Internal Revenue Service Forms required to be provided to the Borrower
pursuant to this Section 3.04(b) or (II) in the case of a payment, other than
interest, to a Bank described in clause (ii) above, to the extent that such
Forms do not establish a complete exemption from withholding of such taxes.
Notwithstanding anything to the contrary contained in the preceding sentence or
elsewhere in this Section 3.04 and except as set forth in Section 11.04(b), the
Borrower agrees to pay additional amounts and to indemnify each Bank in the
manner set forth in Section 3.04(a) (without regard to the identity of the
jurisdiction requiring the deduction or withholding) in respect of any amounts
deducted or withheld by it as described in the immediately preceding sentence as
a result of any changes after the Effective Date in any applicable law, treaty,
governmental rule, regulation, guideline or order, or in the interpretation
thereof, relating to the deducting or withholding of income or similar Taxes.
SECTION 4. Conditions Precedent. The obligation of each Bank to make
--------------------
each Revolving Loan to the Borrower hereunder is subject, at the time of the
making of each such Revolving Loan (except as otherwise hereinafter indicated),
to the satisfaction of the following conditions:
4.01 Execution of Agreement; Revolving Notes. On or prior to the
---------------------------------------
Initial Borrowing Date, (i) the Effective Date shall have occurred and (ii)
there shall have been delivered to the Agent for the account of each Bank the
appropriate Revolving Note executed by the Borrower and in the amount, maturity
and as otherwise provided herein.
4.02 No Default; Representations and Warranties. At the time of the
------------------------------------------
making of each Revolving Loan and also after giving effect thereto (i) there
shall exist no Default or
-13-
<PAGE>
Event of Default and (ii) all representations and warranties contained herein or
in the other Credit Documents in effect at such time shall be true and correct
in all material respects with the same effect as though such representations and
warranties had been made on and as of the date of such Revolving Loan, unless
stated to relate to a specific earlier date, in which case such representations
and warranties shall be true and correct in all material respects as of such
earlier date.
4.03 Officer's Certificate. On the Initial Borrowing Date, the Agent
---------------------
shall have received a certificate dated such date signed by an Authorized
Officer of the Borrower stating that all of the applicable conditions set forth
in Sections 4.02, 4.07 and 4.08 have been satisfied as of such date.
4.04 Opinions of Counsel. On the Initial Borrowing Date, the Agent
-------------------
shall have received opinions, addressed to the Agent and each of the Banks and
dated the Initial Borrowing Date, from Hale and Dorr, counsel to the Credit
Parties, which opinion shall cover the matters contained in Exhibit D and such
other matters incident to the transactions contemplated herein as the Agent may
reasonably request.
4.05 Proceedings. (a) On the Initial Borrowing Date, the Agent shall
-----------
have received from each Credit Party a certificate, dated the Initial Borrowing
Date, signed by the chairman, a vice-chairman, the president or any
vice-president of such Credit Party, and attested to by the secretary, any
assistant secretary or the treasurer of such Credit Party, in the form of
Exhibit E with appropriate insertions, together with copies of the certificate
of incorporation and by-laws (or equivalent organizational documents) of such
Credit Party and the resolutions of such Credit Party referred to in such
certificate and all of the foregoing (including each such certificate of
incorporation, by-laws and equivalent organizational document) shall be
reasonably satisfactory to the Agent.
(b) On the Initial Borrowing Date, all corporate, legal and other
administrative proceedings and all instruments and agreements in connection with
the transactions contemplated by this Agreement and the other Credit Documents
shall be reasonably satisfactory in form and substance to the Agent, and the
Agent shall have received all information and copies of all certificates,
documents and papers, including good standing certificates, bring-down
certificates and any other records of corporate and other administrative
proceedings and governmental approvals, if any, which the Agent reasonably may
have requested in connection therewith, such documents and papers, where
appropriate, to be certified by proper corporate, administrative or governmental
authorities.
(c) On the Initial Borrowing Date, the ownership and capital structure
(including, without limitation, the terms of any capital stock, equity units,
options, warrants or other securities issued by the Borrower or any of its
Consolidated Entities) and management of the Borrower and its Consolidated
Entities shall be in form and substance reasonably satisfactory to the Agent and
the Required Banks.
4.06 Adverse Change, etc. On or prior to the Initial Borrowing Date,
-------------------
nothing shall have occurred since September 30, 1996 (and neither the Banks nor
the Agent shall have become aware of any facts or conditions not previously
known) which the Required Banks or
-14-
<PAGE>
the Agent shall determine (a) has, or could reasonably be expected to have, a
material adverse effect on the rights or remedies of the Banks or the Agent, or
on the ability of any Credit Party to perform its obligations to them hereunder
or under any other Credit Document or (b) has, or could reasonably be expected
to have, a Material Adverse Effect.
4.07 Litigation. On the Initial Borrowing Date, there shall be no
----------
actions, suits or proceedings pending or threatened (a) with respect to this
Agreement or any other Document or the Transaction or (b) which the Agent or the
Required Banks shall determine could reasonably be expected to (i) have a
Material Adverse Effect or (ii) have a material adverse effect on the
Transaction, the rights or remedies of the Banks or the Agent hereunder or under
any other Credit Document or on the ability of any Credit Party to perform its
respective obligations to the Banks or the Agent hereunder or under any other
Credit Document.
4.08 Approvals. On or prior to the Initial Borrowing Date, all
---------
necessary governmental (domestic and foreign) and third party approvals in
connection with the Transaction, the transactions contemplated by the Credit
Documents and otherwise referred to herein or therein shall have been obtained
and remain in effect. Additionally, there shall not exist any judgment, order,
injunction or other restraint issued or filed or a hearing seeking injunctive
relief or other restraint pending or notified prohibiting or imposing materially
adverse conditions upon the consummation of the Transaction.
4.09 Security Documents. (a) On the Initial Borrowing Date, the
------------------
Borrower and each of its Wholly-Owned Subsidiaries shall have duly authorized,
executed and delivered a Pledge Agreement in the form of Exhibit F (as modified,
amended or supplemented from time to time in accordance with the terms thereof
and hereof, the "Pledge Agreement") and shall have delivered to the Collateral
Agent, as pledgee thereunder, all of the Pledged Securities (if any) referred to
therein, endorsed in blank in the case of promissory notes or accompanied by
executed and undated stock powers in the case of capital stock, and the Pledge
Agreement under such other documents shall be in full force and effect.
(b) On the Initial Borrowing Date, (i) the Borrower and each Subsidiary
Guarantor shall have duly authorized, executed and delivered a
Borrower/Subsidiary Security Agreement in the form of Exhibit G-1 (as modified,
amended or supplemented from time to time in accordance with the terms thereof
and hereof, the "Borrower/Subsidiary Security Agreement") and (ii) each
Affiliated Business Guarantor shall have duly authorized, executed and delivered
an Affiliated Business Security Agreement in the form of Exhibit G-2 (as
modified, amended or supplemented from time to time in accordance with the terms
thereof and hereof, the "Affiliated Business Security Agreement" and, together
with the Borrower/Subsidiary Security Agreement, the "Security Agreements"), in
each case covering all of the respective Security Agreement Collateral, together
with:
(A) executed copies of Financing Statements (Form UCC-1 and/or
UCC-3) or appropriate local equivalent in appropriate form for filing
under the UCC or appropriate local equivalent of each jurisdiction as
may be necessary to perfect the security interests purported to be
created by the respective Security Agreement;
-15-
<PAGE>
(B) evidence of the completion of all other recordings and filings
of, or with respect to, the respective Security Agreement as may be
necessary or, in the opinion of the Collateral Agent, desirable to
perfect the security interests intended to be created by such Security
Agreement; and
(C) evidence that all other actions necessary or, in the
reasonable opinion of the Collateral Agent, desirable to perfect the
security interests purported to be created by the respective Security
Agreement have been taken;
and the Security Agreements and such other documents shall be in full force and
effect.
4.10 Guaranty. On the Initial Borrowing Date, each Affiliated Business
--------
and each Wholly-Owned Subsidiary of the Borrower shall have duly authorized,
executed and delivered a Guaranty in the form of Exhibit H (as modified, amended
or supplemented from time to time, the "Guaranty"), and the Guaranty shall be in
full force and effect.
4.11 Plans; Collective Bargaining Agreements; Existing Indebtedness
--------------------------------------------------------------
Agreements; Shareholders' Agreements; Management Agreements; Employment
- -----------------------------------------------------------------------
Agreements; Tax Allocation Agreements; Material Contracts. On or prior to the
- ---------------------------------------------------------
Initial Borrowing Date, there shall have been delivered to the Agent copies,
certified as true and correct by an appropriate officer of the Borrower, of:
(a) any Plans of the Borrower and for each such Plan (i) that is a
"single-employer plan" (as defined in Section 4001(a)(15) of ERISA) the
most recently completed actuarial valuation prepared therefor by such
Plan's regular enrolled actuary and the Schedule B, "Actuarial
Information" to the IRS Form 5500 (Annual Report) most recently filed
with the Internal Revenue Service and (ii) that is a "multiemployer
plan" (as defined in Section 4001(a)(3) of ERISA), each of the
documents referred to in clause (i) either in the possession of the
Borrower, any Consolidated Entity or any ERISA Affiliate or reasonably
available thereto from the sponsor or trustees of such Plan;
(b) any collective bargaining agreements or any other similar
agreement or arrangement covering the employees of the Borrower or any
of its Consolidated Entities (collectively, the "Collective Bargaining
Agreements");
(c) all agreements evidencing or relating to the Existing
Indebtedness that are to remain in effect after giving effect to the
consummation of the Transaction (collectively, the "Existing
Indebtedness Agreements");
(d) all agreements entered into by the Borrower or any of its
Consolidated Entities governing the terms and relative rights of its
capital stock or other equity interests, and any agreements entered
into by shareholders or members relating to any such entity with
respect to their capital stock or other equity interests (including the
Class B Common Stock Purchase Agreement and the Stockholders'
Agreement), in each case that are to remain in effect after giving
effect to the consummation of the Transaction (collectively, the
"Shareholders' Agreements");
-16-
<PAGE>
(e) any material agreements (or the forms thereof) with members
of, or with respect to, the management of the Borrower or any of its
Consolidated Entities that are to remain in effect after giving effect
to the consummation of the Transaction (including each of the Services
Agreements and the Bain Management Agreement) (collectively, the
"Management Agreements");
(f) any employment agreements entered into by the Borrower or any
of its Consolidated Entities (collectively, the "Employment
Agreements");
(g) any tax sharing or tax allocation agreements entered into by
the Borrower or any of its Consolidated Entities (collectively, the
"Tax Allocation Agreements"); and
(h) all material contracts and licenses of the Borrower or any of
its Consolidated Entities that are to remain in effect after giving
effect to the consummation of the Transaction (including, without
limitation, each Sole Stockholder Designation Agreement) (collectively,
the "Material Contracts"); provided, that copies of Medicare, Medicaid
and healthcare provider agreements with the physicians employed by any
Affiliated Business shall not be required to be delivered to the Agent
pursuant to this Section 4.11(h);
all of which Plans, Collective Bargaining Agreements, Existing Indebtedness
Agreements, Shareholders' Agreements, Management Agreements, Employment
Agreements, Tax Allocation Agreements and Material Contracts shall be in form
and substance reasonably satisfactory to the Agent and shall be in full force
and effect on the Initial Borrowing Date.
4.12 Financial Statements. On or prior to the Initial Borrowing Date,
--------------------
there shall have been delivered to the Agent the financial statements referred
to in Section 5.10(a), which financial statements shall be reasonably
satisfactory to the Agent and the Required Banks.
4.13 Pro Forma Financial Statements. On or prior to the Initial
------------------------------
Borrowing Date, there shall have been delivered to the Agent, an unaudited pro
forma consolidated balance sheet of the Borrower and its Consolidated Entities
after giving effect to the Transaction and prepared in accordance with GAAP,
which pro forma balance sheet shall be reasonably satisfactory in form and
--- -----
substance to the Agent and the Required Banks.
4.14 Protections. On or prior to the Initial Borrowing Date, the Banks
-----------
shall have received the financial projections (the "Projections") set forth on
Annex IV, which include the projected results of the Borrower and its
Consolidated Entities for the fiscal year ended after the Initial Borrowing
Date.
4.15 Existing Indebtedness. On the Initial Borrowing Date and after
---------------------
giving effect to the Transaction and the Revolving Loans incurred on the Initial
Borrowing Date, neither the Borrower nor any of its Consolidated Entities shall
have any preferred stock or other preferred equity interests or Indebtedness
outstanding except for Indebtedness permitted under Section 7.04. On and as of
the Initial Borrowing Date, all of the Existing Indebtedness shall remain
outstanding after giving effect to the Transaction and the other transactions
-17-
<PAGE>
contemplated hereby without any default or events of default existing thereunder
or arising as a result of the Transaction and the other transactions
contemplated hereby (except to the extent amended or waived by the parties
thereto on terms and conditions reasonably satisfactory to the Agent and the
Required Banks). On and as of the Initial Borrowing Date, the Agent and the
Required Banks shall be satisfied with the amount of and the terms and
conditions of all Existing Indebtedness.
4.16 Payment of Fees. On the Initial Borrowing Date, all costs, fees
---------------
and expenses, and all other compensation contemplated by this Agreement, due to
the Agent or the Banks (including, without limitation, legal fees and expenses)
shall have been paid to the extent due.
4.17 Notice of Borrowing. The Agent shall have received a Notice of
-------------------
Borrowing satisfying the requirements of Section 1.03 with respect to each
incurrence of Revolving Loans.
4.18 Initial Borrowing Base Certificate. On or prior to the Initial
----------------------------------
Borrowing Date, the Agent shall have received the initial Borrowing Base
Certificate meeting the requirements of Section 6.01(j) and such Borrowing Base
Certificate shall be in form and substance satisfactory to the Agent and the
Required Banks.
The acceptance of the proceeds of each Revolving Loan shall constitute
a representation and warranty by each Credit Party to each of the Banks that all
of the applicable conditions specified above exist as of the date of such
Revolving Loan. All of the certificates, legal opinions and other documents and
papers referred to in this Section 4, unless otherwise specified, shall be
delivered to the Agent at its Notice Office for the account of each of the Banks
and, except for the Revolving Notes, in sufficient counterparts for each of the
Banks and shall be satisfactory in form and substance to the Agent and the
Required Banks.
SECTION 5. Representations, Warranties and Agreements. In order to
------------------------------------------
induce the Banks to enter into this Agreement and to make the Revolving Loans
provided for herein, the Borrower makes the following representations,
warranties and agreements with the Banks, in each case after giving effect to
the Transaction, all of which shall survive the execution and delivery of this
Agreement and the making of the Revolving Loans (with the incurrence of each
Revolving Loan being deemed to constitute a representation and warranty that the
matters specified in this Section 5 are true and correct in all material
respects on and as of the date of each such Revolving Loan, unless stated to
relate to a specific earlier date in which all representations and warranties
shall be true and correct in all material respects as of such earlier date):
5.01 Status. Each of the Credit Parties (i) is a duly organized and
------
validly existing corporation or association, as the case may be, in good
standing under the laws of the jurisdiction of its organization, (ii) has the
power and authority to own its property and assets and to transact the business
in which it is engaged and presently proposes to engage and (iii) is duly
qualified and is authorized to do business and is in good standing in all
-18-
<PAGE>
jurisdictions where it is required to be so qualified and where the failure to
be so qualified would have a Material Adverse Effect.
5.02 Power and Authority. Each Credit Party has the power and authority
-------------------
to execute, deliver and carry out the terms and provisions of the Credit
Documents to which it is a party and has taken all necessary action to authorize
the execution, delivery and performance of the Credit Documents to which it is a
party. Each Credit Party has duly executed and delivered each Credit Document to
which it is a party and each such Credit Document constitutes the legal, valid
and binding obligation of such Credit Party enforceable in accordance with its
terms, except to the extent that the enforceability thereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
generally affecting creditors' rights and by equitable principles (regardless of
whether enforcement is sought in equity or at law).
5.03 No Violation. Neither the execution, delivery or performance by
------------
any Credit Party of the Credit Documents to which it is a party nor compliance
by any Credit Party with the terms and provisions thereof, nor the consummation
of the transactions contemplated herein or therein, (i) will contravene any
applicable provision of any law, statute, rule or regulation, or any order,
writ, injunction or decree of any court or governmental instrumentality, (ii)
will conflict or be inconsistent with or result in any breach of, any of the
terms, covenants, conditions or provisions of, or constitute a default under, or
(other than pursuant to the Security Documents) result in the creation or
imposition of (or the obligation to create or impose) any Lien upon any of the
property or assets of the Borrower or any of its Consolidated Entities pursuant
to the terms of any indenture, mortgage, deed of trust, loan agreement, credit
agreement or any other material agreement or instrument to which the Borrower or
any of its Consolidated Entities is a party or by which it or any of its
property or assets are bound or to which it may be subject or (iii) will violate
any provision of the certificate of incorporation or by-laws (or equivalent
organizational documents) of the Borrower or any of its Consolidated Entities.
5.04 Litigation. There are no actions, suits or proceedings pending or,
----------
to the knowledge of the Borrower or any of its Consolidated Entities,
threatened, with respect to the Borrower or any of its Consolidated Entities (i)
that could reasonably be expected to have a Material Adverse Effect or (ii) that
could reasonably be expected to have a material adverse effect on the rights or
remedies of the Banks or on the ability of any Credit Party to perform its
respective obligations to the Banks hereunder and under the other Credit
Documents to which it is, or will be, a party. Additionally, there does not
exist any judgment, order or injunction prohibiting or imposing material adverse
conditions upon the incurrence of any Revolving Loan.
5.05 Use of Proceeds; Margin Regulations. (a) The proceeds of Revolving
-----------------------------------
Loans shall be utilized for the general corporate and working capital purposes
of the Borrower and the Guarantors (including to effect any Permitted
Acquisitions in accordance with the requirements of Section 7.02(h)).
(b) Neither the making of any Revolving Loan hereunder, nor the
use of the proceeds thereof, will violate the provisions of Regulation G, T, U
or X of the Board of
-19-
<PAGE>
Governors of the Federal Reserve System and no part of the proceeds of any
Revolving Loan will be used to purchase or carry any Margin Stock or to extend
credit for the purpose of purchasing or carrying any Margin Stock.
5.06 Governmental Approvals. No order, consent, approval, license,
----------------------
authorization, or validation of, or filing, recording or registration with, or
exemption by, any foreign or domestic governmental or public body or authority,
or any subdivision thereof, is required to authorize or is required in
connection with (i) the execution, delivery and performance of any Credit
Document or (ii) the legality, validity, binding effect or enforceability of any
Credit Document.
5.07 Investment Company Act. Neither the Borrower nor any of its
----------------------
Consolidated Entities is an "investment company" or a company "controlled" by
an "investment company," within the meaning of the Investment Company Act of
1940, as amended.
5.08 Public Utility Holding Company Act. Neither the Borrower nor any
----------------------------------
of its Consolidated Entities is a "holding company," or a "subsidiary company"
of a "holding company," or an "affiliate" of a "holding company" or of a
"subsidiary company" of a "holding company," within the meaning of the Public
Utility Holding Company Act of 1935, as amended.
5.09 True and Complete Disclosure. All factual information (taken as a
----------------------------
whole) heretofore or contemporaneously furnished by or on behalf of the Borrower
or any of its Consolidated Entities in writing to the Agent or any Bank
(including, without limitation, all information contained in the Documents) for
purposes of or in connection with this Agreement or any transaction contemplated
herein is, and all other such factual information (taken as a whole) hereafter
furnished by or on behalf of any such Persons in writing to the Agent or any
Bank will be, true and accurate in all material respects on the date as of which
such information is dated or certified and not incomplete by omitting to state
any material fact necessary to make such information (taken as a whole) not
misleading at such time in light of the circumstances under which such
information was provided.
5.10 Financial Condition; Financial Statements. (a) (I) Each of the
-----------------------------------------
audited consolidated statements of financial condition of the Borrower as of
December 31, 1995 and September 30, 1996 and the related consolidated statements
of operations and cash flows for the fiscal year or nine-month period, as the
case may be, ended as of said dates, which financial statements have been
examined by Ernst & Young, certified public accountants, who delivered an
unqualified opinion with respect thereto, copies of which have heretofore been
furnished to each Bank, present fairly in all material respects the financial
position of such The Borrower and its Consolidated Entities at the dates of said
statements and the results for the periods covered thereby. All such financial
statements have been prepared in accordance with GAAP consistently applied
except, in the case of the financial statements for the period ended September
30, 1996, for the absence of footnotes and normal year-end adjustments.
(II) Each of (i) the audited consolidated statements of financial
condition of Park Medical Associates, P.A. and Park Medical Labs, Inc. as of
December 31, 1993, 1994 and 1995 and the related consolidated statements of
operations and cash flows for the fiscal years
-20-
<PAGE>
ended as of said dates, which financial statements have been examined by Ernst &
Young, certified public accountants, who delivered an unqualified opinion with
respect thereto and (ii) the unaudited consolidated statements of financial
condition of Park Medical Associates, P.A. and Park Medical Labs, Inc. as of
September 30, 1995 and 1996 and the related consolidated statements of
operations and cash flows for the nine-month periods ended as of such dates,
copies of which have heretofore been furnished to each Bank, present fairly in
all material respects the financial position of such entities at the dates of
said statements and the results for the periods covered thereby. All such
financial statements have been prepared in accordance with GAAP consistently
applied except, in the case of the financial statements for the periods ended
September 30, 1995 and 1996, for the absence of footnotes and normal year-end
adjustments.
(III) Each of (i) the audited statements of financial condition of
Annapolis Medical Specialists, LLP as of December 31, 1993, 1994 and 1995 and
the related statements of operations, cash flows and partners capital for the
fiscal years ended as of said dates, which financial statements have been
examined by Ernst & Young, certified public accountants, who delivered an
unqualified opinion with respect thereto and (ii) the unaudited statements of
financial condition of Annapolis Medical Specialists, LLP as of September 30,
1995 and 1996 and the related statements of operations, cash flows and partners,
capital for the nine-month periods ended as of such dates, copies of which have
heretofore been furnished to each Bank, present fairly in all material respects
the financial position of such entities at the dates of said statements and the
results for the periods covered thereby. All such financial statements have been
prepared in accordance with GAAP consistently applied except, in the case of the
financial statements for the periods ended September 30, 1995 and 1996, for the
absence of footnotes and normal year-end adjustments.
(IV) Each of (i) the audited statements of financial condition of Drs.
Fortier, Libber, Clemmens & Weimer, P.A. as of December 31, 1994 and 1995 and
the related statements of operations, cash flows and shareholders' equity for
the fiscal years ended as of said dates, which financial statements have been
examined by Ernst & Young, certified public accountants, who delivered an
unqualified opinion with respect thereto and (ii) the unaudited statements of
financial condition of Drs. Fortier, Libber, Clemmens & Weimer, P.A. as of
September 30, 1995 and 1996 and the related statements of operations, cash flows
and shareholders' equity for the nine-month periods ended as of such dates,
copies of which have heretofore been furnished to each Bank, present fairly in
all material respects the financial position of such entities at the dates of
said statements and the results for the periods covered thereby. All such
financial statements have been prepared in accordance with GAAP consistently
applied except, in the case of the financial statements for the periods ended
September 30, 1995 and 1996, for the absence of footnotes and normal year-end
adjustments.
(V) Each of (i) the audited statements of financial condition of
Koeppel, Rosen, Rudikoff, M.D., P.C. as of December 31, 1995 and the related
statements of operations, cash flows and shareholders' equity for the fiscal
year ended as of said date, which financial statements have been examined by
Ernst & Young, certified public accountants, who delivered an unqualified
opinion with respect thereto and (ii) the unaudited statements of financial
condition of Koeppel, Rosen, Rudikoff, M.D., P.C. as of September 30, 1995 and
1996 and the related statements of operations, cash flows and shareholders'
equity for the
-21-
<PAGE>
nine-month periods ended as of such dates, copies of which have heretofore been
furnished to each Bank, present fairly in all material respects the financial
position of such entities at the dates of said statements and the results for
the periods covered thereby. All such financial statements have been prepared in
accordance with GAAP consistently applied except, in the case of the financial
statements for the periods ended September 30, 1995 and 1996, for the absence of
footnotes and normal year-end adjustments.
(VI) Each of (i) the audited statements of financial condition of Drs.
Goldgeier, Levine & Friedman, P.A. as of December 31, 1994 and 1995 and the
related statements of operations, cash flows and shareholders' equity for the
fiscal years ended as of said dates, which financial statements have been
examined by Ernst & Young, certified public accountants, who delivered an
unqualified opinion with respect thereto and (ii) the unaudited statements of
financial condition of Drs. Goldgeier, Levine & Friedman, P.A. as of September
30, 1995 and 1996 and the related statements of operations, cash flows and
shareholders' equity for the nine-month periods ended as of such dates, copies
of which have heretofore been furnished to each Bank, present fairly in all
material respects the financial position of such entities at the dates of said
statements and the results for the periods covered thereby. All such financial
statements have been prepared in accordance with GAAP consistently applied
except, in the case of the financial statements for the periods ended September
30, 1995 and 1996, for the absence of footnotes and normal year-end adjustments.
(VII) Each of (i) the audited statements of financial condition of Drs.
Sigler, Roskes, Holden & Schuberth, P.A. as of December 31, 1994 and 1995 and
the related statements of operations, cash flows and shareholders' equity for
the fiscal years ended as of said dates, which financial statements have been
examined by Ernst & Young, certified public accountants, who delivered an
unqualified opinion with respect thereto and (ii) the unaudited statements of
financial condition of Drs. Sigler, Roskes, Holden & Schuberth, P.A. as of
September 30, 1995 and 1996 and the related statements of operations, cash flows
and shareholders' equity for the nine-month periods ended as of such dates,
copies of which have heretofore been furnished to each Bank, present fairly in
all material respects the financial position of such entities at the dates of
said statements and the results for the periods covered thereby. All such
financial statements have been prepared in accordance with GAAP consistently
applied except, in the case of the financial statements for the periods ended
September 30, 1995 and 1996, for the absence of footnotes and normal year-end
adjustments.
(VII) Each of (i) the audited statements of financial condition of Drs.
Pakula, Davick & Bogue, P.A. as of December 31, 1995 and the related statements
of operations, cash flows and shareholders' equity for the fiscal year ended as
of said date, which financial statements have been examined by Ernst & Young,
certified public accountants, who delivered an unqualified opinion with respect
thereto and (ii) the unaudited statements of financial condition of Drs. Pakula,
Davick & Bogue, P.A. as of September 30, 1995 and 1996 and the related
statements of operations, cash flows and shareholders' equity for the nine-month
periods ended as of such dates, copies of which have heretofore been furnished
to each Bank, present fairly in all material respects the financial position of
such entities at the dates of said statements and the results for the periods
covered thereby. All such financial statements have been prepared in accordance
with GAAP consistently applied except, in the case of the
-22-
<PAGE>
financial statements for the periods ended September 30, 1995 and 1996, for the
absence of footnotes and normal year-end adjustments.
(VIII) Each of (i) the audited statements of financial condition of
Chestnut Medical Associates, Inc. as of December 31, 1995 and the related
statements of operations, cash flows and shareholders' equity for the fiscal
year ended as of said date, which financial statements have been examined by
Ernst & Young, certified public accountants, who delivered an unqualified
opinion with respect thereto and (ii) the unaudited statements of financial
condition of Drs. Pakula, Davick & Bogue, P.A. as of September 30, 1995 and 1996
and the related statements of operations, cash flows and shareholders' equity
for the nine-month periods ended as of such dates, copies of which have
heretofore been furnished to each Bank, present fairly in all material respects
the financial position of such entities at the dates of said statements and the
results for the periods covered thereby. All such financial statements have been
prepared in accordance with GAAP consistently applied except, in the case of the
financial statements for the periods ended September 30, 1995 and 1996, for the
absence of footnotes and normal year-end adjustments.
(IX) Each of (i) the audited statements of financial condition of James
F. Haines and William J. Belcastro, Partnership as of December 31, 1995 and the
related statements of operations, cash flows and partners' capital for the
fiscal year ended as of said date, which financial statements have been examined
by Ernst & Young, certified public accountants, who delivered an unqualified
opinion with respect thereto and (ii) the unaudited statements of financial
condition of James F. Haines and William J. Belcastro, Partnership as of
September 30, 1995 and 1996 and the related statements of operations, cash flows
and partners' capital for the nine-month periods ended as of such dates, copies
of which have heretofore been furnished to each Bank, present fairly in all
material respects the financial position of such entities at the dates of said
statements and the results for the periods covered thereby. All such financial
statements have been prepared in accordance with GAAP consistently applied
except, in the case of the financial statements for the periods ended September
30, 1995 and 1996, for the absence of footnotes and normal year-end adjustments.
(X) Each of (i) the audited statements of financial condition of
Alphonse F. Calvanese, M.D., P.C. as of September 30, 1995 and the related
statements of operations, cash flows and shareholders' equity for the fiscal
year ended as of said date, which financial statements have been examined by
Ernst & Young, certified public accountants, who delivered an unqualified
opinion with respect thereto and (ii) the unaudited statements of financial
condition of Alphonse F. Calvanese, M.D., P.C. for the period commencing October
1, 1995 and ending August 30, 1996 and the related statements of operations,
cash flows and shareholders' equity for the period covered thereby, copies of
which have heretofore been furnished to each Bank, present fairly in all
material respects the financial position of such entities at the dates of said
statements and the results for the periods covered thereby. All such financial
statements have been prepared in accordance with GAAP consistently applied
except, in the case of the financial statements for the periods ended August 30,
1996, for the absence of footnotes and normal year-end adjustments.
(XI) Each of (i) the audited statements of financial condition of
Jay M. Ungar, M.D. as of December 31, 1995 and the related statements of
operations and cash flows for the fiscal
-23-
<PAGE>
year ended as of said date, which financial statements have been examined by
Ernst & Young, certified public accountants, who delivered an unqualified
opinion with respect thereto and (ii) the unaudited statements of financial
condition of Jay M. Ungar, M.D. for the period commencing January 1, 1995 and
ending August 30, 1995 and as of September 30, 1995 and the related statements
of operations and cash flows for the periods covered thereby, copies of which
have heretofore been furnished to each Bank, present fairly in all material
respects the financial position of such entities at the dates of said statements
and the results for the periods covered thereby. All such financial statements
have been prepared in accordance with GAAP consistently applied except, in the
case of the financial statements for the periods ended August 30, 1996 and
September 30, 1995, for the absence of footnotes and normal year-end
adjustments.
(XII) Each of (i) the audited statements of financial condition of
Western Massachusetts Medical Group, Inc. as of November 30, 1995 and the
related statements of operations, cash flows and shareholders' equity for the
fiscal year ended as of said date, which financial statements have been examined
by Ernst & Young, certified public accountants, who delivered an unqualified
opinion with respect thereto and (ii) the unaudited statements of financial
condition of Western Massachusetts Medical Group, Inc. for the period commencing
December 1, 1995 and ending August 30, 1996 and as of August 31, 1995 and the
related statements of operations, cash flows and shareholders' equity for the
periods covered thereby, copies of which have heretofore been furnished to each
Bank, present fairly in all material respects the financial position of such
entities at the dates of said statements and the results for the periods covered
thereby. All such financial statements have been prepared in accordance with
GAAP consistently applied except, in the case of the financial statements for
the periods ended August 30, 1996 and August 31, 1995, for the absence of
footnotes and normal year-end adjustments.
(XIII) Each of (i) the consolidated audited statements of financial
condition of Springfield Medical Associates, Inc. as of December 31, 1993, 1994
and 1995 and the related consolidated statements of operations, cash flows and
shareholders' equity for the fiscal years ended as of said dates, which
financial statements have been examined by Ernst & Young, certified public
accountants, who delivered an unqualified opinion with respect thereto and (ii)
the unaudited statements of financial condition of Springfield Medical
Associates, Inc. for the period commencing January 1, 1996 and ending August 30,
1996 and as of September 30, 1995 and the related statements of operations, cash
flows and shareholders' equity for the periods covered thereby, copies of which
have heretofore been furnished to each Bank, present fairly in all material
respects the financial position of such entities at the dates of said statements
and the results for the periods covered thereby. All such financial statements
have been prepared in accordance with GAAP consistently applied except, in the
case of the financial statements for the periods ended August 30, 1996 and
September 30, 1995, for the absence of footnotes and normal year-end
adjustments.
(XIV) Each of (i) the consolidated audited statements of financial
condition of Cardiology and Internal Medicine Associates, Inc. as of December
31, 1994 and 1995 and the related consolidated statements of operations, cash
flows and shareholders' equity for the fiscal years ended as of said dates,
which financial statements have been examined by Ernst & Young, certified public
accountants, who delivered an unqualified opinion with respect
-24-
<PAGE>
thereto and (ii) the unaudited statements of financial condition of Cardiology
and Internal Medicine Associates, Inc. for the period commencing January 1, 1996
and ending August 30, 1996 and as of September 30, 1995 and the related
statements of operations, cash flows and shareholders' equity for the periods
covered thereby, copies of which have heretofore been furnished to each Bank,
present fairly in all material respects the financial position of such entities
at the dates of said statements and the results for the periods covered thereby.
All such financial statements have been prepared in accordance with GAAP
consistently applied except, in the case of the financial statements for the
periods ended August 30, 1996 and September 30, 1995, for the absence of
footnotes and normal year-end adjustments.
(XV) Each of (i) the unaudited pro forma combined balance sheet of
the Borrower as of September 30, 1996 and (ii) the unaudited pro forma combined
statements of operations of the Borrower as of December 31, 1995 and September
30, 1996, copies of which have heretofore been delivered to each Bank, present a
good faith estimate of the pro forma financial condition of the Borrower on a
consolidated basis at the dates of said statements and the pro forma results of
operations for the periods covered thereby.
(b) Since September 30, 1996, nothing has occurred that has had or
could reasonably be expected to have a Material Adverse Effect.
(c) Except as fully reflected in the financial statements described
in Section 5.10(a) and except for the Indebtedness permitted under this
Agreement, (i) there were as of the Initial Borrowing Date (and after giving
effect to any Revolving Loans made on such date), no liabilities or obligations
(excluding current obligations incurred in the ordinary course of business,
Existing Indebtedness and obligations arising under or out of the Stockholders'
Agreement) with respect to the Borrower or any of its Consolidated Entities of
any nature whatsoever (whether absolute, accrued, contingent or otherwise and
whether or not due) and (ii) the Borrower does not know of any basis for the
assertion against the Borrower or any of its Consolidated Entities of any such
liability or obligation which, in the case of clause (i) or (ii) either
individually or in the aggregate, is or would be reasonably likely to have, a
Material Adverse Effect.
(d) The Projections are based on good faith estimates and
assumptions made by the management of the Borrower, and on the Initial Borrowing
Date such management believed that the Projections were reasonable and
attainable, it being recognized by the Banks, however, that projections as to
future events are not to be viewed as facts and that the actual results during
the period or periods covered by the Projections probably will differ from the
projected results and that the differences may be material. There is no fact
known to the Borrower or any of its Consolidated Entities which would have a
Material Adverse Effect, which has not been disclosed herein or in such other
documents, certificates and statements furnished to the Banks for use in
connection with the transactions contemplated hereby.
5.11 Security Interests. On and after the Initial Borrowing Date,
each of the Security Documents creates (or after the execution and delivery
thereof will create), as security for the Obligations, a valid and enforceable
perfected security interest in and Lien on all of the Collateral subject
thereto, superior to and prior to the rights of all third Persons and subject to
no other Liens (except that the Security Agreement Collateral and the collateral
covered by
-25-
<PAGE>
the Additional Security Documents may be subject to Permitted Liens relating
thereto), in favor of the Collateral Agent. No filings or recordings are
required in order to perfect the security interests created under any Security
Document, except for filings or recordings required in connection with any such
Security Document which shall have been made on or prior to the Initial
Borrowing Date as contemplated by Section 4.09(b) or on or prior to the
execution and delivery thereof as contemplated by Sections 6.11, 6.12 and 7.17.
5.12 Transaction. At the time of consummation thereof, the
-----------
Transaction shall have been consummated in all material respects in accordance
with the terms of the respective Credit Documents and all applicable laws. At
the time of consummation thereof, all consents and approvals of, and filings and
registrations with, and all other actions in respect of, all governmental
agencies, authorities or instrumentalities required in order to make or
consummate the Transaction have been obtained, given, filed or taken or waived
and are or will be in full force and effect (or effective judicial relief with
respect thereto has been obtained), except where the failure to obtain, give,
file, or take would not reasonably be expected to have a Material Adverse
Effect. Additionally, there does not exist any judgment, order or injunction
prohibiting or imposing material adverse conditions upon the Transaction or the
performance by the Borrower and its Consolidated Entities of their obligations
under the Documents and all applicable laws.
5.13 Compliance with ERISA. Each Plan is in substantial compliance
---------------------
with ERISA and the Code; no Reportable Event has occurred with respect to a
Plan; no Plan is insolvent or in reorganization; no Plan has an Unfunded Current
Liability; no Plan has an accumulated or waived funding deficiency, has
permitted decreases in its funding standard account or has applied for a waiver
of the minimum funding standard or an extension of any amortization period
within the meaning of Section 412 of the Code; all contributions required to be
made with respect to a Plan have been timely made; neither the Borrower nor any
Consolidated Entity nor any ERISA Affiliate has incurred any material liability
to or on account of a Plan pursuant to Section 409, 502(i), 502(l), 515, 4062,
4063, 4064, 4069, 4201, 4204 or 4212 of ERISA or Section 401(a)(29), 4971, 4975
or 4980 of the Code or reasonably expects to incur any material liability
(including any indirect, contingent or secondary liability) under any of the
foregoing Sections with respect to any Plan (other than liabilities of any ERISA
Affiliate which could not, by operation of law or otherwise, become a liability
of the Borrower or any of its Consolidated Entities); no proceedings have been
instituted to terminate, or to appoint a trustee to administer, any Plan; no
condition exists which presents a material risk to the Borrower or any
Consolidated Entity or any ERISA Affiliate of incurring a liability to or on
account of a Plan pursuant to the foregoing provisions of ERISA and the Code;
using actuarial assumptions and computation methods consistent with subpart 1 of
subtitle E of Title IV of ERISA, the aggregate liabilities of the Borrower and
its Consolidated Entities and its ERISA Affiliates to all Plans which are
multiemployer plans (as defined in Section 4001(a)(3) of ERISA) in the event of
a complete withdrawal therefrom, as of the close of the most recent fiscal year
of each such Plan ended prior to the date of the most recent incurrence of
Revolving Loans, would not result in a Material Adverse Effect; no lien imposed
under the Code or ERISA on the assets of the Borrower or any Consolidated Entity
or any ERISA Affiliate exists or is likely to arise on account of any Plan; and
the Borrower and its Consolidated Entities do not maintain or contribute to any
employee welfare benefit plan (as defined in Section 3(1) of ERISA) which
provides benefits to retired employees or
-26-
<PAGE>
other former employees (other than as required by Section 601 of ERISA) or any
employee pension benefit plan (as defined in Section 3(2) of ERISA) the
obligations with respect to which could reasonably be expected to have a
Material Adverse Effect.
5.14 Capitalization. On the Initial Borrowing Date, the authorized
--------------
capitalization of the Borrower is set forth on Annex VIII. All outstanding
equity interests of the Borrower have been duly and validly issued and are fully
paid. Except as set forth on Annex VIII, the Borrower does not have outstanding
any securities convertible into or exchangeable for its equity interests or
outstanding any rights to subscribe for or to purchase, or any options for the
purchase of, or any agreement providing for the issuance (contingent or
otherwise) of, or any calls, commitments or claims of any character relating to,
its equity interests.
5.15 Subsidiaries; Affiliated Businesses. On and as of the Initial
-----------------------------------
Borrowing Date and after giving effect to the consummation of the Transaction,
the Borrower has no Subsidiaries or Affiliated Businesses other than those
Subsidiaries and Affiliated Businesses listed on Annex X. Annex X correctly sets
forth, as of the Initial Borrowing Date, the percentage ownership (direct and
indirect) of the Borrower, in each class of the capital stock of each of its
Subsidiaries and also identifies the direct owner thereof. All outstanding
shares of capital stock or other equity interests of each Subsidiary of the
Borrower and each Affiliated Business have been duly and validly issued, are
fully paid and nonassessable and have been issued free of preemptive rights.
Neither any Subsidiary of the Borrower nor any Affiliated Business has
outstanding any securities convertible into or exchangeable for its capital
stock or other equity interests or outstanding any right to subscribe for or to
purchase, or any options or warrants for the purchase of, or any agreement
providing for the issuance (contingent or otherwise) of or any calls,
commitments or claims of any character relating to, its capital stock or other
equity interests or any stock appreciation or similar rights.
5.16 Intellectual Property. The Borrower and each of its Consolidated
---------------------
Entities owns or holds a valid license to use all the material patents,
trademarks, permits, service marks, trade names, technology, know-how and
formulas or other rights with respect to the foregoing, free from restrictions
that are materially adverse to the use thereof, that are used in the operation
of the business of the Borrower and each of its Consolidated Entities as
presently conducted.
5.17 Compliance with Statutes, Permits, etc. (a) The Borrower and each
--------------------------------------
of its Consolidated Entities, to the knowledge of the Borrower, is in compliance
with all applicable statutes, regulations and orders of, and all applicable
restrictions imposed by, all governmental bodies, domestic or foreign, in
respect of the conduct of its business and the ownership of its property
(including compliance with all applicable Environmental Laws with respect to any
Real Property or governing its business and the requirements of any permits
issued under such Environmental Laws with respect to any such Real Property or
the operations of the Borrower or any of its Consolidated Entities), except such
noncompliance as is not likely to, individually or in the aggregate, have a
Material Adverse Effect.
(b) The Borrower and each of the Consolidated Entities and all
physicians employed by such Consolidated Entities have all licenses, permits,
franchises, approvals, authorizations, consents or orders of, or filings with
("Permits") any federal, state, local,
-27-
<PAGE>
foreign or other governmental agency, instrumentality, commission, authority,
board or any other Person, necessary or desirable to conduct their business as
now being conducted except where the failure to have any such Permit does not
have a Material Adverse Effect. All Permits of the Borrower and the Consolidated
Entities and all physicians employed by the Consolidated Entities are valid and
in full force and effect except where the failure to have any such Permit does
not have a Material Adverse Effect.
(c) Neither the Borrower nor any of the Consolidated Entities, nor any
other persons or entities providing professional services for the Consolidated
Entities, have engaged in any activities which are prohibited under 42 U.S.C.
ss. 1320a-7b, or the regulations promulgated thereunder pursuant to such
statutes, or related state or local statutes or regulations, or which are
prohibited by rules of professional conduct, including but not limited to the
following: (i) knowingly and willfully making or causing to be made a false
statement or representation of a material fact in any application for any
benefit or payment; (ii) knowingly and willfully making or causing to be made
any false statement or representation of a material fact for use in determining
rights to any benefit or payment; (iii) failure to disclose knowledge by a
claimant of the occurrence of any event affecting the initial or continued right
to any benefit or payment on its own behalf or on behalf of another, with intent
to fraudulently secure such benefit of payment; and (iv) knowingly and willfully
soliciting or receiving any remuneration (including any kickback, bribe or
rebate), directly or indirectly, overtly or covertly, in cash or in kind or
offering to pay or receive such remuneration (a) in return for referring an
individual to a person for the furnishing or arranging for the furnishing of any
item or service for which payment may be made in whole or in part be Medicare or
Medicaid, or (b) in return for purchasing, leasing, or ordering or arranging for
or recommending purchasing, leasing, or ordering any good, facility, service, or
item for which payment may be made in whole or in part by Medicare or Medicaid.
5.18 Environmental Matters. (a) The Borrower and each of its
---------------------
Consolidated Entities have complied with, and on the date of each Revolving Loan
are in compliance with, all applicable Environmental Laws and the requirements
of any permits issued under such Environmental Laws. There are no pending or, to
the best knowledge of the Borrower, past or threatened Environmental Claims
against the Borrower or any of its Consolidated Entities or any Real Property
owned or operated by the Borrower or any of its Consolidated Entities that
individually or in the aggregate would reasonably be expected to have a Material
Adverse Effect. There are no facts, circumstances, conditions or occurrences on
any Real Property owned or operated by the Borrower or any of its Consolidated
Entities or, to the best knowledge of the Borrower, on any property adjoining or
in the vicinity of any such Real Property that would reasonably be expected (i)
to form the basis of an Environmental Claim against the Borrower or any of its
Consolidated Entities or any such Real Property that individually or in the
aggregate would reasonably be expected to have a Material Adverse Effect or (ii)
to cause any such Real Property to be subject to any restrictions on the
ownership, occupancy, use or transferability of such Real Property by the
Borrower or any of its Consolidated Entities under any applicable Environmental
Law.
(b) Hazardous Materials have not at any time been generated, used,
treated or stored on, or transported to or from, any Real Property owned or
operated by the Borrower or any of its Consolidated Entities where such
generation, use, treatment or storage has
-28-
<PAGE>
violated or would reasonably be expected to violate any Environmental Law.
Hazardous Materials have not at any time been Released on or from any Real
Property owned or operated by the Borrower or any of its Consolidated Entities.
There are not now any underground storage tanks located on any Real Property
owned or operated by the Borrower or any of its Consolidated Entities.
(c) Notwithstanding anything to the contrary in this Section 5.18, the
representations made in this Section 5.18 shall only be untrue if the aggregate
effect of all restrictions, failures, noncompliance, Environmental Claims,
Releases and presence of underground storage tanks, in each case of the types
described above, would reasonably be expected to have a Material Adverse Effect.
5.19 Properties. All Real Property owned or leased by the Borrower or
----------
any of its Consolidated Entities as of the Initial Borrowing Date and after
giving effect to the Transaction, and the nature of the interest therein, is
correctly set forth in Annex III. The Borrower and each of its Consolidated
Entities has good and marketable title to, or a validly subsisting leasehold
interest in, all material properties owned or leased by it, including all Real
Property reflected in Annex III or in the financial statements referred to in
Section 5.10(a), free and clear of all Liens, other than Permitted Liens.
5.20 Labor Relations. Neither the Borrower nor any of its Consolidated
---------------
Entities is engaged in any unfair labor practice that could reasonably be
expected to have a Material Adverse Effect. There is (i) no unfair labor
practice complaint pending against the Borrower or any of its Consolidated
Entities or, to the best knowledge of the Borrower, threatened against any of
them, before the National Labor Relations Board, and no grievance or arbitration
proceeding arising out of or under any collective bargaining agreement is so
pending against the Borrower or any of its Consolidated Entities or, to the best
knowledge of the Borrower, threatened against any of them, (ii) no strike, labor
dispute, slowdown or stoppage pending against the Borrower or any of its
Consolidated Entities or, to the best knowledge of the Borrower, threatened
against the Borrower or any of its Consolidated Entities and (iii) to the best
knowledge of the Borrower, no union representation question existing with
respect to the employees of the Borrower or any of its Consolidated Entities
and, to the best knowledge of the Borrower, no union organizing activities are
taking place, except (with respect to any matter specified in clause (i), (ii)
or (iii) above, either individually or in the aggregate) such as is not
reasonably likely to have a Material Adverse Effect.
5.21 Tax Returns and Payments. All Federal, material state and other
------------------------
material returns, statements, forms and reports for taxes (the "Returns")
required to be filed by or with respect to the income, properties or operations
of the Borrower and/or any of its Consolidated Entities have been timely filed
with the appropriate taxing authority. The Returns accurately reflect all
liability for taxes of the Borrower and its Consolidated Entities for the
periods covered thereby. The Borrower and each of its Consolidated Entities have
paid all taxes payable by them other than taxes which are not yet due and
payable, and other than those contested in good faith by appropriate proceedings
and for which adequate reserves have been established in accordance with GAAP.
There is no material action, suit, proceeding, investigation, audit, or claim
now pending or, to the knowledge of the Borrower, threatened by any authority
regarding any taxes relating to the Borrower or any of its
-29-
<PAGE>
Consolidated Entities. As of the Initial Borrowing Date, neither the Borrower
nor any of its Consolidated Entities has entered into an agreement or waiver or
been requested to enter into an agreement or waiver extending any statute of
limitations relating to the payment or collection of taxes of the Borrower or
any of its Consolidated Entities, or is aware of any circumstances that would
cause the taxable years or other taxable periods of the Borrower or any of its
Consolidated Entities not to be subject to the normally applicable statute of
limitations. Neither the Borrower nor any of its Consolidated Entities have
provided, with respect to themselves or property held by them, any consent under
Section 341 of the Code. Neither the Borrower nor any of its Consolidated
Entities have incurred, or will incur, any material tax liability in connection
with the Transaction and the other transactions contemplated hereby.
5.22 Existing Indebtedness. Annex VI sets forth a true and complete
---------------------
list of all Indebtedness of the Borrower and its Consolidated Entities as of the
Initial Borrowing Date and which is to remain outstanding after giving effect to
the Transaction and the incurrence of Revolving Loans on such date (excluding
the Revolving Loans, the "Existing Indebtedness"), in each case showing the
aggregate principal amount thereof and the name of the respective borrower and
any other entity which directly or indirectly guaranteed such debt.
SECTION 6. Affirmative Covenants. The Borrower hereby covenants and
---------------------
agrees that on the Effective Date and thereafter for so long as this Agreement
is in effect and until the Total Revolving Loan Commitment has terminated, and
the Revolving Loans, together with interest, Fees and all other Obligations
(other than any indemnities described in Section 11.13 which are not then due
and payable) incurred hereunder, are paid in full:
6.01 Information Covenants. The Borrower will furnish to each Bank:
---------------------
(a) Monthly Reports. As promptly as practicable and in any event
---------------
within 45 days after the end of each fiscal month of the Borrower, the
consolidated balance sheet of the Borrower and its Consolidated Entities as at
the end of such fiscal month and the related consolidated statements of income
and retained earnings and of cash flows for such fiscal month and for the
elapsed portion of the fiscal year ended with the last day of such fiscal month,
setting forth comparable budgeted figures for such fiscal month, all of which
shall be certified by the chief financial officer or other Authorized Officer of
the Borrower, subject to normal year-end audit adjustments and the absence of
footnote disclosure.
(b) Quarterly Financial Statements. As promptly as practicable and in
------------------------------
any event within 60 days after the close of each quarterly accounting period in
each fiscal year of the Borrower (commencing with the quarterly accounting
period ending on March 31, 1997), the consolidated balance sheet of the Borrower
and its Consolidated Entities as at the end of such quarterly accounting period
and the related consolidated statements of income and retained earnings and of
cash flows for such quarterly accounting period, for the Test Period ended on
the last day of such quarterly accounting period and for the elapsed portion of
the fiscal year ended with the last day of such quarterly accounting period, all
of which shall be in reasonable detail and certified by the chief financial
officer or other Authorized Officer of the Borrower that they fairly present the
financial condition of the Borrower and its Consolidated
-30-
<PAGE>
Entities as of the dates indicated and the results of their operations and
changes in their cash flows for the periods indicated, subject to normal
year-end audit adjustments and the absence of footnote disclosure.
(c) Annual Financial Statements. Within 90 days after the close of each
---------------------------
fiscal year of the Borrower (commencing with the fiscal year ending on December
31, 1996), the consolidated balance sheet of the Borrower and its Consolidated
Entities as at the end of such fiscal year and the related consolidated and
consolidating statements of income and retained earnings and of cash flows for
such fiscal year, setting forth comparative budgeted figures for such fiscal
year and, in the case of all such financial statements (but excluding such
comparative budgeted figures), certified by a firm of independent certified
public accountants of recognized national standing reasonably acceptable to the
Agent, in each case to the effect that such statements fairly present in all
material respects the financial condition of the Borrower and its Consolidated
Entities as of the dates indicated and the results of their operations and cash
flows, together with a certificate of such accounting firm stating that in the
course of its regular audit of the business of the Borrower and its Consolidated
Entities, which audit was conducted in accordance with generally accepted
auditing standards, no Default or Event of Default which has occurred and is
continuing has come to their attention insofar as such Default or Event of
Default relates to financial and accounting matters or, if such a Default or
Event of Default has come to their attention a statement as to the nature
thereof.
(d) Budgets, etc. Not more than 60 days after the commencement of each
------------
fiscal year of the Borrower (commencing with the fiscal year ended December 31,
1996), budgets of the Borrower and its Consolidated Entities in reasonable
detail for such fiscal year and for each of the twelve fiscal months of such
fiscal year, in each case as customarily prepared by management for its internal
use, setting forth, with appropriate discussion, the principal assumptions upon
which such budgets are based. Together with each delivery of financial
statements pursuant to Sections 6.01(a), (b), and (c), a comparison of the
current year to date financial results (other than in respect of the balance
sheets included therein) against the budgets required to be submitted pursuant
to this clause (d) shall be presented.
(e) Officer's Certificates. At the time of the delivery of the
----------------------
financial statements provided for in Sections 6.01(b) and (c), a certificate of
the chief financial officer or other Authorized Officer of the Borrower to the
effect that no Default or Event of Default exists or, if any Default or Event of
Default does exist, specifying the nature and extent thereof, which certificate
shall set forth the calculations required to establish whether the Borrower and
its Consolidated Entities were in compliance with the provisions of Sections
7.04(c), 7.05, 7.08, 7.09 and 7.10, as at the end of such fiscal month, quarter
or year, as the case may be.
(f) Notice of Default or Litigation. Promptly, and in any event within
-------------------------------
five Business Days (or ten Business Days in the case of clause (y) below) after
any Senior Officer of the Borrower or any of its Consolidated Entities obtains
knowledge thereof, notice of (x) the occurrence of any event which constitutes a
Default or an Event of Default, which notice shall specify the nature thereof,
the period of existence thereof and what action the Borrower proposes to take
with respect thereto and shall state that such notice is a "notice of default,"
or (y) the commencement of, or threat of, or any significant development in, any
litigation or
-31-
<PAGE>
governmental proceeding pending against the Borrower or any of its Consolidated
Entities which is likely to have a Material Adverse Effect, or a material
adverse effect on the ability of any Credit Party to perform its respective
obligations hereunder or under any other Credit Document.
(g) Auditors' Reports. Promptly upon receipt thereof, a copy of each
-----------------
report or "management letter" submitted to the Borrower or any of its
Consolidated Entities by its independent accountants in connection with any
annual, interim or special audit made by them of the books of the Borrower or
any of its Consolidated Entities.
(h) Environmental Matters. Promptly after obtaining knowledge of any
---------------------
of the following, written notice of:
(i) any pending or threatened material Environmental Claim against
the Borrower or any of its Consolidated Entities or any Real Property
owned or operated by the Borrower or any of its Consolidated Entities;
(ii) any condition or occurrence on any Real Property owned or
operated by the Borrower or any of its Consolidated Entities that (x)
results in material noncompliance by the Borrower or any of its
Consolidated Entities with any applicable Environmental Law or (y)
could reasonably be anticipated to form the basis of a material
Environmental Claim against the Borrower or any of its Consolidated
Entities or any such Real Property;
(iii) any condition or occurrence on any Real Property owned
or operated by the Borrower or any of its Consolidated Entities that
could reasonably be anticipated to cause such Real Property to be
subject to any material restrictions on the ownership, occupancy, use
or transferability by the Borrower or such Consolidated Entity, as the
case may be, of its interest in such Real Property under any
Environmental Law; and
(iv) the taking of any material removal or remedial action in
response to the actual or alleged presence of any Hazardous Material on
any Real Property owned or operated by the Borrower or any of its
Consolidated Entities where the Borrower or any of its Consolidated
Entities is or is reasonably expected to be responsible for the cost of
such action or where the taking of such action could reasonably be
expected to materially interfere with the operations of the Borrower or
any of its Consolidated Entities at such Real Property.
All such notices shall describe in reasonable detail the nature of the
claim, investigation, condition, occurrence or removal or remedial action and
the Borrower's response thereto. In addition, the Borrower agrees to provide the
Banks with copies of all material written communications by the Borrower or any
of its Consolidated Entities with any Person, government or governmental agency
relating to any of the matters set forth in clauses (i)-(iv) above, and such
detailed reports relating to any of the matters set forth in clauses (i)-(iv)
above, as may reasonably be requested by the Agent or the Required Banks.
-32-
<PAGE>
(i) Consolidation. If, in the Borrower's judgment, it is reasonably
-------------
likely that any Affiliated Business or any Practice Group acquired by or
affiliated with, or to be acquired by or affiliated with, the Borrower, any
Subsidiary of the Borrower or any Affiliated Business will not be eligible to be
consolidated in the financial statements of the Borrower, written notice of such
anticipated ineligibility.
(j) Borrowing Base Certificate. (x) On the Initial Borrowing Date and
--------------------------
(y) within ten days Business Days after the last Business Day of each month, a
borrowing base certificate in the form of Exhibit K (each, a "Borrowing Base
Certificate"), which shall (i) be prepared as of December 31, 1996 (in the case
of the initial Borrowing Base Certificate) or as of the last Business Day of the
preceding fiscal month (in the case of each subsequent Borrowing Base
Certificate), (ii) be certified by the chief financial officer or other
Authorized Officer of the Borrower and (iii) demonstrate compliance with the
provisions of Section 7.11.
(k) Other Information. Promptly upon transmission thereof, copies of
-----------------
any filings and registrations with, and reports to, the SEC by the Borrower or
any of its Consolidated Entities and copies of all financial statements, proxy
statements, notices and reports as the Borrower or any of its Consolidated
Entities shall generally send to analysts or the holders of their capital stock
or other equity interests in their capacity as holders (in each case to the
extent not theretofore delivered to the Banks pursuant to this Agreement) and,
with reasonable promptness, such other information or documents (financial or
otherwise) as the Agent on its own behalf or on behalf of any Bank may
reasonably request from time to time.
6.02 Books, Records and Inspections. The Borrower will, and will cause
------------------------------
each of its Consolidated Entities to, permit, upon notice to the chief financial
officer or other Authorized Officer of the Borrower, officers and designated
representatives of the Agent or any Bank to visit and inspect any of the
properties or assets of the Borrower and any of its Consolidated Entities in
whomsoever's possession, and to examine the books of account of the Borrower and
any of its Consolidated Entities and discuss the affairs, finances and accounts
of the Borrower and of any of its Consolidated Entities with, and be advised as
to the same by, their officers and independent accountants, all at such
reasonable times and intervals and to such reasonable extent as the Agent or any
Bank may desire.
6.03 Insurance. The Borrower will, and will cause each of its
---------
Consolidated Entities to, at all times from and after the Effective Date
maintain in full force and effect insurance with reputable and solvent insurance
carriers in such amounts, covering such risks and liabilities and with such
deductibles or self-insured retentions as are in accordance with normal industry
practice. At any time that insurance at the levels described in Annex V is not
being maintained by the Borrower and its Consolidated Entities, the Borrower
will notify the Banks in writing thereof and, if thereafter notified by the
Agent to do so, the Borrower will obtain insurance at such levels to the extent
then generally available (but in any event within the deductible or self-insured
retention limitations set forth in the preceding sentence) or otherwise as are
acceptable to the Agent. The Borrower will furnish to the Agent on the Initial
Borrowing Date and on each date as the Agent or the Required Banks may
reasonably request, a summary of the insurance carried in respect of the
Borrower and its Consolidated Entities and the assets of the Borrower and its
Consolidated Entities together with certificates
-33-
<PAGE>
of insurance and other evidence of such insurance, if any, naming the Collateral
Agent as an additional insured and/or loss payee.
6.04 Payment of Taxes. The Borrower will pay and discharge, and will
----------------
cause each of its Consolidated Entities to pay and discharge, all taxes,
assessments and governmental charges or levies imposed upon it or upon its
income or profits, or upon any properties belonging to it, prior to the date on
which material penalties attach thereto, and all lawful claims for sums that
have become due and payable which, if unpaid, might become a Lien not otherwise
permitted under Section 7.03(a) or charge upon any properties of the Borrower or
any of its Consolidated Entities; provided, that neither the Borrower nor any of
--------
its Consolidated Entities shall be required to pay any such tax, assessment,
charge, levy or claim which is being contested in good faith and by proper
proceedings if it has maintained adequate reserves with respect thereto in
accordance with GAAP.
6.05 Corporate Franchises. The Borrower will do, and will cause each of
--------------------
its Consolidated Entities to do, or cause to be done, all things necessary to
preserve and keep in full force and effect its existence and its material
rights, franchises and authority to do business; provided, however, that any
-------- -------
transaction permitted by Section 7.02 will not constitute a breach of this
Section 6.05.
6.06 Compliance with Statutes, etc. The Borrower will, and will cause
-----------------------------
each of its Consolidated Entities to, comply with all applicable statutes,
regulations and orders of, and all applicable restrictions imposed by, all
governmental bodies, domestic or foreign, in respect of the conduct of its
business and the ownership of its property (including applicable statutes,
regulations, orders and restrictions relating to environmental standards and
controls) other than such noncompliance as would not have a Material Adverse
Effect or a material adverse effect on the ability of any Credit Party to
perform its obligations under any Credit Document to which it is a party.
6.07 Compliance with Environmental Laws. (a) The Borrower will pay, and
----------------------------------
will cause each of its Consolidated Entities to pay, all costs and expenses
incurred by it in keeping in compliance with all Environmental Laws, and will
keep or cause to be kept all Real Properties free and clear of any Liens imposed
pursuant to such Environmental Laws; and (b) neither the Borrower nor any of its
Consolidated Entities will generate, use, treat, store, release or dispose of,
or permit the generation, use, treatment, storage, release or disposal of,
Hazardous Materials on any Real Property, or transport or permit the
transportation of Hazardous Materials to or from any such Real Property, unless
the failure to comply with the requirements specified in clause (a) or (b)
above, either individually or in the aggregate, would not reasonably be expected
to have a Material Adverse Effect. If the Borrower or any of its Consolidated
Entities, or any tenant or occupant of any Real Property, cause or permit any
intentional or unintentional act or omission resulting in the presence or
Release of any Hazardous Material (except in compliance with applicable
Environmental Laws), the Borrower agrees to undertake, and/or to cause any of
its Consolidated Entities, tenants or occupants to undertake, at their sole
expense, any clean up, removal, remedial or other action required pursuant to
Environmental Laws to remove and clean up any Hazardous Materials from any Real
Property except where the failure to do so would not be reasonably expected to
have a Material Adverse Effect; provided, that neither the Borrower
--------
-34-
<PAGE>
nor any of its Consolidated Entities shall be required to comply with any such
order or directive which is being contested in good faith and by proper
proceedings so long as it has maintained adequate reserves with respect to such
compliance to the extent required in accordance with GAAP.
6.08 ERISA. As soon as possible and, in any event, within 10 days after
-----
the Borrower or any Consolidated Entity or any ERISA Affiliate knows or has
reason to know of the occurrence of any of the following events to the extent
that one or more of such events is reasonably likely to result in a material
liability to the Borrower or any Consolidated Entity, the Borrower will deliver
to each of the Banks a certificate of the chief financial officer or other
Authorized Officer of the Borrower setting forth details as to such occurrence
and the action, if any, which the Borrower, such Consolidated Entity or such
ERISA Affiliate is required or proposes to take, together with any notices
required or proposed to be given to or filed with or by the Borrower, such
Consolidated Entity, such ERISA Affiliate, the PBGC, a Plan participant or the
Plan administrator with respect thereto: that a Reportable Event has occurred,
that an accumulated funding deficiency has been incurred or an application may
be or has been made to the Secretary of the Treasury for a waiver or
modification of the minimum funding standard (including any required installment
payments) or an extension of any amortization period under Section 412 of the
Code with respect to a Plan; that a contribution required to be made to a Plan
has not been timely made; that a Plan has been or may be terminated,
reorganized, partitioned or declared insolvent under Title IV of ERISA; that a
Plan has an Unfunded Current Liability giving rise to a lien under ERISA or the
Code; that proceedings may be or have been instituted to terminate or appoint a
trustee to administer a Plan; that a proceeding has been instituted pursuant to
Section 515 of ERISA to collect a delinquent contribution to a Plan; that the
Borrower, any Consolidated Entity or any ERISA Affiliate will or may incur any
liability (including any contingent or secondary liability) to or on account of
the termination of or withdrawal from a Plan under Section 4062, 4063, 4064,
4069, 4201, 4204 or 4212 of ERISA or with respect to a Plan under Section
401(a)(29), 4971, 4975 or 4980 of the Code or Section 409, 502(i) or 502(l) of
ERISA; or that the Borrower or any Consolidated Entity has or may incur any
liability under any employee welfare benefit plan (within the meaning of Section
3(1) of ERISA) that provides benefits to retired employees or other former
employees (other than as required by Section 601 of ERISA) or any employee
pension benefit plan (as defined in Section 3(2) of ERISA). At the request of
any Bank, the Borrower will deliver to such Bank a complete copy of the annual
report (Form 5500) of each Plan required to be filed with the Internal Revenue
Service. In addition, at the request of any Bank, copies of annual reports and
any notices received by the Borrower or any Consolidated Entity or any ERISA
Affiliate with respect to any Plan shall be delivered to such Bank no later than
10 days after the date of any such request.
6.09 Good Repair. The Borrower will, and will cause each of its
-----------
Consolidated Entities to, ensure that its material properties and equipment used
in its business are kept in good repair, working order and condition, normal
wear and tear and damage by casualty excepted, and, subject to Section 7.08,
that from time to time there are made in such properties and equipment all
needful and proper repairs, renewals, replacements, extensions, additions,
betterments and improvements thereto, to the extent and in the manner useful or
customary for companies in similar businesses.
-35-
<PAGE>
6.10 End of Fiscal Years; Fiscal Quarters. The Borrower will, for
------------------------------------
financial reporting purposes, cause (i) each of its, and each of its
Consolidated Entities' fiscal years to end on December 31 of each year and (ii)
each of its, and each of its Consolidated Entities', fiscal quarters to end on
dates which are consistent with a fiscal year ending on December 31.
6.11 UCC-11 Searches. On or prior to the 45th day following the Initial
---------------
Borrowing Date, the Borrower shall deliver to the Agent (at the Borrower's own
expense) certified copies of Requests for Information or Copies (Form UCC-11),
or equivalent reports, each of a recent date listing all effective financing
statements that name any Credit Party as debtor and that are filed in the
jurisdictions referred to in Section 4.09(b)(A), together with copies of such
financing statements that name any of the foregoing Persons as debtor (none of
which shall cover the Collateral except (x) those with respect to which
appropriate termination statements executed by the secured lender thereunder
have been delivered to the Agent and (y) to the extent evidencing Permitted
Liens).
6.12 Additional Security; Further Assurances. (a) The Borrower will,
---------------------------------------
and will cause each of the Guarantors to, grant to the Collateral Agent security
interests in such assets and properties of the Borrower and the Guarantors as
are not covered by the Security Documents, and as may be requested from time to
time by the Agent or the Required Banks (collectively, the "Additional Security
Documents"), it being understood that the Affiliated Business Guarantors shall
not be required to grant additional security interests in assets and properties
outside the scope of the Affiliated Business Security Agreement. All such
security interests shall be granted pursuant to documentation reasonably
satisfactory in form and substance to the Agent and shall constitute valid and
enforceable perfected security interests superior to and prior to the rights of
all third Persons and subject to no other Liens except for Permitted Liens. The
Additional Security Documents or instruments related thereto shall have been
duly recorded or filed in such manner and in such places as are required by law
to establish, perfect, preserve and protect the Liens in favor of the Collateral
Agent required to be granted pursuant to the Additional Security Documents and
all taxes, fees and other charges payable in connection therewith shall have
been paid in full.
(b) The Borrower will, and will cause each of the Guarantors to, at
the expense of the Borrower, make, execute, endorse, acknowledge, file and/or
deliver to the Collateral Agent from time to time such vouchers, invoices,
schedules, confirmatory assignments, conveyances, financing statements, transfer
endorsements, powers of attorney, certificates, real property surveys, reports
and other assurances or instruments and take such further steps relating to the
collateral covered by any of the Security Documents as the Collateral Agent may
reasonably require. Furthermore, the Borrower shall cause to be delivered to the
Collateral Agent such opinions of counsel, title insurance and other related
documents as may be reasonably requested by the Agent to assure themselves that
this Section 6.12 has been complied with.
(c) The Borrower agrees that each action required above by this
Section 6.12 shall be completed as soon as possible, but in no event later than
90 days after such action is either requested to be taken by the Agent or the
Required Banks or required to be taken by the Borrower and the Guarantors
pursuant to the terms of this Section 6.12; provided that in no event shall the
Borrower be required to take any action, other than using its reasonable
-36-
<PAGE>
efforts, to obtain consents from third parties with respect to its compliance
with this Section 6.12.
6.13 Register. The Borrower hereby designates the Agent to serve as the
--------
Borrower's agent, solely for purposes of this Section 6.13, to maintain a
register (the "Register") on which it will record the Revolving Loan Commitments
from time to time of each of the Banks, the Revolving Loans made by each of the
Banks and each repayment in respect of the principal amount of the Revolving
Loans of each Bank. Failure to make any such recordation, or any error in such
recordation shall not affect the Borrower's obligations in respect of such
Revolving Loans. With respect to any Bank, the transfer of the Revolving Loan
Commitment of such Bank and the rights to the principal of, and interest on, any
Revolving Loan made pursuant to such Revolving Loan Commitment shall not be
effective until such transfer is recorded on the Register maintained by the
Agent with respect to ownership of such Revolving Loan Commitment and Revolving
Loans and prior to such recordation all amounts owing to the transferor with
respect to such Revolving Loan Commitment and Revolving Loans shall remain owing
to the transferor. The registration of assignment or transfer of all or part of
any Revolving Loan Commitment and Revolving Loans shall be recorded by the Agent
on the Register only upon the acceptance by the Agent of a properly executed and
delivered Assignment and Assumption Agreement pursuant to Section 11.04(b).
Concurrently with the delivery of such an Assignment and Assumption Agreement to
the Agent for acceptance and registration of assignment or transfer of all or
part of a Revolving Loan, or as soon thereafter as practicable, the assigning or
transferor Bank shall surrender the Revolving Note evidencing such Revolving
Loan, and thereupon one or more new Revolving Notes in the same aggregate
principal amount shall be issued to the assigning or transferor Bank and/or the
new Bank. The Borrower agrees to indemnify the Agent from and against any and
all losses, claims, damages and liabilities of whatsoever nature which may be
imposed on, asserted against or incurred by the Agent in performing its duties
under this Section 6.13.
6.14 Post-Closing Obligations. (a) Within fifteen days following the
------------------------
Initial Borrowing Date, (i) the Borrower shall furnish to the Agent and the
Banks a collateral examination report in respect of the accounts receivables of
the Affiliated Businesses, which report shall be in form and substance
satisfactory to the Agent and the Required Banks and (ii) the Borrower shall
have agreed to amend (x) this Agreement to modify the definition of "Borrowing
Base" to include eligibility features satisfactory to the Agent and the Required
Banks and (y) Section 7.10 and Exhibit K hereto in a manner satisfactory to the
Agent and the Required Banks to account for any modifications agreed to pursuant
to preceding clause (x).
(b) Within 30 days following the Initial Borrowing Date, Borrower
shall deliver to the Agent analyses and evidence of insurance complying with the
requirements of Section 6.03 for the business and properties of the Borrower and
its Consolidated Entities in scope, form and substance reasonably satisfactory
to the Agent and the Required Banks and naming the Collateral Agent as an
additional insured and/or loss payee, and stating that such insurance shall not
be cancelled or revised without 30 days prior written notice by the insurer to
the Collateral Agent.
-37-
<PAGE>
SECTION 7. Negative Covenants. The Borrower hereby covenants and agrees
------------------
that as of the Effective Date and thereafter for so long as this Agreement is in
effect and until the Total Revolving Loan Commitment has terminated, no
Revolving Notes are outstanding and the Revolving Loans, together with interest,
Fees and all other Obligations (other than any indemnities described in Section
11.13 which are not then due and payable) incurred hereunder, are paid in full:
7.01 Changes in Business. The Borrower and its Consolidated Entities
-------------------
will not engage in any business other than the business engaged in by the
Borrower and its Consolidated Entities as of the Initial Borrowing Date and
activities directly related thereto, and similar or related businesses.
7.02 Consolidation, Merger, Sale or Purchase of Assets, etc. The
------------------------------------------------------
Borrower will not, and will not permit any of its Consolidated Entities to, wind
up, liquidate or dissolve its affairs or enter into any transaction of merger or
consolidation, or convey, sell, lease or otherwise dispose of all or any part of
its property or assets (other than inventory in the ordinary course of
business), or enter into any partnerships, joint ventures or sale-leaseback
transactions, or purchase or otherwise acquire (in one or a series of related
transactions) any part of the property or assets (other than purchases or other
acquisitions of inventory, materials and equipment in the ordinary course of
business) of any Person or agree to do any of the foregoing at any future time,
except that the following shall be permitted:
(a) the Borrower and the Guarantors may lease, as lessee or
lessor, or license, as licensee or licensor, real or personal property
in the ordinary course of business and otherwise in compliance with
this Agreement, so long as any such lease or license by the Borrower or
any such Guarantor in its capacity as lessor or licensor, as the case
may be, does not prohibit the granting of a Lien by the Borrower or any
such Guarantor pursuant to the respective Security Document in the
property covered by such lease or license, as the case may be;
(b) Capital Expenditures by the Borrower and the Guarantors to the
extent not in violation of Section 7.08;
(c) the advances, investments and loans permitted pursuant to
Section 7.05;
(d) the Borrower may sell or discount, in each case without
recourse, accounts receivables arising in the ordinary course of
business, but only in connection with the compromise or collection
thereof;
(e) the Borrower and any of the Guarantors may sell or exchange
specific items of equipment, so long as the purpose of each such sale
or exchange is to acquire (and results within 180 days of such sale or
exchange in the acquisition of) replacement items of equipment which
are, in the reasonable business judgment of the Borrower and or such
Guarantor, the functional equivalent of the item of equipment so sold
or exchanged;
-38-
<PAGE>
(f) the Borrower and any of the Guarantors may, in the ordinary
course of business, license as licensee or licensor patents,
trademarks, copyrights and know-how to or from third Persons, so long
as any such license by the Borrower or any such Guarantor in its
capacity as licensor is permitted to be assigned pursuant to the
relevant Security Agreement (to the extent that a security interest in
such patents, trademarks, copyrights and know-how is granted
thereunder) and does not otherwise prohibit the granting of a Lien by
the Borrower or any such Guarantor pursuant to the relevant Security
Agreement in the intellectual property covered by such license;
(g) the Borrower and each of the Guarantors may sell assets,
provided that the aggregate sale proceeds from all assets subject to
such sales pursuant to this clause (g) shall not exceed $25,000;
(h) so long as no Default or Event of Default then exists or would
result therefrom, the Borrower may form an affiliation with any
Affiliated Business (by management agreement or stockholder transfer or
designation or similar agreement) and any Affiliated Business may
acquire the assets of, or form an affiliation with, any Practice Group
(any such acquisition or affiliation permitted by this clause (h), a
"Permitted Acquisition"); provided that (i) such Affiliated Business or
--------
Practice Group (and the assets so acquired), as the case may be, was,
immediately, prior to such acquisition or affiliation, engaged (or
used) primarily in the businesses permitted pursuant to Section 7.01,
(ii) any Liens assumed in connection with such acquisition or
affiliation are otherwise permitted under Section 7.03, (iii) the
Borrower shall have given the Agent and the Banks at least 10 Business
Days prior written notice of such Permitted Acquisition, (iv) if the
Person so acquired is an Affiliated Business, (x) the Borrower and such
Affiliated Business shall have entered into a Services Agreement in
form and substance satisfactory to the Required Banks, (y) the Borrower
and the physician designated as the sole shareholder of such Affiliated
Business shall have entered into a Sole Shareholder Designation
Agreement in form and substance satisfactory to the Required Banks and
(z) all of the provisions of Section 7.13 are complied with in respect
of such Affiliated Business and (v) the consideration paid in
connection with any such Permitted Acquisition shall consist solely of
cash, Borrower Subordinated Notes, Short-Term Seller Notes and/or Class
A Common Stock of the Borrower;
(i) the assets of any Guarantor may be transferred to the
Borrower; and
(j) any Subsidiary of the Borrower may merge with and into the
Borrower or any Wholly-Owned Subsidiary of the Borrower so long as (i)
the Borrower or such Wholly-Owned Subsidiary is the surviving
corporation of such merger and (ii) the security interests granted to
the Collateral Agent for the benefit of the Secured Creditors pursuant
to the Security Documents in the assets of such Subsidiary so merged
shall remain in full force and effect and perfected (to at least the
same extent as in effect immediately prior to such merger).
To the extent the Required Banks waive the provisions of this Section 7.02 with
respect to the sale or other disposition of any Collateral, or any Collateral is
sold as permitted by this
-39-
<PAGE>
Section 7.02 (and such Collateral is permitted to be released from the Liens
created by the respective Security Document), such Collateral in each case shall
be sold or otherwise disposed of free and clear of the Liens created by the
Security Documents and the Agent shall take such actions (including, without
limitation, by directing the Collateral Agent to take such actions) as are
appropriate in connection therewith.
7.03 Liens. The Borrower will not, and will not permit any of its
-----
Consolidated Entities to, create, incur, assume or suffer to exist any Lien upon
or with respect to any property or assets of any kind (real or personal,
tangible or intangible) of the Borrower or any of its Consolidated Entities,
whether now owned or hereafter acquired, or sell any such property or assets
subject to an understanding or agreement, contingent or otherwise, to repurchase
such property or assets (including sales of accounts receivable or notes with
recourse to the Borrower or any of its Consolidated Entities) or assign any
right to receive income, except for the following (collectively, the "Permitted
Liens"):
(a) inchoate Liens for taxes, assessments or governmental charges
or levies not yet due or Liens for taxes, assessments or governmental
charges or levies being contested in good faith by appropriate
proceedings and for which adequate reserves have been established in
accordance with GAAP;
(b) Liens in respect of property or assets of the Borrower or any
of its Consolidated Entities imposed by law which were incurred in the
ordinary course of business and which have not arisen to secure
Indebtedness for borrowed money, such as carriers', warehousemen's and
mechanics' Liens, statutory landlord's Liens, and other similar Liens
arising in the ordinary course of business, and which either (x) do not
in the aggregate materially detract from the value of such property or
assets or materially impair the use thereof in the operation of the
business of the Borrower or any of its Consolidated Entities or (y) are
being contested in good faith by appropriate proceedings, which
proceedings have the effect of preventing the forfeiture or sale of the
property or asset subject to such Lien;
(c) Liens created by or pursuant to this Agreement and the
Security Documents;
(d) Liens in existence on the Initial Borrowing Date which are
listed, and the property subject thereto described, in Annex VII,
without giving effect to any extensions or renewals thereof;
(e) Liens arising from judgments, decrees or attachments in
circumstances not constituting an Event of Default under Section 8.09;
(f) Liens incurred or deposits made in the ordinary course of
business in connection with (x) workers' compensation, unemployment
insurance and other types of social security, or (y) to secure the
performance of tenders, statutory obligations, surety and appeal bonds,
bids, government contracts, performance and return-of-money bonds and
other similar obligations incurred in the ordinary course of business
(exclusive of obligations in respect of the payment for borrowed
money),
-40-
<PAGE>
provided that the aggregate amount of cash and the fair market value of
the property encumbered by Liens described in this clause (y) shall not
exceed $1,000 at any time;
(g) licenses, leases or subleases granted by the Borrower or
any of the Guarantors to third Persons not interfering in any material
respect with the business of the Borrower or any of the Guarantors;
(h) easements, rights-of-way, restrictions, minor defects or
irregularities in title and other similar charges or encumbrances not
interfering in any material respect with the ordinary conduct of the
business of the Borrower or any of its Consolidated Entities;
(i) Liens arising from precautionary UCC financing statements
regarding operating leases permitted by this Agreement;
(j) any interest or title of a licensor, lessor or sublessor
under any lease permitted by this Agreement; and
(k) Liens arising pursuant to purchase money mortgages,
Capital Leases or security interests securing Indebtedness representing
the purchase price (or financing of the purchase price within 90 days
after the respective purchase) of assets acquired after the Initial
Borrowing Date, provided that (i) any such Liens attach only to the
--------
assets so purchased, (ii) the Indebtedness secured by any such Lien
does not exceed 100%, nor is less than 70%, of the lesser of the fair
market value or the purchase price of the property being purchased at
the time of the incurrence of such Indebtedness and (iii) the
Indebtedness secured thereby is permitted to be incurred pursuant to
Section 7.04(c).
7.04 Indebtedness. The Borrower will not, and will not permit any of
------------
its Consolidated Entities to, contract, create, incur, assume or suffer to exist
any Indebtedness, except:
(a) Indebtedness incurred pursuant to this Agreement and the
other Credit Documents;
(b) Existing Indebtedness outstanding on the Initial Borrowing
Date and listed on Annex VI, without giving effect to any subsequent
extension, renewal or refinancing thereof;
(c) Capitalized Lease Obligations and Indebtedness of the
Borrower and its Consolidated Entities incurred pursuant to purchase
money Liens, provided, that (x) all such Capitalized Lease Obligations
--------
are permitted under Section 7.08 and (y) the sum of (i) the aggregate
Capitalized Lease Obligations plus (ii) the aggregate principal amount
of such purchase money Indebtedness outstanding at any time shall not
exceed $4,000,000;
-41-
<PAGE>
(d) Indebtedness constituting Intercompany Loans to the extent
permitted by Section 7.05(d);
(e) Indebtedness of the Borrower under (x) Borrower Subordinated
Notes and Short-Term Seller Notes issued as consideration in connection
with any Permitted Acquisition and (y) the Shareholder Subordinated
Notes; and
(f) Indebtedness of the Borrower which may be deemed to exist
under the Bain Management Agreement.
7.05 Advances, Investments and Loans. The Borrower will not, and will
-------------------------------
not permit any of its Consolidated Entities to, lend money or extend credit or
make advances to any Person, or purchase or acquire any stock, obligations or
securities of, or any other interest in, or make any capital contribution to,
any Person, or purchase or own a futures contract or otherwise become liable for
the purchase or sale of currency or other commodities at a future date in the
nature of a futures contract, or hold any cash or Cash Equivalents, except:
(a) the Borrower may invest in cash and Cash Equivalents;
(b) the Borrower and its Consolidated Entities may acquire and
hold receivables owing to it, if created or acquired in the ordinary
course of business and payable or dischargeable in accordance with
customary trade terms of the Borrower or such Subsidiary;
(c) the Borrower and its Consolidated Entities may acquire and
own investments (including debt obligations) received in connection
with the bankruptcy or reorganization of suppliers and customers and in
good faith settlement of delinquent obligations of, and other disputes
with, customers and suppliers arising in the ordinary course of
business;
(d) the Borrower may make intercompany loans and advances to
any Guarantor and any Guarantor may make intercompany loans and
advances to the Borrower or any other Guarantor (collectively,
"Intercompany Loans"), provided, that (x) each Intercompany Loan shall
--------
be evidenced by an Intercompany Note and (y) each such Intercompany
Note shall be pledged to the Collateral Agent pursuant to the Pledge
Agreement;
(e) loans and advances by the Borrower and the Guarantors to
employees of the Borrower and its Consolidated Entities for moving and
travel expenses and other similar expenses, in each case incurred in
the ordinary course of business, in an aggregate outstanding principal
amount not to exceed $100,000 at any time (determined without regard to
any write-down or write-offs of such loans and advances) shall be
permitted;
(f) the Borrower and its Subsidiaries may hold additional
investments in their respective Subsidiaries to the extent that such
investments reflect an increase in the value of such Subsidiaries; and
-42-
<PAGE>
(g) the Borrower and the Affiliated Businesses may effect
Permitted Acquisitions in accordance with the requirements of
Section 7.02(h).
7.06 Dividends, etc. The Borrower will not, and will not permit any of
--------------
its Consolidated Entities to, declare or pay any dividends or distributions
(other than dividends or distributions payable solely in common stock or other
common equity interests of the Borrower or any such Consolidated Entity, as the
case may be) or return any capital to, its stockholders or members or authorize
or make any other distribution, payment or delivery of property or cash to its
stockholders or members as such, or redeem, retire, purchase or otherwise
acquire, directly or indirectly, for a consideration, any shares of any class of
its capital stock or other equity interests, now or hereafter outstanding (or
any warrants for or options or stock appreciation rights in respect of any of
such shares or other equity interests), or set aside any funds for any of the
foregoing purposes, and the Borrower will not permit any of its Consolidated
Entities to purchase or otherwise acquire for consideration any shares of any
class of the capital stock or other equity interests of the Borrower or any
other Consolidated Entity, as the case may be, now or hereafter outstanding (or
any options or warrants or stock appreciation rights issued by such Person with
respect to its capital stock or other equity interests) (all of the foregoing
"Dividends"), except that (i) any Subsidiary of the Borrower may pay Dividends
to the Borrower or any Wholly-Owned Subsidiary of the Borrower, (ii) the
Borrower may redeem or purchase shares of common stock of the Borrower or
options to purchase such common stock, as the case may be, held by former
employees of the Borrower or any of its Consolidated Entities following the
death of such employee or other termination of their employment, provided that
(w) the only consideration paid by the Borrower in respect of such redemptions
and/or purchases shall be cash and Shareholder Subordinated Notes, (x) the sum
of (A) the aggregate amount paid by the Borrower in cash in respect of all such
redemptions and/or purchases plus (B) the aggregate amount of all cash principal
and interest payments made on Shareholder Subordinated Notes shall not exceed
$200,000 in the aggregate, and (y) at the time of any cash payment permitted to
be made pursuant to this Section 7.06(ii), including any cash payment under a
Shareholder Subordinated Note, no Default or Event of Default shall then exist
or result therefrom and (iii) whether or not same constitute Dividends, the
payments expressly permitted to be made pursuant to clauses (iv) through (vi),
inclusive, of Section 7.07 shall be permitted. The parties hereto understand and
agree that the term "Dividend" as used in this Agreement does not include
payments made by any Affiliated Business to any physician employed by such
Affiliated Business pursuant to the terms of such physician's employment
agreement.
7.07 Transactions with Affiliates. The Borrower will not, and will not
----------------------------
permit any of its Consolidated Entities to, enter into any transaction or series
of transactions with any Affiliate other than in the ordinary course of business
and on terms and conditions substantially as favorable to the Borrower or such
Consolidated Entity as would be obtainable by the Borrower or such Consolidated
Entity at the time in a comparable arm's-length transaction with a Person other
than an Affiliate; provided, that the following shall in any event be permitted:
--------
(i) the Transaction; (ii) the Service Agreements in effect on the Effective
Date; (iii) the Borrower and any Affiliated Business acquired in connection with
a Permitted Acquisition may enter into a Service Agreement in accordance with
the terms of Section 7.02(h); (iv) the payment, on a quarterly basis, of
management fees to Bain Capital and/or its Related Parties in an aggregate
amount (for all such Persons taken together) not to
-43-
<PAGE>
exceed $125,000 in any fiscal quarter of the Borrower, (v) the payment to Bain
Capital and/or its Related Parties of a fee equal to 1% of the gross amount of
financings obtained by the Borrower and its Consolidated Entities after the date
hereof pursuant to, and in accordance with the terms of, Section 2.b of the Bain
Management Agreement and (vi) the reimbursement of Bain Capital and/or its
Related Parties for their reasonable out-of-pocket expenses incurred by them in
connection with performing management services to the Borrower and its
Consolidated Entities under the Bain Management Agreement.
7.08 Capital Expenditures. The Borrower will not, and will not permit
--------------------
any of its Subsidiaries to, make any Capital Expenditures, except that, during
the fiscal year of the Borrower ended December 31, 1997, the Borrower and the
Guarantors may make Capital Expenditures so long as the aggregate amount of such
Capital Expenditures does not exceed $4,000,000 in such fiscal year.
7.09 Minimum Consolidated EBITDA. The Borrower will not permit
---------------------------
Consolidated EBITDA for any Test Period ending on a date set forth below to be
less than the amount set forth opposite such date below:
<TABLE>
<CAPTION>
Minimum
Consolidated
Date EBITDA
------ --------------
<S> <C>
March 31, 1997 (830,000)
June 30, 1997 (1,368,000)
September 30,1997 (1,456,000)
December 31, 1997 (1,083,000)
</TABLE>
7.10 Borrowing Base. The Borrower will not permit the Borrowing Base at
--------------
any time to be less than the Total Revolving Loan Commitment at such time, it
being understood and agreed that provisions of this Section 7.10 will be amended
in a manner satisfactory to the Borrower, the Agent and the Required Banks and
otherwise in accordance with the terms of Section 6.14(a).
7.11 Limitation on Voluntary Payments; Modifications of Indebtedness,
----------------------------------------------------------------
Organizational Documents and Certain Other Agreements; Issuance of Capital
- --------------------------------------------------------------------------
Stock; etc. The Borrower will not, and will not permit any of the Guarantors to:
- ----------
(i) make (or give any notice in respect of) any voluntary or
optional payment or prepayment on or redemption or acquisition for
value of (including, without limitation, by way of depositing with the
trustee with respect thereto or any other Person money or securities
before due for the purpose of paying when due) any Borrower
Subordinated Note;
(ii) make (or give any notice in respect of) any principal or
interest payment on, or any redemption or acquisition for value of, (x)
any Shareholder
-44-
<PAGE>
Subordinated Note, except to the extent permitted by Section 7.06(ii)
and (y) any Short-Term Seller Note, to the extent permitted by the
terms thereof;
(iii) amend or modify, or permit the amendment or modification
of, any provision of any Borrower Subordinated Note, any Shareholder
Subordinated Note or any Short-Term Seller Note;
(iv) amend, modify, change or terminate (to the extent such
amendment, modification, change or termination is in any way adverse to
the interests of the Banks), any Management Agreement (including the
Services Agreements and the Bain Management Agreement), any Sole
Stockholder Designation Agreement, any Tax Allocation Agreement, its
certificate of incorporation (including, without limitation, by the
filing or modification of any certificate of designation) or by-laws
(or equivalent organizational documents), or any agreement entered into
by it, with respect to its capital stock or other equity interests
(including the Class B Common Stock Purchase Agreement, the
Stockholders' Agreement and any other Shareholders' Agreement), or
enter into any new agreement with respect to its capital stock or other
equity interests which would be adverse to the interests of the Banks;
it being understood that neither (x) an amendment, modification or
change to the Class B Stock Purchase Agreement which effects a change
in the number of Shares, Warrants or Reserved Shares (as each such term
is defined in the Class B Stock Purchase Agreement) to be issued
thereunder, or the purchase price or exercise price therefor nor (y) an
amendment, modification or change to the Class B Stock Purchase
Agreement or the Restated Certificate of Incorporation of the Borrower
which requires the Borrower to satisfy additional financial tests
related to the amounts incurred, paid or expended, including without
limitation transaction fees and expenses, by the Borrower and the
Affiliated Business in connection with the acquisition of assets of, or
affiliation with, any Practice Group, shall not be considered to be
adverse to the interests of the Banks for purposes of this Section
7.11(iv); or
(v) issue any class of capital stock or other equity interests
other than (I) (x) in the case of the Borrower and its Subsidiaries,
non-redeemable common stock or other non-redeemable common equity
interests and (y) in the case of the Borrower, capital stock or other
equity interests pursuant to, and in accordance with the terms of, each
of the Class B Common Stock Purchase Agreement and the Equity Incentive
Plan, provided that in the case of any issuance of any equity interest
by the Borrower no Event of Default will exist under Section 8.10 and
(II) Class A Common Stock to BTCo in accordance with the terms of the
Fee Letter and related documentation.
7.12 Limitation on Certain Restrictions on Guarantors. The Borrower
------------------------------------------------
will not, and will not permit any of the Guarantors to, directly or indirectly,
create or otherwise cause or suffer to exist or become effective any encumbrance
or restriction on the ability of any such Guarantor to (a) pay dividends or make
any other distributions on its capital stock or any other interest or
participation in its profits owned by the Borrower or any Guarantor, or pay any
Indebtedness owed to the Borrower or a Guarantor, (b) make loans or advances to
the Borrower or any Guarantor or (c) transfer any of its properties or assets to
the Borrower or any Guarantor, except for such encumbrances or restrictions
existing under or by reason of (i)
-45-
<PAGE>
applicable law, (ii) this Agreement and the other Credit Documents, (iii)
customary provisions restricting subletting or assignment of any lease governing
a leasehold interest of the Borrower or a Guarantor, (iv) customary provisions
restricting assignment of any licensing agreement entered into by the Borrower
or a Guarantor in the ordinary course of business, and (v) customary provisions
restricting the transfer of assets subject to Liens permitted under Section
7.03(k).
7.13 Limitation on the Establishment or Acquisition of Subsidiaries,
---------------------------------------------------------------
Affiliated Businesses and Practice Groups. Notwithstanding anything to the
- -----------------------------------------
contrary contained in this Agreement, the Borrower will not, and will not permit
any of its Consolidated Entities to, establish, create or acquire after the
Initial Borrowing Date any Subsidiary, any Affiliated Business or any Practice
Group; provided that (a) the Borrower and its Wholly-Owned Subsidiaries shall be
--------
permitted to establish or create Wholly-Owned Subsidiaries, so long as (i) at
least 10 days' prior written notice thereof (or such lesser notice as is
acceptable to the Agent) is given to the Agent, (ii) the capital stock or other
equity interests of any such new Subsidiary is pledged pursuant to the Pledge
Agreement and the certificates, if any, representing such stock or other equity
interests, together with stock or other powers duly executed in blank, are
delivered to the Collateral Agent, (iii) each such new Subsidiary executes a
counterpart of the Guaranty, the Pledge Agreement and the Borrower/Subsidiary
Security Agreement and (iv) to the extent requested by the Agent or the Required
Banks, takes all actions required pursuant to Section 6.12, (b) the Borrower
shall be permitted to establish, create or acquire Affiliated Businesses, so
long as (i) at least 10 days' prior written notice thereof (or such lesser
notice as is acceptable to the Agent) is given to the Agent, (ii) such new
Affiliated Business executes a counterpart of the Guaranty and the Affiliated
Business Security Agreement and (iii) to the extent requested by the Agent and
the Required Banks, such Affiliated Business takes all actions required pursuant
to Section 6.12 and (c) Affiliated Businesses shall be permitted to acquire
Practice Groups in connection with a Permitted Acquisition in accordance with
the requirements of Section 7.02(h). In addition, each new Wholly-Owned
Subsidiary and Affiliated Business that is required to execute any Credit
Document shall execute and deliver, or cause to be executed and delivered, all
other relevant documentation of the type described in Section 4 as a
Wholly-Owned Subsidiary or Affiliated Business, as the case may be, was required
to deliver on the Initial Borrowing Date.
SECTION 8. Events of Default. Upon the occurrence of any of the
-----------------
following specified events (each, an "Event of Default"):
8.01 Payments. The Borrower shall (i) default in the payment when due
--------
of any principal of the Revolving Loans or (ii) default, and such default shall
continue for three or more days, in the payment when due of any interest on the
Revolving Loans or any Fees or any other amounts owing hereunder or under any
other Credit Document; or
8.02 Representations, etc. Any representation, warranty or statement
--------------------
made by the Borrower or any other Credit Party herein or in any other Credit
Document or in any statement or certificate delivered pursuant hereto or thereto
shall prove to be untrue in any material respect on the date as of which made or
deemed made; or
-46-
<PAGE>
8.03 Covenants. Any Credit Party shall (a) default in the due
---------
performance or observance by it of any term, covenant or agreement contained in
Sections 6.11, 6.12, or 7, or (b) default in the due performance or observance
by it of any term, covenant or agreement (other than those referred to in
Section 8.01, 8.02 or clause (a) of this Section 8.03) contained in this
Agreement and such default shall continue unremedied for a period of at least 30
days after notice to the defaulting party by the Agent or the Required Banks; or
8.04 Default Under Other Agreements. (a) The Borrower or any of its
------------------------------
Consolidated Entities shall (i) default in any payment with respect to any
Indebtedness (other than the Obligations) beyond the period of grace, if any,
provided in the instrument or agreement under which Indebtedness was created or
(ii) default in the observance or performance of any agreement or condition
relating to any such Indebtedness or contained in any instrument or agreement
evidencing, securing or relating thereto, or any other event shall occur or
condition exist, the effect of which default or other event or condition is to
cause, or to permit the holder or holders of such Indebtedness (or a trustee or
agent on behalf of such holder or holders) to cause any such Indebtedness to
become due prior to its stated maturity; or (b) any Indebtedness (other than the
Obligations) of the Borrower or any of its Consolidated Entities shall be
declared to be due and payable, or shall be required to be prepaid other than by
a regularly scheduled required prepayment or as a mandatory prepayment (unless
such required prepayment or mandatory prepayment results from a default
thereunder or an event of the type that constitutes an Event of Default), prior
to the stated maturity thereof; provided, that it shall not constitute an Event
--------
of Default pursuant to clause (a) or (b) of this Section 8.04 unless the
principal amount of any one issue of such Indebtedness, or the aggregate amount
of all such Indebtedness referred to in clauses (a) and (b) above, exceeds
$25,000 at any one time; or
8.05 Bankruptcy. etc. The Borrower or any of its Consolidated Entities
---------------
shall commence a voluntary case concerning itself under Title 11 of the United
States Code entitled "Bankruptcy," as now or hereafter in effect, or any
successor thereto (the "Bankruptcy Code"); or an involuntary case is commenced
against the Borrower or any of its Consolidated Entities and the petition is not
controverted within 10 days, or is not dismissed within 60 days, after
commencement of the case; or a custodian (as defined in the Bankruptcy Code) is
appointed for, or takes charge of, all or substantially all of the property of
the Borrower or any of its Consolidated Entities; or the Borrower or any of its
Consolidated Entities commences any other proceeding under any reorganization,
arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or
liquidation or similar law of any jurisdiction whether now or hereafter in
effect relating to the Borrower or any of its Consolidated Entities; or there is
commenced against the Borrower or any of its Consolidated Entities any such
proceeding which remains undismissed for a period of 60 days; or the Borrower or
any of its Consolidated Entities is adjudicated insolvent or bankrupt; or any
order of relief or other order approving any such case or proceeding is entered;
or the Borrower or any of its Consolidated Entities suffers any appointment of
any custodian or the like for it or any substantial part of its property to
continue undischarged or unstayed for a period of 60 days; or the Borrower or
any of its Consolidated Entities makes a general assignment for the benefit of
creditors; or any corporate action is taken by the Borrower or any of its
Consolidated Entities for the purpose of effecting any of the foregoing; or
-47-
<PAGE>
8.06 ERISA. (a) Any Plan shall fail to satisfy the minimum funding
-----
standard required for any plan year or part thereof or a waiver of such standard
or extension of any amortization period is sought or granted under Section 412
of the Code, any Plan shall have had or is likely to have a trustee appointed to
administer such Plan, any Plan is, shall have been or is likely to be terminated
or the subject of termination proceedings under ERISA, any Plan shall have an
Unfunded Current Liability, a contribution required to be made to a Plan has not
been timely made, the Borrower or any Consolidated Entity or any ERISA Affiliate
has incurred or is likely to incur a liability to or on account of a Plan under
Section 409, 502(i), 502(l), 515, 4062, 4063, 4064, 4069, 4201, 4204 or 4212 of
ERISA or Section 401(a)(29), 4971, 4975 or 4980 of the Code, or the Borrower or
any Consolidated Entity has incurred or is likely to incur liabilities pursuant
to one or more employee welfare benefit plans (as defined in Section 3(1) of
ERISA) which provide benefits to retired employees or other former employees
(other than as required by Section 601 of ERISA) or employee pension benefit
plans (as defined in Section 3(2) of ERISA); (b) there shall result from any
such event or events the imposition of a lien, the granting of a security
interest, or a liability or a material risk of incurring a liability; and (c)
which lien, security interest or liability which arises from such event or
events, in the opinion of the Required Banks, will have a Material Adverse
Effect; or
8.07 Security Documents. (a) Except in each case to the extent
------------------
resulting from the failure of the Collateral Agent to retain possession of the
applicable Pledged Securities, any Security Document shall cease to be in full
force and effect, or shall cease to give the Collateral Agent the Liens, rights,
powers and privileges purported to be created thereby in favor of the Collateral
Agent, or (b) any Credit Party shall default in the due performance or
observance of any term, covenant or agreement on its part to be performed or
observed pursuant to any such Security Document and such default shall continue
beyond any cure or grace period specifically applicable thereto pursuant to the
terms of such Security Document; or
8.08 Guaranties. Any Guaranty or any provision thereof shall cease to
----------
be in full force and effect, or any Guarantor or any Person acting by or on
behalf of such Guarantor shall deny or disaffirm such Guarantor's obligations
under its Guaranty or any Guarantor shall default in the due performance or
observance of any material term, covenant or agreement on its part to be
performed or observed pursuant to its Guaranty; or
8.09 Judgments. One or more judgments or decrees shall be entered
---------
against the Borrower or any of its Consolidated Entities involving a liability
(not paid or not fully covered by insurance) in excess of $25,000 for all such
judgments and decrees and all such judgments or decrees shall not have been
vacated, discharged or stayed or bonded pending appeal within 60 days from the
entry thereof; or
8.10 Ownership. A Change of Control Event shall have occurred; or
---------
8.11 Services Agreements; Class B Common Stock Purchase Agreement; Sole
------------------------------------------------------------------
Stockholder Designation Agreements. The Class B Common Stock Purchase Agreement,
- ----------------------------------
any Services Agreement, any Sole Stockholder Designation Agreement or any
provision thereof shall cease to be in full force and effect or the Borrower,
any Affiliated Business or any other
-48-
<PAGE>
Person party thereto shall default in the due performance or observance of any
material term, covenant or agreement on its part to be performed or observed
pursuant to any such document;
then, and in any such event, and at any time thereafter, if any Event of Default
shall then be continuing, the Agent shall, upon the written request of the
Required Banks, by written notice to the Borrower, take any or all of the
following actions, without prejudice to the rights of the Agent or any Bank to
enforce its claims against any Guarantor or the Borrower, except as otherwise
specifically provided for in this Agreement (provided, that if an Event of
--------
Default specified in Section 8.05 shall occur with respect to the Borrower, the
result which would occur upon the giving of written notice by the Agent as
specified in clauses (i) and (ii) below shall occur automatically without the
giving of any such notice): (i) declare the Total Revolving Loan Commitment (or
the unutilized portion thereof) terminated, whereupon the Revolving Loan
Commitment of each Bank (or the unutilized portion thereof) shall forthwith
terminate immediately and any Commitment Fees shall forthwith become due and
payable without any other notice of any kind; (ii) declare the principal of and
any accrued interest in respect of all Revolving Loans and all Obligations owing
here under to be, whereupon the same shall become, forthwith due and payable
without presentment, demand, protest or other notice of any kind, all of which
are hereby waived by the Borrower; and (iii) enforce, as Collateral Agent (or
direct the Collateral Agent to enforce), any or all of the Liens and security
interests created pursuant to the Security Documents.
SECTION 9. Definitions. As used herein, the following terms shall have
-----------
the meanings herein specified unless the context otherwise requires. Defined
terms in this Agreement shall include in the singular number the plural and in
the plural the singular:
"Additional Security Documents" shall have the meaning provided
in Section 6.12.
"Adjusted Certificate of Deposit Rate" shall mean, on any day, the sum
(rounded to the nearest 1/100 of 1%) of (1) the rate obtained by dividing (x)
the most recent weekly average dealer offering rate for negotiable certificates
of deposit with a three-month maturity in the secondary market as published in
the most recent Federal Reserve System publication entitled "Select Interest
Rates," published weekly on Form H.15 as of the date hereof, or if such
publication or a substitute containing the foregoing rate information shall not
be published by the Federal Reserve System for any week, the weekly average
offering rate determined by the Agent on the basis of quotations for such
certificates received by it from three certificate of deposit dealers in New
York of recognized standing or, if such quotations are unavailable, then on the
basis of other sources reasonably selected by the Agent, by (y) a percentage
equal to 100% minus the stated maximum rate of all reserve requirements as
specified in Regulation D applicable on such day to a three-month certificate of
deposit of a member bank of the Federal Reserve System in excess of $100,000
(including, without limitation, any marginal, emergency, supplemental, special
or other reserves), plus (2) the then daily net annual assessment rate as
estimated by the Agent for determining the current annual assessment payable by
BTCo to the Federal Deposit Insurance Corporation for insuring three month
certificates of deposit.
-49-
<PAGE>
"Affiliate" shall mean, with respect to any Person, any other Person
directly or indirectly controlling (including but not limited to all directors
and officers of such Person), controlled by, or under direct or indirect common
control with such Person. A Person shall be deemed to control another Person if
such Person possesses, directly or indirectly, the power (i) to vote 5% or more
of the securities of such other Person having ordinary voting power or (ii) to
direct or cause the direction of the management and policies of such other
Person, whether through the ownership of voting securities, by contract or
otherwise. Notwithstanding anything to the contrary in this definition, any
Affiliated Business shall be deemed to be an Affiliate for all purposes of this
Agreement.
"Affiliated Business Guarantor" shall mean each Affiliated Business
that is or becomes a party to the Guaranty.
"Affiliated Business Security Agreement" shall have the meaning
provided in Section 4.09(b).
"Affiliated Businesses" shall mean each Person in the business of
providing health care services affiliated with the Borrower (other than a
subsidiary of the Borrower), whether by management agreement or stockholder
transfer or designation or similar agreement or otherwise (e.g., MCP and
---
Flagship).
"Agent" shall have the meaning provided in the first paragraph of this
Agreement and shall include any successor to the Agent appointed pursuant to
Section 10.10.
"Agreement" shall mean this Credit Agreement, as the same may be from
time to time modified, amended and/or supplemented.
"Applicable Base Rate Margin" shall mean 1.50%.
"Applicable Eurodollar Margin" shall mean 2.50%.
"Assignment and Assumption Agreement" shall mean the Assignment and
Assumption Agreement substantially in the form of Exhibit I (appropriately
completed).
"Authorized Officer" shall mean the Chief Executive Officer, the
President, the Chief Financial Officer, the Treasurer, the Controller or the
Secretary or any other senior officer of the Borrower designated as such in
writing to the Agent by the Borrower, in each case to the extent reasonably
acceptable to the Agent.
"Bain Capital" shall mean Bain Capital, Inc. a Delaware corporation.
"Bain Management Agreement" shall mean the Management Agreement, dated
as of August 30, 1996, between the Borrower and Bain Capital Partners V, L.P.,
as the same may be amended, modified or supplemented from time to time pursuant
to the terms hereof and thereof.
"Bank" shall have the meaning provided in the first paragraph of this
Agreement.
-50-
<PAGE>
"Bank Default" shall mean (i) the refusal (which has not been
retracted) of a Bank to make available its portion of any Borrowing or (ii) a
Bank having notified the Agent and/or the Borrower that it does not intend to
comply with the obligations under Section 1.01, in the case of either clause (i)
or (ii) above as a result of the appointment of a receiver or conservator with
respect to such Bank at the direction or request of any regulatory agency or
authority.
"Bankruptcy Code" shall have the meaning provided in Section 8.05.
"Base Rate" at any time shall mean the higher of (x) the rate which is
1/2% in excess of the Adjusted Certificate of Deposit Rate and (y) the Prime
Lending Rate.
"Base Rate Loan" shall mean each Revolving Loan bearing interest at the
rates provided in Section 1.08(a).
"Borrower" shall have the meaning provided in the first paragraph of
this Agreement.
"Borrower Subordinated Note" shall mean a pay-in-kind unsecured junior
subordinated note issued by the Borrower as partial consideration in connection
with a Permitted Acquisition, the terms and conditions of which note (including,
without limitation, amortization, maturity, interest rate, limitations on cash
interest payable, guaranty provisions, security therefor, covenants, defaults,
remedies and subordination provisions) shall be in form and substance
satisfactory to the Agent.
"Borrower/Subsidiary Security Agreement" shall have the meaning
provided in Section 4.09(b).
"Borrowing" shall mean the incurrence of one Type of Revolving Loan by
the Borrower from all of the Banks on a pro rata basis on a given date (or
resulting from conversions on a given date), having in the case of Eurodollar
Loans the same Interest Period; provided, that Base Rate Loans incurred pursuant
--------
to Section 1.10(b) shall be considered part of any related Borrowing of
Eurodollar Loans.
"Borrowing Base" shall mean, as at any date on which the amount is
being determined, an amount equal to 53.9% of the book value of the accounts
receivables of the Affiliated Businesses, it being understood that the foregoing
definition will be modified to include eligibility features satisfactory to the
Agent in accordance with the requirements of Section 6.14.
"Borrowing Base Certificate" shall have the meaning provided in
Section 6.01(j).
"BTCo" shall mean Bankers Trust Company, in its individual capacity,
and any successor corporation thereto by merger, consolidation or otherwise.
"Business Day" shall mean (i) for all purposes other than as covered by
clause (ii) below, any day excluding Saturday, Sunday and any day which shall be
in the City of New York a legal holiday or a day on which banking institutions
are authorized by law or other
-51-
<PAGE>
governmental actions to close and (ii) with respect to all notices and
determinations in connection with, and payments of principal and interest on,
Eurodollar Loans, any day which is a Business Day described in clause (i) and
which is also a day for trading by and between banks in U.S. dollar deposits in
the interbank Eurodollar market.
"Capital Expenditures" shall mean, with respect to any Person, without
duplication, all expenditures by such Person which should be capitalized in
accordance with GAAP, including, without duplication, all such expenditures with
respect to fixed or capital assets (including, without limitation, expenditures
for maintenance and repairs which should be capitalized in accordance with
GAAP), and the amount of all Capitalized Lease Obligations incurred by such
Person.
"Capital Lease," as applied to any Person, shall mean any lease of any
property (whether real, personal or mixed) by that Person as lessee which, in
conformity with GAAP, is accounted for as a capital lease on the balance sheet
of that Person.
"Capitalized Lease Obligations" shall mean all obligations under
Capital Leases of the Borrower or any of its Consolidated Entities in each case
taken at the amount thereof accounted for as liabilities in accordance with
GAAP.
"Cash Equivalents" shall mean (i) securities issued or directly and
fully guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided, that the full faith and credit of the United
--------
States of America is pledged in support thereof) having maturities of not more
than twelve months from the date of acquisition, (ii) U.S. dollar denominated
time deposits, certificates of deposit and bankers acceptances of (x) any Bank
or (y) any bank whose short-term commercial paper rating from Standard & Poor's
Ratings Services, a division of McGraw-Hill, Inc. ("S&P") is at least A-1 or the
equivalent thereof or from Moody's Investors Service, Inc. ("Moody's") is at
least P-1 or the equivalent thereof (any such bank or Bank, an "Approved Bank"),
in each case with maturities of not more than twelve months from the date of
acquisition, (iii) commercial paper issued by any Approved Bank or by the parent
company of any Approved Bank and commercial paper issued by, or guaranteed by,
any industrial or financial company with a short-term commercial paper rating of
at least A-1 or the equivalent thereof by S&P or at least P-1 or the equivalent
thereof by Moody's, or guaranteed by any industrial company with a long term
unsecured debt rating of at least A or A2, or the equivalent of each thereof,
from S&P or Moody's, as the case may be, and in each case maturing within twelve
months after the date of acquisition, (iv) marketable direct obligations issued
by any state of the United States of America or any political subdivision of any
such state or any public instrumentality thereof maturing within twelve months
from the date of acquisition thereof and, at the time of acquisition, having one
of the two highest ratings obtainable from either S&P or Moody's and (v)
investments in money market funds substantially all the assets of which are
comprised of securities of the types described in clauses (i) through (iv)
above.
"Change of Control Event" shall mean and include the occurrence of any
of the following events: (i) Bain Capital and/or its Related Parties shall cease
to own on a fully diluted basis in the aggregate at least 20% of the economic
and voting interest in the Borrower's capital stock, (ii) Bain Capital and/or
its Related Parties shall cease to own at
-52-
<PAGE>
least 30% of the Class B Common Stock of the Borrower or (iii) members of the
Board of Directors of the Borrower designated by Bain Capital and/or its Related
Parties shall for any reason cease to have the special voting rights granted to
such members under the Restated Certificate of Incorporation of the Borrower
with respect to each Class B Director Action or upon the occurrence of any Class
B Director Control Event or with respect to any Restricted Action (as each such
term is defined in the Restated Certificate of Incorporation of the Borrower).
"Class A Common Stock" shall mean the Class A common stock of the
Borrower, $.01 per value per share.
"Class B Common Stock" shall mean and include (i) the Class B-1 common
stock of the Borrower, $.01 par value per share and (ii) the Class B-2 common
stock of the Borrower, $.01 par value per share.
"Class B Common Stock Purchase Agreement" shall mean the Class B Common
Stock and Warrant Purchase Agreement, dated as of August 30, 1996, by and among
the Borrower, Bain Capital Fund V, L.P., Bain Capital Fund V-B, L.P., BCIP
Associates and BCIP Trust Associates, L.P., and amended as of December 11, 1996,
as the same may be further amended, modified or supplemented from time to time
pursuant to the terms hereof and thereof.
"Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time, and the regulations promulgated and rulings issued thereunder.
Section references to the Code are to the Code, as in effect at the date of this
Agreement and any subsequent provisions of the Code amendatory thereof,
supplemental thereto or substituted therefor.
"Collateral" shall mean all of the Collateral as defined in each of
the Security Documents.
"Collateral Agent" shall mean the Agent acting as collateral agent for
the Secured Creditors.
"Collective Bargaining Agreements" shall have the meaning provided in
Section 4.11(b).
"Commitment Fee" shall have the meaning provided in Section 2.01(a).
"Consolidated EBIT" shall mean, for any period, Consolidated Net
Income, before (i) total interest expense (inclusive of amortization of deferred
financing fees, premiums on Interest Rate Protection Agreements and any other
original issue discount) of the Borrower and its Consolidated Entities
determined on a consolidated basis, (ii) any non-cash charges deducted in
determining Consolidated Net Income for such period and related to the issuance
by the Borrower of stock or other equity interests, warrants or options to
management (or any exercise of any such warrants or options), (iii) provisions
for taxes based on income, and (iv) giving effect to any extraordinary gains or
losses but with giving effect to gains or losses from sales of assets sold in
the ordinary course of business.
-53-
<PAGE>
"Consolidated EBITDA" shall mean, for any period, Consolidated EBIT,
adjusted by adding thereto the amount of all depreciation expense and
amortization expense that were deducted in determining Consolidated EBIT for
such period.
"Consolidated Entity" shall mean and include each Affiliated Business
and each Subsidiary of the Borrower.
"Consolidated Net Income" shall mean, for any period, the net income
(or loss), after provision for taxes, of the Borrower and its Consolidated
Entities on a consolidated basis for such period taken as a single accounting
period.
"Contingent Obligations" shall mean as to any Person any obligation of
such Person guaranteeing or intended to guarantee any Indebtedness, leases,
dividends or other obligations ("primary obligations") of any other Person (the
"primary obligor") in any manner, whether directly or indirectly, including,
without limitation, any obligation of such Person, whether or not contingent,
(a) to purchase any such primary obligation or any property constituting direct
or indirect security therefor, (b) to advance or supply funds (x) for the
purchase or payment of any such primary obligation or (y) to maintain working
capital or equity capital of the primary obligor or otherwise to maintain the
net worth or solvency of the primary obligor, (c) to purchase property,
securities or services primarily for the purpose of assuring the owner of any
such primary obligation of the ability of the primary obligor to make payment of
such primary obligation or (d) otherwise to assure or hold harmless the owner of
such primary obligation against loss in respect thereof; provided, however, that
-------- -------
the term Contingent Obligation shall not include endorsements of instruments for
deposit or collection or standard contractual indemnities entered into, in each
case in the ordinary course of business. The amount of any Contingent Obligation
shall be deemed to be an amount equal to the stated or determinable amount of
the primary obligation in respect of which such Contingent Obligation is made
or, if not stated or determinable, the maximum reasonably anticipated liability
in respect thereof (assuming such Person is required to perform thereunder) as
determined by such Person in good faith.
"Credit Documents" shall mean this Agreement, the Revolving Notes, the
Guaranty and each Security Document.
"Credit Party" shall mean the Borrower, each Subsidiary Guarantor and
each Affiliated Business Guarantor.
"Default" shall mean any event, act or condition which with notice or
lapse of time, or both, would constitute an Event of Default.
"Defaulting Bank" shall mean any Bank with respect to which a Bank
Default is in effect.
"Dividends" shall have the meaning provided in Section 7.06.
"Documents" shall mean the Credit Documents, the Services Agreements,
the Class B Common Stock Purchase Agreement and the Sole Stockholder Designation
Agreements.
-54-
<PAGE>
"Effective Date" shall have the meaning provided in Section 11.10.
"Eligible Transferee" shall mean and include a commercial bank,
investment company, financial institution or other "accredited investor" (as
defined in Regulation D of the Securities Act).
"Employment Agreements" shall have the meaning provided in
Section 4.11(f).
"Environmental Claims" shall mean any and all administrative,
regulatory or judicial actions, suits, demands, demand letters, claims, liens,
notices of non-compliance or violation, investigations or proceedings relating
in any way to any violation (or alleged violation) by the Borrower or any of its
Consolidated Entities under any Environmental Law (hereafter "Claims") or any
permit issued under any such law, including, without limitation, (a) any and all
Claims by governmental or regulatory authorities for enforcement, cleanup,
removal, response, remedial or other actions or damages pursuant to any
applicable Environmental Law, and (b) any and all Claims by any third party
seeking damages, contribution, indemnification, cost recovery, compensation or
injunctive relief resulting from Hazardous Materials or arising from alleged
injury or threat of injury to health, safety or the environment.
"Environmental Law" shall mean any federal, state or local statute,
law, rule, regulation, ordinance, code, policy or rule of common law now or
hereafter in effect and in each case as amended, and any judicial or
administrative interpretation thereof, including any judicial or administrative
order, consent, decree or judgment (for purposes of this definition
(collectively, "Laws")), relating to the environment or Hazardous Materials or
health and safety to the extent health and safety issues arise under the
Occupational Safety and Health Act of 1970, as amended, or any such similar
Laws.
"Equity Incentive Plan" shall mean the 1995 Equity Incentive Plan of
the Borrower adopted by the Board of Directors of the Borrower on June 21, 1995
and the stockholders of the Borrower on June 30, 1995, as same may be amended,
modified or supplemented from time to time pursuant to the terms hereof and
thereof.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended from time to time, and the regulations promulgated and the rulings
issued thereunder. Section references to ERISA are to ERISA as in effect at the
date of this Agreement and any subsequent provisions of ERISA amendatory
thereof, supplemental thereto or substituted therefor.
"ERISA Affiliate" shall mean each person (as defined in Section 3(9) of
ERISA) which together with the Borrower or any Consolidated Entity would be
deemed to be a "single employer" within the meaning of Section 414(b), (c), (m)
or (o) of the Code.
"Eurodollar Loans" shall mean each Loan bearing interest at the rates
provided in Section 1.08(b).
-55-
<PAGE>
"Eurodollar Rate" shall mean, with respect to each Interest Period for
a Eurodollar Loan, (i) the arithmetic average (rounded to the nearest 1/100 of
1%) of the offered quotation to first-class banks in the interbank Eurodollar
market by the Agent for U.S. dollar deposits of amounts in same day funds
comparable to the outstanding principal amount of the Eurodollar Loan of the
Agent for which an interest rate is then being determined with maturities
comparable to the Interest Period to be applicable to such Eurodollar Loan,
determined as of 10:00 A.M. (New York time) on the date which is two Business
Days prior to the commencement of such Interest Period divided (and rounded
upward to the next whole multiple of 1/16 of 1%) by (ii) a percentage equal to
100% minus the then stated maximum rate of all reserve requirements (including,
without limitation, any marginal, emergency, supplemental, special or other
reserves) applicable to any member bank of the Federal Reserve System in respect
of Eurocurrency liabilities as defined in Regulation D (or any successor
category of liabilities under Regulation D).
"Event of Default" shall have the meaning provided in Section 8.
"Existing Indebtedness" shall have the meaning provided in
Section 5.22.
"Existing Indebtedness Agreements" shall have the meaning provided
in Section 4.11(c).
"Fee Letter" shall mean the Fee Letter, dated as of January 16, 1997,
between the Borrower and BTCo.
"Fees" shall mean all amounts payable pursuant to, or referred
to in, Section 2.01.
"Final Maturity Date" shall mean January 16, 1998.
"Flagship" shall mean Flagship Health, P.A., a Maryland
professional association.
"Flagship Services Agreement" shall mean the Services Agreement, dated
as of December 11, 1996, between the Borrower and Flagship, as the same may be
amended, modified or supplemented from time to time pursuant to the terms hereof
and thereof.
"GAAP" shall mean generally accepted accounting principles in the
United States of America as in effect from time to time; it being understood and
agreed that determinations in accordance with GAAP for purposes of Section 7,
including defined terms as used therein, are subject (to the extent provided
therein) to Section 11.07(a).
"Guarantor" shall mean each Subsidiary Guarantor and each Affiliated
Business Guarantor.
"Guaranty" shall have the meaning provided in Section 4.10.
"Hazardous Materials" shall mean (a) any petrochemical or petroleum
products, radioactive materials, asbestos in any form that is or could become
friable, urea formaldehyde foam insulation, transformers or other equipment that
contain dielectric fluid
-56-
<PAGE>
containing levels of polychlorinated biphenyls, and radon gas; and (b) any
chemicals, materials or substances defined as or included in the definition of
"hazardous substances," "hazardous wastes," "hazardous materials," "restricted
hazardous materials," "extremely hazardous wastes," "restrictive hazardous
wastes," "toxic substances," "toxic pollutants," "contaminants" or "pollutants,"
or words of similar meaning and regulatory effect.
"Indebtedness" of any Person shall mean without duplication (i) all
indebtedness of such Person for borrowed money, (ii) the deferred purchase price
of assets or services payable to the sellers thereof or any of such seller's
assignees which in accordance with GAAP would be shown on the liability side of
the balance sheet of such Person but excluding deferred rent as determined in
accordance with GAAP, (iii) the face amount of all letters of credit issued for
the account of such Person and, without duplication, all drafts drawn
thereunder, (iv) all Indebtedness of a second Person secured by any Lien on any
property owned by such first Person, whether or not such Indebtedness has been
assumed, (v) all Capitalized Lease Obligations of such Person, (vi) all
obligations of such Person to pay a specified purchase price for goods or
services whether or not delivered or accepted, i.e., take-or-pay and similar
obligations, (vii) all obligations under Interest Rate Protection Agreements and
Other Hedging Agreements and (viii) all Contingent Obligations of such Person,
provided, that Indebtedness shall not include trade payables and accrued
expenses, in each case arising in the ordinary course of business.
"Initial Borrowing Date" shall mean the date upon which the initial
Borrowing of Revolving Loans occurs hereunder.
"Intercompany Loan" shall have the meaning provided in Section 7.05(d).
"Intercompany Notes" shall mean promissory notes, in the form of
Exhibit J, evidencing Intercompany Loans.
"Interest Period," with respect to any Eurodollar Loan, shall mean the
interest period applicable thereto, as determined pursuant to Section 1.09.
"Interest Rate Protection Agreement" shall mean any interest rate swap
agreement, interest rate cap agreement, interest rate collar agreement, interest
rate hedging agreement or other similar agreement or arrangement.
"Leasehold" of any Person shall mean all of the right, title and
interest of such Person as lessee or licensee in, to and under leases or
licenses of land, improvements and/or fixtures.
"Lien" shall mean any mortgage, pledge, security interest, encumbrance,
lien or charge of any kind (including any agreement to give any of the
foregoing, any conditional sale or other title retention agreement, any
financing or similar statement or notice filed under the UCC or any similar
recording or notice statute, and any lease having substantially the same effect
as the foregoing).
"Management Agreements" shall have the meaning provided in
Section 4.11(e).
-57-
<PAGE>
"Margin Stock" shall have the meaning provided in Regulation U.
"Material Adverse Effect" shall mean a material adverse effect on the
business, properties, assets, liabilities, condition (financial or otherwise) or
prospects of the Borrower or the Borrower and its Consolidated Entities taken as
a whole.
"Material Contracts" shall have the meaning provided in
Section 4.11(h).
"MCP" shall mean Medical Care Partners, P.C., a Massachusetts
professional corporation.
"MCP Services Agreement" shall mean the Services Agreement, dated as of
August 30, 1996, between the Borrower and MCP, as the same may be amended,
modified or supplemented from time to time pursuant to the terms hereof and
thereof.
"Minimum Borrowing Amount" shall mean (i) for Base Rate Loans $25,000
and (ii) for Eurodollar Loans, $250,000.
"NAIC" shall have the meaning provided in Section 1.10(c).
"Non-Defaulting Bank" shall mean each Bank other than a Defaulting
Bank.
"Notice of Borrowing" shall have the meaning provided in Section 1.03.
"Notice of Conversion" shall have the meaning provided in Section 1.06.
"Notice Office" shall mean the office of the Agent located at One
Bankers Trust Plaza, New York, New York 10006 or such other office as the Agent
may designate to the Borrower and the Banks from time to time.
"Obligations" shall mean all amounts, direct or indirect, contingent or
absolute, of every type or description, and at any time existing, owing to the
Agent, the Collateral Agent or any Bank pursuant to the terms of this Agreement
or any other Credit Document.
"Other Hedging Agreements" shall mean any foreign exchange contracts,
currency swap agreements or other similar agreements or arrangements designed to
protect against fluctuations in currency values.
"Payment Office" shall mean the office of the Agent located at One
Bankers Trust Plaza, New York, New York 10006 or such other office as the Agent
may designate to the Borrower and the Banks from time to time.
"PBGC" shall mean the Pension Benefit Guaranty Corporation established
pursuant to Section 4002 of ERISA, or any successor thereto.
-58-
<PAGE>
"Percentage" shall mean at any time for each Bank, the percentage
obtained by dividing such Bank's Revolving Loan Commitment by the Total
Revolving Loan Commitment; provided, that if the Total Revolving Loan Commitment
--------
has been terminated, the Percentage of each Bank shall be determined by dividing
such Bank's Revolving Loan Commitment immediately prior to such termination by
the Total Revolving Loan Commitment immediately prior to such termination.
"Permits" shall have the meaning provided in Section 5.17(b).
"Permitted Acquisition" shall have the meaning provided such term in
Section 7.02(h).
"Permitted Liens" shall have the meaning provided in Section 7.03.
"Person" shall mean any individual, partnership, joint venture, firm,
corporation, limited liability company, association, trust or other enterprise
or any government or political subdivision or any agency, department or
instrumentality thereof.
"Plan" shall mean any multiemployer or single-employer plan as defined
in Section 4001 of ERISA, which is maintained or contributed to by (or to which
there is an obligation to contribute of) the Borrower, any of its Consolidated
Entities or any ERISA Affiliate and each such plan for the five calendar year
period immediately following the latest date on which the Borrower, any of its
Subsidiaries or any ERISA Affiliate maintained, contributed to or had an
obligation to contribute to such plan.
"Pledge Agreement" shall have the meaning provided in Section 4.09(a).
"Pledged Securities" shall mean all the Pledged Securities as defined
in the Pledge Agreement.
"Practice Group" shall mean each physician practice group acquired by
or affiliated with any Affiliated Business.
"Prime Lending Rate" shall mean the rate which BTCo announces from time
to time as its prime lending rate, the Prime Lending Rate to change when and as
such prime lending rate changes. The Prime Lending Rate is a reference rate and
does not necessarily represent the lowest or best rate actually charged to any
customer. BTCo may make commercial loans or other loans at rates of interest at,
above or below the Prime Lending Rate.
"Projections" shall have the meaning provided in Section 4.14.
"Quarterly Payment Date" shall mean the last Business Day of each
March, June, September and December commencing the last Business Day of March
1997.
"Real Property" of any Person shall mean all of the right, title and
interest of such Person in and to land, improvements and fixtures, including
Leaseholds.
"Register" shall have the meaning provided in Section 6.13.
-59-
<PAGE>
"Regulation D" shall mean Regulation D of the Board of Governors of the
Federal Reserve System as from time to time in effect and any successor to all
or a portion thereof establishing reserve requirements.
"Regulation U" shall mean Regulation U of the Board of Governors of the
Federal Reserve System as from time to time in effect and any successor to all
or a portion thereof establishing margin requirements.
"Related Party" shall mean any Affiliate of Bain Capital on the
Effective Date, provided that for purposes of the definition of "Change of
--------
Control Event," the term Related Party shall not include (x) any portfolio
company of (i) Bain Capital or (ii) any Affiliate of Bain Capital or (y) any
officer or director of the Borrower or any of its Consolidated Entities if not
also a partner or stockholder of Bain Capital on the Effective Date.
"Release" means disposing, discharging, injecting, spilling, pumping,
leaking, leaching, dumping, emitting, escaping, emptying, seeping, placing,
pouring and the like, into or upon any land or water or air, or otherwise
entering into the environment.
"Replaced Bank" shall have the meaning provided in Section 1.13.
"Replacement Bank" shall have the meaning provided in Section 1.13.
"Reportable Event" shall mean an event described in Section 4043(c) of
ERISA with respect to a Plan other than those events as to which the 30-day
notice period is waived under subsection .13, .14, .16, .18, .19 or .20 of PBGC
Regulation Section 2615.
"Required Banks" shall mean Non-Defaulting Banks the sum of whose
Revolving Loan Commitments (or, if after the Total Revolving Loan Commitment has
been terminated, outstanding Revolving Loans) constitute greater than 50% of the
Total Revolving Loan Commitment less the aggregate Revolving Loan Commitments of
Defaulting Banks (or, if after the Total Revolving Loan Commitment has been
terminated, the total outstanding Revolving Loans of Non-Defaulting Banks).
"Returns" shall have the meaning provided in Section 5.21.
"Revolving Loan" shall have the meaning provided in Section 1.01.
"Revolving Loan Commitment" shall mean, with respect to each Bank, the
amount set forth opposite such Bank's name in Annex I directly below the column
entitled "Revolving Loan Commitment," as the same may be reduced from time to
time pursuant to Sections 2.02, 2.03, 3.01(b) and/or 8 or otherwise modified
pursuant to Sections 1.13 and/or 11.04(b).
"Revolving Loan Facility" shall mean the facility evidenced by the
Total Revolving Loan Commitment.
"Revolving Note" shall have the meaning provided in Section 1.05(a).
-60-
<PAGE>
"SEC" shall mean the Securities and Exchange Commission or any
successor thereto.
"Section 3.04(b)(ii) Certificate" shall have the meaning provided in
Section 3.04(b)(ii).
"Secured Creditors" shall have the meaning provided in the respective
Security Documents.
"Security Agreements" shall have the meaning provided in Section
4.09(b).
"Security Agreement Collateral" shall mean all "Collateral" as defined
in the respective Security Agreement.
"Security Documents" shall mean and include the Security Agreements,
the Pledge Agreement, each Additional Security Document, if any and each other
document or instrument entered into pursuant to Sections 4.09, 6.11 and 6.12, if
any, in each case as and when executed and delivered in accordance with the
terms of this Agreement and as the same may be amended, modified or supplemented
from time to time in accordance with the terms thereof and hereof.
"Senior Officer" shall mean the Chief Executive Officer, President,
Chief Financial Officer, Treasurer, Controller or Secretary or any other senior
officer of the Borrower or any of its Subsidiaries with knowledge of, or
responsibility for, the financial affairs of such Person.
"Services Agreements" shall mean and include the Flagstaff Services
Agreement, the MCP Services Agreement and any other management service agreement
entered into between the Borrower and an Affiliated Business in connection with
any Permitted Acquisition.
"Shareholders' Agreements" shall have the meaning set forth in Section
4.12(d).
"Shareholder Subordinated Note" shall mean an unsecured junior
subordinated note issued by the Borrower (and not guaranteed or supported in any
way by the Borrower or any of its Consolidated Entities) in form and substance
satisfactory to the Agent and the Required Banks.
"Short-Term Seller Note" shall mean a short-term note maturing not less
than 30 days after the issuance thereof issued by the Borrower as partial
consideration in connection with a Permitted Acquisition, the terms and
conditions of which note (including, without limitation, amortization, maturity,
interest rate, limitations on cash interest payable, security therefor,
covenants, defaults and remedies) shall be in form and substance satisfactory to
the Agent.
"Sole Stockholder Designation Agreements" shall mean and include (i)
the Shareholder Designation and Stock Transfer Agreement, dated as of November
30, 1996, among the Borrower, Flagship and Laura Mumford, M.D., (ii) the
Shareholder Designation and Stock Transfer Agreement, dated as of August 9,
1996, among the Borrower, MCP and Jay Unger, M.D. and (iii) any other
stockholder transfer or designation agreement entered into between the Borrower
and the sole stockholder of an Affiliated Business in connection
-61-
<PAGE>
with a Permitted Acquisition, in each case as the same may be amended, modified
or supplemented from time to time pursuant to the terms hereof and thereof.
"Stockholders' Agreement" shall mean the Stockholders' Agreement, dated
as of August 30, 1996 among the Borrower, Bain Capital Fund, L.P., Bain Capital
Fund V-B, L.P., BCIP Associates, BCIP Trust Associates, L.P. and various other
management and physician stockholders from time to time party thereto, as the
same may be amended, modified or supplemented from time to time pursuant to the
terms hereof and thereof.
"Subsidiary" of any Person shall mean and include (i) any corporation
more than 50% of whose stock of any class or classes having by the terms thereof
ordinary voting power to elect a majority of the directors of such corporation
(irrespective of whether or not at the time stock of any class or classes of
such corporation shall have or might have voting power by reason of the
happening of any contingency) is at the time owned by such Person directly or
indirectly through Subsidiaries and (ii) any partnership, association, limited
liability company, joint venture or other entity in which such Person directly
or indirectly through Subsidiaries, has more than a 50% equity interest at the
time.
"Subsidiary Guarantor" shall mean each Wholly-Owned Subsidiary of the
Borrower that is or becomes a party to the Guaranty.
"Tax Allocation Agreements" shall have the meaning provided in Section
4.11(g).
"Taxes" shall have the meaning provided in Section 3.04.
"Test Period" shall mean, at the time of any determination thereof, (i)
the fiscal quarter of the Borrower ended March 31, 1997 (taken as one accounting
period), (ii) the two consecutive fiscal quarters of the Borrower ended June 30,
1997 (taken as one accounting period), (iii) the three consecutive fiscal
quarters of the Borrower ended September 30, 1997 (taken as one accounting
period) and (iv) the four consecutive fiscal quarters of the Borrower ended
December 31, 1997 (taken as one accounting period).
"Total Revolving Loan Commitment" shall mean the sum of the Revolving
Loan Commitments of each of the Banks.
"Total Unutilized Revolving Loan Commitment" shall mean, at any time,
(i) the Total Revolving Loan Commitment at such time less (ii) the aggregate
principal amount of all Revolving Loans outstanding at such time.
"Transaction" shall mean, collectively, (i) the incurrence of Revolving
Loans hereunder on the Initial Borrowing Date, (ii) the execution and delivery
of this Agreement and the other Credit Documents by the Credit Parties and (iii)
the payment of fees and expenses in connection with the foregoing.
"Type" shall mean any type of Revolving Loan determined with respect to
the interest option applicable thereto, i.e., a Base Rate Loan or a Eurodollar
Loan.
-62-
<PAGE>
"UCC" shall mean the Uniform Commercial Code as in effect from time to
time in the relevant jurisdiction.
"Unfunded Current Liability" of any Plan shall mean the amount, if any,
by which the actuarial present value of the accumulated plan benefits under the
Plan as of the close of its most recent plan year exceeds the fair market value
of the assets allocable thereto, each determined in accordance with Statement of
Financial Accounting Standards No. 35, based upon the actuarial assumptions used
by the Plan's actuary in the most recent annual valuation of the Plan.
"Unutilized Revolving Loan Commitment" with respect to any Bank at any
time shall mean the remainder of such Bank's Revolving Loan Commitment at such
time less the aggregate outstanding principal amount of all Revolving Loans made
by such Bank at such time.
"U.S. Dollars" and the sign "$" shall each mean freely transferable
lawful money of the United States of America.
"Wholly-Owned Subsidiary" shall mean, as to any Person, (i) any
corporation 100% of whose capital stock (other than director's qualifying shares
and/or other nominal amounts of shares required to be held other than by such
Person under applicable law) is at the time owned by such Person and/or one or
more Wholly-Owned Subsidiaries of such Person and (ii) any partnership,
association, limited liability company, joint venture or other entity in which
such Person and/or one or more Wholly-Owned Subsidiaries of such Person has a
100% equity interest at such time.
"Written," "written" or "in writing" shall mean any form of written
communication or a communication by means of telex, facsimile device, telegraph
or cable.
SECTION 10. The Agent.
----------
10.01 Appointment. Each Bank hereby irrevocably designates and appoints
-----------
BTCo as Agent of such Bank (such term to include for purposes of this Section
10, BTCo acting as Collateral Agent) to act as specified herein and in the other
Credit Documents, and each such Bank hereby irrevocably authorizes BTCo as the
Agent to take such action on its behalf under the provisions of this Agreement
and the other Credit Documents and to exercise such powers and perform such
duties as are expressly delegated to the Agent by the terms of this Agreement
and the other Credit Documents, together with such other powers as are
reasonably incidental thereto. The Agent agrees to act as such upon the express
conditions contained in this Section 10. Notwithstanding any provision to the
contrary elsewhere in this Agreement or in any other Credit Document, the Agent
shall not have any duties or responsibilities, except those expressly set forth
herein or in the other Credit Documents, or any fiduciary relationship with any
Bank, and no implied covenants, functions, responsibilities, duties, obligations
or liabilities shall be read into this Agreement or otherwise exist against the
Agent. The provisions of this Section 10 are solely for the benefit of the Agent
and the Banks, and neither the Borrower nor any of its Consolidated Entities
shall have any rights as a third party beneficiary of any of the provisions
hereof. In performing its
-63-
<PAGE>
functions and duties under this Agreement, the Agent shall act solely as agent
of the Banks and the Agent does not assume and shall not be deemed to have
assumed any obligation or relationship of agency or trust with or for the
Borrower or any of its Consolidated Entities.
10.02 Delegation of Duties. The Agent may execute any of its duties
--------------------
under this Agreement or any other Credit Document by or through agents or
attorneys-in-fact and shall be entitled to advice of counsel concerning all
matters pertaining to such duties. The Agent shall not be responsible for the
negligence or misconduct of any agents or attorneys-in-fact selected by it with
reasonable care except to the extent otherwise required by Section 10.03.
10.03 Exculpatory Provisions. Neither the Agent nor any of its
----------------------
officers, directors, employees, agents, attorneys-in-fact or affiliates shall be
(i) liable for any action lawfully taken or omitted to be taken by it or such
Person in its capacity as Agent under or in connection with this Agreement or
the other Credit Documents (except for its or such Person's own gross negligence
or willful misconduct) or (ii) responsible in any manner to any of the Banks for
any recitals, statements, representations or warranties made by the Borrower,
any of its Consolidated Entities or any of their respective officers contained
in this Agreement or the other Credit Documents, any other Document or in any
certificate, report, statement or other document referred to or provided for in,
or received by the Agent under or in connection with, this Agreement or any
other Document or for any failure of the Borrower or any of its Consolidated
Entities or any of their respective officers to perform its obligations
hereunder or thereunder. The Agent shall not be under any obligation to any Bank
to ascertain or to inquire as to the observance or performance of any of the
agreements contained in, or conditions of, this Agreement or the other
Documents, or to inspect the properties, books or records of the Borrower or any
of its Consolidated Entities. The Agent shall not be responsible to any Bank for
the effectiveness, genuineness, validity, enforceability, collectability or
sufficiency of this Agreement or any other Document or for any representations,
warranties, recitals or statements made herein or therein or made in any written
or oral statement or in any financial or other statements, instruments, reports,
certificates or any other documents in connection herewith or therewith
furnished or made by the Agent to the Banks or by or on behalf of the Borrower
or any of its Consolidated Entities to the Agent or any Bank or be required to
ascertain or inquire as to the performance or observance of any of the terms,
conditions, provisions, covenants or agreements contained herein or therein or
as to the use of the proceeds of the Revolving Loans or of the existence or
possible existence of any Default or Event of Default.
10.04 Reliance by Agent. The Agent shall be entitled to rely, and shall
-----------------
be fully protected in relying, upon any note, writing, resolution, notice,
consent, certificate, affidavit, letter, cablegram, telegram, facsimile, telex
or teletype message, statement, order or other document or conversation believed
by it to be genuine and correct and to have been signed, sent or made by the
proper Person or Persons and upon advice and statements of legal counsel
(including, without limitation, counsel to the Borrower or any of its
Subsidiaries), independent accountants and other experts selected by the Agent.
The Agent shall be fully justified in failing or refusing to take any action
under this Agreement or any other Credit Document unless it shall first receive
such advice or concurrence of the Required Banks as it deems appropriate or it
shall first be indemnified to its satisfaction by the Banks against any and all
liability and expense which may be incurred by it by reason of taking or
continuing
-64-
<PAGE>
to take any such action. The Agent shall in all cases be fully protected in
acting, or in refraining from acting, under this Agreement and the other Credit
Documents in accordance with a request of the Required Banks (or all of the
Banks, to the extent required by this Agreement), and such request and any
action taken or failure to act pursuant thereto shall be binding upon all the
Banks.
10.05 Notice of Default. The Agent shall not be deemed to have
-----------------
knowledge or notice of the occurrence of any Default or Event of Default
hereunder unless the Agent has actually received notice from a Bank or the
Borrower referring to this Agreement, describing such Default or Event of
Default and stating that such notice is a "notice of default." In the event that
the Agent receives such a notice, the Agent shall give prompt notice thereof to
the Banks. The Agent shall take such action with respect to such Default or
Event of Default as shall be reasonably directed by the Required Banks;
provided, that, unless and until the Agent shall have received such directions,
- --------
the Agent may (but shall not be obligated to) take such action, or refrain from
taking such action, with respect to such Default or Event of Default as it shall
deem advisable in the best interests of the Banks.
10.06 Non-Reliance on Agent and Other Banks. Each Bank expressly
-------------------------------------
acknowledges that neither the Agent nor any of its respective officers,
directors, employees, agents, attorneys-in-fact or affiliates have made any
representations or warranties to it and that no act by the Agent hereinafter
taken, including any review of the affairs of the Borrower or any of its
Consolidated Entities, shall be deemed to constitute any representation or
warranty by the Agent to any Bank. Each Bank represents to the Agent that it
has, independently and without reliance upon the Agent or any other Bank, and
based on such documents and information as it has deemed appropriate, made its
own appraisal of and investigation into the business, assets, operations,
property, financial and other condition, prospects and creditworthiness of the
Borrower and its Consolidated Entities and made its own decision to make its
Revolving Loans hereunder and enter into this Agreement. Each Bank also
represents that it will, independently and without reliance upon the Agent or
any other Bank, and based on such documents and information as it shall deem
appropriate at the time, continue to make its own credit analysis, appraisals
and decisions in taking or not taking action under this Agreement, and to make
such investigation as it deems necessary to inform itself as to the business,
assets, operations, property, financial and other condition, prospects and
creditworthiness of the Borrower and its Consolidated Entities. The Agent shall
not have any duty or responsibility to provide any Bank with any credit or other
information concerning the business, operations, assets, property, financial and
other condition, prospects or creditworthiness of the Borrower or any of its
Consolidated Entities which may come into the possession of the Agent or any of
its officers, directors, employees, agents, attorneys-in-fact or affiliates.
10.07 Indemnification. The Banks agree to indemnify the Agent in its
---------------
capacity as such ratably according to their respective "percentages" as used in
determining the Required Banks at such time or, if the Total Revolving Loan
Commitment has terminated and all Revolving Loans have been repaid in full, as
determined immediately prior to such termination and repayment (with such
"percentages" to be determined as if there are no Defaulting Banks), from and
against any and all liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, reasonable expenses or disbursements of any
kind
-65-
<PAGE>
whatsoever which may at any time (including, without limitation, at any time
following the payment of the Obligations) be imposed on, incurred by or asserted
against the Agent in its capacity as such in any way relating to or arising out
of this Agreement or any other Credit Document, or any documents contemplated by
or referred to herein or the transactions contemplated hereby or any action
taken or omitted to be taken by the Agent under or in connection with any of the
foregoing, but only to the extent that any of the fore- going is not paid by the
Borrower or any of its Consolidated Entities; provided, that no Bank shall be
--------
liable to the Agent for the payment of any portion of such liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses or disbursements resulting primarily from the gross negligence or
willful misconduct of the Agent. If any indemnity furnished to the Agent for any
purpose shall, in the opinion of the Agent be insufficient or become impaired
(other than as a result of the gross negligence or willful misconduct of the
Agent), the Agent may call for additional indemnity and cease, or not commence,
to do the acts indemnified against until such additional indemnity is furnished.
The agreements in this Section 10.07 shall survive the payment of all
Obligations.
10.08 Agent in its Individual Capacity. The Agent and its affiliates
--------------------------------
may make loans to, accept deposits from and generally engage in any kind of
business with the Borrower and its Subsidiaries as though the Agent were not the
Agent hereunder. With respect to the Revolving Loans made by it and all
Obligations owing to it, the Agent shall have the same rights and powers under
this Agreement as any Bank and may exercise the same as though it were not the
Agent and the terms "Bank" and "Banks" shall include the Agent in its individual
capacity. The Agent and/or its affiliates may own stock of the Borrower or any
Subsidiary of the Borrower and may accept deposits from, lend money to, and
generally engage in any kind of banking, trust or other business with the
Borrower or any Affiliate of the Borrower as if it were not performing the
duties specified herein, and may accept fees and other consideration from any
Credit Party for services in connection with this Agreement and otherwise
without having to account for the same to the Banks.
10.09 Holders. The Agent may deem and treat the payee of any Note as
-------
the owner thereof for all purposes hereof unless and until a written notice of
the assignment, transfer or endorsement thereof, as the case may be, shall have
been filed with the Agent. Any request, authority or consent of any Person or
entity who, at the time of making such request or giving such authority or
consent, is the holder of any Revolving Note shall be conclusive and binding on
any subsequent holder, transferee, assignee or indorsee, as the case may be, of
such Revolving Note or of any Revolving Note or Revolving Notes issued in
exchange therefor.
10.10 Resignation of the Agent; Successor Agent. The Agent may resign
-----------------------------------------
as the Agent upon 20 days' notice to the Banks and, unless a Default of the type
referred to in Section 8.05 has occurred and is continuing, to the Borrower.
Upon the resignation of the Agent, the Required Banks shall appoint from among
the Banks a successor Agent which is a bank or a trust company for the Banks
subject, to the extent that no payment Default or Event of Default has occurred
and is then continuing, to prior approval by the Borrower (such approval not to
be unreasonably withheld or delayed), whereupon such successor agent shall
succeed to the rights, powers and duties of the Agent, and the term "Agent"
shall include such successor agent effective upon its appointment, and the
resigning Agent's rights,
-66-
<PAGE>
powers and duties as the Agent shall be terminated, without any other or further
act or deed on the part of such former Agent or any of the parties to this
Agreement. If a successor Agent shall not have been so appointed within such 20
day period after the date such notice of resignation was given by the Agent, the
Agent's resignation shall become effective and the Banks shall thereafter
perform all duties of the Agent hereunder and/or under any other Credit
Documents until such time, if any, as the Required Banks appoint a successor
Agent as provided above. After the resignation of the Agent hereunder, the
provisions of this Section 10 shall inure to its benefit as to any actions taken
or omitted to be taken by it while it was Agent under this Agreement.
SECTION 11. Miscellaneous.
--------------
11.01 Payment of Expenses, etc. The Borrower hereby agrees to: (i)
------------------------
whether or not the transactions herein contemplated are consummated, pay all
reasonable out-of-pocket costs and expenses of the Agent (including, without
limitation, the reasonable fees and disbursements of White & Case) in connection
with the negotiation, preparation, execution and delivery of the Credit
Documents and the documents and instruments referred to therein and any
amendment, waiver or consent relating thereto and in connection with the Agent's
syndication efforts with respect to this Agreement; (ii) pay all reasonable
out-of-pocket costs and expenses of the Agent and each of the Banks in
connection with the enforcement of the Credit Documents and the documents and
instruments referred to therein and, after an Event of Default shall have
occurred and be continuing, the protection of the rights of the Agent and each
of the Banks thereunder (including, without limitation, the reasonable fees and
disbursements of counsel (including in-house counsel) for the Agent and for each
of the Banks); (iii) pay and hold each of the Banks harmless from and against
any and all present and future stamp and other similar taxes with respect to the
foregoing matters and save each of the Banks harmless from and against any and
all liabilities with respect to or resulting from any delay or omission (other
than to the extent attributable to such Bank) to pay such taxes; and (iv)
indemnify the Agent, the Collateral Agent and each Bank, its officers,
directors, trustees, employees, representatives and agents from and hold each of
them harmless against any and all losses, liabilities, claims, damages or
expenses incurred by any of them as a result of, or arising out of, or in any
way related to, or by reason of, (a) any investigation, litigation or other
proceeding (whether or not the Agent, the Collateral Agent or any Bank is a
party thereto and whether or not any such investigation, litigation or other
proceeding is between or among the Agent, the Collateral Agent, any Bank, any
Credit Party or any third Person or otherwise) related to the entering into
and/or performance of this Agreement or any other Document or the use of the
proceeds of any Revolving Loans hereunder or the Transaction or the consummation
of any other transactions contemplated in any Document (but excluding any such
losses, liabilities, claims, damages or expenses to the extent incurred by
reason of the gross negligence or willful misconduct of the Person to be
indemnified), or (b) the actual or alleged presence of Hazardous Materials in
the air, surface water or groundwater or on the surface or subsurface of any
Real Property or any Environmental Claim, in each case, including, without
limitation, the reasonable fees and disbursements of counsel and independent
consultants incurred in connection with any such investigation, litigation or
other proceeding.
-67-
<PAGE>
11.02 Right of Setoff. In addition to any rights now or hereafter
---------------
granted under applicable law or otherwise, and not by way of limitation of any
such rights, upon the occurrence and during the continuance of an Event of
Default, each Bank is hereby authorized at any time or from time to time,
without presentment, demand, protest or other notice of any kind to the Borrower
or any of its Subsidiaries or to any other Person, any such notice being hereby
expressly waived, to set off and to appropriate and apply any and all deposits
(general or special) and any other Indebtedness at any time held or owing by
such Bank (including, without limitation, by branches and agencies of such Bank
wherever located) to or for the credit or the account of the Borrower or any of
its Subsidiaries against and on account of the Obligations of the Borrower or
any of its Subsidiaries to such Bank under this Agreement or under any of the
other Credit Documents, including, without limitation, all interests in
Obligations of the Borrower or any of its Subsidiaries purchased by such Bank
pursuant to Section 11.06(b), and all other claims of any nature or description
arising out of or connected with this Agreement or any other Credit Document,
irrespective of whether or not such Bank shall have made any demand hereunder
and although said Obligations shall be contingent or unmatured.
11.03 Notices. Except as otherwise expressly provided herein, all
-------
notices and other communications provided for hereunder shall be in writing
(including telegraphic, telex, facsimile or cable communication) and mailed,
telegraphed, telexed, telecopied, cabled or delivered, if to any Credit Party,
at the address specified opposite its signature below or in the other relevant
Credit Documents, as the case may be; if to any Bank, at its address specified
for such Bank on Annex II; or, at such other address as shall be designated by
any party in a written notice to the other parties hereto. All such notices and
communications shall be mailed, telegraphed, telexed, telecopied or cabled or
sent by overnight courier, and shall be effective when received.
11.04 Benefit of Agreement. (a) This Agreement shall be binding upon
--------------------
and inure to the benefit of and be enforceable by the respective successors and
assigns of the parties hereto; provided, however, no Credit Party may assign or
-------- -------
transfer any of its rights, obligations or interest hereunder or under any other
Credit Document without the prior written consent of all of the Banks and,
provided further, that no Bank may assign or transfer all or any portion of its
- -------- -------
Revolving Loan Commitment and/or its outstanding Revolving Loans except as
provided in Section 11.04(b) and, provided further, that although any Bank may
-------- -------
grant participations in its rights hereunder in accordance with this Section,
such Bank shall remain a "Bank" for all purposes hereunder and the participant
shall not constitute a "Bank" hereunder and, provided further, that no Bank
-------- -------
shall grant any participation under which the participant shall have rights to
approve any amendment to or waiver of this Agreement or any other Credit
Document except to the extent such amendment or waiver would (i) extend the
final scheduled maturity of any Revolving Loan or Revolving Note in which such
participant is participating, or reduce the rate or extend the time of payment
of interest or Fees thereon (except in connection with a waiver of applicability
of any post-default increase in interest rates) or reduce the principal amount
thereof, or increase the amount of the participant's participation over the
amount thereof then in effect (it being understood that a waiver of any Default
or Event of Default or of a mandatory reduction in the Total Revolving Loan
Commitment shall not constitute a change in the terms of such participation, and
that an increase in any Revolving Loan Commitment or Revolving Loan
-68-
<PAGE>
shall be permitted without the consent of any participant if the participant's
participation is not increased as a result thereof), (ii) consent to the
assignment or transfer by the Borrower of any of its rights and obligations
under this Agreement or (iii) release all or substantially all of the Collateral
under all of the Security Documents (except as expressly provided in the Credit
Documents) supporting the Revolving Loans hereunder in which such participant is
participating. In the case of any such participation, the participant shall not
have any rights under this Agreement or any of the other Credit Documents (the
participant's rights against such Bank in respect of such participation to be
those set forth in the agreement executed by such Bank in favor of the
participant relating thereto) and all amounts payable by the Borrower hereunder
shall be determined as if such Bank had not sold such participation.
(b) Notwithstanding the foregoing, any Bank (or any Bank together with
one or more other Banks) may (x) assign all or a portion of its Revolving Loan
Commitment (and related outstanding Obligations hereunder) to its parent company
and/or any affiliate of such Bank which is at least 50% owned by such Bank or
its parent company or to one or more Banks or (y) assign all, or if less than
all, a portion equal to at least $1,000,000 in the aggregate for the assigning
Bank or assigning Banks, of such Revolving Loan Commitments (and related
outstanding Obligations) to one or more Eligible Transferees, each of which
assignees shall become a party to this Agreement as a Bank by execution of an
Assignment and Assumption Agreement, provided that (i) at such time Annex I
--------
shall be deemed modified to reflect the Revolving Loan Commitments of such new
Bank and of the existing Banks, (ii) upon surrender of the old Revolving Notes,
new Revolving Notes will be issued, at the Borrower's expense, to such new Bank
and to the assigning Bank, such new Revolving Notes to be in conformity with the
requirements of Section 1.05 (with appropriate modifications) to the extent
needed to reflect the revised Revolving Loan Commitments, (iii) the consent of
the Agent shall be required in connection with any such assignment pursuant to
clause (y) of this Section 11.04(b) (which consent shall not be unreasonably
withheld or delayed) and (iv) the Agent shall receive at the time of each such
assignment, from the assigning or assignee Bank, the payment of a non-
refundable assignment fee of $3,500 and, provided further, that such transfer or
-------- -------
assignment will not be effective until recorded by the Agent on the Register
pursuant to Section 6.13 hereof. To the extent of any assignment pursuant to
this Section 11.04(b), the assigning Bank shall be relieved of its obligations
hereunder with respect to its assigned Revolving Loan Commitment. At the time of
each assignment pursuant to this Section 11.04(b) to a Person which is not
already a Bank hereunder and which is not a United States person (as such term
is defined in Section 7701(a)(30) of the Code) for Federal income tax purposes,
the respective assignee Bank shall provide to the Borrower and the Agent the
appropriate Internal Revenue Service Forms (and, if applicable a Section
3.04(b)(ii) Certificate) described in Section 3.04(b). To the extent that an
assignment of all or any portion of a Bank's Revolving Loan Commitment and
related outstanding Obligations pursuant to Section 1.13 or this Section
11.04(b) would, at the time of such assignment, result in increased costs under
Section 1.10 or 1.11 from those being charged by the respective assigning Bank
prior to such assignment, then the Borrower shall not be obligated to pay such
increased costs (although the Borrower shall be obligated to pay any other
increased costs of the type described above resulting from changes after the
date of the respective assignment).
-69-
<PAGE>
(c) Nothing in this Agreement shall prevent or prohibit any Bank from
pledging its Revolving Loans and Revolving Notes hereunder to a Federal Reserve
Bank in support of borrowings made by such Bank from such Federal Reserve Bank.
11.05 No Waiver; Remedies Cumulative. No failure or delay on the part
------------------------------
of the Agent or any Bank in exercising any right, power or privilege hereunder
or under any other Credit Document and no course of dealing between any Credit
Party and the Agent or any Bank shall operate as a waiver thereof; nor shall any
single or partial exercise of any right, power or privilege hereunder or under
any other Credit Document preclude any other or further exercise thereof or the
exercise of any other right, power or privilege hereunder or thereunder. The
rights and remedies herein expressly provided are cumulative and not exclusive
of any rights or remedies which the Agent or any Bank would otherwise have. No
notice to or demand on any Credit Party in any case shall entitle any Credit
Party to any other or further notice or demand in similar or other circumstances
or constitute a waiver of the rights of the Agent or the Banks to any other or
further action in any circumstances without notice or demand.
11.06 Payments Pro Rata. (a) The Agent agrees that promptly after its
-----------------
receipt of each payment from or on behalf of any Credit Party in respect of any
Obligations of such Credit Party, it shall, except as otherwise provided in this
Agreement, distribute such payment to the Banks (other than any Bank that has
consented in writing to waive its pro rata share of such payment) pro rata based
--- ---- --- ----
upon their respective shares, if any, of the Obligations with respect to which
such payment was received.
(b) Each of the Banks agrees that, if it should receive any amount
hereunder (whether by voluntary payment, by realization upon security, by the
exercise of the right of setoff or banker's lien, by counterclaim or cross
action, by the enforcement of any right under the Credit Documents, or
otherwise) which is applicable to the payment of the principal of, or interest
on, the Revolving Loans or Fees, of a sum which with respect to the related sum
or sums received by other Banks is in a greater proportion than the total of
such Obligation then owed and due to such Bank bears to the total of such
Obligation then owed and due to all of the Banks immediately prior to such
receipt, then such Bank receiving such excess payment shall purchase for cash
without recourse or warranty from the other Banks an interest in the Obligations
of the respective Credit Party to such Banks in such amount as shall result in a
proportional participation by all of the Banks in such amount; provided, that if
--------
all or any portion of such excess amount is thereafter recovered from such Bank,
such purchase shall be rescinded and the purchase price restored to the extent
of such recovery, but without interest.
11.07 Calculations; Computations. (a) The financial statements to be
--------------------------
furnished to the Banks pursuant hereto shall be made and prepared in accordance
with GAAP consistently applied throughout the periods involved (except as set
forth in the notes thereto or as otherwise disclosed in writing by the Borrower
to the Banks); provided, that except as otherwise specifically provided herein,
--------
all computations determining compliance with Sections 3.02 and 7, including the
definitions used therein, shall utilize accounting principles and policies in
effect at the time of the preparation of, and in conformity with those used to
prepare, the financial statements delivered to the Banks pursuant to Section
5.10(a).
-70-
<PAGE>
(b) All computations of interest and Fees hereunder shall be made on
the actual number of days elapsed over a year of 360 days.
11.08 Governing Law; Submission to Jurisdiction; Venue.
------------------------------------------------
(a) THIS AGREEMENT AND THE OTHER CREDIT DOCUMENTS AND THE RIGHTS AND OBLIGATIONS
OF THE PARTIES HEREUNDER AND THEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH
AND BE GOVERNED BY THE LAW OF THE STATE OF NEW YORK. Any legal action or
proceeding with respect to this Agreement or any other Credit Document may be
brought in the courts of the State of New York or of the United States for the
Southern District of New York, and, by execution and delivery of this Agreement,
each Credit Party hereby irrevocably accepts for itself and in respect of its
property, generally and unconditionally, the jurisdiction of the aforesaid
courts. Each Credit Party hereby further irrevocably waives any claim that any
such courts lack jurisdiction over such Credit Party, and agrees not to plead or
claim, in any legal action or proceeding with respect to this Agreement or any
other Credit Document brought in any of the aforesaid courts, that any such
court lacks jurisdiction over such Credit Party. Each Credit Party irrevocably
consents to the service of process in any such action or proceeding by the
mailing of copies thereof by registered or certified mail, postage prepaid, to
such Credit Party, at its address for notices pursuant to Section 11.03, such
service to become effective 30 days after such mailing. Each Credit Party hereby
irrevocably waives any objection to such service of process and further
irrevocably waives and agrees not to plead or claim in any action or proceeding
commenced hereunder or under any other Credit Document that service of process
was in any way invalid or ineffective. Nothing herein shall affect the right of
the Agent, any Bank or the holder of any Revolving Note to serve process in any
other manner permitted by law or to commence legal proceedings or otherwise
proceed against any Credit Party in any other jurisdiction.
(b) Each Credit Party hereby irrevocably waives any objection which it
may now or hereafter have to the laying of venue of any of the aforesaid actions
or proceedings arising out of or in connection with this Agreement or any other
Credit Document brought in the courts referred to in clause (a) above and hereby
further irrevocably waives and agrees not to plead or claim in any such court
that any such action or proceeding brought in any such court has been brought in
an inconvenient forum.
11.09 Counterparts. This Agreement may be executed in any number of
------------
counterparts and by the different parties hereto on separate counterparts, each
of which when so executed and delivered shall be an original, but all of which
shall together constitute one and the same instrument. A complete set of
counterparts executed by all the parties hereto shall be lodged with the
Borrower and the Agent.
11.10 Effectiveness. This Agreement shall become effective on the date
-------------
(the "Effective Date") on which the Borrower and each of the Banks shall have
signed a counterpart hereof (whether the same or different counterparts) and
shall have delivered the same to the Agent at the Notice Office or, in the case
of the Banks, shall have given to the Agent telephonic (confirmed in writing),
written, telex or facsimile notice (actually received) at such office that the
same has been signed and mailed to it. The Agent will give the Borrower and each
Bank prompt written notice of the occurrence of the Effective Date.
-71-
<PAGE>
11.11 Headings Descriptive. The headings of the several sections
--------------------
and subsections of this Agreement are inserted for convenience only and shall
not in any way affect the meaning or construction of any provision of
this Agreement.
11.12 Amendment or Waiver; etc. (a) Neither this Agreement nor any
------------------------
other Credit Document nor any terms hereof or thereof may be changed, waived,
discharged or terminated unless such change, waiver, discharge or termination is
in writing signed by the respective Credit Parties party thereto and the
Required Banks, provided that no such change, waiver, discharge or termination
--------
shall, without the consent of each Bank (other than a Defaulting Bank) (with
Obligations being directly affected in the case of following clause (i)), (i)
extend the final scheduled maturity of any Revolving Loan or Revolving Note, or
reduce the rate or extend the time of payment of interest or Fees thereon, or
reduce the principal amount thereof, (ii) release all or substantially all of
the Collateral (except as expressly provided in the Security Documents) under
all of the Security Documents, (iii) amend, modify or waive any provision of
this Section 11.12, (iv) reduce the percentage specified in the definition of
Required Banks (it being understood that, with the consent of the Required
Banks, additional extensions of credit pursuant to this Agreement may be
included in the determination of the Required Banks on substantially the same
basis as the extensions of Revolving Loan Commitments are included on the
Effective Date) or (v) consent to the assignment or transfer by the Borrower of
any of its rights and obligations under this Agreement; provided further, that
-------- -------
no such change, waiver, discharge or termination shall (1) increase the
Revolving Loan Commitment of any Bank over the amount thereof then in effect
without the consent of such Bank (it being understood that waivers or
modifications of conditions precedent, covenants, Defaults or Events of Default
or of a mandatory reduction in the Total Revolving Loan Commitment shall not
constitute an increase of the Revolving Loan Commitment of any Bank, and that an
increase in the available portion of any Revolving Loan Commitment of any Bank
shall not constitute an increase in the Revolving Loan Commitment of such Bank),
(2) without the consent of the Agent, amend, modify or waive any provision of
Section 10 as same applies to the Agent or any other provision as same relates
to the rights or obligations of the Agent, or (3) without the consent of the
Collateral Agent, amend, modify or waive any provision relating to the rights or
obligations of the Collateral Agent.
(b) If, in connection with any proposed change, waiver, discharge or
termination to any of the provisions of this Agreement as contemplated by clause
(a)(i) through (v), inclusive, of the first proviso to Section 11.12(a), the
consent of the Required Banks is obtained but the consent of one or more of such
other Banks whose consent is required is not obtained, then the Borrower shall
have the right, so long as all non-consenting banks whose individual consent is
required are treated as described in either clause (A) or (B) below, to either
(A) replace each such non-consenting Bank or Banks with one or more Replacement
Banks pursuant to Section 1.13 so long as at the time of such replacement, each
such Replacement Bank consents to the proposed change, waiver, discharge or
termination or (B) terminate such non-consenting Bank's Revolving Loan
Commitment and repay in full its outstanding Revolving Loans, in accordance with
Sections 2.02(b) and/or 3.01(b), provided that, unless the Revolving Loan
--------
Commitment terminated and Revolving Loans repaid pursuant to preceding clause
(B) are immediately replaced in full at such time through the addition of new
Banks or the increase of the Revolving Loan Commitments and/or
-72-
<PAGE>
outstanding Revolving Loans of existing Banks (who in each case must
specifically consent thereto), then in the case of any action pursuant to
preceding clause (B) the Required Banks (determined before giving effect to the
proposed action) shall specifically consent thereto, provided further, that the
----------------
Borrower shall not have the right to replace a Bank solely as a result of the
exercise of such Bank's rights (and the withholding of any required consent by
such Bank) pursuant to the second proviso to Section 11.12(a).
11.13 Survival. All indemnities set forth herein including, without
--------
limitation, in Section 1.10, 1.11, 3.04, 10.07 or 11.01, shall survive the
execution and delivery of this Agreement and the making and repayment of the
Revolving Loans.
11.14 Domicile of Revolving Loans. Each Bank may transfer and carry its
---------------------------
Revolving Loans at, to or for the account of any branch office, subsidiary or
affiliate of such Bank; provided, that the Borrower shall not be responsible for
costs arising under Section 1.10, 1.11 or 3.04 resulting from any such transfer
(other than a transfer pursuant to Section 1.12) to the extent such costs would
not otherwise be applicable to such Bank in the absence of such transfer.
11.15 Confidentiality. (a) Each of the Banks agrees that it will use
---------------
its best efforts not to disclose without the prior consent of the Borrower
(other than to its employees, auditors, counsel or other professional advisors,
to affiliates or to another Bank if the Bank or such Bank's holding or parent
company in its sole discretion determines that any such party should have access
to such information) any information with respect to the Borrower or any of its
Consolidated Entities which is furnished pursuant to this Agreement; provided,
that any Bank may disclose any such information (a) as has become generally
available to the public or has become available to such Bank on a
non-confidential basis, (b) as may be required or appropriate in any report,
statement or testimony submitted to any municipal, state or Federal regulatory
body having or claiming to have jurisdiction over such Bank or to the Federal
Reserve Board, the Federal Deposit Insurance Corporation, the NAIC or similar
organizations (whether in the United States or elsewhere) or their successors,
(c) as may be required or appropriate in response to any summons or subpoena or
in connection with any litigation, (d) in order to comply with any law, order,
regulation or ruling applicable to such Bank, and (e) to any prospective
transferee in connection with any contemplated transfer of any of the Revolving
Notes or any interest therein by such Bank; provided, that such prospective
--------
transferee agrees to be bound by the provisions of this Section 11.15 to the
same extent as such Bank.
(b) The Borrower hereby acknowledges and agrees that each Bank may
share with any of its affiliates any information related to the Borrower or any
of its Consolidated Entities (including, without limitation, any nonpublic
customer information regarding the creditworthiness of the Borrower and its
Consolidated Entities, provided that such Persons shall be subject to the
provisions of this Section 11.15 to the same extent as such Bank).
11.16 Waiver of Jury Trial. EACH OF THE PARTIES TO THIS AGREEMENT
--------------------
HEREBY IRREVOCABLY WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION,
PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS
-73-
<PAGE>
AGREEMENT, THE OTHER CREDIT DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY OR
THEREBY.
* * *
IN WITNESS WHEREOF, the parties hereto have caused their duly
authorized officers to execute and deliver this Agreement as of the date first
above written.
Address:
- --------
950 Winter Street PHYSICIANS QUALITY CARE,
Waltham, MA 02154 INC.
Attention: Samantha Trotman
Telephone No.: (617) 890-5560
Facsimile No.: (617) 890-1796
By /s/ Jerilyn P. Asher
--------------------------
Name: Jerilyn P. Asher
Title: President
BANKERS TRUST COMPANY,
Individually and
as Agent
By /s/ Dana Klein
--------------------------
Name: Dana Klein
Title: Vice President
-74-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused their duly
authorized officers to execute and deliver this Agreement as of the date first
above written.
Address:
- -------
950 Winter Street PHYSICIANS QUALITY CARE
Waltham, MA 02154 INC.
Attention: Samantha Trotman
Telephone No.: (617) 890-5560
Facsimile No.: (617) 890-1796
By /s/ Jerilyn P. Asher
---------------------
Name: Jerilyn P. Asher
Title: President
BANKERS TRUST COMPANY,
Individually and
as Agent
By /s/ Dana Klein
----------------
Name: Dana Klein
Title: Vice President
-75-
<PAGE>
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (the "Agreement"), made this 21st day of
June, 1995, is entered into by Physicians Quality Care, Inc., a Delaware
corporation with its principal place of business at 950 Winter Street, Suite
2410, Waltham, MA 02154 (the "Company"), and Jerilyn P. Asher, residing at 3
Craigie Circle, Cambridge, MA 02138 ("Asher").
The Company recognizes that the future growth, profitability and
success of the business of the Company will be enhanced by the employment of
Asher. The Company desires therefore to secure the benefit of Asher's experience
and ability. In order to retain the services of Asher, the Company desires to
offer Asher a compensation package which recognizes the significance of her
individual contribution to the future growth, profitability and success of the
Company and allows her to share in the same while allowing her to draw a salary
commensurate with her knowledge and experience.
NOW, THEREFORE, on the basis of the foregoing facts and in
consideration of the mutual covenants and agreements contained herein, the
parties hereto agree as follows:
1. Employment. The Company hereby agrees to employ Asher and Asher
----------
hereby accepts employment with the Company, upon the terms and subject to the
conditions hereinafter set forth.
2. Term. The term of this Agreement (the "Term") shall commence on
-----
June 21, 1995 (the "Commencement Date"), and shall continue in effect for a
period of thirty-six (36) months, expiring on June 21, 1998 unless otherwise
extended as hereinafter provided. The Term shall be automatically extended for
additional twelve-month periods on June 21, 1998 and on each June 21 thereafter,
unless the Company notifies Asher in writing that such extension shall not take
place, ninety (90) days prior to any such June 21 extension date; provided
--------
that, if a Change of Control of the Company (as defined in Section 15(b)) shall
- ----
have
<PAGE>
occurred during the original or extended Term of this Agreement, this Agreement
shall continue in effect for a period of not less than twenty-four (24) months
beyond the month in which such Change of Control occurred, as provided in
Section 15(a).
3. Position; Duties.
-----------------
(a) The Company and Asher agree that, subject to the provisions of
this Agreement and subject to the direction of the Board of Directors of the
Company (the "Board"), the Company shall, during the Term, employ Asher and
Asher shall serve as President and Chief Executive Officer or in such other
position as the Board may determine from time to time. Asher shall be subject to
the supervision of, and shall have such authority as is delegated to her by the
Board. Asher shall be based at the Company's headquarters in Massachusetts and
shall not be obligated to relocate outside the metropolitan Boston area to
perform her duties and responsibilities without her prior written consent.
(b) Asher hereby accepts such employment and agrees to undertake
the duties and responsibilities inherent in such position and such other duties
and responsibilities as the Board shall from time to time reasonably assign to
her. Asher agrees to devote her entire business time, attention and energies to
the business and interests of the Company during the Term. Asher agrees to abide
by the written rules, regulations, instructions, personnel practices and
policies of the Company and any changes therein which may be adopted from time
to time by the Company.
4. Member of the Board. Throughout the Term, Asher shall be eligible
-------------------
to serve as a Director of the Company and a member of the Board. The Company
agrees that it shall nominate Asher for election as a Director of the Company at
all elections of the members of the Board during the Term unless Asher declines
to stand for election.
-2-
<PAGE>
5. Compensation. As compensation for Asher's employment hereunder, the
------------
Company shall pay to Asher a base salary payable in equal semi-monthly
installments at the annual rate of $240,000 or such greater base salary as the
Board may from time to time approve, commencing on December 1, 1995.
6. Bonus. The Company intends to adopt a management incentive program
-----
under which executives of the Company such as Asher would be entitled to receive
bonus payments of up to 100% of their base salary based upon (i) the achievement
of certain performance targets by the Company as set by the Board and (ii) the
achievement of certain individual performance targets agreed upon between the
Board and Asher (collectively, the "Officer Incentive Bonus"). Asher shall be
eligible to receive an Officer Incentive Bonus during each calendar year during
the Term, the amount of such Officer Incentive Bonus to be set and approved by
the Board. For the calendar year 1995, Asher shall be entitled to receive a pro
rata portion (five-twelfths) of the annual Officer Incentive Bonus for 1995
based upon her commencement of employment on June 21, 1995.
7. Benefits. Upon meeting all applicable eligibility requirements,
--------
Asher shall be entitled to receive an automobile allowance not to exceed $600
per month, and such other benefits, compensation or rights as are generally made
available to other members of senior management of the Company including,
without limitation, sick pay, participation in any medical, disability,
retirement and dental insurance plans that may be adopted by the Company and
participation in equity incentive plans, including stock option plans, of the
Company; provided that, in the event Asher fails to qualify for any medical or
-------- ----
disability insurance plan that may be adopted by the Company, the Company shall
pay to Asher an amount which would enable her to purchase an insurance plan from
another carrier which provides substantially similar benefits to those provided
to other members of senior
-3-
<PAGE>
management under the Company's plans; provided however, that such amount may be
-------- -------
capped by the Board in its discretion. Asher represents that on the date hereof,
she has no knowledge of any medical condition which might prevent her from
qualifying as a beneficiary under a standard medical or disability plan. During
the Term, Asher's benefits shall be maintained at least at the same level as are
presently in effect on the date hereof.
8. Vacation. Asher shall be entitled to four (4) weeks of vacation
--------
time each year, to be pro-rated monthly for partial years, during the Term. If
Asher does not utilize all vacation in the year earned, the unused vacation time
in any year shall not carry over to the next year.
9. Expenses. The Company shall reimburse Asher for all reasonable
--------
travel, entertainment and other expenses incurred or paid by Asher in connection
with, or related to, the performance of her duties, responsibilities or services
under this Agreement, upon presentation by Asher of documentation, expense
statements, vouchers and/or such other supporting information as the Company may
request, provided, however, that the amount available for such travel,
-------- -------
entertainment and other expenses may be fixed in advance by the Board.
10. Restricted Stock Award. Pursuant to the Company's 1995 Restricted
----------------------
Stock Plan (the "Restricted Stock Plan"), the Company shall issue to Asher
4,162,500 shares of Common Stock of the Company, $.01 par value per share (the
"Founder's Shares"), at a purchase price of $.01 per share, subject to vesting
and the Company's right to repurchase at $.01 per share, in the event that all
of Asher's Founder Shares do not vest and are forfeited in accordance with the
Restricted Stock Plan (which shall provide for, among other things, a vesting
schedule based on (i) performance targets for the Company as set by the Board,
(ii) performance targets for executive recipients as agreed to between the Chief
Executive Officer
-4-
<PAGE>
of the Company or the Board and such executive, and (iii) the duration of such
executive's employment with the Company). On the date hereof, Asher and the
Company shall enter into a Restricted Stock Agreement substantially in the form
attached hereto as Exhibit A (the "Restricted Stock Agreement").
---------
11. Termination of Asher Without Cause or by Asher With Good Reason.
(a) At any time prior to expiration of the Term, the Board may
terminate Asher's employment without Cause (as defined in Section 13(b)), at any
time, and Asher may terminate her employment with Good Reason (as defined in
Subsection (b) of this Section 11, subject to payment by the Company of the
severance amounts set forth in Subsections (c) and (d) of this Section 11.
(b) For purposes of this Section 11, "Good Reason" shall mean:
(i) the failure of the Company to nominate Asher for
election as a Director of the Company at any election unless Asher declines to
stand for election;
(ii) any purported termination of Asher's employment for
Cause which is not effected pursuant to a notice described in Section 13 of this
Agreement;
(iii) without Asher's express written consent, the assignment
to Asher of any duties materially inconsistent with the offices held hereunder,
or a material alteration or diminution in the nature or status of her
responsibilities; or an adverse and material alteration in her reporting
responsibilities, titles or offices, or any removal of her or failure to re-
elect her to any of such positions, except in connection with the termination of
her employment or retirement (which shall mean her voluntary termination of
employment after having attained age 70);
-5-
<PAGE>
(iv) any reduction in Asher's annual base salary or a
material reduction in fringe benefits as in effect on the date hereof or as the
same may be increased during the Term; and
(v) any material breach by the Company of any material
provision of this Agreement which the Company fails to correct within thirty
(30) working days after receiving written notice thereof.
(c) In the event Asher is terminated by the Company without Cause
or Asher terminates her employment with Good Reason, the Company shall pay to
Asher an amount equal to two (2) times Asher's annual base salary (based on
Asher's base salary prevailing at the time of the termination).
(d) Payment pursuant to Section 11(c) shall be made in twenty-four
(24) equal monthly installments on the last day of each month after termination
of this Agreement pursuant to this Section 11.
(e) The parties hereto expressly acknowledge and agree that the
compensation and benefits payable to Asher upon a termination as specified in
this Section 11 will constitute full, reasonable and adequate compensation for
any such termination and that the payment of such compensation and benefits
shall fully satisfy and discharge any and all obligations of the Company to
Asher in connection with such termination.
12. Termination By Asher Without Cause. Asher may terminate her
----------------------------------
employment hereunder without Cause and without Good Reason, provided that Asher
first gives to the Company a written notice of intent to terminate at least
ninety (90) days prior to the effective date of any such termination. All rights
of Asher under this Agreement shall terminate upon the effective date of the
termination of employment; provided, however, the Company shall pay to Asher any
--------- -------
base salary earned through the effective date of the termination and a
-6-
<PAGE>
pro-rata share of the Officer Incentive Bonus earned during the calendar year in
which the termination of employment occurs.
13. Termination of Asher For Cause
------------------------------
(a) Notwithstanding anything in this Agreement to the contrary,
the Company shall have the right to terminate Asher's employment hereunder for
Cause (as defined in Subsection (b) of this Section 13) by giving to Asher
written notice of such termination as of a date (not earlier than ten (10) days
after such notice) to be specified in such notice, and her employment hereunder
shall terminate on the date so specified, whereupon Asher shall be entitled to
receive her salary at the rate provided in Section 5 and any other compensation
or benefits provided in Sections 6, 7 and 8, only to the date on which
termination shall take effect.
(b) For purposes of this Section 13, "Cause" shall mean (i)
Asher's willful and continued failure materially to perform her duties with the
Company (other than any such failure resulting from her incapacity due to
physical or mental illness or any such actual or anticipated failure after the
issuance of a notice by Asher of termination for Good Reason), which is not
remedied within a reasonable period after a written demand for performance is
delivered to Asher which specifically identifies the manner in which it is
believed that Asher has not materially performed her duties; (ii) the willful
engagement by Asher in misconduct materially and demonstrably injurious to the
Company, or (iii) Asher's conviction of a felony or of a fraud or embezzlement
of the Company's property. For purposes of this Subsection (b), no act or
failure to act by Asher shall be considered "willful" unless done, or omitted to
be done, by Asher without good faith and without reasonable belief that Asher's
action or omission was in the best interest of the Company. For purposes of this
Agreement, Asher shall not be deemed to have been terminated for Cause unless
and until there shall
-7-
<PAGE>
have been delivered to Asher a copy of a resolution, duly adopted by the
affirmative vote of not less than 66 2/3% of the entire membership of the Board
of the Company (excluding Asher) at a meeting called and held for this purpose
after reasonable written notice to Asher and an opportunity for her, together
with her counsel, to be heard by the Board, finding, in the good faith opinion
of the Board, misconduct of the type described in this Section 13(b), and
specifying the particulars thereof in detail.
14. Termination In the Event of Disability or Death.
------------------------------------------------
(a) Disability. In the event that Asher shall fail, because of
----------
illness or injury, to render the services contemplated by this Agreement for six
(6) consecutive calendar months or for shorter periods aggregating one hundred
eighty (180) or more business days in any twelve (12) month period, the Company
shall have the right to terminate Asher's employment hereunder by giving to
Asher written notice of termination. In the event Asher's employment is
terminated within the meaning of this Section 14(a), Asher shall receive her
salary at the rate provided in Section 5 and any other compensation and benefits
provided in Sections 6, 7 and 8, to the effective date of such termination. Such
termination pursuant to this Section 14(a) shall not affect any rights which
Asher may have at the time of termination pursuant to any insurance or other
death benefit, bonus, retirement, severance pay or stock award plans or
arrangements of the Company, or any equity incentive plan or any restricted
stock award or options thereunder, which rights shall continue to be governed by
the terms and provisions of any such plans and agreements.
(b) Death. During the Term of this Agreement, the Company shall
-----
maintain a life insurance policy in the amount of $500,000, to be paid to
Asher's named beneficiaries in accordance with standard policy terms and
conditions. This Agreement in all other respects will terminate upon the death
of Asher except for the payment of Asher's base
-8-
<PAGE>
salary at the rate provided in Section 5 and any other compensation and benefits
provided in Sections 6, 7 and 8 to the date of her death.
15. Termination in the Event of a Change of Control.
------------------------------------------------
(a) In the event a Change in Control (as defined in Subsection (b)
below) shall occur during the Term and Asher's employment with the Company is
subsequently terminated or terminates for any reason within twenty-four (24)
months after such Change in Control other than by reason of (i) disability or
death, (ii) termination by the Company for Cause or (iii) termination by Asher
other than for Good Reason, Asher shall be entitled to receive the payments as
set forth in Subsections (c) and (d) of Section 11 (all to the same extent and
with the same effect as if such termination occurred by Asher for Good Reason)
and the vesting of the Founder's Shares and the exercisability of stock options
Asher then holds as set forth in Subsection (c) of this Section 15.
(b) A "Change in Control" shall occur or be deemed to occur if
-----------------
any of the following events occur:
(i) any individual, entity or group (within the meaning of
Section 13(d) (3) or 14(d) (2) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) (a "Person") is or becomes the "beneficial owner"
(as defined in Rule l3d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing 50% or more of the combined voting power
of the Company's then outstanding voting securities entitled to vote generally
in the election of directors (the "Outstanding Company Voting Securities");
provided, however, that for purposes of this subsection (i), the following
- -------- -------
acquisitions shall not constitute a Change of Control: (A) any acquisition
directly from the Company, (B) any acquisition by the Company, (C) any
acquisition by any employee benefit plan (or related trust) sponsored or
maintained by the Company or any corporation
-9-
<PAGE>
controlled by the Company, or (D) any acquisition by any corporation pursuant to
a transaction which complies with clauses (A), (B) and (C) of paragraph (iii)
below;
(ii) Individuals who, as of the Commencement Date, constitute
the Board (as of such date, the "Incumbent Board") cease for any reason to
constitute at least a majority of the Board; provided, however, that any
-------- -------
individual becoming a director subsequent to the date hereof whose election, or
nomination for election by the Company's stockholders, was approved by a vote of
at least a majority of the directors then comprising the Incumbent Board shall
be, for purposes of this Agreement, considered as though such person were a
member of the Incumbent Board, excluding any individual whose initial assumption
of office occurs as a result of an actual or threatened election contest with
respect to the election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other than the
Board; or
(iii) the stockholders of the Company approve a
reorganization, merger or consolidation of the Company with any other
corporation or the sale or other disposition of all or substantially all of the
assets of the Company (a "Business Combination"), in each case, unless,
following such Business Combination, (A) all or substantially all of the
individuals and entities who were the beneficial owners, respectively, of the
Outstanding Company Voting Securities immediately prior to such Business
Combination beneficially own, directly or indirectly, more than 50% of the
combined voting power of the then outstanding voting securities entitled to vote
generally in the election of directors of the corporation resulting from such
Business Combination (including, without limitation, a corporation which as a
result of such transaction owns the Company or all or substantially all of the
Company's assets either directly or through one or more subsidiaries) in
substantially the same proportions as their ownership of the Outstanding Company
Voting
-10-
<PAGE>
Securities immediately prior to such Business Combination, (B) no Person
(excluding any corporation resulting from such Business Combination or any
employee benefit plan (or related trust) of the Company or such corporation
resulting from such Business Combination) beneficially owns, directly or
indirectly, 50% or more of the then outstanding shares of common stock of the
corporation resulting from such Business Combination or the combined voting
power of the then outstanding voting securities of such corporation except to
the extent that such ownership existed prior to the Business Combination and (C)
at least a majority of the members of the Board of Directors of the corporation
resulting from such Business Combination were members of the Incumbent Board at
the time of the execution of the initial agreement, or of the action of the
board, providing for such Business Combination; or
(iv) Approval by the shareholders of the Company of a
complete liquidation or dissolution of the Company.
(c) The Asher Stock Restriction Agreement and all stock options
for the purchase of the Company's Common Stock granted to Asher by the Company
under any of the Company's stock option plans shall provide for acceleration of
the vesting of the Founder's Shares and the full and immediate exercisability of
each such option upon the occurrence of a Change of Control.
(d) Notwithstanding any other provisions of this Agreement, in the
event that any payment or benefit received or to be received by Asher in
connection with a Change of Control or the termination of Asher's employment
(all such payments and benefits, including those set forth in Subsections (c)
and (d) of Section 11 and Section 15(c) being hereafter called "Total
Payments"), would be subject (in whole or part), to the excise tax imposed under
Section 4999 of the Internal Revenue Code ("IRC") (the "Excise Tax"), then
-11-
<PAGE>
the Total Payments may be reduced, in such order and manner as Asher may elect,
so that no portion of the Total Payments is subject to the Excise Tax if (i) the
net amount of such Total Payments, as so reduced (and after deduction of the net
amount of federal, state and local income tax on such reduced Total Payments) is
greater than (ii) the excess of (A) the net amount of such Total Payments,
without reduction (but after deduction of the net amount of federal, state and
local income tax on such Total Payments), over (B) the amount of Excise Tax to
which Asher would be subject in respect of such Total Payments. For purposes of
determining whether and the extent to which the Total Payments will be subject
to the Excise Tax, (i) no portion of the Total Payments the receipt or enjoyment
of which Asher shall have effectively waived in writing prior to the date of her
termination shall be taken into account, (ii) no portion of the Total Payments
shall be taken into account which in the opinion of tax counsel selected by the
Company does not constitute a "parachute payment" within the meaning of Section
280G(b)(2) of the IRC (including by reason of Section 280G(b) (4) (A) of the
IRC) and, in calculating the Excise Tax, no portion of such Total Payments shall
be taken into account which constitutes reasonable compensation for services
actually rendered, within the meaning of Section 280G(b) (4) (B) of the IRC, and
(iii) the value of any non-cash benefit or any deferred payment or benefit
included in the Total Payments shall be determined by the Company in accordance
with the principles of Sections 280G(d) (3) and (4) of the IRC. Prior to the
payment of any of the Total Payments, the Company shall provide Asher with its
calculation of the amounts referred to in this Section and such supporting
materials as are reasonably necessary for Asher to evaluate the Company's
calculations.
16. Indemnification. Asher shall be fully indemnified by the Company
---------------
in her capacity as an officer and director of the Company to the extent
permitted by Delaware law.
-12-
<PAGE>
17. Non-Compete.
-----------
(a) So long as Asher is employed by the Company and for a period
of two years after the termination or expiration of her employment, Asher will
not directly or indirectly:
(i) as an individual proprietor, partner, stockholder,
officer, employee, director, joint venturer, investor, lender, or in any other
capacity whatsoever (other than as the holder of not more than one percent (1%)
of the total outstanding stock of a publicly held company), engage directly or
indirectly in any business or entity which (i) operates, develops or manages
physician practice management entities or (ii) develops, designs, produces,
markets or sells managed care products or services, of the kind or type
developed or which were being developed, produced, marketed or sold by the
Company while Asher was employed by the Company, to the extent such engagement
assists such business or entity in competing with the business conducted by the
Company in any city in which the Company conducts material operations; or
(ii) recruit, solicit or induce, or attempt to induce, any
employee or employees of the Company to terminate their employment with, or
otherwise cease their relationship with, the Company; or
(iii) solicit, divert or take away, or attempt to divert or to
take away, the business or patronage of any of the clients, customers or
accounts, or prospective clients, customers or accounts, of the Company which
were contacted, solicited or served by Asher while employed by the Company.
(b) If any restriction set forth in this Section 17 is found by
any court of competent jurisdiction to be unenforceable because it extends for
too long a period of time or over too great a range of activities or in too
broad a geographic area, it shall be interpreted to
-13-
<PAGE>
extend only over the maximum period of time, range of activities or geographic
area as to which it may be enforceable.
(c) The restrictions contained in this Section 17 are necessary
for the protection of the business and goodwill of the Company and are
considered by Asher to be reasonable for such purpose. Asher agrees that any
breach of this Section 17 will cause the Company substantial and irrevocable
damage and therefore, in the event of any such breach, in addition to such other
remedies which may be available, the Company shall have the right to seek
specific performance and injunctive relief.
18. Proprietary Information and Developments.
----------------------------------------
(a) Proprietary Information.
-----------------------
(i) Asher agrees that all information and know-how, whether
or not in writing, of a private, secret or confidential nature concerning the
Company's business, business relationships or financial affairs (collectively,
"Proprietary Information") is and shall be the exclusive property of the
Company. By way of illustration, but not limitation, Proprietary Information may
include inventions, products, processes, methods, techniques, formulas,
compositions, compounds, projects, developments, plans, research data, clinical
data, financial data, personnel data, computer programs, and customer and
supplier lists and contracts at or knowledge of customers or prospective
customers of the Company. Asher will not disclose any Proprietary Information to
others outside the Company or use the same for any unauthorized purposes without
written approval by an officer of the Company, either during or after her
employment, unless and until such Proprietary Information has become public
knowledge without fault by Asher.
(ii) Asher agrees that all files, letters, memoranda,
reports, records, data, sketches, drawings, laboratory notebooks, program
listings, or other written,
-14-
<PAGE>
photographic, or other tangible material containing Proprietary Information,
whether created by Asher or others, which shall come into her custody or
possession, shall be and are the exclusive property of the Company to be used by
Asher only in the performance of her duties for the Company.
(iii) Asher agrees that her obligation not to disclose or use
information, know-how and records of the types set forth in Subsection (a) of
this Section 18 also extends to such types of information, know-how, records and
tangible property of customers of the Company or suppliers to the Company or
other third parties who may have disclosed or entrusted the same to the Company
or to Asher in the course of the Company's business.
(b) Developments.
------------
(i) Asher will make full and prompt disclosure to the Company of
all inventions, improvements, discoveries, methods, developments, software, and
works of authorship, whether patentable or not, which are created, made,
conceived or reduced to practice by Asher or under her direction or jointly with
others during her employment by the Company, whether or not during normal
working hours or on the premises of the Company (all of which are collectively
referred to in this Agreement as "Developments").
(ii) Asher agrees to assign and does hereby assign to the Company
(or any person or entity designated by the Company) all her right, title and
interest in and to all Developments and all related patents, patent
applications, copyrights and copyright applications. However, Subsection (b) of
this Section 18 shall not apply to Developments which do not relate to the
present or planned business or research and development of the Company and which
are made and conceived by Asher not during normal working hours,
-15-
<PAGE>
not on the Company's premises and not using the Company's tools, devices,
equipment or Proprietary Information.
(iii) Asher agrees to cooperate fully with the Company, both
during and after her employment with the Company, with respect to the
procurement, maintenance and enforcement of copyrights and patents (both in the
United States and foreign countries) relating to Developments. Asher shall sign
all papers, including, without limitation, copyright applications, patent
applications, declarations, oaths, formal assignments, assignment of priority
rights, and powers of attorney, which the Company may deem necessary or
desirable in order to protect its rights and interests in any Development.
(c) Other Agreements. Asher hereby represents that she is not
----------------
bound by the terms of any agreement with any previous employer or other party to
refrain from using or disclosing any trade secret or confidential or proprietary
information in the course of her employment with the Company or to refrain from
competing, directly or indirectly, with the business of such previous employer
or any other party. Asher further represents that her performance of all the
terms of this Agreement and as an employee of the Company does not and will not
breach any agreement to keep in confidence proprietary information, knowledge or
data acquired by her in confidence or in trust prior to her employment with the
Company.
19. Assignment. Neither this Agreement nor any rights or benefits
----------
hereunder shall be subject to execution, attachment or similar process nor may
this Agreement or any rights or benefits hereunder be assigned, delegated,
transferred, pledged or hypothecated, without the written consent of both
parties hereto, and any such assignment, delegation, transfer, pledge,
hypothecation, execution, attachment or similar process shall be null and void.
-16-
<PAGE>
20. Successors; Binding Agreement.
-----------------------------
(a) The Company shall require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets of the Company to assume expressly
in writing and to agree to perform its obligations under this Agreement in the
same manner and to the same extent that the Company would be required to perform
it if no such succession had taken place. Failure of the Company to obtain an
assumption of this Agreement prior to the effectiveness of succession shall be a
breach of this Agreement. As used in this Agreement, "the Company" shall mean
the Company as defined above and any successor to its business or assets as
aforesaid which assumes and agrees to perform this Agreement by operation of
law, or otherwise.
(b) This Agreement shall inure to the benefit of and be enforceable by
Asher's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. Any amounts payable by
the Company to Asher after the date of her death, unless otherwise provided
herein, shall be paid in accordance with the terms of this Agreement to her
devisee, legatee or other designee, or if there is no such designee, to her
estate.
21. Severability. Whenever possible, each provision of this Agreement
------------
shall be interpreted in such manner as to be valid and effective under
applicable law, but if any provision of this Agreement is found to be prohibited
or invalid under applicable law, such provision shall be ineffective to the
extent of such prohibition or invalidity without invalidating the remainder of
such provision or the remaining provisions of this Agreement.
22. Notices. All notices, requests, demands and other communication
-------
hereunder shall be in writing and shall be deemed to have been duly given if
personally delivered or if mailed by United States Postal Service certified or
registered mail, prepaid, to the parties or
-17-
<PAGE>
their permitted assignees at the Company, in the case of the Company, 950 Winter
Street, Suite 2410, Waltham, MA 02154, with a copy to Paul P. Brountas, Esq.,
Hale and Dorr LLP, 60 State Street, Boston, Massachusetts 02109 or such address
as shall constitute the Company's headquarters and in the case of Asher at the
last address shown in the personnel records of the Company, or at such other
address as shall be given in writing by either party to the other. The date of
such personal delivery or the third business day following the date of mailing
shall be deemed to be the date of such notice, demand or communication.
22. Waiver and Modification. Any waiver, alteration or modification of
-----------------------
any of the terms of this Agreement shall be valid only if made in writing and
signed by the parties hereto. Each party hereto from time to time may waive any
of her or its rights hereunder without affecting a waiver with respect to any
subsequent occurrences or transactions hereunder.
23. Captions and Headings. Captions and section headings used herein
---------------------
are for convenience only, are not a part hereof and shall not be used in
construing this Agreement.
24. Entire Agreement. This Agreement constitutes and embodies the
----------------
entire understanding and agreement of the parties hereto and, except as
otherwise provided hereunder, there are no other agreements or understandings,
written or oral, in effect between the parties hereto relating to the employment
of Asher by the Company.
25. Governing Law. This Agreement shall be governed by and interpreted
-------------
in accordance with the laws of the Commonwealth of Massachusetts, except where
Federal law governs.
26. Counterparts. This Agreement may be executed in counterparts,
------------
each of which shall be deemed an original, but both of which taken together
shall constitute one and the same instrument.
-18-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement below:
DATED: June 21, 1995 PHYSICIANS QUALITY CARE INC.
By: /s/ Jerilyn P. Asher
----------------------------------
Jerilyn P. Asher
President and Chief Executive Officer
DATED: June 21, 1995 /s/ Jerilyn P. Asher
-----------------------------------
Jerilyn P. Asher
-19-
<PAGE>
AMENDMENT TO
EMPLOYMENT AGREEMENT
WHEREAS, pursuant to an Employment Agreement dated as of June 21,
1995 (the "Agreement"), Physicians Quality Care, Inc. (the "Company") and
Jerilyn P. Asher ("Asher") entered into an employment relationship.
WHEREAS, the Company and Asher wish to clarify the Agreement and to
provide for certain additional terms of the Agreement.
NOW THEREFORE, in consideration of these premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto, intending to be legally bound, agree as
follows:
1. Section 5 of the Agreement is hereby amended to provide that Asher
shall be paid a base annual salary of $250,000 retroactively effective as of
June 21, 1995.
2. Section 6 of the Agreement is hereby clarified to correct the
reference to a pro-rata portion of the annual Officer Incentive Bonus for 1995
from "five-twelfths" to "six- twelfths" (i.e., the six month period from July
21, 1995 through December 31, 1995, being the six full calendar months of 1995
Asher has worked for the Company).
3. Section 8 of the Agreement is hereby amended to add a new clause at
the end thereof, as follows: "; provided, however, that upon receipt of approval
from the Company's Compensation Committee or, if there is no Compensation
Committee, the Company's Board of Directors, Asher may elect to receive
additional salary in lieu of any unused vacation time at a rate per week equal
to her annual base salary divided by fifty-two."
4. Section 14(b) of the Agreement is hereby amended by inserting a new
sentence after the first sentence thereof, as follows: "Such life insurance
policy shall be a group term policy or such other form of insurance as may be
mutually satisfactory to the parties; provided, however, that such policy shall
contain a so-called conversion provision permitting Asher to continue coverage
at her own expense at the same benefit level after termination of the Agreement.
IN WITNESS WHEREOF, authorized signatories of the parties have hereunto
set their hands as of this day of January, 1996.
---
PHYSICIANS QUALITY CARE, INC. JERILYN P. ASHER
(the "Company") ("Asher")
By: /s/ Jerilyn P. Asher /s/ Jerilyn P. Asher
------------------------ ----------------------
Its:
<PAGE>
Agreement
This Agreement (the "Agreement") is entered into as of the 30th day of
August 1996 by and between Jerilyn P. Asher ("Executive") and Physicians Quality
Care, Inc., a Delaware corporation (the "Company").
Whereas, Executive and the Company have entered into an Employment
Agreement dated as of June 21, 1995 (the "Employment Agreement") and a
Stock Restriction Agreement dated as of June 21, 1995 (the "Stock
Restriction Agreement").
Whereas, Bain Capital Fund V, L.P., a Delaware limited partnership,
Bain Capital Fund V-B, L.P., a Delaware limited partnership, BCIP
Associates, a Delaware partnership, and BCIP Trust Associates, L.P., a
Delaware limited partnership (collectively "Bain") are providing equity
financing to the Company, and in connection therewith the Company and
certain stockholders thereof have entered into a Stockholders Agreement
dated the date hereof (the "Stockholders Agreement"); and
Whereas, the parties hereto desire to make certain modifications to
the Employment Agreement and the Stock Restriction Agreement and to enter
into certain other agreements in respect to the Shares originally issued to
the Executive (it being agreed and understood that the term "Shares," as
used herein, means the shares of Common Stock listed on Schedule A hereto
and does not include any of the shares of Series A Preferred Stock and
Warrants to Purchase Common Stock owned by the Executive);
Now, therefore, in consideration of the mutual covenants contained herein,
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto, intending to be legally
bound, hereby agree as follows:
1. Certain Definitions. Terms defined in the Stockholders Agreement and
-------------------
not otherwise defined herein are used herein as so defined.
2. Amendment to Employment Agreement, etc.
---------------------------------------
a. Section 15(b) of the Employment Agreement is hereby amended to add
the following subparagraph (v) immediately following subparagraph (iv):
"(v) Notwithstanding any provision of Section 15(b) to the
contrary, for purposes of this Agreement, a Change of Control shall
not occur or be deemed to occur as a result of any one or more of
the following: (a) the beneficial or other ownership by Bain Capital
Fund V, L.P., Bain Capital Fund V-B, L.P., BCIP Associates, BCIP
Trust Associates, L.P. or the affiliates of any of them
(collectively, "Bain") of shares of capital stock of the Company or
securities or other rights to purchase or subscribe for or acquire
shares of capital stock of the Company or securities exchangeable
for or convertible into shares of capital stock of the Company; (b)
the election to the Board of Directors of the Company of the
individuals and representatives provided for in the stockholders
agreement dated August 30, 1996 to which the Company, Bain and
certain other stockholders are party and in the Company's Restated
<PAGE>
Certificate of Incorporation; and (c) the exercise by Bain or
any of its representatives of any rights or obligations
relating to (a) or (b) above, including without limitation any
rights or remedies under the Company's Restated Certificate of
Incorporation."
b. The Stock Restriction Agreement is hereby amended by deleting
Sections 2, 3, 4, 10 and 11 in their entirety.
c. Executive hereby releases and forever discharges the Company, its
stockholders, directors, officers and representatives, including without
limitation Bain and its Affiliates, and their respective partners, stockholders,
directors, officers, employees and representatives (collectively, the
"Releasees") from any and all claims, demands, proceedings, causes of
action, orders, obligations, agreements, debts and liabilities whatsoever, in
law and at equity, which Executive now has, ever had, or may hereafter have
against the respective Releasees arising contemporaneously with or prior to the
Initial Closing A (as defined in the Purchase Agreement) including, but not
limited to any rights to receive salary and bonus or reimbursement from the
Company prior to August 1, 1996.
d. The Company and Executive hereby confirm that Executive's annual
salary for 1996 is payable at the rate of $250,000 per annum for periods from
and after August 1, 1996 and that the Executive is eligible to receive a bonus
payment for calendar year 1996 based upon achieving agreed upon performance
objectives determined by the Board.
3. Options to Purchase.
--------------------
a. Call Options. Upon any termination of the employment by the Company
------------
of Executive, the Company (or its designee) shall have the right to purchase
Shares held by the Executive or originally issued to Executive but held by one
or more Permitted Transferees of Executive (collectively, the "Call
Stockholder Group") on the following terms:
i. Termination by Company for Cause. If such termination is
--------------------------------
the result of termination of Executive's employment by the Company for
Cause, the Company (or its designee), upon written notice delivered within
90 days of termination, (a) may purchase 50% of the Shares that are vested
in accordance with Schedule A hereto ("Vested Shares") at a price equal to
the Fair Market Value of such securities and (b) may purchase all Shares
that are unvested in accordance with Schedule A hereto at Cost (without any
rate of return). If such termination is a result of termination of
Executive's employment by the Company without Cause, the Company shall have
no right to purchase any of the Vested Shares.
ii. Resignation of the Executive. If such termination is the
----------------------------
result of Executive's resignation, the Company (or its designee), upon
written notice delivered within 90 days of termination, (a) may purchase
all or any portion of 35% of the Vested Shares at a price equal to the Fair
Market Value of such securities and (b) may purchase all Shares that are
unvested in accordance with Schedule A hereto at Cost (without any rate of
return).
-2-
<PAGE>
iii. Voting Trust. Upon termination of Executive's employment
------------
with the Company for any reason, Executive agrees to deposit all Shares not
purchased by the Company (or its designee) pursuant to Section 3 hereof in
a voting trust mutually agreeable to Executive, the Company and Bain
containing the following terms and conditions (a) the voting trust shall
terminate upon the earlier to occur of (i) five years from the date it was
entered into and (ii) the date of a Qualified Public Offering, (b) the
trustee shall exercise all voting and other rights with respect to the
Shares subject to the voting trust as directed by Bain, and (c) Executive
shall have the right to transfer all or any portion of her beneficial
interest in the voting trust subject to restrictions analogous to the
restrictions on transfers of Shares contained in the Stockholders
Agreement.
iv. Sale or IPO. In the event the Company consummates the
-----------
initial Public Offering of its Shares or sells the Company or substantially
all of its assets within twelve months of termination of Executive's
employment, the Company shall promptly pay Executive with respect to each
Share purchased at Fair Market Value pursuant to Section 3.1.2 hereof the
positive difference, if any, between (a) the price that would have been
paid for such Share if the Fair Market Value of a Share were equal to the
net proceeds received by the Company with respect to each Share sold in the
Public Offering or in the case of a sale of the Company, the amount per
share paid to the shareholders of the Company (appropriately adjusted for
stock splits, reverse stock splits, stock dividends and the like), and (b)
the amount previously paid to Executive with respect to such Share pursuant
to Section 3 hereof.
b. Determination of Fair Market Value. (a) For purposes of this Section
----------------------------------
3, the term "Fair Market Value" shall mean, as of any date, the fair value of
any Share as of the applicable date on the basis of a sale of such Share in an
arms length private sale between a willing buyer and a willing seller, neither
acting under compulsion, as determined by the Board; (b) at any time when more
than 15% of the Shares then outstanding has been offered and sold pursuant to
one or more Public Offerings, the Fair Market Value of any Share shall be equal
to the average of the sum of the closing prices of the Shares for the 30 trading
days immediately prior to the date on which Share becomes subject to repurchase
under this Section 3. In determining Fair Market Value, the Board shall (a)
consider, in addition to other factors that it determines in good faith to be
relevant, the purchase price of the Shares in recent (i) arms-length sales of
Shares by the Company, (ii) transfers of Shares by a Stockholder in an
arms-length transaction and (b) not give effect to any discount which may
otherwise be attributable to the fact that such Shares which are the subject of
such valuation (i) constitute less than a majority of the Shares outstanding
and/or (ii) are restricted as to transfer as provided herein.
c. "Cause" shall mean for purposes of Section 3 of this Agreement, in
-----
the context of termination of the employment of the Executive, any of the
following events or conditions: (i) Executive's gross negligence or willful
misconduct which causes material injury to the Company or any of its Affiliates
and is not cured within twenty-one (21) days after written notice by the Company
to Executive, (ii) any act of fraud, embezzlement or other material dishonesty,
(iii) conviction of, or plea of nolo contendere to, any felony or any other
crime involving fraud, dishonesty or moral turpitude, or (iv) willful conduct
which causes criminal
-3-
<PAGE>
or material civil liabilities to the Company or its Affiliates thereof. For
purposes of (iv) above, no act or failure to act on the part of the Executive
shall be considered "willful" unless it is done or omitted to be
done by the Executive in bad faith or without reasonable belief that the
Executive's action or omission was in the best interests of the Company and its
Subsidiaries. The cessation of employment of the Executive shall not be deemed
to be for Cause unless and until (i) a written notice has been delivered to the
Executive by the Board which specifically identifies the Cause which is the
Board's basis for termination and (ii) the Board has delivered to the Executive
a copy of a resolution duly adopted by the affirmative vote of not less than a
majority of the entire membership of the Board (excluding the Executive) at a
meeting of the Board called and held for such purpose (after reasonable notice
is provided to the Executive and the Executive is given an opportunity, together
with counsel, to be heard before the Board), finding that, in the good faith
opinion of the Board, the Executive has engaged in the conduct described in the
Board's notice and specifying the particulars thereof in detail.
d. Period. The foregoing provisions of this Section 3 shall
------
expire on the date of a Qualified Public Offering.
e. Construction. The foregoing provisions of this Section 3 are not
------------
intended, and shall not be construed, to eliminate, waive or otherwise affect
(a) the restrictions on transfer, vesting requirements or termination provisions
which may apply to any Share or Option by its terms or under provisions of the
Company's 1995 Restricted Stock Plan, Equity Incentive Plan or other equity or
option plan pursuant to which such Share or Option was granted or other
governing documentation, or (b) any provisions of the Stockholders Agreement
except Section 5.1 thereof. Without limiting the foregoing, Sections 5.4 and 10
of the Stockholders Agreement shall be applicable to all matters contemplated by
Section 3 hereof.
4. Assignment, etc. None of the parties shall have the right to assign
---------------
this Agreement.
5. Amendments and Waivers. No amendment or waiver of any term, provision
----------------------
or condition of this Agreement shall be effective, unless in writing
and executed by each of the Company, the Executive and Bain (which is
an intended third party beneficiary hereof). No waiver on any one
occasion shall extend to or effect or be construed as a waiver of any
right or remedy on any future occasion. No course of dealing of any
person nor any delay or omission in exercising any right or remedy
shall constitute an amendment of this Agreement or a waiver of any
right or remedy of any party hereto.
6. Miscellaneous.
-------------
a. Choice of Law. This Agreement shall be governed by and construed in
-------------
accordance with the domestic substantive laws of The Commonwealth of
Massachusetts without giving effect to any choice or conflict of law provision
or rule that would cause the application of the domestic substantive laws of any
other jurisdiction.
b. Permitted Transferees. Executive agrees that no Transfer of Shares
---------------------
will be made to a Permitted Transferee until the Permitted Transferee has
delivered a written acknowledgment and agreement in form and substance
reasonably satisfactory to the
-4-
<PAGE>
Company that such Shares are subject to all of the provisions of this Agreement
applicable thereto prior to such Transfer and that such Permitted Transferee is
bound hereby and a party hereto to the same extent as Executive.
7. Merger/Entire Agreement. This Agreement contains the entire
-----------------------
understanding of the parties with respect to the subject matter hereof
and supersedes any prior communication or agreement with respect
thereto.
8. Notice. All notices, demands, and communications of any kind which any
------
party may require or desire to serve upon any other party under this
Agreement shall be in writing and shall be served upon such other party
and such other party's copied persons as specified below by personal
delivery to the address set forth for it below or to such other address
as such party shall have specified by notice to each other party or by
mailing a copy thereof by certified or registered mail, or by Federal
Express or any other reputable overnight courier service, postage
prepaid, with return receipt requested, addressed to such party and
copied persons at such addresses. In the case of service by personal
delivery, it shall be deemed complete on the first business day after
the date of actual delivery to such address. In case of service by mail
or by overnight courier, it shall be deemed complete, whether or not
received, on the third day after the date of mailing as shown by the
registered or certified mail receipt or courier service receipt.
Notwithstanding the foregoing, notice to any party or copied person of
change of address shall be deemed complete only upon actual receipt by
an officer or agent of such party or copied person.
If to the Company, to it at:
Physicians Quality Care, Inc.
950 Winter Street
Suite 2410
Waltham, MA 02154
Attention: Chief Operating Officer
If to Bain, to it at:
Two Copley Place, 7th Floor
Boston, Massachusetts 02116
Attention: Stephen Pagliuca and Marc Wolpow
With a Copy to:
Ropes & Gray
One International Place
Boston, Massachusetts 02110
Attention: Lauren I. Norton
-5-
<PAGE>
If to the Executive, to her at:
350 Main Street
Concord, MA 01742
If to another stockholder, to him, her or it at the address
set forth in the stock record book of the Company.
9. Severability. If in any judicial or arbitral proceedings a court or
------------
arbitrator shall refuse to enforce any provision of this Agreement,
then such unenforceable provision shall be deemed eliminated from this
Agreement for the purpose of such proceedings to the extent necessary
to permit the remaining provisions to be enforced. To the full extent,
however, that the provisions of any applicable law may be waived, they
are hereby waived to the end that this Agreement be deemed to be valid
and binding agreement enforceable in accordance with its terms, and in
the event that any provision hereof shall be found to be invalid or
unenforceable, such provision shall be construed by limiting it so as
to be valid and enforceable to the maximum extent consistent with and
possible under applicable law.
10. Counterparts. This Agreement may be executed in any number of counter-
-------------
parts and by each of the parties hereto in separate counterparts, each
of which when so executed shall be deemed to be an original and all of
which together shall constitute one and the same agreement.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf as an instrument under seal as of the date first above
written by its officer or representative thereunto duly authorized.
EXECUTIVE: /s/ Jerilyn P. Asher
----------------------
Jerilyn P. Asher
The Company: PHYSICIANS QUALITY CARE, INC.
By: /s/ Jerilyn P. Asher
----------------------
Title:
-6-
<PAGE>
Schedule A
----------
SCHEDULE OF VESTED STOCK
------------------------
<TABLE>
<CAPTION>
Date Vested Shares
- ----------- ----------
<S> <C>
On or prior to 6/30/96 3,468,750*
6/21/97 346,875
6/21/98 346,875
---------
4,162,500
=========
</TABLE>
*The parties agree that this number of Shares has vested as of August 30, 1996.
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement"), made this 21st day of June, is
entered into by Physicians Quality Care, Inc., a Delaware corporation with its
principal place of business at 950 Winter Street, Suite 2410, Waltham, MA 02154
(the "Company"), and Dr. Arlan Fuller, Jr., residing at 6 Mystic Valley Parkway,
Winchester, MA 01890 ("Fuller").
The Company recognizes that the future growth, profitability and success of
the business of the Company will be enhanced by the employment of Fuller. The
Company desires therefore to secure the benefit of Fuller's experience and
ability. In order to retain the services of Fuller in the manner set forth
below, the Company desires to offer Fuller a compensation package which
recognizes the significance of his individual contribution to the future growth,
profitability and success of the Company and allows him to draw a salary
commensurate with his knowledge and experience.
NOW THEREFORE, on the basis of the foregoing facts and in consideration of
the mutual covenants and promises contained herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged by
the parties hereto, the parties agree as follows:
1. Employment. The Company hereby agrees to employ Fuller and Fuller
hereby accepts employment with the Company, upon the terms and subject to the
conditions hereinafter set forth.
2. Term. The term of this Agreement (the "Term") shall commence on
June 21, 1995 (the "Commencement Date"), and shall continue in effect for a
period of thirty-six (36) months, expiring on June 20, 1998 unless otherwise
extended as hereinafter provided. The Term shall be automatically extended for
additional twelve-month periods on June 21, 1998 and on each June 21 thereafter,
unless the Company notifies Fuller in writing that such
<PAGE>
extension shall not take place, ninety (90) days prior to any such June 21
extension date; provided that, if a Change of Control of the Company (as defined
in Section 11(b)) shall have occurred during the original or extended Term of
this Agreement, this Agreement shall continue in effect for a period of not less
than twenty-four (24) months beyond the month in which such Change of Control
occurred, as provided in Section 11(a).
3. Position; Duties.
(a) The Company and Fuller agree that, subject to the provisions of
this Agreement and subject to the direction of the Chief Executive Officer and
the Board of Directors of the Company (the "Board"), the Company shall, during
the Term, employ Fuller and Fuller shall serve as Executive Vice President,
Medical Information Systems and Academic Development or in such other position
as the Company or the Board may determine from time to time. Fuller shall
report directly to the Chief Executive Officer of the Company and shall be
subject to the supervision of, and shall have such authority as is delegated to
him by the Chief Executive Officer or the Board which shall include, but not be
limited to, those activities set forth on Exhibit A attached hereto. Fuller
shall be based at the Company's headquarters in Massachusetts and shall not be
obligated to relocate outside the metropolitan Boston area to perform his duties
and responsibilities without his prior written consent.
(b) Fuller hereby accepts such employment and agrees to undertake the
duties and responsibilities inherent in such position and such other duties and
responsibilities as the Chief Executive Officer of the Company or the Board
shall from time to time reasonably assign to him. Fuller agrees to devote 40%
of his entire business time, attention and energies to the business and
interests of the Company during the Term. Fuller agrees to abide by the written
rules, regulations, instructions, personnel practices and policies
2
<PAGE>
of the Company and any changes therein which may be adopted from time to time by
the Company.
4. Member of the Board. Throughout the Term, Fuller shall be eligible to
serve as a Director of the Company and a member of the Board. The Company
agrees that it shall nominate Fuller for election as a Director of the Company
at all elections of the members of the Board during the Term unless Fuller
declines to stand for election.
5. Compensation. As compensation for Fuller's employment hereunder, the
Company shall pay to Fuller a base salary payable in equal semi-monthly
installments at the annual rate of $175,000 or such greater base salary as the
Chief Executive Officer of the Company may from time to time approve.
6. Vacation. Fuller shall be entitled to four (4) weeks of vacation time
each year, to be pro-rated monthly for partial years, during the Term. If
Fuller does not utilize all vacation in the year earned, the unused vacation
time in any year shall not carry over to the next year.
7. Expenses. The Company shall reimburse Fuller for all reasonable
travel, entertainment and other expenses incurred or paid by Fuller in
connection with, or related to, the performance of his duties, responsibilities
or services under this Agreement, upon presentation by Fuller of documentation,
expense statements, vouchers and/or such other supporting information as the
Company may request, provided, however, that the amount available for such
travel, entertainment and other expenses may be fixed in advance by the Chief
Executive Officer or the Board.
8. Restricted Stock Award. Pursuant to the Company's 1995 Restricted
Stock Plan (the "Restricted Stock Plan"), the Company shall issue to Fuller
618,750 shares of Common Stock of the Company, $.01 par value per share (the
"Founder's Shares"), at a
3
<PAGE>
purchase price of $.01 per share, subject to vesting and the Company's right to
repurchase at $.01 per share, in the event that all of Fuller's Founder's Shares
do not vest and are forfeited in accordance with the Restricted Stock Plan
(which shall provide for, among other things, a vesting schedule based on (i)
performance targets for the Company as set by the Board, (ii) performance
targets for executive recipients as agreed to between the Chief Executive
Officer of the Company and such executive, and (iii) the duration of such
executive's employment with the Company). On the date hereof, Fuller and the
Company shall enter into a Restricted Stock Agreement substantially in the form
attached hereto as Exhibit B (the "Restricted Stock Agreement").
9. Employment Termination. The employment of Fuller by the Company
pursuant to this Agreement shall terminate upon the occurrence of any of the
following:
(a) Expiration of the Term in accordance with Section 2;
(b) At the election of the Company, for Cause, immediately upon
written notice by the Company to Fuller. For the purposes of this Section 9(b),
"Cause" for termination shall be deemed to exist upon (a) a good faith finding
by the Company of failure of Fuller to perform his assigned duties for the
Company, dishonesty, gross negligence or misconduct, or (b) the conviction of
Fuller of, or the entry of a pleading of guilty or nolo contendere by Fuller to,
any crime involving moral turpitude or any felony;
(c) Thirty days after the death or disability of Fuller. As used in
this Agreement, the term "disability" shall mean the inability of Fuller, due to
a physical or mental disability, for a period of 90 days, whether or not
consecutive, during any 360-day period to perform the services contemplated
under this Agreement. A determination of disability shall be made by a physician
satisfactory to both Fuller and the Company, provided that if Fuller and the
Company do not agree on a physician, Fuller and the
4
<PAGE>
Company shall each select a physician and these two together shall select a
third physician, whose determination as to disability shall be binding on all
parties;
(d) At the election of either party, upon not less than sixty (60)
days' prior written notice of termination.
10. Effect of Termination of Employment.
(a) Termination for Cause or at Election of Either Party. In the
event Fuller's employment is terminated for Cause pursuant to Section 9(b), or
at the election of either party pursuant to Section 9(d), the Company shall pay
to Fuller the compensation and benefits otherwise payable to him under Section 5
through the last day of his actual employment by the Company.
(b) Termination for Death or Disability. If Fuller's employment is
terminated by death or because of disability pursuant to Section 9(c), the
Company shall pay to the estate of Fuller or to Fuller, as the case may be, the
compensation which would otherwise be payable to Fuller up to the end of the
month in which the termination of his employment because of death or disability
occurs.
(c) Survival. The provisions of Sections 13 and 14 shall survive the
termination of this Agreement.
11. Termination in the Event of a Change of Control.
(a) In the event a Change in Control (as defined in Subsection (b)
below) shall occur during the Term and Fuller's employment with the Company is
subsequently terminated or terminates for any reason within twenty-four (24)
months after such Change in Control other than by reason of (i) disability or
death, or (ii) termination by the Company for
5
<PAGE>
Cause, Fuller shall be entitled to receive the vesting of the Founder's Shares
and the exercisability of stock options Fuller then holds as set forth in
Subsection (c) of this Section 11.
(b) A "Change in Control" shall occur or be deemed to occur if any of
the following events occur:
(i) any individual, entity or group (within the meaning of
Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act")) (a "Person") is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing 50% or more of the combined voting power
of the Company's then outstanding voting securities entitled to vote generally
in the election of directors (the "Outstanding Company Voting Securities");
provided however, that for purposes of this subsection (i), the following
acquisitions shall not constitute a Change of Control: (A) any acquisition
directly from the Company, (B) any acquisition by the Company, (C) any
acquisition by any employee benefit plan (or related trust) sponsored or
maintained by the Company or any corporation controlled by the Company, or (D)
any acquisition by any corporation pursuant to a transaction which complies with
clauses (A), (B) and (C) of paragraph (iii) below;
(ii) Individuals who, as of the Commencement Date, constitute the
Board (as of such date, the "Incumbent Board") cease for any reason to
constitute at least a majority of the Board; provided however, that any
individual becoming a director subsequent to the date hereof whose election, or
nomination for election by the Company's stockholders, was approved by a vote of
at least a majority of the directors then comprising the Incumbent Board shall
be, for purposes of this Agreement, considered as though such person were a
member of the Incumbent Board, excluding any individual whose initial assumption
of office
6
<PAGE>
occurs as a result of an actual or threatened election contest with respect to
the election or removal of directors or other actual or threatened solicitation
of proxies or consents by or on behalf of a Person other than the Board; or
(iii) the stockholders of the Company approve a reorganization,
merger or consolidation of the Company with any other corporation or the sale or
other disposition of all or substantially all of the assets of the Company (a
"Business Combination"), in each case, unless, following such Business
Combination, (A) all or substantially all of the individuals and entities who
were the beneficial owners, respectively, of the Outstanding Company Voting
Securities immediately prior to such Business Combination beneficially own,
directly or indirectly, more than 50% of the combined voting power of the then
outstanding voting securities entitled to vote generally in the election of
directors of the corporation resulting from such Business Combination
(including, without limitation, a corporation which as a result of such
transaction owns the Company or all or substantially all of the Company's assets
either directly or through one or more subsidiaries) in substantially the same
proportions as their ownership of the Outstanding Company Voting Securities
immediately prior to such Business Combination, (B) no Person (excluding any
corporation resulting from such Business Combination or any employee benefit
plan (or related trust) of the Company or such corporation resulting from such
Business Combination) beneficially owns, directly or indirectly, 50% or more of,
the then outstanding shares of common stock of the corporation resulting from
such Business Combination or the combined voting power of the then outstanding
voting securities of such corporation except to the extent that such ownership
existed prior to the Business Combination and (C) at least a majority of the
members of the Board of Directors of the corporation resulting from such
Business Combination were members of the Incumbent Board at the time of the
execution of
7
<PAGE>
the initial agreement, or of the action of the board, providing for such
Business Combination; or
(iv) Approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company.
(c) The Fuller Stock Restriction Agreement and all stock options for
the purchase of the Company's Common Stock granted to Fuller by the Company
under any of the Company's stock option plans shall provide for acceleration of
the vesting of the Founder's Shares and the full and immediate exercisability of
each such option upon the occurrence of a Change of Control.
(d) Notwithstanding any other provisions of this Agreement, in the
event that any payment or benefit received or to be received by Fuller in
connection with a Change of Control or the termination of Fuller's employment
(all such payments and benefits, including those set forth in Section 11(c)
being hereafter called "Total Payments"), would be subject (in whole or part),
to the excise tax imposed under Section 4999 of the Internal Revenue Code
("IRC") (the "Excise Tax"), then the Total Payments may be reduced, in such
order and manner as Fuller may elect, so that no portion of the Total Payments
is subject to the Excise Tax if (i) the net amount of such Total Payments, as so
reduced (and after deduction of the net amount of federal, state and local
income tax on such reduced Total Payments) is greater than (ii) the excess of
(A) the net amount of such Total Payments, without reduction (but after
deduction of the net amount of federal, state and local income tax on such Total
Payments), over (B) the amount of Excise Tax to which Fuller would be subject in
respect of such Total Payments. For purposes of determining whether and the
extent to which the Total Payments will be subject to the Excise Tax, (i) no
portion of the Total Payments the receipt or enjoyment of which Fuller shall
have effectively waived in
8
<PAGE>
writing prior to the date of his termination shall be taken into account, (ii)
no portion of the Total Payments shall be taken into account which in the
opinion of tax counsel selected by the Company does not constitute a "parachute
payment" within the meaning of Section 280G(b)(2) of the IRC (including by
reason of Section 280G(b)(4)(A) of the IRC) and, in calculating the Excise Tax,
no portion of such Total Payments shall be taken into account which constitutes
reasonable compensation for services actually rendered, within the meaning of
Section 280G(b)(4)(B) of the IRC, and (iii) the value of any non-cash benefit or
any deferred payment or benefit included in the Total Payments shall be
determined by the Company in accordance with the principles of Sections
280G(d)(3) and (4) of the IRC. Prior to the payment of any of the Total
Payments, the Company shall provide Fuller with its calculation of the amounts
referred to in this Section and such supporting materials as are reasonably
necessary for Fuller to evaluate the Company's calculations.
12. Indemnification. Fuller shall be fully indemnified by the Company in
his capacity as an officer and director of the Company to the extent permitted
by Delaware law.
13. Non-Compete.
(a) So long as Fuller is employed by the Company and for a period of
one year after the termination or expiration of his employment, Fuller will not
directly or indirectly:
(i) as an individual proprietor, partner, stockholder, officer,
employee, director, joint venturer, investor, lender, or in any other capacity
whatsoever (other than as the holder of not more than one percent (1%) of the
total outstanding stock of a publicly held company), engage directly or
indirectly in any business or entity which (i) operates, develops or manages
physician practice management entities or (ii) develops, designs, produces,
markets or sells managed care products, of the kind or type developed or
9
<PAGE>
which were being developed, produced, marketed or sold by the Company while
Fuller was employed by the Company, to the extent such engagement assists such
business or entity in competing with the business conducted by the Company in
any city in which the Company conducts material operations; or
(ii) recruit, solicit or induce, or attempt to induce, any
employee or employees of the Company to terminate their employment with, or
otherwise cease their relationship with, the Company; or
(iii) solicit, divert or take away, or attempt to divert or
to take away, the business or patronage of any of the clients, customers or
accounts, or prospective clients, customers or accounts, of the Company which
were contacted, solicited or served by Fuller while employed by the Company.
(b) The Company acknowledges and agrees that, notwithstanding anything
else to the contrary contained herein, none of Fuller's activities undertaken in
connection with his employment by the Massachusetts General Hospital and the
Harvard Medical School, including but not limited to his activities as a
director or manager of any physician's network or physician's organization or of
any integrated healthcare delivery system developed by Massachusetts General
Hospital and Harvard Medical School, shall be deemed a violation of this Section
13. If any restriction set forth in this Section 13 is found by any court of
competent jurisdiction to be unenforceable because it extends for too long a
period of time or over too great a range of activities or in too broad a
geographic area, it shall be interpreted to extend only over the maximum period
of time, range of activities or geographic area as to which it may be
enforceable.
(c) The restrictions contained in this Section 13 are necessary for
the protection of the business and goodwill of the Company and are considered by
Fuller to be
10
<PAGE>
reasonable for such purpose. Fuller agrees that any breach of this Section 13
will cause the Company substantial and irrevocable damage and therefore, in the
event of any such breach, in addition to such other remedies which may be
available, the Company shall have the right to seek specific performance and
injunctive relief.
14. Proprietary Information and Developments.
(a) Proprietary Information.
(i) Fuller agrees that all information and know-how, whether or
not in writing, of a private, secret or confidential nature concerning the
Company's business, business relationships or financial affairs (collectively,
"Proprietary Information") is and shall be the exclusive property of the
Company. By way of illustration, but not limitation, Proprietary Information may
include inventions, products, processes, methods, techniques, formulas,
compositions, compounds, projects, developments, plans, research data, clinical
data, financial data, personnel data, computer programs, and customer and
supplier lists and contracts at or knowledge of customers or prospective
customers of the Company. Fuller will not disclose any Proprietary Information
to others outside the Company or use the same for any unauthorized purposes
without written approval by an officer of the Company, either during or after
his employment, unless and until such Proprietary Information has become public
knowledge without fault by Fuller.
(ii) Fuller agrees that all files, letters, memoranda, reports,
records, data, sketches, drawings, laboratory notebooks, program listings, or
other written, photographic, or other tangible material containing Proprietary
Information, whether created by Fuller or others, which shall come into his
custody or possession, shall be and are the exclusive property of the Company to
be used by Fuller only in the performance of his duties for the Company.
11
<PAGE>
(iii) Fuller agrees that his obligation not to disclose or
use information, know-how and records of the types set forth in Subsection (a)
of this Section 14, also extends to such types of information, know-how, records
and tangible property of customers of the Company or suppliers to the Company or
other third parties who may have disclosed or entrusted the same to the Company
or to Fuller in the course of the Company's business.
(b) Developments.
(i) Fuller will make full and prompt disclosure to the Company
of all inventions, improvements, discoveries, methods, developments, software,
and works of authorship, whether patentable or not, which are created, made,
conceived or reduced to practice by Fuller or under his direction or jointly
with others during his employment by the Company, whether or not during normal
working hours or on the premises of the Company (all of which are collectively
referred to in this Agreement as "Developments").
(ii) Fuller agrees to assign and does hereby assign to the
Company (or any person or entity designated by the Company) all his right, title
and interest in and to all Developments and all related patents, patent
applications, copyrights and copyright applications. However, Subsection (b) of
this Section 14 shall not apply to Developments which do not relate to the
present or planned business or research and development of the Company and which
are made and conceived by Fuller not during his working hours for the Company,
not on the Company's premises and not using the Company's tools, devices,
equipment or Proprietary Information.
(iii) Fuller agrees to cooperate fully with the Company, both
during and after his employment with the Company, with respect to the
procurement, maintenance and enforcement of copyrights and patents (both in the
United States and foreign countries)
12
<PAGE>
relating to Developments. Fuller shall sign all papers, including, without
limitation, copyright applications, patent applications, declarations, oaths,
formal assignments, assignment of priority rights, and powers of attorney, which
the Company may deem necessary or desirable in order to protect its rights and
interests in any Development.
(c) Other Agreements. Fuller hereby represents that he is not bound
by the terms of any agreement with any previous employer or other party to
refrain from using or disclosing any trade secret or confidential or proprietary
information in the course of his employment with the Company or to refrain from
competing, directly or indirectly, with the business of such previous employer
or any other party. Fuller further represents that his performance of all the
terms of this Agreement and as an employee of the Company does not and will not
breach any agreement to keep in confidence proprietary information, knowledge or
data acquired by him in confidence or in trust prior to his employment with the
Company.
15. Assignment. Neither this Agreement nor any rights or benefits
hereunder shall be subject to execution, attachment or similar process nor may
this Agreement or any rights or benefits hereunder be assigned, delegated,
transferred, pledged or hypothecated, without the written consent of both
parties hereto, and any such assignment, delegation, transfer, pledge,
hypothecation, execution, attachment or similar process shall be null and void.
16. Successors; Binding Agreement.
(a) The Company shall require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets of the Company to assume expressly
in writing and to agree to perform its obligations under this Agreement in the
same manner and to the same extent that the Company would
13
<PAGE>
be required to perform it if no such succession had taken place. Failure of the
Company to obtain an assumption of this Agreement prior to the effectiveness of
succession shall be a breach of this Agreement. As used in this Agreement, "the
Company" shall mean the Company as defined above and any successor to its
business or assets as aforesaid which assumes and agrees to perform this
Agreement by operation of law, or otherwise.
(b) This Agreement shall inure to the benefit of and be enforceable by
Fuller's personal or legal representatives, executors, administrators,
successors, heirs, distributees, deviseesand legatees. Any amounts payable by
the Company to Fuller after the date of his death, unless otherwise provided
herein, shall be paid in accordance with the terms of this Agreement to his
devisee, legatee or other designee, or if there is no such designee, to his
estate.
l7. Severability. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be valid and effective under
applicable law, but if any provision of this Agreement is found to be prohibited
or invalid under applicable law, such provision shall be ineffective to the
extent of such prohibition or invalidity without invalidating the remainder of
such provision or the remaining provisions of this Agreement.
18. Notices. All notices, requests, demands and other communication
hereunder shall be in writing and shall be deemed to have been duly given if
personally delivered or if mailed by United States Postal Service certified or
registered mail, prepaid, to the parties or their permitted assignees at the
Company, in the case of the Company, 950 Winter Street, Suite 2410, Waltham, MA
02154, with a copy to Paul P. Brountas, Esq., Hale and Dorr, 60 State Street,
Boston, Massachusetts 02109 or such address as shall constitute the Company's
headquarters and in the case of Fuller at the last address shown in the
personnel records of the Company, or at such other address as shall be given in
writing by either party to the
14
<PAGE>
other. The date of such personal delivery or the third business day following
the date of mailing shall be deemed to be the date of such notice, demand or
communication.
19. Waiver and Modification. Any waiver, alteration or modification of
any of the terms of this Agreement shall be valid only if made in writing and
signed by the parties hereto. Each party hereto from time to time may waive any
of his or its rights hereunder without affecting a waiver with respect to any
subsequent occurrences or transactions hereunder.
20. Captions and Headings. Captions and section headings used herein are
for convenience only, are not a part hereof and shall not be used in construing
this Agreement.
21. Entire Agreement. This Agreement constitutes and embodies the entire
understanding and agreement of the parties hereto and, except as otherwise
provided hereunder, there are no other agreements or understandings, written or
oral, in effect between the parties hereto relating to the employment of Fuller
by the Company.
22. Governing Law. This Agreement shall be governed by and interpreted in
accordance with the laws of the Commonwealth of Massachusetts, except where
Federal law governs.
23. Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed an original, but both of which taken together shall
constitute one and the same instrument.
[The rest of this page has been left blank intentionally.]
15
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement below:
DATED: June 21, 1995 PHYSICIANS QUALITY CARE, INC.
By: /s/ Jerilyn P. Asher
___________________________
Jerilyn P. Asher
President and Chief
Executive Officer
DATED: June 21, 1995 /s/ Arlan F. Fuller, M.D.
___________________________
Arlan Fuller, Jr., M.D.
16
<PAGE>
Exhibit A
Develop strategy in connection with the academic and business development of the
Company, including engaging in the identification of new market opportunities
with respect to academic medical centers and the identification and development
of new product and service markets.
Provide expertise and advice in connection with the corporate governance and
structure of the Company and the professional corporations which comprise its
affiliated physician groups.
Serve as a member of the Company's National Medical Advisory Board and as an
informal advisor to the Company's National Council of Regional Service
Organizations.
Evaluate technology and develop strategy for the Company in connection with the
development of its medical information systems.
Serve as a member of the Executive Committee which shall interface with business
development, finance, managed care, marketing, operations and systems
development.
17
<PAGE>
AMENDMENT TO
EMPLOYMENT AGREEMENT
WHEREAS, pursuant to an Employment Agreement dated as of June 21, 1995 (the
"Agreement"), Physicians Quality Care, Inc. (the "Company") and Dr. Arlan
Fuller, Jr. ("Fuller") entered into an employment relationship.
WHEREAS, the Company and Fuller wish to clarify the Agreement and to
provide for certain additional terms of the Agreement.
NOW THEREFORE, in consideration of these promises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto, intending to be legally bound, agree as
follows:
1. Section 6 of the Agreement is hereby amended to add a new clause at
the end thereof, as follows: ";provided, however, that upon receipt of approval
from the Company's Compensation Committee or, if there is no Compensation
Committee, the Company's Board of Directors, Fuller may elect to receive
additional salary in lieu of any unused vacation time at a rate per week equal
to his annual base salary divided by fifty-two."
IN WITNESS WHEREOF, authorized signatories of the parties have hereunto set
their hands as of this ______ day of January, 1996.
PHYSICIANS QUALITY CARE, INC. DR. ARLAN FULLER, JR.
(the "Company") ("Fuller")
By: /s/ Jerilyn Asher /s/ Arlan F. Fuller
____________________________ _____________________________
Its:
18
<PAGE>
Exhibit 10.21
OFFICE BUILDING LEASE
---------------------
This lease, dated for reference purposes only, as of the 18th day of March,
1997, is entered into by and between HARBOR COURT ASSOCIATES, a Maryland general
partnership ("Landlord"), and PHYSICIANS QUALITY CARE, INC. ("Tenant");
PREAMBLE
--------
Landlord, in consideration of the rent to be paid and the covenants and
agreements to be performed by Tenant, as hereinafter set forth, does hereby
lease, demise, and let unto Tenant and Tenant hereby leases and accepts from
Landlord that certain office space in the "Building," as defined below, shown
and designated on the floor plan attached hereto as Exhibit "A" and incorporated
herein by this reference (the "Premises") for the "Term," as defined below,
unless sooner terminated as herein provided. The Premises are leased by
Landlord to Tenant and are accepted and are to be used and possessed by Tenant
upon and subject to the following terms, provisions, covenants, agreements, and
conditions.
1. PRINCIPAL LEASE PROVISIONS.
--------------------------
Each reference in this Lease to any of the terms described in this Article
1 shall mean and refer to the following; however, the other Articles of this
Lease contain numerous refinements and exceptions which qualify the provisions
of this Article; all other terms are as defined in this Lease:
1.1 Landlord's Address: c/o Mega Management Company
------------------- PO Box 68
Kannapolis, NC 28082
ATTN: Lynne Scott-Safrit
1.2 Tenant's Address: Physicians Quality Care, Inc.
----------------- 323 West Camden Street
Suite 675
Baltimore, MD 21201
1.3 Building: 575 South Charles Street
--------- Baltimore, Maryland 21201
1.4 (a) Rentable Square Footage of the Building:
----------------------------------------
71,731 square feet
(b) Rentable Square Footage of Retail Space:
----------------------------------------
9,124 square feet
<PAGE>
(c) Rental Square Footage of Office Space:
--------------------------------------
62,607 square feet
1.5 Area of Premises: 1,685 rentable square feet
-----------------
1.6 Floor Number: Second (2nd)
------------
1.7 Suite Number: 203
------------
1.8 Lease Term: Six (6) Months
----------
1.9 Estimated Commencement Date: April 1, 1997
----------------------------
1.10 Termination Date: September 30, 1997
----------------
1.11 Initial Monthly Rental: U.S. Two Thousand Six Hundred
-----------------------
and xx/100 Dollars ($2,600.00)
1.12 Tenant's Percentage:
--------------------
(a) 2.35 % of Building
(b) 0.00 % of Retail Space
(c) 2.69 % of Office Space
1.13 Security Deposit: U.S. Two Thousand Six Hundred
----------------
and xx/l00 Dollars ($2,600.00)
1.14 Brokers: None
-------
1.15 State: Maryland
-----
1.16 Use of Premises: General Office Use
----------------
2. PREMISES.
--------
2.1 Premises. Landlord hereby leases to Tenant and Tenant hereby
--------
leases from Landlord the Premises.
2.2 Common Areas. Tenant shall have, as appurtenant to the
------------
Premises, the non-exclusive right, in common with others, subject to reasonable
rules of general applicability to tenants of the Building from time to time made
by Landlord and of
2
<PAGE>
which Tenant is given notice, to the use of the following areas of the Building:
common entrances, lobbies, corridors, elevators, ramps, drives, service ways,
restrooms, and common walkways necessary to access to the Building (the "Common
Area"). Tenant hereby agrees that Landlord shall have the right, for the
purpose of accommodating other tenants of the Building, to increase or
decrease the configuration and dimensions or to otherwise alter the common
corridors on any floor so long as Tenant's access to the Premises, restrooms,
stairwells, and elevators is not prohibited thereby. Landlord reserves the right
from time to time: (a) to install, use, maintain, repair, replace, and relocate
for service to the Premises and/or other parts of the building pipes, ducts,
conduits, wires appurtenant fixtures, and mechanical systems, wherever located
in the Premises or the Building, and (b) to alter, close, or relocate Common
Areas or any facility therein.
3. TERM AND POSSESSION.
-------------------
3.1 Term. The term of this Lease shall be for a term commencing on the
----
Estimated Commencement Date as set forth in Section 1.9 and ending on the
Termination Date as set forth in Section 1.10, unless sooner terminated as
provided in this Lease.
3.2 Possession. Tenant agrees that if Landlord is unable to deliver
----------
possession of the Premises to Tenant on the Estimated Commencement Date,
Landlord shall not be liable for any damage caused thereby, nor shall this Lease
be void or voidable. Under such circumstances, the term of this Lease shall not
commence and the rent and payments for expenses which Tenant is obligated to pay
shall not commence until the Premises are ready for occupancy by Tenant and the
Termination Date of this Lease shall be based on the Lease Term as stated in
Section 1.8 of this Lease, unless such delay is the fault or responsibility of
Tenant. If Landlord tenders possession of the Premises to Tenant prior to the
Estimated Commencement Date, and if Tenant elects to accept such prior tender,
the term of this Lease shall commence on the date Tenant takes possession of
the Premises and all of the terms, covenants, and conditions of this Lease,
including the payment of rent and other expenses, shall be effective as of such
date. Notwithstanding the fact that the term of this Lease may commence earlier
than the Estimated Commencement Date, the term of this Lease shall end on the
Termination Date set forth in Section 1.10.
3.3 Acceptance of Premises. By taking possession of the Premises,
----------------------
Tenant accepts the Premises in its then "as is" condition and acknowledges that
the Premises and the Building are in good and satisfactory condition at the time
Tenant takes possession of the Premises.
3.4 Quiet Enjoyment. Upon Tenant's paying the rent and other expenses
---------------
provided in this Lease and observing and performing all of the terms, covenants,
and conditions to be observed and performed by Tenant hereunder, Tenant shall
peaceably
3
<PAGE>
and quietly hold, occupy, enjoy, manage, and operate the Premises without
hindrance or molestation by Landlord during the term of this Lease or by any
person or persons claiming under Landlord, subject to all of the provisions of
this Lease.
3.5 Security Deposit. On delivery to Landlord of a copy of this Lease
----------------
executed by Tenant, Tenant shall deposit with Landlord the amount set forth in
Section 1.13 as security for the performance by Tenant of its obligations under
this Lease. Landlord may apply all or any portion of such security deposit in
payment of any obligation of Tenant under this Lease in default. If Landlord so
applies any portion of such security deposit, Tenant shall within ten (10) days
after written demand from Landlord, restore such deposit to the full amount
provided in this Lease. Landlord shall not be required to pay interest to
Tenant on such security deposit or to keep such security deposit separate from
its general accounts. Such deposit shall be returned to Tenant at the
termination of the Lease if Tenant has discharged its obligations under this
Lease in full.
4. RENT.
----
4.1 Payment of Rent. Tenant shall pay the monthly Rental, without any
---------------
prior demand therefor and without any deduction or offset whatsoever, in lawful
money of the United States of America, to Landlord on the first day of each
calendar month during the term of this Lease as rent for the Premises for such
month. Tenant shall make payments of rent and other expenses to Landlord at the
Building Manager's office at the Building or at other such address as Landlord
may from time to time request in writing. If the term of this Lease commences
other than on the first day of a month or ends other than on the last day of a
month, the rent for a partial month shall be prorated on a thirty (30) day
month, based on the number of days in such month that this Lease is in effect.
4.2 Monthly Rental. The Monthly Rental from the commencement of the
--------------
term of this Lease through December 31, 1997, shall be the Initial Monthly
Rental as provided in Section 1.11 hereof. The Monthly Rental for any
succeeding calendar year shall be determined by (i) multiplying the difference
between the Monthly Rental for the immediately preceding calendar year and
$1,476.67 by the CPI Adjustment for such year and (ii) adding to such amount
$1,476.67; however, in no event shall the Monthly Rental be less than the
Initial Monthly Rental. The CPI Adjustment for a calendar year shall be a
fraction, the numerator of which shall be the average CPI for the twelve months
ending with the September immediately preceding such calendar year and the
denominator of which shall be the average CPI for the twelve months ending with
the September before the September immediately preceding such calendar year.
The term "CPI" as used in this Lease shall mean the Consumer Price Index for All
Urban Customers - All Items - U.S. City Average (1967=100 or the then current
basis, if changed by the United States Department of Labor) published by the
United States Department of Labor, Bureau of Statistics. If the issuance of the
CPI by the federal government is
4
<PAGE>
discontinued, the Landlord shall use for the CPI the official index published by
a federal governmental agency which is most nearly equivalent to the CPI. If
no such index is available, then Landlord shall use such index or procedure
which reasonably reflects increases or decreases in consumer prices in the
United States. If the rental payments determined pursuant to this Section 4.2
exceed that allowed by the terms of any valid governmental restriction which
limits the amount of rent or if the rental payments described pursuant to this
Section 4.2 exceed any limitation otherwise imposed by this Lease, the amount of
rent or other payments shall be the maximum permitted by such governmental
restriction and by such limitation; however, all increases or decreases in rent
or other payments provided in this Lease shall be calculated thereafter based
upon the amount of the rent which would have been payable under the Lease as if
such government restriction or other limitation had not limited the rent payable
under the terms of this Lease. As used herein "calendar year" means a period
ending December 31.
5. ADDITIONAL EXPENSES.
-------------------
5.1 Additional Expenses Payable By Tenant. Tenant shall pay a
-------------------------------------
reasonable charge determined by Landlord for any utilities or services required
to be provided by Landlord by reason of any use by Tenant of any utilities or
services in excess of utilities or services customarily provided for general
office use in the Building or by reason of any recurrent use of the Premises at
any time other than the normal business hours of generally recognized business
days and shall also pay any costs reasonably incurred by Landlord to meter or
otherwise measure the amount of such utilities or services used by Tenant.
Tenant shall pay for any additional or unusual janitorial services required by
reason of Tenant's use of the Premises or by reason of improvements in the
Premises other than Landlord's "Building Standard" improvements. If the
replacement cost of improvements in the Premises in excess of such replacement
cost if only Landlord's "Building Standard" improvements were installed in the
Premises or Tenant's use or the conduct of business on the Premises or in the
Building, whether or not with Landlord's consent and whether or not otherwise
permitted by this Lease, results in any increase in premiums for the insurance
carried by Landlord with respect to the Building, Tenant shall pay any such
increase in premiums within ten (10) days after being billed by Landlord.
6. SERVICES AND UTILITIES.
----------------------
6.1 Services by Landlord. Landlord shall furnish to the Premises
--------------------
during such normal business hours of generally recognized business days such
amounts of air conditioning, heating, and ventilation as may be reasonably
necessary for the comfortable use and occupation of the Premises. Landlord
shall, at all times, furnish the Premises with elevator service and reasonable
amounts of electricity for normal lighting and office machines and shall furnish
water for lavatory and drinking purposes. Landlord shall provide janitorial
service equivalent to that furnished in comparable office buildings and
5
<PAGE>
window washing as reasonably required. Landlord shall replace fluorescent tubes
and ballasts in Landlord's building standard overhead fluorescent fixtures as
required. Tenant shall pay for replacement of all other tubes, ballasts, and
bulbs as required.
6.2 Maintenance and Repair by Landlord. Landlord shall maintain the
----------------------------------
Common Areas of the Building in a first-class condition, shall maintain the
plumbing, heating, ventilation, air conditioning, elevator, electrical, and
other mechanical systems of the Building in good working order, shall make
necessary repairs to the roof and the shell of the Building, and shall repair
promptly any damage to the Premises and the Building as provided in Section 10.
6.3 Interruption of Service. Landlord shall not be liable and the
-----------------------
Monthly Rental and other payment to Landlord shall not abate for interruptions
to the telephone, plumbing, heating, ventilation, air conditioning, elevator,
electrical, or other mechanical systems or cleaning services, by reason of
accident, emergency, repairs, alterations, improvements, or shortages or lack of
availability of materials or services. At any time during the term of this
Lease, any utilities or services may be conserved by Landlord without abatement
of rent or other expenses if undertaken by Landlord as required by any
governmental agency or in a reasonable effort to reduce energy or other resource
consumption.
7. USE AND OCCUPANCY BY TENANT.
---------------------------
7.1 Use by Tenant. Tenant shall use and occupy the Premises for
-------------
general office purposes as described in Section 1.16 and for no other purposes
without the prior written consent of the Landlord. Tenant shall operate its
business on the Premises during normal business hours and shall maintain
sufficient personnel on the Premises during normal business hours to receive and
supervise visitors to the Premises. Tenant shall furnish and decorate the
Premises in a manner consistent with its business and the other businesses in
the Building. Tenant shall not do or permit anything to be done in or about the
Premises which would constitute a nuisance to the other tenants or occupants of
the Building or significantly interfere with their use of any area of the
Building other than the Premises.
7.2 Rules and Regulations. Tenant and its employees, agents, and
---------------------
visitors shall observe faithfully the Rules and Regulations attached hereto as
Exhibit "B" and made a part hereof, and such other and further reasonable Rules
and Regulations as Landlord may from time to time adopt. Landlord shall not be
liable to Tenant for violation of any Rules and Regulations or the breach of any
provision in any lease by any other tenant or other party in the Building.
6
<PAGE>
8. MAINTENANCE, REPAIRS, AND ALTERATIONS.
-------------------------------------
8.1 Maintenance and Repair. During the term of this Lease, Tenant shall
----------------------
take good care of the Premises and fixtures therein and maintain them in good
order, condition, and repair in a quality and class equal to the original work,
ordinary and reasonable wear excepted. During the term of this Lease, Tenant
shall maintain at its own expense all plumbing facilities and the area in which
such plumbing facilities are located within the premises, except the restrooms
located in the core of the Building, in good order, condition and repair as they
are on the commencement of the term of this Lease, ordinary and reasonable wear
excepted. Upon surrender of the Premises to Landlord, Tenant shall deliver the
Premises to Landlord broom-clean in as good order, condition, and repair as they
are on the commencement of the term of this Lease, ordinary and reasonable wear
excepted. Without limiting the foregoing, Landlord may require that any such
maintenance or repairs be performed by Landlord at Tenant's expense.
8.2 Alterations. Tenant shall not make nor permit to be made any
-----------
alterations or improvements to the Premises without obtaining Landlord's prior
written consent which shall not be unreasonably withheld, and then only by
contractors or mechanics approved by Landlord. Landlord shall generally consent
to alterations, additions, or improvements which do not affect the value of the
Premises significantly and which do not affect the structure or operation of the
Building. Tenant covenants and agrees that all work done by Tenant shall be
performed in full compliance with any and all applicable laws, statutes, rules,
orders, ordinances, regulations, and requirements of the federal, state, and
local governments, and all their departments and bureaus, as well as the
requirements of the Association of Fire Underwriters, or similar governing
insurance body. Unless otherwise approved by Landlord, all alterations,
additions, and improvements to the Premises shall be made by Landlord. Landlord
shall pay for the cost of any alterations, additions, and improvements to the
Premises only to the extent Landlord agrees to do so by a separate written
agreement with Tenant. Otherwise, Tenant shall pay all costs for such
additions, alterations, and improvements including any additions, alterations,
and improvements to the Premises required by any governmental agency during the
term of this Lease, which costs shall include a reasonable overhead and profit
charge by Landlord. Tenant shall report all costs incurred by Tenant for any
alterations, additions, or improvements made by Tenant to the Premises and shall
permit Landlord to examine all contracts and records relating to such
alterations, additions, or improvements. All alterations, additions, and
improvements to the Premises by Landlord or Tenant shall become part of the
realty and belong to Landlord and, at the end of the term hereof, shall remain
on the Premises without compensation of any kind to Tenant, except that any
trade fixtures which are installed and paid for by Tenant shall remain the
property of Tenant and may be removed by Tenant during the term of this Lease
provided Tenant repairs any damage to the remaining improvements of the Premises
caused by the removal of such fixtures. Moveable furniture and equipment of
Tenant shall remain the property of the Tenant.
7
<PAGE>
9. INSURANCE AND INDEMNIFICATION.
-----------------------------
9.1 Landlord's Insurance and Waiver. During the term of this Lease,
-------------------------------
Landlord shall obtain and keep in full force and effect fire and extended
coverage insurance with a vandalism and malicious mischief endorsement for the
Building and public liability insurance in such reasonable amounts with such
reasonable deductions as would be carried by a prudent owner of a similar
building in the area, or which the first mortgagee of the Building reasonably
deems necessary in connection with the operation of the Building. Landlord may
obtain insurance for the Building and the rents from the Building against such
other perils as Landlord reasonably considers appropriate. Tenant acknowledges
that it will not be a named insured in such policy and that it has no right to
receive any proceeds from any such insurance policies carried by Landlord.
9.2 Tenant's Insurance. During the entire term of the Lease, Tenant
------------------
shall obtain and keep in full force and effect, at its sole cost and expense,
the following insurance: (i) fire and extended coverage insurance with a water
damage and sprinkler damage endorsement and with a vandalism and malicious
mischief endorsement for property of Tenant located in the Building in an amount
not less than ninety percent (90%) of its cash value for any property such as
standard office furniture, furnishings, equipment, files, and supplies and in an
amount of one hundred percent (100%) of its cash value for any properties such
as cash, antiques, art objects, and jewelry, (ii) comprehensive general
liability insurance, including personal injury and property damage insuring
against all claims and liability arising out of the use or occupancy of the
Premises with limits as appropriate to Tenant's use of the Premises but not less
than $2,000,000, and (iii) insurance against interruption of Tenant's business
and loss of Tenant's business records in such amount as appropriate to Tenant's
business, unless Tenant shall provide, in writing, evidence of self insurance
pertaining to interruption of Tenant's business and loss of Tenant's business
records. All insurance policies shall provide that they cannot be canceled
without twenty (20) days prior written notice to Landlord and any other person
holding an interest in the Building designated by Landlord. Tenant shall deliver
copies of such policies to Landlord on request. Tenant may, by written notice of
such election to Landlord, elect to be a self-insurer of its property such as
office furniture, furnishings, equipment, files and supplies, cash, securities,
antiques, art objects, and jewelry and against interruption of Tenant's business
and loss of Tenant's business records. As an alternate to copies of Tenant's
insurance policies, Landlord agrees to accept certificates of such insurance
which are in a form satisfactory to Landlord.
9.3 Indemnification. Tenant hereby waives all claims against Landlord,
---------------
its agents and employees for loss, theft, or damage to equipment, furniture,
records, and other property on or about the Premises, for loss or damage to
Tenant's business or death or injury to persons on or about the Premises or the
Building, except to the extent
8
<PAGE>
caused by the active negligence or willful misconduct of Landlord, its agents or
employees. Tenant shall indemnify and hold harmless Landlord, its agents and
employees from and against any and all claims and liability for the loss, theft,
or damage to property on or about the Premises except Tenant's indemnification
shall not include an indemnification for liability for the active negligence or
willful misconduct of Landlord, its agents or employees. Tenant shall indemnify
and hold Landlord, its agents and employees harmless from and against any and
all claims and liability arising from any breach or default by Tenant in the
performance of any obligation of Tenant under this Lease or arising from the
negligence or willful misconduct of Tenant, its agents, employees, or visitors.
Landlord shall not be liable to Tenant for any negligence or act of any occupant
or invitee of any owner or occupant or invitee of any owner or occupant of any
property adjoining the Building other than Landlord, its agents and employees.
9.4 Waiver of Subrogation. Without limiting the obligation of Tenant to
---------------------
maintain insurance which permits waiver of subrogation (unless otherwise
approved in writing by Landlord), Landlord and Tenant hereby waive all causes of
action and rights of recovery against each other, against all subtenants or
assignees of Tenant, against all other tenants of the Building and their
assignees and sublessees and against any other person or entity holding an
interest in the Building (together, the "Affected Parties"), and against the
agents, officers, and employees of the Affected Parties, for any loss occurring
to the property of the Affected Parties resulting from any of the perils insured
against under any and all casualty insurance policies in effect at the time of
any such loss regardless of cause of origin of such loss, including the
negligence of the Affected Parties or the agents, officers, or employees of the
Affected Parties, to the extent of any recovery on such policies of insurance,
except to the extent that any of such policies of insurance are invalidated, in
whole or part, by said waiver, and so long as such policies of insurance shall
contain (and Landlord and Tenant hereby agree to use their best efforts to cause
such policies to contain), by endorsement or otherwise, a clause in such form or
having substantially the same effect as the following: "It is hereby stipulated
that this insurance shall not be invalidated in whole or in part should the
insured or any of them waive in writing prior to a loss any or all rights of
recovery against any person or entity for loss occurring to the property
described herein." Any self-insurance by Tenant shall be deemed to include such
waiver of subrogation against the Affected Parties. The obligation of Landlord
to use its best efforts to cause such policies to contain the above-described
clause shall not obligate Landlord to obtain such insurance from insurance
companies unacceptable to Landlord nor to incur premium charges therefor which
exceed one hundred ten percent (110%) of the premium charges for such insurance
which does not include such a clause. The obligation of Tenant to use its best
efforts to cause such policies to contain the above-described clause shall not
obligate Tenant to obtain such insurance for the benefit of the Affected Parties
other than Landlord from insurance companies unacceptable to Tenant nor to incur
premium charges therefor which exceed one hundred ten percent (110%) of the
premium charges for such insurance which does not include such a clause
benefitting the Affected Parties other than Landlord. Landlord shall promptly
notify Tenant in writing if such policies
9
<PAGE>
of Landlord do not contain the above-described clause. Tenant shall promptly
notify Landlord in writing if such policies of Tenant do not contain the above-
described clause, and in such event, Landlord shall promptly endeavor to notify
the other Affected Parties of such event.
10. DAMAGE OR DESTRUCTION
---------------------
10.1 Repair of Damage. If the Premises or the Building are damaged or
----------------
destroyed by fire or other casualty covered by the usual form of fire and
extended coverage, Landlord shall commence repair or restoration within sixty
(60) days of such damage or destruction and shall diligently pursue such repair
and restoration to completion unless this Lease is terminated as provided
herein. Landlord shall pay the cost of repair to any damage or destruction of
the Building or the Premises caused by the negligence or willful misconduct of
Landlord, its agents or employees. Tenant shall pay the reasonable cost of
repair of any damage or destruction of the Premises except to the extent caused
by defects in construction of the Building or the negligence or willful
misconduct of Landlord, its agents or employees. Tenant shall pay the reasonable
cost of repair of any damage or destruction of the Building caused by the
negligence or willful misconduct of Tenant, its employees, agents, or visitors.
The costs of repair of the Building or Premises shall include a reasonable
overhead and profit charge by Landlord. Tenant's obligation to pay the cost of
repairs for damage or destruction to the Premises or the Building shall be
reduced by any insurance proceeds payable to Landlord for such damage or
destruction, but only to the extent such insurance provides for a waiver of
subrogation which permits such reduction of Tenant's obligations. Tenant shall
vacate such portion of the Premises as Landlord reasonably requires to enable
Landlord to repair the Premises or Building.
10.2 Abatement. If the Premises are damaged or destroyed by fire or
---------
other casualty not caused by the negligence or willful misconduct of Tenant, its
agents, employees, or visitors, the Monthly Rental shall abate until such damage
or destruction is repaired in proportion to the reduction of the area of the
Premises usable by Tenant. Except as specifically provided in this Lease, this
Lease shall not terminate, Tenant shall not be released from any of its
obligations under this Lease, the rent and other expenses payable by Tenant
under this Lease shall not abate and Landlord shall have no liability to Tenant
for any damage or destruction to the Premises or the Building of any
inconvenience or injury to Tenant by reason of any maintenance, repairs,
alterations, decoration, additions, or improvements to the Premises or the
Building.
10.3 Termination by Landlord. If the Building is damaged or destroyed,
-----------------------
Landlord shall have the option to terminate this Lease within sixty (60) days of
such damage, if Landlord reasonably determines that the cost of repair to the
Building exceeds thirty percent (30%) of the value of the Building exclusive of
the land prior to such damage. If the Premises are damaged or destroyed,
Landlord shall have the option to terminate the term of this Lease within sixty
(60) days of the date of such damage or
10
<PAGE>
destruction if the cost of repair of the Premises, as reasonably determined by
Landlord, exceeds the insurance proceeds estimated by Landlord to be payable to
Landlord for such damage or destruction, unless the Tenant agrees in writing to
pay any cost of repairs of the Premises in excess of such insurance proceeds
within fifteen (15) days of receipt by Tenant of written notice from Landlord of
its intention to terminate this Lease pursuant to this sentence.
10.4 End of Term. Landlord shall not have any obligation to repair,
-----------
reconstruct or restore the Premises during the last twelve (12) months of the
term of this Lease or any extension thereof, as a result of any damage to the
Premises if the cost of any such repair, reconstruction, or restoration as
reasonably estimated by the Landlord exceeds the then Monthly Rental. If
Landlord elects not to repair the Premises of the Building pursuant to this
Section 10.4, Tenant may elect to terminate this Lease within thirty (30) days
of receipt of Landlord's notification of its election not to repair pursuant to
this Section 10.4. If Tenant elects to terminate this Lease as provided in this
Section, this Lease shall terminate thirty (30) days following the election by
Tenant to terminate this Lease. If Tenant does not elect to terminate this
Lease in such thirty (30) day period, the rent and other expenses payable by
Tenant shall not abate, Landlord may repair the Premises at Tenant's cost and
expense, and Tenant shall deposit with Landlord in advance an amount estimated
by Landlord as the cost of such repair.
11. CONDEMNATION.
------------
11.1 The term of this Lease shall terminate as to the portion of the
Premises taken or condemned by any authority under the power of eminent domain
or transferred by Landlord by agreement with such authority under threat of
condemnation, with or without any condemnation action being instituted, as of
date such authority requests possession of such portion of the Premises. The
Monthly Rental shall be adjusted in the proportion that the square footage of
the portion of the Premises taken bears to the total square footage of the
Premises prior to such taking. Tenant shall not be entitled to any
compensation, allowance, claim, or offset of any kind against the Landlord or
any condemning authority, as damages or otherwise, by reason of being deprived
of the Premises or by the termination of this Lease, except that Tenant shall be
entitled to such portion of any separate award for any improvements to the
premises paid for by Tenant in an amount not to exceed the unamortized cost of
such improvements with such costs amortized over the term of this Lease without
reference to any unexercised options. Any portion of the Building other than
the Premises taken by eminent domain or dedicated to public use shall upon such
taking or dedication be excluded from the area over which Tenant is granted
rights hereunder, and this Lease shall continue in full force and effect without
any reduction in rental.
11
<PAGE>
12. ASSIGNMENT, SUBLETTING, AND RECAPTURE.
-------------------------------------
12.1 Consent Required. Tenant shall deliver to Landlord promptly
----------------
following execution an executed copy of any assignment, sublease, or agreement
relating to the Premises, regardless of whether or not such assignment,
sublease, or agreement is permitted by this Lease or requires Landlord's
consent. Tenant shall not assign, sublease or otherwise transfer by operation
of law or otherwise this Lease or any interest herein without the prior written
consent of Landlord. If Tenant desires at any time to assign or otherwise
transfer this Lease or sublease all or a portion of the Premises, it shall first
notify Landlord of its desire to do so and shall submit in writing to Landlord:
(i) the name of the proposed assignee or sublessee, (ii) the nature of the
proposed assignee's or sublessee's business to be carried on in the Premises,
(iii) a copy of the proposed assignment or sublease and any other agreements to
be entered into concurrently with such assignment or sublease, and (iv) such
financial information as Landlord may reasonably request concerning the proposed
assignee or sublessee. Landlord may condition its consent to any assignment or
sublease on the execution by such assignee or sublessee of a written assumption
by such assignee or sublessee of the obligations of Tenant under this Lease. A
transfer of control of Tenant shall be deemed an assignment of this Lease and
shall be subject to all of the provisions of this Section. Tenant shall pay to
Landlord a reasonable fee and Landlord's expenses in reviewing such proposed
assignment or sublease. Landlord shall respond to Tenant's request to assign or
sublease this Lease in a timely manner. This Lease may not be assigned or
sublet without complying with the provisions of this Section in reliance on any
law relating to bankruptcy or debtor's rights generally unless adequate
assurance of future performance is provided Landlord including adequate
assurance of the source of rent and other expenses due under this Lease for the
entire term of this Lease and unless the assignee or sublessee and the proposed
use of the Premises by the assignee or sublessee are consistent with the type of
other tenants in the Building and the use by such tenants of their Premises.
12.2 Prohibitions. Partial assignments of Tenant's interest in this
------------
Lease as prohibited. Any sale, assignment, encumbrance or other transfer of
this Lease and any subleasings or occupation of the Premises which does not
comply with the provisions of this Section shall be void and shall be a default
under this Lease.
12.3 Payments to Landlord. Tenant shall pay to Landlord promptly
--------------------
following receipt the amount by which the value of any consideration received by
Tenant from any such assignments exceeds Tenant's unamortized cost of tenant
improvements in the Premises. Tenant shall pay to Landlord promptly following
receipt the amount by which all sublease rental and other payments received by
Tenant from any subtenant or any other person occupying any portion of the
Premises exceeds the total of the rental or other amounts payable by Tenant
pursuant to Section 4 for the portion of the Premises subleased with the rental
or other amounts payable by Tenant for the Premises allocated on the basis of
square footage. The provisions of this Section
12
<PAGE>
shall apply regardless of whether or not such assignment, subleasing or
occupation is made in compliance with the terms of this Lease. Any payments made
to Landlord pursuant to this Section, or Landlord's acceptance or endorsement
thereof, shall not constitute a consent to any assignment, subleasing or
occupation or cure any default under this Lease.
12.4 Recapture. If Tenant requests Landlord's consent to any assignment
---------
or sublease of this Lease, Landlord shall have the right, to be exercised by
giving written notice to Tenant within thirty (30) days of receipt by Landlord
of the information concerning such assignment or sublease required by Section
12.1 to terminate this Lease effective as of the date Tenant proposes to assign
this Lease or sublease all or a portion of the Premises. On termination of this
Lease by Landlord pursuant to this Section, Landlord shall pay to Tenant the
unamortized cost of any tenant improvements to the Premises paid by Tenant, with
such costs amortized over the term of this Lease without reference to any
unexercised options. Landlord's right to terminate this Lease on assignment or
sublease shall not terminate as a result of Landlord's consent to the assignment
of this Lease or sublease of all or a portion of the Premises, or Landlord's
failure to exercise this right with respect to an assignment or sublease.
12.5 No Release. Landlord's consent to any sale, assignment,
----------
encumbrance, subleasing, occupation or other transfer shall not release Tenant
from any of Tenant's obligations hereunder or be deemed to be a consent to any
subsequent assignment, subleasing or occupation. The collection or acceptance
of rent or other payment by Landlord from any person other than Tenant shall not
be deemed the acceptance of any assignee or subtenant as the Tenant hereunder or
a release of Tenant from any obligation under this Lease. If any assignee,
sublessee or successor of Tenant defaults in the performance of any obligation
under this Lease, Landlord may proceed directly against Tenant without the
necessity of exhausting any remedies against such assignee, sublessees or
successors. Landlord may consent to subsequent assignments or subleasing of
this Lease or amendments or modifications of this Lease with the assignee,
sublessees or successors of Tenant without notifying Tenant or such assignee,
sublessee or successors and without obtaining their consent and such action
shall not relieve Tenant or such assignee, sublessee or successors of any
liability under this Lease.
13. DEFAULT AND REMEDIES.
--------------------
13.1 Events of Default. The occurrence of any one or more of the
-----------------
following events shall constitute an Event of Default: (i) the failure by Tenant
to make any payment of rent or any other payments required to be made by Tenant
under this Lease when due if such failure continues for ten (10) days after
written notice by Landlord to Tenant of such failure; (ii) the failure by Tenant
to observe or perform any of the provisions of this Lease to be observed or
performed by the Tenant if such failure continues for a period of ten (10) days,
or such other period if this Lease specifically provides a different period for
a particular failure, after written notice by Landlord to
13
<PAGE>
Tenant of such failure, provided, however, that with respect to any failure
which cannot reasonably be cured within ten (10) days, an Event of Default shall
not be considered to have occurred if Tenant commences to cure such failure
within such ten (10) day period and continues to proceed diligently with the
cure of such failure; (iii) the failure by Tenant to pay its obligations as they
become due; the making of any general assignment or general arrangement for the
benefit of creditors by Tenant, or the filing by or against Tenant of a petition
to have Tenant adjudged bankrupt or a petition for reorganization or arrangement
under bankruptcy law or law affecting creditor's rights unless, in the case of a
petition filed against Tenant, such petition is dismissed within sixty (60)
days; the appointment of a trustee or a receiver to take possession of the
Premises where possession is not restored to Tenant within thirty (30) days; or
the attachment, execution or other judicial seizure of substantially all of
Tenant's assets located at the Premises or of Tenant's interest in this Lease,
where such seizure is not discharged in thirty (30) days; or (iv) Tenant
transfers or agrees to transfer this Lease or possession of all or any portion
of the Premises without Landlord's prior written consent.
13.2 Remedies. On the occurrence of an Event of Default, Landlord may
--------
at any time thereafter, with or without notice or demand and without limiting
Landlord in the exercise of a right or remedy which Landlord may have by reason
of such default or breach, do the following:
(i) Landlord may elect to continue the term of this Lease in full force and
effect and not terminate Tenant's right to possession of the Premises, in which
event Landlord shall have the right to enforce any rights and remedies granted
by this Lease or by law against Tenant, including, without limitation, the right
to collect when due rental or other sums payable hereunder. Landlord shall not
be deemed to have elected to terminate this Lease unless Landlord gives Tenant
written notice of such election to terminate. Landlord's acts of maintenance or
preservation of the Premises or efforts to relet the Premises shall not
terminate this Lease.
(ii) Landlord may elect by written notice to Tenant to terminate this Lease
at any time after the occurrence of an Event of Default, and in such event
Landlord may, at Landlord's option, declare this Lease and Tenant's right to
possession of the Premises terminated, re-enter the Premises, remove Tenant's
property therefrom and store it for Tenant's account and at Tenant's expense
(but Landlord shall not be required to effect such removal), eject all persons
from the Premises and recover damages from Tenant as hereinafter provided. Any
such re-entry shall be permitted by Tenant without hindrance. Landlord shall
not thereby be liable in damages for such re-entry or be guilty of trespass,
forcible entry or unlawful detainer. If Landlord elects to so terminate this
Lease and Tenant's right to possession or if this Lease and Tenant's right to
possession are terminated by operation of law, such termination shall cancel all
Tenant's options, if any, to extend or renew the term of this Lease.
14
<PAGE>
(iii) Landlord may notify any subtenant of the Premises of the existence
of an Event of Default by Tenant in writing and thereafter all rent or other
amounts due from any subtenant of the Premises shall be paid to Landlord and
Landlord shall apply such rent or other amounts in payment of the amounts due
from Tenant under this Lease. The delivery of such notice to any subtenant and
the collection of such rent or other amounts by Landlord shall not terminate
this Lease.
13.3 Damages on Termination. On Termination of this Lease by reason of
----------------------
Tenant's breach, Landlord may recover as damages from Tenant, in addition to all
other remedies available, but without repeating or otherwise duplicating any
remedy heretofore granted to Landlord, an amount equal to the present value,
discounted by the then current discount rate at the Federal Reserve Bank of
Richmond, of the difference between the rent or other sums payable by Tenant to
Landlord for the term of this Lease after the date of termination, as if this
Lease were still in effect, and the reasonable rental value of the Premises for
such period as proved by Tenant. On termination of this Lease by reason of
Tenant's breach, Landlord may also recover as damages from Tenant all of the
rent or other sums payable by Tenant pursuant to this Lease after the date of
termination, as if this Lease were still in effect, until such time as Landlord
has released the entire Premises, reduced by any rent or other payments which
Landlord receives for the use of any portion of the Premises prior to releasing
the entire Premises. On termination of this Lease by reason of Tenant's breach,
Landlord may also recover as damages from Tenant that portion of any leasing
commissions paid or payable by Landlord applicable to the unexpired term of this
Lease and all costs incurred in releasing the Premises including advertising
costs, the costs of refurbishment and alterations of the Premises and the cost
of any concessions which the Landlord gives to release the Premises. If Landlord
releases the Premises following a termination by reason of Tenant's breach, the
rent charged by Landlord on such releasing shall be deemed to be the rental
value of the Premises for the purpose of calculation of the damages which
Landlord may recover from Tenant.
13.4 Late Charge. If Tenant fails to make any payment of rent, expenses
-----------
or other amounts required of Tenant under this Lease within ten (10) days of the
date such amount is due as set forth in this Lease, then, in addition to any
other amounts recoverable by Landlord hereunder, Tenant shall pay Landlord a
late charge in an amount equal to $0.06 for each dollar past due. If Tenant
fails, on three (3) separate occasions, to make any payment of rent, expenses or
other amounts required of Tenant under this Lease within three (3) days of the
date each such payment is due, then for the remainder of the Lease Term, Tenant
shall pay a late charge in an amount equal to $0.06 for each dollar past due if
Tenant thereafter fails to pay any payment of rent or other amount required
under this Lease promptly when due. Such late charge shall be due
notwithstanding the fact that no notice is given by Landlord to Tenant of such
failure to pay. Notwithstanding the foregoing, if on three (3) separate
occasions Tenant has received notice from Landlord that it has failed to pay
rent, expenses or other amounts promptly when due, Tenant shall pay Monthly
Rental for the balance of the term of this
15
<PAGE>
Lease on a quarterly basis, in advance, on the first day of each such quarter.
Landlord and Tenant agree that it would be extremely difficult and impractical
to fix the actual damages sustained by Landlord for such default and that the
late charge or quarterly rental payment set forth in this Section is a
reasonable estimate of such damages at this time. Landlord anticipates that
such damage would include the administrative costs and expenses, the cost of
arranging for borrowed funds and attorneys' fees. The late charge provided in
this Section shall be the sole damages which Landlord may recover from Tenant
for the delay by Tenant in making any payment within ten (10) days from the date
such payment is due until thirty (30) days after the date such payment is due,
but this Section shall not limit Landlord's right to recover any other amount
due pursuant to this Lease, Landlord's damages equivalent to the amount of the
rent or other payments if this Lease is terminated, Landlord's damages or costs
for Tenant failure to pay for a period beyond thirty (30) days from the date
such payment is due, Landlord's cost and expense in connection with any
litigation and Landlord's right to any other remedy such as terminating this
Lease, recovering possession of the Premises or injunctive relief.
13.5 Past Due Obligations. All amounts which Tenant is obligated to pay
--------------------
Landlord pursuant to this Lease or when due shall bear interest at the maximum
interest rate chargeable by law, not to exceed twenty percent (20%) per annum
from the due date until paid, unless otherwise specifically provided herein. If
a late charge is due with respect to such amount pursuant to Section 13.4, such
interest shall commence to accrue thirty (30) days following the date such
amount is due. The payment of such interest shall not excuse or cure any default
by Tenant under this Lease.
13.6 Non-Exclusive Remedies. The remedies of Landlord set forth in this
----------------------
Section 13 shall not be exclusive, but shall be cumulative and in addition to
all rights and remedies now or hereafter provided or allowed by law or equity,
including, but not limited to, the right of Landlord to seek and obtain an
injunction and the right of Landlord to damages in addition to those specified
herein, except that the provisions of Section 13.4 shall limit Landlord's right
to damages as specified therein. Tenant hereby expressly waives any and all
rights of redemption granted by or under any present or future law if Tenant is
evicted or dispossessed for any cause or if Landlord obtains possession of the
Premises by reason of the breach by Tenant of any of its obligations under this
Lease. Tenant hereby expressly waives (i) the service of any notice in writing
of intention to re-enter or to institute legal proceedings to that end and (ii)
any right which Tenant may have to a jury trial in connection with any such
legal proceedings.
13.7 General Landlord Cure Provision. In the event Tenant defaults in
-------------------------------
the performance of any of the terms, covenants, or conditions of this Lease, or
fails to comply with any of the laws, statutes, ordinances, rules, orders,
regulations or requirements of any governmental authority, then in such case
Landlord shall have the immediate right, in addition to all rights and remedies
outlined in this Section 13, to cure such default or noncompliance for the
account of and at the cost and expense of Tenant,
16
<PAGE>
and the full amount so expended by Landlord, plus interest at the rate of
fifteen percent (15%) per annum thereon, shall immediately be due and owing by
Tenant to Landlord as additional rent hereunder.
14. ADDITIONAL RIGHTS OF LANDLORD.
-----------------------------
14.1 Entry by Landlord. Landlord and its agents and employees shall
-----------------
have the right to enter the Premises at all times, to examine the same, to make
such maintenance and repairs of the Premises and such maintenance, repairs,
alterations, decorations, additions and improvements to other portions of the
Building as Landlord requires and to show the Premises at reasonable times to
prospective tenants during the last six (6) months of the term of this Lease.
Landlord may erect, use and maintain pipes and conduits in and through the
Premises provided such pipes and conduits do not detract from the appearance of
the Premises. Landlord shall take reasonable precautions to minimize the
disruption to Tenant of any entry to the Premises by Landlord as provided in
this Section.
14.2 Building Planning. Landlord shall have the right at any time
-----------------
during the term of this Lease, upon giving Tenant sixty (60) days notice in
writing, to provide and furnish Tenant with like space elsewhere in the Building
of approximately the same size and area as the Premises and to remove and place
Tenant in such new space at Landlord's sole cost and expense. On such
relocation, the terms and conditions of this Lease shall remain in full force
and effect, save and except that the Premises shall be in such new location
within the Building, a revised Exhibit "A" shall become part of this Lease and
shall reflect the location of the new space, Section 1 of this Lease shall be
amended to include and state all correct data as to the new space, and the
Monthly Rental shall be reduced, but not increased, by the reduction of the Area
of Premises, if any, on such relocation. However, if the new space does not meet
with Tenant's approval, Tenant shall have the right to cancel this Lease upon
giving Landlord thirty (30) days written notice within ten (10) days of receipt
of Landlord's notification.
14.3 Transfer by Landlord. Landlord may transfer its interest in the
--------------------
Premises and this Lease without the consent of Tenant, at any time and from time
to time. The obligations of Landlord pursuant to this Lease shall be binding
upon Landlord and its successors only during their respective period of
ownership except that Landlord and its successors shall be relieved of their
obligation to refund security deposits and other funds to Tenant which they have
received from Tenant or a predecessor Landlord only to the extent they transfer
such amounts to their respective transferees. In addition, Landlord may lease
any portion of the Building to others on such terms and for such purposes as
Landlord considers appropriate and may terminate or modify leases with others
for any portion of the Building without any obligation to Tenant and without
relieving Tenant of any obligation under this Lease.
17
<PAGE>
14.4 Default by Landlord. Landlord shall not be liable to Tenant if
-------------------
Landlord is unable to fulfill any of its obligations under this Lease if
Landlord is prevented, delayed or curtailed from so doing by reason of any cause
beyond Landlord's reasonable control. Landlord shall not be in default unless
Landlord fails to perform obligations required of Landlord within a reasonable
time, but in no event later than thirty (30) days after written notice by Tenant
to Landlord, specifying Landlord's failure to perform such obligation; provided,
however, that if the nature of Landlord's obligation is such that more than
thirty (30) days are required for performance, then Landlord shall not be in
default if Landlord commences performance within such thirty (30) day period and
thereafter diligently prosecutes its efforts to satisfy such obligation.
Tenant may not offset against any rent or other amount due from Tenant under
this Lease any amount due or claimed to be due to Tenant from Landlord whether
arising pursuant to this Lease or otherwise. Any notice to Landlord by Tenant
of Landlord's default under this Lease shall also be concurrently provided by
registered or certified mail, to any holder of a mortgage or similar security
instrument covering the Premises, whose address shall have been furnished to
Tenant ("Mortgagee Notice"). The Mortgagee's Notice shall offer such mortgagee
a reasonable opportunity to cure the default, including the time to obtain
possession of the Premises by power of sale or judicial foreclosure, if such
action should be necessary to cure Landlord's default.
14.5 Subordination. This Lease is subject and subordinate to all ground
-------------
or underlying leases, mortgages and deeds of trust which now affect the Building
or any part of the Building and to all renewals, modifications, consolidations,
replacements and extensions thereof. This Lease may, at the option of Landlord,
be subordinate to any ground or underlying leases, mortgages, deeds of trust or
other lien which may hereafter affect the Building or any part thereof and
Tenant will execute and deliver upon the demand of Landlord from time to time
any and all instruments desired by Landlord, subordinating, in the manner
requested by Landlord, this Lease to such lease, mortgage, deed of trust or
other lien, provided such lease, mortgage, deed of trust or lien provides that
in the event of termination of such lease or foreclosure of such mortgage, deed
of trust or lien, any successor to any interest of Landlord in the Building will
not disturb Tenant's possession of the Premises if Tenant attorns to such
successor as Landlord and otherwise performs its obligations under this Lease.
Tenant agrees that Tenant shall attorn to any Landlord under any ground lease
affecting the Building in the event of the termination or cancellation of such
ground lease or to any purchaser upon foreclosure or sale pursuant to any lien.
In the event of termination of such ground lease or foreclosure of such
mortgage, deed or trust or other lien, any successor to any interest of Landlord
in the Building shall have no liability to repay to Tenant any security deposit
paid to any prior Landlord. Landlord may from time to time grant or declare such
restrictions or covenants as may be reasonably required by Landlord or adopt and
record such parcel maps, subdivision maps or condominium plans as may be
reasonably required by Landlord relating to all or any portion of the Building
and the provisions of all such documents shall be senior to this Lease and
Tenant shall sign any of such documents upon receipt of Landlord provided such
documents do not unreasonably
18
<PAGE>
interfere with the use of the Premises by Tenant as permitted by this Lease.
Tenant acknowledges the right of the holder of any first mortgage or other first
security interest in all or any part of the Building to subordinate its first
mortgage or other first security interest either in whole or in part to this
Lease. Tenant agrees at any time, and from time to time, upon not less than
five (5) days notice, to execute, acknowledge and deliver to such holder the
Tenant's agreement to such subordination in such form as such holder may
require. Without limiting the generality of the foregoing, the form of
subordination of the first mortgage or other first security interest may provide
that it does not affect, is not applicable to, and expressly excludes the
following: (i) the prior right, claim and lien of the first mortgage or first
security interest in, to and upon any award or other compensation heretofore or
hereafter to be made for any taking by eminent domain of any part of the
Building, and to the right of disposition thereof in accordance with the
provisions of the first mortgage or first security interest; (ii) the prior
right, claim and lien of the first mortgage or first security interest in, to
and upon any proceeds payable under all policies of fire and rent insurance upon
the Building, or any part thereof, and as to the right of disposition thereof in
accordance with the terms of the first mortgage or first security interest; and
(iii) any lien, right, power or interest, if any, which may have arisen or
intervened in the period between the recording of the first mortgage or first
security interest and the execution of this Lease, or any lien or judgment which
may arise at any time under the terms of this Lease.
14.6 Lender's Rights. On receipt of written request from Landlord, Tenant
---------------
shall enter into a written agreement with Landlord and any ground lessor or any
holder of any encumbrance on the Building in a form satisfactory to such ground
lessor or holder which provides as follows: (i) Tenant shall attorn to such
ground lessor or encumbrancer on termination of its ground lease or foreclosure
of its encumbrance; (ii) without the written approval of such ground lessor or
encumbrancer, Tenant shall not make any payments to Landlord more than thirty
(30) days prior to the date such payment is due pursuant to this Lease, Tenant
shall not subordinate its interest in this Lease to any subsequent ground lease
or encumbrance, and Landlord may not terminate this Lease or modify this Lease
and; (iii) any subordination, termination or modification in violation of such
agreement shall be invalid.
14.7 Estoppel Certificate. Tenant shall upon ten (10) days written notice
--------------------
from Landlord execute, acknowledge and deliver to Landlord a statement in
writing (i) certifying that this Lease is unmodified and in full force and
effect or, if modified, stating the nature of such modifications and certifying
that this Lease as so modified is in full force and effect; (ii) acknowledging
that there are not, to Tenant's knowledge, any uncured defaults on the part of
the Landlord hereunder, or specifying such defaults if any are claimed; (iii)
setting forth the date of commencement of rents and the date of expiration of
the term of this Lease and setting forth any options of Tenant to extend the
term of this Lease, the nature of such options and whether any such options have
been exercised by Tenant; and (iv) stating the amount of security deposit made
by Tenant to Landlord and amount and period covered by any prepayments of rents
or other charges
19
<PAGE>
by Tenant. Any such statement may be relied upon by any then existing or
prospective lessor, purchaser or encumbrancer of all or any portion of the real
property of which the Premises are a part.
14.8 Financial Information. From time to time from the date of execution
---------------------
of this Lease through the term of this Lease, Tenant shall upon five (5) days
prior written notice from Landlord, provide Landlord with a current financial
statement and financial statements of the two (2) years prior to the current
financial statement year. Such statement shall be prepared in accordance with
generally accepted accounting principles, consistently applied, and, if such is
the normal practice of Tenant, shall be audited by an independent certified
public accountant.
15. MISCELLANEOUS.
-------------
15.1 Brokers. Tenant represents and warrants to Landlord that it has not
-------
had dealings with any broker or finder other than as listed in Section 1.14
hereof in locating the Premises and that it knows of no other person who is or
might be entitled to a commission, finder's fee or other like payment in
connection herewith and does hereby indemnify and agree to hold Landlord
harmless from and against any and all claims, liabilities and expenses that
Landlord may incur should such representation and warranty be incorrect.
Landlord agrees to indemnify and hold Tenant harmless from any claims or
liability to any broker or other person arising out of or relating to any
agreement by Landlord to pay a brokerage commission, finder's fee or like
payment to such broker or such person relating to the leasing of the Premises;
provided, however, that Landlord shall not be obligated to Tenant for any claims
or liability to any broker or other person with whom Tenant has dealing
concerning the Building whose identity Tenant has failed to disclose to Landlord
as required by this Section 15.1.
15.2 Holding Over. If Tenant, with or without Landlord's consent, remains
------------
in possession of the Premises or any part thereof after the expiration of the
term hereof such occupancy shall be a tenancy from month-to-month upon all the
provisions of this Lease, except that (a) the Monthly Rental during such tenancy
shall be payable at two hundred percent (200%) of the Monthly Rental for the
last month of the term, and (b) all options and rights of first refusal, if any,
granted under the term of this Lease shall be terminated and be of no further
effect during such month-to-month tenancy. Tenant hereby expressly waives (i)
the service of any notice in writing of intention to re-enter or to institute
legal proceedings to that end, and (ii) any right which Tenant may have to a
jury trial in connection with any such legal proceedings.
15.3 Performance. All payments to be made under this Lease shall be made
-----------
without prior legal notice or demand unless otherwise provided herein, in legal
currency of the United States of America. Time is hereby made of the essence of
each and every one and all of the terms, covenants and conditions to be kept,
observed or performed under this Lease.
20
<PAGE>
15.4 Notices. Any notices required or permitted to be given under this
-------
Lease shall be in writing and may be delivered personally or by certified mail
to the Landlord at the address set forth in Section 1.1 and to Tenant at the
address set forth in Section 1.2. A copy of any notice to Landlord shall also
be mailed to Murdock Management Company, 575 South Charles Street, Baltimore,
Maryland 21201, and to such other parties as such addresses as Landlord requests
in writing. Any notice given by mail shall be deemed received two (2) business
days following the date such notice and the required copies are mailed as
provided in this Section. Either party may change its address for purposes of
this Section by giving the other party written notice of the new address in the
manner set forth above. Any notice required by this Lease shall be deemed to
constitute the notice required by the laws of the State set forth in Section
1.15 above.
15.5 Merger. There shall be no merger of this Lease or of the leasehold
------
estate hereby created with the fee estate in the Premises or any part thereof by
reason of the fact that the same person, firm, corporation or other legal entity
may acquire or hold, directly or indirectly, this Lease or the leasehold estate
and the fee estate in the Premises or any interest in such fee estate without
the prior written consent of the holders of any mortgages or similar security
instruments covering the leased Premises.
15.6 Termination. On termination of the Lease, Tenant shall execute and
-----------
deliver to Landlord immediately upon Landlord's request a quitclaim deed in
recordable form transferring to Landlord any interest of Tenant in the Premises.
15.7 Applicable Laws. This Lease shall be governed by and construed in
---------------
accordance with the laws of the State set forth in Section 1.15 above.
15.8 Professional Fees. If Tenant or Landlord brings any action for any
-----------------
damages or other relief against the other or for a declaration or determination
of any matter relating to this Lease, including a suit by Landlord for the
recovery of rent or other payments from Tenant or for possession of the
Premises, the losing party shall pay to the prevailing party a reasonable sum
for attorneys', architects', engineers', brokers' and other professionals' fees
in such suit, and such obligation shall be incurred on commencement of any
action whether or not such action is prosecuted to judgment or final
determination.
15.9 Modification. This Lease and any other written agreements dated as
------------
of the date of this Lease contain all of the terms and conditions agreed upon by
the Landlord and Tenant with respect to the Premises and the Building. All
prior negotiations correspondence and agreements are superseded by this Lease
and any other contemporaneous documents. No officer or employee of any party
has any authority to make any representation or promise not contained in this
Lease and other contemporaneous documents, and each of the parties hereto agrees
that it has not
21
<PAGE>
executed this Lease in reliance upon any representation or promise not set forth
in this Lease or such contemporaneous documents. This Lease may not be modified
or changed except by written instrument signed by Landlord and Tenant.
Notwithstanding the foregoing, if, in connection with obtaining construction,
interim or permanent financing for the Building, the Lender shall request
reasonable modifications in this Lease as a condition to such financing, Tenant
shall not unreasonably withhold, delay or defer its consent therefor, provided
that such modifications do not increase the obligations of Tenant hereunder or
materially adversely affect the leasehold interest hereby created or Tenant's
rights hereunder.
15.10 Relationship of Parties. Neither the method of computation of rent
-----------------------
nor any other provisions contained in this Lease nor any acts of the parties
shall be deemed or construed by the parties or by any third person to create the
relationship of principal and agent or of partnership or of joint venture or of
any association between Landlord and Tenant, other than the relationship of
Landlord and Tenant.
15.11 Waiver. The acceptance of rent or other payments by Landlord, or
------
the endorsement or statement on any check or any letter accompanying any check
or other payment shall not be deemed an accord or satisfaction or a waiver of
any obligation of Tenant regardless of whether or not Landlord had knowledge of
any breach of such obligation. Failure to insist on compliance with any of the
terms, covenants or conditions hereof shall not be deemed a waiver of such
terms, covenants or conditions nor shall any waiver or relinquishment of any
right or power hereunder, at any one time or more times, be deemed a waiver or
relinquishment of such rights and powers at any other time or times or under any
other circumstance(s).
15.12 Partial Invalidity. If any term or provision of this Lease or the
------------------
application thereof to any person or circumstances shall to any extent be
invalid or unenforceable the remainder of this Lease or the applications of such
term or provision to persons or circumstances other than those as to which it is
invalid or unenforceable shall not be affected thereby, and each term and
provision of this Lease shall be valid and enforced to the fullest extent
permitted by law.
15.13 Interpretations. Any uncertainty or ambiguity existing herein
---------------
shall not be interpreted against either party because such party prepared any
portion of this Lease, but shall be interpreted according to the application of
rules of interpretation of contracts generally.
15.14 Successors and Assigns. This Lease shall be binding upon and shall
-----------------------
inure to the benefit of the parties hereto and their respective permitted heirs,
representatives, successors and assigns.
15.15 Tenant as Partnership. If a partnership or more than one legal
----------------------
person executes that Lease as Tenant, (i) each partner is jointly and severally
liable for
22
<PAGE>
keeping, observing and performing all the terms, covenants, conditions,
provisions and agreements of this Lease to be kept, observed or performed by
Tenant, and (i) the term "Tenant" as used in this Lease shall mean and include
each of them jointly and severally and the act of or notice from, or notice or
refund to, or the signature of, any one or more of them, with respect to this
Lease, including but not limited to, any renewal, extension, expiration,
termination or modification of this Lease, shall be binding upon each and all of
the persons constituting Tenant with the same force and effect as if each and
all of them have so acted or so given or received such notice or refund or so
signed. Termination of Tenant, if a partnership, shall be deemed to be an
assignment jointly to all of the partners, who shall thereafter be subject to
the terms of this Lease is if each and all such former partners had initially
signed this Lease as individuals.
15.16 Tenant as Corporation. If Tenant executes this Lease as a
---------------------
corporation, then Tenant and the persons executing this Lease on behalf of
Tenant represent and warrant that the individuals executing this Lease on
Tenant's behalf are duly authorized to execute and deliver this Lease on its
behalf in accordance with a duly adopted resolution of the board of directors of
Tenant, a copy of which is to be delivered to Landlord on execution hereof, and
in accordance with the By-Laws of Tenant, and that this Lease is binding upon
Tenant in accordance with its terms.
15.17 Partners' Liability. It is understood that Harbor Court Associates
-------------------
is a Maryland general partnership. All obligations of Harbor Court Associates
hereunder are limited to the net assets of Harbor Court Associates from time to
time. No partner of Harbor Court Associates or of any successor partnership,
whether now or hereafter a partner, shall have any personal responsibility for
the obligations of Landlord hereunder.
15.18 Recordation. Tenant covenants that it will not, without Landlord's
------------
prior written consent, record this Lease or offer this Lease for recordation.
If at any time, Landlord or any mortgagee of Landlord's interest in the Leased
Premises shall require the recordation of this Lease, such recordation shall be
at Landlord's expense. If at any time Tenant shall require the recordation of
this Lease, such recordation shall be at Tenant's expense. If the recordation
of this Lease shall be required by any valid governmental order or if any
governmental authority having jurisdiction in the matter shall assess and be
entitled to collect transfer taxes or documentary stamp taxes, or both transfer
taxes and documentary stamp taxes on this lease, Tenant will execute such
acknowledgements as may be necessary to effect such recordation, and pay, upon
request of Landlord, all recording fees, transfer taxes and documentary stamp
taxes payable on or in connection with this Lease or such recordation.
15.19 Exhibits. All exhibits, riders and schedules, if any, attached
---------
hereto shall be deemed a part of this Lease.
23
<PAGE>
IN WITNESS WHEREOF, the parties hereto hereby execute this Lease, as of the
day and year first above written.
LANDLORD:
WITNESS: HARBOR COURT ASSOCIATES,
a Maryland General Partnership
By: Murdock Development Corporation, a
General Partner
By: /s/
- ----------------------------- -------------------------------------
Title: Vice President
TENANT:
WITNESS: PHYSICIANS QUALITY CARE, INC.
By: /s/ Torrey C. Brown, M.D.
- ----------------------------- -------------------------------------
Title:
24
<PAGE>
RIDER
-----
TO LEASE, dated for reference purposes as of the 18th day of March,
1997, by and between HARBOR COURT ASSOCIATES, as "Landlord" and PHYSICIANS
QUALITY CARE, INC., as "Tenant" (the "Lease").
16. ADDITIONAL AGREEMENTS.
---------------------
16.1 Initial Monthly Rental. In addition to the Security Deposit set
----------------------
forth in Section 1.13, Tenant shall pay upon execution of this Lease the amount
set forth in Section 1.11 hereof ($2,600.00) which shall be applied against
the first Monthly Rental due under this Lease.
16.2 Monthly Rental. Notwithstanding anything to the contrary
--------------
contained in Section 4.2 of this Lease;
(a) The CPI Adjustment for any "succeeding" calendar
year shall not exceed 1.06 nor shall it be less than 1.03.
16.4 Option to Extend Term. Provided that Tenant has timely and
---------------------
faithfully performed its obligations under this Lease throughout the term
hereof, timely exercises this right as hereinafter provided, and is not in
default at the time of exercise of such right or at the commencement of any
extension period, Tenant shall have the right to extend the term of this Lease
for one (1) period of six (6) months on the same terms and conditions as
contained in this Lease.
Not later than forty-five (45) days prior to the date the term of this
Lease would otherwise expire, Tenant shall notify Landlord in writing of its
election to exercise the right to extend the term hereof as provided above. The
right to extend the term of this Lease shall terminate if not timely exercised
as herein provided.
During such extension period, Landlord and Tenant shall have the
option to terminate this Lease by notifying the other party in writing thirty
(30) days prior to the termination date.
16.5 Construction of Premises.
------------------------
Tenant hereby acknowledges that Tenant has inspected the Premises, see
Suite Plan (Exhibit "C"), prior to execution of this Lease. Tenant agrees to
accept the Premises in its "as-is" condition, except that prior to Tenant's
occupancy and Lease Commencement, Landlord agrees to make the following
improvements to the Premises at Landlord's expense, "Landlord's Work":
(a) provide two (2) duplex electrical outlets in private office
number 5;
1
<PAGE>
(b) rekey the main entrance door and provide keys to Tenant;
(c) provide building signage to include Tenant suite sign, 1st
floor directory strip, 2nd floor directory listing, and Tenant
directional sign.
(d) paint the entire Premises;
(e) install new carpet and vinyl base.
IN WITNESS WHEREOF, the parties hereto hereby execute this Rider as
of the date of the Lease.
LANDLORD:
WITNESS: HARBOR COURT ASSOCIATES,
a Maryland General Partnership
By: Murdock Development Corporation Inc.
By: /s/
- ---------------------------- ------------------------------------
Title: Vice President
TENANT:
WITNESS:
By: /s/ Torrey C. Brown, M.D.
- ---------------------------- ------------------------------------
Title:
26
<PAGE>
PARKING AGREEMENT
-----------------
This Agreement, dated as of MARCH 18, 1997, is entered into by and
between HARBOR COURT ASSOCIATES and PHYSICIANS QUALITY CARE, INC.
Reference is made to that certain Lease dated as of MARCH 18, 1997,
by and between HARBOR COURT ASSOCIATES, as "Landlord" therein, and PHYSICIANS
QUALITY CARE, INC. as "Tenant" therein (the "Lease"). For so long as the Lease
is in full force and effect, HARBOR COURT ASSOCIATES, for itself and any
successor, owner and operator of the parking facility situate on Parcel 3 as
shown on the Amended Subdivision Plat of Harbor Court, agrees to permit
PHYSICIANS QUALITY CARE, INC. and its successors in interest as Tenant pursuant
to the Lease and Tenant's employees (collectively "Customer") to park an
aggregate of two (2) cars within the said parking facility in unreserved,
unassigned spaces or in such specific or general areas thereof as from time to
time may be designated by such owner or the parking operator, and otherwise
subject to such rules, regulations, waiver of liability and other operating
policies, as same may change from time to time, applicable to monthly parking
provided to the public generally in such parking facility. Customer shall pay
the monthly rate for such parking from time to time applicable; provided,
however, that one (1) of such parked car(s) will be at no cost to Tenant during
the first six (6) months of the term of the Lease.
IN WITNESS WHEREOF, HARBOR COURT ASSOCIATES and PHYSICIANS QUALITY
CARE, INC. have executed this Agreement as of the date first above written.
HARBOR COURT ASSOCIATES
By: Murdock Development Corporation, Inc.
By: /s/
---------------------------------------
Title:
PHYSICIANS QUALITY CARE, INC.
By: /s/ Torrey C. Brown, M.D.
---------------------------------------
Title:
1
<PAGE>
Exhibit 11.1 - Computation of Earnings Per Share
Physicians Quality Care, Inc.
<TABLE>
<CAPTION>
Period from March 20,
1995 (inception) to Year ended
December 31, December 31,
Primary and Fully-diluted earnings per share (1) 1995 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Net loss $2,082,264 $ 4,973,188
Accretion on common stock subject to fair value put 14,436,848
----------------------------------------
Net loss available to common stockholders $2,082,264 $19,410,036
========================================
Weighted average common shares outstanding 7,706,250 10,785,605
========================================
Primary and fully-diluted loss per common share $ 0.27 $ 1.80
========================================
</TABLE>
(1) The effect of options, warrants and convertible securities are not
considered as it would be antidilutive.
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF PHYSICIANS QUALITY CARE, INC.
Physicians Quality Care of Massachusetts, Inc.
Physicians Quality Care of Maryland, Inc.
<PAGE>
Exhibit 23.2
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Summary Financial
Data" and "Selected Financial Data" and to the use of our reports:
. dated March 28, 1997 as it relates to Physicians Quality Care, Inc.
. dated November 21, 1996 as it relates to Springfield Medical Associates,
Inc., Alphonse F. Calvanese, M.D., P.C., Cardiology and Internal Medicine
Associates, Inc., James F. Haines and William J. Belcastro, Partnership,
Jay M. Ungar, M.D. and Western Massachusetts Medical Group, Inc.
. dated September 20, 1996 as it relates to Annapolis Medical Specialists,
LLP, Drs. Fortier, Libber, Clemmens & Weimer, P.A., Drs. Goldgeier, Levine
& Freidman, P.A., Park Medical Associates, P.A. and Park Medical Labs,
Inc., and Drs. Sigler, Roskes, Holden & Schuberth, P.A.
. dated November 18, 1996 as it relates to Koeppel, Rosen, Rudikoff, M.D.,
P.C. and Drs. Pakula, Davick & Bogue, P.A.
all included in the Registration Statement and related Prospectus of Physicians
Quality Care, Inc. for the registration of 8,000,000 shares of its common stock.
/s/ Ernst & Young LLP
Boston, Massachusetts
April 28, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
FINANCIAL STATEMENTS OF THE COMPANY FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,275,405
<SECURITIES> 0
<RECEIVABLES> 6,436,699
<ALLOWANCES> 1,070,052
<INVENTORY> 0
<CURRENT-ASSETS> 8,705,198
<PP&E> 1,577,976
<DEPRECIATION> 88,560
<TOTAL-ASSETS> 39,354,379
<CURRENT-LIABILITIES> 6,488,098
<BONDS> 214,203
31,851,473
0
<COMMON> 112,359
<OTHER-SE> (384,802)
<TOTAL-LIABILITY-AND-EQUITY> 39,354,379
<SALES> 6,026,452
<TOTAL-REVENUES> 6,117,556
<CGS> 0
<TOTAL-COSTS> 10,696,957
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 214,404
<INTEREST-EXPENSE> 104,255
<INCOME-PRETAX> (4,895,060)
<INCOME-TAX> 78,128
<INCOME-CONTINUING> (4,973,188)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,973,188)
<EPS-PRIMARY> (1.80)
<EPS-DILUTED> 0
</TABLE>
