<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended June 30, 1998
-----------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _________________ to _________________
Commission file number 333-26137
---------------------------
Physicians Quality Care, Inc.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 04-3267297
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
950 Winter Street, Suite 2410, Waltham, Massachusetts 02154
- -------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (617) 890-5560
--------------------------
Not Applicable
- --------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Indicate by check X whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days Yes X No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of issuer's common stock, as of August 12,
1998 was: 26,106,780 shares of Class A Common Stock, $.01 par value, 2,809,296
shares of Class B-1, $.01 par value, 1,790,704 shares of Class B-2 Common Stock,
$.01 par value, 7,692,309 shares of Class C Common Stock, $.01 par value, and
2,461,538 shares of Class L Common Stock, $.01 par value.
<PAGE>
PHYSICIANS QUALITY CARE, INC.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Balance Sheets as of June 30, 1998 and
December 31, 1997 ....................................... 1
Statements of Operations for the three and six
months ended June 30, 1998 and 1997 ..................... 3
Statements of Cash Flows for the six months
ended June 30, 1998 and 1997 ............................ 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ..................... 7
PART II OTHER INFORMATION
Item 1. Legal Proceedings ....................................... 23
Item 5. Other Information ....................................... 24
Item 6. Exhibits and Reports on Form 8-K ........................ 26
Signatures ....................................................... 27
</TABLE>
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
PHYSICIANS QUALITY CARE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
JUNE 30, 1998 DECEMBER 31, 1997
------------- ----------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ (257,817) $ 8,782,019
Restricted cash 1,106,290 -
Prepaid expenses 46,811 35,175
Due from affiliated physician practices 14,011,793 5,719,421
Other current assets 17,656 69,868
------------ ------------
Total current assets 14,924,733 14,606,483
Investment in long term affiliation agreements, less
accumulated amortization of $1,879,778 and $1,394,987 in
1998 (unaudited) and 1997, respectively 54,044,322 57,340,059
Property and equipment, net 398,054 1,327,860
Other asset 386,300 136,181
------------ ------------
Total assets $ 69,753,409 $ 73,410,583
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 639,299 $ 1,218,766
Accrued compensation 204,583 266,138
Accrued expenses 607,937 628,433
------------ ------------
Total current liabilities 1,451,819 2,113,337
Deferred taxes 746,061 746,062
Commitments and contingencies
Common stock, subject to put, 18,604,136 and 18,157,982 shares
authorized, issued and outstanding at June 30, 1998 (unaudited)
and December 31, 1997, respectively 60,463,943 54,473,947
Stockholders' equity:
Class A common stock, $.01 par value, 75,000,000
shares authorized, 8,515,144 and 8,505,208 shares issued and
7,502,644 and 7,492,708 outstanding at June 30, 1998
(unaudited) and December 31, 1997, respectively 85,151 85,052
Class B-1 common stock, $.01 par value, 15,367,915
shares authorized, 2,809,296 shares issued and outstanding at
June 30, 1998 (unaudited) and December 31, 1997 28,093 28,093
Class B-2 common stock, $.01 par value 9,732,085
shares authorized, 1,790,704 shares issued and outstanding at
June 30, 1998 (unaudited) and December 31, 1997 17,907 17,907
Class C common stock, $.01 par value, 13,846,155
shares authorized, 7,692,309 shares issued and outstanding at
June 30, 1998 (unaudited) and December 31, 1997 76,923 76,923
Additional paid-in capital 50,033,254 49,846,913
Accumulated deficit (43,139,617) (33,967,526)
Less treasury stock, at cost, 1,012,500 shares (10,125) (10,125)
------------ ------------
Total stockholders' equity 7,091,586 16,077,237
------------ ------------
Total liabilities and stockholders' equity $ 69,753,409 $ 73,410,583
============ ============
</TABLE>
See accompanying notes to unaudited financial statements and management's
discussion and analysis of financial condition and results of operations.
<PAGE>
PHYSICIANS QUALITY CARE, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
--------------------------- -------------------------
1998 1997 1998 1997
--------------------------------------------------------
<S> <C> <C> <C> <C>
Net patient service revenue $20,636,578 $10,669,608 41,802,375 21,223,647
Less: amounts retained by physician groups (5,381,593) (3,757,811) (11,930,442) (7,467,445)
----------- ----------- ------------ -----------
Management fee revenue 15,254,985 6,911,797 29,871,933 13,756,202
Operating expenses:
Nonphysician salaries and benefits 6,827,848 3,146,813 13,647,629 6,214,101
Other practice expenses 7,189,690 2,882,446 13,358,894 5,633,688
Corporate and regional expenses 2,136,833 1,310,224 4,296,657 2,781,347
Deprecation and amortization 842,632 616,831 1,505,377 958,363
Provision for bad debts 778,786 282,318 1,467,114 555,581
----------- ----------- ------------ -----------
Total expenses 17,775,789 8,238,632 34,275,671 16,143,080
Operating Loss (2,520,804) (1,326,835) (4,403,738) (2,386,878)
Other Income (expense):
Interest income 47,344 32,838 151,558 36,793
Interest expense (18,813) (75,102) (57,127) (105,826)
Loss of investment in subsidiary (190,445) (323,287)
----------- ----------- ------------ -----------
Net loss $(2,682,718) $(1,369,099) $ (4,632,594) $(2,455,911)
=========== =========== ============ ===========
Net loss available to common stock $(7,222,214) $(8,025,640) $ (9,172,090) $(9,112,452)
=========== =========== ============ ===========
Net loss per common share-basic $ (0.18) $ (0.30) $ (0.23) $ (0.35)
=========== =========== ============ ===========
Weighted average common
shares outstanding 39,461,589 26,724,848 39,352,829 25,746,314
=========== =========== ============ ===========
</TABLE>
See accompanying notes to unaudited financial statements and management's
discussion and analysis of financial condition and results of operations.
2
<PAGE>
PHYSICIANS QUALITY CARE, INC.
STATEMENTS OF CASH FLOW
(UNAUDITED)
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
----------------------------
1998 1997
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Loss $ (4,632,594) $ (2,455,896)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 1,505,377 958,363
Changes in operating assets and liabilities, net of effects of
business acquisitions:
Increase in due from affiliated physician practices (4,169,908) (3,605,340)
Increase (Decrease) in prepaid expenses and other assets (159,543) (330,062)
Decrease in accounts payable, accrued compensation and
accrued expenses (497,597) (366,228)
Decreases in income taxes payable (22,319) (92,000)
------------- -------------
Net cash used in operating activities (7,976,584) (5,891,163)
INVESTING ACTIVITIES
Purchase of property and equipment (93,402) (949,199)
Cash paid for affiliations (50,000) (831,231)
Cash paid for affiliation costs (406,097)
Increase in restricted cash (1,106,290)
Increase in deferred acquisition costs (657,632)
------------- -------------
Net cash used in investing activities (1,249,692) (2,844,159)
FINANCING ACTIVITIES
Proceeds from issuance of common stock, net of issuance costs 186,440 28,864,362
Proceeds from note payable 3,500,000
Decrease in deferred financing costs 18,196
Payments on note payable (3,500,000)
Payments on capital lease obligations (207,705)
Cash paid for debt issuance cost (331,148)
------------- -------------
Net cash provided by financing activities 186,440 28,343,705
Net decrease in cash and cash equivalents (9,039,835) (19,608,383)
Cash and cash equivalents at beginning of period 8,782,019 136,926
------------- -------------
Cash and cash equivalents at end of period $ (257,817) $ 19,745,309
============= =============
</TABLE>
See accompanying notes to unaudited financial statements and management's
discussion and analysis of financial condition and results of operations.
3
<PAGE>
Physicians Quality Care, Inc.
Notes to Unaudited Financial Statements
Six Months Ended June 30, 1998 and 1997
(1) Basis of Presentation
---------------------
The accompanying unaudited financial statements of Physicians Quality Care,
Inc., a Delaware corporation (the "Company"), have been prepared in accordance
with generally accepted accounting principles and in accordance with Rule 10-01
of Regulation S-X.
In the opinion of management, the unaudited interim financial statements
contained in this report reflect all adjustments, consisting of only normal
recurring accruals which are necessary for a fair presentation of the financial
position as of June 30, 1998 and the results of operations for the three and six
months ended June 30, 1998. The results of operations for the three and six
month periods ended June 30, 1998 are not necessarily indicative of results for
the full year.
These unaudited financial statements, footnote disclosures and other
information should be read in conjunction with the financial statements and
notes thereto included in the Company's Registration Statement on Form S-1, as
amended (No. 333-26137), and the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the amounts reported in the accompanying financial
statements and notes. Actual results could differ from those estimates.
(2) 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 for the three and six months ended June 30, 1998 and
June 30, 1997 reflect the accretion of common stock subject to put to fair value
at those respective balance sheet dates. 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.
In February 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings
Per Share", which established standards for computing and presenting earnings
per share ("EPS") and applies to entities with publicly held common stock or
potential common stock. SFAS 128 is effective for financial statements issued
for both interim and annual periods ending after December 31, 1997 and requires
restatement of all prior period EPS data. Under the new requirements for
calculating primary
4
<PAGE>
earnings per share, the dilutive effect of stock options will be excluded. The
Company has applied this standard in 1997 and 1998.
(3) Pending Accounting Standards
----------------------------
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive
Income," and SFAS No. 131 "Disclosures About Segments of an Enterprise and
Related Information." SFAS No. 130 establishes standards for reporting and
displaying comprehensive income and its components. SFAS No. 131 establishes
standards for public companies to report information about operating segments in
financial statements and supersedes SFAS No. 14 "Financial Reporting for
Segments of a Business Enterprise," but retains the requirements to report
information about major customers. SFAS No. 130 and SFAS No. 131 are effective
for the Company in 1998. The Company does not believe the adoption of these
Statements will have a significant effect on its financial statements.
In November 1997, the Financial Accounting Standards Board's Emerging
Issues Task Force reached a consensus on its Issue 97-2, Consolidation of
Physician Practice Entities which is effective for the Company for its 1998
annual financial statements. The Company is currently evaluating the guidance
contained in the consensus as it affects its current model for its affiliation
structures. However, management does not believe implementation of the consensus
guidance will materially affect the financial position or its net results of
operations.
(4) Contingency
-----------
On June 12, 1997, Jay N. Greenberg, a founder and former executive vice
president of the Company, filed a complaint against the Company in Massachusetts
state court seeking damages of $1.4 million and a declaratory judgment that
843,750 of the shares registered in Mr. Greenberg's name (out of 1,012,500
shares of Class A Common Stock originally granted to Mr. Greenberg) have
"vested" under his Employment Agreement. The Company and Mr. Greenberg entered
into a Settlement Agreement in April 1998 pursuant to which the Company
confirmed Mr. Greenberg's ownership of 1,012,500 shares of Class A Common Stock
and Mr. Greenberg granted the Company an option to purchase all of such shares.
The purchase price is $1.3 million and increases (commencing October 1997) by
$25,000 for each three month period thereafter. The Company's purchase option
expires on the earlier of (i) October 14, 1999, (ii) upon a public offering of
the capital stock of the Company, or (iii) a change in control. No damages were
awarded and mutual releases were granted.
(5) LETTER OF CREDIT
----------------
In connection with the October 1997 acquisition of a 50% interest in TLC
Management Company, a medical management company ("TLC"), and a 50% interest in
Total Quality Practice Management, Inc., a practice management company providing
Medicare risk management services ("Total Quality"), the Company issued a $1.0
million letter of credit in April 1998. In connection with this letter of
credit, the Company is required to maintain a cash balance of $1 million which
is included under the caption "restricted cash" on the balance sheet.
(6) Subsequent Event
-----------------
On July 15, 1998, the Company issued 2,461,538 shares of Class L Common
Stock to certain institutional investors pursuant to a Class L Common Stock
Purchase Agreement. The purchase price was $3.25 for each share of Class L
Common Stock for an aggregate purchase price of approximately $8,000,000. In
connection with such transaction the rights of the Class B Common Stock in a
liquidation were amended to rank prior to the Class A Common Stock and on an
equal basis with the Class C Common Stock. The exercise price of the
outstanding Class B and Class C Common Stock warrants were reduced by $2.00 per
share to $0.50 and $1.25 per share respectively. No distribution, whether as a
dividend, upon liquidation or otherwise, may be made on any other class of
Common Stock until the holders of the Class L Common Stock have received
dividends or distributions equal to the purchase price of the Class L Common
Stock plus an additional 12% per annum. In connection with the Class L Common
Stock financing, the Company's Shareholders approved a Restated Certificate of
Incorporation. The Restated Certificate limits any distribution on capital stock
that constitutes a taxable distribution.
<PAGE>
The Class L Common Stock automatically converts into Class A Common Stock
upon the occurrence of a public offering that satisfy certain criteria, upon a
merger, consolidation, liquidation or winding up of the Company or a sale or
other transfer of all or substantially all of the Company's assets, or certain
other conditions brought about by partial redemption of Class L Common Stock.
The Class L Common Stock is also convertible at any time at the option of the
holder.
The number of shares of Class A Common Stock into which the Class L
Common Stock is convertible is determined according to a formula and is based on
the value of Class A Common Stock issued pursuant to a realization event. The
number of shares of Class A Common Stock issuable upon conversion (assuming no
accrued and unpaid dividends) ranges between 4,923,007 and 12,603,077.
The proceeds of the sale of Class L Common Stock will be used for working
capital and other corporate purposes.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This Quarterly Report on Form 10-Q contains forward-looking statements that
involve a number of risks and uncertainties. There are a number of important
factors that could cause the Company's actual results to differ materially from
those indicated by such forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed under
"Factors Affecting Future Operating Results." The following discussion should
be read in conjunction with the Company's Unaudited Financial Statements and
Notes thereto included elsewhere in this documents.
OVERVIEW
The Company is affiliated with and operates multi-specialty medical
practice groups. The first physician affiliation was completed on August 30,
1996 with 32 physicians in the Springfield, Massachusetts area (the "Springfield
Affiliated Group"). On December 11, 1996 the Company consummated the
affiliation with Flagship Health, P.A., a Maryland professional association
("Flagship," and together with Flagship II, the "Flagship Affiliated Group"),
which consisted of 59 physicians in the Baltimore, Maryland area. On December
1, 1997, the Company entered into a long term affiliation agreement with a
physician practice consisting of 58 physicians in the Baltimore, Maryland area.
Additional physicians have been subsequently added to the Springfield Affiliated
Group and the Flagship Affiliated Group (the "Affiliated Groups") during 1997
and 1998. In connection with the affiliation transactions, the assets and
liabilities of the physician practices were transferred to newly formed
professional corporations ("PCs") or professional associations ("PAs")
affiliated with the Company. The Company is working with these groups of
physicians to improve operating practices and to obtain managed care contracts.
On October 24, 1997, the Company acquired a 50% interest in Total Life
Care, a medical management company based in Atlanta, Georgia.
As of June 30, 1998, the Company had affiliations or independent provider
association ("IPA") arrangements with the following physicians:
<TABLE>
<CAPTION>
Maryland Massachusetts Georgia
--------- -------------- --------
<S> <C> <C> <C>
Affiliated Physicians:
Primary Care 102 27 0
Specialist 50 13 0
--- --- ---
Total: 152 40 0
IPA Physicians: 0 0 334*
</TABLE>
* Reflects number of physicians in the IPA network in which the Company has a
50% interest.
7
<PAGE>
Under the Company's contractual arrangements with its Affiliated Groups,
the Company can improve its management fee revenues by increasing the patient
care revenue of its Affiliated Groups, through improved billing and operating
efficiency, additional patient encounters, increased capitated revenues and
controlling the expenses of Affiliated Groups. To the extent that patient
revenue increases at a greater rate than practice expenses, the Company's
management fee will increase. Conversely, if PQC is not able to control practice
expenses or assist the Affiliated Groups in increasing patient care revenue, the
Company will earn no or only a limited management fee. Under the arrangements
with the physicians formally associated with Clinical Associates, P.A. (which
became effective on December 1, 1997) the Company earns a fee based, in part,
upon increases in billings, net of bad debts and discounts, above historical
levels, and a reduction in the percentage of revenue needed to pay practice
expense. While this structure causes the Company's management fee not to be as
dependent upon controlling practice expenses, the Company believes that both
increased revenues depend upon affiliated physicians being motivated by
competitive levels of compensation.
The Company's and its Affiliated Groups revenues are derived from
governmental programs, managed care payors and traditional fee-for service
arrangements. The following table sets forth the approximate percentage of the
revenues received by the practices that were affiliated with the Company at and
during the three month period ended June 30, 1998:
<TABLE>
<S> <C>
Fee for Service Contracts 49%
Medicare 22%
Capitated Managed Care Contracts 27%
Medicaid and Other 2%
---
100%
===
</TABLE>
RESULTS OF OPERATIONS:
Three Months ended June 30, 1998 and June 30, 1997
Net patient revenues of affiliated practices were $20.6 million for the
three months ended June 30, 1998 compared to $10.7 million for the same period a
year ago. The increase of $9.9 million in net revenues was primarily due to
the Flagship II affiliation in December, 1997. Capitated managed care contracts
were 27% of revenues for the three months ended June 30, 1998 compared to 9% for
the three months ended June 30, 1997. Capitated contracts have increased as a
source of revenue in 1998 due to the Flagship II affiliation.
8
<PAGE>
Amounts retained by physician groups, which represents physician salaries
and benefits, increased $1.6 million for the three months ended June 30, 1998
compared to the three months ended June 30, 1997. This is primarily due to the
increase in affiliated physicians from 1997 to 1998. As a percentage of net
patient service revenues, amounts retained by physician groups was 26% for the
three months ended June 30, 1998 compared to 35% for the three months ended June
30, 1997. This was primarily due to the Flagship II affiliation which has a
lower physician compensation ratio to net revenues than the prior affiliations.
Nonphysician salaries and benefits, which represents salaries and benefits
for physician practice staff increased by $3.7 million to $6.8 million for the
three months ended June 30, 1998 from $3.1 for the three months ended June 30,
1997. As a percentage of net patient service revenues, Nonphysician salaries and
benefits was 33% for the three months ended June 30, 1998 compared to 29% for
the three months ended June 30, 1997. Other practice expenses, which represent
all other physician practice expenses, increased $4.3 million and as a
percentage of net revenue to 35% for the three months ended June 30, 1998
compared to 27% for the three months ended June 30, 1997. The increase in
Nonphysician salaries and benefits and other practice expenses is primarily a
result of the Flagship II affiliation which has higher infrastructure expenses.
The infrastructure expenses include outside services and administrative costs
associated with capitated managed care contracts.
Corporate and regional expenses increased $827,000 for the three months
ended June 30, 1998 compared to the three months ended June 30, 1997. This
increase was due to the hiring of corporate and regional staff and related
expenses to support the affiliated practices. Corporate and regional expenses
were 10% of revenues for the three months ended June 30, 1998 compared to 12%
for the three months ended June 30, 1997.
Depreciation and amortization expense was $843,000 for the three months
ended June 30, 1998 compared to $617,000 for the three months ended June 30,
1997. The increase was due to the Flagship II affiliation completed in December
1997 and is primarily related to the amortization of intangible assets from the
affiliation transactions.
Provisions for bad debt expense increased by $496,000 for the three months
ended June 30, 1998 compared to the three months ended June 30, 1997 and
increased as a percentage of net revenue to 4% from 3% for the same periods. The
increases in provisions for bad debts is due to the provisions for Flagship II
affiliation and patient mix compared to prior affiliations.
Interest income increased for the three months ended June 30, 1998 compared
to the three months ended June 30, 1997 due to a higher level of invested cash
over the entire period.
9
<PAGE>
Loss in investment for the three months ended June 30, 1998 was $190,000.
The Company acquired a 50% interest in Total Life Care on October 24, 1997 and
has accounted for the transaction using the equity method.
Six Months ended June 30, 1998 and June 30, 1997
Net patient revenues of affiliated practices for the six months ended June
30, 1998 were $41.8 million compared to $21.2 million for the same period a year
ago. The increase of $20.6 million in net revenues was primarily due to the
Flagship II affiliation. Capitated managed care contracts were 27% of revenues
for the six months ended June 30, 1998 compared to 9% for the six months ended
June 30, 1997. Capitated contracts have increased as a source of revenue in 1998
due to the Flagship II affiliation.
Amounts retained by physician groups, which represents physician salaries
and benefits, increased $4.5 million for the six months ended June 30, 1998
compared to the six months ended June 30, 1997. This is primarily due to the
increase in affiliated physicians from 1997 to 1998. As a percentage of net
patient service revenues, amounts retained by physician groups was 29% for the
six months ended June 30, 1998 compared to 35% for the six months ended June 30,
1997. This was primarily due to the Flagship II affiliation which has a lower
physician compensation ratio to net revenues than the prior affiliations.
Nonphysician salaries and benefits, which represent salaries and benefits
for physician practice staff increased by $7.4 million to $13.6 million for the
six months ended June 30, 1998 from $6.2 million for the six months ended June
30, 1997. As a percentage of net patient service revenues, Nonphysician salaries
and benefits was 33% for the six months ended June 30, 1998 compared to 29% for
the six months ended June 30, 1997. Other practice expenses, which represent all
other physician practice expenses, increased $7.7 million and as a percentage of
net revenue to 32% for the six months ended June 30, 1998 compared to 27% for
the six months ended June 30, 1997. The increase in Nonphysician salaries and
benefits and other practice expenses is primarily a result of the Flagship II
affiliation which has higher infrastructure expenses. The infrastructure
expenses include outside services and administrative costs associated with
capitated managed care contracts.
Corporate and regional expenses increased $1.5 million for the six months
ended June 30, 1998 compared to the six months ended June 30, 1997. This
increase was due to the hiring of corporate and regional staff and related
expenses to support the affiliated practices. Corporate and regional expenses
were 10% of revenues for the six months ended June 30, 1998 compared to 13% for
the six months ended June 30, 1997.
Depreciation and amortization expense was $1.5 million for the six months
ended June 30, 1998 compared to $958,000 for the six months ended June 30, 1997.
The increase was due to the Flagship II affiliation completed in December 1997
and is primarily related to the amortization of intangible assets from the
affiliation transactions.
10
<PAGE>
Provisions for bad debts increased by $911,000 for the six months ended
June 30, 1998 compared to the six months ended June 30, 1997 and increased as a
percentage of net revenue to 3.5% from 2.6% for the same periods. The increases
in provisions for bad debts is due to the Flagship II affiliation and patient
mix compared to prior affiliations.
Interest income increased for the six months ended June 30, 1998 compared
to the six months ended June 30, 1997 due to a higher level of invested cash
over the entire period.
Loss in investment for the six months ended June 30, 1998 was $323,000. The
Company acquired a 50% interest in Total Life Care on October 24, 1997 and has
accounted for the transaction using the equity method.
LIQUIDITY AND CAPITAL RESOURCES:
Principal capital requirements include payments for affiliation
transactions, related transaction costs, working capital requirements, and the
funding of operating losses. The Company anticipates that its liquidity and
capital requirements will be the same for the short-term and long-term. The
Company has incurred significant operating losses to date and does not have
operating cash flow to fund further losses. The principal sources of capital
have been the issuance of Class B, Class C, and Class L Common Stock to
institutional investors, and the issuance of Class A Common Stock to private
investors. Capital expenditures are expected to be $2 million for 1998. There
can be no assurance that the institutional investors, who have previously been a
source of capital, will continue to fund the operations through the purchase of
additional equity.
Working capital existing at the date of the affiliation transactions has
been retained in the affiliated groups. Additional working capital is required
to fund growth and manage accounts receivable fluctuations. The affiliated
groups had net accounts receivable of $14.4 million at June 30, 1998 compared to
$11.9 million at December 31, 1997. The $2.5 million increase in accounts
receivable is due to billing delays caused by system conversions. Management
believes that the increases are temporary and anticipates that the system
conversions will be completed by December 31, 1998.
During 1998 and 1997 the Company paid an aggregate consideration of $1.5
and $23.6 million, respectively, in connection with affiliation transactions. Of
that amount $50,000 in 1998 and $7.8 million in 1997 was paid in cash and $1.5
million in 1998 and $15.8 million in 1997 was paid in Class A Common Stock. The
majority of the consideration has been ascribed to intangible assets.
As of June 30, 1998, intangible assets net of amortization costs,
represented $54 million of the total assets of $70 million. The Company is
amortizing the intangible assets over 25 years.
Continuing operating losses, working capital requirements and other
expenditures caused the company to experience a net reduction in cash and cash
equivalents of $9 million during the six
11
<PAGE>
months ended June 30, 1998. As a result of such reduction in working capital,
the Company had a negative balance of unrestricted cash of ($258,000) at June
30, 1998 and its current assets at such date were principally composed of
amounts due from affiliated physician practices. Delays in billings and
collections at the affiliated practices due principally to systems conversions
contributed to the decrease in cash and the increase in amounts due from
affiliates. While the Company is addressing the billing and collection problems
at the affiliated practice, the Company faced a serious shortfall in working
capital. To address this problem and to fund its operations and growth, the
Company issued 2,461,538 shares of Class L Common Stock to certain institutional
investors pursuant to a Class L Common Stock Purchase Agreement. The purchase
price was $3.25 for each share of Class L Common Stock for an aggregate purchase
price of approximately $8 million. In connection with such transaction the
rights of the Class B Common Stock in a liquidation were amended to rank prior
to the Class A Common Stock and on an equal basis with the Class C Common Stock.
The exercise price of the outstanding Class B and Class C Common Stock warrants
were reduced by $2.00 per share to $0.50 and $1.25 per share respectively. While
the Company believes that the proceeds from the Class L Common Stock financing
will be sufficient to fund the Company's operations for the current year, the
Company will continue periodically to experience shortfalls in working capital
unless it is able to generate a positive cash follow from its operations. There
can be no assurance that additional equity financing will be available in the
future from the institutional investors in the Company or other sources.
Of the common stock outstanding at June 30, 1998, 18,604,136 shares of
Class A Common are subject to a put option which provided for the purchase of
the shares at fair value upon the death of the holder. In addition, 1,029,749
shares are subject to a fair value put option back to the Company at the later
of the physician shareholder's retirement or June 1998. These Class A Common
Shares have been recorded at fair value on the accompanying balance sheet. Under
the stockholder agreements as of December 31, 1997, the Company has the right to
repurchase 15,471,063 shares of Class A Common Stock for fair value if the
physician shareholder's termination of employment is without cause or is by
resignation, and for the lower of cost or fair value if termination is with
cause. The terms of such repurchase provisions may not permit the Company to
fully recover its physician affiliation payments or reflect the cost of
affiliation transactions at the time of termination. To date, no physician
shareholder has terminated an employment agreement or repurchased any practice
assets. All of the put and call provisions expire on the completion of an
initial public offering with net proceeds of $50 million and which meets certain
other criteria. In addition, the Flagship II physicians have the right to
require the Company to repurchase through a five year non-interest bearing note
4.8 million shares of Class A Common Stock at $3.00 per share if the Company has
not completed an initial public offering prior to December 1, 2001. The Class
A Common Stock is subject to a number of restrictions in the stockholder
agreements and will not trade until the occurrence of an offering. The Company
has not recorded a compensation expense for these puts and calls and believes it
is a nonpublic entity for compensation accounting purposes.
12
<PAGE>
IMPACT OF YEAR 2000
The Company is aware of issues associated with the programming code in
existing computer systems as the year 2000 approaches. The "Year 2000" problem
is pervasive and complex, as virtually every computer operation will be affected
in the same way by the rollover of the two digit year value to 00. The issue is
whether computer systems will properly recognize date sensitive information when
the year changes to 2000. Systems that do not properly recognize such
information could generate erroneous data or cause a system to fall.
The Company is utilizing both internal and external resources to identify,
correct or reprogram, and test its systems for Year 2000 compliance. It is
currently anticipated that all reprogramming efforts will be completed by July
31, 1999, allowing adequate time for testing. A preliminary assessment has
indicted that some of the Company's older personal computers and ancillary
software programs may not be Year 2000 compatible. The Company intends to
either replace or modify these computers and programs. The cost of this
replacement in not expected to be material as the shelf life of the Company's
personal computers is three to five years. The present financial systems are
all Year 2000 compliant. The practice management system is 80% compliant and
the Company plans to move to a new version of the software which is 100%
compliant as part of its reprogramming efforts which will be completed by July
31, 1999. This upgrade is provided under the Company's current software
maintenance agreement with its software vendor. All new software purchased will
be 100% compliant.
The Company is also obtaining confirmations from the Company's primary
vendors that plans are already in place to address processing of transactions in
the Year 2000. However, there can be no assurance that the systems of other
companies on which the Company's systems rely also will be converted in a timely
fashion or that any such failure to convert by another company would not have an
adverse effect on the Company's systems. Management is in the process of
completing the assessment of the Year 2000 compliance costs. However, based on
currently available information (excluding the possible impact of vendor systems
which management currently is not in a position to evaluate) as noted above,
management does not believe that these costs will have a material effect on the
Company's earnings.
FACTORS AFFECTING FUTURE OPERATING RESULTS
Lack of Operating History; History of Operating Losses
The Company's historical financial condition and results of operations may
not be indicative of the Company's results of operations and financial condition
for future periods. The Company has incurred losses of each of its fiscal years
through 1997. 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.
13
<PAGE>
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.
The Company has no committed external sources of capital. Without the
consent of the director elected by the stockholders of the Class B-1 Common
Stock (the "Class B-1 Director"), 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 of the "Class B Directors") and the directors elected by the
holders of Class C Common Stock (the "Class C Directors"), the Company may not
obtain additional financing through external borrowings or the issuance of
additional securities. The issuance of additional capital stock could have an
adverse effect on the value of the shares of common stock held by the existing
stockholders. There can be no assurance that the Class B Directors and Class C
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.
In July 1998, the Company issued 2,461,538 shares of Class L Common Stock for an
aggregate consideration of $8 million to finance the Company's working capital
shortfall and its ongoing operations. Because of the Company's working capital
requirements and operating losses, as well as a general change in the market
valuation of physician management companies, the terms of the Class L Common
Stock financing were less favorable to the Company than its prior institutional
offerings. If the Company is not able to eliminate its operating losses, the
Company will need additional working capital in the future. Additional capital
may also be needed to finance the expansion of the Company's operations. The
Company may not be able to obtain such additional financing when needed or may
not be able to do so on favorable terms. The failure to obtain additional
financing when needed and on appropriate terms could have a material adverse
effect on the Company.
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. In consummating 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.
14
<PAGE>
The Company has incurred approximately $2.9 million and $567,000 during
1996 and 1997, respectively, in 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 Services
Agreements with the Affiliated Groups is based upon a percentage of the profits
of revenues generated by the Affiliated Groups' practices with a substantial
portion of the profits or revenues being allocated to the physicians until
threshold levels of income or revenues, based upon the physicians' historical
compensation or billings, are achieved. Accordingly, the performance of
affiliated physicians affected 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 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.
Risks Related to Expansion of Operations
Integration Risks. The Company has completed affiliation transactions with
the Springfield Affiliated Group and the Flagship Affiliated Group, and is
seeking to enter into Affiliates with additional physicians. 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 is still in the process of
integrating its affiliated practices. 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
cots incurred in connection with integrating such operations could have an
adverse effect on the Company's business, operating results or financial
condition.
While each Affiliation conforms to PQC's overall business plan, the
profitability, location and culture of the physician practices that have been
combined into Affiliated Groups are different in come respects. PQC's
management faces a significant challenge in its efforts to integrate and
15
<PAGE>
expand the business of the Affiliated Groups. Because of limited working capital
and operating losses, the Company has recently reduced the size of its corporate
staff. While intended to improve the efficiency and cost of its operations, such
reduction may also make it more difficult for the Company to manage it
operations and growth. The need for management to focus upon such integration
and future Affiliations may limit resources available for the day-to-day
management of the Company's business. While management of the Company believes
that the combination of these practices will serve to strengthen the Company,
there can be no assurance that management's efforts to integrate the operations
of the Company will be successful. The profitability of the Company is largely
dependent on its ability to develop and integrate networks of physicians from
the affiliated practices, to manage and control costs and to realize economies
of scale. There can be no assurance that there will not be substantial costs
associated with such activities or that there will not be other material adverse
effects on the financial results of the Company as a result of these integration
and affiliation activities.
The Company intends to continue to pursue an aggressive growth strategy
through affiliations and internal development for the foreseeable future. The
Company's ability to pursue new growth opportunities successfully will depend on
many factors, including, among others, the Company's ability to identify
suitable growth opportunities and successfully integrate affiliated or acquired
businesses and practices. There can be no assurance that the Company will
anticipate all of the changing demands that expanding operations will impose on
its management, management information systems and physician network. Any
failure by the Company to adapt its systems and procedures to those changing
demands could have a material adverse effect on the operating results and
financial condition of the Company.
Need to Hire and Retain Additional 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
decrease in the patient base associated with the 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 an 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.
16
<PAGE>
Risk of Inability to Manage 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. Because of limited
working capital and operating losses, the Company has recently reduced the size
of its corporate staff. While intended to improve the efficiency and cost of
its operations, such reduction may also make it more difficult for the Company
to manage it operations and growth. 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 the Growth of Numbers of Covered Lives
The Company is also largely dependent on the continued increase in the
number of covered lives under managed care and capitate contracts. This growth
may come from affiliation with additional physicians, increased enrollment with
managed care payors currently contracting with the Affiliated Groups and
additional agreements with managed care payors. A decline in covered lives or
an inability to increase the number of covered lives under contractual
arrangement with managed care or capitated payors could have a material adverse
effect on the operating results and financial condition of the Company.
Potential Regulatory Restraints Upon the Company's Operations
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.
Risks of Capitated Contracts
The physician groups with which the Company is affiliated and proposes to
affiliate 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").
17
<PAGE>
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 and therefore does not completely protect
against any capitation risk assumed. 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. Except
for a small amount of coverage maintained by Flagship, neither the Company nor
the Affiliated Groups currently maintain any reinsurance arrangement and, to
date, the Affiliated Groups have not experienced losses from participation in
risk pools or incurred any material penalties or obligations with respect to
excess costs under capitated contracts. The Company is pursuing a strategy of
seeking increased participation in capitated contracts for all of its affiliated
physicians. As the percentage of the Company's revenues derived from capitated
contracts increases, the risk of the Company experiencing losses under capitated
contracts increases. As the revenues from capitated contracts become of
increasing importance to PQC and its Affiliated Groups, the Company will review
the financial attractiveness of reinsurance arrangements.
Medical providers, such as the Affiliated Groups, are experiencing
increasing pricing pressure in negotiating capitated contracts while facing
increased demands on the quality of their services. If these trends continue,
the costs of providing physician services could increase while the level of
reimbursement could grow at a lower rate or decrease. 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. Liabilities or insufficient revenues under capitated
and other risk-sharing arrangements could have a material adverse effect on the
Company.
Risks of Changes in Payment for Medical Services
The profitability of the Company may be adversely affected by Medicare and
Medicaid regulations, cost containment decisions of third party payors and other
payment factors over which PQC and its Affiliated Groups have no control. The
federal Medicare program has undergone significant legislative and regulatory
changes in the reimbursement and fraud and abuse areas, including the adoption
of the resource-based relative value scale schedule for physician compensation
under Medicare, which may have a negative impact on PQC's revenue. Efforts to
control the cost of healthcare services are increasing. PQC's Affiliated Groups
contract with provider networks, managed care organization and other organized
healthcare systems, which often provided fixed fee schedules or capitation
payment arrangements which are lower than standard charges. Future
profitability in the changing healthcare environment, with differing methods of
payment for medical services, is likely to be affected significantly by
management of healthcare
18
<PAGE>
costs, pricing of services and agreements with payors. Because PQC derives its
revenues generated by its affiliated physician groups, further reductions in
payment to physicians generally or other changes in payment for healthcare
services could have an 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
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, which is currently maintained at
$1 million per occurrence and $3 million annually for each affiliated physician.
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 PCs in Springfield prior to affiliating
with the Company were merged into the Springfield Affiliated Group, with
stockholders of each PC receiving shares of Class A Common Stock of the Company
and cash in exchange for their capital stock in the PC. Physician groups which
operated as 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 Class A Common Stock of the Company
and cash 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, in which case no gain or loss would generally
be recognized by the PC or PA or the stockholders (other than as cash received)
of the PC or PA. The Company has not sought or obtained a ruling form 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 Company does not believe that the Internal Revenue
Service is issuing rulings at this time on transactions using the Company's
affiliation structure. If a merger were not to so qualify, the exchange of
shares would be taxable to the stockholders of the PC or PA, and the
consideration (net of asset basis) issued in connection with the merger would be
taxable to the Affiliated Group into which such PC or PA was merged. Because of
such tax liability, 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. Also, the inability to structure future
Affiliations on a tax-deferred basis may adversely affect the Company's ability
to attract additional physicians.
19
<PAGE>
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 senior
management team, including Jerilyn P. Asher, the Chief Executive Officer, and
Eugene M. Bullis, Senior Vice President and Chief Financial Officer, and the
PQC's ability to continue to attract, motivate and retain highly qualified
senior management and employees. The Company has employment agreements with Ms.
Asher and Mr. Bullis. The Company does not maintain key person life insurance
with respect to Ms. Asher or Mr. Bullis. As a development stage company, PQC has
experienced some turnover in staff, including two of the founding officers.
Although the Company has entered into employment agreements with certain of its
other 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 personnel could have a material adverse
effect upon the Company's business and future business prospects.
Risk of the Unavailability of the Equity Facility
The remaining amount under the Class B and Class C Stock Purchase Agreement
(the "Equity Facility") with certain institutional investors ("Institutional
Investors") is only available with the consent of the Institutional Investors
and there can be no assurance that the Institutional Investors will be willing
to provide additional capital when needed by the Company. The Equity Facility
and the Class L Common Stock Purchase Agreement also restrict the sources of
capital available to the Company without the consent of the Institutional
Investors. Except for the Equity Facility, the Company has no committed
external sources of capital. Except with the consent of the director elected by
the Institutional Investors, the Company may not obtain additional financing
through external borrowings or the issuance of additional securities. The
Institutional Investors also have received warrants to purchase a substantial
number of shares of Class A Common Stock. These warrants, as amended in
connection with the Class L Common Stock financing, are exercisable at $.50 or
$1.25 per share, which exercise price may be substantially below the fair market
value of the Class A Common Stock at the time of exercise. In addition, the
Class L Common Stock is convertible into Class A Common Stock on the basis of a
formula, which would, as of July 15, 1998, result in conversion at least equal
to two shares of Class A Common Stock for each share of Class L Common Stock.
Any additional equity issuance could have an adverse effect on the value of the
shares of Class A Common Stock held by the then existing stockholders.
Risks from Put and Other Rights Held by Certain Stockholders
Each physician and management stockholder who is a party to the
Stockholders Agreement, dated as of August 30, 1996 (the "Stockholder's
Agreement"), has the right to require PQC to purchase the Common Stock owned by
such stockholder at fair market value upon their death or disability. Pursuant
to the Stockholders Agreement, fair market value, as determined by the Board of
Directors, reflects and arm's length private sale. In determining the fair
market value, the Board is to consider recent arm's length sales by the Company
and the stockholders, as well as other factors
20
<PAGE>
considered relevant. While the Stockholders Agreement does not limit the Board's
discretion, such other factors may include changes, since the last arm's length
sale, in the Company's financial conditions or prospects and any valuation
studies conducted by management of the Company or independent valuation experts.
Under the Stockholder Agreement, the Board is not permitted to discount the fair
market value of the Common Stock to reflect the fact that the Common Stock being
sold constitutes less than a majority of the outstanding shares. The put option
is only triggered by death or disability (and in a few instances retirement) and
will terminate upon the completion of a public offering which results in at
least $50.0 million in gross revenues to the Company and which meets certain
other criteria. The physicians affiliated with Clinical Associates have the
right to require the Company to repurchase their Common Stock at $3.00 per share
(in the form of a five-year, non-interest bearing note) in the event that the
Company has not completed an underwritten initial public offering before
December 1, 2001. The exercise of such right could have a material adverse
effect upon the Company. To the extent that the "put options" are likely to be
exercised, the Company expects to fund such repurchases from working capital,
the Equity Facility or other sources.
Amortization of Intangible Assets
In connection with its affiliations, the Company has recorded, and is
expected to continue to record, a significant amount of intangible assets as the
consideration paid to physicians exceeds the value of the practice assets. At
December 31, 1997, the Company had intangible assets of approximately $57.3
million reflected on its balance sheet as long-term affiliation agreements. The
Company amortizes such intangible assets over a 25-year period. See the Notes to
the Company's Financial Statements. The amortization of these intangible assets,
while not affecting the Company's cash flow, has an ongoing negative impact upon
the Company's earnings. Amortization of intangible assets contributed
approximately $1,292,000 to the Company's net loss of $5.7 million during the
year ended December 31, 1997 and $957,000 to the Company's loss of $4.6 million
during the six months ended June 30, 1998.
21
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On June 12, 1997, Jay N. Greenberg, a founder and former executive vice
president of the Company, filed a complaint against the Company in Massachusetts
state court seeking damages of $1.4 million and a declaratory judgment that
843,750 of the shares registered in Mr. Greenberg's name (out of 1,012,500
shares of Class A Common Stock originally granted to Mr. Greenberg) have
"vested" under this Employment Agreement. The Company and Mr. Greenberg entered
into a Settlement Agreement in April 1998 pursuant to which the Company
confirmed Mr. Greenberg granted the Company an option to purchase all of such
shares. The purchase price is $1.3 million and increases (commencing effective
October 1997) by $25,000 each three-month period. The option expires on the
earlier of (i) October 14, 1999, (ii) upon a public offering of the capital
stock of the Company, or (iii) a change in control. No damages were awarded and
mutual releases were granted.
22
<PAGE>
ITEM 5. OTHER INFORMATION
To address its liquidity needs, the Company issued 2,461,538 shares of
Class L Common Stock to the investors in Class C Common Stock. The purchase
price was $3.25 for each share of Class L Common Stock for an aggregate purchase
price of approximately $8,000,000. The terms of this round of financing are less
favorable to the Company than the Class C Common Stock financing in June 1997
reflecting the Company's current operating deficits and a general downward
valuation of physician practice management companies ("PPMs") in the
marketplace.
No distribution, whether as a dividend, upon liquidation or otherwise, may
be made on any other class of Common Stock until the holders of the Class L
Common Stock have received dividends or distributions equal to the purchase
price of the Class L Common Stock plus an amount sufficient to generate an
internal rate of return thereon equal to 12% per annum (compounded). The
Restated Certificate also limits any distributions on capital stock that
constituted a taxable distribution.
The Class L Common Stock is a new class of Common Stock. The Class L Common
Stock automatically converts into Class A Common Stock upon the occurrence of
(i) a Qualified Public Offering (as defined in the Restated Certificate), (ii)
upon a merger, consolidation, liquidation or winding up of the Company or a sale
or other transfer of all or substantially all of the Company's assets, or (iii)
if less than 30% of the shares of Class L Common Stock issued in the transaction
remain outstanding, subject, in each case, to approval of two thirds of the
Class B and C Directors, voting as a single class. The Class L Common Stock is
also convertible a any time at the option of the holder.
The number of shares of Class A Common Stock into which the Class L Common
Stock is convertible is determined pursuant to the formula set forth below.
Based on that formula and assuming no Class L Adjustment, each share of Class L
Common Stock is initially convertible into two shares of Class A Common Stock.
If the full Class L Adjustment is assumed, the Class L Common Stock is initially
convertible into approximately 5 shares of Class A Common Stock. The Class L
Adjustment is made if the Company's Common Stock does not achieve certain
valuations upon a Public Offering or Realization Event.
The Class L Conversion Factor (see the Restated Certificate for the meaning
of capitalized terms) is determined as follows:
[Class L Conversion Constant] + [the quotient obtained by dividing the Remaining
Class L Minimum Payment Amount by the Applicable Price per share] + [the Class L
Adjustment].
The Class L Conversion Constant is initially 1 and is adjusted in the event of a
stock split or similar event.
23
<PAGE>
The Remaining Class L Minimum Amount is equal to the Investors' initial
investment in the Class L Common Stock plus an amount sufficient to generate an
internal rate of return equal to 12% per annum (Compounded).
Applicable Price per Share means, (a) upon the Public Offering, the Public
Offering Price, (b) at the time of any Realization Event, a fraction, the
numerator of which is the excess, if any, of (i) the aggregate value of all
Common Stock of the Company over (ii) the aggregate Remaining Class L
Minimum Payment Amount with respect to all shares of Class L Common Stock
outstanding and the denominator of which is the aggregate number of shares of
Common Stock, (c) at any other time after the Public Offering Time, the Public
Trading Price, and (d) in connection with any optional conversion of Class L
Common Stock, the Public Trading Price, if at such time the Class A Common Stock
is listed on a national securities exchange or traded in the Nasdaq Stock
Market, and, if the Class A Common Stock is not so listed or traded, the greater
of $3.25 per share and the fair market value of each share of Class A Common
Stock as determined in good faith by the Board of Directors.
The Class L Adjustment is an adjustment to the Class L Conversion Factor
upon the earlier to occur (but only upon the occurrence) of (x) a Realization
Event (i.e., a merger, liquidation or winding up of the Company or a sale of all
or substantially all of its assets) and (y) a public offering. In either such
event, the Class L Conversion Factor is increased by a number equal to, (i) if
the Public Offering Price or the amount distributed to the holders of Class L
Common Stock in such liquidation (together with all prior distributions with
respect to such Class L Common Stock) (the "Class L Value") is equal to or more
than $6.75 per share, 0, (ii) if the Class L Value is equal to or less than
$3.50 per share, 3.12, and (iii) if the Class L Value is less than $6.75 per
share and equal to or greater than $3.50 per share, 0.0096 for each $0.01 that
the Class L Value is less than $6.75.
Certain provisions of the outstanding Class B Common Stock and Class B and
C Common Stock Warrants were amended in connection with the Class L financing.
The rights of the Class B Common Stock were amended so that the Class B Common
Stock ranks in parity with the Class C Common Stock in the event of liquidation.
Consequently, in the event of a liquidation, the assets of the Company would
first be used to pay the holders of Class L Common Stock $3.25 per share plus a
cumulative 12% return per annum; the remaining assets, if any, would be used to
pay the holders of Class C Common Stock and Class B Common Stock the greater of
$3.25 and $2.50, respectively, per share and the amount that those shares would
receive if converted to Class A Common Stock. If any assets remain after those
distributions, they would be available for distribution to the holders of Class
A Common Stock and Class L Common Stock.
The outstanding warrants to purchase Class C and B Common Stock were also
repriced. The exercise price on the Class B Common Stock Warrants was reduced
from $2.50 to $0.50. The exercise price on the Class C Common Stock Warrants was
reduced from $3.25 to $1.25.
24
<PAGE>
The By-laws of the Company provide that the Board of Directors consists of
13 members. Currently there is one vacancy on the Board and twelve Board
members. Of those members, affiliates of Bain Capital have the right to appoint
two members and ABS Capital Partners II had the right to appoint one member.
The composition of the Board was amended to provide that ABS Capital Partners II
has the right to appoint two members to the Board of Directors. The members of
the Board appointed by affiliates of Bain Capital and ABS Capital Partners II
have certain superior voting rights.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS
Exhibit Index
3.1 Amended and Restated Articles of Incorporation
3.2 Amended and Restated By-Laws
10.1 Class L Common Stock Purchase Agreement
10.2 Employment Agreement between the Company and Dana Frank, M.D.
10.3 Employment Agreement between the Company and Alphonse Calvanese , M.D.
10.4 Employment Agreement between the Company and Eugene M. Bullis
10.5 Amendment No. 3 to Stockholders Agreement
27 Financial Data Schedule
(B) REPORTS ON FORM 8-K: None
25
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: August 14, 1998 PHYSICIANS QUALITY CARE, INC.
By: /s/ Eugene M. Bullis
---------------------------------
Eugene M. Bullis
Chief Financial Officer
and Senior Vice President
26
<PAGE>
EXHIBIT INDEX
Exhibits
- --------
3.1 Amended and Restated Articles of Incorporation
3.2 Amended and Restated By-Laws
10.1 Class L Common Stock Purchase Agreement
10.2 Employment Agreement between the Company and Dana Frank, M.D.
10.3 Employment Agreement between the Company and Alphonse Calvanese, M.D.
10.4 Employment Agreement between the Company and Eugene M. Bullis
10.5 Amendment No. 3 to Stockholders Agreement
27 Financial Data Schedule
<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 Amended and Restated Certificates of Incorporation
were filed therewith on June 30, 1995, August 30, 1996 and June 23 , 1997.
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 as of July 2, 1998.
This Restated Certificate of Incorporation has been adopted by the Board of
Directors and the stockholders of the Corporation in accordance with Sections
228, 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, County 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.
FOURTH: Capital Stock.
<PAGE>
3.1 Authorized Shares. The total number of shares of capital stock that
the Corporation has authority to issue is one hundred eighty-six million, one
hundred sixty-eight thousand, eight hundred forty-seven (186,168,847) shares,
consisting of:
(1) one hundred thirty-five million (135,000,000) shares of
Class A Common Stock, par value $0.01 per share ("Class A Common
Stock");
(2) six million, seven hundred twenty-seven thousand, forty-
three (6,727,043) shares of Class B-1 Common Stock, par value $0.01
per share ("Class B-1 Common Stock");
(3) four million, two hundred eighty-seven thousand, nine
hundred fifty-seven (4,287,957) shares of Class B-2 Common Stock, par
value $0.01 per share ("Class B-2 Common Stock");
(4) twenty-seven million, six hundred ninety-two thousand, three
hundred nine (27,692,309) shares of Class C Common Stock, par value
$0.01 per share ("Class C Common Stock");
(5) two million, four hundred sixty-one thousand, five hundred
thirty-eight (2,461,538) shares of Class L Common Stock, par value
$0.01 per share ("Class L Common Stock"); and
(6) 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 L Common Stock, Class C
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 August 30, 1996, each share of every class and
series of capital stock of the Corporation authorized immediately prior to
August 30, 1996 was 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.
-2-
<PAGE>
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:
3.2 Definitions. As used in this Article Fourth, the following terms have
the following definitions:
3.2.1 "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. Notwithstanding the
foregoing and for purposes of the definitions of Restricted Action and
Class B and C Director Action, no Investor shall be deemed to be an
Affiliate of the Corporation and no Person who is an Affiliate of an
Investor for reasons unrelated to the Corporation or its Subsidiaries shall
be deemed to be an Affiliate of the Corporation.
3.2.2 "Applicable Price per Share" shall mean, (a) upon a Public
Offering, the Public Offering Price, (b) at the time of any Realization
Event, a fraction, the numerator of which is the excess, if any, of (i) the
aggregate value of all Common Stock of the Corporation over (ii) the
aggregate Remaining Class L Minimum Payment Amount with respect to all
shares of Class L Common Stock outstanding and the denominator of which is
the aggregate number of shares of Common Stock, (c) at any other time after
the Public Offering Time, the Public Trading Price, and (d) in connection
with any optional conversion of Class L Common Stock pursuant to 4.7.2(b),
the Public Trading Price, if at such time the Class A Common Stock is
listed on a national securities exchange or traded in the Nasdaq Stock
Market, and, if the Class A Common Stock is not so listed or traded, the
greater of $3.25 per share and the fair market value of each share of Class
A Common Stock as determined in good faith by the Board of Directors of the
Corporation.
3.2.3 "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
3.2.4 "Board of Directors " shall mean the Board of Directors of the
Corporation.
3.2.5 "Capital Investors" shall mean ABS Capital Partners II, L.P.
and its Affiliates and certain individuals associated with ABS Capital
Partners II, L.P.
-3-
<PAGE>
3.2.6 "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.
3.2.7 "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.
3.2.8 "Class B and C 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:
(1) 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, profit participation or similar rights with respect to the
Corporation or any Subsidiary or Affiliate thereof;
(2) 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;
(3) incurrence of Indebtedness of the Corporation or any
Subsidiary or incurrence of material Indebtedness by an Affiliate
thereof;
(4) 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);
(5) any Public Offering or Public Event;
-4-
<PAGE>
(6) 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
(7) 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 by or sale to any of the Investors or any Affiliate thereof
under paragraphs (a)-(e) constitute a Class B and C Director Action. All Class
B and C Director Actions shall be taken in compliance with Section 2.8 of the
Corporation's bylaws.
3.2.9 "Class B and C Director Control Event" shall mean:
(1) the earlier of (x) the failure of the Corporation to meet
75% of the Corporation's Business Plan for any two consecutive fiscal
quarters or (y) the failure of the Corporation to meet 50% of the
Corporation's Business Plan for any one fiscal quarter, such Business
Plan to be approved by a majority of the Board, which majority shall
include a majority of all of the Class B and Class C Directors, voting
together as a single class;
(2) 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
(3) the Corporation has not received the prior written consent
of the Investors in respect of any Restricted Action as set forth in
the Class L Common Stock Purchase Agreement among the Corporation and
the parties named therein.
3.2.10 "Class C Conversion Factor" shall mean at any time as of which
it is to be determined as provided in Article 4.7.2(b) below.
3.2.11 "Class L Base Amount" shall mean $3.25.
3.2.12 "Class L Conversion Constant" shall mean, at any time as of
which it is to be determined, one (1), adjusted as provided in Article 4.6
below.
3.2.13 "Class L Conversion Factor" shall mean, at any time as of
which it is to be determined, the sum of
-5-
<PAGE>
(1) the Class L Conversion Constant
plus
(2) the quotient obtained by dividing
(1) the Remaining Class L Minimum Payment Amount
by
(3) Applicable Price per share,
plus
(iii) the Class L Adjustment
all determined at such time.
3.2.14 "Class L Adjustment" shall mean an adjustment to the Class L
Conversion Factor immediately prior to the earlier to occur (but only upon
the occurrence) of (x) a Realization Event and (y) a Public Offering. In
either such event, the Class L Conversion Factor shall be increased by a
number equal to, (i) if the Public Offering Price or the amount distributed
to the holders of Class L Common Stock in such liquidation (together with
all prior distributions with respect to such Class L Common Stock) (the
"Class L Value") is equal to or more than $6.75 per share, 0, (ii) if the
Class L Value is equal to or less than $3.50 per share, 3.12, and (iii) if
the Class L Value is less than $6.75 per share and equal to or greater than
$3.50 per share, 0.0096 for each $0.01 that the Class L Value is less than
$6.75. The Class L Value shall be adjusted to reflect any stock splits,
stock dividends, combinations or similar recapitalizations.
3.2.15 "Closing Date" shall mean the first date on which the
Corporation issues any shares of Class B Common Stock.
3.2.16 "Distributions" shall mean all distributions made by the
Corporation to holders of Common Stock, whether by dividend or otherwise
(including but not limited to any distributions made by the Corporation to
holders of Common Stock in complete or partial liquidation of the
Corporation or upon a sale of all or substantially all of the business or
assets of the Corporation and its subsidiaries on consolidated basis);
provided, however, that the following shall not be a Distribution: (a) any
redemption or repurchase by the Corporation of any shares of Common Stock
approved by the Class B and C Directors, voting together as a single class,
(b) any recapitalization or exchange of any shares of Common Stock, (c)
any subdivision or increase in the number of (by stock split, stock
dividend or otherwise), or any combination (other than a merger) in any
manner of,
-6-
<PAGE>
the outstanding shares of Common Stock, or (d) a merger, share exchange or
consolidation after the consummation of which the stockholders of the
Corporation immediately prior to such merger, share exchange or
consolidation effectively have the power to elect a majority of the board
of directors of the surviving corporation or its parent corporation.
3.2.17 "Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended.
3.2.18 "Goldman Investors" shall mean GS Capital Partners II, L.P.,
Goldman, Sachs & Co., Verwaltungs GmbH, GS Capital Partners II Offshore,
L.P., Bridge Street Fund 1997, L.P. and Stone Street Fund 1997, L.P. and
their Affiliates.
3.2.19 "Investors" shall mean the Bain Capital Investors, the Capital
Investors and the Goldman Investors.
3.2.20 "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.
3.2.21 "Person" shall mean any individual, partnership, corporation,
association, trust, joint venture, unincorporated organization or other
entity.
3.2.22 "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
and 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.
3.2.23 "Public Offering Price" shall mean the price per share
received by the Corporation in connection with an underwritten sale of
shares of Class A Common Stock to the public at the Public Offering Time
net of any expenses incurred and any underwriting commissions and
concessions paid or allowed by the Corporation in connection therewith.
3.2.24 "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
underwritten Public
-7-
<PAGE>
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.
3.2.25 "Public Offering" shall mean the closing of an underwritten
public offering of the Corporation's capital stock registered under the
Securities Act.
3.2.26 "Public Trading Price" shall mean, as of any date of
determination, (a) the average closing price, for the ten most recent
trading days, of the Class A Common Stock, regular way, on a national
securities exchange as officially reported on the national securities
exchange on which Class A Common Stock is then listed or admitted to
trading, or (b) if Class A Common Stock is not so listed or admitted to
trading on a national securities exchange, but is traded in the Nasdaq
Stock Market, the average closing price, for the ten most recent trading
days, of the Class A Common Stock or (c) if the Class A Common Stock is not
so traded on the Nasdaq Stock Market, the average closing bid price, for
the ten most recent trading days, of the Class A Common Stock as shown on a
recognized quotation system selected by the Board of Directors in good
faith.
3.2.27 "Qualified Public Offering" shall mean the closing of a Public
Offering with (i) the net proceeds of the sale of such Shares by the
Corporation and any stockholder of the Corporation to equal or exceed
$50,000,000 provided that (A) the Investors shall have sold or shall be
permitted to sell fifty percent of the capital stock into which the Class B
Common Stock, the Class C Common Stock and Class L Common Stock is
convertible and (B) the net proceeds of the sale of such shares or the net
proceeds of the sale of such shares which would be permitted to be sold in
such offering by (1) the Capital Investors equal or exceed seventy-five
percent of the total amount invested in capital stock of the Corporation by
the Capital Investors up to $19,500,000, (2) the net proceeds of the sale
thereof by the Bain Capital Investors shall equal or exceed seventy-five
percent of the total amount invested in capital stock of the Corporation by
the Bain Capital Investors up to $17,000,000 and (3) the Goldman Investors
equal or exceed seventy-five percent of the total amount invested in
capital stock of the Corporation by the Goldman Investors up to $16,500,000
and (ii) subject to a firm commitment underwriting conducted by a
nationally recognized underwriter acceptable to a majority of the Class B
Directors and Class C Directors, voting together as a single class.
3.2.28 "Realization Event" shall mean a merger in which the holders
of Common Stock of the Corporation prior to the merger own less than a
majority of the shares of common stock of the surviving corporation,
consolidation, amalgamation, liquidation, winding-up, dissolution or sale,
transfer or other action otherwise disposing of or voluntarily parting with
control of (whether in one transaction or a series of transactions) all or
substantially all of the business, property or assets of the Corporation.
-8-
<PAGE>
3.2.29 "Restricted Action" shall mean any of the following:
(1) 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, 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.
(2) 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
(3) 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.
(4) 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.
(5) 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.
(6) Any amendment or restatement of organizational documents
(including the Certificate of Incorporation) or Bylaws of this
Corporation or its Subsidiaries.
-9-
<PAGE>
(7) Retain or dismiss the services of the Chief Operating
Officer or the Chief Financial Officer of the Corporation;
(8) Any transaction between (i) the Corporation or its
Subsidiaries and any Affiliate thereof and (ii) an officer, director
or bolder of more than 5% of the outstanding capital stock of the
Corporation which is not on terms comparable to an arms-length
transaction.
(9) 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 or any Affiliate thereof other than any such action,
suit, or proceeding initiated and instituted by the holders of Class B
Common Stock, Class C Common Stock or Class L Common Stock against the
Corporation.
3.2.30 "Remaining Class L Minimum Payment Amount" shall mean, with
respect to any share of Class L Common Stock at any time the amount that
would then be required to be distributed with respect to such share
pursuant to Article 4.8 in order for no further Distributions to be payable
with respect to such share pursuant to Article 4.8.
3.2.31 "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.
3.3 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, except as provided in this
Article Fourth, 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.
3.4 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 otherwise required by applicable law, all holders
of Common Stock shall vote together as a
-10-
<PAGE>
single class. Notwithstanding anything in this Article Fourth to the contrary,
until each holder of Class L Common Stock obtains any requisite approval
(whether by direct approval or expiration or termination of any applicable
waiting periods) under the Hart-Scott-Rodino Antitrust Improvements Act, as
amended (the "HSR Act"), to acquire additional voting securities of the
Corporation, Class L Common Stock shall not be entitled to any voting rights.
Once the holders of Class L Common Stock who are required to obtain approval
under the HSR Act obtain such approval (or the applicable waiting period
terminates or expires), the Class L Common Stock shall automatically be entitled
to equal voting rights with all other shares of Common Stock.
3.5 Directors. The number of directors constituting the entire Board of
Directors (the "Number of Directors ") shall be thirteen. The directors shall
be divided into classes, elected as follows:
(1) 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");
(2) 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");
(3) 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");
(4) Class C Directors. The holders of record of outstanding
shares of Class C 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 C
Directors"); and
(5) 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").
3.5.2 In the event that all of the Class B Common and/or all of the
Class C Common have converted into Class A Common, the number of directors
automatically
-11-
<PAGE>
will be decreased by the total number of Class B Directors and/or Class C
Directors, as the case may be.
3.5.3 Except as otherwise provided in this Article Fourth, each Class
A Director, Class B Director, Class C 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.
3.5.4 Any vacancy in the Board of Directors shall be filled only by
the 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 any class of stockholders to elect the
full number of directors to 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.
3.5.5 No Class A Director, Class B Director, Class C Director or
Common Stock Director may be removed without the consent of the holders of
the class or classes of Common Stock entitled to elect such director.
3.5.6 With respect to each Class B and C Director Action, each Class B
Director and Class C Director shall be entitled to five votes.
3.5.7 Upon the occurrence of any Class B and C Director Control Event
and for so long as such Class B and C Director Control Event or any other
Class B and C Director Control Event shall continue in effect, each Class B
Director and Class C Director shall be entitled to five votes.
3.6 Stock Splits and Stock Dividends. 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 (i) the outstanding shares
of Class A Common Stock unless a proportional adjustment is made to the Class B
Conversion Factor, the Class C Conversion Factor, the Class L Conversion
Constant and the Class L Adjustment or (ii) the outstanding shares of Class B
Common, Class C Common or Class L Common unless a proportional adjustment is
made to the other classes of Common Stock.
-12-
<PAGE>
3.7 Conversion Rights
3.7.1 Mandatory Conversion
(1) 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 total number of shares of Class B Common Stock issued by
the Corporation on or prior to such date 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, and (2) 1,600,000, in
the event the number of shares of Class B Common Stock issued equals
or exceeds 8,000,000 and is less than 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. From and after such conversion, such
shares of Class B Common Stock shall be retired and shall not be
reissued.
(2) Class C Common Stock. Upon the earlier to occur of (i) a
Qualified Public Offering; and (ii) the date on which the total number
of outstanding shares of Class C Common Stock is less than 30% of the
total number of shares of Class C Common Stock issued by the
Corporation on or prior to such date, each outstanding share of Class
C Common Stock shall automatically convert into the number of shares
of Class A Common Stock determined by application of the Class C
Conversion Factor. From and after such conversion, such shares of
Class C Common Stock shall be retired and shall not be reissued.
(3) Class L Common Stock. Upon the earlier to occur of (i) a
Public Offering; (ii) upon a Realization Event; and (iii) the date on
which the total number of outstanding shares of Class L Common Stock
is less than 30% of the total number of shares of Class L Common Stock
issued by the Corporation on or prior to such date and, in each such
case, subject to the affirmative approval of the mandatory conversion
thereof by the vote of two-thirds of the Class B and Class C
Directors, voting as a single class, each outstanding share of Class L
Common Stock shall automatically convert into the number of shares of
Class A Common Stock equal to the Class L Conversion Factor; provided,
however, that the conversion of shares of Class L Common Stock shall
not occur, in the event that the holder thereof is required to obtain
approval for such conversion under the HSR Act, until the later to
occur of (x) the Public Offering, (y) the Realization Event and (z)
the obtaining of such approval (or the applicable waiting periods
expiring or terminating) under the HSR Act (in which case, the number
of shares of Class A Common Stock issued shall be determined as if the
conversion had not
-13-
<PAGE>
been delayed by such HSR Act filing). From and after such conversion,
such shares of Class L Common Stock shall be retired and shall not be
reissued.
(4) Other. Upon conversion of all of the Class B Common Stock,
the Class C Common Stock and the Class L Common Stock pursuant to this
Section 4.7, (i) 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, (ii) the Restated
Certificate of Incorporation shall automatically be amended to
eliminate the corresponding provisions in Sections 4.2.8, 4.2.9,
4.2.29, 4.5.4, 4.5.5, and 4.5.6 with respect to such class of Common
Stock and (iii) 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, Class C Common Stock
and Class L Common Stock shall be eliminated.
3.7.2 Optional Conversion
(1) 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 may be converted 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.
(2) Class L Common Stock. At the option of any holder of the
shares of Class L Common Stock, exercisable at any time, in whole or
in part, each outstanding share of Class L Common Stock held by such
holder may be converted into the number of shares of Class A Common
Stock equal to the Class L Conversion Factor. From and after such
optional conversion, such shares of Class L Common Stock shall be
retired and shall not be reissued, and upon the conversion of all
outstanding shares of Class L 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 L Common
Stock shall be eliminated.
(3) Class C Common Stock. At the option of any holder of the
shares of Class C Common Stock, exercisable at any time, in whole or
in part, each outstanding share of Class C Common Stock held by such
holder may be
-14-
<PAGE>
converted into the number of shares of Class A Common Stock as
determined by application of the Class C Conversion Factor. From and
after such optional conversion, such shares of Class C Common Stock
shall be retired and shall not be reissued, and upon the conversion of
all outstanding shares of Class C 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 C Common Stock shall be eliminated.
(1) The conversion factor in effect at any time for the Class C
Common Stock (the "Class C Conversion Factor") shall be the
quotient obtained by dividing $3.25 by the Class C Conversion
Value.
(2) The Class C Conversion Value shall be $3.25, as adjusted as
provided below.
(1) Upon Sale of Common Stock. If the Corporation shall, while
-------------------------
there are any shares of Class C Common Stock outstanding,
issue or sell, or be deemed to issue and sell in accordance
with this Section 4.7.2(b)(ii), shares after the date hereof
of its Common Stock (other than Excluded Securities (as
defined below)) without consideration or at a price per
share less than the Class C Conversion Value in effect
immediately prior to such issuance or sale, then upon each
such issuance or sale such Class C Conversion Value, except
as provided in Section 4.7.2(b)(ii), shall be lowered so as
to be equal to an amount determined by multiplying the Class
C Conversion Value by a fraction: (1) the numerator of which
shall be (a) the number of shares of Common Stock
outstanding immediately prior to the issuance of such
additional shares of Common Stock, plus (b) the number of
shares of Common Stock which the net aggregate
consideration, if any, received by the Corporation for the
total number of such additional shares of Common Stock so
issued would purchase at the Class C Conversion Value in
effect immediately prior to such issuance, and (2) the
denominator of which shall be (a) the number of shares of
Common Stock outstanding immediately prior to the issuance
of such additional shares of Common Stock, plus (b) the
number of such additional shares of Common Stock so issued;
provided, however, that no adjustment shall be made pursuant
to this Clause A unless the consideration received by the
Corporation is less than $2.25 per share.
-15-
<PAGE>
(2) Upon Issuance of Warrants. Options and Rights to Purchase
----------------------------------------------------------
Common Stock.
------------
(1) For the purpose of this Section 4.7.2(b)(ii), the
issuance of any warrants, options, subscriptions or
purchase rights with respect to shares of Common Stock
and the issuance of any securities convertible into or
exchangeable for shares of Common Stock (or the
issuance of any warrants, options or any rights with
respect to such convertible or exchangeable securities)
shall be deemed an issuance at such time of such Common
Stock if the Net Consideration Per Share (as
hereinafter determined) which may be received by the
Corporation for such Common Stock shall be less than
the Class C Conversion Value in effect at the time of
such issuance. Any obligation, agreement or
undertaking to issue warrants, options, subscriptions
or purchase rights at any time in the future shall be
deemed to be an issuance at the time such obligation,
agreement or undertaking is made or arises. No
adjustment of the Class C Conversion Value for the
Class C Common Stock shall be made under this Section
4.7.2(b)(ii) upon the issuance of any shares of Common
Stock which are issued pursuant to the exercise of any
warrants, options, subscriptions or purchase rights or
pursuant to the exercise of any conversion or exchange
rights in any convertible securities if any adjustment
shall previously have been made upon the issuance of
any such warrants, options or subscriptions or purchase
rights or upon the issuance of any such convertible
securities (or upon the issuance of any such warrants,
options or any rights therefor) as above.
Should the Net Consideration Per Share of any such
warrants, options, subscriptions or purchase rights or
convertible securities be decreased from time to time
then, upon the effectiveness of each such change, the
Class C Conversion Value shall be adjusted to such
Class C Conversion Value as would have obtained (1) had
the adjustments made upon the issuance of such
warrants, options, rights or convertible securities
been made upon the basis of the actual Net
Consideration Per Share of such securities, and (2) had
the adjustments made to the Class C Conversion Value
since the date of issuance of such
-16-
<PAGE>
securities been made to the Class C Conversion Value as
adjusted pursuant to (1) above. Any adjustment of the
Class C Conversion Value with respect to this paragraph
which relates to warrants, options, subscriptions or
purchase rights with respect to shares of Common Stock
shall be disregarded if, as, and when all of such
warrants, options, subscriptions or purchase rights
expire or are canceled without being exercised, so that
the Class C Conversion Value effective immediately upon
such cancellation or expiration shall be equal to the
Class C Conversion Value in effect at the time of the
issuance of the expired or canceled warrants, options,
subscriptions or purchase rights, with such additional
adjustments as would have been made to that Class C
Conversion Value had the expired or canceled warrants,
options, subscriptions or purchase rights not been
issued.
(2) For purposes of this paragraph, the "Net Consideration
Per Share" which may be received by the Corporation
shall be determined as follows: the "Net Consideration
Per Share" shall mean the amount equal to the total
amount of consideration, if any, received by the
Corporation for the issuance of such warrants, options,
subscriptions or other purchase rights or convertible
or exchangeable securities, plus the minimum amount of
consideration, if any, payable to the Corporation upon
exercise or conversion thereof, divided by the
aggregate number of shares of Common Stock that would
be issued if all such warrants, options, subscriptions
or other purchase rights or convertible or exchangeable
securities were exercised, exchanged or converted and
shall be determined in each instance as of the date of
issuance of warrants, options, subscriptions or other
purchase rights or convertible or exchangeable
securities without giving effect to any possible future
upward price adjustments or rate adjustments which may
be applicable with respect to such warrants, options,
subscriptions or other purchase rights or convertible
or exchangeable securities.
(3) Stock Dividends. In the event the Corporation shall make or
---------------
issue, or shall fix a record date for the determination of
holders of any stock of the Corporation other than Common
Stock entitled to
-17-
<PAGE>
receive a dividend or other distribution payable in Common
Stock or securities of the Corporation convertible into or
otherwise exchangeable for the Common Stock of the
Corporation, then such Common Stock or other securities
issued in payment of such dividend shall be deemed to have
been issued without consideration, except for (i) dividends
payable in shares of Common Stock payable to holders of
Class C Common Stock and to holders of any other class of
stock, whether or not paid to holders of any other class of
stock, (ii) dividends payable in shares of Class C Common
Stock; or (iii) dividends payable in Class L Common Stock to
the holders of Class L Common Stock so long as, in the case
of (i) and (ii) the holders of any shares of Class L Common
Stock shall receive such shares of Common Stock and the
shares of Class C Common Stock issued as such dividend and
payable with respect to the shares into which the Class C
Common are convertible.
(4) Consideration Other than Cash. For purposes of this Section
-----------------------------
4.7.2(b)(ii), if a part or all of the consideration received
by the Corporation in connection with the issuance of shares
of the Common Stock or the issuance of any of the securities
described in this Section 4.7.2(b)(ii) consists of property
other than cash, such consideration shall be deemed to have
a fair market value as is reasonably determined in good
faith by the Class B and C Directors, voting together as a
single class.
(5) Exceptions. This Section 4.7.2(b)(ii) shall not apply: (1)
----------
to the issuance of shares of Common Stock, or options
exercisable therefor, (subject to equitable adjustment in
the event of any stock-split, combination, reclassification
or other similar event involving the Common Stock) issued
and issuable, to officers, employees and consultants of the
Corporation or any Affiliate of the Corporation pursuant to
any incentive stock option plan or stock purchase plan
approved (both as to such plan and as to any issuance of
stock or options thereunder) or any stock option approved by
the Board of Directors in accordance with the provisions of
this certificate; (2) under any of the circumstances under
Section 4.6; (3) to the issuance of shares of Common Stock
upon the exchange or exercise of or pursuant to any
adjustments provided by any warrants (A) outstanding as of
the date hereof or (B) sold to the Investors in connection
with the original issuance of shares of Class B Common
Stock, Class C Common Stock and/or
-18-
<PAGE>
Class L Common Stock or (4) to the issuance of shares of
Class A Common Stock upon the conversion of any shares of
Class B Common Stock, Class C Common Stock or Class L Common
Stock. The shares issued pursuant to (1) through (4) hereof
are collectively referred to herein as the "Excluded
Securities."
3.7.6 Reclassification. If the Common Stock issuable upon the
conversion of the Class B Common Stock, Class C Common Stock or Class L
Common Stock shall be changed into the same or different number of shares
of any class or classes of stock, whether by reclassification or otherwise
(other than a subdivision or combination of shares or stock dividend or a
reorganization, merger or sale of assets provided for elsewhere in this
Section 4.7, or Section 4.8.6 (to the extent that such transaction is
treated as a liquidation, dissolution or winding up) or the sale of all or
substantially all of the Corporation's properties and assets to any other
person), then and in each such event the holder of each share of Class B
Common Stock, Class C Common Stock or Class L Common Stock shall have the
right thereafter to convert such shares into the kind and amount of shares
of stock and other securities and property receivable upon such
reclassification or other change by holders of the number of shares of
Class A Common Stock into which such shares of Class B Common Stock, Class
C Common Stock or Class L Common Stock might have been converted
immediately prior to such reclassification or change, all subject to
further adjustment as provided herein.
3.7.4 Accountant's Certificate as to Adjustments; Notice by
Corporation. In each case of an adjustment or readjustment of the Class C
Conversion Value or upon any calculation of the Class L Conversion Factor,
the Corporation at its expense will furnish each holder of Class C Common
Stock or Class L Common Stock, as the case may be, with a certificate,
prepared by independent public accountants of recognized standing, showing
such adjustment, readjustment or calculation and stating in detail the
facts upon which such adjustment, readjustment or calculation is based.
3.7.5 Cash in Lieu of Fractional Shares. No fractional shares of
Common Stock or scrip representing fractional shares shall be issued upon
the conversion of shares of Class B Common Stock, Class C Common Stock or
Class L Common Stock. Instead of any fractional share of Common Stock
which would otherwise be issuable upon conversion of Class B Common Stock,
Class C Common Stock or Class L Common Stock, the Corporation shall pay to
the holder of the shares of Class B Common Stock, Class C Common Stock or
Class L Common Stock, which were converted, a cash adjustment in respect to
such fractional shares in an amount equal to the same fraction of the
market price per share of Common Stock (as determined in a reasonable
manner prescribed by the Board of Directors), but not less than the
applicable conversion factor, at the close of business on the conversion
date. The determination as to whether or not any fractional shares are
issuable shall be based upon the total number of shares of Class
-19-
<PAGE>
B Common Stock, Class C Common Stock or Class L Common Stock being
converted at any one time by any holder thereof, not upon each share of
Class B Common Stock, Class C Common Stock or Class L Common Stock being
converted.
3.7.6 Reservation of Common Stock; Definitions. The Corporation
shall at all times reserve and keep available out of its authorized but
unissued shares of Class A Common Stock, solely for the purpose of
effecting the conversion of the shares of Class B Common Stock, Class C
Common Stock or Class L Common Stock, such number of its shares of Class A
Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of Class B Common Stock, Class C
Common Stock and Class L Common Stock, and if at any time the number of
authorized but unissued shares of Class A Common Stock shall not be
sufficient to effect the conversion of all then outstanding shares of Class
B Common Stock, Class C Common Stock and Class L Common Stock, the
Corporation shall take such corporate action as may be necessary to
increase its authorized but unissued shares of Class A Common Stock to such
number of shares as shall be sufficient for the purpose.
3.7.7 Validity of Shares. The Corporation agrees that it will from
time to time take all such actions as may be requisite to assure that all
shares of Common Stock which may be issued upon conversion of any share of
the Class B Common Stock, Class C Common Stock and Class L Common Stock
will, upon issuance, be legally and validly issued, fully paid and non-
assessable and free from all taxes, liens and charges with respect to the
issue thereof; and, without limiting the generality of the foregoing, the
Corporation agrees that it will from time to time take all such action as
may be requisite to assure that the par value per share, if any, of the
Class A Common Stock is at all times equal to or less than the amount paid
per share for the Class B Common Stock, Class C Common Stock and Class L
Common Stock divided by the number of shares of Class A Common Stock into
which each share of Class B Common Stock, Class C Common Stock and Class L
Common Stock can, from time to time, be converted.
3.7.8 Effect of Conversion. Upon conversion of any share of Class B
Common Stock, Class C Common Stock or Class L Common Stock, the holder
shall surrender the certificate evidencing such share 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,
Class C Common Stock or Class L 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, Class C Common Stock
or Class L Common Stock; and such holder shall be deemed to
-20-
<PAGE>
have become the holder of record of the same number of shares of the Class
A Common Stock.
3.8 Distributions. All Distributions (including on a liquidation,
dissolution or winding-up of the Corporation) shall be made to the holders of
Common Stock in the following order or priority:
3.8.1 First, the holders of the shares of Class L Common Stock (other
than shares concurrently being converted into Class A Common Stock), as a
single and separate class, shall be entitled to receive all Distributions
until there has been paid with respect to each such share from amounts then
and previously distributed pursuant to this Article 4.8.1 an amount equal
to the Class L Base Amount plus an amount sufficient to generate an
internal rate of return thereon equal to twelve percent (12%) per annum,
compounded annually. Such internal rate of return shall be calculated in
accordance with accepted financial practices, treating the Class L Base
Amount of each share as having been paid for such share on the date on
which such share shall have been originally issued by the Corporation and
each Distribution with respect to the Class L Common Stock as having been
made on the date it is actually paid by the Corporation.
3.8.2 Second, if the Distribution is a distribution in liquidation,
dissolution or winding up of the Corporation and the holders of Class L
Common Stock have received the distribution provided for in Section 4.8.1,
the holders of the Class C Common Stock and Class B Common Stock shall be
entitled to receive prior and in preference to any distribution of any of
the assets of the Corporation to the holders of Class A Common Stock by
reason of their ownership of such stock, an amount equal to the sum of (i)
the greater of (x) $3.25 per share of Class C Common Stock or $2.50 per
share of Class B Common Stock (which amount, in each case, shall be subject
to equitable adjustment whenever there shall occur a stock split,
combination, reclassification or other similar event involving the Class C
Common Stock) and (y) such amount per share of Class C Common Stock and
Class B Common Stock which would be payable in such liquidation,
dissolution or winding up if all outstanding shares of Class C Common Stock
and Class B Common Stock were converted into Class A Common plus (ii) an
amount equal to all declared but unpaid dividends thereon, whether or not
earned, to and including the date full payment shall be tendered to the
holders of Class C Common Stock and Class B Common Stock with respect to
such liquidation, dissolution or winding up. If the assets of the
Corporation available for distribution shall be insufficient to permit the
payment in full to such holders of the Class C Common Stock and Class B
Common Stock of the full aforesaid preferential amount, then the entire
assets of the Corporation legally available for distribution shall be
distributed among the holders of the Class C Common Stock and Class B
Common Stock in the same ratio as the aggregate liquidation preference of
the outstanding shares of Class C Common Stock and bears to the aggregate
liquidation preference of the outstanding shares of Class B Common Stock
held by each of them.
-21-
<PAGE>
3.8.3 Third, if the Distribution is a distribution in liquidation,
dissolution or winding up of the Corporation, after payment has been made
to the holders of the Class L Common Stock, Class C Common Stock and Class
B Common Stock of the full amounts to which they shall be entitled as
aforesaid pursuant to Sections 4.8.1 and 4.8.2, the holders of the Common
Stock (including the Class L Common Stock but excluding the Class B Common
Stock and Class C Common Stock) shall be entitled to share ratably in the
remaining assets, based on the number of shares of Common Stock held by
them; provided that for purposes of this Section 4.8.3, each share of Class
L Common Stock shall be deemed to have been converted into the number of
shares of Class A Common Stock equal to the Class L Conversion Factor.
3.8.4 Fourth, if the Distribution is not a distribution in
liquidation, dissolution or winding up of the Corporation after the full
required amount of Distributions have been made pursuant to Article 4.8.1
above, all holders of the shares of Common Stock, as a single class, shall
thereafter be entitled to receive all remaining Distributions pro rata
based on the number of outstanding shares of Common Stock; provided that
for purposes of this Section 4.8.4, each share of Class L Common Stock
shall be deemed to have been converted into a number of shares of Class A
Common Stock equal to the Class L Conversion Factor.
3.8.5 All Distributions pursuant to Articles 4.8.1, 4.8.2, 4.8.3 and
4.8.4 shall be made ratably among the holders of the class or classes of
Common Stock in question, based on the number of shares of such class held
by such holders.
3.8.6 A reorganization of the Common Stock, or a consolidation or
merger of the Corporation with or into any other corporation or
corporations in which the stockholders of the Corporation immediately after
the consolidation or merger do not own more than fifty percent (50%) of the
outstanding voting power (assuming conversion of all convertible securities
and the exercise of all outstanding options and warrants) of the surviving
corporation, or a sale of all or substantially all of the assets of the
Corporation shall be regarded as a liquidation, dissolution or winding up
of the affairs of the Corporation within the meaning of Section 4.8, unless
the holders of a majority of the then outstanding shares of Class B Common
Stock, Class C Common Stock and Class L Common Stock, voting together as a
separate class, elect not to treat any of the foregoing events as a
liquidation, dissolution or winding up by giving written notice thereof to
the Corporation, at least five (5) business days prior to such event.
3.9 Prohibition on Distributions Constituting Taxable Events.
Notwithstanding anything to the contrary in this Article 4, the Corporation
shall not, without the written approval of the holders of more than sixty
percent of the shares of Class L Common Stock or, if there is no Class L Common
Stock then outstanding, the holders of a majority of the Class L Common
-22-
<PAGE>
Stock at the time such Common Stock was converted into Class A Common Stock, pay
any dividend or make any other distribution on any share of capital stock, or
take any other action, so long as any share of Class L Common Stock is
outstanding and for three years thereafter, if the effect of such dividend,
distribution or action might be to make (a) an increase of the Remaining Class L
Minimum Payment Amount, (b) a conversion of the Class L Common Stock into Class
A Common Stock or (c) an adjustment of the Class L Conversion Factor a taxable
event to the holders of the Class L Common Stock. No amendment to the provisions
of this Article 4.9 shall be effective without the prior written consent of the
holders of more than sixty percent of the then outstanding shares of Class L
Common Stock or, if there in no Class L Common Stock then outstanding, the
holders of more than sixty percent of the Class L Common Stock at the time such
Common Stock was converted into Class A Common Stock.
3.10 Preferred Stock. Preferred Stock may be issued from time to time in
one or more series, each of such series to have such terms as stated or
expressed herein and in the resolution or resolutions providing for the issue of
such series adopted by the Board of Directors of the Corporation as hereinafter
provided subject to the approval of the Class B and C Directors, voting together
as a single class, and compliance with Section 4.9 of this Article Fourth. Any
shares of Preferred Stock which may be redeemed, purchased or acquired by the
Corporation may be reissued except as otherwise provided by law. Different
series of Preferred Stock shall not be construed to constitute different classes
of shares for the purposes of voting by classes unless expressly provided.
Authority is hereby expressly granted to the Board of Directors, subject to
the approval of the Class B and C Directors, voting together as a single class,
and compliance with Section 4.9 of this Article Fourth, from time to time to
issue the Preferred Stock in one or more series, and in connection with the
creation of any such series, by resolution or resolutions providing for the
issue of the shares thereof, to determine and fix such voting powers, full or
limited, or no voting powers, and such designations, preferences and relative
participating, optional or other special rights, and qualifications, limitations
or restrictions thereof, including without limitation thereof, dividend rights,
conversion rights, redemption privileges and liquidation preferences, as shall
be stated and expressed in such resolutions, all to the full extent now or
hereafter permitted by the General Corporation Law of Delaware. Without
limiting the generality of the foregoing, the resolutions providing for issuance
of any series of Preferred Stock may provide that such series shall be superior
or rank equally or be junior to the Preferred Stock of any other series to the
extent permitted by law. Except as otherwise provided in this Certificate of
Incorporation, no vote of the holders of the Preferred Stock or Common Stock
shall be a prerequisite to the designation or issuance of any shares of any
series of the Preferred Stock authorized by and complying with the conditions of
this Certificate of Incorporation, the right to have such vote being expressly
waived by all present and future holders of the capital stock of the
Corporation.
3.11 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
-23-
<PAGE>
to the Corporation) with respect to the 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 an 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.
3.12 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 more than sixty percent of the then outstanding shares of the Class B
Common Stock, Class C Common Stock and Class L 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 increases the rights of
the Class B Common Stock, Class C Common Stock and Class L 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 more than sixty percent 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 of such
director occurring prior to such amendment.
SIXTH:
3.13 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 or
trustee of, or in a similar capacity with,
-24-
<PAGE>
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 interests 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.
3.14 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 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 indemnity for such expenses (including
attorneys' fees) which the Court of Chancery of Delaware shall deem proper.
-25-
<PAGE>
3.15 Indemnification for Expenses of Successful Party. Notwithstanding the
------------------------------------------------
other provisions of this Article, to the extent that 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, suit 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.
3.16 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
Corporation is so notified, the Corporation will be entitled to participate
therein at its 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 of 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.
3.17 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
-26-
<PAGE>
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 authorized in this Article. Such undertaking
shall be accepted without reference to the financial ability of the Indemnitee
to make such repayment.
3.18 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 competent jurisdiction.
3.19 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 that the Indemnitee has not met the applicable standard of
conduct. The Indemnitee's expenses (including attorneys' fees) incurred in
connection with successfully establishing the Indemnitee's right to
indemnification, in whole or in part, in any such proceeding shall also be
indemnified by the Corporation.
-27-
<PAGE>
3.20 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.
3.21 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.
3.22 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.
3.23 Insurance. The Corporation may purchase and maintain insurance, at
---------
its expense, to protect itself and any director, officer, employee or agent of
the Corporation or another corporation, partnership, joint venture, trust or
other enterprise (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.
3.24 Merger or Consolidation. If the Corporation is merged into or
-----------------------
consolidated with another corporation and the Corporation is not the surviving
corporation, the surviving
-28-
<PAGE>
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.
3.25 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 indemnify each Indemnitee as to any expenses
(including attorneys' fees), judgments, 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
portion OF this Article that shall Corporation, to the fullest extent permitted
by any applicable not have been invalidated and to the fullest extent permitted
by applicable law.
3.26 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).
3.27 Subsequent Legislation. If the General Corporation Law of Delaware is
----------------------
amended after adoption of this Article to expand further the indemnification
permitted to Indemnitees, 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.
-29-
<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 9th day of July, 1998.
PHYSICIANS QUALITY CARE, INC.
By:________________________________
ATTEST:
[Corporate Seal]
-30-
<PAGE>
EXHIBIT 3.2
Exhibit A
---------
THIRD AMENDED AND RESTATED
BY-LAWS
OF
PHYSICIANS QUALITY CARE, INC.
<PAGE>
THIRD AMENDED AND RESTATED
BY-LAWS
TABLE OF CONTENTS
Page
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............................................ 5
-----------
2.6. Regular Meetings....................................... 5
----------------
2.7. Special Meetings....................................... 5
----------------
2.8. Notice of Special Meetings............................. 5
--------------------------
2.9. Meetings by Telephone Conference Calls................. 5
--------------------------------------
2.10. Quorum................................................. 6
-------
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................................................. 8
------
-i-
<PAGE>
3.6. Resignation and Removal................................ 8
-----------------------
3.7. Vacancies.............................................. 8
---------
3.8. Chairman of the Board and Vice-Chairman of the Board... 8
----------------------------------------------------
3.9. Chief Executive Officer................................ 8
-----------------------
3.10. President.............................................. 9
---------
3.11. Vice Presidents........................................ 9
---------------
3.12. Secretary and Assistant Secretaries.................... 9
-----------------------------------
3.13. Treasurer and Assistant Treasurers..................... 9
----------------------------------
3.14. Salaries............................................... 10
--------
ARTICLE 4 -- Capital Stock......................................... 10
4.1. Issuance of Stock...................................... 10
-----------------
4.2. Certificates of Stock.................................. 10
---------------------
4.3. Transfers.............................................. 11
---------
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........................... 13
----------------------------
5.7. Transactions with Interested Parties................... 13
------------------------------------
5.8. Severability........................................... 13
------------
5.9. Pronouns............................................... 13
--------
ARTICLE 6 -- Amendments............................................ 14
6.1. By the Board of Directors.............................. 14
-------------------------
6.2. By the Stockholders.................................... 14
-------------------
-ii-
<PAGE>
THIRD AMENDED AND RESTATED
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 Bylaws 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 any member of 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
-1-
<PAGE>
meeting, during 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 Bylaws 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 thirteen. 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 and C Directors
shall mean directors of the corporation who are elected directors in manner
specified in Sections 2.2.3(b), 2.2.3(c) and 2.2.3(d) 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.(e).
2.2.3. So long as there are issued and outstanding shares of Class B-
1, Class B-2 or Class C Common Stock, the number of directors shall be set
at thirteen and the directors shall be divided into classes and elected as
follows:
-3-
<PAGE>
(1) 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;
(2) 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;
(3) 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;
(4) Class C Directors. The holders of record of outstanding
shares of Class C Common Stock, voting separately as a
single class, shall be entitled to elect two directors of
the Corporation; and
(5) 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
-4-
<PAGE>
of the Board of Directors may be held without notice immediately after and at
the same place as the annual meeting of stockholders.
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
and C Director Action (as defined in the Certificate of Incorporation) shall
specify that a Class B and C 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 and C
Directors about such proposed Class B and C 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, in the case of any
Class B and Class C Director Action or any meeting held while a Class B and C
Director Control Event, (as defined in the Certificate of Incorporation) is in
effect, a quorum shall only exist if the Class B and Class C Directors present
at the meeting hold a majority of the total votes entitled to be cast at such
meeting and so long as (i) there are Class B Directors at least one Class B
Director is present and (ii) there are any Class C Directors at least one Class
C Director is present. 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.
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 and C 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.
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
-6-
<PAGE>
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 and C Director Action or actions, authorizations or
directives of the Class B and C Directors following a Class B and C 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.
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.
-7-
<PAGE>
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 tot time be vested in him by the Board of Directors.
3.9. Chief Executive Officer. The Chief Executive Officer 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 or she shall preside at all meetings of the stockholders and, if
he or she is a director, at all meetings of the Board of Directors.
3.10. President. 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.
3.11. 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.
3.12. 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
-8-
<PAGE>
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 t~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.
3.13. 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.
3.14. 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.
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.
-9-
<PAGE>
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 Chief Executive Officer, 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 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
-10-
<PAGE>
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 on 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.
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
-11-
<PAGE>
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 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.
-12-
<PAGE>
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; provided, however, that no amendment may
be adopted which effects the provisions related to Class B and C Director
Actions or Class B and C Director Control Events without the approval of a
majority of the Class B and Class C Directors.
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 and provided, further, that no amendment may be
adopted which effects the provisions related to Class B and C Director Actions
or Class B and C Director Control Events without the approval of a majority of
the Class B and Class C Common Stock.
-13-
<PAGE>
EXHIBIT 10.1
________________________________________________________________________________
PHYSICIANS QUALITY CARE, INC.
CLASS L COMMON STOCK PURCHASE AGREEMENT
As of July 10, 1998
________________________________________________________________________________
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
1. Authorization and Purchase of Class L Common Stock............................................. 1
--------------------------------------------------
1.1 Authorization of Class L Common Stock............................................... 1
------------------------------------
1.2 Purchase and Sale of the Class L Common Stock....................................... 1
---------------------------------------------
1.3 The Closings........................................................................ 1
------------
2. Representations and Warranties of the Company.................................................. 2
---------------------------------------------
2.1 Organization and Corporate Power.................................................... 2
--------------------------------
2.2 Authorization....................................................................... 2
-------------
2.3 Capitalization...................................................................... 3
--------------
2.4 Subsidiaries........................................................................ 5
------------
2.5 Financial Statements................................................................ 6
--------------------
2.6 Absence of Undisclosed Liabilities.................................................. 6
----------------------------------
2.7 Absence of Certain Developments..................................................... 7
-------------------------------
2.8 Title to Properties................................................................. 8
-------------------
2.9 Tax Matters......................................................................... 8
-----------
2.10 Contracts and Commitments........................................................... 9
-------------------------
2.11 No Defaults......................................................................... 9
-----------
2.12 Intellectual Property............................................................... 9
---------------------
2.13 Effect of Transactions.............................................................. 10
----------------------
2.14 No Consent or Approval Required..................................................... 10
-------------------------------
2.15 Litigation.......................................................................... 11
----------
2.16 Securities Laws..................................................................... 11
---------------
2.17 Business............................................................................ 11
--------
2.18 Brokerage........................................................................... 11
---------
2.19 Employees........................................................................... 12
---------
2.20 Insurance........................................................................... 12
---------
2.21 Environmental and Safety Laws....................................................... 13
-----------------------------
2.22 Benefit Plans....................................................................... 16
-------------
2.23 Transactions with Affiliates........................................................ 17
----------------------------
2.24 Books and Records................................................................... 17
-----------------
2.25 Regulatory Matters.................................................................. 18
------------------
2.26 Shareholder Disclosures............................................................. 19
-----------------------
2.27 Material Facts...................................................................... 19
--------------
3. Representations and Warranties and other Agreements of the Investors........................... 19
--------------------------------------------------------------------
3.1 Representations and Warranties...................................................... 19
------------------------------
3.2 Further Limitations on Disposition.................................................. 21
----------------------------------
3.3 Legends............................................................................. 22
-------
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
4. Conditions to the Investors' Obligations....................................................... 22
----------------------------------------
4.1 Representations and Warranties...................................................... 22
------------------------------
4.2 Performance......................................................................... 22
-----------
4.3 Compliance Certificate.............................................................. 23
----------------------
4.4 Restated Certificate of Incorporation............................................... 23
-------------------------------------
4.5 Qualifications; Consents............................................................ 23
------------------------
4.6 Proceedings and Documents........................................................... 23
-------------------------
4.9 Opinion of Company Counsel.......................................................... 24
--------------------------
4.10 Secretary's Certificate............................................................. 24
-----------------------
4.11 Material Adverse Change............................................................. 24
-----------------------
4.12 MCP and Flagship Agreements......................................................... 24
---------------------------
4.13 Amendment to By-Laws................................................................ 24
--------------------
4.14 Capital Certificate................................................................. 24
-------------------
5. Conditions of the Company's Obligations at the Closing......................................... 24
------------------------------------------------------
5.1 Representations and Warranties...................................................... 24
------------------------------
5.2 Payment of Purchase Price........................................................... 25
-------------------------
5.3 Qualifications; Consents............................................................ 25
------------------------
6. Covenants and Agreements....................................................................... 25
------------------------
6.1 Financial and Other Information..................................................... 25
-------------------------------
6.2 Confidentiality..................................................................... 27
---------------
6.3 Insurance........................................................................... 28
---------
6.4 Use of Proceeds..................................................................... 28
---------------
6.5 Payment of Taxes; Corporate Existence, Regulatory Compliance........................ 28
------------------------------------------------------------
6.6 Dealings with Affiliates and Others................................................. 29
-----------------------------------
Best Efforts to Obtain Financing............................................................... 29
--------------------------------
6.8 Payment of Expenses................................................................. 30
-------------------
6.9 Cooperation and Access.............................................................. 30
----------------------
6.10 Conduct of Business................................................................. 30
-------------------
6.11 Reservation of Shares............................................................... 31
---------------------
6.12 Future Financings................................................................... 31
-----------------
6.13 Period.............................................................................. 33
------
6.14 Disclosure of Investment............................................................ 33
------------------------
6.16 Investor Agreement With Respect to Additional Financing............................. 34
-------------------------------------------------------
6.17 Waiver of Anti-Dilution Protection.................................................. 34
----------------------------------
7. Negative Covenants............................................................................. 34
------------------
8. Definitions.................................................................................... 34
-----------
8.1 Certain Defined Terms............................................................... 34
---------------------
8.2 Certain Matters of Construction..................................................... 38
-------------------------------
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
9. Miscellaneous.................................................................................. 38
-------------
9.1 Survival of Covenants; Assignability of Rights...................................... 38
----------------------------------------------
9.2 Incorporation by Reference.......................................................... 39
--------------------------
9.3 Parties in Interest................................................................. 39
-------------------
9.4 Amendments and Waivers.............................................................. 39
----------------------
9.5 Governing Law....................................................................... 39
-------------
9.6 Effect of Investigations............................................................ 39
------------------------
9.7 Notices............................................................................. 39
-------
9.8 Effect of Headings.................................................................. 41
------------------
9.9 Entire Agreement.................................................................... 41
----------------
9.10 Severability........................................................................ 41
------------
9.11 Counterparts........................................................................ 41
------------
</TABLE>
iii
<PAGE>
PHYSICIANS QUALITY CARE, INC.
CLASS L COMMON STOCK PURCHASE AGREEMENT
This CLASS L COMMON STOCK PURCHASE AGREEMENT (the "Agreement") is made as
---------
of this 10th day of July, 1998 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 a "Bain Investor" and collectively they are referred to as the "Bain
------------- ----
Investors") and ABS CAPITAL PARTNERS II, L.P., a Delaware limited partnership
- ---------
("Capital") and each of the persons set forth on Annex I hereto (each of whom
--------
individually is referred to herein as a "Capital Investor" and, together with
----------------
Capital, the "Capital Investors"), and each of GS Capital Partners II, L.P., a
-----------------
Delaware limited partnership, Goldman, Sachs & Co., Verwaltungs GmbH, GS Capital
Partners II Offshore, L.P., Bridge Street Fund 1997, L.P., a Delaware limited
partnership, and Stone Street Fund 1997, L.P., a Delaware limited partnership
(each of whom individually is referred to herein as a "Goldman Investor," and
----------------
collectively, they are referred to as the "Goldman Investors" and, together with
-----------------
the Capital Investors and the Bain Investors, the "Investors").
---------
THE PARTIES HERETO AGREE AS FOLLOWS:
1. Authorization and Purchase of Class L Common Stock.
--------------------------------------------------
1.1 Authorization of Class L Common Stock. The Company has authorized the
-------------------------------------
issuance and sale of 2,461,538 shares of Class L Common Stock, $.01 par value
per share (the "Class L Common Stock") to be issued under this Agreement. The
---------------------
rights, privileges, and preferences of the Class L Common Stock are 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 L Common Stock. 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 in accordance with Section 1.3 the number of shares of Class L Common
Stock (the "Class L Shares") set forth opposite such Investor's name on Exhibit
--------------
A hereto under the heading "Class L Shares." The purchase price for each share
of Class L Common Stock is $3.25. The Class L Shares shall be referred to
collectively as the "Shares."
------
1.3 The Closings. The purchase and sale of the Class L Shares shall take
------------
place at the offices of Ropes & Gray, One International Place, Boston,
Massachusetts on July 10, 1998 or at such other place as the parties shall
mutually agree (the "Closings"). At the Closing, the Company will deliver to
--------
each of the Investors a certificate or certificates, registered in such
<PAGE>
Investor's name, representing the number of Class L Shares to be acquired by
such Investor at the Closing, upon receipt from the Investors of payment in an
amount equal to the amount set forth opposite such Investor's name on Exhibit A
hereto in lawful money of the United States of America by wire transfer of
immediately available funds to the Company.
2. Representations and Warranties of the Company.
---------------------------------------------
In order to induce the Investors to purchase the Class L Shares hereunder,
the Company hereby represents and warrants to each Investor with respect to the
Class L Shares being purchased by them hereunder as of the date hereof and as of
the date of the Closing:
2.1 Organization and Corporate Power. Each of the Company, Medical Care
--------------------------------
Partners, P.C., a professional corporation organized under the laws of The
Commonwealth of Massachusetts ("MCP"), Flagship Health, PA, a professional
---
association organized under the laws of the State of Maryland ("Flagship"), and
--------
Flagship Health II, P.A., a professional association organized under the laws of
the State of Maryland ("Flagship II"), 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, MCP,
Flagship and Flagship II 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, the Articles of Organization and By-laws of MCP, and the Articles of
Incorporation and By-laws of Flagship and Flagship II 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 as amended
-------------
by Amendment No. 3 to the Stockholders Agreement to be delivered pursuant to
Section 4.7 among the Company, the Stockholders named therein and the Investors
(as so amended 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 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 but
--------------
prior to the issuance of the Class L Shares to the Investors hereunder, the
entire authorized capital stock of the Company will consist of (i) 10,000,000
shares of Preferred Stock, $.01 par value per share, of which no shares are
outstanding, and (ii) 176,168,847 shares of Common Stock, $.01 par value
-2-
<PAGE>
per(the "Common Stock"), of which (A) 135,000,000 shares of the Common Stock
------------
are designated as Class A Common Stock, of which 26,176,762 shares are issued
and outstanding; (B) 6,727,043 shares are designated as Class B-1 Common Stock,
of which 2,809,296 shares are issued and outstanding; (C) 4,287,957 shares of
the Common Stock are designated as Class B-2 Common Stock, of which 1,790,704
shares are issued and outstanding; (D) 27,692,309 shares of the Common Stock are
designated as Class C Common Stock, of which 7,692,309 shares are issued and
outstanding; and (E) 2,461,538 shares of Common Stock are designated as Class L
Common Stock, of which no shares are issued and outstanding on the date of this
Agreement. The Company has reserved (i) 3,659,216 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
3,917,747 shares of Class B-1 Common Stock, 2,497,253 shares of Class B-2 Common
Stock and 7,692,309 shares of Class C Common Stock as Reserved Shares for
issuance upon exercise of outstanding warrants and (iii) 31,332,694 shares of
Class A Common Stock for issuance upon conversion of the Class B Common Stock,
Class C Common Stock and Class L Common Stock in accordance with the terms of
the Restated Certificate (the "Conversion Shares"). When issued in accordance
-----------------
with the terms of this Agreement, the Class L Shares will be duly authorized,
validly issued and outstanding, fully paid and nonassessable, 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 nonassessable. Schedule 2.3A hereto contains a
list of (i) all holders of record of capital stock of the Company, including the
number of shares of capital stock held by each such holder, and (ii) all
outstanding warrants, options, agreements, securities, (including notes and debt
securities) or other commitments convertible, exercisable or exchangeable into
shares of capital stock or other equity securities of the Company or pursuant to
which the Company is or may become obligated to issue any shares of the capital
stock or other equity securities of the Company, which names all persons
entitled of record to receive such shares or other securities and the shares of
capital stock or other securities required to be issued thereunder as of the
date hereof. 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 or in the Stockholders
Agreement, there are no preemptive rights with respect to the issuance or sale
by the Company of the 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 are no agreements or
restrictions with respect to the transfer, purchase or voting of any shares of
the Company's capital stock or the capital stock of MCP, Flagship or Flagship
II. 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.
-3-
<PAGE>
(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 "MCP 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, and
are validly issued and outstanding, fully paid and nonassessable and free and
clear of all liens, charges or encumbrances of any kind. Other than as set
forth in the MCP 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 MCP Sole
Stockholder, MCP and the Company have executed and delivered that certain
Shareholder Designation and Stock Transfer Agreement (the "MCP 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 amended and restated Services Agreement (the "MCP
---
Services Agreement") dated as of August 30, 1996, a true and complete copy of
- ------------------
which has been provided to the Investors' counsel. The MCP Designation
Agreement and the MCP 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.
(c) The entire authorized capital stock of each of Flagship and Flagship II
consists of 1,000 shares of Common Stock $5.00 par value per share, of which
1,000 shares of each are issued and outstanding and owned of record by Laura
Mumford M.D. (the "Flagship Sole Stockholder") and no other shares are issued
-------------------------
and outstanding. Neither Flagship nor Flagship II holds any shares of its
Common Stock in its treasury. All capital stock of Flagship and Flagship II has
been duly authorized, and are validly issued and outstanding, fully paid and
nonassessable and free and clear of all liens, charges or encumbrances of any
kind. Other than as set forth in the Flagship Designation Agreements or as set
forth in Schedule 2.3C, there are no outstanding warrants, options or other
rights to purchase or acquire from Flagship or Flagship II, or exchangeable for
or convertible into, any shares of the capital stock of Flagship or Flagship II
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 Flagship or
Flagship II of any shares of their respective capital stock. There are no
existing rights with respect to registration under the Securities Act of any of
the capital stock of Flagship or Flagship II. Neither Flagship nor Flagship II
has violated the Securities Act or any state Blue Sky or securities laws in
connection with the issuance of any of their respective securities. The
Flagship Sole Stockholder, Flagship and the Company have executed and
-4-
<PAGE>
delivered that certain Shareholder Designation and Stock Transfer Agreement
dated December 11, 1996 (the "Flagship I Designation Agreement"), a true and
--------------------------------
complete copy of which has been provided to the Investors' counsel. The Flagship
Sole Stockholder, Flagship II and the Company have executed and delivered that
certain Stockholder Designation and Stock Transfer Agreement, dated as of
December 2, 1997 (the "Flagship II Designation Agreement"), a true and complete
copy of which has been provided to Investors' counsel. The Company, Flagship
and Flagship II have executed and delivered that certain Amended and Restated
Services Agreement (the "Flagship Services Agreement") dated as of December 11,
----------------------------
1996, as amended December 2, 1997, a true and complete copy of which has been
provided to the Investors' counsel. The Flagship I Designation Agreement, the
Flagship II Designation Agreement and the Flagship Services Agreement are
collectively referred to herein as the "Flagship Agreements". Each of the
--------------------
Flagship 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 Flagship 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 2.4, (ii) MCP, (iii) Flagship and (iv) Flagship II, the Company has
no Subsidiaries and has no investments in, or affiliations with, any other
corporation or business organization. All capital stock of 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, Flagship, Flagship II and the Subsidiaries is 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 business, assets, condition (financial or otherwise)
Company and the Consolidated Entities (as defined in Section 6.15) taken as a
whole. Each of 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. None of the Subsidiaries currently conducts or in
the past has conducted any operations.
2.5 Financial Statements.
--------------------
2.5.1 Attached hereto as Schedule 2.5A are the Company's (i) audited
consolidated balance sheet as of December 31, 1997 and the related
consolidated statements of income and cash flows for the fiscal year then
ended (the "1997 Financials") and (ii) the Company's unaudited consolidated
---------------
balance sheet as of March 31, 1998, and the related unaudited consolidated
statements of income and cash flows for the Company for the three-month
period then ended (the "1998 Financials," and together with the 1997
Financials, 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 on a consolidated basis as of
-5-
<PAGE>
each such date and the results of operations for each such period then
ended subject, in the case of the 1998 Financials, to normal year-end
adjustments which, in the aggregate, will not be material. Attached hereto
as Schedule 2.5B are unaudited statements of income and cash flow for the
one month period ended April 30, 1998 and a balance sheet as of April 30,
1998 (the "Monthly Statements"). The Monthly Statements have been derived
from the Company's accounting records and fairly present, in all material
respects, the financial position of the Company on a consolidated basis as
of April 30, 1998 and the results of operations for the one month period
then ended subject to normal adjustments which, in the aggregate, are not
expected by the Company to be material.
2.5.2 The financial projections for 1998 - 2000 of the Company in the
form previously delivered to the Investors were prepared in good faith on
the basis of the assumptions stated therein, and the Company has no reason
to believe that such assumptions are not reasonable.
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 any of its Consolidated Entities has incurred any
accrued or contingent liability 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 December 31, 1997, except as
-------------------------------
reflected in the 1998 Financials or on Schedule 2.7, there has been no material
adverse change and no event which could reasonably be expected to create a
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:
(1) declaration, setting aside or payment of any dividend or other
distribution with respect to the capital stock of the Company or
any Consolidated Entity;
(2) 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;
(3) (x) labor trouble involving the Company or any of its
Consolidated Entities or (y) any material change in any of their
respective personnel or
-6-
<PAGE>
the terms and conditions of employment of such personnel with
respect to clause (y);
(4) waiver of any valuable right by the Company or any of its
Consolidated Entities;
(5) loan or extension of credit to any officer or employee of the
Company or any of its Consolidated Entities;
(6) disposition of any material assets (or any contract or
arrangement therefor) by the Company or any of its Consolidated
Entities other than for fair value in the ordinary course of
business;
(7) merger, consolidation, amalgamation, liquidation, winding up, or
dissolution of the Company or any of its Consolidated Entities;
(8) 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) any Person by the Company or any of its
Consolidated Entities;
(9) material change in the nature of the business conducted by the
Company or any of its Consolidated Entities;
(10) 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 any of its Consolidated
Entities;
(11) incurrence of Indebtedness by the Company or any of its
Consolidated Entities; or
(12) 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 used in 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 used in 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
-7-
<PAGE>
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.
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 examinations or
audits of any Tax Returns or reports by any applicable federal, state or local
governmental agency. The Company and 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 any
Consolidated Entity has any contract, obligation or commitment which involves by
its terms a commitment in excess of $50,000 or any employment or noncompetition
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 any Consolidated Entity is licensee or licensor,
leases of real property, pension, profit-sharing, retirement or stock option
plans or any other Contract material to the Company. Each of the Contracts is
the legal, valid and binding obligation of the Company or the Consolidated
Entity party thereto, enforceable against the Company or the Consolidated Entity
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 under, or in violation of, (a) its organizational documents or its By-
Laws, (b) any note, indenture,
-8-
<PAGE>
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 (c) any order, writ, statute, law, rule,
regulation, 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 the case of clause (b) and
violations of statutes, laws, rules and regulations, for defaults which would
not, individually or in the aggregate have a material adverse effect upon the
Company and its Consolidated Entities, taken as a whole and except as provided
in Schedule 2.25. 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, individually or in the
aggregate 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 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, except as set forth on Schedule
2.12. To the knowledge of the Company, (i) neither the Company nor, any
Consolidated Entity infringes any patent, copyright, trademark or other
intellectual property rights of others and (ii) no third party is infringing on
the patent, copyright, trademark or other intellectual property rights of the
Company or any Consolidated Entity. 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 and the Stockholders Agreement, compliance with the provisions
hereof and thereof by the Company, and the issuance, sale and delivery of the
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 applicable to the Company or its Consolidated Entities 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
-9-
<PAGE>
or by which any of them or any of their property is bound or affected, including
without limitation, the MCP Agreements, the Flagship Agreements and the
Contracts.
2.14 No 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 and filings under the Hart-Scott-Rodino Antitrust
Improvements Act, as amended (the "HSR Act"), which will be made in a timely
manner after each Closing and other than the filing of the Company's Restated
Certificate which, as of the Closing, will have been filed, no authorization,
consent, approval or other order of, declaration to, or filing with, any
governmental agency or body or any third party is required for or in connection
with the valid and lawful authorization, execution, delivery and performance by
the Company of this Agreement, the Stockholders Agreement, the Transaction
Agreements, the MCP Agreements or the Flagship Agreements or for or in
connection with the valid and lawful authorization, issuance, sale and delivery
of the Shares or for or in connection with the valid and lawful authorization,
reservation, issuance, sale and delivery of the Conversion Shares.
2.15 Litigation. Except as set forth on Schedule 2.15, there is no action,
----------
suit, proceeding or investigation pending against the Company, or any
Consolidated Entity, or, to the Knowledge of the Company, threatened against the
Company or any Consolidated Entity including without limitation any action,
suit, proceeding or investigation which questions the validity of this
Agreement, the Stockholders Agreement, the MCP Agreements, the Flagship
Agreements or the right of the Company, MCP, Flagship or Flagship II to enter
into them or to consummate the transactions contemplated hereby or thereby, or
which seeks a material amount of damages, fines or penalties 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 any
such litigation or other proceeding. None of the Company or any of its officers
or directors or 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 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 Class L Shares
and the Conversion Shares are, and will be as of the Closing, exempt from the
registration and prospectus delivery requirements of the Securities Act, and
have been, or will be as of the Closing, registered or qualified (or are, or
will be as of the Closing, exempt from registration and qualification) under the
registration, permit or qualification requirements of all applicable state Blue
Sky and securities laws.
-10-
<PAGE>
2.17 Business. Each of the Company and each Consolidated Entity has all
--------
their material franchises, permits, licenses and other rights and privileges
necessary to permit them to own their property and to conduct their present
business taken as a whole. The operations of the Company and the Consolidated
Entities comply with all applicable laws are, and they have been conducted, in
compliance in all material respects, except as set forth on Schedule 2.25 with
all applicable federal, state, local and foreign laws, rules, regulations and
other requirements of all governmental authorities and of all states,
municipalities and agencies thereof having jurisdiction.
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
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
material respects 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
-11-
<PAGE>
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 Closing. 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
any Consolidated Entity, or to the Knowledge of the Company, 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.
-----------------------------
(1) 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.
(2) 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
-12-
<PAGE>
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.
(3) 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.
(4) 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 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.
(5) 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).
-13-
<PAGE>
(6) 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 any material respect in 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.
(7) 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
each of the Company and each Consolidated Entity has obtained and is in
possession of all 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.
2.21.2 There have been no Hazardous Substances, Hazardous Wastes,
Solid Wastes, petroleum, tanks, containers, cylinders, drums, bottles or
cans buried, stored or deposited 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.
-------------
(1) 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,
-14-
<PAGE>
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.
(2) 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.
(3) 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
no termination, partial termination or discontinuance of any contributions
to any such Qualified Plan without notice to and approval by the Internal
Revenue Service.
(4) 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
-15-
<PAGE>
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
111(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 transaction in an amount greater
-------------
than $10,000 with the Company or any Consolidated Entity, 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 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 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 such Consolidated Entities.
2.25 Regulatory Matters.
------------------
(1) The Company and each of the Consolidated Entities and, to the
Knowledge of the Company, 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
-16-
<PAGE>
Entities, taken as a whole. All Permits of the Company and the Consolidated
Entities and, to the Knowledge of the Company, 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 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
Consolidated Entity in connection with the execution, delivery or
performance of this Agreement and the consummation of the transactions
contemplated hereby.
(2) Neither the Company nor 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 any federal or state self-
referral laws, 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.
(3) The representations and warranties contained in this Section 2.25
are hereby qualified by Schedule 2.25.
2.26 Shareholder Disclosures. None of the document, dated June 26, 1998,
-----------------------
soliciting shareholders to consent to the Restated Certificate and Amendment No.
3 to the Stockholders Agreement, the Company Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 (the "Form 10-K") as filed under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), with
Securities and Exchange Commission ("SEC") and the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended March 31, 1998 (the "Form 10-Q), as filed
under the Exchange Act with the Commission, as of their respective dates or
filing dates, contained any untrue statement of a material fact or omitted to
state any material fact required to
-17-
<PAGE>
be stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading. The Form 10-K
and the Form 10-Q complied, when filed, in all material respects with the
requirements of the Exchange Act and the rules and regulations of the Commission
thereunder. The Company is not required to amend the Form 10-K or Form 10-Q.
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
Closing 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
any Consolidated Entity.
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:
(1) 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.
(2) Purchase Entirely for Own Account. The Class L Shares to be
---------------------------------
received by such Investor 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.
(3) 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 Class L
Shares or the Conversion Shares or an available exemption from registration
under the Securities Act, the Securities must be held
-18-
<PAGE>
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.
(4) Formation. Such Investor represents that it was not organized for
---------
the purpose of making an investment in the Company.
(5) Suitability. Such Investor is an Accredited Investor as such term
-----------
is defined in Rule 501(a) promulgated pursuant to the Securities Act.
(6) 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.
(7) 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.
(8) 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.
(9) 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.
----------------------------------
(1) Each Investor further agrees not to make any disposition of all or
any portion of the Class L Shares or the Conversion Shares unless and
until:
(1) There is then in effect a registration statement under the
Securities Act covering such proposed disposition and such
disposition is made in
-19-
<PAGE>
accordance with such registration statement and all applicable
state securities laws; or
(2) (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.
(2) 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 promulgated
under the Securities Act or a transfer in compliance with the Securities
Act 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, MCP, Flagship or Flagship II, 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 Class
-------
L Shares (and the certificates evidencing the Conversion Shares) may bear
substantially the following legends:
(1) "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 of such Act."
(2) Any legend required by the Stockholders Agreement or the laws of
any other applicable jurisdiction.
Upon the consummation of any event requiring the removal of a legend hereunder,
the Company, upon the surrender of certificates containing such legend and
receipt of evidence to the Company's reasonable satisfaction of the occurrence
of such events from the Investors, shall at its own expense deliver to the
holder of any such shares as to which the requirement for such legend shall have
terminated one or more new certificates evidencing such shares not bearing such
legend.
4. Conditions to the Investors' Obligations.
----------------------------------------
-20-
<PAGE>
The obligations of the Investors under Section 1.3 of this Agreement to
purchase the Class L Shares are subject to the fulfillment on or before the
Closing 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 the Closing with the same effect as though such representations and
warranties had been made on and as of the date of 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 the Closing.
4.3 Compliance Certificate. The Chief Executive Officer of the Company
----------------------
shall deliver to the Investors at the Closing a certificate certifying that the
conditions specified in Sections 4.1, 4.2, 4.4, 4.5, 4.7, 4.8, 4.11, 4.12 and
4.13 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, 1998.
4.4 Restated Certificate of Incorporation. The Company shall have filed
-------------------------------------
with the Secretary of State of Delaware the Restated Certificate 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 required to be obtained by
the Company 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.
4.6 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.
4.7 Stockholders Agreement. Amendment No. 3 to 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.
-21-
<PAGE>
4.8 Amendment of Outstanding Warrants. The Company shall have with the
---------------------------------
consent of each warrantholder (i) amended each outstanding warrant to purchase
Class B Common Stock to reduce the Initial Warrant Price (as defined therein) by
$2.00 per share and (ii) amended each outstanding warrant to purchase Class C
Common Stock held by the Investors to reduce the Initial Warrant Price (as
defined therein) by $2.00 per share. The holders of Class C Common Stock and
Warrants to purchase Class B or Class C Common Stock shall have waived any
adjustment to the conversion or exercise price arising out of the transactions
contemplated by this Agreement and agreed to amend the outstanding warrants in
the form of Exhibits I-1 and I-2 hereto.
4.9 Opinion of Company Counsel. The Investors shall have received from
--------------------------
Hale and Dorr, counsel for the Company, an opinion dated as of the Closing in
substantially the form attached hereto as Exhibit E.
4.10 Secretary's Certificate. The Secretary of the Company shall deliver
-----------------------
to the Investors at the Closing a Certificate, dated as of the 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 and the Stockholders Agreement, the
issuance, sale and delivery of the Shares and reservation, issuance and delivery
of 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 and the Stockholders Agreement; (c) that attached
thereto is a true and complete copy of the Restated Certificate as in effect on
the date of such certification; and (d) to the incumbency and specimen signature
of certain officers of the Company.
4.11 Material Adverse Change. Since March 31, 1998 there shall have been,
-----------------------
in the judgment of the Investors, no material adverse change in the business
affairs, operations, properties, assets or condition or prospects of the
Company, Flagship, Flagship II or MCP.
4.12 MCP and Flagship Agreements. The MCP and Flagship Agreements shall be
---------------------------
in full force and effect and no amendments to or waivers thereunder shall have
occurred.
4.13 Amendment to By-Laws. The Company's By-laws shall be amended
--------------------
substantially in the form attached to Exhibit F hereto.
4.14 Capital Certificate. The Company shall deliver to Capital a
-------------------
certificate substantially in the form attached hereto as Exhibit G.
5. Conditions of the Company's Obligations at the Closing.
------------------------------------------------------
-22-
<PAGE>
The obligations of the Company under Sections 1 of this Agreement are
subject to the fulfillment on or before the 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 the Closing with the same effect as though such representations and
warranties had been made on and as of the date of the Closing.
5.2 Payment of Purchase Price. The Investors shall have delivered payment
-------------------------
of the applicable aggregate purchase price of the Class L Shares to be purchased
by them at the Closing as set forth in Section 1.3.
5.3 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 the Closing
other than those which are not required to be obtained before the Closing.
5.4 Waiver of Anti-Dilution Rights. The holder of Class C Common Stock
------------------------------
and Warrants to purchase Class B or Class C Common Stock shall have waived any
adjustment to the conversion or exercise price arising out of the transactions
contemplated by the Agreement and agreed to amend the outstanding warrants in
the form of Exhibits I-1 and I-2 hereto.
5.5 Waiver of Management Fee. Bain Capital Partners V, L.P. shall have
-------------------------
waived, in a form satisfactory to the Company, (i) any fee payable to Bain
Capital Partners V, L.P. in connection with the transactions contemplated by
this Agreement under the Management Agreement, dated August 30, 1996, as
amended, between the Company and Bain Capital Partners V, L.P. and (ii) any fee
payable to Bain Capital Partners V, L.P. which shall accrue after June 30, 1998.
The Company has not paid the entire fee that has accrued under the Management
Agreement for the period prior to July 1, 1998. The Company agrees to paid such
accrued but unpaid fees for the period prior to July 1, 1998 upon the occurrence
of any Realization Event (as defined in the Restated Certificate).
6. Covenants and Agreements.
------------------------
6.1 Financial and Other Information.
-------------------------------
(1) Accounts and Reports. The Company will maintain a standard system
--------------------
of accounts in accordance with generally accepted accounting principles
consistently applied.
-23-
<PAGE>
(2) Annual and Quarterly Financial Statements. The Company will
-----------------------------------------
deliver to each 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.
(3) 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.
-24-
<PAGE>
(4) 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; provided, however, that
-------- -------
the Investors agree to use reasonable efforts to coordinate their visits
and inspections to minimize disruptions to the Company's operations.
(5) 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 seeks a material
amount of damages or, 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.
(6) 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.
6.2 Confidentiality. Each of the Investors further covenants and agrees
---------------
that any person or entity receiving information under Section 6.1 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 Investor informs such attorney, accountant,
consultant or other professional of the confidential nature of such information,
or (4) disclose such information as may be required by any prospective purchaser
of any Class L 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, partner, shareholder or subsidiary of such Investor provided the
Investor informs such persons of the confidential nature of such information.
-25-
<PAGE>
6.3 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.
6.4 Use of Proceeds. The Company will use the proceeds of the sale of the
---------------
Class L Shares in the Closing in order to finance the acquisitions approved by
the Board of Directors and, for working capital, including the funding of
operating losses and capital expenditures.
6.5 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:
(1) 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;
-26-
<PAGE>
(2) 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;
(3) 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
(4) 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.
6.6 Dealings with Affiliates and Others. Other than with respect to the
-----------------------------------
Management Agreement, neither the Company nor any Consolidated Entity shall
enter into any transaction, including, without limitation, any loans 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.
6.7 Best Efforts to Obtain Financing. The Company shall use its best
--------------------------------
commercially reasonable efforts to obtain at least $8 million of senior bank or
debt financing on terms satisfactory to the Investors as soon as practicable
after the Closing; provided, however, that the Investors acknowledge that this
covenant shall not obligate the Company to have such financing available by any
specific date.
6.8 Payment of Expenses. The Company shall pay at the Closing, the costs
-------------------
incurred to such Closing Date by the Investors in connection with the
transactions contemplated hereby, including filing fees under the HSR Act, which
shall be an adjustment to purchase price.
6.9 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
-27-
<PAGE>
contemplated hereby including, without limitation, the expiration or earlier
termination of all applicable waiting periods under the Hart-Scott-Rodino
Antitrust Improvements Act, as amended, 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 Closing
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.
6.10 Conduct of Business. Prior to the 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.
6.11 Reservation of Shares. The Company shall at all times reserve and
---------------------
make available sufficient Conversion Shares for issuance upon conversion of the
Shares.
6.12 Future Financings.
-----------------
6.12.1 Exclusivity. Until the 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 in the Company or any Consolidated Entity other than the
investments contemplated hereby (subject to the terms and conditions
hereto) by the Investors.
-28-
<PAGE>
6.12.2 Participation Rights. 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 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.
6.12.3 Notice. Notice of an Investor's intention to accept, in
------
whole or in part, the Proposal made pursuant to Section 6.13.2 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"). If the total number of Future Securities is sufficient to
--------
satisfy the elections of Investors contained in the Notices to Purchase
such Future Securities shall be allocated in accordance with their
elections; if not the available Future Securities shall be allocated among
the Investors in proportion to their election, provided, however, such
allocation shall be adjusted if necessary so that no Investor is allocated
more Future Securities than it has elected to purchase.
6.12.4 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 6.13.2. 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
-29-
<PAGE>
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
6.
6.12.5 Exceptions. Notwithstanding anything to the contrary stated
----------
above, the provisions of, and the rights of the Investors under, this
Section 6.13 shall not apply to (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
convertible into or exercisable for shares of Common Stock, 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, (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.
6.13 Period. The foregoing provisions of this Section 6 (other than
------
Sections 6.1, 6.10, and 6.12) shall terminate on a Qualified Public Offering.
6.14 Disclosure of Investment. The Company shall not permit any of its
------------------------
subsidiaries to (i) except as may be necessary or desirable in connection with a
request by or a filing with a governmental agency, regulatory or supervisory
authority or court or as required by law, disclose the transactions contemplated
by this Agreement or any of the Transaction Agreements or any of the terms
thereof without the prior consent of the Investors, (ii) use in advertising or
publicity the name of any Investor, or any partner or employee of such Investor
or any of its respective affiliates, or any trade name, trademark, trade device,
service mark, symbol or any abbreviation, contraction or simulation thereof
owned by any Investor or any of its respective affiliates, in either case
without the prior written consent of such Investor or (iii) represent, directly
or indirectly, any product or any service provided by any or any of its
subsidiaries has been
-30-
<PAGE>
approved or endorsed by any Investor without the prior written consent of the
Investor; provided, however, the Company may orally disclose: (i) that the
-------- -------
Investors are stockholders of the Company, (ii) the aggregate purchase price
paid by each Investor in connection with the investment contemplated by this
Agreement and (iii) the percentage of the outstanding shares of capital stock of
the Company held by each Investor.
6.15 Consolidation. The Company agrees that it will use its reasonable
-------------
best efforts, in consultation with the Board of Directors of the Company, to
take such action as is reasonably necessary, including, amending the governance
provisions of the organizational documents of the Joint Policy Board and, to the
extent necessary, the MCP Agreements and Flagship Agreements, to cause each of
MCP, Flagship 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, (unless
consented to by the Investors) 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 with respect to Issue No. 97-2 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 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".
------------------- ---------------------
6.16 Investor Agreement With Respect to Additional Financing. The
-------------------------------------------------------
Investors agree that from time to time, until the initial underwritten public
offering of the Company's securities, upon the request of the Company to use
commercially reasonable efforts to assist the Company in obtaining additional
debt or equity financing.
6.17 Waiver of Anti-Dilution Protection. By executing this Agreement,
-----------------------------------
each of the Investors who are a party hereto hereby waives any anti-dilution
protection applicable to any shares of capital stock of the Company or warrant
to acquire capital stock of the Company held by the Investor and triggered by
the issuance of Class L shares or the terms thereof or the reduction of the
exercise price of the warrants to purchase Class B Common Stock and Class C
Common Stock as contemplated by Section 4.8 hereof.
7. Negative Covenants.
------------------
So long as the Investors hold in the aggregate at least 30% of the
aggregate number of shares of Class B Common Stock, Class C Common Stock and
Class L Common Stock (together the "Investors Stock") then issued and
outstanding collectively, neither the Company nor any Consolidated Entity will,
at any time, without the prior written consent of the Investors holding in the
aggregate at least two-thirds of the aggregate number of shares of Class B
Common Stock, Class C Common Stock and Class L Common Stock, voting together as
a single class (a "Supermajority") take any Restricted Action or permit any
Restricted Action to be taken. The obligations under this Section 7 shall
terminate on a Qualified Public Offering.
-31-
<PAGE>
8. Definitions.
-----------
8.1 Certain Defined Terms. As used in this Agreement, the following terms
---------------------
have the following definitions:
8.1.1 "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. Notwithstanding the
foregoing, with respect to the definition of Restricted Action, no Investor
shall be deemed to be an Affiliate of the Company and no Person who is an
Affiliate of an Investor for reasons unrelated to the Company or any
Consolidated Entity shall be deemed to be an Affiliate of the Company.
8.1.2 "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) any general partner of any Investor or any of its
Affiliates has the right to direct the voting of shares of corporations in
which such limited partnership or other Person invests or (b) any general
partner of an Investor or any of their respective Affiliates provides
management services.
8.1.3 "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.
8.1.4 "GAAP" shall mean the generally accepted accounting
----
principles as in effect in the United States of America as of the Closing
Date.
8.1.5 "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 m 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.
8.1.6 "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)
-32-
<PAGE>
letters of credit, and (vi) in the nature of guarantees of the obligations
described in (i) through (v) above.
8.1.7 "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; (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; and (e) liens existing
on acquired physician practices approved by the Board of Directors in
accordance with the Restated Certificate, or if applicable, Section 7 of
this Agreement.
8.1.8 "Person" shall mean any individual, partnership, corporation,
------
association, trust, joint venture, unincorporated organization or other
entity.
8.1.9 "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 (A) the Investors shall have sold or shall be permitted to
sell fifty percent of the capital stock into which the Class B Common
Stock, the Class C Common Stock and Class L Common Stock is convertible and
(B) the net proceeds of the sale of such shares or the net proceeds of the
sale of such shares which would be permitted to be sold in such offering by
(1) the Capital Investors equal or exceed seventy-five percent of the total
amount invested in capital stock of the Company by the Capital Investors up
to $19,500,000, (2) the net proceeds of the sale thereof by the Bain
Investors shall equal or exceed seventy-five percent of the total amount
invested in capital stock of the Company by the Bain Capital Investors up
to $17,000,000 and (3) the Goldman Investors equal or exceed seventy-five
percent of the total amount invested in capital stock of the Company by the
Goldman Investors up to $16,500,000 and (ii) subject to a firm commitment
underwriting conducted by a nationally recognized underwriter acceptable to
a majority of the Class B, Class C and Class L Directors, voting together
as a single class.
8.1.10 "Restricted Action" shall mean any of the following:
-----------------
-33-
<PAGE>
(1) 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 shall be a wholly-owned Subsidiary of the Company.
(2) 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
(3) 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.
(4) 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.
(5) 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.
(6) Any amendment or restatement of organizational documents
(including the Certificate of Incorporation) or Bylaws of the Company or
any Consolidated Entity.
(7) 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 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, Class C and the Class L Directors, except as may
be required by law, or enter into any benefit plans or similar agreements
or arrangements;
-34-
<PAGE>
(8) Adopt or approve an annual operating budget for the Company and
the Consolidated Entities, including the budget for capital expenditures;
(9) 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.
(10) 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 or any Affiliate thereof other than any such action, suit or
proceeding initiated and instituted by the holders of Class B Common Stock,
the holders of Class C Common Stock and the Class L Common Stock against
the Company.
8.1.11 "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.
8.1.12 "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.
8.1.13 "Tax Returns" shall mean all returns, amended returns,
-----------
declarations, reports, estimates, information returns and statements
required or permitted to be filed in respect of Taxes.
8.2 Certain Matters of Construction. In addition to the definitions
-------------------------------
referred to as set forth in Section 9.1:
(1) 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;
(2) Definitions shall be equally applicable to both the singular and
plural forms of the terms defined; and
(3) The masculine, feminine and neuter genders shall each include the
other.
-35-
<PAGE>
9. Miscellaneous.
-------------
9.1 Survival of Covenants; Assignability 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 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.
9.2 Incorporation by Reference. All exhibits and schedules appended to
--------------------------
this Agreement are herein incorporated by reference and made a part hereof.
9.3 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.
9.4 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.
9.5 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.
9.6 Effect of Investigations. No investigation by the parties hereto made
------------------------
heretofore or hereafter, whether pursuant to this Agreement or otherwise, shall
affect the representation and warranties of the parties which are contained
herein and each such representation and warranty shall survive such
investigation.
9.7 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:
-36-
<PAGE>
Physicians Quality Care, Inc.
950 Winter Street
Suite 2410
Waltham, Massachusetts 02154
Attn: Jerilyn Asher
with a copy to:
David Phelan, Esq.
Hale and Dorr
60 State Street
Boston, Massachusetts 02109
or to each Bain Investor at its address set out on Exhibit A-1 hereto
with a copy to:
Laura I. Norton, Esq.
Ropes & Gray
One International Place
Boston, Massachusetts 02110
or to the Capital Investors at:
ABS Capital Partners
One South Street
Baltimore, Maryland 21202
Attn: Timothy T. Weglicki
with a copy to:
Michael J. Silver, Esq.
Hogan & Hartson, L.L.P.
111 South Calvert Street
Baltimore, Maryland 21202
or to the Goldman Investors at:
GS Capital Partners
85 Broad Street
New York, New York 10004
Attn: Ronald Jacobe
-37-
<PAGE>
with a copy to:
Stuart Z. Katz, Esq.
Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, New York 10004-1980
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.
9.8 Effect of Headings. The section and paragraph headings herein are for
------------------
convenience only and shall not affect the construction hereof.
9.9 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. The Amended and Restated Class B and Class C
Common Stock and Warrant Purchase Agreement, dated as of June 20, 1997 (the
"Prior Agreement"), shall survive this Agreement, provided that the obligations
of the Company under Section 7 of this Agreement shall supersede the Company's
obligations under Section 8 of the Prior Agreement.
9.10 Severability. The invalidity or unenforceability of any provision
------------
hereof shall in no way affect the validity or enforceability of any other
provision.
9.11 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.]
-38-
<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:
Title:
ABS CAPITAL PARTNERS II, L.P.
______________________________________
By:
ABS Partners II, L.L.C.,
its general partner
______________________________________
By:
Timothy T. Weglicki, Managing Member
_________________________________________
Russell Ray
115 Longwood Road
Baltimore, MD 21210
__________________________________________
Dick Franyo
925 Drohomer Place
Baltimore, MD 21210
__________________________________________
Harris Hyman IV
3131 O Street, N.W.
Washington, DC 20007
-39-
<PAGE>
______________________________________
Mark Klausner
7105 Charles Spring Way
Towson, MD 21204
______________________________________
Michael Singer
3048 Jackson Street
San Francisco, CA 94111
______________________________________
Stuart Smith
7834 Ellenham Road
Ruxton, MD 21204
______________________________________
Gary Lessing
10 Queensdale Place
London, England W11 4SQ
GS CAPITAL PARTNERS II, L.P.
By: GS Advisors, L.P.
Its General Partner
By: GS Advisors, Inc.
Its General Partner
By:_________________________________
Title:
GOLDMAN, SACHS & CO.,
VERWALTUNGS GMBH
By:__________________________________
Managing Director
-40-
<PAGE>
By:__________________________________
Managing Director or
Registered Agent
GS CAPITAL PARTNERS II OFFSHORE, L.P.
By: GS Advisers II (Cayman), L.P., its
General Partner
By: GS Advisers II, Inc., its General Partner
By:___________________________________
Managing Director
BRIDGE STREET FUND 1997, L.P.
By: Stone Street Asset Corp., its Managing
General Partner
By:______________________________________
Title:
STONE STREET FUND 1997, L.P.
By: Stone Street Asset Corp., its Managing
General Partner
By:______________________________________
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:
Title: Managing Director
-41-
<PAGE>
BAIN CAPITAL FUND V-B, L.P.
By: Bain Capital Partners V, L.P., a
Delaware limited partnrship,
its general partner
By: Bain Capital Investors V, Inc.,
its general partner
By:_____________________________________
Title: Managing Director
BCIP Associates
By:_______________________________________
Title: a general partner
BCIP Trust Associates, L.P.
By:___________________________________
Title: a general partner
-42-
<PAGE>
List of Exhibits and Schedules
------------------------------
Exhibits
- --------
A. List of Purchasers of Class L Shares and Warrants
B. Form of the Company's Restated Certificate of Incorporation
C. Form of Class C Warrant
D. Form of Amendment No. 3 to Stockholders Agreement
E. Form of Opinion of Company Counsel
F. Form of the Company's Amended By-Laws
G. Form of Capital Certificate
H. Criteria for Additional Financing
I. Form of Amended Warrants for Class B Common Stock and
Class C Common Stock
Schedules
- ---------
2.3. Outstanding Warrants and Options and Other Rights
2.4. Subsidiaries and Affiliates
2.5. Financial Statements
2.6 Undisclosed Liabilities
2.7 Absence of Material Changes
2.8. Properties
2.10. Contracts
2.12. Intellectual Property
2.18. Brokerage Commissions
-43-
<PAGE>
2.20. Insurance
2.22. Employee Benefit Plans
2.23. Transactions With Affiliates
2.26 Compliance with All Laws
-44-
<PAGE>
EXHIBIT 10.2
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (the "Agreement"), made effective this 1st day of
May, 1998, 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 Dana H. Frank, MD ("Dr. Frank") of
Baltimore, Maryland. The Company recognizes that the future growth,
profitability and success of the business of the Company will be enhanced by the
employment of Dr. Frank. The Company desires therefore to secure the benefit of
Dr. Frank's experience and ability. In order to retain the services of Dr.
Frank, the Company desires to offer him a compensation package which recognizes
the significance of his individual contributions to the future growth,
profitability and success of the Company and allows him to share in the same
while allowing him to draw a salary commensurate with his knowledge and
experience.
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 agrees to employ Dr. Frank, and he accepts
----------
employment with the Company, upon the terms and subject to the conditions set
out here.
2. Term. The term of this Agreement (the "Term") shall commence on May
----
1, 1998 (the "Commencement Date"), and shall continue in effect for a period of
48 months, expiring April 30, 2002 unless extended by mutual agreement. In the
event this Agreement is not renewed for a term of at least one year, Dr. Frank
will receive severance of $125,000 plus $50,000 if his position as President of
Flagship Health, PA is terminated concurrently (i.e within 30 days) with non
renewal of this Agreement or Dr. Frank resigns his position as President of
<PAGE>
Flagship Health, PA concurrently (i.e within 30 days) with non renewal of this
Agreement. Severance under this section shall be paid in 12 equal installments
beginning May 1, 2002.
3. Position. The Company and Dr. Frank 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 Dr. Frank; and Dr. Frank shall serve as President
or Vice Chair of the Board of the Company. During the Term also, the Company
agrees to nominate Dr. Frank for election as President or Vice Chair and
Director of the Company at all elections of officers and Directors unless Dr.
Frank declines to stand for election. Dr. Frank shall report directly to the
Chief Executive Officer of the Company and the Board and shall be subject to the
supervision of, and shall have such authority as is set out in the bylaws and as
is delegated to him by the Chief Executive Officer and the Board which shall
include, but not be limited to, those activities set forth in Exhibit A,
attached and incorporated as part of this Agreement.
Dr. Frank 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. Dr. Frank agrees to abide by
the written rules, regulations, instructions, personnel practices and policies
of the Company and any changes thereto which may be adopted from time to time by
the Company.
It is understood and agreed that Dr. Frank will reside in Baltimore,
Maryland but that his responsibilities under this Agreement will require travel
throughout the Company's services areas. Dr. Frank will not be required to
relocate from Baltimore.
-2-
<PAGE>
4. Additional Duties. In addition to his duties as President of the
-----------------
Company or Vice Chair, Dr. Frank shall serve also as President of Flagship
Health, PA for so long as he is elected to that position in accordance with the
bylaws of the professional association. Additionally, Dr. Frank shall serve as
a member of the Joint Policy Board established under the Services Agreement
between Physicians Quality Care, Inc. and Flagship Health, PA as a nominee of
the Company. Subject to consent of Flagship Health, P.A. for Dr. Frank's
responsibilities under this Agreement, he shall continue to engage actively in
the practice of medicine with Flagship Health, PA. Finally, the Company will
ensure that Dr. Frank has sufficient administrative support to carry out his
responsibilities under this Agreement.
5. Compensation. As compensation for Dr. Frank's employment and his
------------
additional duties as set out in sections 3 and 4 above, the Company shall pay
Dr. Frank an annual base salary of $100,000 or such greater amount as the Board
may approve from time to time, payable in bi-weekly installments; provided that
the Company shall automatically and retroactively increase Dr. Frank's annual
base salary under this Agreement to the extent necessary that his total annual
earnings under his physician employment agreement with Flagship Health, PA,
under this Agreement and for his services as President of Flagship Health, PA
shall be at least $220,000. Dr. Frank's performance will be reviewed annually by
the Chief Executive Officer in consultation with the Board of Directors, and Dr.
Frank will be considered for an increase in his base salary as part of each
annual review.
6. Accounting. It is understood and agreed that Dr. Frank's compensation
----------
under this Agreement shall be accounted for as additional revenue which is
independent of his medical practice revenues under his employment agreement with
Flagship Health, PA.
-3-
<PAGE>
7. Benefits. Upon meeting all applicable eligibility requirements, Dr.
--------
Frank shall be entitled to such other benefits, compensation or rights as are
generally made available to 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. To the extent any benefit referenced in this section
requires a length of service or vesting requirement, Dr. Frank shall be credited
with service to the Company from and after September 1, 1996.
8. Vacation. Dr. Frank shall be entitled to four weeks of paid vacation
--------
and one week of continuing education each year during the Term. If Dr. Frank
does not utilize all vacation or continuing education time 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 Dr. Frank for all reasonable
--------
travel, entertainment and other expenses incurred or paid by Dr. Frank in
connection with, or related to, the performance of his duties, responsibilities
or services under this Agreement, upon presentation by Dr. Frank 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. It is understood and
agreed also that the Company shall pay Dr. Frank's reasonable legal expenses
associated with negotiation of this Agreement, not to exceed $5,000.
-4-
<PAGE>
10. Restricted Stock Option Award. Pursuant to the Company's right to
-----------------------------
repurchase and right to restrict transfer in accordance with a Stock Restriction
Agreement between the parties:
(a) The Company shall issue 500,000 options for shares of Common Stock
to Dr. Frank on May 1, 1998 at a purchase price of $3.00 per share and subject
to vesting during the Term. The first allocation of 300,000 shares shall vest
on the effective date of this Agreement while the remaining allocations shall
vest in equal shares of 100,000 each on April 30, 1999 and April 30, 2000,
subject to the terms and provisions of the Stock Restriction Agreement.
(b) It is expressly understood and agreed that the options granted
under sub-section a) above are in addition to 300,000 options granted to Dr.
Frank during 1997 at a purchase price of $2.50 per share, such options to vest
at the rate of 100,000 options at January 1, 1998; 100,000 options at September
1, 1998; and 100,000 options at January 1, 1999.
(c) The Company agrees that the options to purchase the Company's
Common Stock referred to in subsections a) and b) above are subject to the
following terms and conditions:
(i) Upon termination of this Agreement for any reason prior to April
30, 2002, all vested options, including all options which vest at termination,
if not previously exercised by Dr. Frank, shall expire at the later of October
------
1, 2002 or 27 months from the effective date of termination of this Agreement
and may be exercised by Dr. Frank at any time or times prior to the expiration
date, in whole or in part. Prior to such date, the vested options shall not
terminate for any reason whatsoever, including death, disability, or termination
of employment. Upon expiration of this initial term of this Agreement, all
vested options, if not
-5-
<PAGE>
previously exercised by Dr. Frank, shall expire after 27 months and may be
------
exercised by Dr. Frank at any time or times prior to the expiration date, in
whole or in part. Prior to such date, the vested options shall not terminate for
any reason whatsoever, including death, disability, or termination of
employment.
(ii) All options and any shares represented thereby upon exercise
of the options shall be irrevocable, shall be subject to the terms of the Stock
Restriction Agreement of even date, and shall not be subject to the terms of the
Stockholders Agreement between the Company and Dr. Frank dated August 30, 1996.
All vested options may be transferred to any Permitted Transferee of Dr. Frank
as such term is defined in the Stock Restriction Agreement.
(iii) In the event of any change in the Company's Common Stock,
the Company and Dr. Frank shall make appropriate adjustments to the kind and
number of options granted to Dr. Frank and the price per share of the stock
subject to the options.
11. Discharge of Dr. Frank Without Cause or Termination by Dr. Frank With
---------------------------------------------------------------------
Good Reason.
- -----------
(a) At any time prior to expiration of the Term, the Board may
terminate Dr. Frank' s employment without Cause, and Dr. Frank may terminate his
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) without Dr. Frank's express written consent, the assignment to Dr.
Frank of any duties materially inconsistent with the offices held hereunder, or
a material alteration or diminution in the nature or status of his
responsibilities; or an adverse and material
-6-
<PAGE>
alteration in his reporting responsibilities, titles or offices, or any removal
of him or failure to reelect him to any of such positions or any pattern or
practice of harassment or embarrassment or other offensive conduct by or at the
direction of the Company's management, which conduct is designed, intended, or
has the effect of undermining Dr. Frank's position or authority with the Company
or provoking his resignation;
(ii) any reduction in Dr. Frank's annual base salary or a
material reduction in fringe benefits in effect on the effective date or as the
same may be increased during the Term;
(iii) any material breach by the Company of this Agreement which
the Company fails to correct within 30 working days after receiving written
notice thereof.
(iv) after written notice to and consultation with the Company, a
determination by Dr. Frank that the requirements of his position and duties
under sections 3 and 4 of this Agreement are inconsistent with his practice of
medicine within Flagship Health, PA and provided that he shall be willing and
able to return to full time practice of medicine within Flagship Health, PA or
Flagship Health II, PA.
(c) In the event Dr. Frank is discharged by the Company without Cause
or Dr. Frank terminates his employment with Good Reason under subsection (b),
the Company shall pay Dr. Frank severance equal to the greater of:
---------------
(i) severance for two years at the annual rate of $125,000 plus
$50,000 each year during the severance period if Dr. Frank's position as
President of Flagship Health, PA is terminated concurrently (i.e within 30 days)
with termination of employment under
-7-
<PAGE>
this section 11(c) or Dr. Frank resigns his position as President of Flagship
Health, PA concurrently (i.e within 30 days) with termination of employment
under this section 11(c); or
(ii) severance at the annual rate set out above for the remaining
term of this Agreement otherwise in effect but for discharge or resignation
under this section 11(c). In the event Dr. Frank's employment is terminated
under this Section 11, all stock options issued under this Agreement shall vest
on the termination date. Dr. Frank shall then have an immediate right to receive
all shares of such stock upon payment of the purchase price in accordance with
the Stock Restriction Agreement and section 10 of this Agreement.
(d) Severance payments pursuant to Section 11(c) shall be paid as
follows:
(i) a lump sum payment shall be made within 30 days of termination and
shall be equal to the first six months of the severance amount; and
(ii) beginning 60 days after termination, 18 equal monthly
severance payments shall be made for the balance of the severance amount and
provided that such payments shall accelerate and remaining payments shall be
paid in a lump sum in the event any payments thereunder are overdue by more than
15 business days on more than two occasions.
(e) The parties hereto expressly acknowledge and agree that the
severance amounts payable to Dr. Frank upon a discharge or 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 Dr. Frank in connection with such termination.
12. Termination By Dr. Frank Without Cause. Dr. Frank may terminate his
--------------------------------------
-8-
<PAGE>
employment without cause and without Good Reason, provided he first gives the
Company a written notice of intent to terminate at least 90 days prior to the
effective date of any such termination. All rights of Dr. Frank under this
Agreement shall terminate upon the effective date of the termination of
employment; provided, however, the Company shall pay Dr. Frank any base salary
-------- -------
earned through the effective date of the termination and a pro-rata share of any
--- ----
Officer Incentive Bonus earned during the calendar year in which the termination
of employment occurs. This payment shall be made five business days prior to the
effective date of termination.
13. Discharge of Dr. Frank For Cause.
--------------------------------
(a) Notwithstanding anything in this Agreement to the contrary, the
Company shall have the right to terminate Dr. Frank's employment for Cause (as
defined in Subsection (b) of this Section 13) by giving to Dr. Frank written
notice of such termination as of a date (not earlier than 10 days after such
notice) to be specified in such notice, and his employment hereunder shall
terminate on the date so specified.
(b) For purposes of this Section 13, "Cause" shall mean (i) Dr.
Frank's material failure to perform his duties with the Company as set out in
Exhibit A (other than any such failure resulting from his incapacity due to
physical or mental illness or injury or any such actual or anticipated failure
after the issuance of a notice by Dr. Frank of termination for Good Reason),
which is not remedied within 30 days as specified in a written demand for
performance; (ii) intentional misconduct materially and demonstrably injurious
to the Company, or (iii) Dr. Frank's conviction of a felony or of fraud or
embezzlement of the Company's property or purposes of this Agreement, Dr.
Frank's employment shall not be deemed to have been terminated for Cause unless
and until there shall have been delivered to him a copy of a
-9-
<PAGE>
resolution, duly adopted by the affirmative vote of not less than two-thirds of
the entire membership of the Board of the Company at a meeting called and held
for this purpose, and after reasonable written notice to Dr. Frank and an
opportunity for him, together with his counsel, to be heard by the Board.
(c) In the event this Agreement is terminated under Section 13(b)(i),
Dr. Frank will receive severance equal to his annual base salary then in effect,
payable in 12 equal monthly installments beginning 30 days after termination of
this Agreement and provided that such installment payments shall accelerate and
remaining payments shall be paid in a lump sum in the event any payments
thereunder are overdue by more than 15 business days on more than two occasions.
14. Termination In the Event of Disability or Death.
-----------------------------------------------
(a) Disability. In the event that Dr. Frank shall fail, because of
----------
illness or injury, to render the services contemplated by this Agreement for six
consecutive calendar months or for shorter periods aggregating 180 or more
business days in any twelve (12) month period, the Company shall have the right
to terminate Dr. Frank's employment by giving to Dr. Frank written notice of
termination. In the event Dr. Frank's employment is terminated within the
meaning of this Section 14(a), Dr. Frank shall receive his salary at the rate
provided in Section 5 and any other compensation and benefits provided in
Sections 7, 8, and 9 to the effective date of such termination. Such termination
pursuant to this Section 14(a) shall not affect any rights which Dr. Frank 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,
-10-
<PAGE>
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. This Agreement in all other respects will terminate upon
-----
the death of Dr. Frank except for the payment of Dr. Frank's base salary at the
rate provided in Section 5 and any other compensation and benefits provided in
sections 7, 8, and 9 to the date of his 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 Dr. Frank's employment with the Company
is subsequently terminated or terminates for any reason within 120 days after
such Change in Control other than by reason of (i) disability or death or (ii)
termination by the Company for Cause pursuant to section 13(b) (ii) or
13(b)(iii) or (iii) termination by Dr. Frank for other than Good Reason, Dr.
Frank shall be entitled to receive the payments as set forth in Subsections (c)
and (d) of Section 11 and the vesting of all outstanding Shares.
(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 l4(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 40% 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
-11-
<PAGE>
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
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
-12-
<PAGE>
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, 40% 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) In the event that Dr. Frank's employment is terminated under this
Section 15, all options to purchase the Company's Common Stock granted under
this Agreement shall vest on the termination date. Dr. Frank shall then have
the full and immediate right to receive all such shares upon full payment of the
purchase price.
-13-
<PAGE>
16. Indemnification. The Company hereby agrees to indemnify Dr. Frank in
---------------
his capacity as an officer of the Company to the full extent permitted by
Delaware law and the Company's restated articles of incorporation.
17. Non-Compete.
-----------
(a) So long as Dr. Frank is employed by the Company and for a period
of two years after the termination or expiration of his employment, he 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 in Maryland which operates, develops or
manages physician practice management entities to the extent such engagement
assists through a management position such business or entity in directly and
substantially competing with the business conducted by the Company in Maryland;
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 in Maryland of any
of the clients, customers or accounts, or prospective clients, customers or
accounts, of the Company which were contacted, solicited or served by Dr. Frank
while employed by the Company. Nothing in this Agreement shall restrict Dr.
Frank's right to practice medicine or treat patients.
(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
-14-
<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
Dr. Frank to be reasonable for such purpose. Dr. Frank 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.
(d) Notwithstanding anything in this section to the contrary, the
restrictions of this section 17 shall not apply in the event Dr. Frank's
employment is terminated under section 11(b) or 15(a).
18. Proprietary Information and Developments.
----------------------------------------
(a) Proprietary Information.
-----------------------
(i) Dr. Frank 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 with or knowledge of customers or prospective
customers of the Company. Dr. Frank will not disclose any Proprietary
Information to others outside the Company or use the same for any unauthorized
-15-
<PAGE>
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 Dr. Frank.
(ii) Dr. Frank 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 Dr. Frank or others, which shall
come into his custody or possession, shall be and are the exclusive property of
the Company to be used by Dr. Frank only in the performance of his duties for
the Company.
(iii) Dr. Frank 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 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 Dr. Frank in the course of the Company's business.
(b) Developments.
------------
(i) Dr. Frank 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 Dr. Frank 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").
-16-
<PAGE>
(ii) Dr. Frank 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.
Subsection (b) of this Section 18 shall not apply to any intellectual
work which is not related to the present or planned business or research and
development of the Company and which is made and conceived by Dr. Frank outside
work and not on the Company's premises and not using the Company's tools,
devices, equipment, intellectual property, or Developments.
(iii) Dr. Frank 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) relating to Developments - all at the
Company's expense. Dr. Frank 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. Dr. Frank 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. Dr. Frank further represents that his performance of all
the terms of this Agreement as an employee of the Company does not and will
-17-
<PAGE>
not 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.
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.
20. Successors: Binding Agreement; Authorization.
--------------------------------------------
(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
Dr. Frank's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. Any amounts payable by
the Company to Dr. Frank 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
-18-
<PAGE>
estate. Nothing contained in this Agreement shall be deemed to relieve the
Company of its obligations hereunder in the event of any assignment of this
Agreement.
(c) Execution and delivery of this Agreement on behalf of the company
and the grant of all options contained herein have been fully authorized and
approved by all requisite corporate action of the company and all required
consents from stockholders and other third parties have been obtained by the
Company.
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, prepaid, to
the parties or their permitted assignees at the Company, in the case of the
Company, 950 Winter Street, Suite 2410 Waltham, Massachusetts 02154, with a copy
to Edward J. Dailey, Esq., Bromberg & Sunstein LLP, 125 Summer Street, Boston,
Massachusetts 02110 or such address as shall constitute the Company's
headquarters and in the case of Dr. Frank at the last address shown in the human
resources records of the Company, with a copy to James S. Jacobs, Esq., Jacobs &
Dembert, PA, One South Street, Suite 1910, Baltimore, Maryland 21202-3201. The
date of 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-
<PAGE>
23. 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. Each party from time to time may waive any of his or its
rights without affecting a waiver with respect to any subsequent occurrences or
transactions.
24. Entire Agreement. This Agreement constitutes and embodies the entire
----------------
understanding and agreement of the parties and, except as otherwise provided
here, there are no other agreements or understandings, written or oral, in
effect between the parties hereto relating to the employment of Dr. Frank 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 and except as the corporate laws of the State of Delaware
govern indemnification.
25. 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.
26. No Mitigation. In no event shall Dr. Frank be obligated or required
-------------
in any fashion to seek other employment, set off income or earnings from any
source, or otherwise mitigate or reduce severance amounts payable under this
Agreement.
-20-
<PAGE>
THIS AGREEMENT has been executed in duplicate by Dana H. Frank, MD and
Physicians Quality Care, Inc. by and through Eugene M. Bullis, Senior Vice
President and Chief Financial Officer.
/s/ Dana Frank /s/ Eugene M. Bullis
- ------------------------- -------------------------------
Dana H. Frank, MD Eugene M. Bullis
Senior Vice President and
Chief Financial Officer
Physicians Quality Care, Inc.
-21-
<PAGE>
EXHIBIT A
The President or Vice Chair of Physicians Quality Care, Inc. shall report
to the Chief Executive Officer and the Board of Directors. The President or
Vice Chair shall have such duties as are set out in the bylaws of Physicians
Quality Care, Inc. and as delegated from time to time by the Chief Executive
Officer. Additionally, the President or Vice Chair shall have those duties set
out in the bylaws of Flagship Health, PA for so long as he serves as President
of Flagship, PA. Finally, the President or Vice Chair shall also practice
medicine in accordance with his Physician Employment Agreement with Flagship
Health, PA.
-22-
<PAGE>
EXHIBIT 10.3
EMPLOYMENT AGREEMENT
--------------------
This EMPLOYMENT AGREEMENT (the "Agreement"), made effective this 1st day of
May, 1998, 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 Alphonse F. Calvanese, MD ("Dr.
Calvanese") of Springfield, Massachusetts. The Company recognizes that the
future growth, profitability and success of the business of the Company will be
enhanced by the employment of Dr. Calvanese. The Company desires therefore to
secure the benefit of Dr. Calvanese's experience and ability. In order to
retain the services of Dr. Calvanese, the Company desires to offer him a
compensation package which recognizes the significance of his individual
contributions to the future growth, profitability and success of the Company and
allows him to share in the same while allowing him to draw a salary commensurate
with his knowledge and experience.
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 agrees to employ Dr. Calvanese, and he
----------
accepts employment with the Company, upon the terms and subject to the
conditions set out here.
2. Term. The term of this Agreement (the "Term") shall commence on May
----
1, 1998 (the "Commencement Date"), and shall continue in effect for a period of
48 months, expiring April 30, 2002 unless extended by mutual agreement. In the
event this Agreement is not renewed for a term of at least one year, Dr.
Calvanese will receive severance of $150,000 plus $50,000 if his position as
President of Medical Care Partners, PC is terminated concurrently (i.e. within
30 days) with non renewal of this Agreement or Dr. Calvanese resigns his
position as
<PAGE>
President of Medical Care Partners, PC concurrently (i.e. within 30 days) with
non renewal of this Agreement. Severance under this section shall be paid in 12
equal installments beginning May 1, 2002.
3. Position. The Company and Dr. Calvanese 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 Dr. Calvanese; and Dr. Calvanese shall serve as
Chief Medical Officer of the Company. During the Term also, the Company agrees
to nominate Dr. Calvanese for election as Chief Medical Officer and Director of
the Company at all elections of officers and Directors unless Dr. Calvanese
declines to stand for election. Dr. Calvanese shall report directly to the
Chief Executive Officer of the Company and the Board and shall be subject to the
supervision of and shall have such authority as is set out in the bylaws and as
is delegated to him by the Chief Executive Officer and the Board which shall
include, but not be limited to, those activities set forth in Exhibit A,
attached and incorporated as part of this Agreement.
Dr. Calvanese 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. Dr. Calvanese agrees to abide
by the written rules, regulations, instructions, personnel practices and
policies of the Company and any changes thereto which may be adopted from time
to time by the Company.
-2-
<PAGE>
It is understood and agreed that Dr. Calvanese will reside in Springfield,
Massachusetts but that his responsibilities under this Agreement will require
travel throughout the Company's services areas. Dr. Calvanese will not be
required to relocate from Springfield.
4. Additional Duties. In addition to his duties as Chief Medical Officer
-----------------
of the Company, Dr. Calvanese shall serve also as President of Medical Care
Partners, PC for so long as he is elected to that position in accordance with
the bylaws of the professional association. Additionally, Dr. Calvanese shall
serve as a member of the Joint Policy Board established under the Services
Agreement between Physicians Quality Care, Inc. and Medical Care Partners, PC as
a nominee of the Company. Subject to consent of Medical Care Partners, PC for
Dr. Calvanese's responsibilities under this Agreement, he shall continue to
engage actively in the practice of medicine with Medical Care Partners, PC.
Finally, the Company will ensure that Dr. Calvanese has sufficient
administrative support to carry out his responsibilities under this Agreement.
5. Compensation. As compensation for Dr. Calvanese's employment and his
------------
additional duties as set out in sections 3 and 4 above, the Company shall pay
Dr. Calvanese an annual base salary of $50,000 or such greater amount as the
Board may approve from time to time, payable in bi-weekly installments. The
Company shall automatically and retroactively increase Dr. Calvanese's annual
base salary under this Agreement to the extent necessary that his total annual
earnings under his physician employment agreement with Medical Care Partners,
PC, under this Agreement, and for his services as President of Medical Care
Partners, PC shall be at least $430,000; provided, however, that the maximum
annual base salary paid by the Company under this Agreement shall be limited to
$250,000. Dr. Calvanese's performance will be reviewed annually by the Chief
Executive Officer in consultation with the Board of Directors,
-3-
<PAGE>
and Dr. Calvanese will be considered for an increase in his base salary as part
of each annual review.
6. Accounting. It is understood and agreed that Dr. Calvanese's
----------
compensation under this Agreement shall be accounted for as additional revenue
which is independent of his medical practice revenues under his employment
agreement with Medical Care Partners, PC.
7. Benefits. Upon meeting all applicable eligibility requirements, Dr.
--------
Calvanese shall be entitled to such other benefits, compensation or rights as
are generally made available to 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. To the extent any benefit referenced in this section
requires a length of service or vesting requirement, Dr. Calvanese shall be
credited with service to the Company from and after September 1, 1996.
8. Vacation. Dr. Calvanese shall be entitled to four weeks of paid
--------
vacation and one week of continuing education each year during the Term. If Dr.
Calvanese does not utilize all vacation or continuing education time 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 Dr. Calvanese for all
--------
reasonable travel, entertainment and other expenses incurred or paid by Dr.
Calvanese in connection with, or related to, the performance of his duties,
responsibilities or services under this Agreement, upon presentation by Dr.
Calvanese of documentation, expense statements, vouchers and/or such other
supporting information as the Company may request, provided, however, that the
amount
-4-
<PAGE>
available for such travel, entertainment and other expenses may be fixed in
advance by the Chief Executive Officer or the Board. It is understood and agreed
also that the Company shall pay Dr. Calvanese's reasonable legal expenses
associated with negotiation of this Agreement, not to exceed $5,000.
10. Restricted Stock Option Award. Pursuant to the Company's right to
-----------------------------
repurchase and right to restrict transfer in accordance with a Stock Restriction
Agreement between the parties:
(1) The Company shall issue 500,000 options for shares of Common Stock
to Dr. Calvanese on May 1, 1998 at a purchase price of $3.00 per share and
subject to vesting during the Term. The first allocation of 300,000 shares
shall vest on the effective date of this Agreement while the remaining
allocations shall vest in equal shares of 100,000 each on April 30, 1999 and
April 30, 2000, subject to the terms and provisions of the Stock Restriction
Agreement.
(2) It is expressly understood and agreed that the options granted
under sub-section (a) above are in addition to 300,000 vested options granted to
Dr. Calvanese during 1997 at a purchase price of $2.50 per share.
(3) The Company agrees that the options to purchase the Company's
Common Stock referred to in subsections (a) and (b) above are subject to the
following terms and conditions:
(1) Upon termination of this Agreement for any reason prior to
April 30, 2002, all vested options, including all options which vest at
termination, if not previously exercised by Dr. Calvanese, shall expire at the
------
later of October 1, 2002 or 27 months from the
-5-
<PAGE>
effective date of termination of this Agreement and may be exercised by Dr.
Calvanese at any time or times prior to the expiration date, in whole or in
part. Prior to such date, the vested options shall not terminate for any reason
whatsoever, including death, disability, or termination of employment. Upon
expiration of this initial term of this Agreement, all vested options, if not
previously exercised by Dr. Calvanese, shall expire after 27 months and may be
exercised by Dr. Calvanese at any time or times prior to the expiration date, in
whole or in part. Prior to such date, the vested options shall not terminate for
any reason whatsoever, including death, disability, or termination of
employment.
(2) All options and any shares represented thereby upon
exercise of the options shall be irrevocable, shall be subject to the terms of
the Stock Restriction Agreement of even date, and shall not be subject to the
terms of the Stockholders Agreement between the Company and Dr. Calvanese dated
August 30, 1996. All vested options may be transferred to any Permitted
Transferee of Dr. Calvanese as such term is defined in the Stock Restriction
Agreement.
(3) In the event of any change in the Company's Common Stock,
the Company and Dr. Calvanese shall make appropriate adjustments to the kind and
number of options granted to Dr. Calvanese and the price per share of the stock
subject to the options.
11. Discharge of Dr. Calvanese Without Cause or Termination by Dr.
--------------------------------------------------------------
Calvanese With Good Reason.
- --------------------------
(1) At any time prior to expiration of the Term, the Board may
terminate Dr. Calvanese's employment without Cause, and Dr. Calvanese may
terminate his employment with
-6-
<PAGE>
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.
(2) For purposes of this Section 11, Good Reason shall mean:
(1) without Dr. Calvanese's express written consent, the
assignment to Dr. Calvanese of any duties materially inconsistent with the
offices held hereunder, or a material alteration or diminution in the nature or
status of his responsibilities; or an adverse and material alteration in his
reporting responsibilities, titles or offices, or any removal of him or failure
to reelect him to any of such positions or any pattern or practice of harassment
or embarrassment or other offensive conduct by or at the direction of the
Company's management, which conduct is designed, intended, or has the effect of
undermining Dr. Calvanese's position or authority with the Company or provoking
his resignation;
(2) any reduction in Dr. Calvanese's annual base salary or a
material reduction in fringe benefits in effect on the effective date or as the
same may be increased during the Term;
(3) any material breach by the Company of this Agreement which
the Company fails to correct within 30 working days after receiving written
notice thereof;
(4) after written notice to and consultation with the Company, a
determination by Dr. Calvanese that the requirements of his position and duties
under sections 3 and 4 of this Agreement are inconsistent with his practice of
medicine within Medical Care Partners, PC and provided that he shall be willing
and able to return to full time practice of medicine within Medical Care
Partners, PC.
-7-
<PAGE>
(3) In the event Dr. Calvanese is discharged by the Company without
Cause or Dr. Calvanese terminates his employment with Good Reason under
subsection b., the Company shall pay Dr. Calvanese severance equal to the
---
greater of:
- ----------
1) severance for two years at the annual rate of $150,000 plus
$50,000 each year during the severance period if Dr. Calvanese's position
as President of Medical Care Partners, PC is terminated concurrently (i.e.
within 30 days) with termination of employment under this section 11(c) or
Dr. Calvanese resigns his position as President of Medical Care Partners,
PC concurrently (i.e. within 30 days) with termination of employment under
this section 11(c); or
2) severance at the annual rate set out above for the remaining term
of this Agreement otherwise in effect but for discharge or resignation
under this section 11(c).
In the event Dr. Calvanese's employment is terminated under this Section 11, all
stock options issued under this Agreement shall vest on the termination date.
Dr. Calvanese shall then have an immediate right to receive all shares of such
stock upon payment of the purchase price in accordance with the Stock
Restriction Agreement and section 10 of this Agreement.
(4) Severance payments pursuant to Section 11(c) shall be paid as
follows:
(1) a lump sum payment shall be made within 30 days of
termination and shall be equal to the first six months of the severance amount;
and
(2) beginning 60 days after termination, 18 equal monthly
severance payments shall be made for the balance of the severance amount and
provided that such
-8-
<PAGE>
payments shall accelerate and remaining payments shall be paid in a lump sum in
the event any payments thereunder are overdue by more than 15 business days on
more than two occasions.
(5) The parties hereto expressly acknowledge and agree that the
severance amounts payable to Dr. Calvanese upon a discharge or 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 Dr. Calvanese in connection with such termination.
12. Termination By Dr. Calvanese Without Cause. Dr. Calvanese may
------------------------------------------
terminate his employment without cause and without Good Reason, provided he
first gives the Company a written notice of intent to terminate at least 90 days
prior to the effective date of any such termination. All rights of Dr.
Calvanese under this Agreement shall terminate upon the effective date of the
termination of employment; provided, however, the Company shall pay Dr.
-------- -------
Calvanese any base salary earned through the effective date of the termination
and a pro rata share of any Officer Incentive Bonus earned during the calendar
--- ----
year in which the termination of employment occurs. This payment shall be made
five business days prior to the effective date of termination.
13. Discharge of Dr. Calvanese For Cause.
------------------------------------
(1) Notwithstanding anything in this Agreement to the contrary, the
Company shall have the right to terminate Dr. Calvanese's employment for Cause
(as defined in Subsection (b) of this Section 13) by giving to Dr. Calvanese
written notice of such termination as of a date (not earlier than 10 days after
such notice) to be specified in such notice, and his employment hereunder shall
terminate on the date so specified.
-9-
<PAGE>
(2) For purposes of this Section 13, "Cause" shall mean (i) Dr.
Calvanese's material failure to perform his duties with the Company as set out
in Exhibit A (other than any such failure resulting from his incapacity due to
physical or mental illness or injury or any such actual or anticipated failure
after the issuance of a notice by Dr. Calvanese of termination for Good Reason),
which is not remedied within 30 days as specified in a written demand for
performance; (ii) intentional misconduct materially and demonstrably injurious
to the Company, or (iii) Dr. Calvanese's conviction of a felony or of fraud or
embezzlement of the Company's property. For purposes of this Agreement, Dr.
Calvanese's employment shall not be deemed to have been terminated for Cause
unless and until there shall have been delivered to him a copy of a resolution,
duly adopted by the affirmative vote of not less than two-thirds of the entire
membership of the Board of the Company at a meeting called and held for this
purpose, and after reasonable written notice to Dr. Calvanese and an opportunity
for him, together with his counsel, to be heard by the Board.
(3) In the event this Agreement is terminated under Section 13(b)(i),
Dr. Calvanese will receive severance equal to his annual base salary then in
effect, payable in 12 equal monthly installments beginning 30 days after
termination of this Agreement and provided that such installment payments shall
accelerate and remaining payments shall be paid in a lump sum in the event any
payments thereunder are overdue by more than 15 business days on more than two
occasions.
14. Termination In the Event of Disability or Death.
-----------------------------------------------
(1) Disability. In the event that Dr. Calvanese shall fail, because
----------
of illness or injury, to render the services contemplated by this Agreement for
six consecutive calendar
-10-
<PAGE>
months or for shorter periods aggregating 180 or more business days in any
twelve (12) month period, the Company shall have the right to terminate Dr.
Calvanese's employment by giving to Dr. Calvanese written notice of termination.
In the event Dr. Calvanese's employment is terminated within the meaning of this
Section 14(a), Dr. Calvanese shall receive his salary at the rate provided in
Section 5 and any other compensation and benefits provided in Sections 7, 8, and
9 to the effective date of such termination. Such termination pursuant to this
Section 14(a) shall not affect any rights which Dr. Calvanese 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.
(2) Death. This Agreement in all other respects will terminate upon
-----
the death of Dr. Calvanese except for the payment of Dr. Calvanese's base salary
at the rate provided in Section 5 and any other compensation and benefits
provided in sections 7, 8, and 9 to the date of his death.
15. Termination in the Event of a Change of Control.
-----------------------------------------------
(1) In the event a Change in Control (as defined in Subsection (b)
below) shall occur during the Term and Dr. Calvanese's employment with the
Company is subsequently terminated or terminates for any reason within 120 days
after such Change in Control other than by reason of (i) disability or death or
(ii) termination by the Company for Cause pursuant to section 13(b)(ii) or
13(b)(iii) or (iii) termination by Dr. Calvanese for other than Good Reason,
-11-
<PAGE>
Dr. Calvanese shall be entitled to receive the payments as set forth in
Subsections (c) and (d) of Section 11 and the vesting of all outstanding Shares.
(2) A "Change in Control" shall occur or be deemed to occur if any of
-----------------
the following events occur:
(1) 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 40% 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;
(2) 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
-12-
<PAGE>
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
(3) 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, 40% 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
-13-
<PAGE>
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
(4) Approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company.
(3) In the event that Dr. Calvanese's employment is terminated under
this Section 15, all options to purchase the Company's Common Stock granted
under this Agreement shall vest on the termination date. Dr. Calvanese shall
then have the full and immediate right to receive all such shares upon full
payment of the purchase price.
16. Indemnification. The Company hereby agrees to indemnify Dr. Calvanese
---------------
in his capacity as an officer of the Company to the full extent permitted by
Delaware law and the Company's restated articles of incorporation.
17. Non-Compete.
-----------
(1) So long as Dr. Calvanese is employed by the Company and for a
period of two years after the termination or expiration of his employment, he
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 in Massachusetts which
operates, develops or manages physician practice management entities to the
extent such engagement assists through a management position such business or
entity in directly and substantially competing with the business conducted by
the Company in Massachusetts; or (ii) recruit, solicit or induce, or attempt
-14-
<PAGE>
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 in Massachusetts of any of the clients, customers or
accounts, or prospective clients, customers or accounts, of the Company which
were contacted, solicited or served by Dr. Calvanese while employed by the
Company. Nothing in this Agreement shall restrict Dr. Calvanese's right to
practice medicine or treat patients.
(2) 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 extend only over the maximum period
of time, range of activities or geographic area as to which it may be
enforceable.
(3) The restrictions contained in this Section 17 are necessary for
the protection of the business and goodwill of the Company and are considered by
Dr. Calvanese to be reasonable for such purpose. Dr. Calvanese 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.
(4) Notwithstanding anything in this section to the contrary, the
restrictions of this section 17 shall not apply in the event Dr. Calvanese's
employment is terminated under section 11(b) or 15(a).
18. Proprietary Information and Developments.
----------------------------------------
-15-
<PAGE>
(1) Proprietary Information.
-----------------------
(1) Dr. Calvanese 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 with or knowledge of customers or prospective
customers of the Company. Dr. Calvanese 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 Dr. Calvanese.
(2) Dr. Calvanese 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 Dr. Calvanese or others, which shall
come into his custody or possession, shall be and are the exclusive property of
the Company to be used by Dr. Calvanese only in the performance of his duties
for the Company.
(3) Dr. Calvanese 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 18, also extends to such types of information, know-how, records
and tangible property of customers
-16-
<PAGE>
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 Dr. Calvanese in the course
of the Company's business.
(2) Developments.
------------
(1) Dr. Calvanese 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 Dr. Calvanese 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").
(2) Dr. Calvanese 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.
Subsection (b) of this Section 18 shall not apply to any intellectual work
which is not related to the present or planned business or research and
development of the Company and which is made and conceived by Dr. Calvanese
outside work and not on the Company's premises and not using the Company's
tools, devices, equipment, intellectual property, or Developments.
(3) Dr. Calvanese 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) relating to Developments - all at the
Company's expense. Dr. Calvanese shall sign all papers, including, without
limitation, copyright applications, patent applications, declarations,
-17-
<PAGE>
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.
(3) Other Agreements. Dr. Calvanese 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. Dr. Calvanese further represents that his performance of
all the terms of this Agreement 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.
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.
20. Successors; Binding Agreement; Authorization
--------------------------------------------
(1) 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
-18-
<PAGE>
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.
(2) This Agreement shall inure to the benefit of and be enforceable by
Dr. Calvanese's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. Any amounts payable by
the Company to Dr. Calvanese 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. Nothing contained in this Agreement shall be deemed to relieve the
Company of its obligations hereunder in the event of any assignment of this
Agreement.
(3) Execution and delivery of this Agreement on behalf of the company
and the grant of all options contained herein have been fully authorized and
approved by all requisite corporate action of the company and all required
consents from stockholders and other third parties have been obtained by the
Company.
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
-19-
<PAGE>
United States Postal Service, prepaid, to the parties or their permitted
assignees at the Company, in the case of the Company, 950 Winter Street, Suite
2410, Waltham, Massachusetts 02154, with a copy to Edward J. Dailey, Esq.,
Bromberg & Sunstein LLP, 125 Summer Street, Boston, Massachusetts 02110 or such
address as shall constitute the Company's headquarters and in the case of Dr.
Calvanese at the last address shown in the human resources records of the
Company, with a copy to James S. Jacobs, Esq., Jacobs & Dembert, PA, One South
Street, Suite 1910, Baltimore, Maryland 21202-3201. The date of 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.
23. 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. Each party from time to time may waive any of his or its
rights without affecting a waiver with respect to any subsequent occurrences or
transactions.
24. Entire Agreement. This Agreement constitutes and embodies the entire
----------------
understanding and agreement of the parties and, except as otherwise provided
here, there are no other agreements or understandings, written or oral, in
effect between the parties hereto relating to the employment of Dr. Calvanese 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 and except as the corporate laws of the State of Delaware
govern indemnification.
-20-
<PAGE>
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.
27. No Mitigation. In no event shall Dr. Calvanese be obligated or
-------------
required in any fashion to seek other employment, set off income or earnings
from any source, or otherwise mitigate or reduce severance amounts payable under
this Agreement.
This Agreement has been executed in duplicate by Alphonse F. Calvanese, MD and
Physicians Quality Care, Inc. by Eugene M. Bullis, Senior Vice President and
Chief Financial Officer.
/s/ Alphonse F. Canvense /s/ Eugene M. Bullis
- --------------------------- ---------------------------------
Alphonse F. Calvanese, MD Eugene M. Bullis
Senior Vice President and Chief
Financial Officer
Physicians Quality Care, Inc.
-21-
<PAGE>
EXHIBIT A
The Chief Medical Officer of Physicians Quality Care, Inc. shall report to
the Chief Executive Officer and the Board of Directors. The Chief Medical
Officer shall have such duties as are set out in the bylaws of Physicians
Quality Care, Inc. and as delegated from time to time by the Chief Executive
Officer. Additionally, the Chief Medical Officer shall have those duties set out
in the bylaws of Medical Care Partners, PC for so long as he serves as President
of Medical Care Partners, PC. Finally, the Chief Medical Officer shall also
practice medicine in accordance with his Physician Employment Agreement with
Medical Care Partners, PC.
-22-
<PAGE>
EXHIBIT 10.4
AMENDED EMPLOYMENT AGREEMENT
----------------------------
THIS AMENDED EMPLOYMENT AGREEMENT (the "Agreement"), made effective the ___
day of May 1998, by Physicians Quality Care, Inc., a Delaware corporation with
its principal place of business at 950 Winter Street, Suite 2410, Waltham,
Massachusetts 02154 (the "Company"), and Eugene M. Bullis (the "Employee").
The Company desires to employ the Employee, and the Employee desires to be
employed by the Company. 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 agrees to employ the Employee and the
----------
Employee accepts employment with the Company upon the terms and subject to the
conditions set out here.
2. Term. The term of this Agreement shall commence on March 16, 1998
----
(the "Commencement Date"), and shall continue in effect for a period of twenty-
four months, expiring on March 15, 2000 (the "Original Term"). The Original
Term may be extended for additional twelve-month periods at the Company's
election with written notice provided at least sixty days prior to the
expiration of the Original Term or prior to the expiration of any extension to
the Original Term; provided that, if a Change of Control of the Company (as
defined in Section 15(b)) shall have occurred during the Original Term or any
extension of the Original Term of this Agreement, this Agreement shall continue
in effect for a period of not less than twelve (12) months beyond the month in
which such Change of Control occurred, as provided in Section 15(a).
1
<PAGE>
3. Position.
--------
(a) The Company and the Employee agree that, 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 the Employee as Senior Vice
President and Chief Financial Officer. The Employee shall report directly to
the Chief Executive Officer of the Company and the Board and shall be subject to
the supervision of, and shall have such authority as is delegated to him by the
Chief Executive Officer and the Board.
(b) The Employee 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. The Employee agrees to devote
his entire business time, attention and energy to the business and interests of
the Company during the Term. Further, the Employee agrees to abide by the
written rules, regulations, instructions, personnel practices and policies of
the Company and any changes herein which may be adopted from time to time by the
Company.
4. Officer of the Company. Throughout the Term, the Employee shall be
----------------------
eligible to serve as an officer of the Company.
5. Compensation. The Company shall pay to the Employee a base salary
------------
payable in equal monthly installments of $24,740.00 beginning September 1, 1998
and through December 31, 1998. Thereafter, the Company shall pay to the
Employee a base salary payable in equal bi-weekly installments at the annual
rate of $225,000.00 or such greater base salary as the Board may from time to
time approve. The Employee's performance will be reviewed annually by the
2
<PAGE>
Chief Executive Officer and the Board of Directors, and he will be considered
for an increase in base salary as part of each annual review.
6. Bonuses. On the first anniversary date of this Agreement, if the
-------
Employee has remained in the continuous employment of the Company, he shall
receive a bonus in the amount of One Hundred Thousand Dollars ($100,000.00) (the
"Longevity Bonus"). From and after December 31, 1999, the Employee will be
eligible to receive annual bonus payments of up to 100% of base salary based
upon the achievement of certain performance targets for the fiscal year just
completed. Performance targets shall be determined by the Board and set out in
Exhibit A. From time to time, the Board may amend or revise the performance
targets, but no more frequently than annually.
7. Benefits. Upon meeting all applicable eligibility requirements, the
--------
Employee shall be entitled to such benefits as are generally made available to
other members of senior management of the Company including, without limitation,
sick pay, participation in any medical, dental, retirement, long-term
supplemental disability and/or dental insurance plans that may be adopted by the
Company and participation in equity incentive plans, including stock option
plans, of the Company.
8. Vacation. The Employee shall be entitled to 20 days of paid vacation
--------
time each year during the Term. If the Employee 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 the Employee for all reasonable
--------
travel and other expenses incurred or paid by the Employee in connection with,
or related to, the performance of duties, responsibilities or services under
this Agreement, upon presentation by
3
<PAGE>
the Employee of documentation, expense statements, vouchers and 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.
10. Stock Option. The Company shall issue to the Employee options for
------------
750,000 shares of Class A Common Stock of the Company at an exercise price of
Three Dollars ($3.00) which shall vest in equal installments of 187,500 shares.
April 1, 1999; April 1, 2000; April 1, 2001; and April 1, 2002. In addition,
the Employee shall receive an additional grant of options for 150,000 shares of
Class A Common Stock of the Company at an exercise price of $3.00 per share on
April 1, 1999 on the condition that the Employee successfully meets his
performance targets as determined by the Board in its sole discretion or, in the
event the Board fails to establish performance targets, successfully meets the
Board's expectations with respect to the Employee's performance as determined by
the Board in its sole discretion. In the event the Employee receives such an
additional grant of options, such additional options shall vest in equal
installments of Thirty-Seven Thousand Five Hundred (37,500) shares on April 1,
1999; April 1, 2000; April 1, 2001; and April 1, 2002. The Employee agrees that
upon the execution of this Agreement, he will become a party to the Stockholders
Agreement, dated as of August 30, 1996, and that any shares held by the Employee
shall be "management shares" for purposes of such agreement. Notwithstanding
anything to the contrary, the Employees rights and obligations with respect to
all and any stock options which he may be granted shall be governed and
determined by the terms of the applicable stock option plan which shall
supercede the terms of this Agreement.
11. Discharge Without Cause.
------------------------
4
<PAGE>
(a) At any time prior to expiration of the Term, the Chief Executive
Officer may terminate the Employee's employment without Cause subject to payment
by the Company of the severance amounts set forth in Subsections (b) and (c) of
this Section 11.
(b) In the event the Employee is discharged by the Company without cause,
the Company shall continue to pay base salary to the Employee (based on the
Employee's base salary prevailing at the time of the termination) for one year.
The Employee will not be entitled to any other compensation or benefits other
than benefits required by law, if any.
(c) The parties expressly acknowledge and agree that the compensation
payable to the Employee upon a termination as specified in this Section 11 will
be full, reasonable and adequate compensation for any such termination and that
the payment of such compensation, together with any benefits required by law,
shall fully satisfy and discharge any and all obligations of the Company to the
Employee in connection with such termination.
12. Termination By The Employee Without Cause. The Employee may terminate
-----------------------------------------
employment without cause provided that the Employee first gives to the Company a
written notice of intent to terminate at least 60 days prior to the effective
day of any such termination. All rights of the Employee under this Agreement
shall terminate upon the effective date of the termination of employment;
provided, however, the Company shall pay to the Employee any base salary earned
through the effective date of the termination.
13. Discharge of the Employee For Cause.
-----------------------------------
(a) Notwithstanding anything in this Agreement to the contrary, the
Company shall have the right to terminate the Employee's employment for Cause
(as defined in Subsection (b)
5
<PAGE>
of this Section 13) by giving to the Employee written notice of such termination
and his employment shall terminate on the date so specified in the written
notice.
(b) For purposes of this Section 13, "Cause" shall mean (i) the Employee's
material failure to perform his duties with the Company or (ii) misconduct by
the Employee materially injurious to the Company.
14. Termination In the Event of Disability or Death.
-----------------------------------------------
(a) Disability. In the event that the Employee shall fail, because of
----------
illness or injury, to render the services contemplated by this Agreement for
three consecutive calendar months or for shorter periods aggregating 90 or more
business days in any twelve (12) month period, the Company shall have the right
to terminate the Employee's employment by giving the Employee written notice of
termination. In the event the Employee is terminated within the meaning of this
Section 14(a), the Employee shall receive 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, provided, however, that base salary
shall be reduced by the amount of any short-term disability insurance payments
to the Employee. Termination pursuant to this Section 14(a) shall not affect any
rights which the Employee may have at the time of termination pursuant to any
other insurance or other death benefit, bonus, retirement, severance pay or
stock award plan or arrangement of the Company, or any equity incentive plan,
which rights shall continue to be governed by the terms and provisions of any
such plans and agreements.
(b) Death. This Agreement will terminate upon the death of the Employee
-----
except for the payment of the Employee's base 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 death.
6
<PAGE>
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 the Employee's employment with the Company is
subsequently terminated or terminates for any reason within twelve (12) months
after such Change in Control other than by reason of (i) disability or death, or
(ii) termination by the Company for Cause, the Employee shall be entitled to
receive the payments as set forth in Subsections (b) and (c) of Section 11 and
the Longevity Bonus of $100,000 described in Section 6 if it has not already
been paid, and the accelerated vesting of all stock options the Employee 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 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
7
<PAGE>
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
8
<PAGE>
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
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) In the event the Employee's employment is terminated under this
Section 15, all stock options for the purchase of the Company's Common Stock
granted to the Employee by the Company under any of the Company's stock option
plans or under this Agreement or any stock restriction agreement then in effect
shall vest on the termination date. The Employee shall then have the full and
immediate right to exercise all additional stock options.
16. Indemnification. The Employee shall be fully indemnified by the
---------------
Company as a senior official of the Company to the extent permitted by Delaware
law.
17. Non-Compete.
-----------
9
<PAGE>
(a) So long as the Employee is employed by the Company and for a period of
one year after the termination or expiration of employment, the Employee 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 operates, develops or
manages physician practice management entities to the extent such engagement
assists such business or entity in competing with the business conducted by the
Company in any city or geographic area in which the Company or its affiliates
conduct material operations at the time of termination of employment under this
Agreement; 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 clients, customers or accounts, of
the Company which were contacted, solicited or served by the Employee 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
geographical 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 17 are necessary for the
protection of the business and goodwill of the Company and are considered by the
Employee to be reasonable for
10
<PAGE>
such purpose. The Employee 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) The Employee 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 of the Company. The
Employee 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 employment, unless and
until such Proprietary Information has become public knowledge without fault by
the Employee.
(ii) The Employee 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 the Employee or others, which shall come into
the Employee's custody or possession, shall be and are the
11
<PAGE>
exclusive property of the Company to be used by the Employee only in the
performance of duties for the Company.
(iii) The Employee agrees that the 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 the Employee in the course of the Company's business.
(iv) Notwithstanding anything to the contrary in Section 18(a), the
Company recognizes that the Employee has joined the Company with certain know-
how, skill, experience, expertise, information, and analytical capabilities
which will be used to benefit the Company. The Employee's know-how, skill,
experience, expertise, information, and analytical capabilities are expressly
excluded from the restrictions on disclosure set out in Section 18(a).
(b) Developments.
------------
(i) The Employee 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 the Employee or under the Employee's
direction or jointly with others during 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) The Employee agrees to assign and does hereby assign to the
Company (or any person or entity designated by the Company) all right, title and
interest in and to all Developments and all related patents, patent
applications, copyrights and copyright applications.
12
<PAGE>
Subsection (b) of this Section 18 shall not apply to any intellectual
work which is not related to the present or planned business or research and
development of the Company and which is made and conceived by the Employee
outside work and not on the Company's premises and not using the Company's
tools, devices, equipment, intellectual property, or Developments. It is
expressly understood and agreed that the Employee shall have the obligation to
demonstrate that any such intellectual work is not related to the present or
planned business or research and development of the Company and has been made
and conceived by the Employee outside work and not on the Company's premises and
not using the Company's tools, devices, equipment, intellectual property, or
Developments.
(iii) The Employee agrees to cooperate fully with the Company, both
during and after 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. The Employee 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 reasonably deem necessary
or desirable in order to protect its rights and interests in any Development.
(c) Other Agreements. The Employee represents that performance of all the
----------------
terms of this Agreement 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 the Employee in confidence or in trust prior to 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
13
<PAGE>
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.
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
the Employee's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. Any amounts payable by
the Company to the Employee after the date of death, unless otherwise provided
here, shall be paid in accordance with the terms of this Agreement to the
Employee's devisee, legatee or other designee, or if there is no such designee,
to the Employee's 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
14
<PAGE>
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, 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,
Attention: Jerilyn P. Asher, Chair and Chief Executive Officer, or at such other
address or addresses as may have been furnished in writing by the Company to the
Employee, with a copy to Neil Jacobs, Esq., Hale and Dorr, 60 State Street,
Boston, Massachusetts 02109.
If to the Employee, at the most recent address furnished to the Company.
Any party hereto may give any notice, request, demand, claim, or other
communication 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
individual for whom it is intended. Any party hereto may change the address to
which notices, requests, demands, claims, and other communications hereunder are
to be delivered by giving the other parties in the manner set out here.
23. 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. Each
15
<PAGE>
party from time to time may waive any rights without affecting a waiver with
respect to any subsequent occurrences or transactions.
24. Entire Agreement. This Agreement constitutes and embodies the entire
----------------
understanding and agreement of the parties and, except as otherwise provided
here, there are no other agreements or understandings, written or oral, in
effect between the parties hereto relating to the employment of the Employee 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 and except as the corporate laws of the State of Delaware
govern indemnification.
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.
THIS AGREEMENT has been executed in duplicate by the Employee and
Physicians Quality Care, Inc. by its Chair and Chief Executive Officer.
___________________________________ __________________________________
Eugene M. Bullis Jerilyn P. Asher
Chair and Chief Executive Officer
Physicians Quality Care, Inc.
16
<PAGE>
EXHIBIT A
---------
The Senior Vice President and Chief Financial Officer shall be an officer
of the Company and shall report to the Chief Executive Officer and the Board of
Directors. The Senior Vice President and Chief Financial Officer shall have
responsibility for leadership and direction of all aspects of the Company's
strategic and operating programs for financial affairs.
17
<PAGE>
EXHIBIT B
---------
For the year ending December 31, 1999, bonus payments and performance
targets for award of stock shall be based on achievement of the following
objectives:
18
<PAGE>
EXHIBIT 10.5
AMENDMENT NO. 3 TO STOCKHOLDERS AGREEMENT
This Amendment No. 3 (the "Amendment") to the Stockholders Agreement (as
defined herein) is made and entered into as of July 2, 1998 by and among
Physicians Quality Care, Inc., a Delaware corporation (the "Company'), the
Investors and Class A Common Stockholders listed on the signature page hereof
("Class A Holders"). Capitalized terms not defined herein shall have the
meanings set forth in the Stockholders Agreement.
WHEREAS, the Company, the Investors and certain holders of Class A Common
Stock are parties to a Stockholders Agreement (the "Stockholders Agreement"),
dated as of August 30, 1996, as amended on December 31, 1996 and June 23, 1997;
WHEREAS, the Investors are purchasing 2,461,538 shares of Class L Common
Stock of the Company pursuant to a Class L Common Stock Purchase Agreement dated
the date hereof and as a condition thereto have required certain amendments to
the Stockholders Agreement;
NOW THEREFORE, the parties agree as follows:
1. Section 1 of the Stockholders Agreement is hereby amended to add the
following:
1.1.42. "Class L Common" shall mean the Class L Common Stock, $.01
--------------
par value per share of the Company.
2. Section 1.1.9 of the Stockholders Agreement is hereby amended in its
entirety as follows:
1.1.9. "Common Stock" shall mean the Class A Common, the Class B
------------
Common, the Class C Common and the Class L Common of the Company.
3. Section 1.1.36 of the Stockholders Agreement is hereby amended in its
entirety as follows:
1.1.36. "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 Investors shall have sold or shall be
permitted to sell fifty percent (50%) of the capital stock into which
the Class B Common Stock, Class C Common Stock and Class L Common
Stock is convertible and the net proceeds of the sale thereof which
would be permitted to be sold by the (A) Capital Investor shall equal
or exceed seventy-five percent of the total amount invested in capital
stock of the
<PAGE>
Company by the Capital Investors up to $19,500,000, (B) the net
proceeds of the sale thereof to the Bain Investors shall equal or
exceed seventy-five percent of the total amount invested in capital
stock of the Company by the Bain Investors up to $17,000,000 and (C)
the net proceeds of the sale thereof to the Goldman Investors shall
equal or exceed seventy-five percent of the total amount invested in
capital stock of the Company by the Goldman Investors up to
$16,500,000 and (ii) subject to a firm commitment underwriting
conducted by a nationally recognized underwriter acceptable to a
majority of the Class B Directors and Class C Directors, voting
together as a single class.
4. Section 2.2 of the Stockholders Agreement is amended and restated in
its entirety as follows:
2.2 Future Stockholders. The Company agrees not to issue any shares
-------------------
of capital stock (or any securities convertible, exchangeable or
exercisable into shares of capital stock) to any person that is not
party to this Agreement, unless such Person agrees to be subject to
the provisions of this Agreement and shall be bound by and subject to
the terms hereof, unless the Board, including a majority of the Class
B and Class C Directors, voting together as a single class, approves
the exclusions of such Person from being a party hereto.
5. Section 3.1 is amended to replace the last two sentences of the first
paragraph with the following: Each holder of Class C Common hereby agrees to
cast all votes to which such holder is entitled in respect of a meeting of Class
C stockholders, by written consent or otherwise to elect as the Class C
Directors of the Company any two individuals who are designated to serve on the
Board by the Capital Investors.
IN WITNESS WHEREOF, each of the undersigned has duly executed this
Amendment No. 3 (or caused this Amendment 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:_____________________________________
CLASS B AND C STOCKHOLDERS:
ABS CAPITAL PARTNERS II, L.P.
_____________________________________________
By:
ABS Partners II, L.L.C.,
its general partner
-2-
<PAGE>
______________________________________________
By:
Timothy T. Weglicki, Managing Member
_________________________________________________
Russell Ray
115 Longwood Road
Baltimore, MD 21210
_________________________________________________
Steve Schuh
729 Heather Hill Lane
Hunt Valley, MD 21030
_________________________________________________
Dick Franyo
925 Drohomer Place
Baltimore, MD 21210
_________________________________________________
Christopher Camut
4405 Bedford Place
Baltimore, MD 21218
_________________________________________________
Harris Hyman IV
3131 O Street, N.W.
Washington, DC 20007
_________________________________________________
-3-
<PAGE>
Brent Milner
5505 St. Alban's Way
Baltimore, MD 21212
_________________________________________________
Kathy Coffey
1800 Broadway, #301
San Francisco, CA 94109
_________________________________________________
Mark Klausner
7105 Charles Spring Way
Towson, MD 21204
_________________________________________________
Michael Singer
3048 Jackson Street
San Francisco, CA 94111
_________________________________________________
Stuart Smith
7834 Ellenham Road
Ruxton, MD 21204
_________________________________________________
Gary Lessing
10 Queensdale Place
London, England W11 4SQ
GS CAPITAL PARTNERS II, L.P.
By: GS Advisors, L.P.
Its General Partner
By: GS Advisors, Inc.
-4-
<PAGE>
Its General Partner
________________________________________
By:
Title:
GOLDMAN, SACHS & CO., VERWALTUNGS
GMBH
___________________________________
By:
Managing Director
___________________________________
By:
Managing Director or
Registered Agent
GS CAPITAL PARTNERS II OFFSHORE, L.P.
By: GS Advisors, II (Cayman), L.P.
Its General Partner
By: GS Advisors II, Inc.
Its General Partner
By:______________________________________
Managing Director
THE GOLDMAN SACHS GROUP, L.P.
By: The Goldman Sachs Corporation
-5-
<PAGE>
Its General Partner
____________________________________
By:
Title: Executive Vice President
BRIDGE STREET FUND 1997, L.P.
By: Stone Street Asset Corp.,
its Managing General Partner
By:___________________________________
Title:
STONE STREET FUND 1997, L.P.
By: Stone Street Asset Corp.
its General Partner
By:___________________________________
Title:
BAIN CAPITAL FUND V, L.P.
By: Bain Capital Partners V, L.P., a
Delaware limited partnership,
its general partner
-6-
<PAGE>
By: Bain Capital Investors V, Inc.,
its general partner
___________________________________
By:
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:
Title: Managing Director
BCIP Associates
___________________________________
By:
Title: a general partner
BCIP Trust Associates, L.P.
___________________________________
By:
Title: a general partner
-7-
<PAGE>
AMENDMENT NO. 3 TO STOCKHOLDERS AGREEMENT - SIGNATURE PAGES
PLEASE SIGN AND RETURN
CLASS A STOCKHOLDERS:
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
-8-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 6-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> JUN-30-1998 DEC-31-1997
<CASH> (257,817) 8,782,019
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 14,924,733 14,606,483
<PP&E> 549,432 1,548,068
<DEPRECIATION> 151,378 220,208
<TOTAL-ASSETS> 69,753,409 73,410,583
<CURRENT-LIABILITIES> 1,611,148 2,113,337
<BONDS> 0 0
60,463,943 54,473,947
0 0
<COMMON> 208,074 207,975
<OTHER-SE> 6,893,637 15,879,387
<TOTAL-LIABILITY-AND-EQUITY> 69,753,409 73,410,583
<SALES> 20,636,578 46,037,234
<TOTAL-REVENUES> 20,788,136 46,535,329
<CGS> 0 0
<TOTAL-COSTS> 32,808,557 36,078,855
<OTHER-EXPENSES> 332,287 98,269
<LOSS-PROVISION> 1,467,114 1,105,616
<INTEREST-EXPENSE> 57,127 161,938
<INCOME-PRETAX> (4,632,594) (6,505,511)
<INCOME-TAX> 0 (795,281)
<INCOME-CONTINUING> (4,632,594) (5,710,230)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (4,632,594) (5,710,230)
<EPS-PRIMARY> (0.23) (0.41)
<EPS-DILUTED> 0 0
</TABLE>
